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Are MLB Free-Agent Contract Prices Poised to Skyrocket This Winter?

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Are MLB Free-Agent Contract Prices Poised to Skyrocket This Winter?
Elsa/Getty Images
Obligatory Robinson Cano photo.

Since it's only mid-November, the spending in this year's free-agent market hasn't really gotten going yet. Clubs and players are still in the process of feeling things out, which indeed is what tends to be happening at this point in the process.

But we've already seen Tim Lincecum, a pitcher with a 4.76 ERA over the last two seasons, sign a two-year, $35 million deal. If ever there was a sign that the spending this winter is going to be wild, maybe that was it.

There are, however, other signs to be read. There are circumstances at work this winter that suggest with a wink and a nod that, yeah, it's going to be a wild one for free-agent contracts.

Andrew Marchand of ESPN New York reported in October that the New York Yankees are planning a $300 million spending spree, which is significant given how quiet they were last winter. And while they do have a luxury tax-imposed ceiling, they did have an awful lot of money come off the books at the end of the season. For lack of a better way to put it, the Yanks should be "back" this winter.

Other big-market teams like the Los Angeles Dodgers and Boston Red Sox are bound to be notable players as well, as the Dodgers are baseball's most free-spending team and the Red Sox once again find themselves with an assortment of holes to fill.

Just as important, however, is the fact that all clubs have more spending money to throw at free agents.

That's thanks to the new national TV deals that go into effect in 2014. MLB inked new deals with ESPN, FOX and Turner Sports worth a combined $1.5 billion, or twice as much as the combined $750 million the league's deals with those networks had previously been worth.

The translation, as Wendy Thurm of FanGraphs and many others have outlined, is an extra $25 million of spending money per year. Or, if you prefer, an extra Josh Hamilton for everyone.

Beyond all this is the fact that free-agent prices have already settled into an upward climb in recent winters.

Rick Osentoski-USA TODAY Sports

Pictured above are Prince Fielder and Albert Pujols. They both signed free-agent contracts during the 2011-2012 offseason: Fielder for nine years and $214 million with the Detroit Tigers, and Pujols for 10 years and $240 million with the Los Angeles Angels.

Those weren't the only big contracts signed that winter. Jose Reyes signed for over $100 million, and three others signed deals worth at least $50 million. Basically, 2011-2012 was one of those offseasons.

Based strictly on appearances, it might seem that spending was relatively subdued last winter. The most expensive deal was Zack Greinke's $147 million contract with the Dodgers. The only other player to sign for more than $100 million was Hamilton. Nobody else came within $20 million of a $100 million deal.

But you know that widely held notion about appearances being misleading? Yeah, it applies here.

With a little help (OK, a lot of help) from MLBTradeRumors.com's transaction tracker, here's the progression of the average annual value of free-agent contracts since the 2006-2007 offseason:

Data courtesy of MLBTradeRumors.com.

Just to clarify, this is counting only signings. Not signings and extensions (but we'll have more on those soon enough).

Also, this is only the contracts that were for at least one year and for a certain amount of guaranteed money, and it's only that guaranteed money that's being counted. Option-year dollars were not factored in.

Lastly, international free-agent signings weren't included, as they're apparently different from regular free-agent signings. Especially those involving the Japanese posting process, as players who have come through that (i.e. Daisuke Matsuzaka and Yu Darvish) aren't realistically "free" agents.

These notes aside, the piece-by-piece breakdown looks like this:

MLB Free Agent Contract Breakdown
Offseason Total Deals AVG Years AVG Value (M) AVG AAV (M)
2006-2007 125 1.8 $12.53 $6.96
2007-2008 87 1.6 $12.07 $7.54
2008-2009 104 1.6 $10.92 $6.83
2009-2010 118 1.4 $6.85 $4.89
2010-2011 128 1.6 $10.10 $6.31
2011-2012 109 1.6 $11.84 $7.40
2012-2013 110 1.7 $12.79 $7.52

MLBTradeRumors.com

After tons of money was tossed around in the 2006-2007 and 2007-2008 offseasons—highlights include Gil Meche and Gary Matthews Jr. getting $50 million deals and Alex Rodriguez signing his $275 million deal—things went down to earth in a big way in 2008-2009 and 2009-2010.

The 2008-2009 offseason was the one in which the Yankees splurged on Mark Teixeira, CC Sabathia and A.J. Burnett while guys like Derek Lowe and Ryan Dempster signed for over $50 million, so there was some good money being tossed around that winter. But the average value of a one-year deal that winter was only $2.38 million, easily the lowest of the last seven offseasons.

The opposite happened in the winter of 2009-2010. Only Matt Holliday got a $100 million deal, and the average annual value of a multiyear deal was for 2.6 years and $20.27 million. That's an average value of $7.8 million per year. There just wasn't a lot of star power on the market to drive prices upwards.

That obviously changed in the winter of 2010-2011, which was when Carl Crawford, Jayson Werth and Cliff Lee all signed $100 million contracts. There was plenty of star power on the market again in 2011-2012, so it's no surprise that prices escalated again.

This, however, doesn't explain what happened in 2012-2013. The best players on the market were lesser superstars like Greinke, Hamilton and not-quite-superstars like B.J. Upton and Anibal Sanchez. On top of that, we saw the new qualifying-offer system hurt the values of Nick Swisher, Michael Bourn, Adam LaRoche and Kyle Lohse.

In light of all this, it's odd that prices escalated again. But given the circumstances at play, it actually makes sense that they did.

While there wasn't an abundance of huge deals like there had been in past offseasons, the 2012-2013 offseason did see a nearly unprecedented number of multiyear deals get made. A total of 46 deals for a minimum of two years were signed, the most since there were 50 in the 2006-2007 offseason.

Just as significant is the fact that 19 of these 46 deals were for at least $20 million, or over 40 percent of them. Of the 50 multiyear deals that were signed in 2006-2007, 18 were for at least $20 million. That's 36 percent. So where last offseason was lacking in monster-sized deals, it made up for in decent-sized deals. 

Frank Victores-USA TODAY Sports
The small-market Reds gave Jonathan Broxton $20 million, because sometimes life makes no sense.

It wasn't all rich teams doing the spending either. The Cleveland Indians handed out deals worth an excess of $40 million to Swisher and Bourn, the Atlanta Braves gave Upton a $75 million deal, and the Cincinnati Reds, Kansas City Royals and Milwaukee Brewers all handed out decent-sized deals as well.

Why so many decent-sized deals?

Well, it's not insignificant that the Dodgers and Red Sox did their part. But Cleveland's dealings were significant because of how it took advantage of the new qualifying-offer system. The Indians held a protected top-10 draft pick, so signing Swisher and Bourn didn't hurt them as much as it would have hurt most other clubs.

But one also figures that many of last winter's deals were partially justified on the knowledge that extra TV money would be there in 2014. The league's new national deals were completed in early October of 2012, well before the offseason spending began. The 2012-2013 offseason was conducted with that money looming in the near future.

Now that the once-near future has arrived, it's the players' turn to use that money to their advantage. Whereas teams appeared to be anticipating the new TV money last winter, players would appear to be demanding it this winter.

Robinson Cano, for example, wants $300 million. Jacoby Ellsbury is looking for Carl Crawford money, or around $142 million. Shin-Soo Choo is looking for Jayson Werth money, or around $126 million. A $100 million contract has been rumored for Brian McCann. Shoot, even Ervin Santana wants $100 million.

Not everybody is going to get what they want. Demands such as these are largely cases of players and their people aiming high. Some of them are going to be talked down to more reasonable figures. Ties to draft-pick compensation will likely cause some to settle for deals worth less than what they had in mind.

But because these are some good players we're talking about, and because free-agent prices are trending upwards, and because the extra money is officially there to be invested into pricey free agents, the aforementioned players and many others ought to do very well. 

That, to be frank, is as much a fair warning as it is a prediction.

I get the sense that many of us are still programmed to react to any contract worth, say, $15 million per year as an appalling amount of money. But in a day and age when more money is available to be spent and free-agent prices are rising along with the average MLB salary, well, it's really not. What's going on now is a whole new ballgame.

For what it's worth, however, I do think there is a limit to how high free-agent prices will go this winter. Some money is going to have to be saved for in-house dealings, which is indeed where things are getting really expensive.

Dilip Vishwanat/Getty Images
Pictured: Baseball's most obvious extension candidate.

While extra TV dollars are there to be spent this winter, there are surely going to be more than a few clubs who choose not to put all that money into the free-agent market. Some clubs might figure that money is best set aside for their own players.

That would be understandable. Because if there's one thing rising faster and more steadily than the cost of a free-agent contract, it's the cost of an extension.

With another assist from MLBTradeRumors.com, this is what's been going on in the extension business over the last several years:

MLB Extension Breakdown
Year # of Deals AVG Years AVG Value AVG AAV
2006 39 3.4 $24.06 $7.08
2007 42 3.3 $25.21 $7.64
2008 42 3.9 $29.26 $7.50
2009 35 2.7 $18.64 $6.90
2010 47 3.4 $29.79 $8.76
2011 47 3.4 $32.29 $9.50
2012 63 3.5 $34.08 $9.74
2013 22 4.4 $56.93 $12.94

MLBTradeRumors.com

In line graph form, that last column looks like this:

Data courtesy of MLBTradeRumors.com.

Things were already trending upwards before 2013. And while a relatively small handful of contract extensions were signed, they were worth a huge amount of money.

Like with the free-agent market of 2012-2013, this is another area where you get the sense that clubs have been spending with the incoming TV money in mind. And looking forward, it's fair to expect GMs to continue to be keen on getting extensions done.

Just because they've become enormously expensive doesn't mean they're bad business, after all. Spending money on free agents oftentimes means spending money on players in the late 20s and early 30s who only have a couple of prime years left.

More often than not, big-money extensions go to players who are earlier on in their careers. Theoretically, sealing the deal on an extension means paying top dollar for several prime years rather than top dollar for a couple prime years and some post-prime years.

The rising cost of extensions didn't negatively impact the free-agent market of 2011-2012 or 2012-2013, nor is it likely to negatively impact this year's free-agent market. There's too much money and star power to go around for that to happen.

Going forward, though, I have to think that free-agent prices will level out before extension prices do. Once the new TV money ceases to be "new" money and just becomes plain old money, teams will be operating with normalized budgets that will force them to more carefully ponder how to get the most bang for their buck. They're bound to prefer extensions over free-agent deals.

In other words, perhaps we're all best off enjoying the high-priced craziness that's going to happen this winter. It could well be a one-and-done thing.

 

If you want to talk baseball, hit me up on Twitter.

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