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April 27, 2010

Ahead in the Count

Ryan Howard and the New MORP

by Matt Swartz

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Just days after my two-part series introduced the new MORP to evaluate baseball contracts, the Phillies provided me with an excellent opportunity to put it into action by signing Ryan Howard to a five-year contract extension yesterday.

The deal extends Howard’s contract to cover 2012-16 for a guaranteed $125 million, while providing the Phillies with an option for 20107 that would make the deal worth $138 million in total. The Phillies will also miss out on two all-but-guaranteed picks in the first or second rounds of the 2012 amateur draft in the form of compensation if he had departed. I showed last week that the value of these picks would be roughly $23 million, which means that this is really a deal where the Phillies are choosing between Ryan Howard from 2012-16 at $148 million, or Ryan Howard from 2012-17 at $161 million.

If you listened to the roar of the sabermetricians, you would think the Phillies had thrown nine figures at Juan Castro. You got to hear the same tired claims about Howard trotted out again. These include the "he’s a platoon player" argument, the "he can’t play defense" argument, and the "he’s slow" argument. You have probably already read analyses comparing Howard to Mo Vaughn and Cecil Fielder, and predicting his imminent demise.

On the other hand, if you listened to the roar of the old-school writers, you would think the Phillies had stolen an MVP off the market at a discount. The same tired statistics like runs batted in would have rung through your ears, and assertions about dynasties secured would have undoubtedly hit your eyeballs during your surfing.

The reality is that Howard falls somewhere between these two extremes. The contract is far from spectacular, but it is unlikely to be an albatross. The deal will ultimately come down to two primary factors, neither of which can be properly estimated by either group of commentators: the rate at which Howard ages, and the rate at which the price of a win inflates. Obviously, if Howard ages gracefully and produces well into his thirties, the Phillies are probably going to be getting a great bargain. Equally obviously, if he tanks, the Phillies are in trouble. If major-league salaries inflate the way that they did during the middle of the 2000s, Howard is going to have plenty of leeway to age without being useless; if salaries hold steady like they have over the last few years, Howard is not only going to need to maintain his production, but might need to learn to pitch, too, in order to be worth his salary.

First, let’s talk about the price of a win with a brief refresher of the new MORP, and discuss the kind of production that the Phillies would need from Howard under a few different salary inflation scenarios. After that, I will make the case that this deal is probably a fair one after all, or at least it’s not the albatross that others are claiming.

What Does He Need to Do to Make It Worthwhile?

Last week’s MORP articles explained that the price of 1.0 WARP3 in 2010 is approximately $5 million. This is in contrast with FanGraphs’ claim of approximately $4 million per WAR. These numbers are even further apart when you considering the fact that 1.0 WAR is worth about 1.16 WARP3, meaning that FanGraphs’ numbers are suggesting that 1.0 WARP3 is worth only $3.5 million. The reason that this analysis is inaccurate is that FanGraphs neglected draft-pick compensation, which ignores about 11 percent of total compensation, and it also looked at only the first year of contracts. Since a number of contracts went out to players unlikely to age well this past offseason, average annual value (or AAV) is a particularly poor way to evaluate these deals. As a result, FanGraphs appears to believe that the price of a win went down over 10 percent during an economic recovery from the worst recession in decades.

The new version of MORP provides a more accurate estimate of the cost of a win, which is approximately $5 million for 2010. However, Howard’s deal does not begin until 2012, and extends as far as 2017 if the Phillies pick up the option. I have made a conservative estimate that salaries will inflate at five percent on average for the sake of picking a number, but salaries could really do any number of things. Reports have suggested the salaries inflated at about 8-10 percent during the mid-2000s, while inflation for 2008-10 appears to be about one percent.

The reality is that we do not know how much inflation will be. If it’s two percent, the Phillies are in trouble, but if it’s 10 percent, they are in decent shape. One of the best aspects of this contract is that the option actually takes advantage of this uncertainty. Howard could be anywhere from replacement level in 2017 to a perennial four-win bomber.

How so? If salaries inflate 10 percent and Howard turns into the four-win bomber (a perfect scenario), he will be worth $39 million in 2017 but will only get paid $13 million. On the other hand, if salaries inflate by two percent and Howard turns into a zero-win player (a disaster scenario), Howard will be worth zero. If Howard is equally likely to be worth anywhere from $0-$39 million, but the Phillies only have to pay him $13 million if he is worth $13 million, then effectively they have a one-third probability of not picking up the option, and a two-thirds probability of picking up an option worth somewhere between $13-$39 million for the price of $13 million. On average, this is worth a net $13 million if it is picked up, which will only happen two-thirds of the time, meaning that the value of the option is about $9 million. The cost of the option (the guaranteed portion/buyout) is $10 million; effectively, the option is worth what it costs, meaning that we really only need to analyze the five-year, $115-million dollar deal.

Let’s consider the WARP3 that Howard would need to produce to be worth his contract if there is two, five, or 10 percent salary inflation. Let's start with the scenario where salaries only inflate at two percent, so that the price of a win would change like so:

2012: $5.2 million
2013: $5.3 million
2014: $5.4 million
2015: $5.5 million
2016: $5.6 million

Howard will get paid $20 million in 2012 and 2013, and $25 million in 2014, 2015, and 2016. Also, if we spread the $23 million opportunity cost of foregoing draft-pick compensation across the five guaranteed years, we can think of this as $24.6 million for 2012 and 2013, and $29.6 million for 2014, 2015, and 2016.

Thus, Howard would need to produce as follows to be exactly worth his contract each year:

2012: 4.7 WARP3
2013: 4.6 WARP3
2014: 5.5 WARP3
2015: 5.4 WARP3
2016: 5.3 WARP3

Considering Howard will be 36 in 2016 and produced 5.1, 3.7, and 4.8 WARP3 from 2007-09, it appears that he would need to actually improve to be worth his contract if salaries inflate at only two percent annually.

Now, let's suppose that salaries inflate at five percent. In that case, the price of a win would go to about:

2012: $5.5 million
2013: $5.8 million
2014: $6.1 million
2015: $6.4 million
2016: $6.7 million

In that case, Howard would need to produce at the following clip to be worth his deal in each year:

2012: 4.5 WARP3
2013: 4.3 WARP3
2014: 4.9 WARP3
2015: 4.6 WARP3
2016: 4.4 WARP3

This still seems to assume that Howard will not experience any negative effects of aging, the deal appear to be unspectacular, though not quite disastrous if salaries inflate at a five percent clip.

If salaries inflate at 10 percent, the following prices would be:

2012: $6.1 million
2013: $6.7 million
2014: $7.3 million
2015: $8.1 million
2016: $8.9 million

The win values would need to be:

2012: 4.1 WARP3
2013: 3.7 WARP3
2014: 4.0 WARP3
2015: 3.7 WARP3
2016: 3.3 WARP3

All of a sudden, this starts to look like it could very well be a decent deal. Ultimately, the question is whether Howard is likely to age gracefully or not, because if he becomes a below-average player by the end of the contract or becomes merely average in the middle of the deal, even a high inflation level won’t cut it.

This contract actually starts to look terrific when you consider the possibility that the next collective bargaining agreement (after the current one ends after 2011) could remove draft-pick compensation. If that does happen, and salaries rise as I predicted in my MORP series, then even the five percent salary inflation looks quite plausible for Howard to achieve, and if the outcome of the next CBA does not allow for draft-pick compensation, this could easily turn into a good deal:

2012: 3.6 wins
2013: 3.5 wins
2014: 4.1 wins
2015: 3.9 wins
2016: 3.7 wins

Will the Real Ryan Howard Please Stand Up?

The $100-million question that needs to be answered is how well Howard will age. There are a slew of comparables that we can discuss, and I will elaborate on those players in a minute, but the most important clue about Howard’s aging process is the fact that the Phillies chose to re-sign him. Is that because the Phillies are geniuses? No; the real reason is that the Phillies know more about Howard’s body, habits, and character than any of the analysts attempting to evaluate the deal from afar. That’s not unique to the Phillies; that’s something that holds true for all teams who re-sign their players. To go back to last month, I published the following table of how much of a player’s total WARP3 are produced in each year of multi-year contracts. You will notice something very different between players who re-signed with their teams and players who signed with new teams:

Two-year Deals' WARP Year 1 Year 2
Re-signings 39% 61%
Signed with new teams 63% 37%

 

Three-year Deals' WARP Year 1 Year 2 Year 3
Re-signings 36% 34% 30%
Signed with new teams 45% 39% 16%


Four-year Deals' WARP Year 1 Year 2 Year 3 Year 4
Re-signings 20% 33% 29% 17%
Signed with new teams 29% 25% 21% 24%

Players who re-sign with their teams seem to hold up very well overall, even improving over two-year contracts while barely losing value in three-year and even four-year deals. On the other hand, players who sign two-year and three-year contracts with new teams usually decline drastically. The reason is selection bias. If you know a player’s body, habits, and character, you can get a better sense of how well he might age.

To bring this back to the specifics with Howard, the media reports that appear every spring training are often too clichéd to be taken seriously, but the fact is that Howard has lost noticeable amounts of weight during each of the last two offseasons. He’s gone from a defensive liability to average in both categories as he has gotten lighter. Consider his defensive numbers according to Mitchel Lichtman’s UZR and Baseball Info Solutions’ Defensive Runs Saved (DRS):

Year UZR DRS
2005 7.3 12
2006 -1.0 -8
2007 -1.3 0
2008 1.8 0
2009 2.0 -1
2010 -0.4 2

As far as specifics, Howard may have a terrible arm, but his fielding skills are pretty average and are even improving a little bit. If you watch him in the field, the numbers are confirmed by observation as well. He struggled terribly with ground balls on his glove side early in his career, but he has worked hard and now makes these plays rather well.

To move to one of the other criticisms of Howard, many have claimed that Howard is slow, but he is only a mildly below-average runner. In fact, since his worst season in 2007, he has even improved a little on the base paths, stealing eight bases in nine tries in 2009. Look at Howard’s Equivalent Baserunning Runs (EqBRR) over the course of his career:

2006: -3.2
2007: -4.9
2008: -3.6
2009: -3.4
2010: -0.5

Ultimately, the claims that Howard’s defense and baserunning make him a liability are not true. Though these skills may both decline over time, the Phillies are in a better position to evaluate this than the average analyst. Defense and baserunning often decline because of a player's physical condition, and the Phillies know Howard's body better than anyone. Ultimately, it’s hard to believe the Phillies would have signed Howard to this contract so far in advance of free agency if he had physical problems.

There is also another common, ill-founded criticism of Howard, one which I have called the 'Ryan Howard Can’t Hit Lefties Myth', which I also followed up on in last year’s Baseball Prospectus Idol competition. There are two reasons that people think this is true. One is that they do not know how poorly platoon splits hold up over time: the sample size is rarely large enough, so even an extreme platoon split can be expected to be scaled down the following year. The other reason this myth persists is because people only focus on the difference between Howard’s performances versus right-handed pitching and left-handed pitching, than the actual performance against lefties. While his 2009 troubles against left-handers was very notable, his career OPS against them is 752; the league average left-handed hitter had a 703 OPS against left-handers last year. Howard’s career OPS against same-handed pitching is roughly average for a first baseman. In contrast, his anomalous 1063 OPS against right-handers is so devastating that they intentionally walk him as often in a season as some hitters draw walks overall.

Of course, all of this was just to show that Howard is roughly a 4.5-win player at this stage in his career. The real question is how well he will age. To see the difference between the critics of this deal and its proponents, you only need to look at Ryan Howard’s list of comparables, which includes Willie Stargell, Willie McCovey, and Jim Thome, all whom aged very well and put up elite seasons well into their 30s. The list also includes players who fell off a cliff, like Mike Epstein and Cecil Fielder.

The question is which of these groups of players is Howard most like. Last year, I looked at Howard’s list of comparables according to both PECOTA and Baseball-Reference.com and I noticed an interesting difference between each set. I will reproduce this chart from last year below:

What you should notice is that, for the most part, the players who aged better were the ones who hit more home runs to the opposite field. On the other hand, pull-happy hitters like Fielder and Jose Canseco (who was on last year’s list of Howard comparables) fell apart more quickly. Howard’s batted-ball profile actually looks a lot like Thome’s. That is a good sign, as Thome continued to rack up four- and five-win seasons through most of his mid-30s. If this is what happens to Howard, the deal will look like a major success.

It is tough to tell exactly what will happen to Howard, but if he ages like the Phillies think he will, this deal will be a fair one, if not even a little bit of a bargain in the event of major salary inflation.

So It Might be Worthwhile... But Is It Werth-While?

The fear among Phillies fans is that this deal might have eliminated the possibility of re-signing right fielder Jayson Werth, whose contract expires at the end of this season, which would allow him to become a free agent. This is a false tradeoff, which is the result of assumptions about constant budgets that are not related to winning.

The belief that fans have is that the Phillies won’t be able to afford Werth. The myth here is that teams spend money to be nice to their fans, but only up until they reach some arbitrary budget, and then they stop. This is untrue: teams spend money to make money. What the Phillies probably cannot afford is to spend $150 million a season on a .500 team that never nets them playoff revenue.

The Phillies have essentially committed to spending enough money to be competitive during the time period that Howard is under contract. The Phillies have a lot of contracts expiring after 2011 and may soon become underdogs to strong young Braves squads. However, if the contracts of Howard, Jimmy Rollins, Brad Lidge, Ryan Madson, and Raul Ibanez had all expired after 2011, and Cole Hamels was a year away from free agency, the Phillies could have chosen to fold and spend less money. What they have done by signing Howard is commit to having a lot of money already spent during those years, unless they trade players. They have also recently extended the contracts of Shane Victorino and Joe Blanton through 2012, further indicating their commitment to spend a lot of money during these years. The reality is that if the Phillies think they are going to have to choose between being a $140-million team that is average in 2012 or a $160-million contending team in 2012, they are going to find the latter more profitable.

This impacts Werth’s signability less than you might think, even considering their payroll trend of the past few years, which has gone from $98 million in 2008 to $113 million 2009 to $138 million in 2010. Werth is a player who is worth about four wins per year as well, and will also probably be a Type-A free agent. Thus, he would likely get a contract comparable to the four years and $66 million Jason Bay signed with the Mets over the winter, maybe a bit more with salary inflation. Assuming that this is around five percent or so, this will probably check in around $20 million, as will Rollins if they choose to re-sign him after 2011.

The Phillies have already committed $134.7 million for 2011, and that will be bumped to around $137 million after Ben Francisco and Greg Dobbs are paid and maybe $140 million after re-filling some bench and bullpen jobs. They are already spending $138.2 million this year, so giving Werth about $15 million in the first year of his contract (assuming it is slightly back-loaded) would put them at about a 10-percent increase in payroll between 2010 and 2011. Of course, re-signing Werth would probably entail trading Ibanez and eating some of his contract, as left-handed hitting prospect Domonic Brown will probably be given one corner outfield position in 2011. It only makes sense that Brown would replace the left-handed hitting Ibanez. Eating half of Ibanez’s salary would put the Phillies under $150 million, a perfectly reasonable and possible number for a team that has been spending more and more in recent years. Even if Ibanez struggles greatly in 2010, there is probably a market for him at $6 million, which is half his 2011 salary.

They currently have $86.9 million committed in 2012, but after arbitration adjustments for Hamels, Francisco, and J.A. Happ, and filling a few bullpen and bench roles that are not yet filled, that will be closer to $115 million. Rollins and Werth at around $20 million each fits in perfectly. This process would entail salaries inflating from about $138 million 2010 to $148 million in 2011 to $155 million in 2012.

Things are hazier after 2012, as much depends on whether the Phillies re-sign Cole Hamels, but the Phillies seem pretty committed to locking down their own stars, so that could happen as well.

Conclusion

This is not the apocalypse. The salaries look gaudy, but it’s quite reasonable to expect that the best players in the league are making $40 million by the time this contract is over. Alex Rodriguez isn’t going to be the best player in baseball when he’s earning $28 million in 2013 either. The market will probably move past these numbers. Every time a large contract for an elite player is signed, analysts make the mistake of comparing the player to the players who currently make that salary level. Adjusting for inflation makes this far less scary.

This deal actually makes a lot of sense when you consider the fact that the Phillies probably have a lot of inside information about Howard’s likely aging pattern. Teams have shown that they do a very good job of re-signing only the players who will age gracefully. If Howard can at least be an above average player for the majority of this contract and salaries inflate like they have in other expansions, this deal will probably come out looking fair. I still think it’s probably a little on the high end, given the opportunity cost of two draft picks that they could have received in 2012, but this is hardly a contract that is sure to debilitate the franchise for years to come.

For Phillies phans, this is actually a great sign. The Phillies have committed a lot of money already to the middle of this decade, which is now a sunk cost. The Phillies are that much closer to remaining competitive during those years, and are far more likely to spend the money they need to spend to keep up with the rising Braves in the NL East. This deal could end up making phans happier, even if it was more than the Phillies would have needed to spend for his production.

Teams know about their own players. Both the Jimmy Rollins five-year deal during 2005, and the Chase Utley seven-year deal after 2006 were called into serious question by analysts. The fact is that the Phillies know their guys very well. If the Phillies think Howard is healthy and in good enough shape to age well, I am inclined to take that judgment into account.

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

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