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August 30, 2006

Prospectus Today

The Big "Oh!"

by Joe Sheehan

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The Houston Astros placed a huge bet on the table yesterday, signing Roy Oswalt to a five-year contract worth $73 million. The deal sets a new standard for pitcher compensation in the post-2002 era, and will have a big impact on the market for free-agent pitching as soon as this winter.

The numbers are staggering: an average annual value of $14.6 million per year, heights not reached by any pitcher in a deal longer than two years since the 2002 Collective Bargaining Agreement increased revenue sharing and investment taxes on payrolls. Those mechanisms have served to make contracts signed before that CBA went into effect-such as megadeals for Kevin Brown, Mike Hampton and Mike Mussina--anachronisms. Those three pitchers signed contracts paying more than $14 million per season in the 1998 and 2000 offseasons. In the four offseasons under the new CBA, free-agent pitchers maxed out at about $13 million per annum, with Pedro Martinez setting the pace. The top free-agent pitchers in each year signed deals within a small range of $12 million-$13 million per season.

Pitchers who, like Oswalt, didn't test the market and signed extensions with their current team didn't fare even that well. Ben Sheets, who signed a full two seasons before he could become a free agent and while coming off his best year, makes $9.6 million a year on his deal through 2008. Johan Santana, who also signed two years removed from free agency and four months removed from collecting a Cy Young Award, makes just shy of $10 million per year for four years. Prior to yesterday, Roy Halladay had set the pace for this type of deal, signing a three-year, $40-million contract extension back in March, again a full two years before he could be a free agent.

Two exceptions to this rule are future Hall of Famers Roger Clemens and Randy Johnson. Clemens has reached one-year agreements the past two years for $18 million and $22 million a season. One-year deals should pay more per year than multi-year contracts, which is just the simplest reason why Clemens' case isn't directly comparable to anyone else's. Johnson's contract extension, a two-year deal for $32 million, was the result of his agreeing to be traded to the Yankees in late 2004. He had considerably more leverage than is normal at that point, and like Clemens, signed an extension for a short period of time. Neither is a market contract, as both players signed under exceptional circumstances.

Oswalt's deal dramatically raises the bar for top starting pitchers, setting the price for a top starter on the open market at $15 million per year. Given that the Astros had Oswalt's rights for 2007 for what would likely have been around $13 million (Oswalt is making $11 million in the second year of a two-year, $16.9-million deal) , you can look at this as a four-year, $60-million contract for 2008-2011.

It took a while, but all the new money flowing into the game appears to have returned the prices for talent to 1999-2000 levels. This contract adds support to the idea that salaries move in concert with available revenues, not independent of them. Look for both sides in the upcoming CBA negotiations to be aware of this effect, each looking to retain as much of that revenue growth for their side as they can.

The Oswalt deal is significant for the industry, and clearly a boon for the right-hander himself. The question for the Astros is whether they'll get a good enough return on their investment. Oswalt has been a star for them since he made his debut in May of 2001, and his pitching was a critical part of the franchise's first pennant. His missed start last week-really just pushed back a few days-was his since 2003, although he does tend to fight nagging injuries from time to time, the current one a sore right wrist. His slight frame and explosive motion feed concerns about his durability, but every five days he puts them to rest.

Oswalt's reliance on his fastball and his terrific command are the biggest reasons to believe he'll stay healthy. While he has an excellent curve, he doesn't throw it enough to raise concern, nor does he have some of the more dangerous pitches in his repertoire. His approach-throw strikes, then throw more strikes-not only keeps his walk rate and ERA down, but his pitch counts as well. Oswalt has gone past 121 pitches just six times in the past three seasons, and often gets his work done in under 100 tosses.

PECOTA is fairly optimistic about Oswalt. The system, which regresses pretty heavily, suggests that Oswalt will continue to throw at least 180 innings a year with an ERA below 4.00 through 2010; it's as close to a "two thumbs up" as you'll find on a pitcher. Many of Oswalt's comparables, such as Steve Rogers, Mike Mussina and Larry Jackson, retained their value throughout their next five seasons with nary a health concern.

On general principle, though, I have a hard time endorsing a five-year contract for a pitcher, especially when you don't have to make that kind of commitment for another 15 months (or 280 innings, to make the point more clearly). Consider the example of Halladay and the Blue Jays; after the groundballing right-hander-who's a very strong comp for Oswalt in many ways-won the Cy Young Award in 2003, the team signed him to a four-year, $42-million extension through 2007. Halladay made just 40 starts over the next two seasons, suffering an shoulder injury-and diminished performance-in '04 and a broken shin in '05. He's been great this year, but it's going to be hard for that deal to end up a win for the Jays after they paid $20 million for 40 starts of 3.30 ERA ball over two years. Sheets' deal with the Brewers has gone similarly bad for the team: 33 starts in two years.

Mind you, these are the most generous comps for Oswalt: right-handed starters with good mechanics and command coming into their prime. Those deals looked exactly like this one did on the day they were signed. That is why I say, despite all the reasons to endorse this move, that it's a risk that didn't need to be taken.

Perhaps Oswalt will, like Mussina did, average nearly 220 innings a year for the next five seasons and set himself up for the Hall of Fame, and do so while the price for pitching climbs in a way that makes his deal a winner. In that scenario, the Astros will make out well, but it's as optimistic a picture as I can paint. I don't think the rules are going to change enough to allow $15 million to be any worse than a top-five pitching salary, because the dampening effects of confiscatory revenue sharing and investment taxes are significant. It won't take much for Oswalt to become a red item on the Astros' books; a lost half-season or two, or a year in which his home-run rate spikes and helps him post a 4.70 ERA, would make it hard for them to recoup their investment. Again, I look at Halladay and Sheets, at their 2005-06 seasons. Oswalt is essentially the same guy. We underestimate the risks involved with pitching, even for the very best performers of the craft.

Even if Oswalt pitches well and the market goes nuts, the Astros still might not get much out of it. For as long as they've stretched out the twilight of the Craig Biggio Era, they're going to have to move on to a restructuring quite soon. I'm not convinced that the teams around Oswalt are going to be worthy of him in the short and medium terms, and certainly not with Oswalt himself accounting for upwards of 15% of the payroll, maybe as high as 20%. So much of the value on the Astros' roster is tied up in players who won't be there in two years, and their farm system is a middle-of-the-pack one, distinctly lacking in high-upside talent. Oswalt is likely to spend his ages 29-31 seasons much as Mike Mussina did: pitching for a depleted team getting further from its peak, one that doesn't support him with defense or runs, and seeing his win-loss records separate from the quality of his pitching.

About the only thing to be certain of is that Barry Zito is worth a lot more today than he was two days ago. Gentlemen, start your checkbooks.

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

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