April 3, 2013

Pebble Hunting

The Future of Contract Extensions

by Sam Miller

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There’s a quote that gets attributed to Gandhi in a variety of iterations that follows this idea: “First they ignore you, then they laugh at you, then they fight you, then you win.” Baseball isn’t quite as combative as British colonialism, but baseball’s history of finding inefficiencies fits the structure. Small-market teams come up with new ideas, incubate them, and, if they work, eventually see their ideas incorporated by big-market teams. Virtually any strategy works better with money, so once that happens the edge is trimmed or eliminated. Small-market teams can win but, the thinking goes, not by playing the same game in the same way. I’m not telling you anything new.

This is pretty clearly where we’re going with extensions. A year ago, in a piece on MLB.com, Jordan Bastian ran down the list of teams that had signed players to extensions before the players reached two years of service time.

Each of the 11 teams to hand out such contracts has a payroll under $100 million for 2012, and nine of the clubs fall in the lower half of baseball's 30 clubs in terms of team salary.

The Rays (four), Rockies (three), Brewers (two) and Royals (two) are the three teams that have done more than one such deal. Besides the Indians, the Padres, Pirates, Blue Jays, A's, Twins and D-backs have also completed similar contracts.

That’s not true anymore. A few days later, Madison Bumgarner signed a five-year extension with two club options, and last week Buster Posey signed a forever extension with just 2.2 years of service time. Both Chicago clubs have joined in: Starlin Castro signed his extension with Chicago when he was right at two years of service time, and Chris Sale signed his this offseason at 2.1 years. The Cardinals signed Allen Craig to an extension when he had 2.1 years of service time. When Bill Baer wrote this week that “extensions are the new OBP,” you might have read it as proclaiming a new strategy to take advantage of a market inefficiency. Better, though, to read it as the opposite: The new strategy is now the mainstream strategy.

And when that happens, the market inefficiency might as well be gone. Small-market clubs can’t count on it as an edge; now they have to make these moves just to keep up, and keeping up is not enough. So where does the last dog at the bowl find an edge in the era of extensions?

Some team is going to try one of these things, and we’ll have to wait and see what works.

1. Sign earlier extensions.
The premise of all these extensions is pretty simple, and applies even more strongly the younger the player: the team, as a billion-dollar company with a broad balance sheet of players, can absorb a ton more risk than the player, a kid looking at 70 more years of house payments to make and just one very fragile marketable skill. In exchange for taking on that risk, the team gets a break on salary commitment. If it’s true when we’re talking about Starlin Castro—who had already been paid about a million dollars in his career, was just a year away from making millions more in arbitration, and who had perhaps the safest skill set a baseball player can have—it’s exponentially more true when we’re talking about, say, Starlin Castro two years ago, when he’d been paid $45,000 in his career (plus a few meager minor-league salaries).

This isn’t nearly uncharted territory—Evan Longoria signed a week after his debut, of course—but there is uncharted territory to chart. It’s not inconceivable that a team like the Rays could approach Wil Myers about a long extension now, before he has played a game in the majors. It’s not inconceivable that a team like the Pirates could approach a prospect like Gerrit Cole about a long extension, before he has made his second Triple-A start. It’s not totally inconceivable that someday a team like the Indians could sign a long-term extension with a prospect like Francisco Lindor, who hasn’t even reached High-A. “But that’s so risky!” they’ll say, just like they said about John Hart and the Indians in the 1990s. But that’s the point: the ability to carry risk is an asset that a team can use or waste. The more risk there is, the better their potential position.

Pros: Would completely eliminate any incentive to play service time games; could particularly appeal to minor leaguers who aren’t even making the $500K minimum that pre-arb players get; would likely involve contract extensions small enough that none could cripple a team, and many (like, for instance, Wade Davis’ one-year-of-service-time extension) could still be easily unloaded onto another team even if the player doesn’t develop as planned. 

Cons: The large signing bonuses some amateurs get already create tension in minor-league clubhouses. If a Double-A phenom were to sign a long extension that bought out his entire 20s for $25 million, the unintended consequences would be hard to predict. And if that player is an MVP contender making $4 million as a 26-year-old fifth-year player, he may not take it as well as Evan Longoria has.

Sign Longer Extensions
I wrote about this idea around this time last year, in the context of Mike Trout. Again, it’s more risk. I get that. The risk is the point. It can blow up; every player who gets an extension could be Bob Hamelin, or Angel Berroa, or Manny Corpas. If there weren’t risk, every team would do it on their own, and if every team were doing it it would quit being a small-market gamble. Don’t forget the premise here: teams like the Pirates, Padres, Rays, etc., are probably going to lose. So even a strategy that is probably not going to work might still be the right strategy.

The best part about this strategy is that, in the extension era, there are far fewer free agents to sign. Coinciding with this era is, for now, the TV-contract era, where there is a lot of money going around. Put those two things together and you get situations like we’ve seen in the past year: The Red Sox were able to unload their awful Carl Crawford contract, while the Marlins got rid of a couple big contracts that were less attractive than when they had been signed a year earlier, and both teams got actual value in return. Moving contracts might never be easier than it’s about to be; or, just wait and see the sorts of names that are thrown around in trade talks next winter, when Shin-Soo Choo and the ghost of Roy Halladay could very easily be the best free agents on the market.

Cons: It’s almost certainly not as easy to sign players to longer extensions as it is to sign them to early extensions. A player who signs a five-year extension at two years of service time really has only two options: A five-year extension, or gambling on year-to-year performance. But a player who is offered a 15-year extension at two years of service time would have three options: The long extension, the year-to-year, or a moderate extension in between (say, like, the ones that everybody is signing these days) that guarantees the player riches for life but also leaves the possibility of bigger paydays down the line.

Sign More Extensions
Of the 20 players who have signed extensions longer than four years since the start of last season, all are, if not stars, something close to it. The least star-like is maybe Erick Aybar, but he’s a Gold Glove shortstop and a three- or four-win player. But when Cleveland started signing extensions in the early 1990s, it wasn’t just Carlos Baerga, Kenny Lofton, and Jim Thome getting multiple years.

Hart signed a number of others to multiyear contracts, including marginal players like pitchers Jack Armstrong, Dave Otto and Scott Scudder—all of whom are now playing elsewhere—and third baseman Carlos Martinez, whose contract the club bought out this spring. "We've made some mistakes," he admits, "but they were not big money mistakes, and, in most cases, other clubs have picked up those contracts."

While stars might be the hardest thing to acquire in baseball, average players and worse cost just as much for the production they provide. The Padres signed Cory Luebke to a four-year extension (plus options) when he had one year of service time, and Nick Hundley to a three-year extension (plus an option) when he had three. Neither player is a star, and neither seems likely to ever get a free agent deal as long as the extension he signed.

Cons: A star can get worse but still be worth his roster spot. A marginal player can’t. A marginal player can, however, block a higher-upside alternative. So, less flexibility.

Pros: According to Hart, these contracts are actually about adding flexibility. "The first lesson I learned is that stability leads to flexibility because it's a lot easier trading players who have multiyear contracts," he told Sports Illustrated in 1995.

Sign No Extensions
I can’t figure how this one would work, but I’m still thinking about it. Best hope: if the free agent market shrinks and if extensions become the norm, then the discount a club can expect from an extension will also shrink. That is, a player who knows he’ll be one of the only prominent free agents in a market starved for free agents will require more money to sign an extension; if he does indeed sign that extension, then the market forces pushing extension costs higher just get stronger, creating the momentum of a runaway freight train, or else eventually reaching some sort of equilibrium.

A small-market club might gamble on baseball’s finances being in a bubble right now, and bet on a baseball recession in the next 10 years. If that happened, the clubs without long-term extensions on the books would be the least burdened. There’s no indication that it’s true, and there’s really no indication that any clubs think it’s true. But, for a small-market club trying to win, it’s always going to be about standing alone and hoping to be laughed at, ignored, fought, and ultimately imitated. 

Sam Miller is an author of Baseball Prospectus. Follow @SamMillerBB
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