“A once-in-a-generation baseball player signs a once-in-a-generation subpar contract.”
Sports fans were anxiously waiting to hear where Shohei Ohtani, the once-in-a-generation two-way baseball superstar, would sign his next contract, now that he had served his time with the hapless Los Angeles Angels. (During his six years with the Angels, they won 46% of their games and never had a winning season.)
The free agency process was intentionally kept extremely secret, with news outlets scrambling to find leaks of tidbits of gossip. Analysts were estimating that Ohtani’s contract would be the biggest contract in sports history — somewhere north of $ 500 million. When the news broke that Ohtani would sign with the Los Angeles Dodgers, baseball and sports fans couldn’t believe it: $ 700 million for 10 years, which is about $ 250 million more than any other U.S. sports contract.
The next day, the contract details were revealed — $ 2 million a year for the 10 years that Ohtani is scheduled to play for the Dodgers, followed by $ 68 million a year for the next 10 years.
In an interview with Sports Illustrated sportswriter Tom Verducci, Ohtani’s agent Nez Balelo said that the deferral was Ohtani’s idea: He had asked Balelo, “What if I defer all my salary so that my team has a better chance to compete?” Balelo and the Dodgers obliged. The deferral plan gives the Dodgers an extra $ 24 million to spend each year on free agents such as pitchers Yoshinobu Yamamoto and Josh Hader.
Balelo gushed: “Nobody should be surprised. Everything he does is unique and impeccably well thought out….There is no player like him and so it is fitting there is no contract like this one.”
It sure seems like win-win. The Dodgers get the greatest star in baseball and demonstrate to their fans that they will do whatever it takes to improve the team. Ohtani gets the biggest contract in sports history and demonstrates to his fans that he is willing to do whatever it takes to improve his new team.
What about that deferral? CBS sportswriter Matt Snyder, wrote that, “He’s still getting 700 million freaking dollars….[He’s] making more in the next 20 years than anyone else ever has on a player salary in sports.”
No one is talking about the time value of money. A dollar paid or received five-, 10-, or 20 years from now is not the same as a dollar today because a dollar today can be invested to grow to more than a dollar in five, 10-, or 20 years. This deferred $ 700 million is not $ 700 million: Ohtani left hundreds of millions of dollars on the table and the Dodgers saved hundreds of millions of dollars.
How much? If Ohtani or the Dodgers can earn a 10% return (the long-run average return on U.S. stocks), that $ 700 million is really worth $ 173 million in today’s dollars. The Dodgers can, most likely, earn an even higher rate of return on the money they are not paying Ohtani — so the cost to them is even less than $ 173 million. The true cost is $ 94 million if they can earn a 15% return, $ 54 million if they can earn a 20% return.
It sure looks like a win-lose contract. The Dodgers get the greatest star in baseball and will reap enormous revenue from having Ohtani on their team, and they got him at a bargain price while seeming to have paid a king’s ransom. Ohtani? He will make plenty of money from this contract and his many endorsement deals. He is going to a loaded team and has greatly improved his chances of playing in the World Series. But, out of ignorance or charity, he signed for far less than he is worth.
Cory Smith is an actuarial analyst at Guy Carpenter and is pursuing his associateship and fellowship from 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, Algos, and Alpha,” co-authored with Margaret Smith (Palgrave Macmillan, 2023).
More: Shohei Ohtani reportedly will defer 97% of his annual salary — and that doesn’t break any MLB rules
Also see: Why $ 700 million for Shohei Ohtani could actually be a good deal for Dodgers