Monday, June 8, 2009

Draft Economics 101

The last week saw the beginning of what will undoubtedly be several weeks of heated discourse about the economics of Major League Baseball. People will say the Lerners are cheap, and probably far more people will say that Stephen Strasburg is greedy and almost everyone will say that Scott Boras is evil.

To try to make this conversation as informative and informed as possible, I thought it would be worth presenting some basic facts about the economics of the baseball draft.

1. Drafted players have very, very little negotiating leverage.
A drafted player can only negotiate with one team, and the player must either accept whatever the team offers him or wait a year, risking injury and sacrificing a year of prime earning, to take his chances on the same rigged system the next year. The reason it's so rare for a draft pick to go unsigned is because the players have so few options.

2. Players would make more money in a free market. Some, a lot more.
If draftees were allowed to peddle their services to the employers (read: teams) of their choice, they would make far more money. Those at the top of the draft would earn many times more money. Daisuke Matsuzaka's contract gives us some idea of the market value of a very highly touted prospect. The Red Sox spent $103.11 ($51.11 million posting fee, plus a six-year, $52 million contract) to get him as a 26-year-old rookie free agent out of Japan. There's no cheaper way to acquire premium talent than the draft.

3. Teams can pay players whatever they want for three full MLB seasons after they are drafted.
The major league minimum is about $400,000. Minor league players make much less than that. Therefore, whatever draft bonus a player gets, it's fair to assume that it'll be at least 4-5 years before he sees any more big money. In the case of high school players, it could be more like 7-8 years or more to arbitration. If a player gets hurt during that time, they're SOL. So when a player gets a signing bonus of $X million, think of that as a salary spread over 4-8 years, and it won't seem like quite so much.

4. MLB player salaries account for a little more than half of the total revenue in baseball.
Personally, I think that sounds like a perfectly reasonable share of the spoils. Prior to free agency, player salaries were only about 25%-30% of league revenue, depending on the year. Those who believe the players should earn less should explain why they think the owners deserve more. In a rigged monopoly where they face no risk whatsoever, what value do they add? Investors in a free market face risk. In baseball, fat cats angle for the opportunity to invest, because big profits are a lead pipe cinch.

5. The player's union doesn't represent amateur draftees.
In fact, the interests of current players are in conflict with draftees. At some level, player salaries are zero sum. If draftees get bigger bonuses, there's less money left for the current players represented by the union.

6. Players are entitled to competent representation.
If you go to court, you hire a lawyer. If you're going to invest in the stock market, it's a good idea to get a broker to advise you. If you're selling or buying a house, you probably are going to hire a realtor. Likewise, if you were drafted by a major league baseball team, you'd get an agent. And if you want to hire a hardball badass, that's your prerogative as well.

7. Scott Boras is good at his job.
Jerry Reinsdorf and Bud Selig got caught colluding illegally to rig the free agent market, cheating the players out of $280 million. Scouts have been caught stealing thousands from young Dominicans and teams by skimming bonuses. Scott Boras has never even been accused of anything like this. He's guilty of nothing more than representing his clients effectively, which of course is what he's paid to do.

8. Potenial has value.
You hear all the time during draft time that it's ridiculous that so-and-so wants so much money when he hasn't even played a single inning. This is a particularly uninformed rant. In every market in our economy, potential has value, often a lot of value. If I think, based on geological formations, that there's oil under your land, then your land will be worth more. There are entire markets--futures markets--all about betting on the future value of commodities.

9. The slot system was unilaterally imposed by owners and has never been supported by the players--neither the pros nor the amateurs.
If the owners got together and decided that all free agents would get one year deals worth $5 million, no more, that'd be collusion. Similar coordination with amateur draftees is called the "slot system."

10. Teams that refuse to pay for premium talent in the draft do so at their own risk.
Daniel Moskos over Matt Wieters. Matt Bush over Justin Verlander. Brian Bullington over B.J. Upton. Almost every year brings another cautionary tale. Good players cost a little more. Bad teams don't pay.

21 comments:

Rob B said...

Good case for signing Strasburg, and it's what we should do.
I don't really get the Matsuzaka analogy though; you can't compare other teams to how the Red Sox and Yankees spend their money.

Anonymous said...

You also can't compare a player who played 8 years professionally with one who played 2 years of college ball. Just the number of games and innings alone is a huge difference.
Does not mean that Strasburg may not be worth it, I just don't buy that comparison.

Deacon Drake said...

Matsuzaka was a proven professional commodity with the maturity to step in and make an immediate impact at the major league level.

Strasburg has been beating up the MWC for years and might not be able to handle the pressure of play pro ball.

Not necessarily apples to oranges, but there is much more risk giving a guy $50M who may never see the field in a major league game.

flippin said...

In MLB, the team's value is highly dependent on the market, usually measured by population per team. Unlike the NFL, local revenues, e.g., local media contracts, parking, concessions, advertising, ticket sales, are a big part of the team's revenue pie. Our market, which we share with Baltimore, is at best in the middle of the pack. Our best shot at getting big names (and getting better) is through the draft where we do not bid with the rich guys back east and the Dodgers. Sad to say, but our market most closely resembles that of the SF bay area. Unless the Lerners want to throw money away on free agents, the best course is to trade big money FA for draft picks and prospects. I am glad we did not sign Tex. Paying Strasburg $20 million over 5 years is a BARGAIN!

Steve Shoup said...

I understand what your saying and you are right in the sense that the draft depresses the players value. But there is no way any prospect would get Dice-K money. For one thing Dice-K was a professional already and was making money in Japan. The Red Sox had to up the ante there. Another thing Dice-K had a more proven track record, better international competitions ect. Remember top Amateur talents became FA's back in 1996 guys like John Patterson, Matt White, and Travis Lee (I believe there was a fourth but i can't remember who). None of those guys were even close to what their team paid for them.

Two other quick points to make is that the MLB draft is prob. the least likely choice to be a FA system. NFL and NBA the players go straight to the team and can have an immediate impact. MLB you could have a guy like Matt White that you give $10 million to and he never plays a ML inning. Also finally I think you can make the argument that the MLB draft actually gives more players opportunities than a FA system would. You would be hurting 100's of players from making a living and having a chance to become an major leaguer. I think that if everyone was an FA and teams had to pay say $20-25 million for their top 5 players then you wouldn't see signability guys like Lannan and Stammen have a shot in the majors. Way too many guys like that would get lost in the shuffle. Now teams sign between 30-40 draft picks. I would imagine that, that number would be cut in half, and teams would probably cut a minor league affiliate or two, as a way to save money.

Grover said...

Those who are saying that the Matsusaka was a "proven professional commodity" apparently weren't baseball fans during the Hideki Irabu era.

Don't let the amazing success of Ichiro fool you- the move from Japanese ball to MLB is a huge leap. Not as big as college ball to pro ball, but it's far from a lock that a Japanese star will be an MLB star. Japanese pitchers have tended to disappoint, and as Tom Verducci pointed out recently, even the ones that succeed for a little while (like Nomo and apparently Matsusaka as well) tend to lose their touch by their third year in the MLB.

It's perfectly fair to compare the prospects of Dice-K at age 26 and Strasburg at age 21. Neither one was/is anything close to a sure thing. Dice-K was probably a safer bet, but also far less likely to become a superstar.

Steven said...

The Matsuzaka comp isn't perfect. He was older, and comparing pitching in the Japan leagues to pitching at SDSU is apples to oranges.

That said, they're fairly close in age. Pitching in the Japan leagues and pitching at SDSU are both really different than pitching in MLB. In both cases you're talking about bidding on the potential of a prospect.

If anyone can think of a more appropriate comp, feel free to suggest it.

If the point however is that Strasburg in a free market wouldn't get A LOT more money, then I disagree with you.

As for how the Red Sox spend, in a free market we'd have to compete with them.

Grover said...

Also, Steven, love this post, but it's not really fair or accurate to say that Boras has never been accused of anything untoward and is guilty of nothing more than representing his clients effectively. His dealings with the Pirates on Pedro Alvarez were certainly two-faced and in bad faith at a minimum, and possibly fradulent.

And his stunt with A-Rod during the 2007 World Series served no apparent purpose other than to shine the spotlight on Boras and his client at the expense of the game. The timing of the announcement made A-Rod even more of a villain, possibly costing him millions in endorsements, and it didn't make him any friends in the big budget Red Sox organization. The client he advised to upstage the World Series also apparently didn't think too much of his advice, since he dropped him shortly afterwards.

It's right to say that he's only doing his job when he gets his clients pair, but it's unfair to imply that his zealous representation of clients is the only reason he's villified. He's got other sins in his past.

Steven said...

I don't see how posturing in the media is illegal. Re: Pedro Alvarez, I have no idea what fraud you're talking about.

Basil said...

At some level, player salaries are zero sum.

Interesting point. Ethically, this is actually one potential problem for Boras the Attorney. But Boras the Agent is so effective at his craft that he essentially expands the zero-sum base. So all of his clients, even clients whose interests are at odds with each other, tend to benefit.

Personally, the one thing about the draft I'd like to see is the ability to trade draft picks. I could whip up some sort of rationale for that, but at the heart of it I just think this would be cool.

Steven said...

Careful readers will note that "at some level" is a weasel word.

The pie isn't zero sum in that a) the players can get a bigger share of the overall spoils, as I note in the post elsewhere, and b) MLB overall and the Scats in particular can be more or less profitable, which changes the overall amount of money available.

Basil said...

Careful readers will note that "at some level" is a weasel word.

My job makes me quite familiar with weasel words, thank you. ;-)

But there is some underlying truth to it . . . "at some level." Let's say Boras represents two aging FA catchers, for instance. Not the same player, but similarly situated. This might be an ethical problem for him (within an attorney's rules of professional responsibility), but he's got such an array of tricks up his sleeves as a negotiator/puffmaster extraordinaire that he can take care of both.

PS: Nothing fraudulent about the Alvarez thing, although the allegation at the time was that he set the wheels in motion because the rival agency doing the Posey negotiation gamed him a little bit.

Grover said...

I assumed that your point was that Boras hasn't done anything reprehensible or "wrong," at least as compared to many baseball executives, and that all he does is excel at his job, so the criticism of him in the media and the public was somehow unwarranted. I was arguiung against that point.

If your point is that he hasn't actually violated the law or even been accused of it, of course you're absolutely right. But since I've never ever heard anyone accuse him of being a criminal, that's kind of a straw man argument.

Regarding Alvarez, he renegged on a signed agreement (on behalf of his client) based on a shady claim that it was filed two minutes after a deadline. Nobody knows how exactly the whole thing went down, but it seems very possible that he misled the Pirates regarding his client's intentions for purposes of his financial gain. That's fraudulent behavior according to the dictionary, if not the criminal code.

Steven said...

I don't think good, clean hardball negotiating is wrong or reprehensible. I admire it. I like poker players, and Boras is a good one.

Stealing is wrong, and under the laws of the US, the owners collusion in the 90s was stealing. Bonus-skimming is also stealing.

There's a big difference between bluffing in a negotiation and fraud or stealing.

Basil said...

IIRC, it wasn't a signed agreement but Alvarez had given verbal agreement. The August 15 "deadline" is a bit of a fiction. Basically, the bonus is agreed upon, and then lesser issues are negotiated by the parties after that.

Steven said...

Also, the August deadline os another example of a rule unilaterally imposed by the owners.

I don't see why any draftee should feel bound by that deadline if the owners choose to ignore it, as they did in this case.

Grover said...

There's also a big difference between conducting "good, clean hardball negotiations" and concluding those negotiations, agreeing to terms, and then renegging on that agreement based on a dubious claim that the agreement missed a deadline by two minutes.

dcusimano123 said...

BRAVO.

An extremely well thought out, well written, discussion.

There is one more thing that everyone has glossed over, however. If the Nats do NOT sign Strasburg in 2009, they will be given a compensation pick in the 2010 draft, which will be the #2 pick in that draft. Strasburg would all but certainly be drafted again by the Nationals in 2010.

Given that the Nats have a (currently) 7.5 game lead in the race for the #1 pick in 2010, Strasburg has no leverage whatsoever to avoid playing for the Nats.

Steven said...

Strasburg would have to sign a release to be re-drafted by the Scats. Crow hasn't signed this release, and I see now reason why Strasburg would. He'd become the consensus #3 pick in the 2010 draft.

Basil said...

Unless the Pirates held the No. 3 pick -- in which Lenny McGillicudy of Northwest Upper Buttecrack State would be amenable to using his 84-mph left arm to sign a below-slot contract. ;-)

Deacon Drake said...

Actually, the Nats have Strasburg by the balls. I think they will get him signed to a fair, probably slightly ridiculous offer. Well under $20M and way under $50M.

The value of being the #3 pick next year will be far less than this year, when the Strasburg hype machine is in full swing. Washington DC is excited to have a shot at him. Will Baltimore offer big bucks at him next year? Will he even risk playing Indy ball?

Strasburg is throwing 102, which likely means he has hit his physical peak (http://deacondrake.blogspot.com/2009/06/some-notes-about-102-mph-fastballs.html) and while he still has great years ahead of him, the wear and tear of throwing that hard will make it difficult to have a long career (Randy Johnson is a freak). Boras is making a money grab now before arbitration hits and he is just a "good" pitcher.

Not signing is a huge risk, because unless a big market team falls to the 3 spot and NEEDS to fill seats, the Nats are the best he's going to do... KC, Pit, etc. will pay above slot, but not anybody's 20+ million.