It’s Just a Business, After All

The Hardball Times has just published three great articles about the business of baseball. Monday, Dan Fox took a look at the impact of the Collective Bargaining Agreement on baseball’s competitive balance. On Tuesday and Wednesday, guest writer Vince Gennaro contributed the latest in his Player Value series, first assessing the impact of the postseason on a player’s financial worth, and then wrapping it all up with a Player Value overview (which really is a must-read).

It seems like it’s hard to be a knowledgeable baseball fan these days without an undergraduate degree in economics. How much should your team pay a certain free agent? Should you root for them to invest in their minor league system instead? How do you feel when they trade away a good player with an expensive contract? Forming an opinion about your team’s management often requires an opinion about their business acumen, too.

I have no answers, but I do spend some time analyzing baseball player salaries. So I was intrigued by Vince’s lead paragraph in yesterday’s article:

There is no simple answer to the question of how much a player is worth. A common, even if somewhat flawed, approach is to compare the salary of similar players, creating a set of “comparables” as if it were a real estate transaction. The problem with this approach is that it assumes there is some intrinsic value to a player who can generate six wins.

I think Vince was referring to investment real estate, like office buildings, which generate cash through rental payments. And he’s right that ballplayers don’t have “intrinsic value;” they don’t generate cash. They just help win ballgames. Vince’s point is that a player’s worth is equal to his impact on a ball club’s incremental revenue, regardless of what any other player is paid. Just like they taught us in economics class.

But I’m not sure major league general managers really think that way. It seems to me that they approach the “ballplayer market” the same way you or I would sell our house, by checking out the prices of other local “houses” and hoping there’s a favorable combination of buyers and sellers when we go to market. Consider a couple of anecdotes:

• Last winter, the Mets signed Kris Benson, an average major league pitcher, to a three-year deal worth $7.5 million a year. Reportedly, most other major league teams were livid with the Mets for “raising” the price of major league pitchers, and the average salary of free-agent pitchers subsequently rose dramatically.
• This winter, the Cubs signed relievers Scott Eyre and Bobby Howry to three-year deals worth $11 million and $12 million, respectively. Other teams howled in penurious agony (just testing your vocabulary there), and, lo and behold, the average price of a free-agent reliever rose.

If teams were negotiating salaries based only on incremental revenue impact, why would they care what other clubs pay other players? The answer is they wouldn’t. And if general managers pay that much attention to other players’ salaries, then something else is going on.

Vince estimates that Brandon Inge is worth about eight times more to the Yankees than the Tigers. And if he had chosen the Royals instead of the Tigers, the difference probably would have been more like 13 times. But the difference between what teams actually pay free agents isn’t that large.

The following table shows the amount of money each team spent on free agents in 2005. Specifically, I’ve listed the number of free agents who played on each team, the expected Win Shares from those players (a measure of playing time), how much they were paid, how much they were paid per expected Win Share, the number of Win Shares Above Bench (WSAB) contributed by those free agents and how much they were paid (above the salary minimum) for each WSAB. All dollars are in thousands. (Note to self: phew!) Take a look:

Team     FA's   ExpWS       Salary       Sal/ExpWS     WSAB       Sal/WSAB
TB        15     63.0       $13,720         $218        0.9        $9,517
PIT        4     26.0       $12,375         $477        2.5        $4,408
BAL       12    100.6       $58,499         $582       15.8        $3,472
DET       12     70.5       $51,148         $726       14.1        $3,349
KC         7     52.1       $22,566         $433        7.0        $2,920
WAS       16    111.7       $49,364         $442       15.6        $2,841
CIN       11     69.5       $34,065         $490       15.3        $1,993
SEA       14    115.4       $67,190         $582       34.8        $1,802
CLE        9     62.8       $21,500         $342       10.4        $1,794
NYA       22    195.3      $197,133       $1,009      111.2        $1,711
SF        19    157.6       $89,804         $570       51.1        $1,639
NYN       29    158.1      $103,028         $652       60.3        $1,557
ATL       12     68.4       $63,194         $924       39.2        $1,514
PHI       18    137.1       $76,791         $560       48.2        $1,476
OAK        9     71.3       $31,319         $439       20.4        $1,394
COL        9     49.2       $17,057         $347       10.4        $1,368
MIN        5     42.6       $17,216         $404       12.1        $1,294
LAA       11    104.6       $65,416         $626       48.7        $1,271
LAN       15     88.6       $51,771         $584       38.3        $1,227
CHN       17    127.3       $58,007         $456       49.5        $1,063
SD        23    146.0       $65,004         $445       55.0        $1,051
HOU       10     71.3       $54,116         $758       48.5        $1,050
ARI       13    129.6       $55,124         $425       48.9        $1,044
BOS       22    192.2      $110,843         $577      120.7          $861
TEX       10     53.6       $18,348         $343       18.0          $844
CHA       14    121.8       $52,762         $433       62.2          $777
MIL        9     55.0       $18,263         $332       20.0          $771
FLA       17    130.1       $42,809         $329       48.8          $767
STL       20    157.1       $69,297         $441       85.0          $741
TOR        7     54.0       $15,500         $287       18.0          $740

Now, there are flaws with this data. I didn’t know how to apportion some players so, for instance, all of Mike Hampton’s salary is listed with the Braves, even though I know the Rockies and Marlins paid part of his salary. Also, as in the Hampton example, a number of free agents aren’t playing with the team that orignally signed them. Obviously, some didn’t perform up to expectations and some have wacky contracts (such as Carlos Delgado getting only $4 million last year, but about $14 million each year after). Finally, Tampa Bay looks terrible because of my questionable decision to categorize Dewon Brazelton as a free agent.

Having said all that, I think you can draw some valid general conclusions from this info, starting with the obvious: the Yankees paid $197 million to free agents last year, 16 times more than the Pirates ($12 million). But when you factor in playing time, the difference between the team that paid the most per expected Win Share (Yankees) and the least (Tampa Bay) was 4.6 times.

If you drop the Braves (see Hampton) and the habitually profligate Yankees from the sample, the difference was 3.5 times. Turning to dollars paid for performance, if you focus on teams that had at least 100 expected Win Shares from free agents (sample size), the difference between the team that paid the most for each WSAB (Orioles) and least (Cardinals) was 4.7 times.

I’d like to comment on specific teams, but I need to stay on topic here. If you have any questions or comments about the table, e-mail me, and I’ll post a follow-up on my Baseball Graphs blog.

Anyway, the difference between the highest-paying team and the lowest-paying one is much narrower than the difference in player value articulated by Vince. Let me offer a few reasons for why this may be happening:

• It’s fairly obvious that most general mangers operate under a budget. Toronto’s J.P. Ricciardi, for example, has been given a three-year $210 million budget. When a general manager is given a budget, he has no incentive to think about a player’s incremental value. He just attempts to spend his budget as best he can.
• Teams have to consider more than incremental economics. There are marketing perceptions, the commitment to the community (which has often paid for the stadium), the ultimate resale value of the franchise and ego.
• Players’ agents and particularly their union (through collective bargaining over the years) have done a good job of effectively positioning all ballplayers on a consistent economic level.
• Per the Collective Bargaining Agreement, for instance, only comparable player salaries are considered during arbitration. The status of a ball club’s financial condition is not a factor in the decision. To the extent this thinking “leaks” into the free-agent market, general managers will focus on market prices instead of incremental economics.

Baseball has always been a business. It was competitive in the 1800s (except the 1890s) and the very beginning of the 1900s. From 1915 to the 1970s, it was a monopoly, and the owners reaped the benefits, mostly at the players’ expense. It’s still a monopoly, but a major injustice was corrected when Curt Flood, Marvin Miller and Andy Messersmith stood up to the owners. Unfortunately, the subsequent Collective Bargaining Agreement negotiations between the owners and the players have made the business nearly incomprehensible to most fans.

As Vince pointed out in his first article (and as documented by Andrew Zimbalist in May the Best Team Win), the most recent Collective Bargaining Agreement contains a revenue-sharing system that is essentially a regressive payroll tax for small-market teams (though I’ve never been able to figure out Zimbalist’s math). Vince factored this into his analysis. Maybe teams just haven’t factored it into their decision-making. Perhaps they take the threat of sanctions from Selig seriously (the Collective Bargaining Agreement calls for Selig to penalize teams that don’t spend their revenue-sharing windfall on improving the team).

But when small-market teams pay salaries that are close to market, they are paying more than those players are worth to them. In the long run, those teams will want to drop out of the free-agent market altogether.

Dan looked at the impact of the revenue-sharing system and found that it seems to have actually hurt baseball’s competitive balance. I took a slightly different view of Dan’s numbers on my blog and found a little more reason for optimism, particularly when you consider that both the Blue Jays and Royals increased their budgets this year. Nevertheless, the revenue-sharing system needs to be improved. It’s just too hard to see how it can work in the long run.

I sometimes tell my kids, “If something in the world doesn’t make sense to you on the surface, money is usually the reason.” Maybe, for us baseball fans, that’s all we can say.

References & Resources
For those who would like to learn more about the business of baseball, I’d recommend:
– SABR’s Business of Baseball website
– Neil deMause’s Field of Schemes website
– Anything by our own Brian Borawski and Maury Brown. Maury also maintains his own business blog.