The Easy Economics of the Most Expensive Trade in Baseball History

It's all about TV.

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Why did the Los Angeles Dodgers just complete the most expensive trade in MLB history this weekend with the Boston Red Sox? The answer is a good lesson in sports and entertainment economics.

Responding to questions about the mammoth $260 million trade -- which, for the first time ever, included not one but two players with more than $100 million left on their contracts -- the Dodgers' chairman Mark Walter claimed "the value of this franchise is represented in the price we paid -- that doesn't go up or down with one or two players' salaries."

Huh? Why is the owner of the Los Angeles Dodgers acting like he doesn't care about money? Maybe it's because he's crazy. Or maybe it's because he doesn't care about a particular kind of money -- the $400 million or so he'll spend on contracts between today and 2014. As it happens, that's the year the Dodgers are poised strike a new local TV deal that could make them the new money kings of baseball.

When you look at a baseball team like a business, you might first look at the stadium and players on the field, which you'd consider the main cost, and the people in the seats, which you'd consider the main revenue. But look closer and you'll see an announcer's booth and cameras around the field, which brings the game to an audience many times the size of the bleachers. Like any entertainment business, sports is all about attention. And there are a lot more people with couches and TVs than there are seats in a stadium.

TV is, simply, where the money is. In 2010, the Texas Rangers signed a deal worth somewhere between $1.6 and $3 billion. In 2011, the Los Angeles Angels signed a deal worth $3 billion, or about $150 million per year. And the Dodgers? Jonah Keri says their 2014 contract to be twice as lucrative if they built enough excitement around the club to persuade a regional sports network to pay through the nose for the rights to broadcast them.

Every sports team is in the business of building excitement. Boston's veteran players weren't merely expensive, but also part of the most unpopular Red Sox club in recent memory. Getting rid of them could theoretically increase buzz and allow the team to start over quickly rather than linger for many seasons with a souring fan base, falling ratings, and bad old players. Acquiring Boston's expensive vets at a historic sticker price makes the Dodgers instant contenders for the National League championship not just this year, but also next year, and the year after ... just as the team is negotiating a local TV deal worth up to $6 billion (which is more than 20 times the size of this trade).

Whether this trade makes Boston or Los Angeles better is beyond our knowing. But there are a few known knowns here. Baseball is in the TV business and Los Angeles stands to sign the most expensive local TV deal in baseball history in 2014. They have two years to persuade the fans and networks that they are worth it.