Following the 2008 season, the Yankees made big news by attempting to corner the free agent market by doling out what seemed like huge contracts to C.C. Sabathia, Mark Teixeira, and A.J. Burnett. The Yankees were widely ridiculed for their lavish spending. Only three years later, while the Burnett deal turned out to be a disaster, the other two now look like bargains:
Teixeira: Eight year deal worth $180 million.
Sabathia: Seven year deal worth $161 million.
The Sabathia deal turned out to be so team friendly, that C.C. opted out in November, and cut what could be considered a hometown discount to stay in New York. Given the recent contract awarded to Albert Pujols, and similar expectations for Prince Fielder, common sense would say that Teixeira would follow Sabathia’s path if he had the chance.
New Age of TV Contracts
Will restructured TV contracts spark the next wave of salary hyper-inflation? Possibly. Teams now generate an ever-increasing amount of money from media. The Angels recently exercised an escape clause in their current TV contract, opted out, and came to a new agreement reportedly worth over $3 billion over twenty years. The deal is expected to top the recent mammoth Rangers deal worth over $80 million annually.
Additionally, all teams receive a share of the new revenues from MLB Advanced Media, including the new MLB Network, MLB TV, Extra Innings, and more.
The death of live television in the DVR age has put a premium on programming that forces viewers to watch commercials, and the Rangers and Angels deals could be the first two dominoes to fall. One has to think that there are other teams standing in line to negotiate lucrative deals of their own.
When accounting for actual economic inflation measured by the CPI, Biz Of Baseball’s Maury Brown points out that the average Major League salary rose by 1,783% between 1970 and 2010. Without inflation, salaries rose by 6,600%. You’ll notice on the chart below that the largest spike came during the 1990’s. Unless a team is willing to give a CPI adjusted salary, higher inflation should only help the club locking in a deal.
This could be for two reasons: the strength in the U.S. economy, and the influx of new ballparks during that decade. As strong as the economy was during the ‘90s, it can’t alone explain the jump in average salary from over $968,000 at the start of the decade, to above $2.3 million in 2000.
Between 1990 and 2000, the average MLB salary rose by about 144%.
Between 2000 and 2010, the average MLB salary rose by about 42%.
While the new stadium phenomenon is mostly complete, four teams increased their revenue potential in the last three years through new ballparks. In the ’90s, the White Sox, Orioles, Rangers, Indians, Rockies, Braves, Diamondbacks, Rays, and Mariners each opened a new park. The Giants, Tigers, Astros, Brewers, and Pirates each debuted new stadiums in 2000-2001. The following years saw new stadiums for the Reds, Cardinals, Phillies, Padres, and Nationals.
The Yankees and Mets debuted new ballparks in 2009, the Twins moved to Target Field in 2010, and the Marlins will open their own new facility in 2012. Aside from the Mets, who have dealt with ownership issues related to Bernie Madoff, each time has responded by aggressively bidding up player contracts.
This leaves Oakland and Tampa Bay as the final two teams with financially crippling stadium situations. The A’s could conceivably move to San Jose within the next ten years, and the Rays could finally secure long sought public funding for new digs of their own. If they do, contract premiums will only continue to rise.
The Next Decade
If you expect salary inflation over the next decade to replicate 2000-2010, a $25 million player today will be worth $35 million ten years from now. If you think TV deals or improving economics could force inflation higher, the number would be even larger.
Injuries and regression are among the many risks that accompany ten year deals. In all likelihood, the Pujols contract will look bad ten years from now regardless of any realistic inflation expectations – 40 year old players are rarely worth much at all.
I’m sure Scott Boras and company are working hard to make the case that a Pujols-like deal for Prince Fielder, who will be 37 in ten years, could be a bargain. I just might believe him.