Trend Spotting....Is that an African or European Swallow?

Two interesting and likely related trends are emerging in MLB these days, both of which are clearly byproducts of the MLB's exploding salary structure. MLB is flush with revenue these days, which is being passed on through to the players. The internet division of MLB is growing by leaps and bounds, which creates more financial resources for teams to plow back into their organizations. This phenomena not only drives up player salaries, but it also has two unintended effects.

1) Teams are unwilling to pay millions of dollars to league average starting pitchers.

The trend only began to reveal itself in the latter portion of this offseason, as the market changed quickly, pulling the rug out from several veteran pitchers. Josh Fogg terribly misread the market when he turned down an offer of $5M for 2008 from the Rockies and was forced to settle for a $1M contract from the Reds. As bad as it is for him, he still fared better than Jeff Weaver and Kyle Lohse, pitchers who are still out of work.

The market has completely dried up, as teams are looking more and more towards inexpensive young talent to carry the load. Even the Axis of Evil tandem of the Red Sox (Clay Buchholz and Jon Lester) and the Yankees (Joba Chamberlain, Phil Hughes, and Ian Kennedy) are relying more on the cost efficiencies inherent in younger players.

It's a trend not likely to change any time soon. As long as the cost for players with 0-3 years of service time remains astronomically low, rookies and prospects will see their value continue to skyrocket. A young player who provides equivalent production to an established veteran is SIGNIFICANTLY more valuable, as his production comes at a fraction of the cost. The young player's production is much more efficient and in the modern game, the most efficient organizations win in Major League Baseball.

As long as the upper reaches of the pay scale continue to out pace the artificially constrained lower end, the value of prospects will rise and the value of expensive veterans will fall.

All of which leads to our second point:

2) Players with less than 3 years of service time are not happy with their salaries.

The younger players have become aware that they are getting the fuzzy end of the lollipop and they aren't happy about it. This offseason, players like Prince Fielder, Cole Hamels, and Nick Markakis have failed to get multiyear contracts from their organizations. Instead, they've seen their contracts renewed at bargain basement prices, as is the organization's right under the Collective Bargaining Agreement (CBA).

Here are some quotes bouncing off the walls of spring training ballparks:

Prince Fielder on having his contract renewed for $650,000: "I'm not happy about it at all," Fielder said. "The fact that they've renewed me two years in a row now. There are a lot of guys with the same amount of time I have who have done a lot less than me and are getting paid a lot more. But my time is going to come and it's coming quick, too."

Cole Hamels, on having the Phillies renew his contract for $500,000: "It was a low blow."

Nick Markakis after having his contract renewed for $450,000: "We couldn't come to an agreement with anything, so we're just going to take it and get renewed. That's just how the Orioles feel. I don't have much of a choice. I'm just going to have to deal with it."

The escalation at the upper range of the salary structure is now putting pressure on the lower end of the pay scale. You can see the effect in the pay for the lower range veteran ballplayers, as not many have to settle for $1M anymore. However, the star players with only 0-3 years of service time cannot join in on the booming salaries, as their pay is restricted by the terms of the CBA. The rising tide of increased revenue is raising all salary boats in MLB, with the exception of the boat containing the young star players, which is chained down. It's obvious that players the caliber of Prince, Cole, and Nick don't like making significantly less than their peers, especially while they are in the process of drastically outperforming those peers.

FUTURE IMPLICATIONS

Given the dissatisfaction expressed by the stars with less than 3 years of service time, it seems likely that the MLB minimum salary will be revisited and revised in the next round of collective bargaining. The MLBPA will likely push for increased salaries at the lower end of the service time spectrum, which will bring the MLB universe back into balance. Perhaps the best way to get this done is for the MLBPA to agree to a restriction on what can be paid to draft choices, in exchange for MLB conceding to an increase in the salary range of players with 0-3 years of service time.

The value of younger players has skyrocketed over the past several years, largely at the expense of league average veterans. Changing the financial structure of the game to increase the cost of the younger MLB players, while reducing the cost of unproven draft picks, could tip the scales back the other way towards the veteran players.

If younger players cost more, then their production will be less efficient and they will become a bit less valuable, which will again drive up the value of veteran players. So, league average pitchers will be able to find jobs and prospects will once again be available in trade deadline deals. However, until that time, the value of a top notch farm system has never been higher, which means that the Reds player development efforts are peaking at the exact right moment. Yet another reason to be optimistic about the direction of the Redleg organization.

Player Salary Trends in MLB

Well, it's that time of year again. When MLB sanity goes out the window in the search of the perfect new toy. It seems now, more than ever, player salaries are skyrocketing. Personally, I don't generally mind players getting paid large salaries, because the alternative is the money goes into the owner's pocket. Given the choice between paying the hard working player a substantial wage or placing the increased revenue in the pocket of an owner who did little more than turn a profit with a business that's a legal monopoly, I tend to favor paying the players.

That said, it really does seem like salaries are getting out of control. Professional athletes aren't just getting rich, but are now joining the super rich. At the end of his career, Alex Rodriguez could likely buy a baseball franchise, or at least the majority share of one. All of this got me to thinking about salaries and trends, so I took a look at MLB salaries over the past couple of decades to identify the real trends.

Here's the average player salary from 1985 through 2006 and the annual percentage increase or decrease:



Over the past ~21 years, on average player salaries in MLB rose ~10.0% on an annual basis. Of course, it's never quite that simple in baseball, because there was so much happening behind the numbers. There were a number of forces driving the players salaries up and down over the past 21 years.

1985-1988 THE COLLUSION YEARS

After the emergence of the players' Union, the balance of labor relations began to shift in MLB. After years of essentially indentured servitude, the newly unified players gradually began to gain concessions from the owners. Two of the most important gains they achieved were the establishment of an independent arbitration process for the hearing of grievances and the requirement that all labor agreements must be negotiated through a collective bargaining process. These two less heralded gains paved the way for significant advances for the players, including free agency.

These gains can be seen in a variety of ways, one of which is that the Players' Union has gradually increased the percentage of the pie that the players receive. In 1950, MLB teams paid out an average of 17.6% of their revenue to player salaries. By 2001, player salaries had increased to 54.1% of team revenues.

In the early 1980s, the owners grew tired of continually losing ground to the players in collective bargaining, so they came together under the direction of then commissioner Peter Uberroth (pictured) and developed a collaborative plan of action. Simply put, the plan was that no owner would bid on any other owner's free agents. In 1985 and 1986, only four free agents changed teams each year and none of the eight was wanted by his previous team. This tactic of course undercut free agency by eliminating the demand for that player's services, which resulted in lower salaries. This plan constituted collusion, which was a violation of the terms of the Collective Bargaining Agreement (CBA).

Eventually, the owners paid the price for the collusion in the form of fines totaling over $280M, but over that four year period, collusion was very effective in holding salaries in place. In 1985, the average MLB salary was $476,142. In 1986, the average MLB salary actually dropped 12.4% to $417,192. In each of 1987 and 1988, there was meager salary growth of 4.2%, which still didn't bring the salaries back up to where they were in 1985.

1989-1991 REVENUE BOOST FROM NEW TELEVISION BROADCAST CONTRACTS

The owners were fined for collusion when the Union won three separate cases for collusion. While the law helped eliminate collusion, it took a massive influx of revenue to get the player salaries back on track.

On December 14, 1988, CBS paid approximately $1.8 billion for the rights to broadcast the Saturday game of the week, the All-Star game, the postseason, and the World Series.

In addition, on January 5, 1989 ESPN contracted with MLB for the right to show over 175 games beginning in 1990. The ESPN contract was worth $400M to MLB.

The overall financial impact of these television contracts is stunning. Looking at the total revenue from national television contracts equalized for inflation by adjusting the values to 2002 dollars, you get a sense of the kind of impact. In 1989, revenue from television contracts was $357,000,000. In 1990, the new contracts saw that number increase all the way to $907,000,000.

Given those figures, it's not difficult to see what caused the 74.3% increase in the average player salary in 1991. The new revenue from the television contracts started rolling in during the 1990 season and the owners immediately plowed that money into signing free agents the following offseason to improve their club for the 1991 season. The owners followed up the 74.3% increase in 1991 with a 17.4% increase in 1992.

Clearly, the owners are willing to let increased revenue flow down through to the players, which is essentially how it should be.

1993-1995 LABOR UNREST

It seems highly likely that the 1994 strike loomed large over player salaries from 1993 through 1995. Owners would not have been willing to hand out large contracts with a work stoppage looming and the lost revenue from 1994 and 1995 resulted in a decrease in salaries in the 1995 season.

To this day, it seems strange that the 1994 work stoppage actually happened, as everyone lost out: owners, players, and fans included.

FROM 2001 TO THE PRESENT

Baseball financial information is always difficult to discuss with any degree of precision, as these are private organizations that do not share their financial information. However, Bud Selig is on record saying that overall revenues have risen from ~$1.2 billion in 1995 to $6.075 billion in 2007.

A substantial percentage of that increase is being driven by the success of MLBAM, which includes MLB.com and related businesses, and satellite radio. Revenues for MLBAM are growing at 40% a year since it was founded in 2001. In 2001, the owners agreed to share all Internet revenue equally, which means that all owners are reaping the benefits from this new revenue stream equally.

For those hoping to see a salary cap in Major League Baseball, I wouldn't count on it any time soon. The game is incredibly healthy from a financial standpoint. Revenue has increased ~6 fold since 2001 and league wide attendance records fall almost on an annual basis. The players and the owners are reaping unprecedented financial rewards, so there is no reason for either side to want to significantly change the terms of the CBA. However, there are also unintended consequences, as this rapid increase in player salaries is also changing the trade market.

That kind of increase is incredible and we've already seen what the owners are willing to do with a substantial increase in revenue: pass a big chunk of it on down to the players. So, I don't think it's a stretch to say that salaries may actually increase at a faster rate in the near future. It won't be too long until the question becomes: who will be the first $1 billion ballplayer?

There goes the neighborhood.....

Well, we are already off to the races in the silly season. Technically, it doesn't open until tomorrow, but the Tigers essentially fired the first shot by re-signing Todd Jones to a one year contract worth $7M, which represents, roughly, a $2.2M raise over his 2007 salary.

The shoulder injury suffered by Joel Zumaya likely provided the impetus for the move, but the Jones contract is the type that can set the market for other available relievers. A few years ago, the Mets set the market by signing Kris Benson to a very high (at the time) contract which subsequently increased the asking price on all starting pitchers.

In 2007, Todd Jones pitched 61.3 innings, posted a 4.26 ERA, a 1.42 WHIP, and a K/BB ratio of 33/23. His performance earned him 6 Total Win Shares. However, in 2007, Todd Jones had a WSAB (Win Shares Above Bench) of only 2.

Here's the definition of WSAB:

Win Shares Above Bench, or Baseline. WSAB is a refined approach to Win Shares, in which each player's total Win Shares are compared to the Win Shares an average bench player would have received, given that player's time at bat, on the mound or in the field.

So, in short, the Tigers just gave Todd Jones a $7M contract for doing something only marginally better than any average bench player would have posted. It hardly seems like a sound business decision to pay so much for production that almost equals that of an average bench player.

Unfortunately, this contract may set the market for all relievers on the free agent market, which is why there are very few good values to be realized on the free agent market.

The Reds need to be wise and not spend their money like the Tigers. The Reds should only pay for production that is unique (i.e. well above bench/replacement level production) and, hence, difficult to obtain anywhere else.

Bobblehead Bucks

I've heard complaints recently about Cincinnati Reds fans and their propensity for showing up in large numbers for select giveaways. The giveaway item that is most often cited is the (in)famous Bobblehead. Accordingly, I thought I'd check to see if the Reds did get substantially more fans on Bobblehead nights.

In 2007, the Reds had four separate Bobblehead nights. These four giveaways were spaced out over the season, with one each falling in May, June, July, and August respectively. The Bobbleheads were of Bronson Arroyo, Aaron Harang, Frank Robinson, and father and son broadcasters Marty & Thom Brennaman.

Here's a breakdown of the attendance for those games:




For what it's worth, the Brennamans clearly fared the worst of the four promotional giveaways, as the other three giveaways were close to, or exceeding, 30,000 fans. On average, the Reds had a paid attendance of 28,882 on Bobblehead nights.

But, how does the Bobblehead average stack up against the Reds average attendance in 2007?

Well, in 2007, the Reds drew 2,056,453 fans over their 81 home games. That's a per game average of 25,388. So, on average, the Reds drew 3,494 more fans for Bobblehead games than non-Bobblehead games. That's a percentage increase of 13.8%.

All in all, Reds fans do like their Bobbleheads. Unfortunately, many will point to this as evidence of a fickle, unsophisticated fan base, but whatever the reason, at least they attended. Die-hard fan or not, their revenue spends the same for the Reds.

In short, long live the Bobbleheads!!!!