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Oakland Athletics Fiscal Problem
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In Oakland Baseball Simworld Simulation, Oakland Athletics Lost $23 Million At End of 2004 Season
Sports Business Simulations creates online simulations of sports organizations for use in the high school and college classroom. "SBS," as its called, currently has two simulations: The Oakland Baseball Simworld and the XFL Simworld.
The Oakland Baseball Simworld is a system-dynamics based simulation constructed using Forio Business Simulations "FML" programing language. It was developed for the college classroom, and to mimic the fiscal behavior of the Oakland Athletics and allows one to test different business strategies over a 15-year period.
To assure a realistic simulation, the Oakland Baseball Simworld is updated every year to match observed fiscal changes in the real Oakland Athletics. This year, calibrating the sim revealed a $23 million loss.
"We believe that estimate is correct plus or minus $5 million," said SBS CEO Zenophon Abraham. "We've been very accurate in the past, and the Oakland Sim is rapidly becoming the standard to use in the classroom as a teaching tool.
Mr. Abraham developed the Oakland Sim orginally as a tool to help a prospective buyer of the Oakland Athletics, when Abraham was Economic Advisor to then-Oakland Mayor Elihu Harris in 1997. After his stint with the Mayor's Office, Abraham built the simulation into the 975-variable, 2,256-element device that exists today. It's used at several universities, including Washington State University, The University of San Francisco, as well as high schools, like North Branch High School in North Branch, MI.
Abraham talked about the recalibration of the sim that revealed the fiscal shortfall "I had to reset the organization simulation to reflect the fiscal position at the end of the season. At that point, the A's payroll had ballooned to $59.6 million. When I set the model equations to start at that player payroll level, and didn't reset the ticket prices, I noticed a huge shortfall in revenues versus expenses, so I researched to determine if the organization made any media release about ticket prices. I didn 't see one. So, I reset the weighted average ticket price from $11 to $14 just to be on the safe side.
"At that point, the franchise value the sim produced was $172 million, and a loss of $23 million (which varies by $2 million to $5 million depending on the random variable concerning response to ticket prices and won loss record, but the direction of the response is the same)."
Abraham says that according to reports in the SF Chronicle, other well-placed sources, the team's worth between $150 million and $170 million. "The only way for me to reach $150 million in value would be to further reduce the initial ticket price, and $170 million is very close to that reported in the simulation," Abraham said, "That means an even deeper loss, but I don't think it's that great. I believe the $23 million, plus or minus $ 5 million, is accurate."
Abraham says this shortfall explains not only why the A's let go of starts like pitcher Tim Hudson, but also marks the limits of the expense level the organization can maintain: "The A's raised player payroll to the highest level its ever been in team history," Abraham observed, "Management was spending for a championship, gambled, and lost.
It also explains why the organization is being sold. In the Oakland Baseball Simworld, it's hard to push player playroll over $45 million without borrowing $100 million or building a new stadium, or some change in the MLB Collective Bargaining Agreement with respect to TV contracts."
You can try the Oakland Baseball Simworld yourself at http://www.sbs-world.com Just go to "SBS Free Trial" to run the sim for free for a one day period. A subscription is just $12.50.
The Oakland Baseball Simworld also comes with a special curriculum called "Baseball Business Dynamics 101" which can be used with your current classroom teaching format.
You can contact SBS at 510-444-4037.
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