THE BOOK--Playing The Percentages In Baseball

The first question to ask is how much of the 6billion$ MLB revenue pie should go to players (i.e., players + player development costs).

The player development costs are not direct transfers of revenue to players.  In fact, the amount devoted to direct payments to amateur players, ie signing bonuses, may be well under 50% of those PD costs.

Last year, according to BA, teams spent 187M on draft bonuses.  That was a huge increase from 151M in 2007.  It’s going to be fascinating to see if teams are able to use the economy to push bonuses back to that 2007 number. 

I also have a total international free budget report (probably from BA) of 42M.  That’s a fuzzier number because the international market does not have the organizing structure and signing deadline of the draft market.  But I beleive it’s pretty close.

So far 2008 I have MLB as an industry paying 229M in amateur talent acquistion for both the draft and international FA market.

That works out to 7.6M per team.  If you’re estimating total per team spend at 40M, then the amateur players are directly receiving 20% of that total.

The rest of the money would presumably be spent on paying for scouts, instructors, coaching staffs, latin academy infrastructure, etc.

Now those costs are investments that the teams make to improve the players’ skills and value so players - at least the ones who make it - do get indirect benefits from that money, but it’s not a simple apples to apples comparison to MLB FA compensation.

I do agree with Tango that the yearly 10% increase - a number taken from FA increases, I guess - probably isn’t the best one to use.  I know some teams have spent significant money upgrading their academies, but longterm I doubt the infrastructure and non-player PD costs have increased at anything close to 10%.

And actually, amateur player costs haven’t either.  There’s a lot of public talk about how the bonus slotting system does not work based on the fact that there are some signability picks that bust the system.  But in terms of holding down costs overall, it’s worked great.

I have data for the yearly increases of the average 1st rd pick going back to the 1960s.  The slotting system was introduced in 2000.  The ave 1st bonus in 2000 was 1.9M.  In 2008 it was 2.5M.  The yearly average change is about 4%.

In the 1990s bonuses went from 252k to 1.8M with an average yearly increase of 27%.

A lot of that rapid increase is catching up from a very low baseline, but MLB has had great success for most of the 2000s keeping draft bonuses to modest year to year increases.

Philly, fantastic info.

“...but it’s not a simple apples to apples comparison to MLB FA compensation. “

I think it’s a McIntosh to Green Apples comparison at the least.

A team could decide to simply have a bare bones operation for non-MLB (say a 15-player academy for the non-MLB players on their 40 man roster, so they can use them for emergency purposes).  In effect, shut down their 40MM operation, refuse to draft players, and acquire talent on the open market.

The reason they do not do that is because the ROI on the non-free agents each year is better than the 55MM they spend on free agents.

For free agents, they spend 55MM in salaries and they get 40MM in value back.

For non-free agents, they spend 40MM in development and signing costs, plus they spend another 35MM in salaries, and they get 90MM in value.  That’s a great ROI.

A team that would go with a free agent-only model would be in the hole by 15MM every year. 

So, I don’t know why you’d say we can’t make the comparisons.  Indeed, the teams MUST make these comparisons, so they know where they can best spend their money to get whatever wins they want each year.

Indeed, a team can completely forego the free agency route, spend 75MM on everyone else (40MM for non-MLB operation plus 35MM in non-FA salaries), and get 90MM of value.  That is, have the true talent to win around 65 games.  And everything else is profit.

This is what the average team is faced with:

If they spend 40MM$ on non-MLB operations (i.e., minors, scouting, drafting, signing, etc), and they spend 35MM on players with less than 6 years of MLB experience, and nothing on free agents, they will have the true talent to win 65 games.

Their dollar value is 90MM, but it only costs them 75MM (40+35+0), for a net profit of 15MM$.

If they spend 18MM on free agents (i.e., guys with at least 6 years of service), they have a 71 win team, with a net profit of 10MM$.

As you can see, teams are trying balance how much money to throw away in order to become competitive.

A team can try to sink itself by getting one of the best teams in the league (true talent wins of 91), by putting in alot of money on free agents.  And their profits will sink.

However, some teams, like the Yanks, are better able to capitalize on free agents.  And so, they get better value from them.  That’s why they can go for free agents, while the Royals can’t.

In the end, each team is going after the same profit dollars (say to be equal to every other team), and let their market sizes be the leveraging factor that puts them ahead in the W column. 

Other teams try to counter their small market size by leveraging the talents of their front and back offices.  The Twins and A’s would be the popular examples over the last decade.

IMO, Colin oversteps a bit in his conclusion that the low minors would cease to exist if the reserve clause was abolished.  Independent leagues exist, and while they certainly are not the most stable enterprise, there are enough people interested in watching reasonably high-quality baseball games at low prices to keep them afloat, and enough people willing to work as ballplayers for low wages. 

Also, his scenario is eliminating BOTH the draft and the reserve clause, but there’s no reason why that would have to be the case.  There was a minor league reserve clause before there was a draft. In fact, before there was a draft there were many more minor leagues (I am not claiming causation--television certainly hurt the minors and caused the demise of many before the draft was implemented).

So, I don’t know why you’d say we can’t make the comparisons.  Indeed, the teams MUST make these comparisons, so they know where they can best spend their money to get whatever wins they want each year.

I better understand your point now.  I was looking at things from the player perspective, not the team side of the negotiation.  If the pool of amateur players are going to get 7.6M per team per year, they don’t really care if the team is spending another 32M or 2M on development costs.

Players - both amateur and MLB - will fight and negotiate for additional direct spending from the teams to the players.  I don’t think they really recognize these indirect costs as part of the ROI for themselves as individuals or a collective group of players.

Your team perspective is based on total player compensation comprised of FA salaries, pre-FA salaries and total PD costs.  The players see total player compensation as comprised of FA salaries, pre FA salaries and the portion of PD costs paid out as signing bonuses.

That makes for an interesting discrepancy.  Using your 40M estimate of PD costs and an 8M amateur bonus budget that leads the owners to believe that total player compensation is 960M (30 teams x 32M indirect PD costs) higher than what the players as a group thinks it is.

In a 6B industry, that’s a huge gap.  It’s enough to think that the two sides would be at each other’s throats every CBA negotiation and yet we haven’t seen that lately.

Does that suggest an error in the calculation? Is this a function of the disconnect between unionized MLB players and amateurs?

Colin’s article kind of confuses me. 

He poses the article as a consideration of whether there’s a “better way” to deal with the draft, then talks about exploitation and getting rid of the reserve clause as a result, which would then take the minor leagues, then suggests MLB develop players the way the NBA and NFL do (that is, largely via colleges subsidizing the process), despite his statement that college football and basketball players are still exploited, if only not as much as a pre-arb player on a MLB roster. 

Is exploitation important or not, and if it’s important, how much do we tolerate?  How does he propose that MLB get universities to subsidize it’s player development?  Or is he suggesting that MLB subsidize college baseball programs?  Would that be cheaper than just running minor leagues?

It seems like baseball’s antitrust exemption is the source of much of the inequities concerning pay and performance that are described above.  If baseball didn’t have an antitrust exemption or the courts ruled that the exemption didn’t extend to its operation of the minor leagues then a minor league player could sue to end the reserve clause or an amateur player player sue to end the draft.  That would basically bring baseball back to the pre-1922 state of independent minor leagues and every player not a member of MLBPA a free agent able to negotiate his own best contract.  I am not sure how the NBA has gotten away with establishing rules about at restrictions on who can sign a player contract, but I would think those rules would also stand a good chance of being over turned by an antitrust suit as well.  Any lawyers out there knowledgeable on this subject please inform us on this.

I can’t see how this would be a bad thing.  MLB teams would only hire players that were ready to play at that level.  The number of players a team would have to have on a team would probably have to increase to 30 or so to allow for a quick respons to injuries.  But that would still be fewer than the 40 signed to major league contracts today.  Plus teams wouldn’t have to incur paying draft bonuses to unproven 18 year old players that don’t ever make the majors.

Players would have more flexibility to choose their own career path.  They could sign at an early age if teams thought they already had major league skills.  Or they could sign with minor league clubs for a salary consistent with the market rates for their current ability.  Or they could still choose a college scholarship if they felt that would provide more future benefit to them than playing in the minors.

This would make an athlete more like a normal person with skills to offer an employer for what the market will bear for those skills.  And like a normal job seeker he may choose to forego a higher immediate salary to choose an employer who offers less money, but a better opportunity to improve his skills so that his value will rise more quickly in the market and he can maximize his total future compensation.

Minor league teams could potentially benefit by being able to move their teams into major markets and not being prevented from negotiating their own TV contracts.

I agree with puck.  I read Colin’s article through several times and still can’t figure out what he was advocating.  A lot of information in there, but terribly written.

Philly: I think we’re on the same page now.  Well said.

The minor leagues were not independent prior to 1922.  They certainly had more autonomy than they do now, but that is not a direct consequence of the anti-trust exemption, as the Cardinals had already begun developing their farm system at that time, and some leagues would retain some semblance of autonomy for years to come (specifically the IL and the PCL, and maybe others--I’m certainly not a minor league history expert.  Lefty Grove and Baltimore is the classic case--the majors did not have draft power over the IL, so Jack Dunn could hold onto Grove in perpetuity.) It is not as if the anti-trust exemption ushered in a new era in which the majors gobbled up the minors; minor leagues had begun lining up under the autonomy of the majors as early as the 1877 League Alliance and particularly the 1883 Tripartite Agreement.

Patriot - You are correct that abolishing the draft would not entail abolishing the reserve clause. Here is the paragraph as originally written, before editing:

“If we simply abolish the draft, teams aren’t going to suck up an eight-figure loss. They are going to find some other way to either recoup the cost or offset it somehow. It’s unlikely they will raise prices or find new revenue streams; if they could do so they probably would do so regardless of what occurs with the draft. So reducing the costs of player development is the most likely strategy. And we can look to the other major sports leagues in the U.S. to come up with a good idea of how they could achieve just that.”

I probably should have clarified that before my editor did it for me. I’ll get that corrected.

Obviously something went wrong between what I was thinking and what I wrote, because I never meant to imply that I supported abolishing the draft. My point was that there were real consequences to abolishing the draft that need to be taken into consideration, and that it wasn’t a case of simply exploiting players.

And yes, there would still be independent minor leagues. But I think the subsidized low minors would become a thing of the past if the draft was abolished. It is possible that the independent minors would benefit from this, actually, and I should have pointed that out.

In other words - abolishing the draft would not abolish the reserve system, but it would raise the cost of acquiring amateur talent, and thus raise the cost of developing talent.

I’ll check on the math error when I get home; I don’t have that spreadsheet on me. The average growth of the Brewers’ player development expenses in the report was about 12% per year, though, so I don’t know that 10% growth is unreasonable.