April 9, 2009

The Biz Beat

Exploiting the Down Times

by Shawn Hoffman

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In a down market, patience tends to be the ultimate virtue. The Phillies jumped the gun this winter and signed Raul Ibaņez for three years and $31.5 million; the Angels waited everyone else out, and picked up Bobby Abreu for some loose change and an expired Best Buy gift card. Cash-rich teams should remember this in July, when the trade market inevitably shifts in their favor. With the economy still taking a beating and attendance expected to sag, a number of small- and mid-market teams (especially those that fall out of contention) could end up in a major cash crunch by midseason. That should open up some significant opportunities for those teams that are willing to take on salary, as cash gains value relative to prospects.

Consider this: according to USA Today's salary database, Opening Day payrolls were down about $31 million this year from 2008, or about 1.2 percent, but the top ten payrolls this year are cumulatively $63.8 million lower than last year, and the middle ten are down $19.9 million. That means the bottom ten payrolls are actually up $52.8 million. While the Red Sox, Yankees, Angels, and Dodgers cut a combined $43 million, the Marlins, Royals, Twins, A's, and Rays added about $70 million.

Some of the teams from the latter group make plenty of sense; the Rays, A's, and Twins are clearly trying to compete, and Tampa Bay in particular can expect higher attendance coming off of last year's World Series run. This is still a high-stakes wager, however. What will happen if the Twins or A's are fifteen games out at the All-Star break? Given the bad economy, attendance could easily fall precipitously in August and September, making mid-season payroll dumps not just a priority, but a necessity.

Think back to the last time that the sport felt a financial pinch, from 2001 to 2003. The Pirates had given long-term deals to just about anyone that could walk, trying to prove that a new stadium would help support a higher payroll. Four years, $15 million for Pat Meares. Four years, $24 million for Kevin Young. Six years, $60 million for Jason Kendall. The team's payroll jumped from $27 million in 2000 (the team's last year in Three Rivers Stadium) to $58 million in 2001-just in time for the first recession of the new millenium. By late 2003, they were unloading Aramis Ramirez for whatever they could get, which turned out to be Jose Hernandez, Bobby Hill, and Matt Bruback. (To Dave Littlefield's credit, they were more careful with Brian Giles a month later, netting Jason Bay and Oliver Perez.)

Most teams weren't nearly as spend-happy during this recent bull market as they were in the late '90s (the percentage of revenues spent on payroll was far below 1999-01 levels), but cutbacks are probably inevitable, even for some large-market teams. Let's say the White Sox are out of the AL Central race by the trade deadline. (I'm only picking on them because they make for a good hypothetical.) According to Forbes, the Sox made $72 million in ticket sales in 2007. We don't have the numbers for 2008 yet, but we do know that their attendance declined about seven percent, so we'll assume gate revenue declined at the same pace, to $67 million. If the team doesn't play well in this economy, it's certainly possible they could see a decline of $10 million or more in game-related revenue, counting concessions and parking (the Forbes number only takes into account tickets sold).

Without knowing anything about the team's cash position, that's not such an enviable spot to be in. Come July, they would almost certainly become sellers. Jim Thome, Jermaine Dye, Octavio Dotel, and Jose Contreras are making a combined $40 million this year, and could all be free agents this winter (Dye has a mutual option). Two-thirds of that-or about $27 million-will be paid out by the end of July, leaving $13 million in potential savings. If the team isn't drawing well, the primary concern may be to shed payroll, even if it means getting slightly less in terms of talent.

Plenty of teams could find themselves in a similar situation, and few will be looking to lock up their free-agents-to-be to long-term deals. As we saw this offseason, uncertainty usually leads to risk aversion; most teams will continue to take a wait-and-see approach heading into next winter. All of this may result in a torrent of players becoming available in July, or even June if attendance is bad enough in certain markets.

Keep in mind, however, there probably won't be many buyers banging down the doors. The economy has completely changed the risk/reward equation of a mid-season trade, and making the playoffs could be worth millions less than in past years, especially if the economy is still struggling in 2010 (post-season appearances usually have a bigger payoff the year after). Taking on $4-5 million just for the chance of reaching that diminished upside might be too risky for most teams' tastes.

All of this just plays into the hands of the healthy and opportunistic organizations. If a team is willing to add payroll, it might find fire-sale prices in terms of actual talent. Look at the list of big-market teams that have cut payroll; the Yankees are going to blow away last year's revenue total, while the Red Sox, Dodgers, and Angels probably won't see big declines as long as they stay in contention. The Yankees could easily tack on another $10 million or more in July, which, in this atmosphere, is a tremendous competitive advantage.

The key, as usual, will be patience. As the deadline gets closer, the pressure to dump salary is only going to become more intense. Whether the bidding begins on May 1 or July 1, the best deals will probably come in late July or even August. As usual, we'll see a number of shotgun marriages right at the deadline, but for the first time in several years, it will be the buyers who have all the leverage.

Shawn Hoffman is an author of Baseball Prospectus. 
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