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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.