Updated: Dec 3, 2021
We are less than two weeks from the MLB/ MLBPA Collective Bargaining Agreement from expiring. Almost from the moment the last agreement was signed in 2016, the players have felt they agreed to a bad agreement. Expect to hear how the current collective bargaining agreement (CBA) is unfair to players and how it must be fixed in louder and louder noises from the players up to and beyond the December 1st expiration date. The real question here is are both sides ready to depart with long term held positions that have facilitated this situation and are they both open to real change. How did we get here?
For most of the first half of my life I have watched the MLBPA own the owners in the labor space. The owners of the game had a unique level of impotence to make key business decisions. In 1994, the owners determined to take charge of at least the financial framework of their business by implementing significant changes. Due to the strike at that time, this cost us the end of the 1994 season and the 1994 World Series. After two plus years of negotiation, court trials, arbitrators, and fan strikes; the historic 1997 CBA brought us the framework for:
- Interleague play
- Revenue sharing
- Competitive balance tax (CBT aka Luxury Tax)
There was a lot of pain in 1994-1997 to get to that agreement, but the consequences of that framework also dominate the current labor landscape. In 2003, the CBT transitioned from a tax on the top 5 revenue teams to the luxury tax model it is today.
It was not until the next CBA in 2003 that a Joint Drug Agreement was implemented to start testing for PEDs. Baseball owners AND the players union soon began to realize they jointly needed to get a grasp of this issue as their sport was severely tarnished. MLB and its players union have spent more than 10 years strengthening this policy and making punishments harsher. This has had an almost unspoken impact on the artificially elongated careers of MLB players. The impact of the Joint Drug Agreement is also part of the current labor landscape.
To find out more of the history of the CBA, consult Cot’s Baseball Contracts as I have here (https://legacy.baseballprospectus.com/compensation/cots/league-info/cba-history/). In looking through this history, I believe the 1997 and 2002/2003 CBAs are foundational for the changed business model that the MLB operates in today.
Before we dig into the details, let’s line out the fundamental issue that separate the owners and players.
Maury Brown at Forbes.com provides some excellent analysis of the business of baseball and the current situation here:
The first article I will quote is from late 2019 because it shows a VERY worrisome trend for the players and why they are so adamant that the CBA needs to be changed.
The financial challenge is the 2020 – est. $3.66B (per statista.com) - and 2021 seasons have not been normal revenue and salary years for either side. Players are right to look at the trend line up to 2019 and scream that the current deal is not fair to them receiving a reasonable ratio of the revenues. The Owners are right to say after their losses in 2020-2021 that the business of baseball needs fundamental changes and more secure finances to weather unforeseen dynamics.
The second article from Maury Brown at Forbes describes the current negotiations and posturing between the two sides. https://www.forbes.com/sites/maurybrown/2021/11/11/mlbs-second-proposal-to-the-players-shows-rob-manfred-out-to-radically-alter-economics-of-the-game/?sh=4c8ceec0f606
Quoting from it
“Since the inception of the MLBPA, two core pieces have been in place that altered not only baseball but professional sports as a whole: salary arbitration and free agency. The radical changes that the league is proposing to the players would upend both aspects.
The league believes that the salary arbitration system creates acrimony between the players and clubs given that clubs offer a salary figure for the following season lower than the player seeks. It should be noted that the overwhelming majority of these players and clubs reach settlements without heading into arbitration hearings where a panel of three arbitrators determines the club salary offer or the players asking salary.
At its core, the proposed system to replace salary arbitration places further restrictions on a player’s ability to negotiate for their salary. After slotted bonuses for the amateur and international draft picks, if the change were accepted it would leave only free agency as a way for players and their agents to negotiate salaries. The players are trying to claw back from the tightening restrictions around salaries that have occurred over the last two labor deals. Here, the league is seeking another form of constraint thus outlining how far apart the sides are philosophically on matters of economics.”
The players see the current framework as sound with some tweaks including
wanting rules that allow them to enter Free Agency earlier
wanting the league to address tanking clubs that slash salaries
wanting to eliminate service time manipulations that cause teams to gain an additional year of control
wanting to increase the minimum salary
The owners (seen as winners in at least the previous two deals) seem to be proposing fundamental changes that alter the very CBA framework including:
wanting a more solid and LOWER luxury tax cap (from $210M to $180M) with higher penalties for violating it
proposing a salary floor at $100M (this concept is one the players would likely to agree to but at a higher level)
wanting to eliminate service time from determining when a player would reach free agency- instead everyone would reach free agency after 29.5 years old
proposing to eliminate the arbitration system and replace it with a pool system that is a fixed amount for those with 3 years of service time
proposing a WAR based system to establish arbitration compensation
The challenge the baseball world has is the two sides have diametrically opposed goals
want greater freedom and access to negotiate salaries before aging past their athletic peak and deemed not worthy of a long-term deal
want a healthy marketplace where most if not all teams are active
want security and predictability in costs to insure healthy profits
want to reduce financial risk by paying for only for performance without long term commitment
This summarizes the gulf between the two sides. There are other factors that are playing into the state of the game and making additional challenges and opportunities.
What else has happened over the 10-20 year period since the CBT system was installed? Data- mountains and mountains of analytical data teams can use to better evaluate when a player is finished, or his skills are beginning to wane. Teams have access to evaluate multiples of the data that is publicly available. They can make more fact based and less emotional based decisions. This has driven the vast majority of teams to currently similarly value what makes a winning team. The reality for players is that this data revolution has forever changed the negotiations environment. The premium players will get paid immense salaries and years because there are so few of them. The 95 percent of other players won't- ever. The players NEED to negotiate a framework in this CBA for the 95% and know that the 5% will be taken care of by the marketplace.
What has happened in the last few years of the trend when the percentage of player compensation to total revenues has dropped? Several franchises (Cubs, Astros, Rays, among some) have demonstrated a different model for becoming great without necessarily signing the top free agents. This analytically driven model has shown all of MLB that there is merit to not paying aging players and investing time and efforts in getting the best young talent (even if one has to “tank” to do it) and developing that talent.
Impact of the Joint Drug Agreement
Add to this that players are constrained far more by a PED testing regime and older players are not remaining in the game as long and teams will not project a player to be a big contributor past his mid-30s in general. Yes, there are the Verlanders and Gurriels but they are rare. The game of baseball is becoming younger and cleaner.
Although guaranteed contracts are not mandated by the CBA, they are the norm in the MLB. This means a team is committing to take the full financial risk for whatever is agreed to with a player during negotiations. Because of this risk, teams are mitigating the risk by shortening the length or reducing the value. There seems to be far more contracts negotiated with team options and player opt outs because neither side is satisfied with the risk and reward of a pure guaranteed contract. Guaranteed contracts are also getting shorter.
Small Market Teams
Many small market teams seem to be following the lead of the strategy laid out by the Astros and Rays. A small market team will oscillate between making a competitive run and pulling back costs when a majority of their players go past their prime or shedding those players before they get expensive. This leads to several teams not spending even half of the CBT and not engaging in free agency in a meaningful way while they are in rebuilding mode.
Team Control and Arbitration
Multiple CBAs have included the system of team control of players for six years in the MLB. There are nuances where teams tweak call-up dates to get an additional partial season of control. Teams have been careful to only promote players when they are ready (some might argue past ready) to the big leagues. If a player is promoted to the MLB at age 23 or 24, they are not hitting free agency until age 29 or 30. At age 30, they are generally viewed due to analytical analysis to have a maximum of four years of peak production left. This means for many MLB players they have one shot at a free agent contract that will likely be around three years or less. This is the reality of the effect of the youth movement in MLB, banning PEDs, CBA team control parameters, analytics, guaranteed contracts, and the CBT constraining spending and risk taking. It is a new world where all these factors are coming together at once.
Let’s look at some data relative to MLB contracts. This will help clarify why the sides are taking the positions that they are.
Free Agent Contract Length
One-year contracts make up a whopping 44% of all free agent contracts. Two-thirds of all contracts are three years or less. Less than 10% of the 327 contracts are for seven or more
The players see this data and are immediately frustrated that they are unable to negotiate longer deals. What factors are making this difficult?
Age when FA Contract is signed vs. Contract Length
If we plot all the FA contract lengths vs. the player’s age when he signed those contracts it looks like this.
Five-year deals are non-existent after age 32. Four-year deals are non-existent after age 34. If we show how many contracts are signed at each age as well as the average contract length, we see how rare multi-year year deals are after age 33. In
fact, the average contract length drops dramatically from age 27 (5.6 years) to age 28 (3.2 years). Does it make sense why the owners want to start free agency at age 29.5 yet?
Clearly the free agent contracts get shorter with the age of the player signing the contract. This dynamic won’t change with this CBA. Both sides are trying to drive the age when players sign their big contracts in opposite directions.
Age when FA Contract is signed vs. Contract AAV
Not only do contracts get shorter as a player ages, the contract AAV drops until only the very best players are getting one or two year deals late in their careers (as Verlander just did.) Below is a plot of the active contracts AAV vs. the age when the player signed the contract.
Plotting the average AAV at each age shows the trend even more clearly.
Trout, Betts, Lindor, and Arenador all signed mega top 10 contracts at age 27 which causes the spike at that age.
Age when FA Contract is signed vs. Total Contract Value
Here are the contracts with a total value greater than $200M. (Contract data is from Spotrac)
The entire database plots out like this. Notice how teams strongly reduce risk (long-term investment) after age 32. As shown in the table, Greinke’s contract is the ONLY $200M value contract for someone 32 or older. In fact, Donaldson at $92M is the next highest value contract for players 32 or older.
The average contract value tracts closely with the AAV previously shown dropping off at age 28 and continuing to drop with age.
What if we were to consider the total value owners have committed to contracts signed at each age? This would show you their real commitment to free agents and further help one understand why they are attempting to delay free agency to after age 29.5.
It is almost shocking to see how much MLB baseball is a young man’s game at this point. Owners have less than 10% of their total contract commitment allocated to players older than 31.5 years old.
Numerically, dwell on these numbers.
On one hand, the owners are proposing that players do not enter free agency until 29.5 years old, and at the same time they are only allocating 38% of all of their free agent contracts to players 29.5 and older, Age 29.5+ players are on average getting $26M total value contracts for only two years (AAV $13M/year.).
Imagine being told in your industry that you will not have the freedom to change companies until after the time when other companies are VERY unlikely to really want you to work for them. THAT is what the owners just proposed.
THIS is the free agency system the owners are offering the players! It is ludicrous and the players should file a grievance with the NLRB immediately that the owners are negotiating in bad faith.
Alternatively, the players union could offer to accept this framework ONLY if the age was set at 25.5 or maybe 26.5. That would make it clear to ownership how patently unfair their offer
Before I continue, let's review Carlos Correa's apparent contract expectations in the context of all of the data I showed
10 Years- only 9 of the 327 Free Agent contracts in the Spotrac data base are for 10+ years
$32M+ AAV- only 8 of the 327 Free Agent contracts in the Spotrac data base are for $32M+ AAV
$320M Total contract value- only 7 of the 327 Free Agent contracts in the Spotrac data base are for $320M+ Total Contract Value
Only TWO contracts in MLB are for 10+ years AND $32M AAV
Trout and Lindor
With all due respect to Correa, he is not Trout
With all due respect to Lindor,
he fleeced the Mets and everyone knows it
if anyone gives Correa Lindor money, they are just as stupid as the Mets were
Aging fan base and the recent slowing of revenue growth
While most of the past 25 years have experienced rapid revenue growth, the past three to five seem to be the exception and there are some very disturbing trends. Much of the revenue growth in past generation was driven by Regional Sports Network growth, a new generation of stadiums designed to grow gate receipts, and revenue advances with apps, MLB TV, and MLB Network. This growth has slowed as these advances have matured. RSNs are shedding viewers as more and more people cut the cord from cable or satellite TV. Recently Street & Smith’s Sports Business Journal and Magna Global reported the average age of a baseball viewer is 57 years old. Younger generations are not engaging with baseball, and this will cause problems with revenue eventually. Teams are aware of these macroeconomic threats to the game and this impacts the free agent marketplace.
While both sides are struggling to adopt to this new reality, free agent negotiations seem to be heading into later and later in the calendar. Neither players, who want the same deal players 5-10 years ago would have got, nor owners, who are concerned about the long-term prospects for the game and see cheaper options with younger players, are willing to give in. However, after two seasons have seen revenues dramatically drop due to COVID, MLB cannot afford a prolonged labor crisis which impacts a third season.
This is the environment surrounding the CBA negotiations today. How LarryTheGM would solve the CBA impasse is coming next.