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Joey Votto’s Massive Extension Changes the Game

Well, I think we’ve just seen the first piece of fallout from the stunning $2.15 billion purchase of the Dodgers on Wednesday. With money flowing into MLB at a breakneck pace, the Cincinnati Reds decided to make star first baseman Joey Votto an offer he couldn’t refuse. Actually, they made him an offer that no player in baseball could refuse, signing him (per Bob Nightengale of USA Today) to the longest contract in the history of the game — a staggering 12-year, $251.5 million commitment (or, phrased differently, a 10-year extension on top of the 2/26 he had already agreed to) that will keep Votto in Cincinnati through the 2023 season.

For as much as the Albert Pujols and Prince Fielder contracts helped shape the off-season, this is the deal that could have long lasting effects going forward. First baseman have been getting monster contracts in free agency for years, and in both cases, there were some special circumstances that set their particular case apart; Pujols is one of the great players in the history of the game, while Fielder certainly benefited from Victor Martinez‘s torn ACL, which didn’t occur until after most other options were already off the table. Free agents trying to use these deals as yardsticks for future negotiations would not stack up to Pujols resume, nor would they likely reap the rewards of a high-payroll team suddenly needing their services just weeks before spring training begins.

This contract for Votto, though, doesn’t come with any of those caveats, and it didn’t come through an intense bidding war in free agency. This is the third-largest contract in baseball history being given to a player who was two years away from free agency. This deal just blows up the expected compensation level for premium players negotiating with only their own franchise.

Before this deal, these were the recent comps that teams and agents could point to for power hitters who needed two more full seasons before they reached free agency:

Miguel Cabrera: 8 years, $152 million, covering ages 25-32
Ryan Howard: 5 years, $125 million, covering ages 32-36
Travis Hafner: 4 years, $57 million, covering ages 32-35

Cabrera got a deal that rivaled what you might expect a premium free agent to get, but he got to the majors as a 20-year-old and was much younger than the average player who has 4+ years of service time. Even though the Tigers gave him an eight-year deal, they still weren’t locking him up much past his prime, and could expect to get premium production for nearly the entire duration of the contract. Hafner and Howard were both older when they got their deals than Votto is now, but we still see that teams were reluctant to guarantee premium money past the mid-30s.

And, while he’s not the same type of player, Ryan Zimmerman added another 4+ service-time extension data point this winter, agreeing to a six-year, $100 million addition to the contract he was already signed to. That deal started with Zimmerman’s age-29 season, so in terms of ages, he’s a better fit for Votto than the three listed above. Of course, the things Zimmerman does well aren’t as highly valued as the things that Votto does well, so Votto should have been expected to clear Zimmerman’s bar pretty easily. Which he did, and then some.

Even if we expand the list of comps to cover guys with 5+ years of service time, this deal still blows the doors off anything we’ve seen before. Here are the contracts that guys have signed just one year before reaching free agency:

Derek Jeter: 10 years, $189 million, covering ages 27-36
Joe Mauer: 8 years, $184 million, covering ages 28-35
Matt Kemp: 8 years, $160 million, covering ages 27-34
Adrian Gonzalez: 7 years, $154 million, covering ages 30-36
Vernon Wells: 7 years, $126 million, covering ages 29-35

Jeter’s deal was the closest thing to this extension for Votto, but the Yankees were coming off three consecutive World Series championships, and keeping Jeter in NY was as much a business decision as a baseball decision. Even still, the Yankees only locked Jeter up through age 36. The rest of the deals all vary around the $20 million per year range, but come in with the same basic timeframe, buying out seasons through the player’s mid-30s in order to keep him around for his prime years. And remember, these guys were all one service-time year up from Votto, giving them substantially more leverage in negotiations.

Votto’s deal guarantees him that same $20ish million AAV, but locks him up through his age-39 season. This is basically unprecedented for a non-free agent, and when you factor in that he was two years away from free agency, it’s a staggering guarantee by the Reds. To do this deal now and absorb the extra risk of guaranteeing him 2014-2023 while Votto is still two years away from being able to negotiate a deal on the open market, the Reds are essentially saying that his fair market value is somewhere around $300 million.

A few months ago, that would have sounded absurd. However, since the off-season began, we’ve seen the Angels flex their financial muscle after agreeing to a television contract that promises to push significant new revenues into their organization. Just a few days ago, we saw the Dodgers get purchased at a valuation that was dramatically higher than expected, and with their own television deal coming up for renegotiation, they also look to be in a position to push a lot of cash into the industry. Put simply, we’re seeing some positive shocks to the game’s economy, and the result looks to be a significant uptick in willingness by teams to borrow from their own futures to finance talent acquisition in the present.

What we’re seeing could be described as inflation, but it’s not upward price adjustments in the traditional form. Pujols, Fielder, Reyes, Votto, Kemp, and Zimmerman all landed contracts in excess of $100 million this winter, but in each situation, the surprising number wasn’t the AAV but the amount of guaranteed years on the back end. The $24M AAV for Pujols and $23.8M AAV for Fielder don’t even rank in the top five in baseball history, but they took slightly lower annual paychecks in order to get deals that would keep the money flowing for essentially the rest of their careers. Now Votto has done the same thing, taking a deal that pays him just slightly more per season than Carl Crawford, but basically ensures that this is the last contract he will ever have to negotiate.

And, perhaps this is exactly what we should expect as a reaction to potential new revenue sources opening up for MLB franchises. These TV deals that are being signed don’t come with huge lump sum payments, so teams don’t have buckets of cash burning holes in their pockets. What they do have, or may expect to have in the next few years, is a guaranteed revenue source that will allow them to be in a strong financial position for the next couple of decades. And now, with every team looking to see when they can get in on this upwards adjustment in TV money, it’s become an arms race to lock in talent at current market prices for as long as possible, and getting these deals done by guaranteeing parts of the future expected revenue pie.

This deal for Votto signifies that this trend is not going away any time soon. The Reds aren’t a big market, high payroll franchise and their television contract reportedly is only paying them ~$10 million per year at the moment, but they know a renegotiation of that price is going to come in three to four years, and if current trends persist, they’re going to be able to get a significant hike on their next contract. That rate increase will come along just in time to finance the back end of Votto’s deal, and I’d imagine that knowledge played a huge role in convincing them to guarantee Votto current market premium dollars for years when he likely won’t be earning premium dollars on the field.

So, at this point, we have a couple of options – we can continue to be shocked and amazed at the growing rate of contracts that guarantee big money to players from 2018 and beyond, or we can adjust our expectations for what premium players are going to be able to command going forward. With the promise of new money flowing into many organizations over the next three to five years, I’d imagine we’ll see more and more teams being aggressive in trying to lock up their young stars before they get to free agency and have to bid against whichever franchise just happened to renegotiate their television contract a few months prior.

For the Reds, the equation was pretty simple – keep Votto and contend during the run-up to the expiration of their television deal, or trade him away, rebuild, and come to the table asking for more money after a couple of years of going young and probably taking their lumps. Given those options, giving Votto a couple of extra years at the back end to increase their bargaining position doesn’t look quite so crazy.

However, that logic could be used to justify nearly any price. Give Tim Lincecum $500 million? Why not, new TV money on the way! Obviously, there’s a line where these deals cease to make sense even if we anticipate that this trend of upward spikes in revenues is not going away any time soon. Where does Votto’s deal fall in terms of that line?

It’s probably pretty close to it, honestly. Votto’s been a +7 win player each of the last two years, but a decent chunk of his offensive value is tied up in his career .352 BABIP, which is pretty much the absolute upper limit for a sustainable performance over the long term. Over the last 20 years, the top three on the BABIP leaderboard (min 3000 PA) are Derek Jeter (.355), Matt Kemp (.352, just barely over 3000 PA), and Ichiro Suzuki (.351). You’ll probably note that all three of them are pretty fast, and can leg out infield hits when they need to. The best comparison for Votto is Miguel Cabrera, who comes in at .347 – in other words, it’s not impossible for Votto to keep getting balls to fall in at this rate, but there’s really nowhere for him to go but down in that area. More likely, we should probably project Votto as a +6 win player going forward, which accounts for some overall regression and variability of health.

Given that he’s in his prime, we can probably sustain Votto as a +6 win player for three years before we project age-related decline, and then we’d accelerate the decline towards the end of his career when his skills are likely to disappear a bit faster. So, a projection for Votto over the next 12 years might go something like this:

2012: +6 WAR
2013: +6 WAR
2014: +5.5 WAR
2015: +5.0 WAR
2016: +4.5 WAR
2017: +4.0 WAR
2018: +3.5 WAR
2019: +2.8 WAR
2020: +2.1 WAR
2021: +1.4 WAR
2022: +0.7 WAR
2023: +0.0 WAR

Total: +41.5 WAR

If we start at $5 million per win and apply the 5% future inflation to these expected performances, we’d get a total of $249 million over the next 12 years, almost exactly what the Reds just signed Votto for. But, again, that model is for free agents, and Votto was two years away from free agency. In other words, the Reds basically didn’t seem to get any kind of discount for taking on additional risk.

A few months ago, this deal would have looked crazy, and we’d have all been in shock at the Reds willingness to mortgage their long term future to chase after near term wins. However, this deal suggests the possibility of inflation going well over 5% down the line, as teams are basically guaranteeing themselves large portions of dead money in the future, and will have to increase their spending to offset the large amount of cash going to players who will probably not be overly productive at the ends of their careers.

A few months ago, I would have expected Votto to have to settle for a contract somewhere between Ryan Howard’s $125 million and Miguel Cabrera’s $154 million. Now, though, those numbers simply seem obsolete. Votto’s deal shows that it’s not just the big market teams that are expecting significant revenue growth going forward.

This deal is going to have lasting repercussions on the sport. Not only does it suggest that the Reds are going to remain competitive in the NL Central going forward, but it also resets the price expectations for every pre-free agent player in the sport. Congratulations, players, all of your expected prices just went up. Way up.