29 May 2008

What is Nick Markakis Worth?

A point of frustration to some may be the top brass of the Orioles dragging their feet with regard to signing Nick Markakis to a long-term contract. So far this year other teams have shown a proclivity to locking in their young players for the long-term. Detroit traded for and signed Miguel Cabrera to a 7 year deal for 140 MM. The Tigers also locked up Curtis Granderson for 5 years at 30 MM. Toronto handed down a 6 year, 64 MM deal to Alex Rios and a 4 year, 12 MM deal to Aaron Hill. Evan Longoria was signed long-term after a handful of games. That contract has some iffy language and can be 6 to 9 years in length and 17.5 to 44 MM in worth. The Milwaukee Brewers signed Ryan Braun to an 8 year, 45 MM contract. Rockies inked Troy Tulowitski to a 6 year, 31 MM deal. The Indians, who supposedly invented this approach of committing to young talent, sign Fausto Carmona to a 4-7 year deal for 15-48 MM. So, yeah, a lot of these contracts have been signed lately, but a major question is: Why are these deals being signed?

The Players Perspective
A baseball players entire perceived worth is related to his baseball performance. In turn, this is basically related to his physical fitness. A baseball career can be incredibly short. Many players have had an amazing rookie season and then just disappeared. Stuck in the renewal and arbitration systems, their pay is undervalued in comparison to their worth to the team. A few examples would be Angel Berroa, Ben Grieve, Bob Hamelin, Jerome Walton, Pat Listach, Marcus Giles, and even our very own Craig Worthington. The retention of physical ability is a chief concern among players and it is understandable why they would want to enter into a long-term contract because of the financial stability of such a deal.

There is a counter argument. Jayson Stark's article last week listed several players who have little interest into locking themselves into a deal. The players mentioned were the Uptons, Russell Martin, Prince Fielder, King Felix, Jeff Francoeur, and the Red Sox trio of young stars (Jonathan Papelbon, Kevin Youkilis, and Dustin Pedroia). Why would they not wish to enter into a deal? The trade off of signing a long term deal is that you may undercut your own value. The thought is that these deals cost a player about 3-5 MM per free agent year bought out. That is dependent, of course, on whether the player pans out. The players listed above are some of the best in the game, so it goes to reason that they can most likely keep their level of play. If I was Francoeur, I'd sign a deal though. Extreme contact hitters are a risky projection.

The Teams Perspective
A major concern of any organization is salary control. Money isn't free . . . it obviously has a cost. This cost often is hard to see. It will be difficult to know whether Jay "Albatross" Gibbons played in effort in courting other free agents, investing in the minor league system, or improving scouting. It is to a team's advantage to be able to identify plus talent and then secure it with a low ball offer. That is where these contracts make sense. Even teams with massive amounts of cash flow engage in this. Robinson Cano's extension is an example. The issue is though that sometimes the player you locked in is Kenny Lofton and sometimes it is Carlos Baerga. For a mid to low market teams, this strategy may be a necessity as the only way to compete long-term is taking a risk on young players and securing a few free agent years on the cheap. Richer teams do it because it gives them more money to spread around and a poor decision on this level is not going to affect them as much as a poor decision on a free agent signing when the contract carries more of a premium.

The Orioles' Perspective
It appears the Orioles are in between. Dan Connolly wrote an article a week or so back in the Sun. An anonymous source in the front office called the deal absurd and was quoted:
"To give a guy a contract like that who has never done it in the big leagues, that is what I call high-risk," the official said. "This game isn't that easy to predict."
The source of those comments may have emerged from someone who thought signing Gibbons and Mora to extension was a good idea. Andy MacPhail's comments (mentioned in the story) were more general and even-handed, which is what one would want from an official statement. It seems to be more clear that the team sees themselves as having not much to gain if Markakis does become the best right fielder in the game, but much to lose if he does not. It looks to me they will wait and let the free agent market determine his value. Is this a good move if it is indeed what they are doing?

From the Orioles (and, conversely, Markakis') perspective, what savings can be gained by signing Nick right now? This study will dive back into the generalized runs created equation and shifting that to wins, which I have done in the past on many occasions. Nick's performance will be used from PECOTA's 7 year forecast. Changes in the forecast by year will be incorporated into the current 25th and 75th projectile performance projections. Valuation is my own figure with each win being worth roughly 3 MM in today's market. Over the past five years, players salary has increased roughly 10% each year. Projected worth will increase at the same rate. All of this will be tied together in terms of cumulative savings or cost. It should be stated that I considered his defense to be average. The general consensus is that he has a plus arm and average range.

Nick Markakis Projection
Markakis' year has been a bit peculiar. He is on pace for 26 home runs, but is also on pace for 16 doubles. It is a peculiar line. His rates fall in at 253/374/424. His PrOPS place him at 280/396/492. His 2007 50th percentile PECOTA projection places him at 356/470, so PECOTA is right there in the middle and I am going to run with that. PECOTA's projections require a subscription, so I don't feel right publishing them here. What I will show is his 25th, 50th, and 75th percentile projections convert to runs created per 162 games. As you can see, he 25th percentile condition shows him being roughly replacement level as a right fielder (RL-RF is 348ops/413slg) for his career. The 50th percentile places him slightly above league average (Avg-RF is 360/465). His 75th percentile has have as significantly better than league average. Perhaps the strangest thing about these projections is how consistent they have Markakis' level of performance over these next 7 years.

Performance Valuation By Year
Although his performance is projected to remain relatively constant over the next seven years, salaries will climb as more cash flushes into MLB. Over the past five years, salaries have increased about 10% each season. Each win over replacement level player performance was multiplied by 3 MM in 2007, 3.3 MM in 2008, 3.6 MM in 2009, etc. Markakis' current performance is worth about 12 MM to the Baltimore Orioles, but he is being paid 0.455 MM. You can probably understand why he might be a little annoyed about the renewal system. If he was a free agent (ignoring his age and potential breakout ability), he would be worth that 12 MM. Compared with other players in that range it falls right on the nose. Jose Guillen is getting paid 13 MM and he was the 2007 league average right fielder (I'm still not sure how he did not get pay docked for the PED aura).

Cumulative Earnings Gained or Lost
This leads us to the bottom line. I think a proper correlative to Markakis would be Alex Rios. Toronto signed him to a 6 year, 64 MM contract this past offseason. That would be similar to what we would expect it would take to sign Nick this upcoming offseason. I assigned him a 6 year, 66.01 MM contract for simplicity and avoidance of numbers with dreadful connotation. The cumulative costs for the 25, 50, and 75 projections are based on three arbitration years and three years of free agency with the cost set by performance valuation of the prior season. For instance, in the 50th percentile I predicted arbitration worth as 5MM in 2009, 7MM in 2010, and 11MM in 2011. The next three years were then dictated by the valuation of his 2011 performance, which comes to 18 MM per season. That comes to a cumulative cost/earnings of 76 MM.

Out of the scenarios considered here, the Orioles would lose money only if Nick hits his 25th percentile projections. The Orioles would lose 16.5 MM over the course of 6 years. Of course, this is based on the free agent market and may overvalue his worth as there may be 0-3 year players capable of this performance. If you consider that possibility, it might be a loss of 50 MM or so over that time period. If Markakis hits his 50th percentile, the Orioles would have saved 10MM over 6 or 1.7 MM each year. The 75th percentile would be a savings of 37 MM over 6 years or about 6MM per year.

It is understandable why the Orioles might be reluctant to secure Markakis for the long term. If he falters it be a costly mistake (about 50 MM). If he stays the same as he is now, he basically get what he would have gotten anyway. If he breaks out . . . then he will cost a lot of money and years. That is basically what it comes down to. If you are sure that he is going to be a premium player, then you should lock him up in order to maximize your cash efficiency for other players on your roster. Ideally, the only time you pay a premium is when you bring players into your organization via free agency.

I think signing Markakis should be a priority and it will be fine to lock him in for 6 years at 66.01 MM. Perhaps a bit smarter of a contract would grant him 4 years at 40 MM and 2 team options years for 13.005 MM a piece. That way, he would still get a great deal of value for his first 4 seasons of the contract and the team would have an out if he completely crashes. I think Nick is not a high risk player. As opposed to the previous players mentioned (i.e., Craig Worthington, Ben Grieve) is not someone who relies on two tools. Markakis has plus ability in all skills and I think that makes him an easy one to bet on. Of course, this assumes Nick wants an extension. He certainly wants to be paid more, but I am not sure he wants to be lock in long-term. If he buys into the hype (Rob Neyer predicted that over the next 5 years he would be the best RF in the game), then he would be foolish to sign long term. Time will tell.

Though perhaps the biggest lesson is the savings attributed to developing young talent. Looking at Nick Markakis' 75th percentile projection, what we see is that over the next 6 years is that he could earn 103 MM if he goes the arbitration and free agency route. In turn, to get that much production off the free market, it would cost 157 MM. Even with respect to the average RF, you get a savings of 22 MM over 6 years. This is probably the lesson we have learned over the last decade or so: 0-3 year players are worth a lot of money. So, the next time you get excited by your team acquiring an established player (i.e., Bedard) for a collection of prospects (i.e. Adam Jones, Chris Tillman) . . . remember that with the extra 20-30% savings your team may be making, you can extend your own guys or pay the premium for the specific free agent talent to get you over the hump.

1 comment:

Nick J Faleris said...

This was VERY well done. Great job, Craw.