Earlier in the week, the Dodgers signed Clayton Kershaw to a seven-year, $215 million contract that covers his final year of arbitration and six seasons of free agency. Kershaw can opt out of the contract after after the 2018 season, headed into his age-31 season.
The deal obviously is massive, and there has been plenty of analysis on the topic. It’s the largest contract ever signed by a pitcher, and he’ll temporarily be paid the highest average annual value of any player in baseball history.
The opt-out clause recognizes that the Dodgers believe he is worth even more than this contract. Alex Rodriguez and CC Sabathia have shown how valuable the opt-out can be; they both cashed in on their opt-outs shortly before showing signs of decline. Others like Vernon Wells demonstrate the risk clubs shoulder by including the opt-out.
Certainly, there is an upside to opt-outs, as a disciplined club (apparently not the Yankees) can let the player walk away without paying the final few seasons. For more on the opt-out component, including some small-sample evidence that teams should avoid paying for the second contract, I recommend this article by Dave Cameron.
The Dodgers were already in luxury tax-penalty land, so Kershaw’s contract represents an additional financial commitment. Unlike the Yankees, who have been dieting for several seasons in the hopes of reducing their tax burden, the Dodgers appear to be unapologetic about their free spending. Perhaps their massive TV deal has something to do with it. That deal, which is expected to be worth an average of $340 million per season, begins in 2014.
The announcement of Kershaw’s mega-deal coincided with this A-Rod related tweet from Jonah Keri:
With nine-figure contracts skyrocketing throughout baseball, it’s surprising that the players’ share of the revenue pie has declined so precipitously. It makes sense, though. A lot of new revenue has flooded baseball in recent years, and it could take some time before a new equilibrium is reached.
TV money used to be a game dominated by the Yankees’ YES network, but now the Dodgers are the big fish, and the Rangers, Mariners, Phillies and Angels have joined the high-stakes club. Based on the chart at the end of this article by Wendy Thurm, those five teams may average higher yearly earnings from their TV deals than the Yankees.
The chart in that article also shows the increasingly have-and-have-not nature of these TV deals. While they are subject to revenue sharing, the beneficiaries still, well, benefit. Revenue sharing currently calls for all teams to pool 31 percent of their local revenue, which is then divided into 30 equal slices. So the TV behemoths lose several million dollars, yet they retain a massive financial advantage.
A new system currently being phased in will disqualify the 15 teams in the largest markets from receiving revenue sharing, but that likely will create other imbalances. Additionally, revenue from an equity stake is not taxed, so clubs can effectively hide some of their revenue. However, it’s quite possible that owners will pocket those earnings.
Major League Baseball has been incredibly successful at cutting costs in recent seasons. Teams now have to semi-adhere to draft pick slotting set by the commissioner’s office, and there is also a limit on international spending. Teams can exceed their various pools and allocations, but they will be subjected to penalties.
Meanwhile, the luxury tax was given real teeth, to the point where most teams (not the Dodgers) appear to be looking at it as an actual cap. Even Japan’s Nippon Professional Baseball (NPB) agreed to a seemingly one-sided new posting arrangement, although it’s unclear if this will reduce or increase the cost of Japanese players.
Some speculate that the owners will turn their attention to controlling major league contracts next. As the line of thought goes, the players let them have Austria and Belgium uncontested, so now the owners want France and England. Of course, that is the one area where the MLBPA has shown a willingness in the past to fight. The player’s union is in the relatively inexperienced care of Tony Clark, so the owners may hope to steamroll the new regime on a firmer luxury tax or even a cap. That’s not likely to work.
Instead, look for the players to demand more compensation. The current arrangement expires after the 2016 season, so we probably won’t hear much about this topic for at least another year or two. Since baseball is raking in such large quantities of money, more than a few owners will go green at the gills when confronted with a possible labor stoppage. If the two parties are looking for a fair and equitable solution, perhaps it finally is time to do away with the reserve clause or take other steps to improve early-career compensation.
Depending on how this brewing battle shakes out, Kershaw’s mega-deal and other large, long-term commitments could look team-friendly as early as 2017.