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July 31, 2012 BizballInefficiency Becoming the Norm with Veteran Contract ExtensionsMoney has a way of making people do funny things. A lot of it can alter your perception of what is (and is not) extravagant. It certainly changes how you approach purchases, and in MLB, it’s no different. The times were different and the circumstances far removed, but I can’t help but recall former commissioner Peter Ueberroth speaking to the owners on October 22, 1985. As I said, the topic was far, far different (collusion), but nothing (maybe ever) has changed about owners being hyper-competitive. As outlined in John Helyar’s seminal book, Lords of the Realm, Ueberroth was quoted as saying: If I sat each one of you down in front of a red button and a black button and I said, “Push the red button and you’d win the World Series but lose $10 million. Push the black button and you would have a $4 million profit and you’d finish in the middle.” You are so damned dumb. Most of you would push the red button. Look in the mirror and go out and spend big if you want, don’t go out there whining that someone made you do it. The point is this: owners, when given opportunity, will spend to win… if they have the resources to do so. And, so here we are. Just shy of 26 years after Ueberroth’s quote, the song remains the same. The difference is that under Bud Selig’s tenure controls have been put in place to curb that spending appetite. Whether it’s the Competitive Balance Tax (better known as the luxury tax), debt limits on clubs, or the new luxury tax on draft bonuses, the ability to get “spend fever” in order to win a World Series has become harder. Don’t think that it doesn’t happen, though. Not for a minute. Not for a split-second. With media rights money from regional television deals and through MLB Advanced Media, clubs are raking greenbacks in. Even if they don’t have greenbacks, some are willing to go into debt to get there. Along the way, getting creative with how contracts are structured gets around that nasty luxury tax. In the midst of all this, some clubs find themselves inking deals that they have to know are bad due to exceptionally long length. In that, I mean, they’re inefficient.
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Surprise Me!
"...to keep Hamels in the fold, you had to offer more years in order to garner the high dollars. The AAV would kill the Phillies in terms of the luxury tax."
To me, that is the key line in this. Longer-term contracts are going to be even more common and teams are going to be sunk with their costs. A couple of bad moves or bad luck with long-term contracts could cripple a team.