Major League Baseball and Nippon Professional Baseball have reached a new posting agreement apparently designed for one purpose: thwart the Yankees and other free spenders from signing Masahiro Tanaka. However, a careful examination of the details suggests the resolution could come back to haunt the small market teams who reportedly pushed for its implementation.
Under the old posting systems, teams placed secret bids for the right to negotiate with a Japanese player. The MLB club bidding the highest amount was given an exclusive window to hammer out a contract, upon which the NPB team would be paid the posting fee. This system placed the player at a disadvantage because it gave MLB teams all of the leverage. If the player refused to sign a contract, his only recourse was to return to Japan. As a result, MLB clubs were able to pass on much of the posting fee to the player in the form of a discounted salary. Although the old system clearly favored the NPB because it produced bloated posting fees, MLB teams still made out well thanks to the extreme leverage those fees created.
Under the new system, NPB clubs will be able to set a posting fee up to, but not more than $20 million, and MLB clubs willing to pay that price will win the right to negotiate with the player. However, because the cap is so low, the best players will likely attract several teams willing to pay the maximum fee. When this occurs, the player will be given the opportunity to negotiate with all of the top-bidding teams, making him a de facto free agent. So, in exchange for reduced posting fees, MLB teams have ceded leverage to the player, who will now be able to play one team off another.
Assuming teams are rational and will only pay an amount commensurate with perceived value, the net effect should be about neutral to MLB, with the advantage shifting from the NPB to the player. Consider Yu Darvish as an example. In 2011, the Rangers paid a $51.7 million posting fee to the Nippon Ham Fighters and then signed the right hander to a $60 million six-year contract, creating a total outlay of $111.7 million. If the new system had been in place, it stands to reason that several teams would have bid $20 million and Darvish would have then negotiated a contract worth at least $81 million.
Why did MLB push for a new agreement that doesn’t really change its cost? Perhaps MLB clubs were sympathetic toward the plight of Japanese players, but a more realistic motivation was probably the luxury tax, namely, preventing very large market teams from avoiding it. By shifting the bulk of the cost from the posting fee to the player salary, a larger percentage would be applied to payroll, and therefore subject to the luxury tax. Again using Darvish as an example, under the old system, only the $10 million average annual value (AAV) of the righty’s contract is applied to the Rangers’ payroll for luxury tax purposes, but with the new rules, a comparable deal would create a $13.5 million hit.
The AAV implications of the new posting system only impact teams that pay the luxury tax, so it’s natural to assume the new rules are targeted at the Yankees and, to a lesser extent, the Dodgers and Red Sox (and other large markets that may someday decide to cross the $189 million barrier). However, in their effort to thwart the financial advantage of big money teams, the smaller market clubs may have shot themselves in the foot.
If teams like the Yankees and Dodgers adhere to the luxury tax limit, then the new posting system is prohibitive. But, what happens if they disregard it? Now, small market teams will have to compete head-to-head with these behemoths, instead of behind the secrecy of the posting system. Not only would the Yankees and Dodgers benefit from the greater lore of their brands, but they would have the ability to outbid for any player they wanted. Although big market teams could be extravagant under the old posting system, small market teams had the opportunity to take advantage of both its secrecy and the leverage it provided. These two elements made it possible for small markets to be aggressive in the posting process and conservative in player negotiations. Also, because the player’s only alternative was to return to Japan, a small market team unable to reach a deal would at least have the consolation of blocking their larger market competitors. Now, the only way for a small market team to sign a Japanese player is by winning a bidding war.
There is one other potential unintended consequence of the new agreement. Because NPB teams are taking it on the chin, they may reevaluate the benefit of posting players. If NPB teams decide their top stars are worth more than $20 million, it will drain the MLB talent pool and deprive baseball fans in the United States of seeing some of the game’s best players. In addition, it could hamper MLB’s marketing power in Asia and limit all of the revenue that comes from it (revenue that all teams share equally).
The Rakuten Eagles will be the first team to test the new agreement. Will they still allow Masahiro Tanaka to post? And, if so, do the new rules all but earmark him to a big market team like the Yankees and Dodgers? The answers could have MLB and its small market owners seeking a do-over.