Small Market Teams Make Smart Risks With Recent Contracts

New stadiums, superstar players, winning seasons, even championships will never be enough for the Milwaukee Brewers or Tampa Bay Rays to compete with the New York’s and Boston’s of the world in revenue, and subsequently payroll. To compete with the free-spending big market teams, sans salary cap in baseball, smaller market teams must make smart business decisions and take calculated risks. The latest fad – locking up young players to long-term contracts – continued in a big way last week.

Milwaukee signed Ryan Braun, 153 games into his career, to a club-record seven-year, $43M contract, on the heels of Hanley Ramirez’ 6 year, $70M deal with Florida. Early career long term contracts work benefit both parties, the player in the short term, the team in the long term. The deals work because each side accepts risk. Players trade potentially millions of dollars in each of three arbitration years, and occasionally their first year or two of free agency, for guaranteed money. In arbitration, players must perform at a high level each year to earn pay increases. However, those that do perform stand to earn in excess of $10M, last seasons record set by Ryan Howard for a first year arbitration case. On the flip side, players will earn under $1M for their first three seasons, and have no guarantee that they will avoid injury, or eventually wind up back in the minor leagues before arbitration time rolls around. These contracts secure a healthy payout, substantially higher in the first three years, and guaranteed throughout the years of arbitration no matter how they perform.

Teams accept the risk that a Braun may flame out after two seasons, and become another Kevin Maas or Angel Berroa, a flash in the pan that winds up out of baseball in three years. If that’s the case, Milwaukee still owes him six years. Conversely, if Braun continues his success path, Milwaukee will never go through the usually acrimonious arbitration process, remaining on good terms with Braun. They stand to save money on the back end of the contract, when All-Star caliber arbitration players will earn more than the $6.5M average salary in Braun’s contact. The Brewers also built predictability into their payroll, allowing the team to sign other free agents down the line, without the unknown of what Ryan Braun will earn year to year during arbitration.

This season we have seen an explosion of teams buying out arbitration years on young, potential stars with long-term contracts. Arizona inked Chris Young, the Rockies locked up Troy Tulowitzki, and Tampa signed both Evan Longoria and Scott Kazmir in the past few weeks. At least one, if not more, of these players is bound to fail, or at least not live up to expectations. The reason teams can take the risk is at an affordable $5-7M per season, the contract does not cripple the team, the way a Barry Zito or Jason Giambi contract can.

Inevitably, rumors circulate that the union is not pleased with these contracts because player’s are selling themselves short, leaving money on the table. However, it’s not nearly as bad as they make it seem. In fact, these contracts are the similar to the big money contracts of earlier this decade, except teams front-load the money on these deals. Previously, a player’s salary would escalate each season, reaching exorbitant fees in the final season. These contracts are front-loaded because players will earn $5-$7M, or more depending on the player and contract, in the pre-arbitration seasons when they would typically earn under $1M. If they continue to blossom players will earn less than market rate at the end of the contract, a give and take. Not as one sided as the players association tends to believe.

Cleveland laid the ground work in the early to mid 1990’s, locking up Albert Belle, Carlos Baerga, Charles Nagy, Jim Thome, and Manny Ramirez, to name a few, for the better part of the decade. The team grew together into a perennial playoff team that earned two World Series appearances. It took teams almost a decade to catch on, but they finally understand its the best way to control costs and compete with the big boys.

Teams still need to spend on payroll to win, Pittsburgh and Kansas City listen closely, just not exorbitantly. In other walks of life, its called good business. Secure young players, reward them, use the money you save to surround them with affordable role players, and make a big mid-season trade when the opportunity to win presents itself.

By putting money into the business, it inherently helps the bottom line. Better players leads to more wins and a sense the team is trying to win, both of which put more fans in seats and sell more merchandise. Further, securing franchise type players to long term deals allows the marketing department to build campaigns around players, and build a brand strong enough to weather a downturn on the field. Essentially, baseball teams are creating a self-regulated salary cap. Big spenders, like the Yankees and Mets, are feeling the pain of haphazardly throwing big money at free agents – see Carl Pavano, Giambi, Carlos Delgado (trade), and Mo Vaugn, to go back a few years, as examples. This proves a ceiling exists where overspending can hurt a team. Meanwhile, the recent success of Minnesota, Cleveland, and Oakland to name a few, show teams need to spend some money to compete, proving a salary basement exists. Outrageously low payrolls will not only never compete, they will not make money in the long run.

Florida, Arizona, Colorado, Tampa, and Milwaukee spent smartly, and will reap the benefits over the next few seasons. The more smaller to mid market teams that follow this business model will lead to further parity in baseball, and the years where only half the teams have a chance at the playoffs, and the Yankees make it each season will disappear.

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