It's The Economy, Stupid

This post isn't going to be as in-depth as I'd like it, but it should get the general sense of something that's been kicking around in my mind.

The Beltway Boys points to Chicago's recent signings as an example of the folly of the market and how you can't build through the free agent market. I'd quibble with some of his assertions, but that's for another time. I do take issue with his idea that these contracts are going to cripple the teams: "In a couple of years, the market will have stabilized, and guys like Ted Lilly aren't going to be earning $10 million a year. If he remains true to his career statistics, he'll likely have under-performed during his stint in Chicago, and the Cubs, still smarting from signing all those free-agents, will try to get rid of Lilly and the gang."

I can't argue with the second half, although I think much more highly of Lilly than he does. But I think his first part is wrong. I'm not meaning this to pick on him, but it's a general argument I've seen in a few places, especially with respect to the smarts of the Lerner's current tight-wallet strategy.

We're starting to see a radical change in the economics of the game. That, as much as anything, has probably led to the turbo-charged free agent market. What's made baseball different than football is its reliance on local revenues. You hear lots of teeth gnashing over the Royals' ability to compete, yet there's never any talk of Green Bay not being able to compete. The NFL generates most of its money through the gigundous national TV contracts. Whereas in baseball, the Yankees get tens and tens (if not hundreds!) of millions more from their team-owned cable network than the Royals do for their broadcast rights. It's an unequal playing field.

There's still a huge disparity with what the Yankees make, but teams are gaining larger and larger bundles of shared revenue. The recent TBS package brings MLB's national TV Rights to about $3 billion over the next 7 years or so, and this guy estimates that means an additional 19% in revenue. At the same time, MLB.com is exploding. Although nothing has been officially released, I've read that teams get about $6-7 million for that, and it's only going to grow. One estimate I read recently expects that number to double in the next few years.

This 2001 article (I'd really encourage you to read the entire series if you're at all interested in the economics of the game) says that mlb teams used to only get about $24 million in league revenues. This article claims it's up to about $27 million. But with continued growth in MLBAM, the increase in revenue from the new TV deals, and continued growth in near areas, such as their deal with XM, revenues will continue to expand -- as that article notes, profits were up nearly 50% in just one year.

With revenues climbing higher and higher and some changes to the revenue sharing formula which make it less profitable to be a cheapskate, creating incentives for teams to grow their own local revenue, there's no reason to believe that salaries aren't going to continue to grow steadily. They might not grow as exponentially as they seemed to this offseason, but $8-10 million is going to be the going rate for a league average innings eater. Just one offseason ago, Billy Beane was laughed at for signing Esteban Loaiza to a 3/$21 million deal. 12 months later and that almost seems like a bargain, doesn't it?

At some point, we're all going to have to hold our noses and accept the new reality. Of course, this places a premium on having a top-notch farm system. If you can have the kids do it for a fraction of the price, you're better off. But, at some point, the Nats are going to have to pay top dollar for top talent instead of kvetching about the prices. Otherwise they'll be like my grandmother who always tipped by rounding up to the next dollar because she only got a nickel back in the thirties. Or worse, the Peter Angelos strategy of paying 3 mediocrities $5 million a year instead of giving one stud the $15 he deserves.

Time, of course, will tell.

The system is changing. All of us need to adapt.