Should Baseball’s Free Agent Spending Binge Bother Fans?




Baseball teams, awash in cash from a new television deal and rising revenues, are spending money during the winter free agent period at a record rate, so much so that they could collectively hand out more than $2 billion in new contracts before the winter ends. If that sounds like a huge number, it’s because it is: the previous record for a single offseason is $1.75 billion, set in 2006 when massive deals for Japanese stars Daisuke Matsuzaka and Kei Izawa spurred the binge.

It’s easy for fans or casual observers to see the $2 billion headline number or the massive contracts teams are handing out — $240 million for Robinson Cano, $153 million for Jacoby Ellsbury, $130 million for Shin-Soo Choo — and think that baseball salaries are spiraling out of control, that undeserving millionaires are becoming undeserving hundred millionaires just for playing a game. It happens every time a new contract is signed and every time a story appears about the amount players make. The reality, though, is that despite the big headline numbers, baseball players as a whole are making less today as a share of total revenues than they have in the past.

Since the strike-shortened 1994 season, Major League Baseball’s revenues have skyrocketed, growing from $1.4 billion in 1995 to $5.5 billion in 2006 to about $8.5 billion this year. For most of that period, however, baseball salaries haven’t kept up, no matter what a rash of big deals — those like Alex Rodriguez’s $252 million deal from the Texas Rangers in 2003 — would make fans believe. In fact, since 1990, baseball salaries have grown by 192 percent, not quite as fast as the 242 percent increase in overall revenues.

Baseball salaries have also made up an increasingly smaller share of overall revenues, declining from a peak just above 60 percent in 1994 to less than 50 percent in recent years, as this chart from The Atlantic‘s Matt O’Brien shows:


CREDIT: Matt O’Brien, The Atlantic

The past season wasn’t much different. Baseball salaries, according to ESPN’s Darren Rovell, cost the league’s 30 teams about $3.76 billion in 2013. That’s roughly 45 percent of revenues, right in line with recent history and, actually, a smaller share than players receive in either the NFL or NBA. There are different reasons for the drop. One is that baseball teams have used advanced metrics to get more bang for their buck in the post-Moneyball era. Another is that young players are increasingly choosing security over full-on prosperity, signing long-term contracts before they become eligible for free agency. When the best young players, guys like Evan Longoria and Andrew McCutcheon, aren’t leading the free agent market, that depresses the value of the free agent pool overall. The chart doesn’t tell the entire story, since it doesn’t include minor league salaries and doesn’t account for the fact that baseball contracts are far friendlier than football or basketball deals because most of the money is guaranteed. But its point is consistent: baseball salaries aren’t exactly keeping up with baseball revenues.

Still, won’t a spike in salaries paid to players mean higher costs for fans? That’s the common thought fans have when they see these huge salaries, and it’s often the doomsday scenario owners in all sports warn about when they argue that player costs are out of control during labor disputes. But that’s not how the economics of ticket prices or fan costs actually work.

Ticket prices and salary costs have no actual link. That sounds counter-intuitive, I know, but for a variety of economic reasons I won’t fully delve into here, it’s true. Put simply, as Joe Sheehan explained at Baseball Prospectus in 2002, “The price of tickets is not set to recoup costs, but to maximize revenue.” The slightly more complicated way to explain that is that baseball teams set ticket prices in a way that is totally disconnected from what they spend on salaries. The price of tickets is usually (or at least should be) set at an optimal level that will maximize the number of fans who attend games and thus maximize the amount of money the teams make. Because they are set at this revenue-maximizing level, raising them to compensate for higher salaries would be counterproductive: it would almost always result in less revenue. The best evidence proving that salaries and ticket prices aren’t linked comes from baseball itself: when free agency first began in the 1970s, player salaries skyrocketed. Ticket prices, however, remained virtually unchanged. And while prices have grown in recent years, they’ve done so at a much slower pace totally disconnected from the rise in player salaries.

All that is to say that rising salaries shouldn’t worry baseball fans, unless they think their favorite team handing say, $62 million to Dan Uggla for five years is a bad deal when it comes to winning baseball games. $2 billion is a shiny round number that looks huge, but it doesn’t really mean anything by itself once it’s put into the proper context. Baseball is healthier than ever and its teams, bolstered by new TV deals, are bringing in more money than they ever have. So it only follows that they should be paying out more than they ever have too. If the context tells us anything, in fact, it’s that from a pure labor perspective, Major League teams probably ought to be paying players as a whole a little bit more than they already are.