THE BOOK--Playing The Percentages In Baseball

Thursday, June 11, 2009

Surplus value of non-free agents

Free agents get 60% of the payroll, yet provide 30% of the value.  However, in addition to the MLB payroll, there is the player development costs.  If we assume that those costs are roughly 40MM$ per team (see below), now the salaries of free agents relative to the total payroll plus player development costs is down to 42%.  Free agents are still being overpaid relative to the non-free agents.

Let’s presume that the cash outlay by the teams for players and player development costs (130MM$ per team) is the “competitive market” costs (i.e., they are paying the correct amount, if all teams were truly independent).  Teams are paying 55MM$ for free agents, and 75MM$ for everyone else (arb, pre-arb, minors, signing bonuses, scouts, etc).  Seeing that the free agents only generate 30% of the value, then they should be getting about 40MM$, and everyone else should be getting 90MM$.  Free agent contracts should be cut by 27%, and non-free agent costs should increase by 15MM$ to get them in-line.  Basically, management has transferred 15MM$ of value from the non-free agents to the free agents. 

I am sure the agents are well-aware of this, which is why they fight so hard to get as much as they can in the signing bonus money.  If the pre-arb and arb players aren’t able to tap into that surplus value, then the drafted players are going to try.

However, if we presume that free agents are being fairly paid, then the non-free agents should be getting an additional 55MM$ per team in order for the free agents to still get 30% of the costs.  I don’t believe free agents are being fairly paid.  I would bet we are far closer to the first supposition than the second.

The first question to ask is how much of the 6billion$ MLB revenue pie should go to players (i.e., players + player development costs).  Once you figure that out, then the free agents should get 30% of the player pie.

And, the draft / minors / arb / free agent system you construct should reflect that, if we want to be fair.  At the same time, the A’s and Twins are able to exploit the arbitrage opportunity here, in order to remain competitive on the playing field.  In some wacked-out sense, by having the system we have, we can get all the teams in equilibrium.  Otherwise, in order to get the players fairly compensated by service class, the teams would have to do an enormous amount of revenue sharing (similar to the NFL) just so that they can maintain equilibrium.

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Colin gives us his view on the draft and minor leagues.

A math error:

..."other baseball operating expenses” ...  from 1998 to 2003, or roughly $21 million a season. ... Assuming 10 percent growth from last season, which is typical for free agent salaries, and you’re looking at a estimated $63 million for 2009.)

If it was 21MM$ in 1998, then growing 10% would give you 60MM$ in 2009.  However, it was an average of 21MM from 1998-2003.  That would mean starting at 16.33MM$ in 1998, growing by 10%, getting your 21MM$ average for 98-03, and bringing us to 47MM$ in 2009.

I don’t know that I’d necessarily go with a 10% increase here.  If we instead start with 18.52MM$ in 1998, grow at 5%, then you still get the 21MM$ average for 98-03, and you are now at 32MM$ in 2009. 

I’d say 40MM$-ish probably is a decent working number.

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Colin also links to this great article, to which I agree 100%.

There is inherent value in all performers.  The question is always who gets that value, and how can it be maximized.  The NCAA desperately wants that value, and it will pay very little for it (via scholarships) than they are actually worth.  There is absolutely nothing wrong with Lebron James signing any kind of deal he wants (with parental consent if under 18) to crystallize his value in monetary terms.  In no way should any entity, other than Lebron and whoever wants to value him, have any say here.