Baseball's 2018 Free Agents as an Economic Indicator
You can learn a lot about the state of the economy by following the ebbs and flows of the Major League Baseball free agency market.
Pro sports revenue grows faster during economic expansions than during recessions. Billionaire owners feel a little more flush during bull markets and are more willing to break the bank to acquire a prized free agent. And superstar players, advised by their agents, try to time their free agency perfectly, to hit the market at just the right time. When all the best players look to become free agents at the same time, it might mean that the good times are ending for player salaries and the economy as a whole.
Baseball fans have marked their calendars for 2018. Many players have the option to become free agents that year, and if the economy is doing well, many of them will -- for large sums.
It's shaping up to be the biggest year for free agency since the winter after the 2000 season, when superstars Alex Rodriguez and Manny Ramirez signed contracts worth well in excess of $100 million each, and teams committed over $1 billion to player salaries in new deals. After the 2018 season, some of the best players in baseball like Bryce Harper, Manny Machado, Clayton Kershaw and David Price all have the option to become free agents. Some experts say Bryce Harper could fetch the largest contract in baseball history.
This era's astronomical figures began with the largest contract in baseball history, signed by Alex Rodriguez with the Yankees at the end of the 2007 season. At that time, the Yankees had the highest payroll in baseball -- full of aging superstars like Derek Jeter and Mariano Rivera who had won multiple championships for the team.
Payroll inequality between the large market teams and small market teams was one of the biggest challenges in the sport. In 2008, Alex Rodriguez had a higher salary than the entire Florida Marlins roster. The Yankees had successfully been supplementing their "championship core" with the best free agents on the market.
Small-market teams knew that they couldn't compete with the Yankees for free agents, so inspired by "Moneyball," they employed a tactic that changed the balance of power in baseball over the next several years: They signed young, risky players to multi-year contract extensions. Evan Longoria of the Tampa Bay Rays was perhaps the first and most high-profile example: In 2008, after playing just six major-league games, he signed a six-year extension with the Rays. It ended up being one of the best deals of the era.
Other teams copied the Longoria model. Young players were happy to guarantee themselves $10 million or more before they had proven they would play up to their potential. It was a good public relations move for smaller-market teams to indicate to their fans that they were serious about winning. And by "cornering the market" on their own homegrown talent, small-market teams starved the free-agent market of top-tier talent, making large-market teams like the Yankees spend more and more money on older, riskier players.
At the same time, baseball revenue was booming. Local broadcasting rights for baseball on cable television soared in value. In 2013, the Los Angeles Dodgers agreed to a deal worth $7 billion over 25 years. Their payroll more than doubled between the 2012 and 2014 seasons. Additionally, Major League Baseball Advanced Media, which began as a platform to broadcast games over the internet, became more and more valuable as a platform to stream all kinds of live content on the internet.
By now the market players are adjusting to this new reality. The Yankees' aging core was no longer good enough to compete for championships, so the team decided to stop spending as much in free agency until enough of their contracts had expired and their payroll was reasonable again. Young stars saw that some of the contract extensions signed by players like Longoria were too team-friendly, and became less willing to agree to similar deals, seeing what even mediocre older players were fetching in free agency. And all parties wanted to wait for the resolution of the collective bargaining agreement between the league and the players' union to see how league rules would change as it pertained to revenue and free agency.
With the collective bargaining agreement resolved as of last week, players see 2018 as the perfect year to maximize their leverage while the economy is hopefully still good and teams are in a spending mood. They don't want to get caught by an economic downturn or a revenue-threatening unwinding of the cable TV bundle.
Players are a bit like privately held tech companies that hope to go public at the perfect moment when valuations are at their peak. Some manage to time it perfectly. Just ask Alex Rodriguez, whose two record-breaking contracts were signed just weeks before the onset of recession.
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