In a comment to a previous post on how the flood gates of money may be opening, rbj writes:
Still not sure about the Votto deal. A-Rod & Pujols at least have a long track record with legitimate shots at the all-time HR record (better odds go to Albert.) What screams $200+ million for Joey, in Cincinnati?
My guess is that $200 million is not the same as it was last month. If you do the math on FanGraphs WAR and dollar values, you find one WAR for a free agent is pretty steady around $4.5 million over the last four seasons. If you assume Votto’s average of 7.1 for the last two seasons is his true talent level, that would be worth about $30 million a year. Let’s say that value holds up until the contract kicks in, then declines 0.5 WAR a year (per Tango), while the value of one WAR increases 5% a year. He would then produce $263 million worth of value for $225 million dollars.
That doesn’t seem like much of a discount, given that the deal doesn’t kick in for two years. There is plenty of uncertainty in the game, and Votto did not have other teams bidding on him. The break even point of the deal would be eight years, and that seems very far off. This suggests the Reds value one WAR much higher than $4.5 million. I suspect they peg one WAR at around six million. Votto would then produce $350 million in value during the contract. The Reds would then break even after six seasons, so Joey only needs to last through age 36. That seems doable.
It is a very good thing the Angels did not announce their TV deal until after Albert Pujols signed. Don’t compare the two contracts, since they are working off different assumptions. The price of free agents just went way up, and Votto’s deal suggests next winter’s crop of players are going to reap a windfall.
The Prince Fielder deal just looked a whole lot better for Detroit if this is the new math.
Thanks for the analysis David. Also have to factor in the local t.v. & attendance audience, to see if the Reds generate enough revenue to afford to surround Votto with other good players such that they can contend. A-Rod in Texas didn’t work because Tom Hicks couldn’t afford anyone else. A-Rod in NY (or Boston) works because the team has such high revenue they can afford other good players. Same with Pujols in LA. Fielder in Detroit? The team does draw well, been to a few games myself, and there are other quality players already on the team. But Detroit is a dying city, down 50% in population from the 1950s.
Dunno about Cincinnati, I think it’s big market enough for the Votto deal. Also, Houston is exiting the division next year so competition-wise it’ll be a bit easier.
Why would the Reds value WAR above what the baseball economists are saying? Is it something specific to Cincinnati or their situation, or is it possible that the usual calculations are quite systematically undervaluing WAR?
James » I think WAR prices jumped with all the new TV deals and the huge amount of money brought in by the Dodgers sale.
Another thought. Youthful athletically inclined guys (think teenaged Dave Winfield & John Elway) now have more of an incentive to specialize in baseball over other sports, if they think they can get a $200+ million contract. In that sense these deals are good for the future of the game.
rbj » Good point.
Maybe that’s right, about the tv deals and Dodgers sale price. Just to see if I understand this: extra wins will boost the tv rights price of a team, and that price is now a lot higher than it used to be; also, if the capital value of teams is really huge, then putting together one of the higher echelon teams might be worth much more than it was formerly thought to be.
In other words, other teams are now a lot more like the Yankees and Red Sox than they used to be, with vast tv money available and enormous capital appreciation potential.
James » Exactly.
The Reds TV deal pays 10 million a year and is not up until after 2016. If they can get what the small market Padres got for their new deal, that would get them 30 million in 2017, but why would they want to spend it all on players salaries. What market forces compels them to do so?
Most businesses will spend only 40-45% of revenues on salaries, and increase in revenues of 20-30 million would mean they have at most 8-14 million more to spend on payroll, or about 10% more than the Reds spend today.
The other thing to consider is that with the new CBA, large market teams are faced with losing revenue sharing rebates for going over the luxury tax threshold, so this should suppress salaries for FA since large market teams like the Red Sox, Phillies and Yankees will have to curtail their spending to get the rebates (which could be more than 30 million a year for the Yankees by 2016).
The other things is large market teams are subject to 30% revenue sharing, so while teams like the Angels may increase TV revenues by 100 million a year, 30% of it goes to revenue sharing, and the small market teams like the Reds.
In fact, it may very well be that the Reds are counting as much on receiving more revenue sharing dollars as they are counting on more local TV revenue.
Of course, that assumes large market teams are not going to protect their TV revenue by setting up separate companies like NESN and YES and then giving the Red Sox and Yankees only a fraction of the market value for the rights(which is subject to revenue sharing)
“you find one WAR for a free agent is pretty steady around $4.5 million over the last four seasons”
Yes, but that’s not usually what teams pay. Only in the world envisioned by Marx is the worker given 100% of what he produces. LOL.