Wednesday, February 27, 2013

Team Construction and the Baseball Bubble

Watching the lunatic deals given out this off-season, I've begun to think that baseball player salaries are in something of a bubble. Across the board, sports are thriving financially because they are DVR-Kryptonite and essentially the last televised commodity, and baseball in particular is giving the money from the TV deals back to the help. Normally, baseball salaries increase at about 5% per year, but this winter has shown teams banking on an influx of TV revenue and willing to pay a premium for guys like Joe Blanton (2 years/$15 million) and 37-year-old regression candidate Torii Hunter (2/$26M). Crazy overpays for non-star star players aren't rare - Barry Zito and Jayson Werth being two prime recent examples - but the lesser important players are getting a larger slice of the pie now, too.
Team Construction.
Overpay contracts to stars (or "stars") make sense because other teams would likely match them, so strictly speaking the players are worth that much, but these mid-tier and low-tier contracts make no sense. There's a reason we use the construction "wins above replacement." Joe Blanton is being paid to produce about 1.5 WAR each of the next two years, which is eminently replaceable (2 WAR is average for a major leaguer playing a full season). If a team could almost certainly find a guy in the minor leagues able to put up those numbers for literally 1/20th the price, why pay Blanton that money?

The dollars have leaped up specifically this year, because starting in 2014 the new national TV contract will net each team an additional $40 million annually, and teams are raking in money from local TV deals as well. It appears that most teams haven't quite figured out how to most efficiently allocate their resources, and are acting a bit like a kid in an overpriced candy shop. Star players should be able to demand a higher premium for their talent, because when you can only play 9 guys, marginal gains in WAR are more valuable. The 2 WAR climb from 5-7 is the same in a strict value sense as 1-3, but if each player plays every day, the star's extra value means more because there are only so many innings a team plays. In this MLB climate, though, teams are essentially paying star scale for the replaceable guys. This, in turn, will bring up the price of the star players, and that's where this model may ultimately be unsustainable.

These contracts are basically untethered to anything other than the tantalizing promise of future TV money (Side note: I understand that what I just said is a rough facsimile for the vagaries of the stock market, but that does not disprove my example; the stock market has proved susceptible to bubbles more than a few times in its history). Baseball is an outlier in this sense, too. The NFL has a hard team salary cap, while the NBA has a less rigid team-wide limit, but strict caps on individual pay. Both of these cap structures are tied to the overall revenue the leagues take in (as opposed to the individual revenue baseball teams can amass). Ironically, baseball is the most strictly "free market" of the leagues and is the worst at exploiting inefficiencies, because for top-of-the-market teams there's basically no incentive to do so.

I'm couching this in a lot of unnecessary language. Every sports fan understands that the difference between a team like the Yankees versus even a solidly upper-class team like the Cardinals is that the former can hand out an atrocious contract and not be crippled by it, where the latter cannot. A-Rod (part deux), Mark Teixeira and Carl Pavano make that clear. The Cardinals, by comparison, seemed more than happy to part with Albert Pujols when it became evident they would need to give him a ten-year deal to keep him. The Angels wanted a star player in Pujols and they paid handsomely for him.

Where Uggs model Tom Brady recently restructured his contract, ultimately taking more money up front but giving his team more flexibility, an MLB player would have almost no incentive to do so. Unlike NFL agreements, MLB contracts are guaranteed and they have little bearing on what any given team can shell out, beyond an internal cap on contract outlays (which players will argue is none of their problem, as it is not externally imposed).

Not that this is time immemorial stuff, since free agency has only been around for about 40 years, but I think the paradigm of team construction may be changing. Over at Grantland, Jonah Keri wrote an interesting piece on just this subject, weighing the relative merits of building through depth versus attaching a team's fortunes to a few stars, and found that while each way has worked, depth may be a greater advantage than we previously thought. The Yankees, who pay star-level money to so many of their guys, year in and year out have no bench, and when star players go down, the Yankees are still paying a huge amount for basically zero production. Part of the problem is that the Yankees have given massive contracts to the wrong guys, but the Yankees are also hemmed in by those contracts. Teams like the Rays or last year's Orioles or A's work on the opposite model, and they're consistently able to plug holes. The Yankees' ceiling is probably (definitely) higher, but they have no such flexibility.

In that way, signing mid-tier players may be the new Moneyball, the new inefficiency to be exploited. If a team can scout well, and the Rays have proven that's a culture that can be instilled, then why chase the Fielders or the Greinkes and overpay for them? Sign talent young to lower-risk contracts and fill in the gaps with mid-tier players instead.

By the way, everything I've said doesn't apply to the Dodgers. They might just be lunatics.

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