Why stars like Cano, Pujols are worth $240M -- and maybe more
One of the more fitting opening series matchups, especially if you believe the hysteria that baseball contracts are handed out only by the dumb and the loony, finds Robinson Cano and the Mariners visiting Albert Pujols and the Angels. Each of them is being paid $240 million over 10 years. The knock is that most of those seasons will be their decline years as they collect guaranteed money past their 40th birthday.
Too much money over too many years -- that's the common criticism from pundits and fans, not just for the contracts of Cano and Pujols, but also for those of Miguel Cabrera ($248 million, eight years, through age 40), Joey Votto ($225 million, 10 years, through 39), Prince Fielder ($214 million, nine years, through 36) and Joe Mauer ($184 million, nine years, through 35). Those are the six longest contracts signed in the past four years -- none of which have been handed out by a team from New York or Boston.
The complaining has become a cliché. You take the player's age and his projected WAR and decry that he is not "worth" the money. All that is required to lodge such complaints is that you totally ignore current market conditions, precedents, the growth of revenues and the halo effect of securing the services of a rare available superstar.
When you actually step out of a vacuum and into the real world, you understand that there is so much money in Major League Baseball these days and for the foreseeable future that teams no longer value free agent years on performance alone. Built into contracts are the costs of acquiring or keeping the player -- that is, what it costs to keep him away from other teams -- and the market value of comparable contracts. If Pujols gets 10 years starting at age 32, for instance, you are not going to sign Cabrera for five years at age 31.
(And the idea of paying more money over a shorter term doesn't make sense because of luxury tax implications. Better to amortize the investment over more years to reduce the average annual value, the key number that is applied to luxury tax calculations.)
If you think owners are overpaying players, understand this simple fact that is driving the new model of "value:" owners are growing revenues faster than the money they are paying out to players. In 2002, according to MLB's figures, baseball generated $3.6 billion in revenues and paid players 63 percent of the pot -- an all-time record percentage of revenues for the players. Last year, baseball took in more than $8 billion in revenues, of which the players received "only" 51 percent of the financial pie.
Commissioner Bud Selig said recently that baseball revenues this year could top $9 billion -- which would represent a doubling of revenues in the last 10 years. And as people worry about players being "overpaid," less of those revenues are actually going to the players.
Some media estimates of the players' take of revenues last year put their cut at below 50 percent. But some of those estimates are due to oversimplified accounting. MLB's figures, which put the take at between 50 and 55 percent through the past decade, include these factors:
• The cut of player compensation includes about $184 million in benefits.
• The total MLB revenues do not include income from MLB Advanced Media, a highly successful limited partnership of club owners that was founded in 2000. MLBAM generated about $650 million in revenues in 2012, doubling its revenues in just six years. MLBAM has been so successful as a state-of-the-art streaming and hosting service that baseball-related revenues now account for less than half of the company's total revenues. MLBAM is said to be so successful that the inside joke among owners is that owning one-thirtieth of the company is a major incentive to buy a club in the first place.
• Baseball's new national television contracts kick in this year with an average annual increase of $788.3 million, or an extra $26.3 million per team per year. But in actuality, teams will see far less than $26.3 million in additional TV money this year. That's because the annual TV payments are not paid equally over the next eight years (the total from the network partners is below average this year) and also because Selig has designated that a chunk of those annual payments (estimated as high as one-third) be socked away in the MLB Central Fund rather than immediately distributed in full to the clubs. Think of it as "allowance" money.
Now re-think what Pujols means to the Angels and what Cano means to the Mariners in an industry in which revenues double every 10 years. Pujols was 31 years old when he went on the free agent market after the 2011 season. His career at that age was most similar to all-time greats such as Jimmie Foxx, Hank Aaron and Willie Mays. Four years earlier, the Yankees gave Alex Rodriguez -- also 31 at the time -- a 10-year contract worth $275 million.
Angels owner Arte Moreno was interested in signing Pujols. Moreno had bought the team in 2003 and still was trying to build his first World Series team. He first looked at Pujols' value in the kind of vacuum critics and fans like to use. He decided $200 million for eight years sounded right.
"In a perfect world," Moreno told me in 2012, "it was going to be eight 25s. In a perfect world. I don't think you sign him in a perfect world. Number one, you have the A-Rod contract."
Moreno smiled. He is a self-made billionaire. He is not dumb. "I try to be in a situation where you're not stupid," he said.
The perfect world of cost analysis does not exist. Moreno knew that the Rodriguez contract and interest from the Cardinals to keep Pujols and from the Marlins to seize him also were factors. Moreno also knew his regional TV contract was about to triple in annual value, to about $150 million per year, that his club had no outstanding debt, that his team was riding a streak of nine straight years of drawing at least three million fans, and that signing a Hall-of-Fame bound hitter like Pujols would make his team a true national brand.
Factor in the market forces and the soaring revenues, and what was $200 million in a vacuum became $240 million in reality. The contract calls for Pujols to be paid $30 million when he is 41. Moreno is a smart man. He can't truly believe Pujols will be playing liked an MVP at that age. But you don't value a contract so fundamentally any more. There is so much money in the game and so much emphasis on the acquisition of assets that the situation recalls the story about the billionaire who "overpaid" for a $25 million yacht. You can argue over the price, but the bottom line is that the billionaire has a $25 million yacht at his dock. Pujols is Moreno's yacht.
Pujols hit .190 in his first 30 games with the Angels -- falling into the common trap among high-profile free agents who switch teams by trying to justify the money all at once. After that he looked more like the same, dangerous Pujols, with an impressive slash line of .309/.370/.574. The next season, 2013, he never played a day healthy. Plantar fasciitis left him with pain in his foot and an unstable base for hitting. He hit .258 in 99 games before the tendon in his foot finally tore, ending his compromised season.
Now he is being held up as a reason why 10-year contracts are bad investments, as if the guy who hit like Foxx suddenly forgot how to hit. If he is healthy, Pujols will hit. Ted Williams played 10 more seasons after he was 31 and batted .336 with 23 homers per year. Hank Aaron played 11 more seasons after he was 31 and hit .285 with 32 home runs per year.
There is also a value in simply associating such a star player with your franchise. In 2000, the Reds traded for Ken Griffey Jr., then 30 years old, and signed him to the richest contract in baseball history: $112 million over nine years. They bought the decline of his career -- he batted .270 for Cincinnati with an average of 23 home runs per year, down from the .292 with 32 homers he averaged in Seattle. But Griffey made the Reds relevant, if not a winner. Their attendance in his first season in Cincinnati (2.5 million) remains the second-highest total in franchise history, trailing only the world champion Reds of 1976.
During Griffey's tenure in Cincinnati, the Reds were sold in 2006 to Bob Castellini for $270 million. Eight years later, the value of the Reds has more than doubled, to $600 million, according to Forbes.
Like the Reds with Griffey and the Angels with Pujols, the Mariners saw Cano as the rare opportunity to add an all-time great hitter to a brand that needed polishing. Meanwhile, revenues since Griffey signed his contract have more than doubled -- and thus so have the prices for a superstar player.
Seattle had suffered four straight losing seasons and watched its paid attendance cut in half over 12 straight non-playoff seasons. The Mariners knew all about the attrition rate for middle infielders; they don't age well through their mid-30s. In "a perfect world," maybe Cano made sense in the range of $175 million over seven years, the offer made by the Yankees to keep him. He would be 37 in the last year of the deal, and most likely not playing second base or an impact hitter or both.
Over the past 80 years, only two second basemen older than 34 have had more than one season with an OPS+ greater than 120: Jeff Kent and Lou Whitaker. The clubs know all about these actuarial tables, and a lot more. But the Mariners also knew that to get Cano they had to outbid the Yankees by a clear margin. They had payroll flexibility; they had no financial commitments beyond 2014 other than to franchise pitcher Felix Hernandez.
So Seattle invested $240 million in 10 years for Cano. It wasn't because they think he is going to be an impact-hitting, Gold Glove second baseman at ages 38, 39 and 40. It's because a brand in need of immediate help saw a rare opportunity to get one of the five best hitters in the game. The additional years were folded into the cost of acquisition. By the last year of the deal, the way owners figure it, revenues may have doubled again.
The Yankees signed Derek Jeter in 2001 to a 10-year contract. His salary rose from $11 million in year one to $21 million in year 10. In that span baseball revenues rose from $3.7 billion to $7.0 billion. A $24 million player today may be a $48 million player in 2023 -- or at least that's how owners are conditioned to think in this Golden Age of Growth.
Understand this: Owners don't seem to be as worried as you are about how long and how expensive these contracts appear today. Complaining about baseball contracts is a tradition older than the seventh-inning stretch. Whether it's Pujols, Cano or Cabrera, critics keep complaining about the "albatross" that these contracts will become, as if it is their own money being spent or that revenues will stagnate. (To be fair, there are some media observers who do caution about TV money as a bubble due to burst, especially if legislation advances to "unbundle" cable and create a la carte choices for consumers.)
The opening series between the Angels and Mariners should stand not as a warning of impending doom, but as a symbol of the strong financial health of the game. Sixty years ago, stars like Pujols and Cano never would have left the Cardinals and Yankees, respectively, because there was no free agency. If you think those were the "golden years" of baseball, you should know that players were paid only 18 percent of total revenues in the sport in 1950. Sure, it was a golden era -- for the owners.
Twenty years ago, stars like Pujols and Cano would have signed free agent contracts that guaranteed only five or six years. In 1993, for instance, Barry Bonds was 28 years old and the reigning MVP and Greg Maddux was 27 years old and the reigning Cy Young Award winner. They signed as free agents for just six and five years, respectively. Revenues were just $1.9 billion.
It's a whole new ballgame today. Pujols and Cano can sign contracts that outlast their expected impact on the field because there is that much money in the game today and that much money expected to keep rolling in tomorrow. Whether baseball is that smart or that serendipitous, we live in an age in which technology has made live content the most valuable property for an entertainment-hungry American audience. And baseball, with its 2,430 games every year, is the king of all sports when it comes to an inventory of live content. If baseball builds upon this live content by continuing to scale up internationally -- that's why we have the World Baseball Classic and 4 a.m. games in Australia -- revenues may grow even faster than doubling every 10 years the way it has for the past two decades.