MLB Players' Salaries as a Share of Revenues: Laying Out the Issues

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The chart above clearly explains what the issue is.  Major League Baseball players' salaries have decreased relative to the league's revenues. The players' shares of the revenues used to hover above 50%, but have since fell to around 40%. As a point of reference, all of the other North American major professional sports leagues have collective bargaining agreements that guarantee players approximately 50% of revenue.

In terms of real dollars, the difference is more striking. MLB revenues were over $8 BB last year.  That means every  percentage point in 2013 represents about $80 MM in salaries. That's close to $100,000 per player.  And that's just for one percentage point of revenues.  If players were receiving the industry standard of 50% (a gain of ten percentage points), that would mean closer to a billion more dollars going towards salaries.

Some people may not think that this is a problem. Players salaries have still been increasing rapidly, even relative to inflation, when most peoples' wages have remained stagnant. Most of the world's workers are not losing much sleep over how athletes may be missing out on a few hundred thousand dollars.

Team shareholders and MLB officials also probably don't see what the problem is.  After all, this is extra cash going into their pockets.  It's a transfer of wealth from millionaires to billionaires, and most fans probably don't care.

But for players and their agents, this is a real problem.  In fact, this might be the biggest challenge the MLB Players Association has faced in a generation.  And while a significant number of players do earn generational wealth playing the game, many fringe major leaguer's never make that kind of money. For them, even a small change in salaries could make a real difference.

But the big question is "Why has the players' share of revenue decreased?" This is too big a question to answer in one post, but I think it is important to lay out the major issues that need to be addressed.  I have organized my thoughts into four major points, that will each be the subject of its own post.  Two are listed as "Player-side issues" meaning that they are most affected by the actions of players (or perhaps agents and the MLBPA as well).  The other two are listed as "Management-side Issues", since they revolve more around the behavior of teams and the league.

Remember, we are trying to explain hundreds of millions of dollars in lower salaries, so it's probably not just one thing. And if it is just one thing, it would have to be a pretty big thing. Before I get into the issues that I will be addressing, I'll mention a few other alternatives.

Some could claim that revenues and salaries are not being measured accurately, or consistently over time. If that were true, this may not be as big of an issue, but there's just no way that the we are off by such a wide margin to explain the relative decrease in salaries.

One other interesting possibility that I didn't list below is if the supply of baseball labor had changed in some significant way. More precisely, if there was less variation in talent, in say, the top 5000 baseball players in the world, then MLB players would have less leverage in negotiating salaries.  Since the quantity of players demanded has been static since the late 1990's, this could be answerable by looking at the data.  Until I see empirical evidence, I'm not giving this scenario serious consideration.

Matt Swartz's latest works on The Hardball Times were not the first pieces to call attention to the players' share of revenue, but they were the most helpful in getting started.  Cot's Baseball Contracts and Biz of Baseball are valuable resources for anyone looking to do research on the topics. Also, Tom Tango's (and his esteemed readers') comments were really what got me thinking about the issue.

So I've already used a bunch of words, and I haven't gotten to the main issues, so here they are. They'll be a post on each one, but for now I've just written enough to clarify what I mean.

Player-side Issues

1. Players are not optimizing their compensation. 

Basically, players and agents are losing many more contract negotiations than they are winning.  The main theory is that early career extensions have been lopsided in favor of teams.  More players are willing to bypass arbitration and prime years of free agency in favor of relatively less rich extensions. Some would argue that this phenomenon can even affect players who haven't received extensions. Jeff Passan of Yahoo Sports thinks this issue is very important, and wonders if less players are looking out for the "next guy". These extensions are certainly a far cry from players' fights against the reserve clause and collusion.

2. Salary is a relatively less important piece of player's compensation packages.

Another possibility is that players as a whole are placing less of a value on salary when signing contracts.  In this scenario, a relative decrease in salary isn't necessarily a problem for the MLBPA.  Players, like workers as a whole, may be increasingly factoring in location, career development, or "fit", when considering offers. In baseball terms, this could involve working with particular coaches,  being a part of a certain team chemistry, or even "playing for a winner". While this likely wouldn't explain a huge change in salaries, it could be a part of the trend.  We may also be missing out on the value of small items such as health care and the players' pension plan.


Management-side Issues

3. Teams have become more efficient in the way they compensate players.

A generation ago, teams were only effectively able to limit pay via collusion.  Today, there is a common framework that executives can use to put a value on every player.  Every team is at least aware of the market $/WAR.  Additionally, newly available statistics and more modern thinking may have led to cheaper, younger players occupying more roster spots relative to older, more expensive players. Regardless, the increase of business-minded management teams have led to more sophisticated roster construction.

4. The revenues of teams are now less dependent on team performance (and how much they spend on players).

Of all the issues, this has the most potential to impact salaries.  It would also be the most difficult problem for the players to address.  As gate revenue, and other revenue related to team success (merchandise, concessions, parking, etc.) have decreased as a share of total revenue, teams have less incentives to spend big on winning teams.  With most teams locked in on long-term local TV deals, short-term winning is also somewhat less important. National TV money, and other centrally distributed revenue (revenue sharing funds, MLBAM earnings), is earned regardless of team performance. Finally, the competitive balance tax acts as a disincentive for teams with the highest marginal revenue products from spending freely on players.

Additionally, across all sports, the business operations of teams have become more professionalized. Every team business official I've talked to has described the importance of separating financial success from on-field success.  With revenue targets that must be met regardless of winning or losing, perhaps a larger share of MLB's revenues should be going to the front office folks who are finding better ways to capture every last dollar (at least in the short term).

So those are what I consider to be the main factors.  I think that my individual posts will be more content-filled and incisive, but I needed this post to lay out the issues.  Hopefully it helped line things up for you as well, and let me know if I missed anything.

The Weekly Rant: MLB, Outsourcing, and the Indy Leagues as Temp Agencies

Among the many trends in baseball's long history, perhaps none is lamented so much as the disappearance of independent minor leagues. By the middle of the last century, all of the nation's minor league's became either subservient to major league teams, or defunct.

By the mid-1990s, unaffiliated leagues began to reemerge. While many clubs and leagues have sprung up one season, only to fold the next, several leagues have found a bit of stability as the "Indy Ball" renaissance enters its third decade.  It would be a stretch to say that independent baseball is thriving, but it is certainly existing. Total attendance for independent baseball topped 7 MM last season and at one point, 32 former Indy Ball Players were on 40 man rosters.  It's undeniable that Indy Ball is having an impact on the baseball world.

The most successful leagues have been able to carve out a niche as a sort of caste system has developed outside of organized ball. Atlantic League teams often carry multiple former major league players and many other high-minor veterans. While the league has entered the mainstream baseball discussion for its publicity stunts (i.e. Roger Clemens), over 600 former Atlantic League players have been signed by MLB organizations.  It is widely-believed that the Atlantic League has the highest quality of play in Indy Ball, possibly falling somewhere between AA and AAA leagues in the affiliated ladder.

The American Association has a lower quality of play, but more talented young players.  The American Association has received national attention as an alternative for unsigned draft picks, such as Tanner Scheppers and Aaron Crow.  The Frontier League might be even a little lower in terms of quality play, with league rules placing age and experience restrictions on team rosters.   But this has made the Frontier League a haven for raw or under-scouted amateur players.

The development of unaffiliated baseball could be a response to the labor market for players.  There could be a larger raw amount of players capable of playing at level suitable for entertainment.  Or perhaps the growth in the consumer market for sports and entertainment is behind change.  Whatever the reason, MLB clubs now scout independent leagues coast to coast looking for talent.

On a whole, Major League clubs do a remarkable job at selecting and retaining the players with the highest probability of contributing in the major leagues.  But when a few players slip through the cracks, they are likely to end up on an independent team's roster.  This allows for a  MLB clubs to get a second chance on a great number of players.

Instead of adding an additional minor league affiliate, MLB teams can use the lower-level Indy Leagues to identify talent that might have been missed in the draft.  Essentially, teams find it more viable to have some of this player identification take place externally. This is an obvious example of how teams can use Indy Leagues for functions that alternatively could be performed internally.

Another area where this could be occurring is in the high-minors.  Teams would like to devote most of their AA and AAA plate appearances and innings to prospects.  But all teams must also find a way to store several waves of depth options in the upper levels. And over the course of the season, between injuries and call-ups, sometimes players are needed just to fill out rosters.

So instead of having to carry every player a team might need on opening day rosters, teams can pick and choose depth options and roster fillers from the Atlantic League.  Not only does this save roster spots, but it also offers great flexibility and decreases costs.  The Atlantic League basically serves as temp agency (with a low cost to purchase contracts, about $4,000).

This can be especially valuable when dealing with longshots or reclamation projects such as Dontrelle Willis or Tracy McGrady.  Instead of using up valuable minor league innings and roster spots on these types of players, the teams can wait and see how they perform before making a commitment. The worst case scenario, if the player performed well, would be small-scale bidding war with other interested MLB clubs.

The return of independent minor league baseball has been celebrated among baseball fans.  MLB teams are able to take advantage of their existence to outsource specific functions that would be less viable to perform internally.  In this sense, Major League Baseball is acting in line with labor market trends in many other industries.

The Weekly Rant: Qualifying Offer Trends

The qualifying offer has been talked about a lot lately.  Everyone has ideas on how to change the QO system so that it is more fair for players or teams or both.  While I think that there is plenty of room for improvement, I wanted to take a look at some data that incorporates the qualifying offer.

If you are nor familiar with the basics of the system, here's a good primer from MLBTR. So far, 23 players have received QO's, and 23 have rejected them. 10 players in 2012, and 13 players in 2013.  The chart below shows all of the the players, along with information related to the team that extended the QO:

Player	Year	Old Team	Payroll	Wins
Michael Bourn	2012	Braves	83.31	94
Nick Swisher	2012	Yankees	197.96	95
Adam Laroche	2012	Nationals	81.34	98
Rafael Soriano	2012	Yankees	197.96	95
BJ Upton	2012	Rays	64.17	90
Kyle Lohse	2012	Cardinal	110.30	88
Josh Hamilton	2012	Rangers	120.51	93
David Ortiz	2012	Red Sox	173.19	69
Hiroki Kuroda	2012	Yankees	197.96	95
Curtis Granderson	2013	Yankees	230.84	85
Robinson Cano	2013	Yankees	230.84	85
Ubaldo Jimenez	2013	Indians	80.26	92
Nelson Cruz	2013	Rangers	129.07	91
Shin-Soo Choo	2013	Reds	107.98	90
Mike Napoli	2013	Red Sox	151.15	97
Brain McCann	2013	Braves	92.25	96
Carlos Beltran	2013	Cardinals	117.69	97
Jacoby Ellsbury	2013	Red Sox	151.15	97
Hiroki Kuroda	2013	Yankees	230.84	85
Kendrys Morales	2013	Mariners	81.53	71
Ervin Santana	2013	Royals	84.07	86
Stephen Drew	2013	Red Sox	151.15	97
Averages			125.20	90.82

*Payroll Data from USA Today

As you can see, teams that extended qualifying offers were pretty well off financially and competitively. The average payroll of the teams for each of the free agents is over $125 MM (the Major League average team was spending around $105 MM per seasons during these years). The teams extending the QO averaged nearly 91 wins the previous season.

These numbers are a little higher than I would have thought.  We would expect good/higher-spending teams to have more players likely to receive large contracts than the rest of the league. But this data shows that bad/lower-spending teams have hardly participated in the process.  The only losing teams to make QO's are the under-performing 2012 Bobby V Red Sox (David Ortiz) and last year's Mariners (with the slightly anomalous Kendrys Morales).

Overall, better performing/higher-spending clubs are more likely to extend a qualifying offer, and are therefore more likely to receive benefits from the system.  These teams either receive draft pick compensation or increased leverage in retaining the player. If the qualifying offer was meant to benefit small market teams and competitive balance, there is no evidence that it does so.

Now let's look at the data on teams who have signed players under this system.  In this table, I have used the payroll and win amounts from the previous season for each team.  (For example, the Indians signed both Nick Swisher and Michael Bourn after each had turned down a qualifying offer following the 2012 season.  Therefore, the Indians' 2012 Payroll and Wins totals are listed.)

Player	Year	New Team	Payroll	Wins
Michael Bourn	2012	Indians	78.43	68
Nick Swisher	2012	Indians	78.43	68
**Adam Laroche	2012	Nationals	81.34	98
Rafael Soriano	2012	Nationals	81.34	98
BJ Upton	2012	Braves	83.31	94
Kyle Lohse	2012	Brewers	97.65	83
Josh Hamilton	2012	Angels	154.49	89
**David Ortiz	2012	Red Sox	173.19	69
**Hiroki Kuroda	2012	Yankees	197.96	95
Curtis Granderson	2013	Mets	75.40	74
Robinson Cano	2013	Mariners	81.53	71
Ubaldo Jimenez	2013	Orioles	99.83	85
Nelson Cruz	2013	Orioles	99.83	85
Shin-Soo Choo	2013	Rangers	129.07	91
**Mike Napoli	2013	Red Sox	151.15	97
Brain McCann	2013	Yankees	230.84	85
Carlos Beltran	2013	Yankees	230.84	85
Jacoby Ellsbury	2013	Yankees	230.84	85
**Hiroki Kuroda	2013	Yankees	230.84	85
*Kendrys Morales	2013	None
*Ervin Santana	2013	None
*Stephen Drew	2013	None
Averages			136.12	84.47

*Remains unsigned
**Re-signed with original team

From the chart, 5 players resigned with their former teams, while 3 players from this class remain unsigned.  But we still have some interesting numbers.  The average payroll of the teams signing these players was in fact higher than the teams that extended the offer.  However, these clubs had won 6 fewer games on average than the previously mentioned teams.  Overall, we still find that most of the teams who have participated in the the QO system are good/higher-spending.

Some have theorized that free agency hurts competitive balance, while previous studies have shown increased parity in the free agency era. This data does suggest that in the short term, premium free agents have moved from good teams to less good teams.  But in the long term, the flow of draft picks in the opposite direction could counteract or overwhelm the positive contributions of free agents. And again, it is mostly higher-performing, higher-spending teams that are involved in the first place.

It will be interesting to see how the qualifying offer will play out in future seasons.  There really isn't enough data to draw any solid conclusions.  But at the moment, it is hard to imagine the qualifying offer having any positive effect on competitive balance.  It seems that as  many commentators have stated, that the QO exists only as way to suppress free agent salaries.

The Weekly Rant: The Mixed Incentives of MLB's International Spending Limits

During the last CBA negotiations, MLB owners had to find areas in which they could restrain spending.  The league's ever-increasing revenues were directed not only into free agent salaries, but also into bonuses for amateur players from both North America and around the world.

While the Players Association resisted changes that would limit big league salaries (excepting the disastrous Qualifying Offer/Draft Pick Compensation scheme), they were certainly willing to budge on amateur spending.  Spending in the First-Year Player Draft (in which amateurs from the United States, Canada, and Puerto Rico participate) had increased dramatically as teams recognized the value in acquiring cost-controllable, young talent.

Similarly, amateurs from the rest of the world (mostly Latin America and Asia) saw their signing bonuses grow richer and richer in an unrestrained market place.  International amateurs could negotiate with any team, meaning they could receive more than equally talented U.S. players, who could only negotiate with the team that drafted them.

A "hard-slotting" system was agreed upon for the draft, which significantly limited what teams could spend on each pick (and the draft as a whole).  The new rules were a significant achievement for Major League Baseball, in that the spending pattern was not only stunted, but reversed.  Harsh penalties, including loss of future high-round draft picks as well as 100% taxes on overspending, have been effective as disincentives; draft spending decreased by over 11% the year after the new rules went into effect.

The clubs weren't as successful in crafting a new policy for international spending.  Many felt that an international draft would be the next logical step to contain spending and also to allocate talent more equitably across the league.  But a laundry list of possible difficulties caused the two sides to table the idea until after the CBA was negotiated*.

*In fact, an international draft may be a long ways off.  Sources I've talked to have said that neither side is really that unhappy with the current arrangement, and it may be more trouble than it's worth to implement a full international draft.

Instead, teams have "bonus pools" for international spending, just as they do in the draft. Players are still free to negotiate with all 30 teams, but some teams have more bonus pool money available (the amounts are determined using reverse-order standings of the previous season). In theory, this system should work just as effectively as hard-slotting in the draft.  But in reality, spending did not decrease, and may actually increase in coming seasons.

Unlike in the draft, the penalties for overspending are just not harsh enough in the international market.  Teams do face escalating taxes on overspending, along with reductions on spending during the next year.  But these disincentives did not deter the Cubs or Rangers from spending millions more than their allotted bonus poll during the most recent signing period.

While those two teams spent more than $8 MM each, the Yankees are prepared to make a mockery of the system.  Some reports estimate the New York club will spend upwards of $18 MM on prospects, which would result in over $12 MM in penalties.  They would be very restricted in the next season's international class, but there is just too much incentive to break the rules.

The return on investment for amateur talent by all lines of thinking is really quite high. Landing just one star player can result in tens of millions of surplus value during pre-arbitration and arbitration seasons. And while money isn't everything in scouting and signing top prospects, it certainly helps.  Some teams obviously feel that there is more to be gained by spending a great deal in one season to land a bunch of top prospects (and basically sitting it out the next year), than by signing one or two highly touted players each July 2.

This will be a perfect storm once the Yankees really get involved.  First, there are the diminishing marginal costs (once you go over by a little bit, it makes sense to go over by a lot).  Then you have a team that has seen its spending in other areas slowed by tougher penalties. The competitive balance tax curtails the free agent market. Hard-slotting restricts draft spending.  The Yankees are severely limited on ways they can spend money efficiently.

Additionally, the Yankees have struggled to add impact talent through the draft (as a result of both their later draft positions and general under-performance in scouting, signing, and developing talent).  It's easy to see why they are prepared to go crazy on this coming year's crop of international amateurs.

Obviously this isn't what Bud Selig envisioned when the new system was drawn up; big market teams like the Cubs, Rangers, and Yankees buying up the top rated prospects from around the world while small market teams fight for the scraps.  One way to change this would be through the previously discussed international draft.

In absence of that possibility, harsher restrictions are needed.  More severe taxes would be the easiest and least intrusive penalty to implement. I would favor more severe and effective disincentives, such as the loss of draft picks for anything worse than minor overspending.  That penalty has worked thus far for hard-slotting, and I think it could be employed similarly in the international market.


Feature Image courtesy of MLB.com.

The Weekly Rant: Orioles, Blue Jays, and Red Sox Monopolizing Knuckleballers

"There are two theories on catching the knuckleball... unfortunately, neither of the theories work."          -Charlie Lau

I have always found the knuckleball fascinating, in more than just a gimmicky way.  I think having a one or two knuckleballers in the majors is great, because upper 90's fastballs can get boring when everyone has one.

There's currently one "established" Major League knuckleballer, Cy Young winner and Toronto Blue Jay R.A. Dickey.  There's also a scattering of minor league knuckleballers, that range from fringe major leaguers to basically out-of-baseball hanger-ons. 

I tried to find a list of all active professional knuckleballers, and through an assortment of internet pages I was able to scrap together 12 names.  So here it is, (I hope) a list of all the knuckleballers in American professional baseball, with their 2014 organization and 2013 highest level in parenthesis:

Eddie Gamboa (Orioles, AAA)
Zach Clark (Orioles, MLB)
Zach Staniewicz (Orioles, Rk)
Tomo Ohka (Blue Jays, Ohka received an invitation to Spring Training after pitching in an independent league in Japan last season.)
Josh Banks (Blue Jays, Banks hasn't pitched professionally since 2011.  He also received an invitation to Spring Training.)
R.A. Dickey (Blue Jays, MLB)
Steven Wright (Red Sox, MLB)
Charlie Haeger (Red Sox, AAA)
Eddie Bonine (Padres, AAA)
Blaine Sims (Braves, A+)
Joe Zeller (Unknown, Ind)
Joe Gannon (Unknown, Ind)

The thing you may notice is that the Baltimore Orioles, Toronto Blue Jays, and Boston Red Sox all have multiple knuckleball pitchers in their organizations. This is probably nothing, but it seems noteworthy enough to at least examine.

It's a little odd that these teams are all in the same division.  But when you consider that the Red Sox and Blue Jays have also employed the only successful pitchers to have thrown the flutterball this millennium, it's not so weird.

Indeed, the Blue Jays surplus of knucklers really isn't extraordinary at all. We all know about R.A. Dickey.  Banks seems like just a spring training invite that will help the Jays new catching core practice receiving the pitch.  Ohka probably is there for the same reason, although his pedigree and initial success could make him a little less of a long shot.

The Red Sox may be in a similar situation.  Steven Wright may or not make it as a big leaguer, but as long as he's around, it won't hurt to have another veteran knuckleballer in Charlie Haeger.  The fact that Tim Wakefield is still relatively fresh in everyone's minds probably has something to do with it as well.

Really, the only interesting club is the Orioles.  Perhaps after being dazzled by Wakefield and Dickey for so long, they thought they would like their own version.  They even went out and got Hall of Fame knuckleball specialist Phil Neikro to work with their stable of inexperienced knucklers.

Gamboa and Clark are both recent converts who stalled out after climbing up the organizational ladder throwing traditional stuff.  Stainiewicz, meanwhile, used to pitch in Indy ball, but more recently was a member of the Air Force Reserve, pitching for All-Star teams in the armed services.

Really, the odds are stacked against any of these pitchers being effective in the Majors (besides Dickey, obviously).  But it's worth keeping your eye on teams who stockpile certain types of pitchers.  Knuckleballers just happen to stand out.  Also, it would be difficult for more than a couple teams to employ this strategy.  There are a limited number of ex-knuckleballers willing to teach, current pitchers willing and capable of giving it a try, and expendable rotation spots in the high minors.

But just for the sake of variety, I hope some of these guys can break out. Who knows, maybe there will be an organization that becomes the next "Knuckleball U".

The Weekly Rant: Starting Pitching Market Trends

 

The offseason is finally winding down, with just a few significant free agents still out there. The highest upside players available are mostly starting pitchers.  While Kendrys Morales, Stephen Drew, and Nelson Cruz are still unemployed, the real impact players left are Ubaldo Jimenez, Ervin Santana, and AJ Burnett.

Some may have anticipated the sluggers waiting on the market, but the high quality starting pitching for hire is surprising.  Burnett has always been in control of his market, so the choosy 36-year-old looking for the perfect one-year deal isn't really an indicator of the market.  But youngish, goodish, durable guys like Jimenez and Santana should have signed their lucrative deals by now, right?

I mean these were pitchers who were close to the top on most people's free agent rankings.  Among the 18 domestic pitchers in MLBTR's Top 50 Free Agent rankings, Santana and Jimenez were ranked No. 1 and No. 5 respectively.  And with older hurlers Kuroda and Burnett ahead of him, the up-and-down Jimenez was actually in-line for the third largest contract among free agent pitchers.

There's a couple reasons why they are still out there.  The obvious reason is they haven't received a contract offer they like.  The big reason why they haven't gotten that kind of offer yet (or why they never will) is because of the Masahiro Tanaka sweepstakes.  Tanaka split the market for starting pitchers into two segments. You either signed before he got posted, or you signed after he did.  No major league deals with starters went through while the Tanaka drama was unfolding. Check out the flurry of activity and then the long gap:

Dec. 3:  Ricky Nolasco signs with the Twins.
Dec. 4:  Scott Kazmir signs with the A's.
Dec: 5:  Phil Hughes signs with the Twins.
Dec. 6:  Scott Feldman signs with the Astros.
Dec. 7:  Hiroki Kuroda signs with the Yankees.
Dec. 14: Bartolo Colon signs with the Mets.
Dec. 16: Posting System Agreement is reached.
Dec. 26: Masahiro Tanaka is posted.
Jan. 22:  Tanaka signs with the Yankees.
Jan. 26:  Matt Garza signs with Brewers.

Obviously teams weren't going to keeps signing players at the rate they did leading up to the winter meetings (or else everybody would have been signed in 45 minutes), but there's no denying it held everybody up. Besides the actual process surrounding Tanaka, the uncertainty of his availability (along with Burnett's more recent drama) also had an effect on the market.

Now I can't prove that the presence of Tanaka will actually reduce the money other starters receive (I think it will a little, especially for a guy like Santana, who the Yankees may have been in on.).  But it definitely pushed the market back about a month.

I decided to take a look at the contracts starting pitchers were projected to sign, compared to the contracts they actually did sign.  I used the previously mentioned Top 50 Free Agent list from MLBTR, and used the predictions from their various free agent profiles of starting pitchers.  I left off Tanaka, Suk-Min yoon, Jason Hammel, and Roy Halladay. These are predictions made by industry experts, and while they are not perfect, they are pretty good.

Rank	Name	Projected		Actual
		Years	Total $	Years	Total $	Date
1	Santana	5	75
2	Garza	4	64	4	50	26-Jan
3	Kuroda	1	16	1	16	7-Dec
4	Burnett	1	12
5	Jimenez	3	39
6	Kazmir	2	16	2	22	4-Dec
7	Nolasco	3	36	4	49	3-Dec
8	Colon	1	10	2	20	14-Dec
9	Arroyo	2	24	2	23.5	10-Feb
10	Feldman	2	17	3	30	6-Dec
11	Johnson	1	8	1	8	20-Nov
12	Hudson	1	9	2	23	18-Nov
13	Haren	1	10	1	10	25-Nov
14	Vargas	3	28.5	4	32	21-Nov
15	Hughes	1	8	3	24	5-Dec
16	Maholm	1	7	1	1.5	8-Feb

You can see there are some notable discrepancies.  There are also a few that are right on.  Remember, some of these deals have important non-guaranteed elements, such as vesting options (Garza or Haren) or incentives (Maholm). Draft pick compensation will also be important to consider when Jimenez and Santana sign.  But there is still a lot going on in this data.

I decided to look at the date the contracts were signed.  This graph has the difference between the total value of the actual contracts and the total value of the projected contracts for each player on the y axis, and the date each player signed on the x axis (It's recorded as "days after Nov. 1", so that January 1= 61 days.)

Overall, the predictions were low (the new TV contracts likely resulted in double digit salary inflation). But the graph really looks like two sets of data when organized like this.  It's pretty clear where the Tanaka sweepstakes took place.  But the difference between the early and late contracts is pretty striking.

At the beginning of the offseason players were getting the same or more in average annual value or years, or both, than they were expected to.  The three domestic starting pitchers to sign in 2014 have all gotten the same or less in all of those categories.  Now this might change a little. If Burnett is really testing the market, he will likely get more than $12 MM.  And, Jimenez should still be able to land north of $39 MM. 

But Santana will probably come in at way under $75 MM.  And you could add another data point in the early signers column if we included Tim Lincecum.  His 2-year, $35 MM contract certainly blew away expectations, and may have been what set the bar so high, at least early in the offseason.

Overall, it seems this year that if pitchers signed early in the offseason, they earned more than expected. For guys signing later in the offseason, (It's only three guys so far), things don't seem so good.  Looking at it from the team perspective, adding your rotation help early didn't generally result in any savings.  It has certainly been an interesting free agent period for starting pitching, and it's not over yet.

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.  

The Weekly Rant: A-Rod and Arbitrators

 

 

We learned late last week that Alex Rodriguez's suspension had been cut to 162 games. Commissioner Bud Selig had originally banned the former star for 211 games, but arbitrator Frederic Horowitz decided on a reduced sentence, although not as reduced as A-Rod and his team would have liked. The decision generated a great deal of buzz because Rodriguez is still baseball's most famous active player, and because many people are interested in the Yankees. 

 

Critics of Major League Baseball immediately pointed out how much more severe this punishment was than suspensions for other players who violated the Joint Drug Agreement, including those who attempted to mislead investigators.  The JDA levies penalties of 50 games for a first-time, 100 games for a second-time, and a lifetime ban for a third-time violation. Ryan Braun accepted a 65-game ban after repeatedly lying about and concealing his use of PED's. Besides Braun, all violators had received penalties in accordance with the JDA.

 

But baseball obviously decided that A-Rod's actions constituted more than just using banned substances.  Selig used his powers as commissioner to dole out punishments for actions detrimental to the good of baseball.  While this power has traditionally been used for lifetime bans, MLB officials saw no reason it couldn't be used for lesser suspensions as well. The MLBPA filed a grievance on Rodriguez's behalf, and he went to an arbitration hearing armed with his private legal team, after pushing away his own union.

 

Much of the writing about baseball out there is done by, you know, baseball writers.  But there are some people who weigh in on baseball's legal and economic aspects that know what they are talking about.  Wendy Thurm at Fangraphs is one of these people. Thurm's well-researched and well-written pieces are truly must-reads.  That's why I was a little disappointed in her last post, Arbitrator’s Decision On Rodriguez Suspension Leaves Bad Taste.

 

The writing had an almost accusatory tone to it.  While it was factually correct, Thurm didn't really clarify who she was criticizing for the decision.  Her biggest criticism concerned the lack of precedent for the length of the suspension, and the specific violations A-Rod was being punished for. Since the JDA only accounts for 50 games (or possibly 100 if MLB successfully argued multiple violations), then the suspension must also have considered additional language in the CBA. And to go from 65 games (Braun) to 162 games (Rodriguez) is quite a big gap. So while I agree with Thurm that the arbitrator's decision was kind of dramatic and somewhat surprising, I still have faith that Horowitz made a good decision.

 

Horowitz had access to evidence and testimony that we may never see or hear, and ruled that most of the suspension would remain intact.  To argue that his decision leaves a bad taste would imply that he is either incompetent or lacked impartiality.  I don't think it would be fair to say he was incompetent, especially since he had more information than us.  To say that he was not impartial would ignore the realities of arbitration.  Arbitrators must be impartial or else they do not get hired again. 

 

The one possible critique of baseball arbitrators that may have some credence is a tendency to split the decisions between labor and management.  While I have never seen data to support this theory, anecdotally it could be true that after a big win for the employees (the case where the drug tester improperly handled Braun's urine sample), then arbitrators may lean more towards employers in the next decision. 

 

But if we assume Horowitz is impartial, than who could be blamed for the bad taste of the decision?  If the MLBPA was heading A-Rod's case, then it may have been plausible that they didn't deliver a just defense.  But it was Rodriguez's lawyers that defended him, so I assume they were putting in a good effort.

 

Could Selig and MLB be at fault for the bad taste of this decision? They of course went all out to make this suspension stick, and they must have done a pretty good job. If they did anything in poor taste, it would have been up to A-Rod's lawyers to exploit it, and up to the arbitrator to ultimately decide. 

 

I guess I just have more faith in binding arbitration than Thurm does. In all fairness, her writing may have been just pointing out that it's not good to have your most famous player suspended for a whole season.  Nor is it good for the next potential commissioner (Rob Manfred) to be paying drug dealers for evidence against a player.  Nor is it good that we are still talking about performance enhancing drugs so many years into the "new" Joint Drug Agreement.  I think all of those statements are more fair than criticizing an arbitration decision. 

 

Most people agree that Rodriguez will not be able to win a favorable decision in federal courts.  He may receive an injunction if there is a sympathetic judge out there.  But that will just allow him to be a side show for a little longer.  Much like Bonds, Rodriguez has been turned into a great villain.  Whether you think he did it all to himself, or if you think baseball, the union, or even an arbitrator were out to get him, it's a very sad baseball story. Thurm was certainly right that something leaves a bad taste. 

 

 

 

The Weekly Rant: Masahiro Tanaka and the Posting System

Masahiro Tanaka may or may not be coming to Major League Baseball this winter.  The Japanese ace's future is in the hands of his current team, the Rakuten Golden Eagles. With the changes in the Posting System decreasing incentives for Nippon Professional Baseball clubs to post the very best players, Rakuten may hope to keep Tanaka for at least 2014, his last season before he reaches free agency in Japan. And then he would still have to complete one more season in Japan to become a free agent in MLB terms.

The new posting system allows NPB teams to place a price on players they post. That's a significant change. The more dramatic change is that the posting fee is capped at $20 MM.  Another major change is that any MLB team that meets that number will be free to negotiate with the player. For a quick recap on the incentives of the old posting system, check out my post on the subject.


The clear losers in the new agreement are the NPB teams. For most players who get posted, the $20 MM limit probably won't come into the play, but they stand to lose big money on players like Tanaka. And while this is a big loss for Japanese clubs, it is not a big gain for MLB clubs.  It's impossible to imagine that teams would spend less via this arrangement.

While the posting fee is capped, the players contracts part of the equation will probably make up the difference, especially since guys like Tanaka will essentially be free agents with many teams bidding. Small-market teams will still not be able to get the top posted players, although they'll be happy to see more of the transaction costs for big-market teams counted against the competitive balance tax.

Japanese players who make it through the process stand to get a much bigger chunk of the MLB club's money.  But with less incentive for teams to post them, many could lose out on years of a lucrative career in North America.  So just to sum things up, the Masahiro Tanaka saga will be a huge test of the posting system.

So the decision for Rakuten comes down to how much surplus value he will have to their team.  One way to think about this is one season at a time. Would Tanaka be worth more than $25 MM ($20MM posting fee + about $5 MM in salary) for them in 2014.  I don't know the answer, but it's not unrealistic that it could be yes. While NPB revenue (~$1.5 BB) is a fraction of MLB revenue, it is split among just 12 teams. While Rakuten has not traditionally been a top earner since it's entry as expansion team midway through the last decade, 2013's championship season may have helped bolster the club's income statement. But still, $25 MM is far more than any NPB player has ever made, and  likely too high an evaluation of Tanaka.

But if the team could still post him next year for a similar fee, then it's really a much simpler question.  There's no reason to believe the posting fee cap will be lowered, and unless Tanaka has a disastrous season, he would still bring the max amount.  It's likely even if he misses some time with injury, MLB teams still might be interested at a highly stomachable $20 MM. So yeah, it seems like Rakuten will be highly motivated to keep Tanaka for one more season.

The only hiccup could be Tanaka.  If he wants to pitch his age-25 season in MLB next season, he certainly will have some clout.  Rakuten would not want an ugly PR battle with their star. Although, contrary to what has been repeatedly in the US media, I'm not sure their would be public backlash to a team holding onto its best player after their first championship.  That's just not how it usually unfolds in sports.

But besides a publicity battle, Tanaka could simply hold out to gain leverage.  This would certainly make Rakuten more likely to post, or even trade him to another team that would.  Alternatively, some other agreement could be worked out. He could agree to a contract that takes him to full free agency, giving Rakuten two more years of his prime, and Tanaka the ability to essentially pocket the $20 MM posting fee.  These scenario's are a little far-fetched, but with the perverse incentives of the new posting systems, they are not out of the question.

The next few weeks should give us a great deal of information.  There will be further dialogue from  Rakuten on how much they value Tanaka.  MLB insiders will likely examine how he is valued stateside. At some point, there will likely be statements from Tanaka himself on where he wants to pitch.  He may very well wish to stay in Japan and earn a very comfortable paycheck for a few more years.  Or he may yearn for the brighter lights and even more comfortable paycheck that MLB teams can offer.  One way or another, we are going to learn a lot about the new posting system.