2017 Reds

The Case Against Service Time Manipulation

Questions about who will be playing for the Reds come April inevitably end up as discussions about service time with the idea being that the Reds should try to keep players cost-controlled for as long as possible. The implication here is that the Reds are a small market team and on a budget and blah blah blah.

I don’t buy it.

News broke recently that Jeffrey Loria is looking to sell the Marlins for at least $1.4 billion. That’s billion-with-a-B. The Marlins. This, kids, is not a marquee franchise.

I understand exactly why teams manipulate service time. It’s the same reason they get cities to build them stadiums. They like to keep as much money as they can. But not wanting to spend money and not being able to afford something are not the same thing.

And so here is my belief: I believe that every major league team has much, much more money than they pretend they do. If the Marlins are worth more than a billion dollars, then they are making money hand over fist. The Marlins. And if that team is making that much money then EVERY team is making a ton of money and can absolutely afford to call up players when they are ready and not worry about service time.

And, by logical extension, any noise we hear about budget constraints is also nonsense.

Let’s not forget that Major League Baseball has an anti-trust exemption. The owners literally have permission to maintain a monopoly. In recent years as revenue and revenue-sharing have exploded, it has been noted that the players’ chunk of the pie has gotten smaller on a percentage basis. The owners can afford to pay players more. They have more money than they are using.

So yes, the Reds will likely make some decisions based on service time. But those decisions are likely not about what they can afford. Rather, they are about what they want to spend and we should constantly remind ourselves that those are not the same thing.

54 thoughts on “The Case Against Service Time Manipulation

  1. This is a much talked about topic, but no action is really necessary. It only affects a few players each year. The MLBPA and the owners just approved a new 5 year CBA, and with all the ballyhoo over Kris Bryant and the Cubs, no action by either party was taken to change this system in the new CBA.
    If the players and their union are non-responsive on this topic, I don’t care either. The MLB Commissioner doesn’t care either. He is more concerned with shaving 30 seconds off of game times than he is about fairness in salaries.

  2. Your thesis seems to be if you can afford to do something, then you should. In reality, people generally seek the best value they can rather than choosing what they can afford.

    The CBA that the players agreed to incentives teams to delay the arrival of players by a couple of weeks. A team like the Reds that doesn’t expect to compete would be crazy not to take advantage of this provision.

    Second, even very lucrative business work on budgets and make investment trade off decisions. Lucrative cash flow does not mean they have a printing press and are unconstrained.

  3. What someone can afford is not always the same as what is a smart business decision…

    I would be very interested to see a story/statistics about the top prospects (at the time) who were obviously held back for service time reasons and how many of those even made it to arbitration with the same club or were a grade A/B free agent six years later. In short, with how many of these guys does it really even matter?

  4. Sounds like an attack on the owners. Since when does the owner have a demand placed on him to stream profits to the players? Why not stream the profits into lowering ticket prices instead or improving the product with modernized stadium? It isn’t like the players are poor and are being treated harshly they are more than compensated for their work. Even those that show up to spring training out of shape.
    Here is simple logic. If baseball owners pay the players more, the baseball owners will charge even more for fans to see the product.
    the Marlins are worth 1.4 billion dollars because their stadium is near to Miami, Florida. Have you seen the cost of real estate down there compared to Cincinnati? Here is another comparison to Reds Baseball since 1997 Marlins have 2 WS Championships Reds have 0 winning affects value of a franchise as well. Reds are hard luck losers and the Marlins have a much better long term future than the Reds. Like it or not. It is what it is.

  5. I am always confused at how quickly people defend the owners. All I am saying is, they Reds can afford to put a better team on the field than we’re likely to see at the start of the year and I don’t feel the need to pretend otherwise. It may be smart business, but it won’t make for the best baseball.

    • nor will higher ticket prices. If the Reds pay the players more we the fans will pay the owners more. Business 101. Not a defense of the owners, rather, that is how business works.

    • Could the Reds afford to spend more right now? Probably.

      Would increasing payroll by 20 million enable them to win more games? Probably.

      Would that increase enable them to win the division? Probably not.

      Would that increase enable them to win a Wild Card? Maybe, but still unlikely.

      Does a 80 win Reds team have more revenue than a 70 win team? Usually.

      Would that 20 million increase in spending create more than 20 million in revenue? Highly unlikely.

      In summation, spending what they could
      ” afford” makes little business sense and in all likelihood very little baseball sense. They would in all likelihood be simply less bad..and have less flexibility to spend when they’re ready to compete.

    • What Louria is asking for the Marlins and what he gets may be different, and a team’s theoretical value isn’t realized until it’s sold, at which point the former owner, who now has the value of the team in hard cash, has no reason to pay any of the team’s players. The new owner just parted with lots of money and may not have much left to spend. I’m not fundamentally sympathetic to to owners (class bias, I suppose), but I’m far from certain that we have enough information to know what any of them can actually afford.

    • Thank you Jason. Great article and spot on response. The owners who continually short sell their fans by putting an inferior product on the field, cough, Reds, and then blame it on a small market deserve no sympathy from fans. But their getting it, which is probably why cities keep publicly funding stadiums.

  6. Teams invest millions each year in player development. The vast majority of players never contribute at the major league level. Without having the ability to recoup their development cost, the vast majority of teams cannot field a competitive team. Retaining control for the first 6-7 seasons enables that to occur.

    What basis do you have to conclude that teams are secretly making money hand over fist? It’s pretty easy to determine an approximate level of revenue for most teams and an approximate expense level. In most cases, the actual amount of cash profit is relatively minor. If the Reds clear 5 million on 200 million in revenue then that’s a 2.5% profit margin….about the same as buying a 10 year treasury bond. Yes, the teams value has increased but one’s ability to extract that is limited….unless you sell….and lose 20-30% of your gain to taxes.

    The Marlins have a great stadium deal and are the only MLB team within a 300 mile radius of one of the wealthiest areas in the country that will see significant population growth. They are also the gateway to Latin America where baseball is extremely popular. They have been so poorly run there is an enourmous amount of financial upside. Do the Reds, Brewers, Pirates, Royals have the same amount of ancillary factors that enhance their value? No way.

    • Good points Chuck.

      I’ll add “value of a perpetuity”, explains a bit of this.

      Also, if poor grandma’s house in San Fran is worth $2M. She might be a millionaire but she can’t spend like one until she sales the house.

      Value and Cash Flow are not always the same.

      • To be fair, Grandma probably isn’t running a business that brings in cash flow, either. Much less have a bunch of other home owners who also have businesses doing the same thing, leaving them with nice, big bank accounts in which they can draw from to “invest” in that house and make it worth even more when they choose to sell it.

        • If Bob C. took 50 million out of the banana company and invested in payroll it would not increase his revenue by anywhere near 50 million nor would it necessarily increase the value of the team at all.
          It is estimated that Reds gross $30 per fan inside the stadium. They would need to draw an additional 1.7 million to simply break even on that investment. That means the Reds would need to draw 1 million more than they ever have. Since media deals and sponsorships are long term contracts, attendance is the only thing that can generate an immediate return and the math simply doesn’t jive.

          • But Bob doesn’t need to do that. Bob and the other owners need to do that. And if you can go from the Reds situation, to constantly winning like the Cardinals, you’re going to make that money back, easily. Even before you sell the team. You’ve got to win, and win consistently. But if you are drawing 30-35000 a night because you are winning consistently, that investment is going to pay off in a big way.

          • The Cardinals haven’t spent much more than the Reds over the past few years. They win because they invested in a player development system that enables them to produce cheap, able replacements when guys become more expensive than they are worth.
            The Cardinals are a brilliant business. Only the Yankees, Dodgers and Cubs make more…yet they generally spend more like the Reds and Brewers and continue to win.
            They own their stadium, own the parking lots around the stadium and own their version of “The Banks”…they are literally printing money…and yet they win without spending like a drunken congressman.

            If the Reds drew 40,000 per game, their revenue would increase by about 30-35 million. The Cardinals and Cubs would still be able to dramatically outspend them.

        • What if their other businesses offer better ROI for that next investment dollar; shouldn’t that be where they put their money?

    • Having a valuable asset provides you greater access to capital. If we assume the Reds are worth a billion dollars, and if we assume the Reds didn’t have extra money to spend on players, they COULD go out and get the money at some rate of interest.

      Now, whether or not that is prudent is another discussion, but I think it’s incorrect to act like the Reds can’t raise capital if they wanted. They could easily increase payroll whenever they wanted without much problem. In perpetuity? No. But I don’t think that’s the gist of the topic.

  7. If it’s only two weeks down for a year of service then its a no-brainer.

    • This shows that the Rays and Pirates have modest profit margins and are by no means cash generation machines. If your net profit margin is 5% you don’t have much margin for error.

      • That was also 2008. TV contracts have exploded since then, both locally and nationally. And so has MLBAM – which is now sending a check each year, to each team, of nearly $40M for their part.

        Teams are printing money.

        • You’re confusing MLBAM revenue with profit. The teams do not get a check for 40 million per year from MLBAM.

          The estimated revenue for MLBAM is about 1.2 billion or 40 million per team. Most of that money is reinvested as technology companies will always have a need for constant capital as their
          “Product” becomes outdated rather quickly. The last published estimate is that each team receives around 10 million per year from MLBAM….about what Homer Bailey is paid from opening day to July 1.

          • MLBAM did sent a one time payment that was $30M to each team recently, and I did confuse that for the yearly payment. Each team is also getting about $10M a year from MLBAM as a part of the MLB.tv/Radio subscriptions.

            Here’s what I do know – as of the last CBA, the players were only getting 39% of current baseball revenues. That’s down 11% from the last CBA. I fully believe that teams are spending more money in other areas (analytics departments and systems to run it aren’t cheap – expanding that into the minor leagues costs the teams an initial $30,000 per stadium investment if they put in the trackman – and they almost all did so – then it does cost a little bit each year after that to maintain and have someone run the system – though this is usually someone making less than $10 an hour for a few hours a day).

            But, what’s 11% of all baseball revenue? Well, they pushed in on $10B in 2016. So, roughly a billion dollars. Per year. That’s $30M+ per team (though I do bet it’s different for the Reds than it is for the Yankees). No team around is spending that kind of money in their new front office areas. $2M? Maybe. Where’s the rest of that money going now that it’s not going to the players?

            Teams have money to spend. They just aren’t. How much certainly depends on the team in question…. but it’s a hard sell to me to say that these guys are breaking even given all that we do know.

            Heck, look at the TV contract. We know what every team in baseball gets for their TV contract. Well, every team except the Reds. Why is that? How is it that we know exactly what everyone gets the second they sign a deal, but we can’t get an ounce of information on how much the Reds make other than “it’s a fair market price when compared to other similarly sized teams” from the Reds owner? Either they got royally screwed, or they don’t want people to know how much money they’ve got to spend.

  8. I am for controlling the players in a Reds uniform as long as I can

    always will be.

  9. So, basically, you’re saying that the Reds really aren’t a small market team bcuz they are probably making money “hand-over-fist”…just like Miami. I never knew about this service time stuff until the Reds started this rebuild. Never knew it existed. But then I started to understand it and how it gives a club an extra year of control. I can see how that could be (or is) a good thing for a club. So when I saw your headline to this article I was intrigued. I didn’t think there could be a downside to keeping a plyr under control for an extra year. So I checked out the article and it wasn’t the argument I thought it would be. I don’t know exactly what I was expecting but it wasn’t this. BUT!, that’s not to say that it still wasn’t an interesting and intriguing article. You just might be on to something here. Good points.

    • This. Chapman would fill more seats than Jesse Winker… at least for the first few years.

    • Like the Yankees, you mean? Been awhile since their last championship. If you build your team from free agents, you will be paying huge amounts of money for players in or near their decline years.

  10. Jason, I love your posts, but this one made me wrinkle up my nose (which I believe is a first). What I think you are primarily arguing is that payroll could be much higher than it is (or will be when the Reds next invest in a new window). I agree with a good part of that argument. The other piece of the argument – and title of the post – is that manipulating service time to keep a player a year longer (or delay arbitration in super 2 cases) is not a good idea. While slightly related, service time control is a different issue than how much can (or will) be spent on payroll. No matter how big the payroll, spending it wisely in a competitive environment is important. Losing a year of control on Mike Leake for one start did not just cost the Reds money, it cost them a solid player for a year, lowering the overall ROI of that draft/draft pick. Yes, the larger the payroll gets, the smaller ‘error’ it is to mis-spend or over-spend on a player, but it still exists. I want the Reds to be excellent at managing the ROI of every draft/signee, no matter how high payrolls go.

  11. I think you are confusing the balance sheet with the Income Statement. In other words, sure the “Asset” is worth a ton of money, but that doesn’t mean the Income Statement, shows some crazy profit. Also, consider there are multiple owners.

  12. If the purpose of this article is to argue against keeping players down until after the Super Two cutoff date, then you have an argument.

    But if the purpose is to argue against keeping players down until the cutoff point to have another year of control, then it’s way off base. A team like the Reds can only hope to be a long-term contender if they maximize control of their young players for as long as possible. Trading 2 weeks now, for an entire year later on, is simply a no-brainer.

    • I agree here. The only time I’d think about it would be if the team is going to compete right now and every game might matter. So, when you’re going for a playoff run, the games in April count just as much as the games in August. In those cases, I can see not holding a player back due to service time concerns when he is ready to help the team win right now.

  13. I tend to be against service time shenanigans from a competitive perspective.

    Presumably, a team will be counting on Prospect A to be a contributor to a winner team. How much time in the bigs does Prospect A need before he “gets it” and turns into a contributor? Each player is different, of course. Mike Trout needed 2 bad months. Some players need years. Some players gel instantly.

    Consider then, if you have a player than needs, say, 6 months of playing time to really hit his stride. If he gets 4 months in Season 1, then he won’t be “hitting his stride” until 2 months into Season 2. What if that hurts the competitiveness of that team in Season 2?

    And think about it this way, as well… if you have a player who both 1) was good enough to want to play service time games with and 2) produces enough for 6 years that he is still a wanted member of the team for year 7, then you’ve likely got a guy who produced well and is getting big arbitration raises anyways, which cuts into the value proposition of playing the games in the first place.

    Also, I have nothing to back this up, but I think service time shenanigans are likely to make a player NOT want to sign a team-friendly extension, a la Paul Goldschmidt or Anthony Rizzo, or Mike Trout. Those guys are playing for way under market value. You think Kris Bryant is signing a team-friendly deal to stay in CHI after they squeezed him for several million bucks? Nope!

    (This was a long and meandering post. I try to avoid these, in general, but here we are…)

  14. I posted basically the exact same concept months ago on this sight.Not one person thought that what I was saying was valid.My entire point was that sports franchises make the big $ when they sell the franchise.Year to year profit is basically just an excuse to claim things like”small market”,”we cant afford to sign a player”and similar b.s.
    I was told by responders one after the other about accounting principles and that teams have to show profits now and then or some consequences come down on them.
    I was shocked that literally not one person could see that in the end Bob C and associates will cash in big time.They all felt that it was critical that management had to make $ now.If a franchise had zero fans buy a ticket for an entire season they would still make $.Between tv and profit sharing they more than break even.
    Great article
    Very real

  15. There are two forms of service time manipulation. One is making sure players don’t achieve Super Two status. The other is maximizing the number of years of team control. Jason’s point about ownership willingness to spend money applies to the first of these, because Super Two status would cost millions of dollars to the organization over the term of the player’s full contract time.

    The second form of service time manipulation, which generally involves delaying the arrival of a star player by two weeks, isn’t directly related to financial concerns. The Cubs delaying Kris Bryant’s arrival by two weeks in 2015 means that Bryant will reach free agency after the 2021 season instead of a year earlier.

    If you’re interested in reading more details about this and how the Reds handled Mike Leake’s service time, read this: https://redlegnation.com/2016/03/30/time-is-money-and-time/

    • On Mike Leake, though, controlling him an extra year would have required the Reds to pay him about $8 million in arbitration (a guess, and maybe conservative) in the middle of a rebuild. In his case, did losing him a year early actually hurt the Reds? I suppose they could have traded him for more than Duvall, but it seems pretty much a wash.

      I’m with Patrick on service time shenanigans. If a guy is ready, then play him. With Amir Garrett this year, for example, holding him back if he is otherwise ready tells the team that competing–playing good, hard-nosed baseball– is not important for now.

  16. MLB franchises are appreciating year-to-year, regardless of $ spent on salaries, for other reasons, such as scarcity and MLB’s anti-trust exemption status.

    I own 2 small businesses. The number one piece of advice I received from other business owners, 2 of whom have bigger revenues than the Reds, “never tap credit or personal assets to improve cash flow, unless it’s an emergency ‘keep the doors open’ situation.” It’s kept me very solvent during the worst business climate since the Great Depression.

    At the risk of “supporting ownership”, I tend to take Bob Castellini at his words in this old article. In a state full of snake oil salesmen sports owners, he seems better than most.

    http://www.cincinnati.com/story/sports/mlb/reds/2014/03/01/reds-finances-are-sound-but-castellini-wont-blow-this-franchise/5938765/

  17. Unfortunately one thing for sure will happen…the Red’s management will choose the wrong players.

  18. At their price point, we’re probably looking at a sale price that is around 7 times EBITDA (earnings before interest, taxes, depreciation, ammoritization) – so basically, profits. If the sale price is $1.4b, That would suggest an annual EBITDA of $200m for the Marlins. Now, they’re probably asking for a bit more than 7 times EBITDA to anchor the negotiation – so maybe annual EBITDA is really closer to $150m – still a big hunk of money not allocated to salaries.

    • The Marlins estimated revenue is 200 million so an EBITDA of 150-200 would not be possible. Their actual EBITDA is likely in the 25 million range.

      • If true, and I think the numbers are closer to yours than mine, then the asking price of $1.4b makes zero sense. At $25m of EBITDA, an asking price of $1.4b is 56 times EBITDA- which is insane.

        • There is no sanity with this stuff. Teams sell for about 100 x’s earnings.

  19. First of all, thanks to Redleg Nation (Jason) for posting this editorial and facilitating this awesome discussion. For me, I find the business analysis to be very much beside the point when looking at professional franchises. That doesn’t mean they aren’t run as corporations with business principles undergirding decisions, it just that business owners (I own my own) do not operate in the same business universe as professional sports. I find this to be the implicit argument made by Steve and company, and I am on board.

    I’d like to offer as evidence, this odious example in the NFL:
    https://theringer.com/oakland-raiders-las-vegas-relocation-stadium-bank-of-america-8c4522ee4388#.hk4rz7za8

    Owners are not subject to the normal constraints of businesses (with all due respect to Sliotar, who is spot on in a normal business sense), owners of sports team are extremely powerful individuals with undue influence over the government at the local, state and federal level, and frequently work their influence to guarantee financial windfalls unavailable to rest of us. If they want and need to go out of pocket, they should without moralizing. Whether Bob C. has to go on credit is irrelevant, as he made the vain and egotistical choice of getting into sports team ownership. If he wants to win, spend, and hopefully get that money back and then some with a ludicrous resale value.

    That does not make the players victims or powerless, but the owners aren’t one of us, they are should play there best players every game possible as far as I’m concerned. If playing Nick Senzel the first week in April in 2018 gets the Reds one game closer to winning the division and a championship, play him on opening day and every game afterwards. After that, the other advice dished out by this website on drafting and developing new players can help the franchise continually compete through replenishing its talents and also lets these players get paid earlier in their careers.

  20. I’m not familiar, or haven’t seen much of an argument that service time manipulation is due to status as a small market. It’s not that the Reds, or any team, can’t afford ARB costs or even the FA costs, but why pay more than you’d have to, especially in instances that would only require about two weeks of patience. Moreso, in my opinion it is less about the cost and more about the team control. The Reds will not compete often on the FA market. It’s not that they ultimately can’t, it’s that they won’t. Plus other teams still have deeper pockets, even if both pockets are filled with billions. Keeping control over a young player from their system for seven years instead of six is just practical when the Reds aren’t likely to bring replacements via FA. It gives them more time to develop a replacement and keeps productive players here longer.

  21. There’s little correlation between the sales price of a team and its revenue. You seem to be arguing that if the Marlins are selling for $1.4 billion they must be dramatically under reporting their revenues. I think it’s more likely that some one is dramatically overpaying. Forbes set the value at $675 million last spring.

  22. I don’t think this article criticizes owners for maximizing profit. Its criticism is that owners should at least be honest about it. Pleading poverty is a facade and a method to hold cities hostage and get taxpayer funded stadiums (and more favorable CBAs). The worst part is the gov’t protects the owners’ interests due to the monopoly. In many ways, the employer is MLB, not each team–as is the case with all professional sports. There is no free market in professional sports.

    And people want MORE gov’t to limit corporate power. HA! The gov’t IS the problem!

    • It’s interesting that you point out that the owners (corporations) hold cities hostage and then somehow conclude that the government is the problem.

  23. All kinds of businesses are given tax abatements, incentives and inducements to conduct business in a certain city. Many cities have given away the farm to sports teams. Reasonable people can debate whether that was a good idea or not, but it’s tough to argue that it’s the team’s fault.

    All kinds of businesses are given favorable tax treatment for research and development. Companies are given patent protections that enable them to recoup their investments and enjoy a price monopoly for a set number of years.

    A very small number of players that are drafted ever play an inning on the majors. If teams aren’t able to recoup their investment during the controllable years then the business of baseball doesn’t work. The MLBPA understands that their members are better served if teams are profitable and if all teams have the ability to compete. The Reds were successful because they could under pay Votto, Bailey, Chapman, Cueto and Leake for 6 seasons. Those players ultimately received market based pay. Players ultimately make more when the game is successful and being able to earn an return on player development enables that to occur.

    • Do you mean the operating costs of minor league teams or the signing bonuses and salaries of the players, in regards to your focus on costs for the players that never make it?

      • The entire cost of development. From bonuses to bats for anyone outside the big league club

Comments are closed.