Wednesday, December 20, 2006

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.

9 Comments:

  • As long as the teams are flush with cash, its not going to change. There has always been the ever sliding uphill slope to player salaries. And, as the top players get more and more, the average, and above talent will get more as well. The Goldman Sach's Chief Executive is taking home $53.4 million in bonus cash for helping return a 25% after tax profit and nearly 40% profit on equity in 2006. Does he deserve it?--Sach's thinks so and feels the market can bear it. I'd like to receive a bonus like that too--I am not going to fault anyone on their financial decision making. Its their money, they can do as they feel fit. My Nats Season Ticket prices are going to go up too, very soon--and I would be shortsighted to not expect that. I will adjust--accordingly.

    By Blogger Screech's Best Friend, at 12/20/2006 2:54 PM  

  • ierfctmYou keep talking but all I hear is how you want to destroy our minors in favor of signing 5 "Jason Maquis"s to a 5/60 year deals.

    Why can't you just trust Stan is putting every last saved cent into the minors and even moving 1 million of that money would cause damage to our now-inevitable 2010 WS champs?

    By Anonymous Pro-Planner, at 12/20/2006 3:04 PM  

  • Man! Over the past couple of days, I've been the lead story on several blogs, usually with a headline something like "Some of what he says makes sense, but man he's stupid!" (or a similar variant).

    I guess I'd rather get stomped on rather than someone say, "Beltway Boys? Who are they?"

    :)

    Seriously, thanks for reading; I'm just kidding about the disagreement part. If we all thought the same thing, there would only be one blog, right?

    I can't say for sure that you're not right. Time will tell.

    I just don't see a scenario where these type of contracts can continue without something bad happening. Escalating salaries got scary enough for the owners that they colluded not-to-many years ago to keep those salaries down. At some point, owners are going to put away their check books. Maybe it won't be for 10 years, maybe it'll be in 2. I don't know.

    But like you said, "time will tell"

    I always enjoy your work.

    Farid

    By Anonymous Farid @ Beltway Boys, at 12/20/2006 3:22 PM  

  • I think there is always a year in every cycle where the salaries do seem to come under control, but those are the exceptions rather than than rule.

    There are new standards in play. The Nats can choose to ignore them now for the sake of saving a few bucks (note I didn't say so they can rebuild the farm system - they could do that anyway), but they won't be able to ignore them in 3-4 years. Let's see what happens.

    By Blogger El Gran Color Naranja, at 12/20/2006 3:41 PM  

  • I don't think you're being stomped on at all, either here or at Harper/EGCN's place, but here's an instance where you were the "lead story" (or one of them, sort of) in an exhibit of gratitude.

    By Blogger Basil, at 12/20/2006 3:57 PM  

  • "Why can't you just trust Stan is putting every last saved cent into the minors and even moving 1 million of that money would cause damage to our now-inevitable 2010 WS champs?"- By Pro-Planner

    Thats the problem for me; where is tthe 20 million there going to save next year( and beyond) going. Can you honestly tell me that all thats going into the farm system? I doubt ever 2 million is going back into the system. There is only so much you can put into a farm system at one time; and the rest of the money (if not all of it) is going in Lerner's pocket. Sure, that money will come in handy next year to sign some of those pricey draft picks, but can't they spare a little to make the tream decent. We don't need to lose 100 games+ next year, but the "plan" they have seems to dictate that it is the only way the team will become a winner.

    By Blogger natsfan7, at 12/20/2006 6:23 PM  

  • Nice post. I agree completely. One thing that I've noticed in player negotiations is that teams are starting to place a much lower premium on cash than they are on home-grown talent from the minors.

    People are willing to pay what seems like outrageous sums for middling talent, but deals involving better-than-average prospects seem to be on the decline.

    The question is, of course, is this situation sustainable? That is, will revenues (hence salaries) continue to rise indefinitely or will things level off again once some of the new markets you mention mature? We'll see.

    By Anonymous Anonymous, at 12/20/2006 10:08 PM  

  • Good stuff. You had me, then you lost me right around:

    "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?"

    Seems that Gil Meche has really messed with you if Loaiza is (almost) looking like a bargain to you at this point...

    By Anonymous ck, at 12/20/2006 11:05 PM  

  • Oh, I was kidding about the "being stomped on", just a back-handed thank you for reading my stuff.

    Seriously, we each come to the "table" with a different set of expectations and hopes. To be different is to be desirious.

    Unless, of course, you are a borg.

    By Anonymous Farid, at 12/21/2006 10:06 AM  

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