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November 16, 2006

Prospectus Today

The Money of Matsuzaka

by Joe Sheehan

Fifty-one point one. If this had been "The Price is Right," we'd all be standing there dumbfounded as Bob Barker tells us that no one is anywhere close to the right answer and we have to start again.

Fifty-one point one million dollars. In the run-up to the posting of Daisuke Matsuzaka, a lot of numbers were bandied about. I remember being in Phoenix at the Arizona Fall League, astounded that smart people were pushing the idea that the winning bid might be as high as $30 million. Even the seemingly insane rumors that were floated after the bid deadline-$42 million, $45 million-didn't go this high. The Red Sox just paid more for negotiating rights with one pitcher than they did for Manny Ramirez and David Ortiz over the past two years combined.

Of course, we're still near the start of the story. The Sox still have to sign Matsuzaka, and then we have to see if the righthander is worth all of this money. The former is no lock; if someone thinks the exclusive rights to negotiate with you for 30 days are worth $51 million, it's fair to say that you're going to want a contract worth at least that much. There has been idle speculation, some even within BP, that the Sox blew out the bidding on Matsuzaka as a preemptive measure, to ensure that the Yankees wouldn't get him. The idea is that the Sox, having spent $51 million already, will not make Matsuzaka an offer comparable to the other top free agents. If he signs, great; if he doesn't, well, they've kept him from wearing pinstripes.

It's just Machiavellian enough to sound appealing, but I don't believe it for a second. For one, the Sox can afford a massive cash outlay. They sold out the season with the highest average ticket prices in baseball, they own a piece of their highly-rated broadcast outlet and they've made the playoffs in three of the last four seasons. John Henry has had some success in other areas, too-writing the checks won't be a problem.

Beyond that, Matsuzaka is exactly what the Sox need, a top-of-the-rotation starter. If the $51 million is treated as a sunk cost, which it should be, the Sox should evaluate Matsuzaka as roughly equivalent to Roy Oswalt, who signed with the Astros for five years and $73 million. (Note: Many, many people have pointed out that this is wrong, because the money has not yet been paid, and will not be paid in the event the Sox do not sign Matsuzaka. I was trying to make the point that the posting fee is disconnected, from Matsuzaka's standpoint, from his negotiations. "Sunk cost" was the wrong term to use. My apologies, and my thanks for the feedback.--JSS) That may be the low end of the range for the top free-agent starters this winter, actually. It's not entirely clear how Matsuzaka and Scott Boras will approach the negotiation; will they look to maximize the overall value of this contract, or try and get Matsuzaka a lot of money in a shorter deal so that he can hit the market again-using the same contract clause Hideki Matsui did-while he's still in his prime?

In either case, the Sox have the cash flow and the payroll room to sign Matsuzaka for a market rate. There's no reason for them not to do so when adding him could push them ahead of the Yankees in the AL East.

Well, maybe "could" is a bit weak. After all, according to Clay Davenport, Matsuzaka's comparables are pretty much the best pitchers in baseball: Roger Clemens at the top, followed by Roy Halladay, Brandon Webb, Chris Carpenter and a whole lot of other names you might recognize from All-Star Games and Cy Young vote totals. His translated PERA over the last four years is just 3.41, far below that of Barry Zito and a bit below Jason Schmidt, the top two pitchers on the market right now. Given that the scouting evaluations of Matsuzaka are overwhelmingly positive, and that Matsuzaka was a star during the World Baseball Classic, all evidence points to him being at worst a low-end #1 starter in MLB.

If he meets those projections, will be be worth the Sox' massive investment in him? There's a lot of variables to pin down here, so what follows can best be considered an informed estimate.

Start with Clay Davenport's comparables, as referenced by Christina Kahrl in last week's piece on Matsuzaka, and let's use a four-year window based on the 2006 PECOTA cards. By using the old PECOTAs, the projections will err on the conservative side, because almost all of these pitchers have gotten through 2006 healthy and effective. The old PECOTAs discount the 2007-10 values more than the new ones will, but that's all right for our purposes.

The ten most comparable pitchers to Matsuzaka have the following projected WARP and MORP for 2007:

           WARP      MORP (in millions)
Clemens     4.9     $8.25
Halladay    5.5    $10.13
Webb        6.4    $12.98
Sabathia    4.0     $6.08
Carpenter   5.4     $9.80
Schmidt     4.8     $8.10
Beckett     4.6     $7.45
Martinez    6.9    $14.65
Hudson      4.2     $6.45
Peavy       6.8    $14.38
Admittedly, this is a crude tool, although the end value looks right because the errors balance out. Pedro Martinez is, er, unlikely to be a seven-win player in 2007. On other other hand, the projections for Halladay, C.C. Sabathia and Jason Schmidt are all fairly low. If Matsuzaka's projection is the average of those ten hurlers, he'd project to be worth about 5.4 wins next year. Of course, the straight average probably doesn't credit Matsuzaka enough for being 26 years old, possessing a good health record and at or near his peak. He's more like Halladay, Webb or Jake Peavy than he is Clemens, Martinez or Tim Hudson, so again, the numbers above can be considered a conservative estimate.

One More Thing...

One interesting aspect of this to me is the comparison with the Rule 4 draft. The baseball industry has just valued the exclusive negotiating rights with a top player from a lower level of baseball at $51.1 million. They'll pay nothing for the exclusive negotiating rights to the top players from a lower level of baseball next June, on draft day.

I'm not calling for a revolution here, but if you're David Price or Andrew Brackman-or Scott Boras, for that matter-don't you have to wonder a little bit? Just as in 1996, when the exploitation of draft loopholes exposed just how much the draft held down signing bonuses, the Daisuke Matsuzaka posting fee shows just how valuable the exclusive right to negotiate with top players is worth. Because of a superstructure they had no hand in negotiating, though, the top players in the draft get nothing for what is clearly a valuable asset.

If someone decides to challenge the draft in the next few years, the bid process for Matsuzaka is going to be one of the most significant pieces of their case.

MORP, or Marginal Value Above Replacement Player, is a key figure here. Introduced by Nate Silver last year and expounded upon in Baseball Between the Numbers, the statistic attempts to measure the revenue a player's performance will be worth to his team. Based on the figures above, Matsuzaka's projected MORP would be about $10 million in '07.

Of course, this isn't a linear calculation. As Silver wrote in Baseball Between the Numbers, the wins a team gains between 86 and 93 each have a large impact on its chance of making the playoffs, and playoff appearances are the real moneymaker for teams, worth up to $25 million. The Red Sox are in that sweet spot, where every marginal win is worth a heck of a lot of potential revenue in terms of their chance of making the playoffs. If Matsuzaka's five wins above replacement push the Sox from being an 87-win team to a 92-win one, he's added a staggering amount of marginal value to the roster. This is a restatement of the earlier premise: the Red Sox have a lot to gain by signing Matsuzaka, and can justify paying more as a result.

Silver also passes this along:

Just looking at the very early returns from the free agent market, the amount that teams are willing to pay for a win has increased 29% from last year. What's scary is that several of these contracts involved likely "hometown discounts", so the market might end up even higher than that.

Per my method in Baseball Between the Numbers, the new structure of the revenue-sharing system increases the marginal value of a win by 21%. Add that to the 6-7% inflation we see in the system inherently and we get right to that 29% number.

Matsuzaka's 5.4 WARP would now be worth nearly $13 million based on inflation before taking into account his impact on the Sox' chance to reach the postseason.

One reason a team like the Red Sox, which has never had a Japanese star, is motivated to sign one is the potential for marketing opportunities. It's not easy to quantify what these mean to the bottom line, since much of the potential revenue has been tapped by MLB via broadcast contracts and licensing agreements. BP's Maury Brown says, "It may be hard to quantify the situation as a 1:1. Ichiro's value to the Mariners/Seattle is due to the location: Seattle sits on the Pacific Rim, and allows for a great deal of tourism dollars to be associated with Ichiro. I don't know if you will have the tourism dollars associated to Matsuzaka like you have with Ichiro, but other revenues may come along with his acquisition."

The Red Sox are not very well equipped to handle extra demand for tickets among Japanese fans, as they've about maxed out capacity at Fenway Park. They can capture some of the increased demand through raising ticket prices, although they already have the highest ones in the game and they run the risk of a loss of goodwill if they continue to squeeze the fan base. Because Sox games will be televised in Japan more often, they may have the opportunity to sell some stadium signage geared to that market. Neil deMause doesn't see that as a big factor, saying, "If signing Matsui allowed the Yankees to sell ad signage in the stadium to Japanese companies (I seem to recall the K counter is sponsored by one), how much more did they get over what they could have sold the boards for to another company?"

The Red Sox may have less to gain by adding a Japanese star than the Mariners or Yankees did in signing theirs, but they'll likely generate some additional revenue by having Matsuzaka as opposed to Barry Zito or Jason Schmidt. It is unlikely that those monies alone will cover the $51 million posting fee over a period of years. For the Sox to "win" on a Matsuzaka deal, they will have to do it on the field. Matsuzaka will have to pitch well enough to help the Red Sox go from a team that might make the playoffs to one that does, at least on a few occasions. It's those lucrative playoff appearances, and not the lure of a new market, that make paying twice for the services of one pitcher justifiable, even desirable.

Joe Sheehan is an author of Baseball Prospectus. 
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