Sunday, December 09, 2007

Baseball's Biggest Inefficiency

Despite my constant rants about the things MLB teams get wrong, they generally do a good job. League-wide, profits have never been higher, and we're in a very competitive era. Teams have found new revenue streams, ticket pricing has gotten much more efficient, and generally teams are awash in money.

However, there's one major facet of the game that teams still get wrong: They're not willing to spend an appropriate amount of that money to acquire elite amateur talent through the draft.

I was prompted to write this by Tom Tango and the Detroit Tigers. Casual fans don't often think about just how much a young player is worth, because his salary is restricted for six years by MLB. As Tango points out, if Troy Tulowitzki was a free agent this offseason, he could probably sign a five-year contract for roughly $136 million. (If this number sounds high to you, compare Tulowitzki from ages 23-27 to Torii Hunter from 32-36, and ask if the difference really isn't worth $46MM.)

Though he's worth $136MM on the open market, the Rockies could probably lock him up through 2012 for $35MM or so, given the going rate for pre-arbitration players. (Last year, Jose Reyes signed an extension through 2010 for $23 million, and that even bought out a year of his free agency.) If you're counting at home, that's a $100 million surplus the Rockies created by drafting and developing well.

Young players as good as Tulo are rare, but it's not all that uncommon for a young stud to be worth a killing. The Marlins traded Miguel Cabrera and Dontrelle Willis for a package centered around Cameron Maybin and Andrew Miller, two players that fell in the draft to Detroit because of their "high" bonus demands: a combined $8 million.

What would it cost to sign two talents like Cabrera and Willis for two years each on the open market? I doubt you could ever convince Cabrera to take a two-year deal at this stage of his career, but I think $100 million over two years is a reasonable estimate for the pair. The Tigers will actually pay them a combined $45 million, give or take. Net profit: a cool $55MM.

I'm simplifying the math, but essentially the Marlins put a $50 million price tag on Miller and Maybin. The duo were signed for a combined $8 million, and both have basically followed their expected progression since they were drafted. That's one hell of a good investment by Dave Dombrowski and the rest of the Tigers organization.

Obviously, not every guy who demands a big signing bonus becomes a success. Joe Borchard and Drew Henson are notable failures, and Jeff Samardzija looks like he'll join them. But the overwhelming trend favors the big-bonus player becoming a valuable MLB commodity. The list includes names like J.D. Drew, Josh Beckett, Mark Teixeira, and Jered Weaver. They're not only great players now, but were widely regarded as the top talents in their respective draft classes.

But the Phillies decided they'd rather get nothing out of their number 2 pick than give in to Scott Boras' demands. The Devil Rays figured Josh Hamilton was a safer bet than giving Beckett a Major League contract. The Rays and Phillies went with cheaper options Dewon Brazelton and Gavin Floyd rather than Teixeira. And the Padres...oh, the Padres. They passed on Weaver--and #2 pick Justin Verlander--to go with high schooler Matt Bush, who wasn't demanding a major league contract. If you've never heard of Bush, don't bother remembering his name, because his baseball career is DOA.

It's not a coincidence that the Rays and Phillies showed up on the list twice apiece. The Rays had an organizational philosophy not to spend big money on draft picks, and the Phils weren't about to relive the Drew nightmare with Teixeira, a classic example of letting the past cloud their judgment.

Philadelphia, who wouldn't give an extra $4 million to take Teixeira over Floyd, did deem it necessary to spend $85MM so Jim Thome could block Ryan Howard. And that's the problem: teams are willing to break the bank for free agents, when they could be putting that money to much better use developing from within.

Prospects are never a sure thing, but in a world where teams will spend $45 million to "upgrade" their center fielder from Matt Kemp to Juan Pierre, why is it such a big deal to throw a few bucks at an elite young talent? I think it's Proven Veteran Syndrome on a grand scale: teams will happily overpay a scrappy vet by $30MM, but are so afraid of signing a Borchard that they ignore the relatively small magnitude of the mistake.

In the baseball world, a $5 million signing bonus is practically nothing, but drafting an inferior talent like Bush or Floyd is the kind of mistake that, like signing Mike Hampton, can doom your franchise for years. Yet teams are still guilty of this error every year. I think it's a safe bet that in 2012, the Pirates would gladly pay a lot more than $3.6 million--the difference in their signing bonuses--to exchange Daniel Moskos for Matt Wieters.

But hey, at least these teams are sticking it to Scott Boras, right? In the end, that's all that really matters.


jb said...

my intuition is that ur general sentiment is right but this is a pretty poor post

a handful of cherry picked data points don't mean anything even if u pepper in some cherry picked counter examples as well

j holz said...

If I had access to historical data of who dropped in the draft due to signability concerns, I'd run an actual regression of WARP to signing bonus. (Well, not WARP, because WARP sucks, but a similar stat.)

I do agree that you shouldn't trust people who generalize based on small sample sizes. However, the return on investment for the high-bonus draft picks is so much better that in any random sample of low-bonus and high-bonus players, the bonus babies will come out ahead.