The Red Sox, Market Value, and Actual Value

The Red Sox currently have a .448 winning percentage, the eighth worst mark in baseball. They haven’t performed this poorly on the field since 1966, when they went 72-90, finishing with a better record than only one other AL team – the New York Yankees. Over the last 35 years, the sport has undergone some pretty significant changes, and neither the Red Sox nor the Yankees are used to having these kinds of seasons anymore. This kind of large scale failure is simply not something that anyone associated with the franchise has had to deal with in the last three decades, and not surprisingly, it has prompted a lot of changes in response.

Gone are many of the most visible faces of the last few years. Kevin Youkilis, Adrian Gonzalez, Carl Crawford, and Josh Beckett were all shipped out mid-season, and it seems like a foregone conclusion that Bobby Valentine will be leaving after the year ends. The Red Sox aren’t just going for a talent adjustment; they’re looking for a culture change.

And that change is apparently going to start with the valuation of talent.

The Red Sox have been talking for a month or two now about getting Bill James more involved in the organizational decision making going forward, but Michael Silverman’s piece in the Boston Herald on Sunday lays out an interesting quote from James about this organizational shift:

“We’re trying to think more clearly about player’s value,” said James in an email, his preferred mode of communication these days. “Our process in the past has relied on making good judgments about players, and then paying whatever the market demanded we pay for those players that we liked. That process had sprung a wheel, so we’re trying to think about player’s value in a more organized, cohesive fashion. That’s essentially what’s driving this, I think.”

Essentially, James is saying that the Red Sox attempted to specialize in player evaluation, with price being set by forces of the market and the bids of their competitors. Evaluation and valuation are linked in many ways, but definitely not the same thing, and James is essentially stating that the team is going to focus more on the actual value of a player rather than using their financial resources to build a roster full of players who they have positive evaluations on. In other words, the Red Sox want to get away from attempting to win through quantity of spending and instead focus on the efficiency of that spending.

In theory, it sounds like a better plan. There’s no question that the teams that have attempted to build winners through spending on top-tier free agents have had a miserable year, with the Red Sox joining the Angels, Tigers, Marlins, and Phillies in the land of disappointment. However, as we talked about a few weeks ago, this year is also something of an historical outlier, as the relationship between payroll and wins is weaker this year than it has been since the days of collusion. It is unusual for this many teams with these kinds of payrolls to all fall flat on their faces in the same year.

It is impossible to ignore the fact that these kinds of years do happen, though, and they’re generally quite miserable for everyone involved. Valentine is almost certainly going to lose his job because of what happened this year. Ozzie Guillen seems like he won’t survive year one in Miami either. Mike Scioscia and Jerry DiPoto have had to answer questions about their ability to work together, and it seems like that marriage may stay together simply due to the high cost of a breakup. These kinds of high profile face plants leave bodies in their wake, and create animosity between a team and the fan base that can linger for years. It is understandable that the Red Sox would be in no hurry to go through another season like this, and focusing on efficiency of payroll may very well create a more likable roster that is just as capable of winning baseball games.

However, while their collapse this season is certainly a motivating factor, there are shifts going on within the economics of the game that may be the real instigator of these changes, even more than the Red Sox failure this season. Major League Baseball just finished renegotiating their television contract with ESPN, Fox, and TBS, and according to the New York Times, annual payments to the league from those contracts is expected to rise from a current rate of $750 million per year to $1.55 billion per year by 2021. That’s basically an 8% annual rate of increase guaranteed over the next nine years, and that’s just national television contracts.

We’ve also seen an explosion of local television contract revenue for many franchises, and while the Red Sox ownership of NESN — more accurately, the group that owns the Red Sox has 80% ownership of the regional sports network — means that they won’t be getting a large increase in payment from a media company like Fox Sports, it does mean that they have access to significant revenues that a team simply selling their broadcast rights doesn’t have, and those revenues should continue to grow going forward, as sports is proving to be one of the main television events that is both DVR-proof and can’t be easily replaced without a cable subscription.

In short, television money is flowing into baseball at a breakneck pace, and a decent chunk of this increase is going to be evenly distributed to each organization, giving additional revenues to clubs that have had to count on payroll efficiency as their only path to success. While it’s unlikely that the Tampa Bay Rays are suddenly going to start spending money wildly in free agency, these revenue increases should drive up spending by lower revenue clubs, and the changes to the CBA have essentially dictated that those revenues have to flow into Major League players, since there are now caps on amateur spending in both the draft and international free agency.

Continuing inflation of free agent prices seems inevitable, and yet, with the Yankees attempting to avoid the luxury tax and the Red Sox talking about focusing more on player valuation, it seems that several of the big spenders of recent times may be looking to rein in their spending at the same time that lower revenue teams are expanding their payrolls. While we can’t know for sure that this will happen, it seems that the pieces are in place to lead baseball towards a more balanced economic landscape than we’ve seen over the last 10 years. In other words, the Red Sox desire to be more efficient with their payroll may not be purely a choice, but a fate being thrust upon them by the changing nature of the television contracts in the sport.

A year ago, it seemed impossible to think that the Reds would be able to retain Joey Votto unless he gave the team a significant discount. Instead, they re-signed him to the largest contract extension in league history, then locked up Brandon Phillips too. In February, St. Louis gave Yadier Molina a $75 million extension that looked shocking at the time but appears to be brilliant now. Matt Cain bypassed free agency to stay in San Francisco. The Blue Jays have successfully kept both Jose Bautista and Edwin Encarnacion off the market in recent years. The Mariners continually refuse to trade Felix Hernandez, even as his contract nears closer to expiration.

The top end of this year’s free agent class is extraordinarily weak, and with the recent trend of long term extensions from even small-to-mid-revenue franchises, there is some thought that this is the start of an annual trend. If lower revenue clubs are not continually replenishing the free agent market by developing stars they can’t afford to keep, we may very well be in for off-seasons like this one where money is flowing into the game but there aren’t any obvious candidates to throw a lot of money at. And, in that scenario, the evaluate-and-let-the-market-dictate-price strategy would be nothing short of a total disaster.

If we actually do see this shift occur, with prices in free agency rising in response to additional revenues but weaker crops of talent actually making it to free agency in the first place, then being the high bidder on the biggest names each winter could very well turn out even worse than it has in the past, and large free agent contracts already have a mediocre track record to begin with. Finding value in an inflationary environment isn’t easy, but more and more, it’s looking like it may be necessary, especially if the market value and actual value of a player continue to diverge.

The Red Sox got a kick in the pants this year, which has pushed them in this direction as a response to their recent failures in free agency. However, this shouldn’t just be painted as a Red Sox issue – this appears to be a baseball issue, and potentially a pretty interesting one for those who have been hoping for increased financial parity throughout the sport.

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Dave is a co-founder of and contributes to the Wall Street Journal.

46 Responses to “The Red Sox, Market Value, and Actual Value”

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  1. Anon says:

    In February, St. Louis gave Yadier Molina a $75 million extension that looked shocking at the time but appears to be brilliant now.

    What would Molina have be worth as a free agent this offseason? 6/100?

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  2. Marty says:

    Isn’t this exactly what the Cubs started to do last year?

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    • Dave Cameron says:

      Slightly different situation, because the Cubs weren’t recently competitive, and don’t have the same history of success with large payrolls. Theo is basically doing a classic rebuild there – what the Red Sox are talking about doing is more of a Yankees-style plan, still spending in free agency but spending differently.

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      • Marty says:

        Yeah you are right, it is definitely not quite a full rebuild for the Red Sox / they probably aren’t going to be absolutely dreadful. I am just thinking of pickups like DeJesus & Maholm and the fact that the Cubs have been shrinking the payroll for a couple of years.

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  3. rustydude says:

    So, based on this information, complete this sentence…

    The Dodgers are ________ .

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    • Dave Cameron says:

      Going to be just fine. They probably could have done better by skipping out on the Gonzalez deal and throwing their money around this winter, but the coming inflation might just serve to make their commitments look a little less crazy. They’ll have to get some value guys to fill out the roster, but they still have a strong core.

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      • Spike says:

        glad you said that. so much of the knee jerk reaction has been to criticize the Dodgers in-season moves. They should be fine for the next several seasons given the core 7 or 8 players there. Kershaw being the big issue they’ll have to deal with.

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      • Richie says:

        I don’t think so. Those contracts are just too inflated. The Dodgers’ competitors will also have some extra money to play with, and they can’t help but put it too more effective use.

        The Dodgers will only have a strong core if those guys stay considerably healthier than competing professional ballplayers usually manage. Anywhere near normal injury luck, they’ve little farm to cover for it now, and are also now no less but also no more able than their competitors to take on a bad contract or two to cover for an injury.

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      • Richie says:

        Very nice article, tho’.

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    • Table says:

      Dodgers should have an easy time this offseason zeroing in on the remaining holes on their roster. LF and the bench OF have been terrible.

      Juan Rivera (-1.0 WAR)
      Tony Gwynn Jr (-.2 WAR)
      Scott Van Slyke (-.2 WAR)
      Jerry Sands (0 WAR)
      Alex Castellanos (-.5 WAR)
      Bobby Abreu (.2 WAR)

      That’s 948 plate appearances going to players that combined for -1.7 WAR. If Carl Crawford and perhaps Scott Hairston were to replace that playing time with just 2 WAR, that’s a huge 3.7 WAR swing. An equally large upgrade could be coming from a full season of Adrian Gonzalez at first base. A full season of Hanley, Cruz, Punto should be an improvement seeing as how awful Uribe/Gordon were for a large chunk of this year. A healthy Kemp could add a few wins. Lastly It can be assumed that the Dodgers will sign at least one of the top starting pitchers (Grienke, Peavy, Sanchez, Jackson, Dempster, etc). So it’s easy to see the Dodgers improving greatly next year. Long term though…that roster could encounter a 2012 Philly like hiccup.

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      • 2Chainz says:

        Not to rain on your parade, but counting on all players to return to peak levels and ignore the probability of more injuries is a recipe for disappointment.

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      • Table says:

        I expect there to be both regression of the expected and unexpected kind, and injuries. However that does not change the fact that areas of the roster where there was crap to begin with can’t now be filled with quality, thus greatly increasing the team’s ceiling and margin for error

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  4. jcxy says:

    Very interesting take…although I understand you’re using them as a lens through which you can view MLB parity, I’m nonetheless curious as to your view of the Red Sox going forward.

    If you subscribe to the conventional narative of Red Sox success (circa 02-07), one believes that they succeeded because they were able to outthink the room with advanced analysis coupled with financial means.

    As teams caught up in terms of analysis (ie more sabermetrically inclined GMs assembled analytical FOs), the Sox stayed ahead by flexing their financial clout to insure they got the players they wanted in FA.

    But fastforward a decade and the league has, generally speaking caught up to the point where FO is not an advantage, and–if I read your take on salary inflation going forward–payroll as well. If this is the case…where does this leave them?

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  5. Basebull says:

    Jayson Werth broke baseball.

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  6. Josh Amaral says:

    This is all very interesting.

    I just wonder how much of it is kind of circular reasoning. As in, if the Red Sox spent the last few years paying for exact value as opposed to paying market price for players they evaluated to be good, would they have still made the same decisions?

    I’m guessing probably, maybe with the admittedly large exception of Crawford. But the calculus used to evaluate Crawford in the first place was a detour from either method of thinking we’re talking about.

    The issue here seems to be this: If you “value” a player at 12m a year, but his market value is 14m and other teams are offering that, should you budge? What if we play with other variables within the same problem, i.e., “this player will put you over the top.” This is a situation the Red Sox have already been in, explored, and decided on.

    Distancing themselves from their evolved point of view after deals didn’t work out and going back to a more basic valuation process might be dumb. I think the solution is more along the lines of just committing money to better players. The flaws were in the evaluation process in the first place, not the money they paid.

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  7. TLD says:

    How long can deals like that last? The Yankees are trying to get under the luxury tax, the Dodgers are going to run out of roster spots for 100 million plus guys, and the other teams in the league simply aren’t going to have the money to sign superstars to 200 million dollar contracts. I would guess that fairly soon we’ll see contracts drop in value as the big players fall out of competition for the superstars.

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    • Josh Amaral says:

      I bet we see some amendments to the CBA luxury tax/amateur spending before it’s all said and done.

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    • chuckb says:

      About the luxury tax, won’t the influx of revenues raise the luxury tax level or is that set in stone as long as the current CBA is in effect?

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  8. 81 says:

    MLB tv makes avoiding cable entirely too easy

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    • Anon21 says:

      Only if you live out of the team’s blackout zone, which the majority of fans of any given team don’t. And MLB has also gone to some lengths to ensure that is a very imperfect substitute for cable TV (the atrocious Saturday blackouts, the unavailability of postseason games online).

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      • 81 says:

        Well I’m fortunate enough to be a Chicago fan in the Milwaukee market and get all Cubs games unless they’re in Milwaukee (which just lends greater incentive for me to go to games when they’re a ten minute drive away, which is the intention of network black outs) or Chicago, which if I’m really desperate, I’ll run my router through a out-of-network proxy. Usually I prefer the Cubs radio broadcasts to television anyway, so if I’m fiending for baseball I’ll passively watch another game while I actively listen to my awful Cubbies. I realize now that no one cares about my methods of baseball consumption, but I’m fairly high right now so this sort of thing happens.

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      • Nancy Reagan says:

        Just say no.

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  9. Braves Fan says:

    Dave, any thoughts on how this affects teams with bad TV deals like the Braves? I know you say above that all the sharing will help the low market teams, but having a HORRENDOUS TV deal has to hurt them.

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    • Mike says:

      Yes, but the point is it may hurt them less. They will still likely become a mid/low payroll team in 10 years – but if teams continue to shy away from hitting the fixed luxury tax threshold, while more money comes in to everyone, there could be a consolidation of payrolls.

      Still terrible TV deal for a Braves team that could benefit more than just about anyone from an excellent TV deal. They have to have the highest “too far away to go to games” to “fans” ratio in the league.

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  10. MustBunique says:

    Anyone else think that not firing Bobby V and keeping their groomed scapegoat into next season would be a possible move for the Sox? Just in case things don’t go well next year it would be nice to be able to pull the switch on him and appease fans and the local media. I like this move only if a really good managerial candidate is not available for them (like last offseason).

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  11. Tom says:

    How does the 8% national TV growth rate compare to historical increases? Some context is necessary – is this an increase? decrease? same as past growth?

    “Continuing inflation of free agent prices seems inevitable”

    Hasn’t the cost/win on the free agent market been relatively flat for the last 4 years? I get that you’ve been driving the inflation bandwagon for the past two offseasons, but do the numbers support this narrative? You were saying 5mil/win two offseasons ago.

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    • Bookbook says:

      I don’t know the numbers, but at least the high- profile deals (Crawford, Werth, Felder, Pujols, Votto) have supported the narrative of ever-rising $/expected win.

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  12. DodgersKingsoftheGalaxy says:

    “sports is proving to be one of the main television events that is both DVR-proof”
    Tell me about it, just try watching a game on tape delay and watch everyone get all butt hurt when they find out

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  13. Ben says:

    Incredibly thought-provoking stuff, Dave.

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  14. Patrick says:

    Of course, we could always just assume that Theo Epstein cut a deal with Cubs owner Tom Ricketts shortly after he bought the team back in 2009, and decided to manage like there was no tomorrow, because he wasn’t planning to be there when tomorrow came. That would explain how the reveryone knew the Cubs were interested in Theo Epstein (and Epstein was interested in the Cubs job) months before the Cubs had permission to talk to Epstein, why the Red Sox suddenly abandoned the statistical approach that had worked so well for them before in December of 2009, how the Padres were able to hire their current GM nine months before their previous GM left, and how Theo Epstein managed to trade the Red Sox best prospect — TO HIMSELF.

    In a less conspiratorial vein, I think the reality is that the CBA has always provided bad teams the opportunity to compete, they just didn’t fully exploit it. Because, unlike in other sports, players can be “stashed” in the minors, teams can remain bad for a couple of years and stockpile real quantities of talent. It is no coincidence that the Nationals are arguably baseball’s best team after a half a decade of high picks (watch for the Astros in a few years).

    Small market teams didn’t take full advantage of their draft position, often drafting “safer” cheaper players instead of the best player available, and they didn’t use the leverage provided by the CBA to lock up their players to long-term contracts. Now they are, and as a result, the pool of premium talent available later in the draft or via free agency has shrunk (and some new big market teams have waded into the pool).

    It is very hard to build a winning team without either high draft picks (or selling high on premium veterans). A short list of the players drafted before the Red Sox first pick would include: Justin Verlander, Clayton Kershaw, Mike Trout, Jared Weaver, Steven Strasburg, Troy Tulowitzki, David Price, Evan Longoria, Buster Posey, Chris Sale, Bryce Harper, Ryan Zimmerman, Tim Lincecum, Josh Beckett, Adrian Gonzalez, Mark Texeira and there’s plenty more. I think the reality for the Red Sox isn’t so much about better free agent signings as it is about accepting the fact that every year you are competitive is year you are further removed from access to about half of the talent pool. With the possible exception of the Yankees, it is impossible to field a playoff team year after year; every now and then you have to re-tool. You either have to occassionally be bad (and draft high) or occassionally sell high on productive veterans (and be bad as a result).

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  15. tyke says:

    “an historical”

    please make this die. the ‘h’ is not silent. ffs.

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    • kp says:

      This, and pronouncing “human” as yoo-man are quite possibly the worst things ever.

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    • Michael says:

      When the stress is on the second syllable, the h tends to soften so much it nearly vanishes. That is why, historically, the article an has been used before words like historic, habitual, hysterical. When the stress is on the first syllable (hot, happy, hectic), the h is a hard consonant and the article a is used.

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  16. Ivan Grushenko says:

    So James is saying that if the Red Sox value say….Zack Greinke at $20M/year for 5 years and someone offers hims $25M/year for 5 years they’ll pass? OK, now let’s see how long they keep this up after foregoing all the Greinkes and finishing 3rd or 4th a few years in a row and revenues start to get affected. At some point the Red Sox have to understand that their price should be above just about everyone else’s price for FA, other than the Yankees and maybe Dodgers and Angels. James is actually saying that they won’t chase the best players just because of price? Not only do I not believe they’ll actually do that if the alternative is missing the playoffs year after year, I do not believe they should do that.

    Is anyone seriously saying that they’d be getting all this flak for Gonzalez and Crawford if they had been in the postseason the last couple of years and Crawford had been a healthy player, even at 3.5- 4 WAR? Hah.

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  17. Steve says:

    haha. Dodgers. Stupid

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