I've seen a lot of people saying that the Rangers should definitely offer Lee $20M per year.

But most of this seems to be based on the idea that would be a good value... without consideration of what it might cost the Rangers elsewhere.

What if the Rangers' maximum operating break-even is estimated around a team payroll of $85M for the next 3 years?

In that case, the Rangers, giving Lee $20M would face a 2012 that looks like this (using Scott Lucas's #s):

Lee - $20M
Young $12M
Hamilton - $9M (?)
Cruz - $8M (?)
Kinsler - $7M
Feldman - $6.5M
Lewis - $3.5M

That is $66M for just those 7 players. That leaves $19M to pay 33 other players, including DH, C, 1B, CF, and 2 more starters (assuming we let Feldman be the 5th starter). An average of ~$576,000... just over the league minimum. Even if you want to assume a $90M break-even point and Cruz/Hamilton getting arb awards a combined few million lower, you are still having to pay the remaining 33 players at an average of around $800,000 or so...

Lee ain't happening. It's sad that a team so close to a large and relatively affluent city is pay-capped so low out in the fields, but that's how baseball in Arlington go unfortunately. Someday, maybe we'll be able to have nice things...

I'm pretty sure the Rangers would go to $100m payroll for 2012 and even 2011 if they could get Lee. He'd be worth an extra $3-5m in revenue this season alone anyway. Also, that low average salary for the remaining players is much less scary when you consider the list of guys who WILL be making less than $500k: Feliz, Moreland, Kirkman, Borbon, Treanor (wouldn't get more than that in arb) or Teagarden (if we let Treanor go), Ogando, O'Day. Plus all of the kids we expect to be up by 2012: Perez, Scheppers, Engel Beltre, Omar Beltre. Plus, when you talk about "the other 33 guys" some of those guys will be on minor league deals at less than $150k, bringing the average down, while others may be veteran journeymen stashed at AAA for depth, like German was this year, making very little. On top of all of that, you could always deal Feldman for a bag of magic beans and pay half his salary. Someone would want him essentially for free for $4-5 million. This is all doable.

How did you pick $85M as the number, and why that number for 3 years? Why wouldn't it go up a bit in years 2 and 3?

But, to answer your point, it's a good one. No matter what the number really is, signing Lee (or any other free agent) to a large contract means the Rangers will continue to need to be value hunters in most other positions.

But I have a hard time seeing $85 as the number they are working with if they are seriously considering getting both Lee and Greinke (who makes $13M or so the next two years). Adding those two would put the payroll in the $90-95M range in 2011 wouldn't it? The way they've been talking the payroll number has to be at least $90M in 2011 and a bit higher the next two year.

Payroll budget is dynamic. If you sign Lee and trade for Greinke, you win more games, sell more tickets (and parking, and beer, and hot dogs to those extra butts in the seats), plus you sell more jerseys, and caps, and claw/antler tees, and then you increase your probability of getting additional playoff revenue at the back end of the season.

So if adding Greinke and Lee costs $36 mil/yr, and that pushes your budget to $105 mil instead of the $90 mil you had planned, but you'vre got all these additional revenue streams coming in, it's not really a problem.

And if winning increases the fan base and revenue streams long-term by inculcating lots of wee little Rangers fans out there, it's worthwhile from an investment perspective.

How did you pick $85M as the number, and why that number for 3 years? Why wouldn't it go up a bit in years 2 and 3?

Fair and good questions.

Here's my thought process...

-- The Rangers in 2009 did $167M in revenues. Operating expenses of $174.8M (team payroll of $75.9M), for an operating loss of $7.5M.
-- Game-day revenues (tickets, concessions, suites, parking, merchandise) were $75M. With total 2009 attendance of 2.156M, that gives us an average of around $34.80 per fan. More merchandise was sold in 2010, but prices were discounted on concessions and parking, so let's say the net was around a 3.5% pricing increase to $36.00 per fan.
-- $36/fan * 2,505,171 (regular season attendance) = $90.1M. Add in $4.7M from postseason ticket sales, and bump that up to a combined $6M for increased sales in the other categories, and you have $96.1M for 2010 game-day revenues. Give TV/radio and other advertising sales a 5% increase and adding them back to the game-day revenues, along with $10.5M for "Other, net" and we get revenues of around $193M for 2010. Leaving out the new TV contract contribution for now (I'll address that below), let's model in an aggressive (off a World Series season base) 7% annual revenue increase in both 2011 and 2012. That gives us an estimated $221M in revenues for 2012.
-- Let's say non-payroll expenses grew 5% (mainly due to more games, larger crowds, more marketing, etc.). Also, with higher revenues, let's say that the revenue sharing offset falls from $5.5M to only $2M. That gives us a 2010 non-payroll budget of $113M. Let's model in 5% growth there in 2011 and 2012. That gives us a 2012 non-payroll budget of $125M.
-- So for now, being about as aggressive toward a higher number as I think is reasonable, we have $96M for payroll in 2012.
-- Now, about the new TV contract. It is around $80M per year ($1.6B over 20 years), up from $20M per year under the current contract. It doesn't start until 2014 though. But those future revenues could be used to offset the financing of operating losses before 2014. A problem here though is that the new ownership group supposedly already used the new contract revenues to largely offset the expense of a larger amount from lenders... in order to increase their bid and beat out Crane/Cuban. (I have heard this from people familiar with the deal.) So I am not sure how much of the new contract is not accounted for already, but it sounds like a significant portion.

So we are around $96M for 2012 under this pretty aggressive scenario.

Back to the 2012 team payroll (leaving out Lee and holding that spot open for now), filling it in some more:

Committed ($47.8)
Young - I said $12M originally, using Lucas's #, but Baseball-Reference has it at $16M (which matches the 5-year, $80M reported). Let's split the difference and call it $14M.
Hamilton - $9M
Cruz - $8M
Kinsler - $7M
Feldman - $6.5M
Lewis - $3.25M

Other Likely-to-Possible Arbs ($10M)
Andrus - $4M
Holland - $3M
Hurley - $1.5M
Murphy - $1.5M

So $57.8M so far. Feldman is bullpen (at best), so we need 2 more starters (in addition to the ace spot), C, 1B, CF, DH. That leaves 22 other spots on the 40-man. Calling them a $455,000 average we get $10M. Now we're at 67.8M.

We'll pray that Borbon and Moreland or Davis work at CF and 1B and hope that the other 2 starters can be filled successfully from the rookie contract guys. $1.7M there. Leaving DH and C. If we commit just $4M on average to these, we are at $75.8M. Let's bump the already aggressive $96M for payrolls up to $98M, we have enough to offer Lee $20M... and have an operating profit of basically $0. And with this we have likely downgraded in the bullpen (now using rookie contract players instead of Francisco and Oliver), we are needing a rookie contract pitcher to replace Wilson's +3-4 season, we are needing someone to step forward at 1B and CF (or C, were we to shift the $4M for C to buy a 1B or CF)....

This is all just way out on the fringe of riskiness at this point. We're a Hamilton blown knee, a Cruz ripped hamstring, and/or a Lee back injury from a .500 team and right back at 26,000 fans/game, no playoff revenues, $10-$20M less in revenues, and huge operating losses again. (The kind that cost Hicks $300M over the course of his pursuit of a World Series.)

Which brings me to Ray Davis. I have heard from several who know him and how he works that he is a very disciplined investor and businessman (and a good guy, by the way). From what these people have seen from him through this process, he just isn't looking to go blowing millions of dollars on a baseball team. This is a smart investment in an asset he found in bankruptcy and believed to be undervalued as such assets often are. People like this look for 30% IRRs over the life of such investments. That just isn't going to happen with operating losses (or even small operating profits) and a team not moving to a new stadium or expecting some event like that which would greatly raise the value of the club for a sale within 5 years or so.

Wow, thanks for laying all those details out. I wonder if they'll defer Lee or someone else's salary a bit, or if there is more revenue from either the tv or new radio deal we don't know about, but I think your estimates are probably not too far off in general terms. Maybe there will be some more dynamic ticket pricing? I also believe that some of the tv revenue may have been used to finance the increased bid. Maybe there are escalators in the tv bid, maybe they got a large enough up front payment that they can go for it right now for a few years...I dunno.

Given how they've been talking about adding players right now, there must be some more money somewhere. I agree with you that they are not going to operate at a loss structurally for any length of time. I think they want to win and profit and have a plan to do so.

I was thinking the low $90s in 2011, and about $5M more the next two years and a plateau right around there after (depending of course on what MLBAM, ticket prices, the new CBA, etc. etc.).

If they didn't have room to add Lee and Greinke both, then you'd expect rumors of Greinke to wither if/when Lee is signed. And how were they going to afford Lee AND someone like Dunn or Martinez? They had to know those guys would cost more than Vlad by at least a couple to a few million a year. But it just seems like the budget must have some room or they wouldn't be making these kind of plans.

or if there is more revenue from either the tv or new radio deal we don't know about

Admittedly, this is the big question mark in my numbers above. I have heard they had to use the new TV contract to offset a bigger loan for the winning bid. But I don't know how much of it was committed there.

But it just seems like the budget must have some room or they wouldn't be making these kind of plans.

Well, we'll soon find out how serious these rumors are... or if they are just the Rangers doing their best and giving the appearance of being capable of such additions. Even if they aren't, giving that appearance would be smart business for many reasons.

Reports tonight about the Rangers trying to move Young. Just as reports are coming out that the Lee market now includes two 7-year, >$20M/year offers.

I think we're seeing the Rangers are up against their limit. That awful Young contract... ugh...

Heh, just saw that Young rumor and came here to post it. Even if they move Young they'd likely have to swallow some of his salary, so I don't think it would help much.

Here's a scenario I could be excited about: Deal Young, taking on 1/3 or so of his pay. Sign Beltre, trade for Greinke. That would cost roughly what they would have paid Lee by himself and the team would improve its run prevention without hurting its lineup. Actually the lineup would probably be better. I can dream.

And of course, that's assuming that they move Young for someone that doesn't add much payroll or is not on the 40.

and just to round things out with another short post: Barry Horn is reporting that the Rangers and ESPN will sell ad time for Rangers radio broadcasts, with the team controlling the rights. I have no idea how much revenue that means.