Are long baseball contracts worth it?
Megadeals for players that stretch well into their 30s are perilous. So why do teams keep doing it?
FIFTY YEARS AGO, a contrarian-thinking generation adopted the battle cry “Never trust anyone over 30.” Around the ballparks of Major League Baseball today that warning could be updated to: Never pay anyone over 30.
After 30, the body’s flexibility starts to decrease, lean tissue can be harder to maintain, bones become more fragile, and coordination and stamina take a hit — even among highly conditioned elite athletes. Do teams want to keep paying an aging player millions of dollars to sprint after fly balls and collide with hard walls, dive headfirst into bases with fingers slamming cleats, and contort into awkward angles to hurl a ball as hard as he possibly can or swing a heavy wooden bat as fast as he can?
Overpaying for past performance rather than future greatness is another thorny issue in a sport where a player’s peak years typically come in his mid- to late 20s. If a team waits too long to sign a star to a long-term contract, it risks having millions in dead money on its payroll should the player’s performance decline sharply a season (or two, or three) later. Conversely, a long-term deal given to a standout player just entering his peak years can backfire if he suddenly can’t hit a breaking pitch or blows out his elbow.
Consider the case of Miami Marlins outfielder Giancarlo Stanton. By any metric, Stanton is an elite baseball talent, a potent combination of youth, speed, power, and batting prowess. Four years into his career, the 25-year-old has already clubbed 154 home runs and collected nearly 400 RBIs, numbers that put him on pace to become one of the game’s all-time greats.
So just how valuable a commodity is Stanton? During the offseason, the Marlins, a team not otherwise known for spending lavishly, signed their star to a record 13-year contract extension worth $325 million, the richest in American sports history. In its final year, Stanton will be 38, an age when very few players are performing at a high level. It’s quite possible that in the waning years of his back-loaded contract, when he may be worn down by nagging injuries and struggling to get his bat around on a 95-mile-an-hour fastball, Stanton won’t even be in his team’s starting lineup. Yet he’ll still earn more than $30 million per season, five times the $6.5 million he is slated to earn this season, when he’s assumed to be entering his peak performance years. Barring unforeseen circumstances, like getting caught using banned substances, all the money owed him is guaranteed. Every penny.
When it comes to signing lucrative long-term contracts, Stanton has plenty of company. Among them, a pair of veteran pitchers: Max Scherzer, 30, got a seven-year deal worth $210 million, and Jon Lester, 31, six years at $155 million. Another five pitchers are working their way through seven-year deals worth $150 million or more.
Meanwhile, Boston signed free agent sluggers Pablo Sandoval (five years, $95 million), 28, and Hanley Ramirez (four years, $88 million), 31, to mega-deals this offseason. They have battled injuries, weight issues, or both in the past. Their contracts will nevertheless pay them handsomely for several years to come, into their mid-30s, no matter how well, or miserably, they perform.
Will any, or many, or all of these expensive signings pan out in the long run? Could they, given the vagaries of advancing age and physical health? That question bedevils both fans, who ultimately underwrite these contracts through the tickets and merchandise they buy, and team executives, who sign the players’ paychecks. The answer really depends on how success is measured.
WINNING A WORLD SERIES (or two) might be the ultimate yardstick. Post-season appearances? Highly valued, certainly. Regular-season wins? Individual statistics? Team attendance figures? Television ratings and revenue from rights fees? All are part of the calculus that teams go through before offering nine-figure contracts to players who may be long past their prime when the deals expire.
The Red Sox figure prominently in any such conversation. Prior to last season, principal owner John Henry (who also, it should be noted here, owns The Boston Globe) referred to data demonstrating that age 30 has become the dividing line between baseball’s most overpaid and underpaid performers. He cited this research as one reason the Red Sox chose not to bid on high-priced free agents following the team’s 2013 surprising championship season, won largely with lower-cost players all jelling as a unit and performing beyond the team’s expectations.
“What looks good on the surface below the surface often doesn’t look good,” the owner said, comparing these splashier signings to high-risk financial trades.
One year later, however, even the surface did not look so good. The championship season was followed by a last-place finish in 2014. Then they lost a bidding war to reacquire Lester, a team favorite who helped the Red Sox win championships in 2007 and 2013 before he was traded, and the franchise ownership spent more than $200 million on six free agents, five of whom will be 30 or older on Opening Day.
Why the abrupt reversal? It starts with basic economics, according to many who study the sport from that perspective.
But first, a few fundamentals: Baseball is unique among America’s four major professional sports in many ways. Its 162-game schedule is twice as long as the National Basketball Association and National Hockey League seasons, and even though the National Football League season stretches from September to February, the teams only play 16 regular-season games. Baseball’s endless summer means there are more games to market — and more value placed on team chemistry as players work and travel together over eight months or more.
Then there are the player contracts. In baseball, those contracts are fully guaranteed, thanks to a collective bargaining agreement struck between the players’ union and team owners. Unlike other pro sports, baseball imposes no cap on how much teams can spend. Provided they’re willing to pay a penalty fee, or luxury tax, for exceeding the ceiling set by Major League Baseball (currently $189 million), teams can offer as many long-term contracts as they like, for whatever dollar value they feel comfortable with.
Taking into account all of these factors, did these offseason signings by the Red Sox represent a dramatic shift in payroll strategy? A readjustment to market realities? Or simply a desire to field a more competitive team after finishing last, no matter the risk in long-term commitments?
Speaking to reporters in Florida in February, Henry said his team remained “more discerning than ever” about how it spends its resources, “especially with regard to . . . 30-year-old free agents and above.”
Boston fans might have found that statement a bit curious knowing the profiles of Sandoval (a pudgy, albeit nimble third baseman with middling power numbers, who nevertheless helped San Francisco win three World Series) and Ramirez (a gifted hitter with a history of injuries and attitude issues). But if they help the Sox go from last place to first, will anyone care how much they’re paid five years from now?
ONE STUDY TO WHICH Henry was likely alluding was presented at last year’s MIT Sloan Sports Analytics Conference, an annual gathering of sports business experts and stats geeks at which Henry spoke. Titled “Can’t Buy Much Love: Why Money Is Not Baseball’s Most Valuable Currency,” the paper was written by Martin Kleinbard, a Columbia Business School student now working for American Express in risk analytics. Kleinbard is a longtime Yankees fan who’d grown frustrated watching Yankees teams with huge payrolls regularly lose to teams with more modest budgets.
According to Kleinbard, his study grew out of two passions: baseball and making sense of numbers that don’t always seem to add up.
“Even though everyone says money is ruining baseball and only the rich teams can win,” he tells me by phone from New York, “it was shocking to me that there wasn’t that much serious, longitudinal analysis done on this.”
Kleinbard ran what is known as a regression analysis — a statistics term referring to the process by which the relationship among dependent and independent variables is measured. In essence, he wanted to map the intersection between team payroll and team performance. In factoring wins into his analysis, he limited himself to regular-season victories, reasoning that post-season games, while important, represent too small a sample to be statistically relevant.
Kleinbard’s study, cited in a Bloomberg Businessweek profile of John Henry, wound up challenging the widely held notion that a high payroll virtually guarantees a team more wins than a low payroll does. Instead, Kleinbard concluded that baseball’s most valuable currency has become skilled players in their pre-free-agency years. Veteran stars with dazzling stats and contracts to match? Not so much.
“Young talent, not deep pockets, is the ultimate trump card in the MLB of today and tomorrow,” Kleinbard summarized. He noted in passing that with baseball cracking down on the use of performance-enhancing drugs, older players have, perhaps not coincidentally, seen their power numbers decline, making them even riskier to sign to multiyear deals.
Kleinbard’s paper included charts, graphs, and customized metrics, made-up terms like Win Buying Index, Payroll Inequality Index, and Youth Dominance Index. The last measures the percentage of statistically “dominant” seasons produced by players in their first six seasons in the majors, prior to their becoming eligible for free agency.
“A lot of free-agent contracts look good for a year or two but pretty sour by the end,” Kleinbard explains during our talk. Even though most teams understand this, he adds, they may feel differently about signing veteran talent if they don’t have a good young player to plug into a particular spot. Also, a team may place additional value on an exceedingly popular player who draws more fans to the ballpark or otherwise boosts its bottom line.
“A lot of these signings come from the owner as much as the general manager,” Kleinbard says. “They’re investing as much in the player’s brand as anything.”
In one chart appended to his study, Kleinbard looked closely at the 2002-2013 seasons and at which players gave their teams the best value, and worst. Taking into account a player’s annual salary and Wins Above Replacement figure — a widely used statistic calculating the number of wins a team earns with that player in the lineup beyond what it would have earned with his replacement (that is, a likely substitute from the actual professional ranks) — Kleinbard came up with what he identified as the 25 most overpaid and underpaid baseball players over that decade.
Twenty-four of the 25 overpaid ones were in their 30s, a list headed by sluggers Vernon Wells, Alex Rodriguez, and Adam Dunn, who signed huge contracts at the peak of their market value and then went into decline. Conversely, all 25 of the most underpaid were still in their 20s, a cast led by Mike Trout, former Sox center fielder Jacoby Ellsbury, and Josh Donaldson. Dollar for dollar, these players gave their respective teams the most bang for the buck.
“I think what my paper did was reinforce what people were already thinking,” says Kleinbard, “but maybe to a greater extent than what they thought was true.”
Teams seem to be wising up, he adds, “paying a little more now and a little less later” to lock up their best young players in the prime of their careers. Well, some teams are, but not all. Will the Miami Marlins’ Stanton really be worth more money at 38 than 28, or did they just decide it didn’t matter? They knew the only way they could have him at 28 was to agree to still have him at 38.
MOST BASEBALL ENTHUSIASTS could reel off the worst contracts they’ve ever seen, current or recent. Red Sox fans would not have to wander very far back to start their own list.
In 2012, three Boston players with huge contracts — Carl Crawford, Josh Beckett, and Adrian Gonzalez — were traded to the LA Dodgers in mid-season. Crawford was already pegged as one of the all-time worst free-agent signings, given how much he was making ($142 million over eight years) and how mediocre he’d been. Sox fans were positively giddy when the trade was announced.
On the flip side, fans applauded just as hard when, in 2013, second baseman Dustin Pedroia was signed to an eight-year contract extension worth $110 million. A shrewd move, locking up a home-grown star still in his prime? Most thought so then — and may still believe that, despite Pedroia, now 31, having battled hand injuries for the past two seasons while struggling to regain his power stroke.
Any contract stretching seven years or longer is almost automatically fraught with risk, says Sox radio broadcaster Joe Castiglione, who has seen plenty of head-scratching deals during his four decades in the booth. That is primarily due to the injury threat, especially for pitchers, who can blow out an elbow or tear a rotator cuff at any moment. Yet teams continue to bind themselves to these long-term deals. Why?
“It’s supply and demand, basically,” says Castiglione. “And competition. If a team wants somebody enough, they have to do that.”
Mark Conrad, an author, law professor, and director of Fordham University’s sports business program, says the Yankees have gotten burned more than most by saddling themselves with expensive, injury-prone players. Not only has this tied up payroll resources and roster spots, it has also hampered the team’s development of young, home-grown talent.
And yet, says Conrad, teams operating in markets like New York, LA, Chicago, and Boston look at these signings differently from smaller-market franchises. Having the resources to spend more and recognizing the need to keep their fan bases excited, the teams know that a free agent like Lester — he’ll pitch for the Cubs this year — creates a buzz that’s good for business. Ticket sales rise. Sports-talk chatter intensifies. If Lester keeps his team in post-season contention longer, that’s more revenue for the team and greater interest from fans, a win-win situation.
“So there’s an economic incentive for this,” Conrad says, “even if people say, ‘Why would we pay all this money to some guy who can get hurt next week, and we still have to pay him?’ ”
“Certainly there’s a number of examples of teams making considerable mistakes in [offering] long-term contracts,” says Michael McCann, director of the University of New Hampshire’s Sports and Entertainment Law Institute. “It typically results from a competitive bidding process that maybe the team didn’t expect, a pressure to match another team.”
Marc Isenberg, who runs the blog Money Players, maintains that teams understand the nuances of baseball economics, including what a player is worth to the franchise both on and off the field, no matter how risky or rash these contracts might look from the outside. He says the deal everyone points to as a potential game-changer — Alex Rodriguez’s disastrous 10-year, $275 million extension with the Yankees — has in fact had little discernible impact on how teams operate. “I am sure owners would like to think A-Rod’s deal would have a chilling effect on these mega-deals,” Isenberg says, “but it does not appear to be the case. Just like many investors were skittish after the last big recession, eventually we got back to our normal state of ‘irrational exuberance.’ ”
Players’ agents play a key role, too, in negotiating these mega-deals, says Steve Freyer, a sports and entertainment agent based in Danvers. Freyer’s clients have included former Red Sox pitcher John Tudor and Boston Bruins star Ray Bourque. “With agents, it’s an ego thing,” says Freyer, who has reduced his sports practice. “Getting the biggest, baddest contract they can get becomes a magnet for attracting other free agents down the road.”
Most ballplayers see little difference between a $100 million contract and a $110 million one, Freyer says. But for agents, each contract becomes a scoreboard used as a professional marketing tool. “It’s often the negotiation between the agent and player, not the ball club, that becomes the most delicate,” he says.
IF FANS OCCASIONALLY run out of patience with bad signings, baseball itself is not running out of money. Not by a long shot.
In 2012, Major League Baseball signed deals with three broadcast entities — ESPN, TBS, and Fox Sports — totaling $13 billion, the money being split among the 30 teams. On top of that, franchises are profiting from local broadcast rights that have left many flush with cash. In the LA market, deals with Fox Sports worth $2.5 billion (Angels) and $3 billion (Dodgers), each stretched over 17 years, have helped to land free agents like Albert Pujols and to pay Dodger ace Clayton Kershaw $215 million over seven years. Locally, the Red Sox take in $60 million annually from New England Sports Network for televising their games.
Backed by revenues like these, Major League Baseball’s aggregate payroll reached $4.06 billion in 2014. The average player salary has hit $3.8 million per year, and multiyear contracts look less risky when players help sell tickets and juice TV ratings.
According to Victor Matheson, an economics professor at College of the Holy Cross, calculating a player’s overall value to his team is a hot topic among sports economists. Prior to the dawn of free agency in the late 1970s, star players were being paid about one-10th of their earning power, says Matheson, a specialist in sports economics. “It’s a different landscape now,” he says, with the reserve clause long gone and players and their agents able to pit teams against one another in a competitive bidding process.
“ ‘How much more revenue do you get out of this player being on the field?’ ” is the question teams ask themselves, says Matheson. “You do that on the basis of wins and what wins do for your team in terms of revenue.’’
Players who become recognized stars — the Stantons, Trouts, and Kershaws — “are much more than statistics on the field,” he adds. They drive ticket and merchandising sales, media coverage, rights fees, and advertiser interest. So are these mega-deals mostly worth it?
“I’d say a qualified yes, they are,” he says. By locking in star players for long periods of time, even with the injury risk, “it’s like a home mortgage. You’re hoping that [paying] $25 million a year isn’t that much down the road” as revenues from attendance, sponsorships, rights fees, and other sources keep growing.
Ask author Daniel Okrent if these mega-deals look sane or silly and his answer might surprise the average fan. Okrent, whose books include Nine Innings, and who, as cofounder of the Rotisserie Baseball League, helped launch the fantasy-sports craze, thinks Giancarlo Stanton’s $325 million deal could turn out to be a bargain for the Marlins — even if he only has a few great years ahead of him, not a dozen or more. “The question is,” says Okrent, “how good was he when he was good? And what’s his value in an era of ever-escalating salaries?”
Even the Alex Rodriguez contract doesn’t look so bad, he says, considering he had three All-Star years in pin stripes and led the Yankees to a World Series title. How much money did that one title earn the Yankees? By that metric, Rodriguez was paid the equivalent of $92 million per All-Star year, while the Yankees still turned a nifty profit.
“The difficulty for the average fan is, he doesn’t think a player is worth $32 million, so why would you pay him $64 million” for each good year? Okrent says. “Well, it’s play money if a team’s making a profit. And baseball is making huge profits.”
An owner like John Henry “is not in it to make money, he’s in it to win pennants,” Okrent adds. “And to have a good time. Therefore, whatever he pays a player — if he’s having a good time — is worth it.”
If it feels good, do it. Sounds like a mantra from 50 years ago, back when age 30 was a whole different kind of dividing line.
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