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November 14, 2006

Prospectus Today

The Disconnect

by Joe Sheehan

One of the truths about baseball since 1975 or so is that absent an agreement to not do so—you know it as "collusion"—new revenues flow down to the players. As much as people here at BP and in many other places have analyzed the relationships between revenues and payroll, the fact is, most teams spend what they can. Right now, "what they can" is a very, very big number. Baseball is now a four-billion-dollar industry, and with the 2002 and 2006 CBAs leveling the distribution of that money, more teams find that they can spend a lot of money on payroll.

So we get Aramis Ramirez for five years, $75 million. We get a 38-year-old Gary Sheffield coming off a 150-AB season and a surgery for two years and $28 million for his ages 39 and 40 seasons. We get an industry valuing the right to negotiate with a single player at approximately a fifth of the value of some franchises.

The thing to tuck away as we head into the Winter of the Massive Cashier’s Checks is that our scales are not correctly calibrated for what we're about to see. Every contract is going to be a head-scratcher, because all the new money coming into the industry is, as it has done for decades, going through the owners' pockets and into the players'. The notion of cost-per-marginal-win, or the examples of contracts that have been signed in past seasons, won't help guide our evaluations. It may be impossible to evaluate the deals we'll see beyond the skills, age and projected performance of the player being signed, and how that impacts his team’s chance to win. There will be no bargains in this market, at least not in the moment; it will take a year or two before we know again what "overpaid" and "underpaid" means.

The last time we saw this kind of disconnect between the previously established scale of player compensation and the transactions wire was two years ago, when pitchers with limited track records and high risk profiles were wildly compensated. Carl Pavano, Jaret Wright, Russ Ortiz, Eric Milton and others came out of the winter meetings in Anaheim set for life, and proceeded to pitch poorly for their new teams when they pitched at all. The problem in 2004 wasn’t just the outgrowth of revenues and a need to spend them, but a complete inability by the men charged with the task to correctly evaluate the available talent.

The time before that, however, was 2000. That was the winter in which the industry set records for spending money, lavishing massive free-agent deals on Alex Rodriguez (ten years, $232 million), Manny Ramirez (8/136), Mike Mussina (6/87) and Mike Hampton (8/106). (Thanks to Paul Swydan for his research.) It was that winter, in fact, that set the stage for the 2002 CBA negotiations that hampered the abilility of teams at the top of the revenue and payroll scales to continue paying exorbitant prices for talent. Unlike in 2004, though, the deals signed that winter have mostly returned adequate value. Rodriguez and Ramirez have been MVP candidates in virtually every season since, while Mussina averaged 31 starts and seven wins above replacement a season for the Yankees. Only Hampton, who signed with the Rockies and struggled mightily in the thin air, was a bust. It is possible for high-priced, even the highest-priced, free agents to be good signings.

In part because of the 2002 CBA, the contracts of that winter have effectively been a ceiling ever since. Rodriguez’s deal may have been an outlier—there has never been a free agent with a more attractive profile entering the market—but no player has come within $15 million of the value of Ramirez's deal, no player has signed a contract longer than seven years, and an average annual value of $17 million has been something of cap. That CBA also cut into the marginal value of a win for high-revenue clubs, made it difficult for the three good contracts to be financial winners for their teams no matter how well the players performed. Add in the specter of collusion in the offseasons that followed, and the free-agent market of 2000 sticks out like a sore thumb in the game's history.