Why This Free Agent Class May Hit the Jackpot

If you’re a team looking to add a significant piece to your roster, this is a pretty great winter to be a buyer. Unlike most recent free agent crops, this group of available players boasts both legitimately elite players and a host of quality mid-tier options. Especially for teams looking for starting pitching or outfield help, the supply of talent is unlike anything we’ve seen in a while, since the boom of early-career extensions has served to keep a lot of the game’s best players from reaching the open market.

Of course, supply and price are often inversely correlated, so when there’s a lot of talent available, it’s easy to conclude that teams will price-shop across multiple options, and we might see less inflation this year than we have in previous years. However, in this case, I don’t know that the increased supply of talent is actually going to lead a stagnation in salary inflation; in fact, I think there are some reasons to believe that we may see some significant spending, above and beyond what is already expected, by MLB teams this winter.

As has been widely reported, MLB is currently rolling in money; league-wide revenues are pushing towards $10 billion per year, and the rapid rise of television money has dramatically raised the bottom tier of MLB payrolls. It’s no longer just the Yankees and Red Sox who bid on all the top free agents, and with the sport featuring historic levels of parity, everyone fancies themselves a contender now, so there are far more buyers in free agency than there used to be. So, the demand side of the price equation is also experiencing a surge, which helps equalize things in a market filled with available talent.

But while the spending sprees of the last few years have been driven by television money, there’s another potential burst of revenue that team owners are likely already factoring into their long-term spending plans: the liquidation of their status as the sole owners of a newly formed company called BAM Tech. Back in August, the owners approved the formation of BAM Tech as a separate entity from MLB Advanced Media, which is the division that developed the league’s significant digital footprint. As the league proved that their streaming infrastructure was far ahead of what most media companies could do on their own, MLB became a go-to resource for other companies not only looking to sell access to their content online– the league has served as a hosting provider for ESPN and the NCAA, among others — but also an app-development partner (as their deals with HBO and WWE show), and now, with their most recent deal with the NHL, BAM Tech is a full-on content rights holder.

Given how successful this part of the league’s investment in digital properties has been, each MLB team now owns about 3% — we don’t know exactly how much equity in BAM Tech has been sold off, but some outside investment (the NHL deal, at least) has already diluted the team’s stakes, so they don’t own exactly 1/30th — of a technology company that has been profitable since 2008 and is growing their revenues at a rapid pace. Depending on which reports you go by, estimates of BAM Tech’s valuation range from as low as $3 billion to $8 billion on the high end. A 3% stake in a $3 billion company is worth $90 million; a 3% stake in an $8 billion company is worth $240 million.

Every team in the league is looking at a significant financial windfall if MLB decides to go through with the long-rumored IPO of BAM Tech. Bob Bowman, the CEO of MLBAM, downplayed the chances of an IPO recently, but did note that, at minimum, the league is looking to sell more equity to outside investors.

“I don’t think we’re ready for an IPO,” said Bowman, an investment banker before he joined MLB Advanced Media when it launched in 2000. “I think we’re ready for another round of investments. We’re a neophyte in the rights business. We have a pretty good way to monetize rights.”

Whether they’re ready for an IPO in the short-term or not, BAM Tech won’t remain under MLB’s umbrella forever, and the widely held expectation remains that Bam Tech will spin off at some point in future. A strategic investment, which is what Bowman has stated they are currently looking for, would likely lead to funds being raised to help grow BAM Tech itself rather than provide a cash out for the owners, but growing BAM Tech into an even more valuable company raises the potential for an even higher valuation down the line. At some point in the future, BAM Tech will likely spin off via an IPO, at which point teams will receive a significant amount of cash for their equity.

If you’re a Major League team trying to decide whether to go six or seven years on a premium free agent, and you have a reasonable expectation of receiving a significant amount of cash at some point during that contract, it may very well be much easier to take the risk of a deal that might look like an overpay today. After all, if every team is looking at a windfall potentially in the hundreds of millions of dollars if BAM Tech does go up for an IPO, then a deal that looks like an overpay now may look like a bargain by the time new contracts are pricing in those revenues.

Of course, the teams aren’t under any legal obligation to spend all of the money they’re going to receive on player salaries; these returns are based on investments the owners made in a technology company, and they could argue that that the profits made on that investment don’t need to be reinvested into the team. Clearly, not every owner is going to decide that their stake in BAM Tech should be used to increase their player payroll, so you shouldn’t expect to see payrolls ballooning in an evenly distributed way.

But with a potentially tense CBA negotiation coming next year, there are problematic optics associated with pocketing tens of millions of dollars without passing on some of the benefits to the players, and you know the MLBPA is going to push back against the players declining share of revenues in recent years. Teams aren’t going to spend money simply because they want to avoid getting yelled at in labor negotiations next year, but I do think they have more incentive to make sure the players feel well compensated this winter than they have in a very long time. This probably isn’t the winter to attempt to hold the line on player salaries, at least.

Beyond the potential BAM Tech cash infusion and the looming CBA negotiations, there’s a third factor which might drive even more spending than expected this winter; the pitiful crop of free agents that make up next year’s market.

This winter, teams can go after David Price, Jason Heyward, Zack Greinke, Johnny Cueto, and Yoenis Cespedes, among others. Next winter? Well, there’s Stephen Strasburg, who will likely get a lot of money assuming he stays healthy this year. And then there’s a 36 year old Jose Bautista and a 34 year old Edwin Encarnacion for teams who might want short-term power boosts. Free agent hitters who will still be selling at least one season in their 20s include Wilson Ramos and, uh, Logan Morrison, I guess. Carlos Gomez and Josh Reddick will be out there as early-30s guys, and Aroldis Chapman will probably blow away the previous record for a contract given to a reliever, but compared to this crop of talent, next year’s group looks nothing short of terrible.

So, a Major League team on the upswing that expects to contend in a couple of years might look at the next free agent crop and decide that they’re better off getting their money in now, buying some future wins before they’re faced with a market in which wins are harder to buy with their future revenues. For instance, the Atlanta Braves have been pretty clearly building towards the future, pointing to the 2017 opening of their new ballpark as the next time they expect to seriously compete for the NL East title, but it may very well be in their best interests to try and identify some free agents in this market that they think will still be productive in a few years, rather than holding off another 12 months to try and make a big splash right before the stadium opens.

The weakness of next year’s free agent class, combined with the potential of a revenue infusion from the company’s digital properties, along the possibility of contentious CBA negotiations, sets up some interesting external variables that will likely impact how much money teams want to throw around this winter. The fact that MLB teams handed out 20 qualifying offers on Friday shows just how much financial flexibility teams have right now, and we may very well see that kind of aggressive behavior continue as teams use their strong financial positions to bid on talent that won’t be available next year.

Predicting what teams are going to do in advance is difficult, and this is all just speculation based on my attempts to read some tea leaves. But it does appear that some stars are aligning that could push MLB teams towards significantly increased spending this winter. It’s a really nice year to be shopping for talent, but it also could be a really great year to be a free agent.