Peak Payroll

By David Saltzer, AngelsWin.com Senior Writer

I don’t know about you, but it sure seems like it’s been a slow offseason for baseball. Sure, the Angels have been killing it, and there have been some big trades, but overall, someone should check to see if the hot stove has been lit for most of the free agents out there this year.

So far, there have been several theories advanced regarding why the owners have been holding off on making the large free agent splashes that span quite a few possibilities. I’ve read that owners are holding back in preparation for next year’s free agent class, which is expected to be much better than this year’s free agent class and that the market has been held up by notable trades/signings (Ohtani and Stanton in particular). But that doesn’t seem to fully explain the lack of free agent signings this year, and the overall slowness to the market.

To figure out why I think that the market is slow, I’d like to draw on my background in geology. In the petroleum industry, there’s a term called “peak oil” which refers to the point in time when maximum rate of petroleum is extracted from the earth. After that, petroleum extraction is expected to decline. It is a controversial theory, based on the work of M. King Hubbart, and has certainly been affected by many technological developments, such as slant drilling, and the discovery of many new oil fields.

However controversial the theory is, especially in geology, it still is useful for explaining many phenomena. Often things will reach a peak, and after that, taper off. And I believe that this is what may be affecting this offseason.

While fans love to look at each season as an independent event, most owners view their franchise in a much longer term. And two things have to be particularly jarring to baseball owners, especially as they project their payrolls going forward. The first is the ongoing implosion at ESPN. The second is the radical decline in football ratings.

Over the past 6 years, ESPN has lost over 13 million viewers. That’s over 2 million viewers per year! And, as that has happened, ESPN has fired over 250 employees this year, including many highly paid and well known announcers.  While not all of these moves appear to be the direct result of the declining subscribers, there’s no doubt that ESPN has been looking to find ways to reduce their payroll to shore up their financial commitments.

Projecting this forward, if ESPN continues to lose viewers, at some point, it will become unprofitable to continue. ESPN owes so much in guaranteed TV contracts, that without a substantial increase in fees, ESPN may not be able to fulfill its financial obligations to the major sports leagues. While ESPN could consider raising its fees to its ongoing subscribers to cover this potential loss, that could accelerate the rate at which viewers unsubscribe from the network, leading to a death spiral.

If I were an owner, this ongoing situation at ESPN would be quite alarming on its own. It’s hard to make substantial long-term financial commitments to players without having a guaranteed funding stream to pay for the obligations. And, that’s why the ongoing situation with the NFL is doubly alarming.

As much as the owners in the NFL don’t want to admit it, ratings for the NFL are down about 9% overall this season. While attendance in the stadiums appear to be up, there is plenty of anecdotal evidence that the actual attendance in the games is down quite a bit. Worse still ticket resale prices appear to have dropped quite substantially. It will be very interesting to see what happens in the NFL next year with season ticket sales in order to gauge the seriousness of concerns that the changes to the NFL are causing to owners in all sports.

While the decrease in the NFL appeared to buoy the World Series ratings for baseball, owners have to know that ratings and viewership can be quite fickle. Prior to 2016, the NFL didn’t identify their ratings and fan attendance drop. So, I wouldn’t be surprised if owners everywhere, and in all sports, are being cautious on their long-term financial commitments while they analyze what is happening with the NFL. The combination of these forces has led to a slow offseason and a decrease in the salaries being offered to free agents.

Furthermore, owners may have finally learned that in the negotiation dynamics with a free agent, owners can gain an advantage by waiting further and further into the offseason to sign free agents. Players, who have lofty projections of their worth at the start of the offseason may start to accept a more realistic offer as the number of suitors dwindle and the prospects of starting the season without a contract become more realistic.

Finally, it appears that many teams are finally being forced into financial restraint, or possibly learning financial restraint through the ongoing penalties associated with the luxury tax. The Dodgers recently made a trade to get out of those penalties and the Yankees appear to be doing all they can to stay beneath the limit.

All combined, it appears that there are many factors that may be suppressing the free agent market this offseason beyond the potential signings and trades that have been so often cited. And, the combination of these factors may play out over many years, leading to a dampening on the overall market, and the potential for a “peak payroll” or at least a peak in the rate of growth in payroll.

For baseball fans, this may play out to our benefit. Since baseball payrolls have grown far faster than inflation, or our salaries, we may see a period where ticket prices and stadium concession prices start to stabilize and not increase as quickly as they did for most of the past 30 years. That could come as welcome relief.

And, for the baseball owners, there are a couple of bright spots for them. First, with regional sports networks becoming more and more important for the financial future of the sport, and the national broadcasters providing less and less content, they should be less affected by the problems at ESPN than the NFL or other sports. Second, baseball has the possibility to expand into more markets to generate more fans and revenue. The Angels, with Shohei Otani, should be able to expand into Japan to introduce new revenue streams. And, if baseball chooses to expand (which in a separate article I will outline), they could place an expansion team in Mexico City, opening up another market to increase their revenues.

Overall, as much as there have been some plausible theories for why the market this offseason has been slow, I do believe that we may have entered into an era of peak payroll, or at least peak growth in payroll. Even if next year has a frenzy for a few pivotal free agents, overall, I would expect the trend to decrease in the following years as owners return to their more cautious approach to financial commitments. If team payrolls continue to grow in the beyond that, it might be at a much slower rate–more in line with inflation–than they have grown in the past.  And, that would make this offseason the year teams hit peak payroll.