“Ohtani left hundreds of millions of dollars on the table and the Dodgers saved hundreds of millions of dollars.”
Sports fans were anxiously awaiting to hear where Shohei Ohtani, the one-time 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 deliberately kept top secret, with news outlets scrambling to find leaking gossip. Analysts estimate Ohtani’s contract would be the largest in sports history – somewhere north of $500 million. When the news broke that Ohtani would be signing 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 American sports contract.
The following days, the contract details were revealed: $2 million per year for the ten years Ohtani will play for the Dodgers, followed by $68 million per year for the next ten years.
In an interview with Sports illustrated sports journalist Tom Verducci, Ohtani’s agent Nez Balelo, said the postponement was Ohtani’s idea: he had asked Balelo, “What if I postpone all my salary so that my team has a better chance to compete?” Balelo and the Dodgers were willing to do that. The deferral plan gives the Dodgers an additional $24 million to spend each year on free agents such as pitchers Yoshinobu Yamamoto and Josh Hader.
Ball said, “No one should be surprised. Everything he does is unique and impeccably well thought out. There is no player like him and so it is fitting that there is no contract like this.”
It certainly seems like a win-win situation. The Dodgers get the biggest star in baseball and show their fans that they will do whatever it takes to improve the team. Ohtani gets the biggest contract in sports history and shows his fans that he is willing to do whatever it takes to improve his new team.
What about that postponement? CBS sportswriter Matt Snyder wrote: “He still gets $700 million….[He’s] earn more over the next twenty years than anyone has ever earned on a player’s salary in sports.”
No one talks about the time value of money. A dollar paid or received five, ten, or twenty years from now is not the same as a dollar today, because a dollar today can be invested to grow into more than a dollar five, ten, or twenty years from now. 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 many? If Ohtani or the Dodgers can earn a 10% return (the average long-term return on U.S. stocks), that $700 million is really worth $173 million in today’s dollars. The Dodgers can most likely get an even higher return on the money they don’t pay Ohtani – so the cost to them is even less than $173 million. The actual cost is $94 million if they can achieve a 15% return, and $54 million if they can achieve a 20% return.
It certainly looks like a win-lose deal. The Dodgers are getting the biggest star in baseball and will generate huge revenue by having Ohtani on their team, and they got him for a bargain price when it seemed like they paid a king’s ransom. Ohtani? He will make a lot of money from this contract and his many endorsement deals. He goes to a loaded team and has greatly increased his chances of playing in the World Series. But out of ignorance or charity, he signed for much less than he is worth.
Cory Smith is an actuarial analyst at Guy Carpenter and is pursuing his membership and fellowship of 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 will reportedly defer 97% of his annual salary – and that doesn’t break MLB rules
Also see: Why $700 million for Shohei Ohtani could actually be a good deal for Dodgers