Joey Votto’s Contract And The Day After Tomorrow

On Tuesday, the long-rumored contract extension between the Cincinnati Reds and their excellent first baseman, Joey Votto, was announced, and the numbers are astounding. The contract includes the two years Votto was already under control for, and adds 10 years for a grand total of $251 million over 12 years. While we have seen a lot of future money guaranteed this off-season, there is no contract as shocking to me as this one. If this is viewed as anything but an outlier in future negotiations, then the game has just changed.

I understand how it would be easy to see this contract, marvel at the figures, shake your head thinking about how you should have stuck with baseball an extra year or six, and then chalk this up as another example of a team handing out a contract that is too backloaded and move on. However, I would argue that this represents something significantly different from the previously high dollar amounts given out this winter. For starters, Albert Pujols and Prince Fielder were free agents and were able to use competition in the market to drive up their final contract totals. Joey Votto still had two years left on his existing deal and could only use the threat of free agency in negotiating, not actual competing offers. 

Furthermore, the Cincinnati Reds are not a large-market team; it may, in fact, be optimistic to call them a mid-size market. Playing in a metro area that features roughly 2.1 million people, the Reds have averaged two million in attendance over the past three years, and only make $10 million in TV revenues each year. In comparison, the Rangers were making $35-40 million yearly on their old TV contract. Over the past five years, their payroll has increased from $68 million to $80 million, rating consistently in the bottom half to bottom third in the majors.

This winter, Albert Pujols, Yu Darvish, Prince Fielder and, most recently, Matt Cain, have signed contracts that will eventually cost their teams over $100 million, but they have done so with teams that are in the top half of the wealthiest teams in baseball. While it is always hard for fans to really come to grips with such high dollar amounts, these contracts are not remarkably different from last off-season when Carl Crawford, Cliff Lee, and Jayson Werth all signed deals with large-market teams in the same nine-figure ballpark. What makes this contract shocking is not just committing to paying a 40-year-old $20 million, but that it was the small-market Reds that did so. Did the Reds just commit (future) financial suicide?

Well, maybe not. While we have yet to see any smoke regarding a new Reds TV deal, we know that their current deal will expire before the end of the Votto contract. Furthermore, we have plenty of indicators that in this DVR generation, broadcasting companies will pay extra for sports including baseball. Given this, it seems like a very reasonable expectation by the Reds' decision-makers to expect their next contract to be significantly higher than their current one.  

In other words, the Reds have not, in fact, committed financial suicide. Then again, they are taking quite the risk to lock themselves into this contract before they have the details finalized regarding how much they will make and when they will make it. My take on this contract is that the Reds paid full market value for Votto and did very little to shield themselves from the inherent risk of a contract this long. It's hard to completely lambaste the Reds for this contract, though, because their other option involved trading Votto away after this year and beginning another rebuilding project.

Now that we have some general idea of what this means for the Reds, what does this mean for MLB and the Rangers? It would be facile to say that a small/mid market team like the Reds giving out a contract like this means that we are about to see an incredible amount of inflation in the free agent and contract extension markets, but there are few problems with this. One is that other teams are going to argue that this contract is an outlier; given the importance of Votto to the Reds in terms of fan excitement and the signals that keeping him sends to the fanbase regarding their desired window of competition, it's certainly not hard to make this case. From a larger perspective, using one data point to make definitive statements about large, sweeping changes is a good way to look like an idiot in short order. 

However, the largest issue with this assumption of grand inflation comes to us from the MLB-MLBPA negotiations -- the luxury tax. While the luxury tax has been in place for a while now, this new tax system introduces key changes. Teams that are over the limit for four years in a row will now pay 50 percent (up from 40 percent) of the amount over the limit; however, if a team can get under the limit for a year, the next time they go over the limit, they will be taxed at 17.5 percent. This creates a big incentive to get under the limit at least occasionally, which is something we have yet to see the Yankees really pursue.

Now, however, we see the effects, as the Yankees pursued more cost-effective options to fill out their rotation this winter -- where in years past, it seems like they would have been the one to overpay for Mark Buerhle -- and Boston shipped out the useful-but-not-great Mark Scutaro for the purpose, according to rumors, of clearing room to sign Roy Oswalt (which, in a delicious twist, they were unable to do). The luxury tax line will undoubtedly rise as revenues rise for the league, but there at least exists a possibility now, with the largest markets reigned in to some degree and revenues rising for the middle and smaller market teams, that we see a far closer distribution of MLB team payrolls than we have seen at any point in the recent past. It's probably only a fool's hope at this early juncture, but it's definitely something that will merit a close watch.

What does this mean for the Texas Rangers? It's a bit difficult to get a clear picture because there is still some uncertainty as far as how (and when) their new television contract will affect their actual revenues (and thus their team payroll). Certainly, the Rangers can expect to be able to consistently field a team that has a payroll in the top third of the majors. Assuming the Rangers can keep enough of this current front office together moving forward, I feel confident that they will spend this money wisely and be proactive in finding ways to acquire talent outside of free agency.

These are the factors that lead us to being confident that the Rangers will be good today and tomorrow, but what about the day after tomorrow? What is the best way to leverage future TV dollars in an environment where at least one small market team is expecting to be generating significantly larger revenues?

From a team payroll perspective, the goal would be to use the future money to take advantage of opportunities that may not exist when the new contract actually starts. It's difficult to say how much of the Rangers' increase in payroll is this looking ahead versus the natural increase from the Tom Hicks pennypinching and increased revenues from fielding a competitive team making deep playoff runs. 

One way to leverage future money on a player-specific level would be to offer contracts that are backloaded. There are indications that, unlike last year's (rumored) contract offer to Cliff Lee which avoided backloading, the Rangers pursuit of Prince Fielder involved a "creative offer" that involved more money in later years, and would have allowed the Rangers to stay within their budget this year.

Another approach would be to try to extend current Rangers in an attempt to get some hometown discount and/or leverage uncertainty for players beyond cost-controlled years to avoid paying full free market prices. At the very least, this would help avoid overpaying in terms of years, which is the problem with the contracts given out to all of the slugging first basemen this year. Of course, extending current players to team-friendly deals is always a goal. 

The difference is that, if the Reds are right about the day after tomorrow, what constitutes ‘team friendly' may be dramatically different then compared to what it was yesterday.