Within the context of MLB free agency, four years and $48 million sounds about right for 30-year-old Ubaldo Jimenez. Within the context of MLB economics, it probably just was a more palatable deal for the Baltimore Orioles than the Cleveland Indians.
You see, even though the Orioles had to sacrifice the No. 17 overall pick1, they’re in a peculiar situation with potentially waning oodles of money to spend and in a division that requires spending. The Indians, although seven games better than the O’s in 2013, already have likely reached their spending limit for the coming season. Indications had been a bound for months that a Jimenez return was unlikely – the two sides reportedly hadn’t talked in weeks.
But the financial flexibility difference between Baltimore and Cleveland, although both face significant pressure for 2014, has a lot to do with TV and its associated boom of sports-related revenue.
Baltimore’s TV advantage
Grantland’s Jonah Keri wrote about the Orioles just less than two weeks ago. His must-read mega-article, titled “For the Birds,” reviewed the franchise’s recent resurgence in the crazy competitive AL East. Most fascinating and relevant, however, was his focus on their co-owned regional sports network with the neighboring Washington Nationals.
When the Nats moved in 2005, O’s owner Peter Angelos worked out a deal with MLB that allowed the former Expos team2 to move into his protected market space. That deal led to the creation of the Mid-Atlantic Sports Network (MASN) with terms substantially favoring Angelos’ team. Per Keri’s research:
The terms dictated that each franchise would receive the same amount in rights fees, but that Baltimore would control a 90 percent share of MASN and any MASN-owned spinoff networks at the start; the Nationals would pick up an additional 1 percent stake each year after an initial two-year wait, until eventually reaching a 33 percent cap.
In 2013, MASN was owned 16 percent by the Nationals and 84 percent by the Orioles. The network is at an overall revenue disadvantage because its subscription fees are lower than the industry average and likely can’t be renewed anytime soon. But the math still is outrageous and benefits the majority owner.
MASN’s projected 2013 revenues were $179 million. Of that, a set $29 million was paid out in rights fees to both teams.3 The other $121 million is a different story, however. MLB regards RSN ownership as a “separate business venture that’s not subject to the usual revenue-sharing rules.” By controlling 84 percent of the network, the Orioles are pocketing a huge amount of that money – another estimated $101.6 million in gross revenue.
Obviously, Angelos would greatly prefer the rights fee payments to be as low as possible to both teams since they’re required to be equal. The more money mostly arbitrarily kept away from revenue-sharing taxing, the more there is (for mostly his franchise) to pocket directly. Of course, there also are the equal disbursements of national TV money – about $25 million per team in 2013 and expected to double starting in 2014. But we’re still talking about an $80 million annual Orioles advantage over the Nationals.
Keri shared how the Nats, owned by the Lerner family, have attempted to renegotiate the terms to no avail. It’s seen as somewhat inevitable that the two sides will be forced to set a more agreeable long-term deal. Major League Baseball is reportedly sending the Nationals an undisclosed amount annually to “bridge the gap, and to prevent the Lerners from taking matters to court, until the deal becomes more balanced.”
For context from the Indians’ perspective, they receive $40 million in annual rights fees from FOX Sports Ohio. That’s already about $90 million shy of Washington’s total RSN-related revenue. The Indians did receive $200-250 million in the late 2012 sale of SportsTimeOhio. With the lack of RSN ownership stake however, they’re not taking in anymore annually flowing separate money that can be free from taxes.
In order to close this TV-related revenue gap, Cleveland would need to receive about $90 million more in net revenue-sharing over Baltimore. That’s even before any other team revenue measures. Per Bloomberg’s team valuations, that net revenue-sharing difference is only an estimated $10 million. The STO sale only made a slight dent in this long-run gross revenue and franchise valuation discrepancy.
The Orioles’ place in free agency
Where did this situation then leave for the Orioles? Keri said they probably had two “defensible strategies” to please their impatient yet growing fan base after their third-place 2013 season. One, they could trade some of their young talent that might be difficult to extend long-term. This would boost an already strong farm system and help to provide for many more years of possible contention.
Second, they could actually spend aggressively in free agency to build on their success and perhaps not-for-long revenue advantage. First baseman Chris Davis (6.9 WAR in 2013) and third baseman Manny Machado (6.5) were among the AL’s most productive players last season4. Starting pitching was seen as a desperate organizational need5, as their top prospects are just now rising up the system. A free agency deal seemed logical in many ways.
They didn’t do that until yesterday, despite often being listed in the rumor mill. Their only significant previously move was a three-year, $5.75 million deal with 27-year-old Japanese pitcher Suk-min Yoon, who also can contend for the rotation. Even FanGraphs joked about the signing late last week: “Orioles do something.”
Ubaldo Jimenez is a durable starting pitcher with no significant long-term health issues. Starters like that often get paid very well in free agency. That is especially true for pitchers with a three-year history as a top 10 pitcher (2008-10) and a most recent repeat of that level of success in a five-month stretch. His other career struggles aren’t that drastic compared to the usual weaknesses of available pitching talent.
After the season, Jimenez declined his $8 million player option and then declined the team’s $14.1 million qualifying offer. Reports speculated that he was looking for that dollar figure for multiple years. Four years seemed par for the course for the final deal, with $12 million making sense as a slight reduction in that annual average value.
Ricky Nolasco (0.5 career WAA) and Jason Vargas (-1.1 career WAA) are purely average MLB starters that also signed four-year deals this offseason. Nolasco’s was for $49 million with Minnesota and Vargas’ “major baseball announcement” was a $32 million contract with Kansas City. They’re also each one year older than Jimenez.
The Indians did not pass along a qualifying offer to Scott Kazmir, who then signed a two-year $22 million deal with Oakland. It’s possible that offer – which I dismissed fairly quickly – could have been an appropriate one-year fix for the Indians.
In terms of Jimenez’s price, it seems about right, perhaps even lower than to be expected. As I’ve reviewed in the past, research from Lewie Pollis shows the average actual price of a WAR on the free agent market is about $7 million. A durable average starter should usually produce 2-3 WAR per season. The Orioles are only technically banking on him providing 7 WAR over the duration of the contract.
However, Pollis likely would contest with this article’s basic theory: That Jimenez’s contract makes more sense for Baltimore. Pollis has repeatedly shared that if a carton of milk (or a sack of potatoes) is $1, then why would anyone pay $2? And how could you get away with paying only 51 cents? In order to make WAR theory actually meaningful, wins and players have to be fungible. Teams can’t (or shouldn’t) pay at different levels per a likely ill-conceived notion of increased marginal benefits.
But at a certain point, the Orioles have more money to spend on a deal than the Indians. They have more pressure to do so. They have more ability to withstand the risk of guaranteeing all that money. Baltimore’s manager even said they’d get up to $100 million in the Jonah Keri article, an increase from $92 million last season. Without the Jimenez deal, they’d be way short of that expected jump
The Indians currently are at $80.7 million, a slight increase from last season already. With the unclear futures of Justin Masterson and Jason Kipnis, other players are likely higher long-term priorities with the national TV windfalls6. Cleveland’s immediate financial flexibility – even if the deal was a fair value with an interchangeable amount of wins and benefit – just isn’t the same as Baltimore’s.
- According to baseball-reference.com, the No. 17 pick has had a 65% success rate of reaching the majors and 8.3 WAR per major leaguer [↩]
- Keri actually is a Montreal native and is wrapping up a book on his hometown team. Go check out the podcast he recently did with the great Indians site Let’s Go Tribe. [↩]
- Of the respective $29 million allotments, 34 percent each gets thrown into the MLB revenue-sharing pot – that’s the standard RSN rights-fees tax. But for now, I’ll just be focusing on gross TV revenue. [↩]
- For added context, those seasons would rank in top seven among Indians infielders in the franchise’s last 50 years. [↩]
- Chris Tillman had a 4.4 WAR in 2013. He only turns 26 in April and the team’s ace. After that? Mostly mediocre. Other expected locks are pleasant surprises Miguel Gonzalez (2.0 WAR) and Wei-Yin Chen (1.8 WAR), plus Bud Norris (1.6 WAR), acquired at last year’s trade deadline. Jimenez’s presence can further delay the MLB clock for top prospect Kevin Gausman. [↩]
- Assuming usually promoted theories of spending 50 percent of revenue on player salaries, it’s possible the Indians’ long-term payroll could indeed be closer to $90 million. That would factor in spending about $10-12 million of the extra TV money. That could easily be the case depending upon more long-term deals signed for 2015. [↩]