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December 3, 2007

Prospectus Today

Playing the Game

by Joe Sheehan

Friday afternoon, I suggested that the Twins should sign Johan Santana if the published asking price-six years at $20 million per-was accurate. He's the best pitcher in baseball, and while I'm no fan of getting overcommitted to pitchers, that price is actually reasonable considering the established top end of the pitching market, Barry Zito's seven-year, $119-million contract.

I've since been persuaded that Santana's demands are higher, although not dramatically so. Let's extend the contract by a year, and the salary by another 15 percent. After all, Santana is more than 15 percent better than Barry Zito by any measure. That would be a seven-year contract for $161 million, the highest aggregate value of any pitcher ever, and a cool 35 percent bump over the total value of Zito's contract, signed just shy of a year ago.

Now, that sounds like a massive jump. A 35 percent increase at the top of the pay scale is the kind of thing that will set teeth gnashing throughout the game, causing GMs, owners, and league officials to predict the imminent demise of competitive balance, possible franchise insolvency, and the inevitable collapse of the league, perhaps even American society itself.

This year, however, that kind of increase might be about right. It's heresy in some circles, but Johan Santana may well be worth $23 million a year. Let's go to the available analysis of Santana's marginal value, Nate Silver's MORP figure, available on Santana's PECOTA card. These figures are a year old-Nate is buried deep in BP headquarters cranking out the 2008 cards as I write this-but they provide a starting point. Santana was projected to be worth $24.9 million in 2008, $21.8 million in 2009, $17.4 million in 2010 and $18.9 million in 2011.

Now, with Santana having had another productive-and more importantly, healthy season, we can expect that his 2008-12 projections will be similarly positive. We can also expect that the value of a win-the rock on which the MORP projections are based-will climb by at least eight percent, and possibly more. If Santana's four-year projection is stagnant and we account for inflation, he'd be worth about $90 million from 2008-11, or $22.5 million per season, which is pretty close to the $23 million I mentioned above. That kind of deal isn't overpaying: it's market value.

Back away from Santana for a second and look at the free agent contracts agreed to so far this offseason. Almost all of them have come in higher, some a lot higher, than was anticipated even at the end of the season. We shake our heads at a $90 million Torii Hunter, or a $46 million Francisco Cordero, or a $52 million Jorge Posada, wondering how teams can make these investments in properties certain to decline.

Think about what we're likely to see this week in Nashville, whether Santana reaches agreement on a new contract or not. Aaron Rowand and Andruw Jones are out there. Carlos Silva and Kyle Lohse, the booby prizes in the market for starting pitching, are sorting through suitors. There are second- and third-tier free agents looking for work. When these players sign, all of their contracts are likely to seem like "bad" ones based on the pay scale that we, as fans, have in our heads. There's no way Hunter can be worth $18 million a year, or Rowand $14 million a year, or Lohse $12 million a year, the same way that we looked at A.J. Burnett at $11 million a year, or Gil Meche at that same number, or Gary Matthews Jr.'s $10 million AAV, and drew the same conclusions. A year or two later, those contracts have lost their ability to shock.

We're in a new world. The baseball industry is growing revenues at such a pace that each new offseason is a market completely detached from the previous one. I actually wrote something similar a year ago, but it rings even more true today: the industry is awash in money, so much so that there's virtually no way to reconcile each offseason's contracts with those that came before. For 30 years of free agency, there has been one truth: money flows down to the players. The primary reason owners spent three decades trying to hinder the free market is because they knew competitive pressures would cause them-not players, not agents, not the media-to drive up the cost of talent in that market.

A few weeks ago, Bud Selig proudly announced that MLB's revenues exceeded $6 billion in 2007. This is a watershed moment, a sign that the game, no matter its problems on a micro level, is as healthy and successful as it has ever been. (My extensive disagreements with his decisions and his approach aside, Selig's reign has to be considered successful for this reason.) Not long after, Yahoo's Jeff Passan ran the numbers and found that player salaries (calculated from Opening Day payrolls) amounted to just 41 percent of that figure.

Now, I'm not sure what that number should be, but just to pull one data point, the NFL's Collective Bargaining Agreement, negotiated by the weakest union in sports, allots 53 percent of revenue for players. Let's knock a few points off and suggest that in a perfect world, the players would take home 50 percent of revenues, and that the labor market should more or less move towards that number. (Prior to the 2002 CBA that instituted aggressive revenue sharing and mechanisms to curb spending, players were approaching 60 percent of revenues.) The difference between the 2007 Opening Day payroll mark and 50 percent of revenues is $540 million.

The teams have $540 million burning a hole in their pocket. They're going to spend it, because that's what teams do, and if they can't use it to buy Albert Pujols or David Ortiz or Justin Verlander or David Wright-those guys have contracts or are otherwise prevented from making market salaries-they'll squint and tell themselves that Lohse is a late bloomer, and that their team's defense can make Silva a 20-game winner, and that Rowand's off-field contributions justify paying $84 million for his decline phase. There are no superstars in this market, none of the top 50 or even top 75 players in baseball, and yet we'll see top-30 contracts signed, because these players are the ones available, and the money is available, and the two finding each other is as inevitable as strained metaphors at the end of a too-long paragraph.

The most valuable properties in baseball are true superstars. They cannot be replaced at any price, and as more teams realize this and prevent theirs from hitting the market-Jake Peavy, to name one example, will sign a pre-free agency contract as soon as this week-the gap between the players who do become available and the true superstars grows, and the desperation of the teams who lack these talents to buy facsimiles grows, and the free agent market goes from a tool to a trap.

Some thought we got there in 1978, of course. They were wrong. As revenues increase and every team in baseball is able retain its very best players, however, the caliber of each free agent pool will continue to decrease. The players who hit the market will all have flaws, all be bad buys, all be money sinks. Maybe this winter isn't the turning point, but the trends are clear, and a future in which good free agent buys are not just rare, they're nonexistent.

Joshua had it right. The only winning move is not to play.

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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