Seattle Mariners pitcher Felix Hernandez is underpaid. He also just signed a new, seven-year, $175 million contract. How in the world do those two sentences make any sort of sense?
Well, the economic value of a player like Hernandez — and the value of Major League Baseball’s product as a whole — is skyrocketing. Within the past year, MLB has inked two new eight-year national TV contracts, one with Turner Sports for $2.8 billion and one with Fox for a whopping $4 billion.
That doesn’t include the money that high-profile teams can make off of their own local TV contracts, like the Yankees with the YES Network and the Red Sox with NESN, which both seem to undermine the adage that “money doesn’t grow on trees.” Oh, and the Los Angeles Dodgers recently agreed to a TV deal that will earn $8 billion over 25 years. Again, that’s for one team.
Baseball’s revenues have risen almost 50 percent over the last five years, from $5.5 billion in 2007 to $7.5 billion in 2012, and they’re expected to break $9 billion by 2014. By comparison, the NFL makes around $9.5 billion per year, and, as any insufferable NFL talking head will tell you, the NFL is America’s most popular sports league.
Even though only big-market baseball teams can sign their own lucrative local TV deals, MLB has a revenue sharing system that is unrivaled by any other sports league with local TV contracts. On the other hand, the NFL has a sharing system that is so equalizing that I’m surprised that MichelleBachman hasn’t compared it to the supposed socialism of Barack Obama, but it’s important to note that there are no local TV contracts in the NFL because games are not broadcasted on local networks.
MLB’s wealth is evinced by the average net worth of its teams, rising by 23 percent this past year, according to Forbes. Therefore, when small-market owners cry poverty in order to claim that they can’t realistically spend more on premium players, they’re lying as much as I would be if I claimed to like Rick Pitino. If a baseball team’s net worth has risen dramatically in recent years, but the owner keeps the payroll at a constant number because of “small-market limits,” something obviously isn’t adding up.
The truth is that every MLB team is swimming in money, including smaller-market teams like Seattle, which gave King Felix that mammoth $25-million-per-year contract. Another effect of baseball’s increasing bottom line is that elite players’ salaries are going to keep rising. And this is why, economically speaking, a man who will make $25 million every year to throw a baseball from age 27 to age 33 is underpaid.
In recent years, the use of advanced stats in baseball has skyrocketed almost as much as the value of MLB teams themselves. One great statistic, wins above replacement, encompasses all aspects of the game in order to estimate how many wins a player is worth to his team relative to a replacement-level player. The average player’s WAR figure in a given year is around two, meaning that an average player provides two more wins to his team than just any old stiff that you could acquire for peanuts and plug into the lineup. Recent studies have shown that, because of baseball’s rising revenues, a player’s market value is around $6 million per each WAR he produces in a given year. At first glance, though, it seems wrong that an average MLB player’s salary should be in the $12-million range.
But that is simply a reflection of how much baseball’s revenues are exploding. Using the above barometer for King Felix, who has produced an average of 5.5 WAR in the past four seasons, he should be earning around $33 million per year. Actually, that’s an underestimation, because baseball’s revenues are only going to keep rising as well as because of inevitable inflation between now and 2019. By the end of the contract, if Hernandez still puts out 5.5 WAR, he’d probably be worth around $40-45 million per year to his team.
Baseball’s revenues are exploding, and they will continue to do so for at least the next few years. Here’s the problem: Are new fans really tuning into baseball the way that they used to? The younger that kids are, the faster they expect everything to be. For reference, the Red Sox-Yankees Opening Day game took an absurd three hours and thirty-seven minutes to go nine innings. Not exactly fitting the bill.
MLB is also behind on everything technology-related, most notably not allowing instant replay for most plays because the league still wishes it were 1923. This might make some sense if players couldn’t wear batting gloves, wear batting helmets or watch film of the opposing pitchers’ tendencies, but all of these are technological advances that are obviously already woven into today’s game. Add in the fact that MLB doesn’t allow game footage on YouTube, because MLB’s executives clearly hate people or something.
Even so, for the next few years, baseball will feel as happy about its income statements as DikembeMutombo feels when blocking a shot. (Note: the preceding joke was blatantly stolen from that hilariousGeico commercial.) After that, who knows? As the NBA has learned by marketing its young stars to kids, appealing to youth is one of the best ways that a sports league can keep growing. While MLB can admire its cash flow for the next decade or so, appealing to young fans is the next challenge it must tackle.
Tom Hoff is a sophomore in the McDonough School of Business. DOWN TO THE WIRE appears every Friday.