Wednesday, November 30, 2011

New MLB CBA: Owners win!

I haven't had much to say about the MLB CBA that was recently agreed upon. Really, the whole thing seems a bit silly, and I'm not totally sure how some of the things will play out. Whatever the result, I don't think it's nearly as much as some seem to be howling about. What should be howled about is the screw job on the young players, not so much the implications for professional baseball.

It will probably give slightly more incentive for players to go to college, I guess. But that only depends on the return to go to college, as they'll be subject to negotiations with only a single team next time their drafted. If so, then so what? College players generally make it to MLB a bit quicker, so they may still arrive at the same time (or just slightly later) they would have otherwise. But ultimately, those players will end up in MLB. How many multi-sport players are we really talking about? I can't imagine this is significant at all to the total talent in the league. Here's a few thoughts.

International Players
The idea that large market teams don't invest heavily in international players, and that this cap will only affect the small market teams seems ridiculous to me. If anything, I think the cap gives smaller teams more incentive to invest in international talent and training.

Before, teams really had to worry about investing heavily in training only to watch international players sign with a team that had more money. Now, the return to training is higher (less bonuses) and the probability that the player will sign with the team that trained them is higher (market has less huge offers).

This could have the effect of redistributing talent across all teams, certainly. But this, just like before, is a free agent market for these players. Yes, with more uncertainty and less leverage for the players, but a competitive market nonetheless. Before making a final judgment here, I would have to see the distribution of international spending by team. I suspect it is not highly negatively correlated with market size, meaning the effect is just cheaper talent.

This restriction probably helps all owners, unless it creates a situation in which big market teams decide to only target 'sure thing' players, and allocate all of their cap to a single player trained by another team. Not sure how reasonable of a worry that is, but I'd be interested in someone enlightening me on the data here. Again, the loser here is the international players and the bonuses they're paid to feed their families.

Slotting in the Draft
First, I think it's a bit silly that if a pick isn't be signed, those dollars can't go toward signing another player. This is pretty classic "screw the guys with no representation" at work. The owners' interest in the slotting is pretty obvious: they get cheap talent even cheaper. The veterans, I think, were a bit misguided on this one. They probably assume that the money not going to the draft picks will be reallocated to them in the free agent market. As Lee Corso would say, "Not so fast my friend!" (As a note, this thought was sparked by a question from Sky Kalkman on Twitter, so I'm going to try and lay it out fully here.)

Outside of the impact on the likelihood of signing picks, the slotting really has no consequences in the free agent market (if they don't sign them, they might want to spend some money to replace this talent they would have otherwise had). Assuming that the large majority of draft picks are signed (they really don't have a more lucrative option, do they?), the teams are getting the same amount of talent they had before, but for less money. So there's a large surplus in the draft. Surplus has to go somewhere right!?!

Right!...into the owners' pockets (or into another, more lucrative investment). Major League Baseball has no requirement on the percentage of revenues that must go toward MLB salaries, outside of the minimum salary requirements to individual players. Even if it did, I'm not sure that this would cover rookie signing bonuses. But let's assume it did have this, and it included both draft bonuses and salaries. Then teams would have to make up that spending somewhere else. Depending on the stipulations of the minimums on payroll and bonuses, it very well could go into the free agent market. But this isn't the case. The teams have the same talent they did before, but for cheaper. Would buying more talent make sense?

It could, under certain conditions. But I don't think these hold. First, it would require that their marginal revenue be above the marginal cost. In other words, teams spend up to some point where these two are equal. But they're already doing this, under the assumption of profit maximization.

Unless the marginal revenue for an additional win increases or the marginal cost decreases, there isn't an incentive to spend more. Yes, the total cost (average cost of a win) decreased for them due to the slotting on the whole. But, in the competitive market for free agents, there is no reason to believe that the cost for one more win has gone down (in fact, if you believe more money is being reallocated there, it would increase!). As for marginal revenue, why would that increase? If the CBA increased interest in the sport as a whole, then maybe it would a tiny bit. But I doubt that's the case.

Here's an example. Let's say the Rays spent $15 million on rookies last year. At first glance, a veteran might say "Hey, this year they only have to spend $2 million. Then they'll spend the other $13 million on us! Woohoo!"

But--taking into account the uncertainty of draft and veteran talent in the future (let's just talk in expected values) and signing all picks--they have the same talent they did last year. To buy more talent, they have to enter the competitive free agent market. Last year, let's say an additional expected win for Tampa would increase revenues by $3.9 million (no reason to think this changed from last year due to the new rules). Similarly, the market price for a free agent is at $4 million (and why would this decrease now?). It isn't rational to spend $4 million for the additional $3.9 million in revenues. Sure, they could get from 88 to 89 expected wins for cheaper than they could last year. But it would decrease overall profits to reallocate that money under these new rules. Therefore, it's not likely that they'll go into the free agent market and spend that money by choice.

Now, there is an exception to this. If under collective bargaining, the agreement was to slot draft picks only if the minimum salary was increased, then some goes to the players. It is bargaining after all, and we can't assume that all the vets are stupid. In fact, the minimum MLB and 40-man roster minimum salaries were increased by about 16% each. But this minimum still does not go into calculating the marginal cost of an additional win. In, say, a WAR equation you just add it to the total for each player: Salary = $414,000*1.16 + $B*WAR. Therefore, it's a new fixed cost of operation in MLB (a new intercept for the equation). The amount you pay for marginal wins is independent of the minimum salary in this case. The total additional cost to owners is ($480,000-$414,000) * 25 players * 30 teams = $49,500,000 plus the 40-man increase ($78,250-$67,300)*15*30 = $4,927,500. Include guys getting sent up and down, and we'll put it at a cool $55 million.

According to Jim Callis of Baseball America, teams spent $192 million on bonuses in the first 10 Rounds of the 2010 MLB draft (I think I'm reporting this correctly). That means that the owners are left with a surplus of $192 - $55 = $137 million total. So, here both the owners (+$137 million) and players (+$55 million) gain from the new agreement. Other than the agreed upon increase in minimum salary, there isn't any reason to believe that owners will reallocate this money saved in the draft to free agents.

Certainly these results change under revenue or win maximization. But for North American sports, profit maximization is usually assumed to best describe owners.

As always, I welcome (and enjoy) any thoughts and criticisms or clarifications about things I've misunderstood here.

ADDENDUM: I realized that I didn't subtract from the $192 the allocation that still goes to the draft picks. Woops! Should be same conclusion, just less share than $137 million for the owners. Assuming they spend $2 million on average, they'd be looking at more like a $77 million surplus in their pockets. At $3 million, you're at $47 million, and so on. Previously, they were at a $6.4 million average total per team in the first 10 Rounds. Not sure what the exact slotting will be, but if we assume it cuts this in half, then we're near the $50 million mark and the players and owners may have split this up near 50-50. This likely means that, in terms of percentage increase, the lower-level players (Craig Counsells of the world) are sitting pretty.

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