Orioles Approach To Free Agency

Free agency in Major League Baseball begins 6 days after the World Series ends.  Since the World Series ended on Sunday night with a Giants sweep, the beginning of free agency this year will start at 12:01 am on Saturday, November 3.  After the Orioles successful 93 win season, the team will surely enter free agency hoping to improve the team and build on the success of this season.  However, Dan Duquette has said repeatedly that he does not expect to make a high priced free agent acquisition this off season.  Is that because the Orioles don’t have the money to spend?  Let’s explore that.

According to the latest information we have from Forbes, in 2011 the Orioles revenue was $179 million with an operating profit of $12.9 million.  Throughout the last 10 years, again according to Forbes, the Orioles have had an operating profit between $7.7 million and $34 million.  I believe Peter Angelos would support a larger payroll as long as he can maintain a $10-15 million operating profit on the team.  Now, let’s take a look at where the increased revenue is going to come from in order to increase payroll.

As a result of the successful season, the Orioles attendance in 2012 increased by 274,174 to a total of 2,102,240 for the season.  That figure was still 20th in the MLB, but it was a significant improvement over 2011.  If we modify the Forbes gate receipts to reflect the increase in attendance, we get an additional $6,306,000 in revenue.  Furthermore, while there is no guarantee of increased attendance in 2013, it has been suggested by many that attendance increases in the season after a playoff run.  But since we can’t assume it will increase, (even though it’s probable) we won’t use any potential 2013 increase in our calculations.

Because of the Orioles making the playoff this season, they’ll make some additional money as a result.  MLB has an extremely complicated formula for determining just how much the players and teams receive from the playoffs.  Instead of boring you all with the gory details, I’ll just point you to Maury Brown’s excellent summary here if you’re interested.  In summary, teams make more money the deeper they go into the playoffs and they also make more in each series that goes beyond the minimum.  Players receive 60% of the gate receipts for only the first 3 games of the division series.  After that, there is a set percentage that gets paid to the commissioner’s office while the rest is split between the two teams.  I’d estimate that the team made somewhere between $4-5 million as a result of the 5 game American League Division Series.  Are you still with me?  We’re over $10 million in increased revenue at this point.

I’m sure you’re all aware of the ongoing debate about the MASN revenues going to the Nationals and Orioles.  If you’d like to read the background on the story, you can read it in this Washington Post article, which does a great job summarizing the story.  Currently, the two teams each get $29 million per season from MASN.  The Nats are able to ask for more money in rights fees for the first time this offseason, and by all accounts they have done so.  They have asked for somewhere between $100-120 million from MASN, while MASN has in return offered an increase to $34 million.  Major league baseball has appointed a 3 team panel to decide the debate between the two teams and MASN.  They were supposed to have reached a decision much earlier in the year, but still haven’t reached a decision as we reach the end of October.  They have already missed two MLB imposed deadlines to reach a decision earlier and no one has any idea when they will come to a conclusion.  If I had to take a guess, I’d say that they’ll reach a decision some time late in the offseason once they’ve had some time to work on it without the distractions that come during the season.

Since it would be irresponsible of me to guess a number that the teams will give the Nationals (that’s what it would be, just a guess) let’s say for the sake of argument that they give the Nationals exactly what MASN is offering them, $34 million.  As part of the agreement when MASN was created, the Orioles rights fees are tied to the rights fees of the Nationals.  In other words, the Orioles would receive $34 million next year as well.  Being extremely conservative, that’s an increase of $5 million over what MASN paid them this season.  At this point, we’ve reached a little over $15 million in increase revenue.

The last point to consider is the new TV contracts signed by MLB this year.  Now they don’t go into effect until 2014, but you can be sure that MLB organizations are planning on funneling the increased TV money into their future budgets.  Reports have each team seeing an increase of $13 million from the new ESPN contract alone.  Craig Calcaterra of Hardball Talk speculates that teams could see as much as $40 million more from the new contracts combined.  Conservatively, let’s say the Orioles decide that they can increase payroll another $5 million because of these expected payments in 2014.  I know they won’t see the money next year, but they will be able to sign long term contracts with players while knowing the money will be there in 2014.

In total, I believe the Orioles have the ability to increase payroll about $20 million should they choose to and maintain the same operating profit.

According to Cot’s Contracts, the Orioles 2012 payroll was $84,102,333.  In 2013, the Orioles have already committed to paying players $53,170, 334.  In addition to the contracts that are already signed for next year, the Orioles have the most arbitration eligible players in the league with 15.  I don’t expect Steve Pearce, Lew Ford, or Omar Quintanilla to be back with the team, so let’s decrease that number to 12.  Using MLB Trade Rumors estimated values for arbitration (they’re good at it, so why try to do it again?) the Orioles would pay these 12 players an estimated $39.6 million.  If we assume the team lets Mark Reynolds go, the number drops to $30.7 million.

Here is the team’s estimated payroll for 2013 after agreeing to contracts with its arbitration eligible players:

With Mark Reynolds:  $92,770,334   

Without Mark Reynolds:  $83,870,334

Because the team is only slated to lose Joe Saunders, Nate McLouth, and Jim Thome in free agency and the Orioles have so many arbitration eligible players, the team payroll is already slated to increase if they simply keep Mark Reynolds.  And I’m assuming they don’t pick up his option and take him to arbitration.

One last thing to talk about in free agency this year, the free agent compensation rules have changed.  There is no longer Type A and Type B free agents.  Teams will have to make free agents a qualifying offer in order to be eligible for compensation.  The qualifying offer is a one year contract for $13.3 million.  Teams have five days after the World Series to make the offer and the players have seven days from then to accept or decline.  Teams that sign free agents who turn down qualifying offers will have to forfeit their first round pick in the 2013 draft unless the pick is one of the first 10 selections.  The player’s former team will receive one pick after the end of the first round.  Only players who were with their team for the full season will be eligible for a qualifying offer.

So now that we know the rules and we’ve determined that the O’s have between $11 and $20 million to spend in free agency (depending on whether they bring back Mark Reynolds), the next series of articles will talk about who the Orioles will spend that money on.  Yes, I’m predicting that the Orioles will raise payroll to somewhere around $104 million.  So maybe Dan Duquette isn’t blowing smoke when he says that the Orioles are unlikely to make any big free agent acquisitions.  But the club can make a few small acquisitions and still make the same amount of profit for its owner.

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About the author

Kevin Ebert  

Kevin was the owner of the Orioles blog Eutaw Street Blues. He had operated the site since the beginning of the Orioles magical 2012 season. He tends to focus on sabermetric analysis of the Orioles and their minor league affiliates. He balances his analysis between what he sees with his eyes and what the analysis of the data says. The Columbia, MD native attended the University of Colorado at Boulder while obtaining a Bachelors of Science degree in Business Administration. He also attended Loyola University Maryland obtaining the degree of Masters of Business Administration. When Kevin is not reading or writing about baseball, he finds time to work at M&T Bank.

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