Athletes

Athletes

Stanton Deal Indicative of New Normal in Major League Baseball

Professor Mark S. Nagel

Posted: November 27, 2014

On November 17, 2014, the Miami Marlins announced they had reached a 13-year contract extension with 25-year old All-Star outfielder Giancarlo Stanton worth $325 million, the largest contract in the history of North American professional sports.  The signing immediately generated extensive attention as Stanton has never won a Most Valuable Player Award and the total value of the contract exceeded the sale price of the Milwaukee Brewers ($223 million in 2005) and dwarfed the price Marlins’ owner Jeffry Loria paid for the franchise in 2002 ($158 million). Immediately, pundits examined the contract’s compensation terms and attempted to project what Stanton would produce on the field as he ages until the contract expires when he turns 37 (Stark, 2014; Steinberg, 2014). Despite the initial shock at the contract’s size and the mixed reviews of Stanton’s ability to provide adequate on-field value for the compensation he will receive, much of the analysis failed to discuss specific contract elements, Stanton’s ability to spur additional revenues for the Marlins and, most importantly, the dramatic increase in MLB revenues that are likely to create numerous additional megadeals that exceed hundreds of millions of dollars.

The overall $325 million value of the contract certainly shatters the old record set by Alex Rodriguez’ 10-year, $275 million contract signed in 2007. However, Stanton’s deal permits the Marlins to have some financial flexibility since the bulk of the compensation is provided in its later years. Stanton will “only” receive $30 million over the first three years before his yearly base compensation grows to $25 million in 2018. Over the first six years of his deal, Stanton will earn “only” $117 million which should enable the Marlins to have resources to sign and develop prominent minor league players and attract other quality players to the major league roster. In 2013, 20 MLB players earned more than $20 million, most of whom were not nearly the player that Stanton was in 2014 or should be in the near future, so having Stanton at half of that average rate for three years provides the Marlins an opportunity to team him with other prominent players to achieve success and generate increased attendance.

Certainly, with any deal this long and worth so much, there is tremendous concern that Stanton will not continue to develop his baseball skills or that his recent success was an aberration rather than the beginning of a long-term trend. While Alex Rodriguez, Joe Mauer, Miguel Cabrera, and many of the other $20+ million players had established consistent excellence over a number of seasons, Stanton has only recently become a dominant player. However, he provides an important skill – hitting for power – that has become scarce in the post-steroids’ era. His ability to hit home runs – particularly as a right- handed batter – while other players have seen their power numbers decline will provide a valuable resource for the Marlins, even if Stanton’s performance merely plateaus (Lemire, 2014). Given his age and recent on-field play, the bigger contract danger is not that Stanton will fail to be a dominant player, but that he will exercise the escape clause in the contract that permits him to leave after the 2020 season. If the Marlins decide to pocket their revenues or undertake another fire sale by trading a number of their best players like they did in 1997 (under previous owner Wayne Huizenga), 2005, and 2012 to enhance profitability, Stanton will likely leave after the 2020 season. Stanton’s contract also contains a no-trade clause which prevents the Marlins from moving him to another franchise without his permission.

Ultimately, the key story from the Stanton contract is that MLB, and other North American professional sports leagues, are booming financially. Though MLB salaries are growing rapidly, owner revenues are growing at a higher rate. As noted by Sheehan (2014), in 2000, average MLB payrolls were 60% of team revenue, that figure is now down to 40%. An important component of the increased revenues has been the technological advances that have made traditional television viewing largely obsolete. With a plethora of cable channels offering niche programming and digital video recorders in a significant number of homes, sports have become one of the few televised events that can attract a live audience of consumers from a wide variety of demographic groups. Major League Baseball’s national television deals, which are split evenly among all the teams, have dramatically increased franchise revenues. In 2014, MLB’s new national television deal doubled the annual payout per team to approximately $52 million (Davis, 2013).

In addition to the lucrative national television revenues, local cable deals, often in the form of Regional Sport Networks (RSNs), have begun to expand dramatically for MLB teams as the 162-game schedule offers many evenings of live programming for consumers. While “large-market” teams like the New York Yankees and Boston Red Sox have long received enormous compensation for their “local” broadcasts, recent signings for “small market” teams such as the San Diego Padres ($60 million/year average compensation), Houston Astros ($80 million/year), and Cleveland Indians ($40 million/year)  have changed the economic landscape (Thurm, 2013). A short time ago prominent free agents typically were pursued solely by the large market teams because their small market employers often could not come close to matching the potential compensation. That has now changed as the recent signings by the Cincinnati Reds for star first baseman Joey Votto (12-year, $251.5 million) and the Tampa Bay Rays for star third baseman Evan Longoria (6 year, $100 million extension) indicate. Large market teams will continue to have more money to spend on players, but it is no longer a given that medium and small market teams cannot make highly lucrative offers to some of the best players.

For the Marlins, the Stanton signing offers a tremendous hope for the future as their local television deal, signed many years ago, only pays $18 million a year (Thurm, 2013). Marlins owner Jeffrey Laria noted, “We have the worst TV revenue in baseball, and we have another two or three years to go before we can negotiate that” (Davis, 2013, para. 6). According to Marlins’ President David Samson, when their local TV contract expires in 2020, the Marlins’ new deal, “…will be quite a bit different from this one…” (Davis, 2013, para. 19). In order to have any opportunity to generate interest from multiple media partners to maximize their upcoming local TV negotiations, the Marlins will need Stanton, and the rest of the team, to be playing well. If the team suffers through losing seasons due to a lack of commitment to fielding a quality roster, Stanton is likely to exercise his escape clause and leave the team, at the moment when the Marlins will need his presence the most to enhance their media revenues. Though the $325 million contract looks incongruous for a player who many casual baseball fans have only recently noticed, it is not likely to be the last megadeal to be signed given MLB’s changing economics.

IDavis, C. (2013, March 10). Marlins missing out on local TV bonanza. Sun Sentinel. Retrieved from [Link] />

IILemire, J. (2014, June 10). What’s behind baseball’s right-handed power decline? Grantland.com. Retrieved from [Link] />

IIISheehan, J. (2014, November 10). Money mania. Sports Illustrated, 121(18), 35.

IVStark, J. (2014, November 18). Stanton’s megadeal makes perfect sense. Retrieved from [Link] />

VSteinberg, L. (2014, November 19). Miami's contract for Giancarlo Stanton is huge but that doesn't mean it's smart. Retrieved from [Link] />

VIThrum, W. (2013, July 26). Dodgers could be last team to strike gold with local TV deal. FanGraphs. Retrieved from [Link] />

About Professor Mark S. Nagel

A native of California, Dr. Nagel became a faculty member in the Department of Sport and Entertainment Management at the University of South Carolina in 2006. Prior to joining the department, he was the director of the graduate sport management program at Georgia State University. At Georgia State he was responsible for all aspects of the sport management program including recruiting and advising students, developing and scheduling courses, identifying and supervising adjunct faculty, and maintaining alumni and sport business relationships. Dr. Nagel has also previously worked as a sport management professor at the University of West Georgia and San Jose State University. Dr. Nagel currently serves as an adjunct faculty member at the IE Business School in Madrid, the University of San Francisco and St. Mary’s College of California. Before pursuing a career in academe, Dr. Nagel worked in different areas of sport management—primarily in athletic coaching and administration as well as campus recreation. During his years as an assistant coach of the women’s basketball team at the University of San Francisco, he helped lead the team to three NCAA Tournament appearances and a spot in the 1996 Sweet 16.

Dr. Nagel has co-authored three textbooks: Introduction to Sport Management: Theory and Practice; Financial Management in the Sport Industry; and Sport Facility Management: Organizing Events and Mitigating Risks. Dr. Nagel has authored or co-authored numerous articles in refereed journals such as the Journal of Sport Management, Sport Marketing Quarterly, Entertainment and Sport Law Journal, International Journal of Sport Finance, and Sport Management Review. He has also published extensively in professional journals as well as written numerous academic book chapters and given dozens of research presentations. He has also served as treasurer for the North American Society for Sport Management and the Sport and Recreation Law Association.