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Good Thursday Morning. Here’s the rundown of this week’s Sports Business Playbook:

• 📰 This Week’s Topic: Shohei Ohtani has signed with the Los Angeles Dodgers for 10 years/$700 million, making it the biggest contract in North American sports history. There is much more than meets the eye to this deal, though.

• 🍸️ Impress Your Friends at Cocktail Party: Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? Hit the “Impress Your Friends at Cocktail Party” section at the bottom for a CliffsNotes of this week’s topic

• 🤯 “Whoa of the Week”: The Washington Wizards and Capitals are heading south, leaving the DC metro for a new arena and entertainment district in Alexandria, VA.

• 💪 Weekly Reminders that Sports are Awesome: The Tommy DeVito story continues to get more incredible with the introduction to a new character — his agent.

Hey team,

Shohei Ohtani is a unicorn.

And it’s not just because he’s a two-time American League MVP who is a top five pitcher and hitter in the game.

It’s also not that he just negotiated the largest — and most unique — contract in sports history.

To set the stage, after months of free agency speculation that culminated in a hilarious “where in the world is Shohei” saga, complete with private planes, a sushi reservation, and a member of Shark Tank, the Japanese superstar announced on December 9th that he had chosen to leave the LA Angels and sign with the LA Dodgers for 10 years/$700 million.

If those numbers didn’t make you fall out of your chair, here’s another kicker: Ohtani requested to defer payments on $68 million — 97% — of his $70 million annual salary until after his deal is complete in 2034.

But no, Shohei Ohtani is a unicorn because in addition to the two things above, he and his business team just pulled one of the greatest marketing/PR moves in sports history — and it’s not for the reasons you may think.

Let me explain why.

Who is Shohei Ohtani

For quick background, Shohei Ohtani is 29 years old and from Oshu, Japan. He became something of a baseball myth early on in his career due to his prowess both on and the mound and at the plate.

Ohtani initially turned down MLB out of high school in 2012, instead choosing to sign with the Hokkaido Nippon-Ham Fighters of Japan’s Nippon Professional Baseball Pacific League. One of the primary reasons: many, if not all, of the MLB clubs would not allow him to continue as both a pitcher and a hitter. The Fighters would.

After four stellar years with the Japanese club and increased demand for his services in the States, Ohtani made the jump to MLB, signing with the Los Angeles Angels in late 2017.

Since then, he’s developed into the best player in the game, winning the Rookie of the Year Award in 2018, MVP awards in 2021 and 2023, and becoming one of the most impressive athletes in all of sports due to his dominance as both a pitcher and a hitter.

As I noted in a rant at the end of an article about MLB’s rules changes earlier this year, what Shohei Ohtani does as both a pitcher and hitter is not normal. Some players can serve as two-way players in emergencies or as gimmicks, but no one excels at both at this high of a level.

Babe Ruth is the only moderately reasonable comp, and he played over 100 years ago and gave up pitching during his career to focus on hitting only. For an additional point of reference if you are not a baseball fan, Ohtani’s two-way mastery would be the equivalent of Patrick Mahomes throwing for 300 yards and three touchdowns a game while also averaging 10+ tackles and a sack as a linebacker.

What makes the whole situation cruelly ironic, though, is that even with Ohtani’s dominance — and another generational talent in Mike Trout playing beside him — the Angels didn’t make the playoffs once during Ohtani’s six years with the club. And despite being “in LA,” the Angels reside south of the city in Anaheim and do not have the pull of the other big market clubs, including the other team in-market — the Dodgers.

So, despite heading only 30 miles north up I-5, Ohtani is now entering a whole new world, trading Orange County suburbia — or MLB’s Siberia depending on who you ask — for the bright lights of Hollywood and one of the game’s most historic franchises where he has a chance to finally win.

Sho Me the Money — in 10 years

Here are the key points of the deal that Ohtani signed with the Dodgers.

Wait, this contract is legal?

Yes — to be explicitly clear: this is 100% legal.

Per Article XVI of the MLB collective bargaining agreement that was agreed upon by both MLB/owners and the players’ union, “there shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.”

In fact, the salary deferment strategy has been used before.

It most famously created Bobby Bonilla Day for the Mets over 20 years ago, and the largest deferred payment for a superstar prior to Ohtani was pitcher Max Scherzer, who deferred half of his $210 salary with the Washington Nationals in 2015. Ohtani obviously takes it to an extreme here, but there is precedent.

What is Ohtani actually going to make annually?

While the deal is technically the largest contract in sports history, it actually looks much different on an annual basis.

Ohtani’s deferral decision — which he apparently brought to all of the clubs he was seriously negotiating with — means his annual payout looks like this:

• 2024-2034: $2 million annually. He’ll be 39 when the deal ends and most likely at the very tail end of his career.

• 2034-2043: $68 million annually (note that he is not charging the Dodgers interest on this deferral; something that Bonilla and others did.)

Is the deferment that big of a deal?

This looks like a ridiculous amount to give up on the surface, particularly when you factor in inflation and the time value of money. For reference, the present value of $68 million in 2034 — essentially what it’s worth in today’s dollars — is $44 million. More on this number later.

So, if you’re taking the contract at face value, Ohtani is effectively forgoing 35% of his future annual earnings by not taking the money now.

This deferment has earned Ohtani a ton of praise in the media and with fans for looking like the ultimate team player.

There’s one problem with that logic: it’s incorrect.

This whole line of thinking assumes that the interested clubs were going to pay him $70 million per year — $30 million more than the prior record — and that Ohtani then offered a discount to make the contract more club friendly.

In reality, the clubs were always going to give him a record setting amount, but they were never going to reset the market with a dollar amount several orders of magnitude higher than prior deals like what was initially being reported.

Despite Ohtani’s greatness, MLB mega contracts do not have a great track record, and there are long-term question marks for Ohtani personally. He’s 29, he has now had two major elbow surgeries, and there is a fair concern on if he can sustain this torrid two-way pace into his 30’s.

The teams all know this, and his contract’s actual value reflects it.

His contract’s average annual value (AAV) to the Dodgers is $46 million —his $2 million salary + the $44 million present value deferred payment. This AAV figure comes in right at the median prediction of $45.9 million most experts were estimating.

So, $44 million in today’s dollars is obviously still f*** you money and still the largest annual salary in MLB history — breaking Aaron Judge’s nine-year/$360 million deal ($40 million AAV) with the Yankees last year — but the only reason he got that mind melting $700 million number that the public latched on to is because his business team negotiated such a backloaded salary that the Dodgers were comfortable agreeing to that final amount.

So the Dodgers are going to take only a $2 million hit to their payroll for the next 10 years for the best player in the game?

Yes and no. To explain why, it’s time for a short “Sports Contracts 101” with Professor SBP.

While MLB does not have a salary cap like other North American professional sports leagues that teams are required to stay under, it does have a “luxury tax” — the Competitive Balance Tax (CBT).

Clubs with payrolls above the agreed upon CBT threshold are taxed on each dollar above the threshold, with the tax rate increasing based on how much the club exceeds the threshold and the number of consecutive years a club has exceeded the threshold.

So while this is not a “cap” and you can go above this number, it’s going to cost your business operations additional money.

The following thresholds were put in place per the 2022-26 collective bargaining agreement:

• 2022: $230 million

• 2023: $233 million

• 2024: $237 million (first year of the Ohtani deal)

• 2025: $241 million

• 2026: $244 million

The Dodgers and several other teams, including the Mets who went full Leroy Jenkins and spent a record $110 million over the $233 million limit (only to miss the playoffs, mind you), exceeded the CBT threshold this past season. Most want to find a way to avoid it but do see it as a cost of doing business; particularly if you’re a big market club who can afford it.

Here’s why this matters to Ohtani’s contract.

As noted above, Ohtani’s contract average annual value (AAV) is $46 million —his $2 million salary + the $44 million present value deferred payment. This is the highest AAV in Major League Baseball.

Even though the deferred payment portion is not “real money” that is going into Ohtani’s pocket, this $46 million is what counts towards the overall payroll calculations and the CBT determination. For that reason plus the debunked “discount” theory, this doesn’t really help the Dodgers that much when it comes to managing their luxury tax bill.

Yes, it is a nice thing for the club to have more cash flow be able to pay “real money” out to build a competitive roster of supporting cast members that can help the Dodgers win. And SI’s Tom Verducci (not an AI bot; actually a real person) reported that “Ohtani asked for language in his contract that assures him the club will make good on its promise to use the savings he created to build a competitive team around him.”

But it’s a small victory, and again, it is not the massive savings that were initially advertised.

Plus, the Dodgers are the second highest valued club in the league at $5.24 billion, so they’re not exactly hurting for cash on their balance sheet.

Lastly, per the CBA, the club will have to put almost all of those deferred payment funds into an escrow account early on in the contract to ensure that Ohtani can be paid what he’s due when the time comes.

In sum, it does give an advantage, but it’s not the major windfall for the Dodgers as initially portrayed.

It’s Shotime

Here’s what this deal means for the parties involved.

So, why did Shohei Ohtani and his team set up the contract this way?

I teased this at the beginning, but Ohtani and his business team pulled off a master class in PR here. To recap:

1. He signed the richest deal on paper in sports history — bigger than Messi, Cristiano Ronaldo, and any of the global soccer superstars. That $700 million number is going to stick in people’s minds regardless of what it actually means in practice. And even with the deferred payments, he still got the highest AAV contract in MLB history and is on a team that should compete in the playoffs almost every year.

2. Because so many people anchored on the $70 million per year and the deferred payment numbers, he looks like the ultimate team player who just wants to win by taking the deferred payment strategy. Even the $46 million AAV, while still an MLB record, looks like a “discount” to many.

3. And if the first two weren’t enough, he should be able to skirt some state income taxes on those deferred payments when the time comes. According to the Wall Street Journal, there is a 1996 federal law that bans states from imposing their income taxes on certain retirement and deferred-compensation plans if someone is receiving roughly equal annual payments over at least 10 years. So, if Ohtani moves back to Japan or to Florida, Texas, or another no state income tax state after he finishes playing, he’s going to skip the 14.4% top tax rate in California on those mega payments.

I legitimately believe Ohtani is a good teammate and a competitor who wants to win. This strategy doesn’t take away from that at all, in my opinion.

I think this is just good business because the orchestrated moves successfully bolstered Ohtani’s profile as a global superstar, earned a ton of goodwill with the fans, and is sure to help him with his rapidly growing sponsorship portfolio — he currently makes $40-50 million per year in sponsorship deals, per The Athletic.

This is still a good deal for the Dodgers though, right?

Hell yes.

They are paying top dollar — at least in payroll terms — for Ohtani, but they’re getting the best player in the league who is sure to help them both on the field and at the box office.

In addition to his direct impact on the field, he’s already recruiting players to come to the Dodgers and can still be a key contributor as a hitter even though he is not pitching this upcoming season as he recovers from elbow surgery.

On the business side, Ohtani could help generate the Dodgers an additional $20-$40 million annually, according to the LA Times.

Secondary ticket prices for Dodgers games next season have surged, the Dodgers surpassed the Yankees for the most followers of any MLB team on Instagram — 3.4 million — and Fanatics announced that Ohtani had set the record for highest jersey sales within 48 hours of a release, surpassing Lionel Messi’s Inter Miami jersey unveiling earlier this year.

But, it’s also what Ohtani can do overseas for the club. He is a national symbol of pride for Japan, and the team Ohtani that plays for will pick up millions of global fans just by being associated with him. This means incremental revenue in merchandise, sponsorships, and other key revenue streams.

What does the MLB league office think about this?

They’re over the moon as well.

Their most exciting, marketable, and global superstar is now on a marquee franchise, and given the Dodgers’ run of regular season dominance, he is almost guaranteed to take center stage in the playoffs every year for the foreseeable future.

This signing also gave baseball another jolt of positive momentum for the league writ large. For a sport that was trending downwards for the last several years, there are some strong tailwinds beginning to pick up.

In an NBC News article, Marcus Collins, a marketing professor at the University of Michigan, said "I've thought more about baseball in the past 48 hours than I have in the past 48 months” because of Ohtani's signing. "I mean, when is the last time people have talked about baseball to this fidelity?"

The game’s unicorn has found his new home. Now, get ready to sit back and watch the Sho.

🍸️ Impress Your Friends at a Cocktail Party

Want to show off your sports knowledge in a public setting but don’t have time to read the deep dive? This section is the CliffsNotes of this week’s topic

• Opener: Shohei Ohtani, Japanese superstar and 2-time AL MVP, has signed with the Los Angeles Dodgers for 10 years/$700 million, making it the biggest contract in sports history. There is much more than meets the eye to this deal, though.

• Shot: Ohtani is deferring $68 million of his annual salary to the end of his deal, which means he will only make $2 million per year in real money for the 10 years of the contract. The rest of the money will be paid out in the 10 years after.

• Chaser: This is all legal, but there is a bit of number massaging going on here. The $68 million deferred to 2034 has a present value of $44 million, which means that Ohtani’s actual payroll hit for the Dodgers is not $2 million or $70 million, but $46 million — $2 million + the $44 million present value of his deferred payment. So while Ohtani gets to claim the richest contract ever, his $46 million average annual value (AAV) is in-line with what most baseball insiders predicted. There is no “discount” really.

• Chaser: This is good for the business of both the Dodgers and MLB as a whole. The Dodgers will see incremental revenue increases due to Ohtani’s global presence, and MLB is thrilled to get their most marketable star on a marquee franchise and most likely in the playoffs for the first time in his career.

• Chaser: This was a master class in PR strategy by Ohtani and his team from the beginning. They get the richest contract on paper ever, they still get the highest AAV ever and also create a potential tax loophole for those deferred payments due to the length of time they’re being held, and they have earned a ton of goodwill with the fans and sponsors because he took a perceived discount in order to win.

🤯 “Whoa” of the Week

Insane, mind-blowing things constantly happen in the sports business world. Here was my favorite of the past week.

1. The Washington Wizards and Capitals are heading south, leaving the DC metro for a new arena and entertainment district in Alexandria, VA. The ambitious plan was announced on Wednesday by owner Ted Leonsis and Virginia governor Glenn Youngkin.

💪 Weekly Reminder that Sports are Awesome

This newsletter is, of course, mostly centered on the business side of sports and the things that happen off the field. That being said, it’s important to remember why we fell in love with sports in the first place, though.

This section is meant to highlight the amazing things that happened in sports this week that serve as that reminder.

1. The Tommy DeVito Cinematic Universe continues to expand. We now have his agent joining the frenzy. What a time to be a Giants fan. If you’re not familiar with “Tommy Cutlets,” watch the two first videos.

Thanks for reading! Let me know what feedback you have.

Also, if you enjoyed this breakdown, please consider sharing it with your friends and network by clicking the social media icons at the top of the newsletter.

Until next time, sports fans!

-Alex