October 25, 2009

The Biz Beat

Another Chilly Winter?

by Shawn Hoffman

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What's the free-agent market going to be like this winter? A buyer's market, or a seller's? I can honestly say that I have no idea, and any team executive who gives you a more definitive answer is probably either hoping or hedging.

Remember this time last fall, when the world was imploding on itself? Lehman Brothers had collapsed, and was about to take the entire financial system down with it until the federal government stepped in. Meanwhile, you couldn't get a credit card or a home loan unless you were Mark Cuban, and companies were firing thousands of people just to make sure they could survive. Yeah, that was fun.

But as scared as everybody was, it actually made a lot of decisions easier: in a normal recession, it's hard to decide if or when to cut costs. But in the Great Recession, it was simply a race to the bottom, as companies rushed to slash inventories and lay off anybody that wasn't absolutely critical. As such, it also made business in 2009 pretty predictable: it was going to suck.

But going into next year, that sense of certainty is gone. (Although at the very least, we know the world isn't going to end, which is a step up from last October.) Perhaps, more than any year in recent history, 2010 is proving to be extremely tough to predict. Are we in for a V-shaped recovery? One that's U-shaped? A double-dip recession, like the one in the early 1980s? Ask five different people, you might get five different answers-and none with any real conviction.

This is crucially important to baseball's free-agent market, probably even more so than the actual players available. Teams set their budgets based on forward-looking revenue projections, which can lean heavily on the general economic outlook. I walked through this last December on Baseball Analysts:

[C]ompanies will hire employees up until the point when marginal revenue equals marginal cost. So if the A's project that Rafael Furcal will bring them $15 million in additional revenue next season, they should be willing to pay him up to $15 million. This number is his marginal revenue product (MRP)...

But what if the A's, worried about the economic climate, decided to do a whole new set of revenue forecasts for 2009, and found that ticket sales were likely to take a huge hit? Or that demand for playoff tickets (should the team get that far) would be much lighter than normal, resulting in lower prices? All of a sudden, the rewards of winning five more games and possibly reaching the playoffs are much smaller. This, in turn, means that Furcal's marginal value to the team is much less, so his MRP (or the salary the team would have been willing to pay him) goes down as well.

With that in mind, it wasn't exactly rocket science to figure out what would happen in the free agent market:

The teams with some breathing room, like the Yankees and Red Sox, will keep taking calculated risks. The top tier of players (CC Sabathia, Mark Teixeira) should get very nice deals. But the great majority of the small- and mid-market teams will be extremely conservative, and that will bring down overall demand (and salaries) for the rest of the players on the market.

That's more or less what happened-the top guys on the market got their contracts, but the middle and bottom end of the market got crushed. Altogether, Opening Day payrolls were down 1.7 percent this year, meaning that teams had been about as conservative as they could have possibly been-really, the only team that spent like we weren't in an econolypse was the Yankees, and even their payroll was a bit lower.

And to no one's surprise, MLB attendance was down a pretty significant amount this year: 6.77 percent on a per-game basis, according to Maury Brown's tremendous wrap-up piece on this year's attendance figures. That's the steepest year-over-year decline since 1952, and comes on top of a 1.14 percent drop from 2007 to 2008. Twenty-two of the thirty teams were down, and only Texas, Kansas City, and Florida were up more than 10 percent. (Eleven teams were down by at least that much, including five that fell over 20 percent.)

But despite all of those negative numbers, MLB seemed prepared for it. Player payrolls were down, several teams laid off office employees, and you can bet there were other operational cuts across the board. In fact, MLB had predicted a 6-7 percent drop in attendance last winter, meaning the teams had every reason to budget that in before the season even started.

(As a side note, those numbers really aren't as bad as they could have been, considering that the Mets and Yankees accounted for about 30 percent of the total drop, while undoubtedly bringing in more money than in 2008. There are certainly a lot of teams that were hurting, but at the very least, their revenue sharing intake probably won't be that much lower.)

So what happens when nobody really knows how the economy is going to play out? Well, it depends on the people involved. The Yankees, Red Sox, and especially the Mets have money coming off the books, and baseball owners aren't exactly known for avoiding bidding contests (to put it nicely). But common sense says that most teams should still be playing it conservatively, at least until there's some greater consensus on 2010-and anyway, most teams have actually been much more cost-conscious since the player market bubble of the late '90s.

In other words, if I had to guess, I'd expect something similar to last year, with a little less going to the high-end players simply because of a lack of real top-tier talent, and a small boost for the low end due to slightly higher revenue projections.

But don't hold me to that.

Shawn Hoffman is an author of Baseball Prospectus. 
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