The Rising Price and Length of Free Agent Contracts

The 2013-2014 free agent season isn’t over yet. Ubaldo Jimenez, Ervin Santana, A.J. Burnett, Stephen Drew, Kendrys Morales, Nelson Cruz, and Bronson Arroyo are still on the market and in most cases are looking for multi-year contracts. Between just those seven, I’d imagine MLB teams will probably commit somewhere between $250 and $300 million, and when they do, they’re going to push total spending on free agent contracts handed out this winter over $2 billion.

I’m not breaking any news here, but the rapid increase in free agent contracts over the last five years is still pretty staggering. Just for fun, I pulled all the data for Major League contracts signed for each of the last five years from ESPN’s free agent tracker, and dumped the data into a spreadsheet. Here are some total numbers for each of the last five free agent classes.

Year MLB Contracts Multi-Year Contracts Total Years Total Dollars Average Years Average Salary
2009 121 32 174 $846,795,000 1.4 $4,866,638
2010 124 43 198 $1,305,955,000 1.6 $6,595,732
2011 106 30 182 $1,366,988,058 1.7 $7,510,923
2012 89 42 165 $1,337,125,000 1.9 $8,103,788
2013 89 48 184 $1,775,075,000 2.1 $9,647,147

We already have seen more multi-year contracts signed this off-season than any of the previous four, and depending on how many of the second tier pitchers — Chris Capuano, Paul Maholm, Jason Hammel, etc… — land two year deals, there’s probably another 10 to go. If a couple of the available relievers end up snagging two year contracts as well, we could see the off-season end with 60 multi-year deals, almost double the number given out five years ago, and that’s with a smaller total number of MLB contracts handed out.

And the overall annual average value of contracts handed out this winter is almost exactly double the overall AAV of contracts handed out in 2009: $9.65 million to $4.87 million. We all know that the cost of signing a free agent has gone up a lot since these new TV deals started making MLB teams richer than they’ve ever been, but I didn’t realize just how quickly the total numbers had doubled.

Now, those averages for 2013 will come down a bit by the time the off-season is over, as there aren’t any more mega contracts to be signed that will drive those prices up, and there’s still a decent amount of filler arms that will likely sign low dollar one year deals before spring training opens. But of the 147 players who filed for free agency, we’re probably only looking at 100-115 Major League contracts, and it’s very possible that, for the first time in MLB free agent history, that most of the MLB contracts handed out will be multi-year deals, not one year pacts.

The death of the one year contract looks particularly stark if you focus on the last two off-seasons versus the prior three. From 2009 to 2011, 105 of the 351 MLB deals handed out were for two years or more, or just 30% of the total. In 2012 and 2013, 90 of the 178 contracts we’ve seen signed have been for two years or more, or 51% of the total. Even if we see a late barrage of one year deals, the one year/multi-year breakdown is still going to come in around 50/50 for the second year in a row, after being between 25/75 and 35/65 for most of the free agent periods that came before.

As MLB teams get more secured long term revenues, they’ve been more willing to give out longer guaranteed contracts, knowing that even if their attendance crashes, they’ve still got enough TV money around to pay their future commitments. And, of course, with more money in the game than ever before, the price to sign a free agent even on a short term deal has gone up as well. The surge in total spending has been driven by an increase in both price and length, which has pushed the average overall free agent contract from $7 million in 2009 to $20 million in 2013. The rate of increase has been slightly faster in AAV than in years, but both are clearly trending upwards.

And keep in mind, none of this data includes the explosion of free-agent priced extensions that we’ve seen in recent years. From Joey Votto to Clayton Kershaw — with Felix Hernandez, Justin Verlander, and many others in between — it has become pretty normal for non-free agents to sign contracts that rival the largest free agent deals in any given off-season, and this data isn’t capturing any of those commitments, so the total rise in recent contract expenditures over the last few years is probably even greater than these numbers show.

This is mostly a post without a conclusion, as I’m not really trying to make any broad points other than just to present some information, but I will say this: it is evidently clear that free agent prices have been trending upwards pretty rapidly over the last five years, and there’s no real indication that this trend is going to slow down any time soon, at least while cable companies are tying their long team success to the exclusive rights to show live sporting events. So, in the interest of having a conclusion, I’ll simply say this: perhaps the MLBPA should send a really big thank you card to Netflix, Amazon, Redbox, and all the other companies that are threatening the old cable business models. Major League free agents are getting very rich thanks to those companies existence.

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Matthew Murphy
Member

If the average annual value of these contracts has doubled and the talent has remained roughly the same, that means the cost of a win is increasing much faster than 5% per year (more like 15%) and our contract models ought to be adjusted accordingly.

Brad Johnson
Member

What Dave said.

No five year period of inflation is going to representative. So we absolutely can’t look at recent inflation and just project similar linear growth.

A few teams really pushed their payroll during this period. How much did the Phillies, Dodgers, Rangers, M’s, etc. increase their payroll? Given the luxury tax, how much further could they increase their payroll? What other teams are in line for a big pay day?

Since there aren’t many teams left that are looking at a big TV contract and most of the other teams have already used a lot of their payroll, we should expect a decrease in the rate of inflation sometime within the next few seasons.

Of course, that’s a surface level analysis and assumes that the MLBPA would get the luxury tax threshold substantially increased in the next CBA. If the players are only taking home some 40% of league wide revenue, you can bet some changes are ahead that will increase that number.

Matthew Murphy
Member

Understood, and I guess most of the expected big TV contracts have already been signed, but there are still another 5 teams due for new TV deals in the next 4 years, and another 4 teams in 2019. I’m not suggesting that we calculate inflation at 15% for the long-term future, but I don’t think it’s crazy to think that teams might expect the cost of a win to continue to rise a bit faster than 5%/year for at least the next few years.