Self-Inflicted Middle Market Woes

About a week and a half ago I wrote about playoff diversity, mostly to dispel the myth that small market teams cannot compete in Major League Baseball. Yes, it pays to have money, but it pays to have money in other prominent sports leagues too that don't face the same kind of parity-related scrutiny which MLB does.

As I gathered evidence to support my claim, an unexpected number popped out: middle market teams in baseball are the least represented in the playoff the past five seasons. Not surprisingly, it's better to have more money, but quite surprisingly it also seems better to have less cash. I promised a follow-up post.

Here it is.

Now, it is definitely plausible that five years is a short enough time period for fluky fluctuations to happen. Maybe middle market teams have simply had bad luck. However, my hunch was that this pointed to something tangible going on.

Really, there are two direct pathways to acquire talent in Major League Baseball: free agency and the draft. Trades are also a major source, but they involve players who had to be acquired in the first place - and every player is acquired either through free agency or the draft.

Issues with free agency in baseball are well documented. There are the definite "haves" (Yankees, Red Sox, et al.) and "have nots" (Pirates, Marlins, et al.). More or less, major market teams have a prohibitive advantage over small market teams in the open market. However, teams like the Royals and Pirates are counteracting this by pouring money into the draft at rates that exceed most major market teams.

If there really are only two ways to acquire talent in baseball, and major market teams spend the most in free agency, while small market teams spend the most in the draft, it might make sense how the middle teams get squeezed. Perhaps they they tend to lose out on the best free agents, as well as the best prospects.

I did some exploratory number-crunching to see if my hypothesis held up. I took the 2011 MLB team valuations according to Forbes, and split teams into thirds: the top 10 I considered "major market," the middle 10 "middle market," and the bottom 10 "small market." I focused on spending habits in free agency and the draft.

Let's start with free agency. I looked at the 2010 offseason (the most recent one), and only considered MLB contracts. I omitted minor league deals for a few reasons. First of all, I'll be honest, it would have been tedious to go through and make sure I caught all the guys that signed those deals and made MLB rosters, taking the time to calculate whatever the veteran minimum was for each player. Second, I don't think the additional information would have provided anything useful. We are talking about players on non-guaranteed deals. Any team signing a guy to a minor league deal is hoping to fill a hole on the cheap. That does point to a fiscal strategy I am interested in, but omitting minor league deals captures that strategy anyway. It's easy to capture a money-saving strategy by not counting the spending at all.

The above paragraph was probably way too long and technical, but there's definitely room to debate my methodology. You might as well know the method to my madness.

This past offseason, major market teams spent $760.3 million on 39 free agents, which comes to an average of $19.49 million per player. Middle market teams spent $290.43 million total on 33 free agents ($8.8 mil per player). Small market teams, unsurprisingly, pulled up the rear, spending $205.3 million on 30 players ($6.84 mil per player).

Free agency numbers aren't very surprising. The big market teams dominate free agency because they not only hand out huge contracts by annual salary, but also tend to lock up players for many years. Look no further than Carl Crawford's monster contract, as well as Adrian Beltre's. The longevity of contracts is what spikes the major market per player average as much as anything.

Again, there is room to debate my methodology here, but I thought the total value of a contract was the best way to go. It is all guaranteed money, so it all has a bearing on where a player signs.

Clearly, major markets acquire talent through free agency, and will collect the majority of the most attractive free agents (in theory, the best) simply because the spend so much more money than other teams in the open market.

What about the draft?

Below are the totals for draft bonuses handed out the past three years. Even though some teams have moved up or down in the baseball world of franchise values, I locked them in as whatever market they are according to the 2011 team valuations. That's to say that, for instance, the Rangers might not have been a top-10 franchise when they drafted players in 2008, but their 2008 draft bonuses count for the major market total, because they are a major market team as of 2011. I promise these long, technical paragraphs are almost over, but I want to diligently flag places that are open for debate in my methodology. I say that a team's draft strategy over the past three seasons has a bearing on its current franchise value, so this method is justifiable.

Without further ado, the numbers. The totals are for the 2008-2010 drafts, according to Baseball America (with only 2010 in parentheses):

• Major market teams: $177,037,200 ($63,302,200)
• Middle market teams: $191,736,428 ($60,880,730)
• Small market teams: $204,602,000 ($71,599,900)

I prefer the three-year totals, because they lessen the impact of a team's draft slot, since teams tend to pick in different slots each year. It's usually pretty easy to pick out who had the top three to five picks in a draft just by scanning the bonus totals by team. They tend to stick out like sore thumbs.

With that said, the Washington Nationals are a middle market team by the definition I'm using, and they spent the most money in the 2010 draft. However, the middle market as a whole still spent the least money of any market in the draft last year!

Finally, I am getting to my point. Draft slots certainly impact draft spending, and it makes intuitive sense that teams with less money might tend to lose more often. However, there are small budget teams winning lots of games in baseball, and just last year, the team with the top pick in the draft came from the market size that spent the least on the draft as a whole. Team strategies lurk behind these draft spending habits.

In case you are wondering, international spending does not change the numbers much. Baseball America has these figures too. Middle market teams spent the most least year ($28.0 million), followed by small market teams ($27.5 million), and then big market franchises ($19.9 million).

Baseball's wealth is top-heavy. The 10 most valuable franchises are worth an estimated $7.7 billion total, and the bottom 20 are worth an estimated $7.9 billion combined. In other words, about half of MLB's franchise values is wrapped up in a third of the teams. Free agent spending mirrors this reality, and payrolls do as well.

Draft spending does not. For one thing, it is more linear, but what's more troubling to me is that middle market teams do not behave the way they should, given their circumstances. The middle market, as a whole, is noticeably closer to the small market than the major market. So, presumably, it should act more like the small market than the major market to compete - especially considering that the small market is getting teams in the playoffs on a more consistent basis than the middle market, at least in the past five years.

However, while middle market teams act more like their smaller brethren in free agency, they do not in the draft. Last year, they spent even less than major market teams, and over the past three years, they more or less split the difference between the major and small markets.

Simply put, the middle market is taking a flawed approach, and it's showing up in the results on the field. Maybe it's an issue of pride, but middle market teams would be wise to model their spending after small market teams. Heck, even major market teams should take the small market approach.

As much as I'd like to believe that baseball has an amazing economic model where money doesn't matter, the reality is that the major and middle markets have the potential to squeeze the life out of small markets if they were more strategic with their own spending. Since major markets continue to win with their model that emphasizes free agent spending, changes aren't likely to come from them (and arguably shouldn't). It is the middle market that is more likely to change. Whether they do or not is the million dollar question, rather literally.