Opinion: Dodgers are allowing Shohei Ohtani to steal bases
“A once-in-a-generation baseball player signs a once-in-a-generation, subpar contract.”
Sports fans have been anxiously waiting to see where once-in-a-generation baseball superstar Shohei Ohtani will sign his next contract following his run with the ill-fated Los Angeles Angels. (In six years with the Angels, they won 46% of their games and never had a winning season.)
The free agency process was intentionally kept top secret, and news outlets were scrambling to find gossipy leaks. Analysts were estimating that Ohtani’s contract would be the largest in sports history (approximately more than $500 million). When news broke that Ohtani was signing with the Los Angeles Dodgers, baseball and sports fans couldn’t believe it. At $700 million over 10 years, that’s about $250 million more than any other U.S. sports contract.
The next day, details of Ohtani’s contract were released: $2 million per year for 10 years, $68 million per year for the next 10 years, in which he will play for the Dodgers.
In an interview with sports illustration Sportswriter Tom Verducci, Ohtani’s agent, and Nez Balelo, Ohtani’s agent, said acting was Ohtani’s idea. He asked Valero, “What would happen if we deferred all of our salary to give our team a better chance to compete?” Valero and the Dodgers obliged. The postponement plan would allow the Dodgers to spend an additional $24 million annually on free agents such as pitchers Yoshinobu Yamamoto and Josh Hader.
“No one should be surprised,” Ball said. Everything he does is unique and impeccably planned… . “There is no player like him and therefore it is appropriate that he has no other contract like this one.”
It definitely seems like a win-win. The Dodgers secure the biggest star in baseball and show their fans that they will do whatever it takes to improve their team. Ohtani signs the biggest contract in sports history, showing fans that he is willing to do whatever it takes to develop his new team.
How’s the acting? CBS Sports writer Matt Snyder wrote, “He’s still making $700 million….(He’s) making more money than anyone else will make in sports salaries over the next 20 years.”
No one talks about the time value of money. A dollar paid or received 5, 10, or 20 years from now will not be the same as a dollar today. Because $1 invested today can grow into $1 or more 5, 10, or 20 years from now. This deferred $700 million is not $700 million. Ohtani left hundreds of millions of dollars on the table, saving the Dodgers hundreds of millions of dollars.
How much? If Otani or the Dodgers could earn a 10% return (the long-term average return for U.S. stocks), that $700 million would actually be worth $173 million in today’s money. The Dodgers would likely get a much higher return on the money they didn’t pay Ohtani. So the Dodgers would have to pay less than $173 million. The actual cost is $94 million if you get a 15% return, and $54 million if you get a 20% return.
It certainly looks like a win-lose deal. The Dodgers will secure the biggest star in baseball and make a huge profit by signing Ohtani, and they got him at a bargain price while appearing to have paid a ransom. Otani? He will make a lot of money from this contract and numerous endorsement deals. He’s going to a loaded team and greatly increases his chances of playing in the World Series. However, either because of his ignorance or his charity, he signed for far less than he was worth.
Cory Smith is an actuarial analyst at Guy Carpenter. and pursuing fellowships and fellowships with the Casualty Actuarial Society.
Gary Smith, Fletcher Jones Professor of Economics at Pomona College, is the author of dozens of research articles and 17 books, most recently “The Power of Modern Value Investing: Beyond Indexing, Algoth, and Alpha,” co-authored with Margaret Smith. I wrote it. (Palgrave Macmillan, 2023).
more: Shohei Ohtani will reportedly defer 97% of his salary, but this does not violate MLB regulations.
See also: Why Shohei Ohtani’s $700 million could actually be a good deal for the Dodgers
