Archive for Business

Dominican Baseball Agents

There is an interesting article on the agent system for putting Dominican kids in Major League Baseball in The Washington Post. The article focuses on Nationals prospect Esmailyn Gonzalez and his agent (buscone), Basilio Vizcaino. Buscones are agents who find talent before MLB teams can sign them (after their 16th birthday). They groom, feed, and clothe them so that they can make the big leagues. In return, buscones receive a 10-30% share of the signing bonus.

Of course, there are problems with this method, because the agents are in a position where they can do all sorts of things, such as juice players steroids (or worse) and sign contracts that give the agents much more than 30% of the signing bonus. While MLB acknowledges the problems with the system, there is not much it can do. And at least the incentives encourage agents to improve the lives of Dominican’s with baseball talent.

“I hate to say it, I hate to admit it: It really do work in [the players’] favor,” said Jose Rijo, a native of nearby San Cristobal who pitched 14 years in the majors and now serves in the Nationals’ front office. “Now, we got kids 13 years old, 14 years old with talent. [The buscones] feed them, give them some better instruction, give them a chance to develop every day. If you go back to the old system, nobody would discover them, nobody would help them.”

“We do have a concern,” MLB’s Peralta said. “But I have to be honest with you, and I want to state for the record: Buscones, or independent scouts, are a very important part of the industry. They help fill a gap, because there’s not a lot of organized baseball in the Dominican Republic. They provide a service.

I’m not sure what can be done to improve the situation, but I haven’t heard too many complaints from Dominican players in the big leagues. I’m curious to see what happens to this system over time.

Read Between the Lines

From the AJC:

The Mets told Glavine they’d wait while he explored returning to the Braves, and he spent the past month discussing the decision with his family and later waiting for the Braves to make an offer.

“In the end, it wasn’t fair for anybody involved to drag it out any longer,” Glavine said. “I didn’t know exactly their payroll constraints and what’s going on with them. I guess there could have been ways around not formally making me an offer [but making an informal one], but none of that happened.”

“The Mets were first class the whole way. I’m going back to an organization I’ve had a lot of fun with, and they’ve been hugely respectful of me and my family, and a good team on top of that. We’ve got some things we’re trying to fix, but the team is committed to doing it.”

Ouch!

What Are The Orioles Thinking?

Well, that’s a rhetorical question that Ken Rosenthal asks to make a point about the O’s offseason signings of Jamie Walker ($12 mil/ 3-years), Danys Baez ($19 mil/ 3-years), and Chad Bradford ($10.5 mil/ 3-years). The answers:

A. The Orioles, coming off nine consecutive losing seasons, needed to overpay each reliever in a three-year contract to attract him to Baltimore, or,

B. The Orioles have lost their minds.

With Mazzone moving to the O’s I’ve started following them again. I grew up in Charlotte, which hosted the Double-A affiliate of the club. I actually threw out the first ball at a game when Cal Ripken was on the team. I view Rosenthal’s question as a good one. I don’t think the O’s are crazy or “overpaying” on purpose.

Baltimore needs better pitching. It’s why they brought in Mazzone last year, and it’s why they are targeting pitchers in the free agent market this year. Here are some rough projected values (based on 10% revenue growth and recent performance) for these three pitchers over the next three years:

Baez: $16 million
Walker: $9 million
Bradford: $19 million

Baez and Walker seem to be getting a bit more than my estimated worth, but these values are heavily influenced by playing time. If the O’s think they can utilize these pitchers differently than in the past, they might get some extra value out of these players that other teams missed (I’m just saying). In total, this value adds up to $43 million, which is pretty close to the $41.5 million the O’s have invested in these players. It’s also an interesting move, because they are targeting relievers, not starters. I wonder if the Orioles feel that the starter market is overvalued, and therefore they decided some extra innings from good relievers. I’m not saying I would have recommended doing what the Baltimore did, but I can at least comprehend their behavior. I guess we’ll see if it works soon enough.

Thanks to Ballbug, for pointing me to the Rosenthal article.

More on Rising Salaries

There has been a nice discussion on salaries going on across the web. There are two small things I wish to add to the general discussion, and rather than sprinkle them far and wide, I’ll post them here.

1) The term “inflation” should not be applied to salary growth in MLB. Yes, I know what people mean, but inflation has a very distinct definition: a continuous rise in the price level, which reflects the average prices of all goods and services in the economy. The rise in baseball player salaries reflects a relative change in value compared to all other goods in the economy. They are becoming more expensive in relation to other things we purchase. And look, I understand the innocent mis-use of the term, but given the recent passing of Milton Friedman, let’s at least honor his dictum: inflation is always and everywhere a monetary phenomenon. :-)

2) In absence of some external force or cognitive bias, teams will pay players a salary equal to their net marginal revenue products (MRP). Non-free agents earn less than their MRPs, because their movement within the labor market is restricted. Free agents ought to earn their projected MRPs (there is a lot of variance in these projections) in the competitive labor market, and no team ought to pay a player more than his estimated MRP value, even if it has room in the budget. To do so would be a violation of everything we have come to know in labor economics. Might some team make mistakes based on past rules of thumb? I’ll grant room for some small mistakes, but owners and GMs are pretty smart. I think it’s important to start from the premise that owners know what they are doing (even though it’s not always the case, and we should be on the lookout for mistakes) and try and interpret what is going on.

Given what Tangotiger points out about salary growth in MLB, I’m inclined to think these salaries aren’t as out of whack as I first thought. Furthermore, I believe the potential mistakes that are being made are in regard to projecting players—Soriano and Matthews look like panic moves to me—but that’s me as a fan talking. I would not be surprised if I am proved wrong in the future, more so about Soriano than Matthews; I still can’t understand what the Angels are thinking…unless revenue growth is going to rise at a rate a good bit higher than 10%.

Free Agent Salaries and MLB Revenue Growth

Like most baseball fans, I am shocked by the money going to free agents this off-season. I expected this to be a big year, but these numbers are off-the-chart huge, far higher than I anticipated. Because many of these contracts are long-term deals—Soriano got 8 freakin’ years, which is a totally different problem—I wondered if some anticipated revenue growth would be enough to explain these salaries. Maybe, by the time the contracts expire, the players will have generated value equivalent to the higher revenues the league will generate in the coming years. So, I decided to take a quick look.

I took the 2006 performances of Carlos Lee, Gary Matthews, Juan Pierre, Aramis Ramirez, and Alfonso Soriano, and assumed that these players would perform at the same level for the duration of their contracts (an upwardly biased assumption). I then determined the annual revenue growth rate needed to generate a value equal to the 2006 performance of each player over the course of the contract. For example, I estimate that Soriano generated over $12 million for the Nationals in 2006, far below the $17 million/year average of his contract. But, as revenue rises player performances will grow more valuable. Maybe by the time 2014 rolls around, $17 million won’t seem so expensive.

It turns out that the annual revenue growth needed to justify these contracts is about 10% for all of the players. TEN PERCENT! Heck, even if you assume modest inflation that’s a high growth rate. Now, I can easily buy a year or two of such growth—in fact, revenue did increase by about that much from 2004 to 2005—but this type of growth is not sustainable very high for a large established business over a long period of time. At that rate MLB will be doubling its revenues in about 7 years. So, what is going on?

Hypothesis 1: All teams are plain nuts. (very unlikely)
Hypothesis 2: All teams are estimating on recent high growth as sustainable. (possible, but doubtful)
Hypothesis 3: A few teams are plain nuts or confused by recent growth. (likely, but not the full explanation)
Hypothesis 4: MLB has been making a lot more money than we thought, and for some reason teams are not restraining themselves the way that they have in the past. (hmm…)

I’ve been wondering about some language in the labor deal that settled some past collusion allegations, which occurred in 2002. Supposedly, this is no big deal, just patching up some minor disagreements. The settlement was small, but I wonder if the players gave up their fight because they had reached some agreement that would prevent future collusion, if it did exist. After all, A-Rod and Manny got big contracts in 2001 because owners thought they’d generate enough revenue to cover them. If the owners then figured out a way to shut off the tap, then these deals would stop. And that’s when the black helicopters swoop in…

Hey, this is way over-the-top conspiracy reasoning, but I am really curious as to what is going on here.

Addendum: Other suggested reasons are welcome.

Further Addendum: In the comments, Tangotiger points out that 10% growth in salaries is the historical norm over the past 20 years.

More on Matsuzaka

I’m tired of updating the previous post on the subject, so I’ll add another. David Gassko of The Hardball Times comes up with some estimates of potential contracts that take into account Matsuzaka’s value from being Japanese.

Here is what would [be] a fair offer to Matsuzaka:

3 years, $22 million, or
4 years, $49 million, or
5 years, $75 million

While I doubt that Boras and Matsuzaka would ever agree to the first offer, the latter two look pretty realistic. In fact, it had been rumored that Boras would be seeking a Roy Oswalt-type deal, and Oswalt got five years and $73 million from the Houston Astros. If the Sox can bargain him down to a lower price, they might just make a little money on Matsuzaka.

What Will Daisuke Matsuzaka Get?

Rumors have it that the Boston Red Sox have paid somewhere between the mid-30s to low-50s in millions of dollars for the right to sign Japanese ace pitcher Daisuke Matsuzaka. That money gives the Red Sox the right to negotiate with Matsuzaka (through his agent Scott Boras) for 30 days. If no agreement is reached, Matsuzaka must return to Japan for a year before being posted again. So, how much is he going to get paid?

A team will be willing to pay a player a equal to his marginal revenue product (MRP)—the additional value he generates in value to the team. A player in the open market ought to receive a salary equal to his MRP; but, a player with who is restricted in his salary will earn less. I’ve seen several reports that the Red Sox will be paying Matsuzaka ace money, but that is not the case. Part of Matsuzaka’s value will be going to the team that holds his reserve rights, the Seibu Lions of Japan. The salary that any team will be willing to pay him will be his total added value minus the amount paid to his old team. Furthermore, because the bid winner has the sole right to sign him in MLB, it only has to pay him enough to make him want to play in the US over playing in Japan. I’m not sure how accurate this report of his salary is, but translated into dollars, Matsuzaka made about $2.8 million last year. Since his team still owns his rights, I’ll assume he’s good for a raise to $4 million in 2007 (I have no idea if this is a good assumption, if you have better information, please pass it along). Now, the Red Sox have to convince him that playing in the U.S. is worth more than the $4 million he would earn in Japan.

Also, it looks as though he’s going for a three-year deal like most Japanese players. Before even paying him a salary the Red Sox will be paying out between $10-$16.7 million a year for his services. Let’s then assume he’s as valuable as Brandon Webb, whom I estimate to be worth about $20 million year. This gives him a salary of between $3.3 and $10 million. He certainly won’t come for the low number, but the high number surely would do it. But I don’t think the Red Sox would be willing to go to the high end. All they have to do is outbid their competition in salary and compensate him enough to not mind living in the U.S.

So, after all this, I’ll stop being fancy and take a stab. I’ll guess that he’ll be getting a $6 million contract from the Red Sox, who will pay a $36 million bid fee to the Lions. In total, the Sox will be on the hook for about $18 million a year. I’m not buying the $50 million reports unless the Red Sox are planning to sign him for more years and he’s willing to work for peanuts. I guess will find out soon enough.

Update: I was way off. ESPN reports it’s a $51 million posting fee. I think one of three things will happen.
1.) Matsuzaka signs for a five-year deal.
2.) The parties don’t reach an agreement. Maybe the Red Sox were only out to prevent the Yankees from getting him.
3.) We are getting ready to see salary escalation so high that A-rod will wish he had an out clause in his contract.

I’m betting on 2.

Addendum: Can someone find a sources that clarifies what happens if Matsuzaka and the Sox do not reach a deal. Some people are saying that he becomes an unrestricted free agent, but the only document I’ve found says that he would have to be reposted next year. Also, I believe he has two more years of service before he can become a free agent in MLB. Is this correct?

Answer:

If the Sox do not reach a deal by the deadline, Matsuzaka will return to Seibu to pitch next season and the posting fee will not be paid by Boston. Matsuzaka, whose current salary in Japan is $3 million, could then be posted again next year.

Further Addendum: A few other issues that seem relevant. Some people have been discussing whether or not the Red Sox are using their bid to block the Yankees. If this is the case, Bud Selig can intervene and give the rights to the second-highest bidder. However, let’s say that the Red Sox offer him a $6 million/year deal. Boras might argue that a player of this caliber would command a salary of double that to accuse the Red Sox of negotiating in bad faith. However, I think the Sox could easily beat that rap. They would be offering him more than he would earn in Japan, and it’s not the Sox’s fault that the Lions hold his reserve rights. What the Red Sox pay out for him is not the same as his salary. I expect the Sox to play hardball. Matsuzaka has a lot to gain from playing in the U.S. from endorsement deals, so I think it’s going to be difficult to turn down a deal.

Also, are the Red Sox banking on an influx of revenues from Japanese fans and advertisers? Certainly, there will be some money from Japan, but I can’t imagine it would be that large. As I just mentioned, I think the player will reap most of the benefits from endorsements. Following baseball from the other side of the world has to be difficult. Do the Red Sox think they can get NESN on Japanese television? If so, then he probably is very valuable. But if it means that the Sox forgo singing Zito and J.D. Drew by spending $30 million on Matsuzaka, what is that going to do to Boston fans who value winning?

From the article mentioned above:

To calculate Matsuzaka’s financial impact on the Red Sox, Boras said, he will use Hideki Matsui as a benchmark. Boras said he’s heard from Japanese sources that Matsui brings in $21 million per season for the Yankees in advertising and marketing, so he wasn’t blown away by the $51.1 million bid.

That’s bull. I don’t think anyone will be impressed by what Boras as heard. Put some numbers on the table and then that’s something impressive.

It looks like the Sox are trying to buck the trend of signing a Japanese players to three-year deals.

The Sox, meanwhile, likely will try to tie him up for five years, but at somewhere in the $12 million-$13 million range.

This makes a lot more sense—an average of $22 million/year over five years—but it’s still a lot more than I thought he would get.

Thanks to Baseball Musings for pointing me to the article.

What Is J.D. Drew Worth?

The big story last night was that J.D. Drew opted out of the remaining three years of his deal with the Dodgers that would have paid him $11 million/year. For 2006, I estimate Drew’s bat was worth $9.5 million. I have him at $6.2 million in 2005, but he was knocked out by a freak HBP accident (it wasn’t his old knee problem, which hasn’t bothered him since his Cardinal days). Drew was on his way to an even better season, and would have put up a $12 million season if he played at the same level over the time he missed. These values account only for offense, and J.D. Drew is an excellent defender. But still, a guaranteed $11 million is a lot to pass up. It’s not like he producing a lot more than my estimates. Given what we have seen in the market so far, it’s looks like it’s going to be an amazing year for free agents.

Estimates from The Baseball Economist.

Payroll and Wins

Over at the Wages of Wins, Stacey Brook discusses the issue of payroll and wins in baseball. I’m surprised at how many problems people are having with an argument that they make in their book: payroll is not the largest determinant of wins. Using data from 1988-2006, Brook reports that payroll differences explain approximately 18% of the variance of wins across teams. This result come from regressing wins on a measure of relative payroll. Now the point is that if 18% is responsible, then 82% of other stuff is playing a bigger role. It seems pretty straight forward, but some people are getting caught up in the argument. Let me clarify a few things.

An R2 of .18 does not mean that there is no correlation between payroll and wins. Quite the opposite. There is strong and statistically significant correlation. In fact, the authors make this quite clear in the book. The coefficient on salary is statisitically significant. However, the point is that sum of other factors appear to be more important. The results indicate it’s quite a stretch to say that success on the field is a product of financial determinism.

Using data on salaries and wins from 1985-2006 I estimated the impact of payroll on wins using linear regression, while correcting for a few problems in the data. I used the percent difference of a team’s salary from the league mean to account for different values of players over time. Also, I used year dummies to capture influence of individual seasons. The result: every 10% above the mean in payroll is worth about 1 win, and salary explains about 17% of wins. These estimates conform to what the WoW authors find: a majority of the explanation is determined by factors other than salary. However, let’s take it a bit further. Having a payroll of one standard deviation (34%) above/below average is associated with 3.4 more/less wins. Is that a lot? Well, let’s see how well it predicts.

Below is a table of the percentage salary differences from the mean by franchise from 1985-2006 (excluding 1994). The table includes the average wins, the regression predicted wins above average (based on the 10% ==> 1 win prediction) and the actual wins above average. To me, the data indicates a trend, but not a strong one. For example, the Royals have spent a little less than average, but they’ve lost a lot more than average. The Braves have spent more than average, but won more above the average than predicted.

Club	Wins	% Diff	Pred.	Actual
ANA	82.05	9.93	0.98	1.05
ARI	80.89	13.30	1.31	-0.11
ATL	87.19	28.36	2.79	6.19
BAL	75.81	10.11	0.99	-5.19
BOS	86.67	33.68	3.31	5.67
CHC	77.38	11.15	1.10	-3.62
CHW	82.86	-7.53	-0.74	1.86
CIN	80.52	-8.62	-0.85	-0.48
CLE	80.33	-8.11	-0.80	-0.67
COL	74.77	-6.66	-0.65	-6.23
DET	73.62	-8.95	-0.88	-7.38
FLA	76.15	-33.16	-3.26	-4.85
HOU	84.24	-4.18	-0.41	3.24
KCR	73.81	-12.41	-1.22	-7.19
LAD	83.43	33.05	3.25	2.43
MIL	75.43	-24.52	-2.41	-5.57
MIN	79.90	-26.08	-2.56	-1.10
NYM	84.05	27.73	2.72	3.05
NYY	90.24	70.35	6.91	9.24
OAK	86.81	-13.39	-1.32	5.81
PHI	77.48	-5.26	-0.52	-3.52
PIT	74.52	-30.87	-3.03	-6.48
SDP	78.43	-11.21	-1.10	-2.57
SEA	79.90	-7.15	-0.70	-1.10
SFG	84.24	3.87	0.38	3.24
STL	85.71	9.78	0.96	4.71
TBD	64.33	-38.87	-3.82	-16.67
TEX	79.38	-0.27	-0.03	-1.62
TOR	84.00	2.63	0.26	3.00
WSN	77.95	-36.49	-3.58	-3.05

This figure makes a similar point.
Payroll and Wins

There is clearly a positive trend between average payroll and average wins, but it also shows a wide variance in performance outside the prediction. The points are not clustered closely around the line, and that is because other factors are affecting how teams perform. There is plenty of room for other factors to matter. That’s how the Marlins can compete for the Wild Card with $15 million and the Mets can come in last with a $90 million payroll. Just compare the Cubs and the A’s in the graph. Does money have an effect on winning? Yes, but that impact isn’t as certain as it’s widely believed to be. That’s the point. Winning isn’t as simple as spending.

Now, in an effort to offer full disclosure, let me say the following. I have met or corresponded with all of the authors of the book—we are economists working in the same field. The book was largely written before I met the authors, though I did check a fact for them right before the book went to press. I also gave the book a postive review in the International Journal of Sport Finance, as I really do like the book. If I thought they were wrong, I’d tell them. Heck, I’d write up my critique and submit it to the Journal of Sports Economics. I’d love the line on my vita. I’d also like to ask for politeness among those arguing. The tone of the response has been too harsh to be productive. If we are all after the truth, it’s best to keep things civil.

The $20 Million Man

Yesterday, in an interview with Andruw Jones’s agent, Scott Boras, David O’Brien suggested that the Jones may be expecting $20 million/year from his next contract. I’m not sure whether O’Brien’s words were based on speculation or an off-the-record numbers fed to him by Boras, but in any event, it’s interesting to think about what Andruw Jones might be worth this offseason.

As I’ve hinted at here on a few occasions, I’ve developed a method for valuing players, which I will release in my book. I haven’t done the 2006 numbers yet, only 2005. Luckily, Jones’s 2005 and 2006 were very similar. I estimate Andruw’s offensive output was worth about $10.5 million in 2005—I’m still working on a method for capturing defensive value. Let’s assume that his defense is good enough to make him worth exactly what his contract pays him, $13 million, although I think that understates his worth. Can we get AJ to $20 mil? Well, a few recent events make me think that $20 million isn’t so far fetched.

First, MLB attendance and revenues have been rising. The MLB Advanced Media is an example of the league’s recent success. As the league brings in more money, there is more in the pot for owners to spend on players. How much is this going to affect player salaries? Well, let’s look to two players: Tori Hunter and Gary Sheffield.

A few weeks ago, the Twins decided to pick up Hunter’s $12 million option for 2007. When I saw that, I about fell out of my chair. The Twins aren’t a dumb organization, and Hunter isn’t as good or as young as Jones. I have Hunter pegged at $4 million in 2005, but he only played two-thirds of what he played in 2006; but, ajusting for that only gets him to $6 million for a full season of play. He was better by a little in 2006, but not by a lot, let’s put him at $7 million.

Gary Sheffield is upset that the Yankees are picking up his $13 million option for 2007. Sheffield claims that he doesn’t want to play first base, but I think the real reason is that he’s been told by his agent that he’s worth a lot more than that…and I think the Yankees know it. According to my estimate, Sheffield was worth $10 million in 2005. And though he missed much of 2006 with injuries, he should be back producing in 2007. Why else would the Yankees have picked up his option? They are not desperate for a first basemen or a right fielder.

This brings me back to Jones. He’s always been a much better player than Hunter, and he’s younger. He has not reached Sheffield’s heights yet, but I think he’s better than the 38-year-old model that will take the field next season. These guys will make $12 and $13 million next year. I think that there is that possibility that Andruw rises to the next level. He’s a low-risk-high-reward guy, and I suspect many teams view him in the same manner.

I expect that the free agent market this year is going to be exciting, and that Andruw Jones, may be get his $20 million. Whether it will be through an extension with the Braves or for another team in 2007, he’s in for a nice payday. I hope that the Braves hold on to him for one more year. Right now, he’s looking like a steal.