THE BOOK--Playing The Percentages In Baseball

Friday, June 05, 2009

Scott Boras is right

Wayne Gretzky signed a 21-yr $5MM deal at the age of 18 in the WHA (right at center ice).  The fantastic thing about the WHA is that all the underaged players signed (NHL drafting age at the time was 20) would be similar to what a free agent would be.  Gretzky’s contract would be equivalent to a $3.2MM deal if you presumed 5% growth.  Or, in other words, if he signed a 150,000$ salary at age 18, with an annual 5% raise for the next 21 years.  That would be pretty much what the stars of the day were getting already.  And he only played a handful of WHA games when he signed that deal.  Gretzky was the can’t miss prospect to end all can’t miss prospects, who managed to sign a virtual free agent contract.  Nothing like it has ever happened.  What this shows is that prospects have tremendous value, if you can price it right.  This is exactly what actuaries do with any other product (or service, which is what athletes provide), and what mom & pop do when buying stocks with no history.

The first six years of an MLB player’s career is paid at around 30% of what he would get as a free agent.  A player leaves 70 cents on the free agent dollar, in order to abide by the CBA.  A CBA he is a party of once he is part of the 40-man roster.  Until then, he’s really a free agent.  The draft somehow exists, and it remains mostly unchallenged, if only because virtually all the players accept it as the price of gaining entry.  They figure they’ll make it up in the end.

Or, before the beginning.  That’s what Scott Boras is for.  If you have a true star player, a can’t miss kind of player, a one-of-a-kind player, you would expect that player to provide you with about 30 WAR (wins above replacement) over 6 years.  30 WAR is worth around $130MM.  However, this can’t miss player will only get $40MM if he were to sign a MLB contract before playing his first game.  (Think Evan Longoria, but better, if you want.)

Now, free agents are terribly overpriced to begin with.  So, while this can’t miss player is worth $130MM in free agent dollars, if they made ALL players free agents, he would not sniff this.  Free agents get a premium because MLB management has made their supply so limited (how’s that for shooting yourself in the foot?).  This can’t miss player is likely really worth one-third less than that if the free agent market was more plentiful.  So, that would be around $90MM.  That’s the true value of the can’t miss player, if athlete services would be more readily available on the open market.

This can’t miss player, under the current CBA, will probably get a $40MM 6-yr deal after playing for one month.  He’ll be leaving $50MM on the table.

And Scott Boras wants that money in the beginning.  He is right on this one.  However, he will ALSO want the premium free agents will get on the back-end as well.  This of course is not fair, which is why the can’t miss player is required to leave the $50MM on the table today, so that he’s going to get it in free agency.

Now, whether Stephen Strasburg is MLB’s equivalent of Wayne Gretzky, I don’t know.  The question to ask is what kind of deal would he have signed, had there been the equivalent of the WHA in baseball.