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April 3, 2013

Pebble Hunting

The Future of Contract Extensions

by Sam Miller

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There’s a quote that gets attributed to Gandhi in a variety of iterations that follows this idea: “First they ignore you, then they laugh at you, then they fight you, then you win.” Baseball isn’t quite as combative as British colonialism, but baseball’s history of finding inefficiencies fits the structure. Small-market teams come up with new ideas, incubate them, and, if they work, eventually see their ideas incorporated by big-market teams. Virtually any strategy works better with money, so once that happens the edge is trimmed or eliminated. Small-market teams can win but, the thinking goes, not by playing the same game in the same way. I’m not telling you anything new.

This is pretty clearly where we’re going with extensions. A year ago, in a piece on MLB.com, Jordan Bastian ran down the list of teams that had signed players to extensions before the players reached two years of service time.

Each of the 11 teams to hand out such contracts has a payroll under $100 million for 2012, and nine of the clubs fall in the lower half of baseball's 30 clubs in terms of team salary.

The Rays (four), Rockies (three), Brewers (two) and Royals (two) are the three teams that have done more than one such deal. Besides the Indians, the Padres, Pirates, Blue Jays, A's, Twins and D-backs have also completed similar contracts.

That’s not true anymore. A few days later, Madison Bumgarner signed a five-year extension with two club options, and last week Buster Posey signed a forever extension with just 2.2 years of service time. Both Chicago clubs have joined in: Starlin Castro signed his extension with Chicago when he was right at two years of service time, and Chris Sale signed his this offseason at 2.1 years. The Cardinals signed Allen Craig to an extension when he had 2.1 years of service time. When Bill Baer wrote this week that “extensions are the new OBP,” you might have read it as proclaiming a new strategy to take advantage of a market inefficiency. Better, though, to read it as the opposite: The new strategy is now the mainstream strategy.

And when that happens, the market inefficiency might as well be gone. Small-market clubs can’t count on it as an edge; now they have to make these moves just to keep up, and keeping up is not enough. So where does the last dog at the bowl find an edge in the era of extensions?

Some team is going to try one of these things, and we’ll have to wait and see what works.

1. Sign earlier extensions.
The premise of all these extensions is pretty simple, and applies even more strongly the younger the player: the team, as a billion-dollar company with a broad balance sheet of players, can absorb a ton more risk than the player, a kid looking at 70 more years of house payments to make and just one very fragile marketable skill. In exchange for taking on that risk, the team gets a break on salary commitment. If it’s true when we’re talking about Starlin Castro—who had already been paid about a million dollars in his career, was just a year away from making millions more in arbitration, and who had perhaps the safest skill set a baseball player can have—it’s exponentially more true when we’re talking about, say, Starlin Castro two years ago, when he’d been paid $45,000 in his career (plus a few meager minor-league salaries).

This isn’t nearly uncharted territory—Evan Longoria signed a week after his debut, of course—but there is uncharted territory to chart. It’s not inconceivable that a team like the Rays could approach Wil Myers about a long extension now, before he has played a game in the majors. It’s not inconceivable that a team like the Pirates could approach a prospect like Gerrit Cole about a long extension, before he has made his second Triple-A start. It’s not totally inconceivable that someday a team like the Indians could sign a long-term extension with a prospect like Francisco Lindor, who hasn’t even reached High-A. “But that’s so risky!” they’ll say, just like they said about John Hart and the Indians in the 1990s. But that’s the point: the ability to carry risk is an asset that a team can use or waste. The more risk there is, the better their potential position.

Pros: Would completely eliminate any incentive to play service time games; could particularly appeal to minor leaguers who aren’t even making the $500K minimum that pre-arb players get; would likely involve contract extensions small enough that none could cripple a team, and many (like, for instance, Wade Davis’ one-year-of-service-time extension) could still be easily unloaded onto another team even if the player doesn’t develop as planned. 

Cons: The large signing bonuses some amateurs get already create tension in minor-league clubhouses. If a Double-A phenom were to sign a long extension that bought out his entire 20s for $25 million, the unintended consequences would be hard to predict. And if that player is an MVP contender making $4 million as a 26-year-old fifth-year player, he may not take it as well as Evan Longoria has.

Sign Longer Extensions
I wrote about this idea around this time last year, in the context of Mike Trout. Again, it’s more risk. I get that. The risk is the point. It can blow up; every player who gets an extension could be Bob Hamelin, or Angel Berroa, or Manny Corpas. If there weren’t risk, every team would do it on their own, and if every team were doing it it would quit being a small-market gamble. Don’t forget the premise here: teams like the Pirates, Padres, Rays, etc., are probably going to lose. So even a strategy that is probably not going to work might still be the right strategy.

The best part about this strategy is that, in the extension era, there are far fewer free agents to sign. Coinciding with this era is, for now, the TV-contract era, where there is a lot of money going around. Put those two things together and you get situations like we’ve seen in the past year: The Red Sox were able to unload their awful Carl Crawford contract, while the Marlins got rid of a couple big contracts that were less attractive than when they had been signed a year earlier, and both teams got actual value in return. Moving contracts might never be easier than it’s about to be; or, just wait and see the sorts of names that are thrown around in trade talks next winter, when Shin-Soo Choo and the ghost of Roy Halladay could very easily be the best free agents on the market.

Cons: It’s almost certainly not as easy to sign players to longer extensions as it is to sign them to early extensions. A player who signs a five-year extension at two years of service time really has only two options: A five-year extension, or gambling on year-to-year performance. But a player who is offered a 15-year extension at two years of service time would have three options: The long extension, the year-to-year, or a moderate extension in between (say, like, the ones that everybody is signing these days) that guarantees the player riches for life but also leaves the possibility of bigger paydays down the line.

Sign More Extensions
Of the 20 players who have signed extensions longer than four years since the start of last season, all are, if not stars, something close to it. The least star-like is maybe Erick Aybar, but he’s a Gold Glove shortstop and a three- or four-win player. But when Cleveland started signing extensions in the early 1990s, it wasn’t just Carlos Baerga, Kenny Lofton, and Jim Thome getting multiple years.

Hart signed a number of others to multiyear contracts, including marginal players like pitchers Jack Armstrong, Dave Otto and Scott Scudder—all of whom are now playing elsewhere—and third baseman Carlos Martinez, whose contract the club bought out this spring. "We've made some mistakes," he admits, "but they were not big money mistakes, and, in most cases, other clubs have picked up those contracts."

While stars might be the hardest thing to acquire in baseball, average players and worse cost just as much for the production they provide. The Padres signed Cory Luebke to a four-year extension (plus options) when he had one year of service time, and Nick Hundley to a three-year extension (plus an option) when he had three. Neither player is a star, and neither seems likely to ever get a free agent deal as long as the extension he signed.

Cons: A star can get worse but still be worth his roster spot. A marginal player can’t. A marginal player can, however, block a higher-upside alternative. So, less flexibility.

Pros: According to Hart, these contracts are actually about adding flexibility. "The first lesson I learned is that stability leads to flexibility because it's a lot easier trading players who have multiyear contracts," he told Sports Illustrated in 1995.

Sign No Extensions
I can’t figure how this one would work, but I’m still thinking about it. Best hope: if the free agent market shrinks and if extensions become the norm, then the discount a club can expect from an extension will also shrink. That is, a player who knows he’ll be one of the only prominent free agents in a market starved for free agents will require more money to sign an extension; if he does indeed sign that extension, then the market forces pushing extension costs higher just get stronger, creating the momentum of a runaway freight train, or else eventually reaching some sort of equilibrium.

A small-market club might gamble on baseball’s finances being in a bubble right now, and bet on a baseball recession in the next 10 years. If that happened, the clubs without long-term extensions on the books would be the least burdened. There’s no indication that it’s true, and there’s really no indication that any clubs think it’s true. But, for a small-market club trying to win, it’s always going to be about standing alone and hoping to be laughed at, ignored, fought, and ultimately imitated. 

Sam Miller is an author of Baseball Prospectus. 
Click here to see Sam's other articles. You can contact Sam by clicking here

Related Content:  Extensions

13 comments have been left for this article. (Click to hide comments)

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Cory Luebke is well on his way to becoming a star; his numbers are very similar to Brandon Beachy, and allows about 1.1 BR per nine. Darn TJ. Check back in mid 2014, after he's been back a year.

Apr 03, 2013 06:43 AM
rating: 0
John Carter

" . . . a player who knows he’ll be one of the only prominent free agents in a market starved for free agents will require more money to sign an extension" Wouldn't that only be true if the market for that type of player didn't shrink in proportion with the market of players similar to that type? With more extensions, not only will there be fewer free agents, but fewer teams needing free agents.

Apr 03, 2013 06:52 AM
rating: 0
BP staff member Sam Miller
BP staff

I think it's in the middle. I don't know it for a fact, but if there are four teams bidding for one star player I would expect it would favor the player somewhat more than five teams bidding for two star players, and more still than six teams bidding for three. But it's debatable.

Apr 03, 2013 07:06 AM
John Carter

True, it would depend on the numbers. What if there are more free agents than there are teams looking for free agents - at least of a particular type? There are always a couple of guys each March still looking for a contract. It's like musical chairs. However, those are typically players at the end of their long career not guys who are just entering their free agency years - at least that's my impression.

Apr 03, 2013 08:31 AM
rating: 0

The downside is that a team is stuck paying millions to a player who is no longer productive (aka Vernon Wells). The upside is not having to worry about losing him (quite so soon) to free agency. Would you try to lock down someone like Matt Wieters today?

Apr 03, 2013 06:55 AM
rating: 0
Shaun P.

If enough small market teams guess right on enough young players to give extensions to, the free agent market really might become a wasteland - and the big market teams that don't draft and develop enough talent to sustain themselves might be in big trouble, for a little while.

Thus, I think the "sign more extensions" route, if taken by enough teams, if they all get enough guys right, might enable those small market teams to compete for a while after the big market teams have already jumped on the "sign extensions" bandwagon.

Lots of big ifs, but interesting to consider.

I also think it would be fascinating to consider the flip side of this coin - what do the big market teams who need free agents (Phillies, Yankees, Dodgers, Angels, White Sox, etc.) do when the free agent pickings are slim?

Apr 03, 2013 07:17 AM
rating: 0
BP staff member Sam Miller
BP staff

Trade for the back half of small-market teams' extensions

Apr 03, 2013 07:30 AM

"The large signing bonuses some amateurs get already create tension in minor-league clubhouses."

Is there some articles or reading I can do into this topic? I find clubhouse chemistry and tension is an extremely interesting part of the baseball world.

Thanks for the article.

Apr 03, 2013 08:57 AM
rating: 0
BP staff member Sam Miller
BP staff

First thing that comes to mind is the book Odd Man Out by Matt McCarthy. Part of it is that the players are all competing with each other for the next promotion, so if you feel that the club has more invested in your "competition" than in you...

Apr 03, 2013 10:45 AM
Eddie Bajek

I think there is language in the new CBA preventing guys in the minors from signing MLB extensions as a way to prevent circumventing the signing bonus rules. I'd have to check further after I leave the office...

Apr 03, 2013 09:54 AM
rating: 0
BP staff member Jason Wojciechowski
BP staff

Eddie, did you find anything on this? It would make sense if the rule did exist because it would be the easiest way in the world to get around the rule that you can't sign a draft pick to a major-league contract.

Apr 04, 2013 21:08 PM

Be lots better at guessing which players should get extensions and which shouldn't.

This is the only one that works, because the reason big clubs can offer more extensions the same as with free agent contracts, they can afford mistakes. Both plans boil down to money and you can't won a money game with less money. You have to find a way to compete elsewhere. Billy Beane made this work for awhile by embracing OBP and saber metrics, but then the big market teams figured it out and copied it.

Offer extensions longer, larger and more often, but to coaches, trainers and scouts.

An outside the box idea I've had for awhile. Coaches, trainers and scouts make tons less than players so you could significantly outbid other teams for a tiny fraction of what it would cost to outbid on players. More and better scouts would give you more good prospects. More and better coaches would increase the odds your prospects pan out. More and better trainers means you lose fewer guys to injury. If all this worked you could survive losing talent to bigger market teams because your system was producing more talent.

The extension game is just like the free agent game, you can't

Apr 03, 2013 16:18 PM
rating: 2

But the trend is that the teams really aren't saving money in these extensions anymore. No more Longoria sucker-deals. Guys like Votto and Posey are getting paid as if they will be MVP candidates for the next 8+ seasons.

Apr 04, 2013 05:27 AM
rating: 0
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