April 4, 2012
Tragedy of the Commons
On Opening Day Eve (ignoring the two games held at the crack of dawn to accommodate the Tokyo Dome venue), the big story in baseball is a pair of big-money deals—Matt Cain and Joey Votto got paid, man. What’s interesting is that these were players years away from free agency, who certainly didn’t need to be signed now.
Can these deals go bad? Of course they can. An object lesson is Ryan Howard, whose contract extension has managed to look worse and worse over the past few seasons, even though it won't start covering real baseball games until tomorrow. Will they go bad? It’s hard to say, and the esteemable Ben Lindbergh does a better job covering the possibilities than I could. That frees us up to consider the larger implications—what does all this money mean?
Dave Cameron says the culprit is the torrent of cash pouring into MLB:
And, perhaps this is exactly what we should expect as a reaction to potential new revenue sources opening up for MLB franchises. These TV deals that are being signed don’t come with huge lump sum payments, so teams don’t have buckets of cash burning holes in their pockets. What they do have, or may expect to have in the next few years, is a guaranteed revenue source that will allow them to be in a strong financial position for the next couple of decades. And now, with every team looking to see when they can get in on this upwards adjustment in TV money, it’s become an arms race to lock in talent at current market prices for as long as possible, and getting these deals done by guaranteeing parts of the future expected revenue pie.
So, at this point, we have a couple of options – we can continue to be shocked and amazed at the growing rate of contracts that guarantee big money to players from 2018 and beyond, or we can adjust our expectations for what premium players are going to be able to command going forward. With the promise of new money flowing into many organizations over the next three to five years, I’d imagine we’ll see more and more teams being aggressive in trying to lock up their young stars before they get to free agency and have to bid against whichever franchise just happened to renegotiate their television contract a few months prior.
Of course, there’s more than one way to sign a long-term deal. The Rays also worked to lock up young talent this offseason, but they’re no longer waiting for players to be close to free agency or even expend their rookie eligibility before talking extension. Matt Moore got a five-year deal from the Rays at a base rate of $14 million that has the potential to grow into an eight-year, $40 million deal. This may be the Rays at their Raysiest, but this isn’t too far afield from how they typically operate:
Ever since John Hart built a powerhouse Indians team in the 1990s by signing talented young players to long-term contracts before they reached eligibility for salary arbitration, many teams have placed an emphasis on the practice. But while almost all extensions have gone to players with at least a year of Major League service, and often more, the Rays established a new frontier by acting sooner.
Evan Longoria came first, in 2008, followed by Moore. The Royals got into the act this offseason by locking up 21-year-old catcher Salvador Perez after 39 big league games. It's a maneuver that heightens the risks and rewards -- for both sides -- inherent in a typical contract extension, so the two recent signings don't necessarily represent the beginning of a trend.
"I've always said necessity is the mother of invention, and I think in the case of Tampa, it was very similar to what we had in Cleveland," Hart said. "They had a market where they couldn't compete with some of the bigger heavy hitters and they just trusted their process."
For that reason, Hart believes lower-revenue teams are the most likely to continue offering long-term deals to players with little service time. But those teams still must deal with reluctant agents and players who might not want to tie themselves down so early. Plus, few players combine the talent and character to command that type of deal in the first place.
It’s important now to note that none of these developments confirms a trend. The Rays clearly have a Rays Way, but it’s not yet clear that this is going to become the New New New New New Moneyball. (I may have missed a few New Moneyballs between the actual Moneyball and this one; if so, please forgive me). And while this is probably the biggest year for long-term deals since the 2007 offseason, it’s important to note that after the contract binge when players like Alfonso Soriano and Carlos Lee got megadeals, the market quieted down afterward until what we've seen this offseason.
But if we are at the cusp of a real trend—if long-term deals locking up prime talent are the new norm—what kind of an effect will that have on baseball? I’m not sure it’s entirely a good one.
Free agency came about because union president Marvin Miller saw a way to exploit the Uniform Player Contract, using Andy Messersmith and Dave McNally as test cases. But once free agency came into being, Miller had a new set of worries.
Free agency would be available, but how would Miller negotiate the terms? As Miller wrote in, A Whole Different Ballgame, "In the wake of the Messersmith decision it dawned on me as a terrifying possibility, that the owners might suddenly wake up one day and realize that yearly free agency was the best possible thing for them; that is, if all players became free agents at the end of each year, the market would be flooded, and salaries would be held down."
Charlie saw this advantage. "Hey what's the problem?" Finley said. "Make 'em all free agents!" Miller waited to see if anyone would actually listen to the maverick. "My main worry was that someone would actually listen to him," Miller said.
The result? No one listened.
Instead teams came up with a limited reserve system in which a team that drafts (and signs) a player gets six years of control—salaries can rise through arbitration but are held lower than they would be if every player were a free agent. If you have six years of control and buy out two to get a 10-year extension, that’s 14 years of a player’s career accounted for. Even for an inner-circle Hall of Fame player, that’s almost always the majority of his productive years.
There are benefits to this—general managers aren’t acting irrationally when they lock up good players to long-term deals. The principle benefit is that you get a good player, and if you do it the Rays' way, you can even do so at a relative discount. One of the major side effects is that nobody else gets that good player. That’s good for you in the immediate case, but in the long run you’re far more likely to be that somebody else. And that’s the rub.
Some strategies are effective if a few participants utilize them but disastrous if everyone does. Economists call this the tragedy of the commons—if a group of farmers have a common area for grazing livestock, no individual farmer has a strong incentive to prevent overfeeding or to maintain the area. But if all the farmers bring too many animals to the commons, pretty soon there won’t be a commons—the farmers have a strong collective incentive to prevent overgrazing but suffer because they followed their individual incentives instead.
If teams overgraze the free agency pool, what they’ll come to find is that pretty soon there won’t be many free agents left. The obvious problem is that this makes it harder for teams to acquire new talent. But the subtler and possibly more dangerous problem for teams and their owners is that if talent becomes scarce, it becomes harder to properly evaluate that talent—with so few players available, the market becomes inefficient, and salaries fall out of whack with actual production.
What we are certain about is that MLB now has a collective bargaining agreement that severely curtails the ability of clubs to use money to acquire new amateur talent. Teams are forced into a de facto hard slot for draft picks, and their ability to spend money on foreign players is severely curtailed. Continuing to sign players to these long-term deals would be a way for teams to put similar constraints on their ability to acquire professional talent. For the few players left, that would mean clear benefits in terms of the salaries they’re able to command. By locking up the supply of players on both ends, teams may be causing themselves to spend more money on players rather than achieving the cost savings they thought were in store.