Skyrocketing revenue driving baseball's big contracts

Revenue increases are creating a new order in baseball free agency

12/14/13 in MLB   |   Eric_   |   7716 respect

Blog Photo - Skyrocketing revenue driving baseball's big contractsOn the surface, most of the big free agent contracts signed this winter have looked insane. $240 million for Robinson Cano? $153 million for Jacoby Ellsbury? $49 million for Ricky Nolasco? $30 million for Scott Feldman? What is going on here? Why is so much money being thrown around?

The biggest and most obvious reason is teams are making more money than ever before. While MLB Advanced Media helps, the biggest driver of that is TV revenue. The national TV deal will net teams an additional $25 million a year each now, and the local deals that keep cropping up are only getting bigger. Baseball is benefiting from the fact that live sports are just about the only thing on television that people still watch live, and not on DVR. Many think a bubble has developed with these TV contracts, but for now the money is flowing. Fangraphs listed each team's yearly revenue from local TV last July. Excluding the Dodgers deal, which is on another planet from the rest, the average each team receives is around $48.5 million a year.

There are other factors driving these large free agent contracts. One is scarcity of talent that even gets to free agency. While this class had some elite talent, it dropped off pretty quickly as teams mostly look to lock up their young talent well before they even hit the open market. Last month, Jay Jaffe at took a look at guys who could've been free agents this winter, a list that included Adam Wainwright, Joey Votto, and David Wright. Maybe a decade ago these guys would've been free agents, and while they certainly would've gotten huge deals, it might have depressed the market a bit for the mid-tier free agents.

We also need to look at who is signing these players to big deals. Take Robinson Cano. In this environment, you could make an argument that the next few years he'll be worth $24 million a year. For 10 years though? Not a chance, which is why the consensus is that contract will be an albatross sooner or later. For the current Seattle brass though, including embattled GM Jack Zduriencik, the length of the contract doesn't really matter, because it won't be their problem at the end of it. If a GM has to win now to keep their job, a 8-10 year contract is just fine with them, because if they're still around to deal with it, that means they've won games and kept their job. If not, they get fired and it's no longer their issue.

Teams also must deal with what's known as winner's curse. Winner's curse is common in auction like environments, with free agency essentially is. What happens is the bidding gets to a point where the winner has likely overpaid relative to the asset's market value. The revenue increases have changed what fair market value is, but free agency is still a classic example of winner's curse and a big reason why free agency is considered an inefficient way to build a team.

The incredible thing is despite these big deals, the players' share of revenues may in fact be going down. Last month, the Pittsburgh Tribune Review reported on this, and with the caveat that they didn't show their work, they reported that the players' share of revenues is down to 42 percent. Ten years ago, that number was 63 percent. Revenues have exploded for baseball and its member clubs, but most of that largesse actually hasn't made its way to the players.

In the end, we as baseball fans need to reset our expectations. The money being thrown around is the new normal. The paradigm has shifted, and expectations must be adjusted accordingly. Time will tell if the TV explosion really is a bubble, but for now the money is flowing, and baseball teams are ready to spend it.
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