Quantitative Methods II

Case Study


A-Rod: Signing the best player in baseball

Executive Summary
In the late 1990s, America saw the birth of a new baseball star in the form of Alex Rodriguez, popularly known as A-Rod. A-Rod was a unique combination of world-class offense and defense and in no time had become one of the game’s best players. Apart from his sporting talents, A-Rod became a significant name in the world of baseball business when he became a free agent in the Major League Baseball. This case looks into how Texas Rangers which is one of the American League teams is facing a long-term investment decision regarding the hiring of A-Rod.
The Major League Basketball consisted of 30 teams, governed by the Major league Agreement, whose revenue was derived from three primary sources:
  * Local revenues –ticket sales, local television, radio and cable rights, ballpark concessions, parking, and team sponsorships.
  * Central Fund revenues – Receipt and disbursements from national television contract and licensing arrangements (Shared equally by the teams)
  * Revenue sharing – Transfer of Local Revenues from high-revenue to low-revenue teams, as a part of Collective Bargaining Agreement
The local revenues generated the maximum share of the revenue stream for all the teams. Also, the local revenues varied a lot from team to team since the local broadcasting rights were sold to individual teams which depended on the size of the city and population.
The major costs to the teams were salary expenses (more than 50% of the total) and operating expenses (fixed costs and same across teams). The salaries varied a lot across teams since it depended on the star-value of the players as it directly impacted the local revenues.
The Texas Rangers, founded in 1971, had a stadium capacity of 49,200 with occupancy of around 71%. In 1998, when Southwest Sports Group took over, the agenda of the club was to upgrade the quality of the team...