AngelsWin.com Today: Peak Payroll

[AngelsWin.com]

By David Saltzer, AngelsWin.com Senior Writer

I don’t know about you, but it sure seems like it’s been a slow offseason for baseball. Sure, the Angels have been killing it, and there have been some big trades, but overall, someone should check to see if the hot stove has been lit for most of the free agents out there this year.

So far, there have been several theories advanced regarding why the owners have been holding off on making the large free agent splashes that span quite a few possibilities. I’ve read that owners are holding back in preparation for next year’s free agent class, which is expected to be much better than this year’s free agent class and that the market has been held up by notable trades/signings (Ohtani and Stanton in particular). But that doesn’t seem to fully explain the lack of free agent signings this year, and the overall slowness to the market.

To figure out why I think that the market is slow, I’d like to draw on my background in geology. In the petroleum industry, there’s a term called “peak oil” which refers to the point in time when maximum rate of petroleum is extracted from the earth. After that, petroleum extraction is expected to decline. It is a controversial theory, based on the work of M. King Hubbart, and has certainly been affected by many technological developments, such as slant drilling, and the discovery of many new oil fields.

However controversial the theory is, especially in geology, it still is useful for explaining many phenomena. Often things will reach a peak, and after that, taper off. And I believe that this is what may be affecting this offseason.

While fans love to look at each season as an independent event, most owners view their franchise in a much longer term. And two things have to be particularly jarring to baseball owners, especially as they project their payrolls going forward. The first is the ongoing implosion at ESPN. The second is the radical decline in football ratings.

Over the past 6 years, ESPN has lost over 13 million viewers. That’s over 2 million viewers per year! And, as that has happened, ESPN has fired over 250 employees this year, including many highly paid and well known announcers.  While not all of these moves appear to be the direct result of the declining subscribers, there’s no doubt that ESPN has been looking to find ways to reduce their payroll to shore up their financial commitments.

Projecting this forward, if ESPN continues to lose viewers, at some point, it will become unprofitable to continue. ESPN owes so much in guaranteed TV contracts, that without a substantial increase in fees, ESPN may not be able to fulfill its financial obligations to the major sports leagues. While ESPN could consider raising its fees to its ongoing subscribers to cover this potential loss, that could accelerate the rate at which viewers unsubscribe from the network, leading to a death spiral.

If I were an owner, this ongoing situation at ESPN would be quite alarming on its own. It’s hard to make substantial long-term financial commitments to players without having a guaranteed funding stream to pay for the obligations. And, that’s why the ongoing situation with the NFL is doubly alarming.

As much as the owners in the NFL don’t want to admit it, ratings for the NFL are down about 9% overall this season. While attendance in the stadiums appear to be up, there is plenty of anecdotal evidence that the actual attendance in the games is down quite a bit. Worse still ticket resale prices appear to have dropped quite substantially. It will be very interesting to see what happens in the NFL next year with season ticket sales in order to gauge the seriousness of concerns that the changes to the NFL are causing to owners in all sports.

While the decrease in the NFL appeared to buoy the World Series ratings for baseball, owners have to know that ratings and viewership can be quite fickle. Prior to 2016, the NFL didn’t identify their ratings and fan attendance drop. So, I wouldn’t be surprised if owners everywhere, and in all sports, are being cautious on their long-term financial commitments while they analyze what is happening with the NFL. The combination of these forces has led to a slow offseason and a decrease in the salaries being offered to free agents.

Furthermore, owners may have finally learned that in the negotiation dynamics with a free agent, owners can gain an advantage by waiting further and further into the offseason to sign free agents. Players, who have lofty projections of their worth at the start of the offseason may start to accept a more realistic offer as the number of suitors dwindle and the prospects of starting the season without a contract become more realistic.

Finally, it appears that many teams are finally being forced into financial restraint, or possibly learning financial restraint through the ongoing penalties associated with the luxury tax. The Dodgers recently made a trade to get out of those penalties and the Yankees appear to be doing all they can to stay beneath the limit.

All combined, it appears that there are many factors that may be suppressing the free agent market this offseason beyond the potential signings and trades that have been so often cited. And, the combination of these factors may play out over many years, leading to a dampening on the overall market, and the potential for a “peak payroll” or at least a peak in the rate of growth in payroll.

For baseball fans, this may play out to our benefit. Since baseball payrolls have grown far faster than inflation, or our salaries, we may see a period where ticket prices and stadium concession prices start to stabilize and not increase as quickly as they did for most of the past 30 years. That could come as welcome relief.

And, for the baseball owners, there are a couple of bright spots for them. First, with regional sports networks becoming more and more important for the financial future of the sport, and the national broadcasters providing less and less content, they should be less affected by the problems at ESPN than the NFL or other sports. Second, baseball has the possibility to expand into more markets to generate more fans and revenue. The Angels, with Shohei Otani, should be able to expand into Japan to introduce new revenue streams. And, if baseball chooses to expand (which in a separate article I will outline), they could place an expansion team in Mexico City, opening up another market to increase their revenues.

Overall, as much as there have been some plausible theories for why the market this offseason has been slow, I do believe that we may have entered into an era of peak payroll, or at least peak growth in payroll. Even if next year has a frenzy for a few pivotal free agents, overall, I would expect the trend to decrease in the following years as owners return to their more cautious approach to financial commitments. If team payrolls continue to grow in the beyond that, it might be at a much slower rate–more in line with inflation–than they have grown in the past.  And, that would make this offseason the year teams hit peak payroll.

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[DCAngelsFan]

The advent of how we get our entertainment is certainly a factor these days - if you look at how people view TV these days, how much of is is watched live, over-the-air?  (And of that tiny percentage, how much of that demographic is something advertisers care about?)

People are becoming used to having every form of entertainment available to them, when they want it - movies, music, tv series - streamed on-demand.

That - and the declines in NFL attendance (I saw Redskins tickets going for $6 last weekend) must certainly give MLB pause.   Will future fans accustomed to getting their entertainment when and where they want sit in front of tv's to watch live baseball?  And if not, how will they become fans?  

And of course, there's the penalties of exceeding the CBT and signing free agents.  The loss of picks and international bonus pool money for signing a FA who was offered a QO has an effect - teams are seeing that as another, and necessary way to create a pipeline of cost-controlled talent to their club.  The big money teams already *have* big payrolls - they're not sitting around with $200m of salary space - they're bumping up against the threshhold already.  

The length of the contracts demanded (and signed in the past) must certainly give pause - paying someone a mega-contract for production they achieved for another club doesn't really translate - I mean, who wants to be stuck paying someone over $100m for years of a replacement player?  (cough, cough)

And that's the other thing - the player are all at or past their prime - which means it's all downhill from here in terms of results.  

With revenue sharing, teams don't have to "win or go broke" - they can be patient -- or cheap - with few consequences.  

I think these are all factors, but perhaps none of them definitive - I think the most important factor is that analytics and  the objective valuations that result are letting teams look at these players in dispassionate and unbiased ways - which may have been true for years, but old-school baseball guys are either finally accepting of these tools, or have retired and replaced by those who treat roster building as an economics equation and not based on "guys that look like ballplayers."

 

 

 

[oater]

So basically you are saying that at the end of the day, baseball is a business and the owners are acting like business men.  What a novel idea.

[eaterfan]

I just hope the payroll isn't peaking too soon.

[Dave Saltzer]

24 minutes ago, oater said:

So basically you are saying that at the end of the day, baseball is a business and the owners are acting like business men.  What a novel idea.

I'm saying a bit more than that, but in a larger scheme of things, yes. Unlike the past, where owners spent ridiculously, and payrolls skyrocketed way past beyond what inflation did, it appears that the spending spikes have peaked, and won't be like the rate of increase we saw in the past. So, yes, they appear to finally be acting like business owners rather than as fans. 

[oater]

25 minutes ago, Dave Saltzer said:

I'm saying a bit more than that, but in a larger scheme of things, yes. Unlike the past, where owners spent ridiculously, and payrolls skyrocketed way past beyond what inflation did, it appears that the spending spikes have peaked, and won't be like the rate of increase we saw in the past. So, yes, they appear to finally be acting like business owners rather than as fans. 

Sorry, my remark was not intended in any way to be critical.

 

[Troll Daddy]

Does this mean Mike Trout won’t get $500M

[aznhockeyguy]

I've been saying this for the past 3 years.  The sports teams will still receive a boat load of money for media rights will increase, it's the who will be paying it will be different.  Instead of the TV providers paying it, in the next 10 years, it'll be instead facebook, amazon, twitter, netflix, google, and the other web-based entertainment channels that will be paying it instead.  Some tv-content providers are getting smart and have already begun this transition as FSW and Prime are now offering streaming services with a valid subscription with a tv provider.  Within the next 5 years, they may start offering streaming-only subscriptions so you can only get FSW and Prime without having to get DirecTV or cable.  How many of us would get that channel if we only have to pay 5-10 dollars a month, instead of buying a tv subscription?  The growth will be stagnant for the next few years as everyone is still gathering data/info, but in the next round of negotiations for rights, don't be surprised if the TV stations gets outbid by online providers.  The competition between the TV channels for broadcast rights will be replaced by the online content providers.  

I also agree teams are getting smarter about signing above average players to high value contracts.  I don't mind teams paying a premium for premium talent, but paying a premium for average talent is the problem.

[Angelsjunky]

Good article, Dave. I've often wondered when we'll reach peak salaries - not quite the same as payroll, but certainly related. I remember when Mark Langston broke all records and got 5/$15M, an average yearly salary that is now below league average - and only 27 years later (man, I feel old). Now I'm fairly certain that inflation hasn't risen by 10x in 27 years.

At some point this whole thing has to crash.

[AngelsLakersFan]

18 hours ago, aznhockeyguy said:

I've been saying this for the past 3 years.  The sports teams will still receive a boat load of money for media rights will increase, it's the who will be paying it will be different.  Instead of the TV providers paying it, in the next 10 years, it'll be instead facebook, amazon, twitter, netflix, google, and the other web-based entertainment channels that will be paying it instead.  Some tv-content providers are getting smart and have already begun this transition as FSW and Prime are now offering streaming services with a valid subscription with a tv provider.  Within the next 5 years, they may start offering streaming-only subscriptions so you can only get FSW and Prime without having to get DirecTV or cable.  How many of us would get that channel if we only have to pay 5-10 dollars a month, instead of buying a tv subscription?  The growth will be stagnant for the next few years as everyone is still gathering data/info, but in the next round of negotiations for rights, don't be surprised if the TV stations gets outbid by online providers.  The competition between the TV channels for broadcast rights will be replaced by the online content providers.  

I also agree teams are getting smarter about signing above average players to high value contracts.  I don't mind teams paying a premium for premium talent, but paying a premium for average talent is the problem.

This is a distinct possibility. The thing owners should be afraid of is how their television deals look the next time they try and renegotiate. Large contracts have been backed by huge increases in tv money, but that money is based around the profitability found in bundling, the desire of cable providers to stay relevant and the wide reach of television markets. 

[Angelsjunky]

Benchmarks for average annual salaries:

$1M+: 1980 (Nolan Ryan)

$3M+: 1990 - Rickey Henderson, Kirby Puckett, Mark Langston, Mark Davis

$5M+: 1992 - Roger Clemens, Bobby Bonilla

$10M+: 1997 - Albert Belle, Barry Bonds

$15M+: 1999 - Kevin Brown

$25M+: 2001 - Alex Rodriguez

$30M+: 2015 - Jon Lester, Zach Greinke

 

And some guesses: 

$35M+: 2019 - Manny Machado

$40M+: 2019 - Bryce Harper

$45M+: 2019/20 - Mike Trout

[AngelsLakersFan]

6 minutes ago, Angelsjunky said:

Benchmarks for average annual salaries:

$1M+: 1980 (Nolan Ryan)

$3M+: 1990 - Rickey Henderson, Kirby Puckett, Mark Langston, Mark Davis

$5M+: 1992 - Roger Clemens, Bobby Bonilla

$10M+: 1997 - Albert Belle, Barry Bonds

$15M+: 1999 - Kevin Brown

$25M+: 2001 - Alex Rodriguez

$30M+: 2015 - Jon Lester, Zach Greinke

 

And some guesses: 

$35M+: 2019 - Manny Machado

$40M+: 2019 - Bryce Harper

$45M+: 2019/20 - Mike Trout

This goes to show you how suppressed player salaries became after AROD. While he was obviously an overpay the fact that it took more than a decade for another player to surpass him is a not so subtle hint towards collusion. 

[Angelsjunky]

4 minutes ago, AngelsLakersFan said:

This goes to show you how suppressed player salaries became after AROD. While he was obviously an overpay the fact that it took more than a decade for another player to surpass him is a not so subtle hint towards collusion. 

I don't think this is necessarily true. As you said, it was a huge overpay compared to recent contracts, doubling the highest salary from just 2-3 years before. If you replace A-Rod's $25M with $20M, the curve makes more sense. 

[UndertheHalo]

I’ll believe a player gets paid 40 million a season when I see it.  At some point there is going to a point of resistance.  Even for the Yankees and Dodgers, who frankly have not yet handed out these contracts. 

[AngelsLakersFan]

1 minute ago, Angelsjunky said:

I don't think this is necessarily true. As you said, it was a huge overpay compared to recent contracts, doubling the highest salary from just 2-3 years before. If you replace A-Rod's $25M with $20M, the curve makes more sense. 

What's interesting is that the Yankees were fine with taking on most of that contract, and then they re-signed him to an even bigger deal on the back end. My take on the contract wasn't that it was too high, but rather that it was too much for the Rangers. 

I'm not sure if it was Greinke who was the first to surpass that deal, or if it was Stanton with his contract's length, but considering that those contracts were almost 15 years later, it's clear something was up, especially given the pace of the increases before Arod came along.

[AngelsLakersFan]

2 minutes ago, UndertheHalo said:

I’ll believe a player gets paid 40 million a season when I see it.  At some point there is going to a point of resistance.  Even for the Yankees and Dodgers, who frankly have not yet handed out these contracts. 

I think the Yankees and Dodgers are playing things smart. They let other teams make the mistake of biting off more than they can chew, and then swoop in to save the day, at a huge discount or with some solid prospects attached to sweeten the deal.

[Angelsjunky]

14 minutes ago, AngelsLakersFan said:

What's interesting is that the Yankees were fine with taking on most of that contract, and then they re-signed him to an even bigger deal on the back end. My take on the contract wasn't that it was too high, but rather that it was too much for the Rangers. 

I'm not sure if it was Greinke who was the first to surpass that deal, or if it was Stanton with his contract's length, but considering that those contracts were almost 15 years later, it's clear something was up, especially given the pace of the increases before Arod came along.

Don't forget that A-Rod was an unprecedented free agent: a 25-year old generational talent. That's kind of like if Trout had been a free agent before 2017. On the open market he would have gotten $40M+ a year, maybe more.

So it makes sense that not only did A-Rod get far more than anyone had done previously, but that salaries essentially ignored his contract because his case was so unique. There was no other free agent like him that hit the market. Instead we see the pack reach $20 million that same year (Manny Ramirez) and gradually increase. Of course it didn't skyrocket in terms of percentages like it did from 1980-2001, when it went from $1 million to $25 million.

Here's lists by year:

http://www.stevetheump.com/Millionaires.htm

[Dick B Back]

51 minutes ago, Angelsjunky said:

Benchmarks for average annual salaries:

$1M+: 1980 (Nolan Ryan)

$3M+: 1990 - Rickey Henderson, Kirby Puckett, Mark Langston, Mark Davis

$5M+: 1992 - Roger Clemens, Bobby Bonilla

$10M+: 1997 - Albert Belle, Barry Bonds

$15M+: 1999 - Kevin Brown

$25M+: 2001 - Alex Rodriguez

$30M+: 2015 - Jon Lester, Zach Greinke

 

And some guesses: 

$35M+: 2019 - Manny Machado

$40M+: 2019 - Bryce Harper

$45M+: 2019/20 - Mike Trout

100K: 1963 - Mays

200K: 1972 Aaron

[Docwaukee]

Nice article Dave!  Lots of food for thought.  A few things:

This offseason is being dictated by Scott Boras.  A notoriously slow mover with his clients in the FA market.  

I do believe that the rate of salary escalation has leveled off for a couple of reason. First, teams realizing decline year are now 32+ and not 35+.  I truly believe the next CBA will try to shorten the time of club control.  Or at least take out some of the loop holes for manipulation.   Second, large market teams like the Yanks, Dogs, and Cubs all did well at predicting the future.  The went heavy on intl spending metrics.  Both of which are now at a level playing field.  So they will ride that wave for a few years.  Along with a few other teams that were smart enough to take advantage of it.  

At some point, those advantages will run out, but the big money teams will find ways to use cash to exploit the system.  It might not be player payroll, but it might be paying every top scout or front office analytics guru more than other teams.  

The old loophole used to be that the big market teams could spend a little more on payroll to beat you.  All that's happened is they've forced different ways for those teams to spend.  But they will spend.  

Moneyball is alive and well.  It's always been about finding the next undervalued metric to take advantage of.  At some point it will be paying the guy that taught the old Chris Taylor to become the new Chris Taylor. Teams that can spend more will always have the advantage.  All the CBT did was to force the money back internally.  Most owners are thrilled I'm sure because instead of spending 6 zeroes on talent, they are spending 5.  

The rate at which money is being poured into baseball is likely to decline, but the actual amount of money will continue to increase.  How it get's spent is another story and that will continue to evolve as I believe we are only in the infantile stages of that.  

We'll see how this dovetails with the ability to maintain popularity and create heroes.  

[Tank]

On 12/21/2017 at 12:40 PM, Angelsjunky said:

Benchmarks for average annual salaries:

$1M+: 1980 (Nolan Ryan)

$3M+: 1990 - Rickey Henderson, Kirby Puckett, Mark Langston, Mark Davis

$5M+: 1992 - Roger Clemens, Bobby Bonilla

$10M+: 1997 - Albert Belle, Barry Bonds

$15M+: 1999 - Kevin Brown

$25M+: 2001 - Alex Rodriguez

$30M+: 2015 - Jon Lester, Zach Greinke

 

And some guesses: 

$35M+: 2019 - Manny Machado

$40M+: 2019 - Bryce Harper

$45M+: 2019/20 - Mike Trout

 

On 12/21/2017 at 1:33 PM, Dick B Back said:

100K: 1963 - Mays

200K: 1972 Aaron

$1 bazillion: 1995 Ralston Schmidt