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Posey, Verlander, Andrus Mega-Contract Extensions Define Baseball’s New Economics

The economics of Major League Baseball ownership has come a long way. Nothing illustrates this better than the recent contract extensions of the Giants' catcher Buster Posey, pitcher Justin Verlander of the Tigers, and Texas Ranger's shortstop Elvis Andrus.

Contract extensions on top of existing multi-year contracts in baseball has become a template for ownership. And for one very good reason– soaring MLB team values and revenues.

Although extensions are inevitably cheaper than losing yearly arbitration awards or standing in the free agent line with five other teams bidding on your own star first baseman, many owners still had a chronic fear of economic commitment.

But now all franchises up and down the team value scale have an even bigger incentive to pay 2013-2015 prices for six, seven, eight or nine year contracts: they actually have the money to do it.

Today, thanks to a series of MLB national media megadeals and other revenue generating investments, there are no "small market" teams in the way we used to think of them.

For instance, every MLB team gets $50-55 million dollars a year as their slice of the national TV pie. And that doesn't count local TV and radio revenue (the Red Sox have an $18 million a year radio deal, the Texas Rangers pull in another $150 million a year from local TV broadcasts).

Additional income comes to all 30 teams from various other MLB investments and lower earning teams also receive revenue sharing.

Much of this is guaranteed income no matter how smart or incompetent a team's executives may be. Which means that if a baseball owner can simply manage to not totally screw up the other aspects of running their franchise they can realize staggering annual revenues.

"Large market" and "small market" haven't been valid measures of any MLB team's worth, spending power, or ability to make money for almost a decade.

Twenty years ago there were actual large market and small market teams and many of the best players gravitated to East Coast clubs where the New York Yankees and Boston Red Sox opened their vaults each season and took their pick of the best available free agents. Now we see teams up and down the economic spectrum signing free agents and offering long-term contracts to their star players.  

Take the recent Forbes magazine 2013 MLB team valuation list. The 30th ranked team, the Tampa Bay Rays, is worth $451 million and generates revenues of $167 million a year.

Forbes ranked the San Francisco Giants 7th overall in value at $786 million. The Giants also have the 6th highest payroll in baseball ($140 million) with three mega-contract players: Buster Posey, 9 years $167 million; Matt Cain, 6 years $127.5 million; and Barry Zito, 7 years $126 million.

Leading the Forbes' most valuable franchise list, of course, were the New York Yankees ($2.3 billion) and the Los Angeles Dodgers ($1.6 billion). But the change in every team's ability to sign players to multi-year contracts is bad news for the former "big market" big spenders like Boston and New York.

In the past the Yankees and Red Sox would cherry pick talented players at will from teams that didn't have the money for long-term contracts. Now the so-called "low payroll" teams like the Tampa Bay Rays are signing their best players to big long-term contracts.

Maybe the best example of this is Rays' third baseman Evan Longoria.

Longoria is exactly the kind of player Boston or New York would have pounced on 10-15 years ago when he hit his first arbitration or free agent year. Tampa would have had to trade Longoria just before his free agent years hit to get some value back for a player they drafted and developed but simply couldn't afford to keep.

But under the new MLB economics Tampa was able to sign Longoria to a six year contract in 2008 and recently extended him for another 6 years. He will make $131 million between 2013 and 2022.

And the New York Yankees? Prior to the start of the 2013 season the Yankees signed 34 year old journeyman Kevin Youkilis to a one year $12m contract to play third base.

Details of Buster Posey's 2013 contract extension at MLB.com

Details of Justin Verlander's 2013 contract extension at MLB.com

Details of Elvis Andrus' 2013 contract extension at MLB.com

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