The Weekly Rant: Possible Outcomes of the Tanaka Deal

Masahiro Tanaka's contract with the Yankees has gotten a lot of attention already.  Dave Cameron at Fangraphs had a nice overview of it.  I wanted to look more in depth at the specific possible outcomes for the deal.

The contract is interesting for reasons besides being one of the largest ever for a pitcher, at 7 years, $155 MM. (There's some disagreement on how to rank the pitcher mega-deals. MLBTR's Tim Dierkes has a great read on how they should be analyzed.) The contract also includes a $20 MM "release fee" and an "opt-out" after four seasons. Here's how the contract breaks down cost-wise with and without the "opt-out":

Years Cost Cost/Year w/ opt-out 4        $108 MM $27 MM w/o opt-out 7        $175 MM $25 MM

It's a ton of money either way.  The Yankees are going to be seriously hoping Tanaka opts-out though. The reason is that it is nearly impossible to imagine a situation where Tanaka both a) does not pitch well in his first four seasons and does not exercise the opt-out and b) pitches well enough in years 5-7 to be worth $67 MM.

Even if salary inflation bumps the value of 1 WAR over $9 MM by 2020 (Year 7), Tanaka would need to put up 2.5 WAR per season over years 5-7.  If he's likely to produce at that level, he will have just opt-out.  Overall, this deal would be pretty terrible if for the Yankees if Tanaka doesn't opt out.

Let's say he averages 2 WAR per year over the entire 7 seasons.  Maybe a little above 2 WAR for his 4 younger seasons and a little below for his 3 older seasons.  That's not great production, and not what the Yankees are expecting, but it's also not a complete bust. And let's assume some significant salary inflation, so that the overall $/WAR rate over the contract's duration is $8 MM/WAR. Here's how the contract would look:

Total	Total	Total	Surplus	$/WAR
WAR	Value	Cost	Value
14	$104 MM	$175 MM	­-$71 MM	$12.5MM

I guess that wouldn't crippling (for the Yankees), but its pretty bad.  Now lets see what would happen if Tanaka is a 3 WAR pitcher through his 4 seasons.  He would likely opt-out if this is the case.  If the going $/WAR rate is at just say $7 MM, he should be able to find a deal with more years and similar average annual value to what amounts to a 3-year, $67 MM option.  He would be entering his age-29 season at that point, so he'd be in line for a nice payday if healthy.  So I think as long as he's about 3 WAR pitcher through year 4, he'll opt-out. Now let's say $7 MM is the market rate over those four years and see what the contract looks like:

Total	Total	Total	Surplus	$/WAR
WAR	Value	Cost	Value
12	$84 MM	$108 MM	-$24 MM	$9 MM

Now it looks at least reasonable.  Since the "release fee" is getting spread around 4 years as opposed to 7, the average annual value goes up a couple million.  And remember this is guessing that Tanaka is about about as good as Hiroki Kuroda.  That would be a pretty nice projection for Tanaka, and he still doesn't provide positive return on that contract.  What does he have to pitch like for this deal to break even?

Total	Total	Total	Surplus	$/WAR
WAR	Value	Cost	Value
16	$112 MM	$108 MM	$4 MM	$6.75 MM

Basically, assuming some inflation, the Yankees are betting on Tanaka being a 4 WAR pitcher. He doesn't have to pitch like Yu Darvish to make this work, but he does have to very good.  And if he's only pretty good, the deal doesn't look good at all. And if he's not that good, this deal will be a 7-year disaster.  Tanaka is set-up exceptionally well to optimize his earnings no matter how he pitches.  But the Yankees are taking a big risk, knowing that Tanaka will have to pitch like an ace for this deal to be a winner.