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A-Rod has found a taker. Baseball's hottest free agent, Seattle Mariners shortstop Alex Rodriguez, has signed a $252 million, 10-year contract with the Texas Rangers -- the richest deal in sports history. The contract would make the 25-year-old Rodriguez the highest paid player in the league, surpassing the eight-year, $123.8 million deal that the Colorado Rockies gave former New York Mets' left-handed starter Mike Hampton on Dec. 8.
How long can this go on? Will these skyrocketing salaries eventually plummet back to earth, meeting the same fate as the dot-com stocks of yesteryear?
Probably not. Unlike most businesses, success in Major League Baseball (MLB) is determined more by how much a franchise is willing to spend to acquire talent than by watching operating expenses. It seems to go: The more a team pays, the more it wins. The more it wins, the more fan support, advertising, broadcasting rights, and corporate interest it attracts -- which, in turn, generates even more money for the franchise.
Just take a look at the report of the Commissioner's Blue Ribbon Panel on Baseball Economics, a group formed by MLB to study the sharp rise in player salaries. The report concludes that there's a strong correlation between high payrolls and success on the field. Indeed, it claims that a high payroll has become an increasingly necessary ingredient of on-field success.
BRAGGING RIGHTS. There's no getting around it: The teams with the largest payrolls are the teams that win games in the playoffs. For example, in 1999, the three teams with the highest player payrolls (the New York Yankees, Texas Rangers, and Atlanta Braves) had a combined record of 296-190 while the trio with the lowest payrolls (the Minnesota Twins, Florida Marlins, and Kansas City Royals) had combined records of 191-292. The first three teams had total player payrolls of $254 million, while the lowest three totaled $49.7 million -- less than half the payroll of the New York Yankees alone.
A-Rod & Co. are touting their services as value-added assurance that the team they play for will actually make the playoffs -- with the resulting increased revenue flowing directly through higher attendance and indirectly through an increase in the club's "goodwill" business value. A winning team draws better at the gate. Fans will come to see an All-Star, but even more, they'll come to see a winning team.
With top-notch talent, it's also more likely a team will land a fat television contract, according to Roger I. Abrams, dean and Richardson Professor of Law at Northeastern University School of Law. Abrams is author of The Money Pitch: Baseball Free Agency and Salary Arbitration, which analyzes the economics of baseball and details the free agency and salary arbitration processes.
THE HUBRIS FACTOR. But it's not all economics. Yankees President Randy Levine says most teams consider "whether there's a fit" before pursuing a free agent. Another factor is hubris -- on both sides of the bargaining table. The franchises want bragging rights for having elite players on their roster. The players (and their agents) want the fattest contracts.
Abrams says this game of one-upmanship introduces salary comparability into the equation. So when one hot free agent receives a lucrative contract, the price goes up for the next hot free agent, and so on. This comparability is built into the salary-arbitration system for players with from three to six years of major-league service. But players with fewer than three years get paid whatever management wants to pay them, as long as it's more than the contract minimum of $200,000.
Abrams says having Rodriguez in the Texas Rangers lineup will increase attendance -- and the gate is still the largest overall money-maker in baseball -- will increase the chances of the club making the playoffs, with the additional revenue that produces, and will increase the value of the local-TV contract, the typical team's second most important revenue source of revenue. Will that offset $252 million? "That's what business is all about: balancing factors and predicting behavior," Abrams says. "If I was a fan, I sure would want him at shortstop."
PAY BY PLAY. There's no questioning Rodriguez' talent. He holds the American League single-season record for most home runs by a shortstop (42 in both 1998 and 1999). He had a 20-game hitting streak from Aug. 16 until Sept. 4 of 1996. And he has a lifetime batting average of .309 for his seven seasons in the big leagues.
With a contract valued at roughly $25 million per year, A-Rod would be paid roughly $154,000 per game in a 162-game season. That's $17,000 per inning, or $59,500 every time he steps up to the plate, assuming he bats an average of 3.5 times a game. Will this hefty investment pay dividends? It depends. Each MLB team has a different business model. All teams rely heavily on crowd attendance for revenues, but for the teams really raking in the money, the lion's share of revenues -- 80% in some cases -- comes from television broadcast rights. The Texas Rangers would have to factor any new broadcast-rights agreement into the equation, or rejigger their existing business model.
While the pricing of any commodity or service is subject to valleys as well as peaks, salaries for professional athletes have been steadily climbing. The average MLB payroll has increased 50% from 1995 to 1999.
SELLING THE GOODS. With a system so market-based, "it is clear that collusion between owners to hold down salaries violates the collective bargaining agreement," notes Abrams. "Like any market-based system, the limits are set by supply and demand." Simply put, Abrams believes salaries will rise as long as some owners think it's worth the investment. "The bubble will burst only when the players and owners through their shortsightedness kill the golden goose."
A-Rod's superagent, Scott Boras, sure did an aggressive marketing job. He prepared a 60-page book detailing why Rodriguez could be one of the greatest players in baseball history and deserves to be paid accordingly. The book is loaded with quotes and testimonials about Rodriguez' skills. Boras even projected future stats, in an attempt to justify the requested salary. "Nothing Scott [Boras] does is 'common practice,'" Abrams says.
So who pays for acquiring expensive talent? The commissioner's panel concluded that fans pay the bill: "In a majority of MLB markets, the cost to clubs of trying to be competitive is causing escalation of ticket and concession prices, jeopardizing MLB's traditional position as the affordable family spectator sport."
"BATTLE OF ATTRITION." Abrams disagrees. He says studies prove that there's no direct correlation between ticket prices and player salaries. Instead, teams raise prices without regard to free-agent salaries. "If a team could charge more in tickets or in local-TV contracts, it will do so even without high-priced free-agent talent." He notes that the Chicago Cubs just raised the price of bleacher seats by $5, even though the team didn't have to recoup any fancy free-agent salaries. Still, when players see the increase in owners' ability to pay, they continue to demand more money.
So will collective bargaining talks next year help stifle these skyrocketing salaries, making this the last hurrah for free agents? Not likely, Abrams says. "Absent some dramatic change in circumstances, I foresee an awful battle of attrition. When it ends, the parties will be in the same trenches they are in now. The only change that will occur will be a greater willingness on management's part to share revenue among themselves. I don't expect the union to give up 30 years of hard work."
In today's sports market, Abrams compares players like A-Rod to a hot IPO. "Some of those skyrocket, and others flop. I would bet on this one paying off." As in the world of financial markets, salaries are whatever the market will bear.
By Alan Hughes in New York Edited by Douglas Harbrecht
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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