Breaking down Giancarlo Stanton’s $325 million deal: could the first billion dollar contract happen sooner than we think?

Marlins owner Jeffrey Loria and slugger Giancarlo Stanton are all smiles as Stanton signs his $325 million deal. USA Today Sports/Reuters

In baseball history, nine players have signed guaranteed contracts worth over $200 million. Five of those contracts have been for ten years. Two of the five belong to Alex Rodriguez; the others include those for sluggers Miguel Cabrera, Robinson Cano, and Albert Pujols.

Only one player has signed for more than ten years and for more than $300 million: Giancarlo Stanton, the 25-year-old outfielder for the Miami Marlins who inked a $325 million, 13-year deal earlier this week.

With the first professional athlete cracking the $300 million barrier, some are asking: when will we see the first $1 billion contract? Let’s use some simple math. Back in 1980 Dave Winfield signed baseball’s first ten-year deal, for a total of $25 million. Using that as a base – and comparing it to Stanton’s deal, which begins in 2015 – baseball’s mega-contracts have been growing at an annual rate of 7.6 percent over the last 35 years. If they continue to grow at this rate, the first $1 billion deal will come in 2031.

in 1980, Dave Winfield signed baseball’s first ten year contract (for a total value of $25 million). Since then, the value of mega-deals has risen at an annual rate of 7.6 percent.

Before you take that prediction to the bank, there are some caveats. For one, Stanton’s contract is heavily backloaded. Next season he will be paid a “pauper’s wage” of $6.5 million, followed by $9 million and $14.5 million over the two ensuing years. It is not until year seven that his annual average salary exceeds $31 million. This, of course, makes the contract more palatable to Marlins’ owner Jeff Loria (in the short term, at least), leaving him with more cash to surround Stanton with a group of winning players.

Jeff Loria has been excoriated in the Miami press for gutting his team the year after his new stadium was built and for perennially carrying one of baseball’s lowest payrolls; the embattled owner needed to redeem himself in the eyes of the Marlins’ fan base. So, in addition to buying himself a mighty fine slugger (though arguably not at the level of A-Rod, Cabrera, Cano and Pujols when they signed their mega-deals), Mr. Loria also purchased a modicum of legitimacy among his prospective consumers.

He also won’t be paying nearly as much – in present value – as $325 million would indicate.

Present value adjusts for the fact that, due to inflation and time preference, one would rather have a million dollars today than a million dollars ten years from now. Because Stanton’s remuneration starts so low and ends so high, the $325 million figure being advertised is somewhat of a mirage.

If we use a discount rate of five percent, the present value of the 13 years of payments due Stanton is around $220 million. At a discount rate of three percent, the present value rises to $256 million – still far below the widely publicized $325 million.

Although the diminished present value sums and the need for Loria to hit the PR reset button may seem to make the contract more manageable and understandable, we can rest assured that both the gross value of the contract and its length are nonetheless alarming to other team owners.

Consider, for instance, the fact that MLB is the only team sports league in the United States without a limit on the length of guaranteed player contracts. The NHL limit is eight years. The NBA limit is five years. The NFL does not have guaranteed long-term contracts.

Consider, too, that the average baseball player hits peak performance at between 29 and 30 years of age, that injuries become more commonplace as a player moves through his thirties, and that most players do not reach free agency until their late twenties or early thirties. A-Rod will be 43 when his contract ends, Pujols will be 42, Cabrera 41 and Cano 41 (another consolation for Mr. Loria is that Stanton, at 37 years old, will be a spring chicken during the last year of his deal). There isn’t a living baseball analyst who thinks that A-Rod’s contract isn’t an albatross for the Yankees. Time will tell how Pujols, Cabrera and Cano are viewed as they enter their late thirties.

Angels slugger Albert Pujols will be 42 years old when his $240 million deal expires in 2021. Three years into the deal, his statistics have already precipitously declined. Danny Moloshok/Reuters

So, it may not be far-fetched to assume that during the negotiations for MLB’s next collective bargaining agreement (which will occur prior to the 2017 season), owners will push for a contract limit provision. If this contract length limit is, say, seven years, then in order for there to be a contract whose gross value is $325 million, the annual average salary would have to be $46.4 million – or, 86 percent above Stanton’s current level. At 7.6 percent growth per year, that will delay the first billion dollar deal until 2039.

There’s one more consideration to make. Baseball, like football, basketball and hockey, devotes approximately 50 percent of its revenues to player salaries. Thus, for player salaries to grow at 7.6 percent per year, league revenues also would have to grow at this rate.

Only a few straightforward questions remain. What will be the U.S. rate of inflation over the next 25 years? What will be the delivery mechanism for streamed baseball games (which could have a huge impact on revenues)? How many times will we witness a government shutdown?

Ahem, yes, 2039. Or maybe not.