How did we get here? How did we get to within such tantalizing proximity to spring training while still having the likes of Bryce Harper, Manny Machado, Dallas Keuchel, and Craig Kimbrel still looking for work? As last offseason proved, it’s not a one-off quirk of the market. Deep within the economic machinery of the game, a gear has slipped. Free agents — free agents that would’ve been deeply coveted not so long ago — are being frozen out, and it’s not clear why. What is clear is that it’s a problem.
Fixing said problem will be complicated, probably painful, and may require will on both sides that doesn’t exist. As to underlying causes, they defy simple and glib answers. It’s a number of things, is the general answer. Now come the specific answers to the question: How did we get here?
1. Teams have a great deal of guaranteed revenues
Thanks largely to exploding media rights contracts at the national and local level, teams are pretty much guaranteed profitability before the games even begin. As such, they’ve never been less reliant on ticket sales and concession and merchandise income. Time was when, those things mattered much more to the bottom line, which meant owners had incentive to improve the on-field product — and often that meant spending money on free agents. That’s not so much the case anymore. As well, each team not long ago received a $50 million windfall from the sale of BAMTech to Disney, and the flow of revenue-sharing dollars from large-market teams to small-market teams also plays a role.
2. More teams are tanking
The post-tank success of the Astros and Cubs proved that losing with malice aforethought is a viable (if distasteful) strategy. Yes, it often affords a better tomorrow, as it did in Chicago and Houston, and it also pads the bottom line by paring down payroll. Teams that undertake a deep rebuild obviously aren’t actively pursuing big-name free agents, and at the same time they’re looking to deal veteran contributors. By extension, that means the decreasing number of good-faith contenders can fill holes via trades rather than the free-agent market (recall the Marlins‘ dealing Christian Yelich, Giancarlo Stanton and Marcell Ozuna in the same offseason and this offseason). Insofar as free-agent spending is concerned, the tanking boomlet has a cascade effect.
3. The competitive balance tax (or luxury tax) functions like a salary cap
The competitive balance tax (CBT) — known informally and more commonly as the luxury tax — has been in place since the 1996 Basic Agreement between MLB clubs and the Players’ Association. It functions as a tax on the game’s highest player payrolls, and its structure has been tweaked over the years part of the collective bargaining process.
In 2017, six teams wound up above the threshold. In 2018, that figure was down to two — the Red Sox and Nationals. For 2019, any team with a calculated payroll in excess of $206 million will be considered to be over the tax threshold. Doing so brings about penalties:
- Teams over the limit for the first year pay a 20 percent tax on the overage amount.
- Teams who are over the limit for a second consecutive year pay a 30 percent tax on the overage.
- Teams over the limit for a third consecutive year pay a 50 percent tax on the overage.
But wait, that’s not all:
- Clubs that exceed the threshold by $20 million to $40 million are also subject to an additional 12 percent surtax.
- Those teams that exceed it by more than $40 million are taxed additionally at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).
- Teams that are $40 million or more above the threshold also have their highest selection in the following Rule 4 Draft (i.e., the June MLB draft) moved back 10 spots. If the team has a selection in the top six overall picks, then its second-highest selection will be moved back 10 spots instead.
In reality, those penalties sound a bit worse than they really are, at least when it comes to the money involved. Even so, they’ve come to function as a cap of sorts. Teams like the Yankees and Dodgers have maneuvered to get under the threshold (get under the cap for even one season, and the penalty schedule resets), and most owners of teams near the line seem to be treating it as a payroll ceiling.
For instance, the Los Angeles Times recently reported that the Dodgers, in an effort to attract potential investors, intend to stay under the threshold for the next four years. Along those same lines, here’s what one exec told Jeff Passan, then of Yahoo, last November:
“I know people say it’s soft. It’s not. Our owners see the CBT number. They want us to stay under it.”
Whether it’s tidy rationale for teams to behave as though there’s a hard ceiling on player salaries or whether they’re over-responding to the disincentives, the effect appears to be the same.
4. Front offices value older players much less than they once did
Major-league rosters have generally gotten younger over the past 20 years, but the stark difference these days is how much more valuable young players have become. As Travis Sawchik of FiveThirtyEight detailed not long ago, the share of team WAR going to position players age 32 or older is now at its lowest point since before the free-agent era. The situation with pitchers isn’t much better from the standpoint of the veteran.
This has happened in large measure because front offices, now more reliant on analytics than ever before, have come to the defensible conclusion that young players are better investments than older players. As a general rule, players arrive at the major-league level these days without much of a learning curve. This is probably owing at least in part to advances in training and nutrition. At the same time, players are peaking earlier, which means their value is concentrated during their early years. Time was when you could mostly assume a player would be at his best at some point between ages 27 and 29, but that assumption doesn’t really hold up anymore. Given that it takes six years of major-league service time for a player to reach free agency, many free agents are nearing or beyond age 30 when they hit the market — i.e., years beyond what was likely their peak.
Layered on top of all this is the fact that players are peaking during those early cost-controlled years. Teams are obligated to pay most players the minimum salary through their first three years in the majors, and even during their arbitration years they’re significantly underpaid relative to market worth. The team-friendly buzz-term for this is “excess value” — players generally put up their best numbers while they’re being paid the least.
Time was when, teams seemed to bid for free agents with an eye toward what those players had already achieved. Now front offices — with hordes of data at the ready and somewhat homogenous in terms of makeup and thinking — care only about how a player projects moving forward. The past matters only to the extent that it informs the future, at least when it comes to evaluating players. That mentality works against free agents who, to repeat, tend to hit the market as their skills are declining. To be sure, great players can remain great even in decline, and aging curves aren’t one-size-fits-all. Dully like-minded front offices, though, see them as bad investments relative to their underpaid and younger peers. That dynamic is very much at work right now.
5. The MLBPA failed to address this trend in the last CBA
MLB and the union (MLBPA) forged the latest collective bargaining agreement (CBA) soon after the end of the 2016 season, and it will be in effect until Dec. 1, 2021. As is typically the case, the MLBPA negotiated a modest increase to the minimum salary but otherwise focused on quality-of-life issues such as chefs in the clubhouse, four additional off days during the regular season, earlier start times on getaway days and the like. Going the other way, the players allowed owners to cap international signing bonuses and make tweaks to the competitive balance tax structure. What the MLBPA didn’t do was address the outdated salary structure. Here’s what happened …
Once Harper and Machado ink, expect the current figure to rise to $1.5 billion or so (barring the possibility that they sign shorter-term deals so as to re-enter the market relatively soon). What’s striking is how much the 2015-16 offseason stands out. That’s when seven free agents wound up signing nine-figure contracts — including David Price and Zack Greinke, who each topped $200 million. Coincidentally, that rush of spending occurred in the final free agent period before the new CBA was finalized, which may or may not have something to do with the MLBPA’s prioritizing during talks.
Yes, 2015-16 looks like an outlier, but even in the absence of that frenzied winter you’d expect to see more of an upward trajectory in the years to come. This, after all, is now a $10 billion industry in which the average franchise is valued at roughly $1.5 billion. Viewed through that lens, payroll spending as a percentage of revenues hasn’t been this low in a long, long time. In matters related, the vast majority of teams right now aren’t even within sniffing distance of the CBT threshold.
Doubtless, if union head Tony Clark and his lieutenants could go back in time, they’d press for a drastically raised minimum salary and a shorter free agency timeline. They didn’t do that, though, and now teams are capitalizing on the shortsightedness. The union is responsive to its members, and the veteran-dominated group presumably prioritized those lifestyle improvements over attacking the compensation system.
Whether it’s a dereliction of duties on the part of union leadership or an understandable failure to anticipate trends, the MLBPA has failed to head off ownership. Getting something done the next time around won’t be easy. The MLBPA has already agreed to implement the competitive balance tax and put hard caps on draft spending an international free-agent budgets. Perhaps agreeing to an international draft could be dangled in front of ownership, but such a proposal likely won’t be popular with a number of Latin union members. Offer a salary cap? That’s surely a verboten thought to a number of union members, and since the owners have something like a de facto cap in place (as noted above) would they even see it as a giveback?
Given all that the MLBPA may need to strike to have a shot at getting younger players paid more in line with their worth.
6. Ownership collusion could be a possible factor
Collusion — i.e., when one side of the labor-management divide acts knowingly in concert so as to rig the market — is strictly forbidden by the CBA. That, however, hasn’t stopped owners from colluding against free agents in the past.
From 1985-87, clubs manipulated the market to absurd extremes. They shared offers with each other and operated under a pact to not pursue other teams’ free agents unless given the go-ahead by said teams, among other examples of malfeasance. In the end, the MLBPA sniffed out the scheme, and owners were hit with a judgement numbering in the hundreds of millions of dollars. It happened again, albeit on a smaller scale, during the 2002-03 offseason. As well, many would attest that the league colluded to keep Barry Bonds out of baseball when he hit the market following a 2007 season in which he led the majors in OBP and put up anof 169. (Bonds lost his grievance hearing on the matter.)
Proving collusion would be difficult, especially since the owners have no doubt learned to cover their tracks, but that doesn’t mean it’s not happening at some level.
7. Early extensions have thinned the crop of available free agents
Within the last few years, teams have been much more willing to sign players to early contract extensions that provided guaranteed money in exchange for the players’ selling away one or more free agent years. Thanks to the lack of life-changing money available to players during their early years of service time, they’re more willing to sign such team-friendly deals, and clubs have recognized this. Corey Kluber, Anthony Rizzo, Andrelton Simmons, Jean Segura, Jose Quintana and Adam Eaton would have been available for hire alongside Harper, Machado, and the rest. Three or four of those names likely would’ve inked nine-figure deals., early extensions have deprived this winter’s market of names like
As detailed, it’s not any one phenomenon that’s leaked the intrigue from the offseason. It’s the full complement of decisions — some coincidental, some no doubt plotted out — that have pushed baseball from the winter news cycle. The players no doubt want things to change, and MLB should, too, if it wants to re-engage fan bases and maintain the labor peace that’s typified the game since 1995. What happens over the next 12 months or so will be telling in the extreme.