The Better Letter: Statue Contract

A deep dive into the new Fernando Tatis, Jr. contract and my San Diego Padres

The newly-turned 22-year-old Fernando Tatis, Jr. agreed to a 14-year, $340 million extension with the San Diego Padres this week, the longest and third richest contract in baseball history. This week’s TBL will take a deep dive into that historic contract, what it means for my Padres, the only major professional sports team in America’s Finest City, baseball, and for Tatis, Jr., for whom the stars are surely bright.

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Statue Contract

On April 29, 1999, Fernando Tatis, Sr. caught lightning in a bottle. From that day forward, the “Fun Fact” on his baseball card could read: “The only Major Leaguer ever to hit two grand slams in the same inning.” Truth be told, however, he really caught lightning in a bottle nearly four months earlier, just after New Year’s, when his son, Fernando Tatis, Jr., was born.

Tatis, Jr. was a Top 30 potential international prospect for the 2015-16 international period when he signed for $700,000 at age 15 with the Chicago White Sox, who shipped him to the Padres the following June, before he had played a professional game, as part of the trade that sent a past-his-prime James Shields and his excessive contract to the Pale Hose. He made his pro debut in 2016 and quickly made his mark. In 2017, he was #52 on the MLB prospects list. By 2018, he was perhaps the top prospect in all of baseball.

I saw Tatis, Jr. in person for the first time at the 2018 Futures Game during the All-Star Game festivities in Washington, D.C. I took my three older grandsons to the game and introduced them to baseball’s next superstar. He played shortstop for the World team, got two hits, and stole a base. He was picked by the players in the game as the one among them they expected to become the biggest MLB star.

In 2019, at 20, he became the youngest player in Padres history to start on Opening Day, and got two hits. He made the All-Rookie team despite missing nearly half the season with an injury. In 2020, he hit his 30th career home run in just his one-hundredth game . . . at age 21, won a Silver Slugger award, was the All-MLB First Team shortstop, and improved his defense markedly while leading the Padres to the postseason for the first time in fourteen years.

Fernando Tatis, Jr. signed a “statue contract” this week. It’s the longest baseball contract ever, executed with the idea that Tatis, Jr. will one day be embronzed outside Petco Park like Tony Gwynn and Trevor Hoffman. He is the “most exciting player for the most exciting team in the league.”

“It’s been my mindset since I started playing this game,” Tatis said. “I feel like the team that gave me the chance, I will embrace it 100 percent. And why not? Why not go to a statue contract? People are saying, ‘Oh, too many years,’ but I just love what I’m seeing, what we’re going to do. And I want the statue on one team. I want to be able to stay with one team and build my legacy over here in San Diego.”

Padres GM A.J. Preller was ridiculed by other organizations when he refused to manipulate service-time rules to gain an extra year of control over Tatis, Jr. in 2019. Instead, he installed the then 19-year-old at shortstop on Opening Day at Petco Park.

“I will never forget that Opening Day, my first at-bat, how the fans received me in that moment,” said Tatis, Jr., who singled off Madison Bumgarner after receiving a standing ovation. “It just clicked in that moment. I felt the love; it was mutual right away. And I said, ‘This is home.’”

Some veteran baseball people see Tatis, Jr. as the best athlete the sport has ever seen but with serious skills, too. Last season, he led all qualified hitters in average exit velocity, hard-hit rate, and barrel rate, per Statcast measurements. He hits for average and power, dazzles on defense, steals bases, and turns infield popups into sacrifice flies.

Best of all, a sport with a recent history of money-motivated trades of great players has found a bright light for fans and the game amidst that darkness. Tatis, Jr. is the one baseball player who may be bright enough to light up the whole sports sky. He is the most exciting player in baseball and well on his way to being the best. Now he’s a Padre for good.


Small Market?

I have been a San Diego Padres fan for more than 25 years. I became a Friar follower when we moved to San Diego in 1995. The Pads won their division in 1996 and had a terrific National League championship team in 1998 that lost to an all-time great Yankees team in the World Series. I saw Hall-of-Famers Tony Gwynn and Trevor Hoffman in their primes.

It was all downhill from there. We did win division titles in 2005 and 2006, but only one post-season game. Then nothing for 14 years. 

Walt Whitman proclaimed that “Baseball is the hurrah game of the republic!” But there weren’t a lot of hurrahs in San Diego. The Padres have the worst aggregate record in the history of baseball and have never won a World Series.

On August 6, 2014, the Padres announced the hiring of A.J. Preller as their new general manager. Preller made many dubious moves over his first (2014-2015) offseason. However, since that disaster, A.J. has executed an almost perfect four-year rebuild. Let’s call it the Preller Project. A.J. got to work building a top organization and the best farm system in baseball. 

Before last year, we had the best ballpark in baseball, the best beer, the best fan experience, the best broadcasters, and a lousy team. The “lousy team” part has changed. In 2020, led by Tatis, Jr., the Padres advanced to play October baseball and won a postseason series. Only the hated Los Angeles Dodgers had a better record in the National League.

Getting there wasn’t easy.

In terms of overall revenue, the Padres are just about in the middle among MLB teams while situated in a bottom-five media market (constrained by the Mexican border to the south, the Pacific Ocean to the west, the desert to the east, and Dodger Stadium just 124.7 miles north of Petco Park). The Pads earn barely half the revenue the Dodgers do, largely because their division rival’s local television deal is more than five times as good as that of the Friars. Because the Dodgers own 100 percent of their network (compared to the Padres’ 20 percent) and because such ownership interests are exempt from MLB revenue sharing, in reality, the gap is even bigger

Oh, and the Dodgers are the current World Series champions and have won eight straight division titles. So there’s that.

The economics of baseball, and most prominently the lack of comprehensive revenue-sharing among the “partner” teams, means that the disparity between the financial haves from the have nots is by far the widest among the major sports. Shrewd leadership can allow small-market teams to succeed (take a bow, Tampa Bay Rays), but there is a chasm of difference in financial and performance opportunity between, say, the Dodgers and my Padres.

The Padres are in the lower half of MLB in terms of value (the Dodgers are worth more than twice as much, with roughly twice as much operating revenue and operating income) and play in just the 29th largest media market. Los Angeles is nearly six times bigger.

Small market teams are typically content with modest goals, modest expectations, but healthy profits. Not San Diego. At least, not anymore. Over the four-year rebuilding process, Preller built the best farm system in baseball. Rather than inspire bad faith and game their service time, the Padres placed Tatis, Jr. and pitcher Chris Paddock on the Opening Day roster to start the 2019 season and left them there. There’s nothing small market about that.

Tatis’s recent deal comes two years after the Padres committed $300 million to Manny Machado, which came a year after a $144 million commitment to Eric Hosmer. San Diego used the financial uncertainty of a pandemic (the claims of financial hardship resulting from the COVID-compromised 2020 season are temporary and almost certainly overstated) and that strong farm system to buy when everyone else was selling and create a roster with the talent to compete with the best teams in baseball. There’s nothing small market about that. 

The Padres achieved the majors’ second-best run differential last season, behind only the Dodgers, then, with the support of new lead owner Peter Seidler, added Blake Snell, Yu Darvish, Joe Musgrove, and Ha-seong Kim this winter. Even so, the Yankees and Dodgers are projected to have better records this season, according to both FanGraphs and Baseball Prospectus. So Preller may not be done. There’s nothing small market about that.

According to Spotrac figures, the Padres’ payroll in 2020 will exceed $160 million, by far the highest figure in franchise history and projected to be the ninth-highest payroll in MLB, by far their highest finish ever in that category. Looking further into the future, the Padres have nine-figure salary commitments through 2023 and at least $75 million committed to player payroll through 2027. There’s nothing small market about that.

The Padres undertook these moves even though they remain underdogs in their own division. The Pads may have the second-best roster in baseball, but LA’s remains best by most accounts. Because non-division winners that qualify for the post-season face a single-game elimination to advance, which means a very wide variance in outcomes, the risk is enormous. There’s nothing small market about that.

“This is not a small-market franchise,” insists Padres executive chairman Peter Seidler. On April 25, the Padres will appear on ESPN Sunday Night Baseball for the first time since 2007. Not a single player from that 2007 Padres team is still playing baseball.

For fans, the Preller Project is an unmitigated success and A.J. has been rewarded with a new six-year contract extension for it. Fans want their teams to try to win and, when they have a shot, to go for it. Preller has done that in spades.


Good Deal

Fernando Tatis, Jr. plays baseball preternaturally well and with the joy of Christmas morning. He is a transcendent talent. He makes me think baseball is still the National Pastime.

When Tatis, Jr. agreed to that 14-year, $340 million extension this week, the most stunning major-league contract in recent memory, Padres officials compared it to signing LeBron James or Magic Johnson on account of El Niño’s work ethic, attention to detail, talent, character, and marketability. It is the longest contract in MLB history, the third-largest overall, and the largest for a player who has not yet reached arbitration. It’s a big price with a wide variance in possible outcomes, but the Padres get cost certainty while Tatis gets financial security for life.

The Padres have locked down the most electrifying and potentially the best player in baseball – a “five-tool” guy who plays a premium defensive position – for the long-term. His entire prime will be in San Diego. The numbers say Tatis, Jr. is on track to be an all-time great. But to appreciate him fully, you have to watch.

So. Much. Fun.

This contract surely has risks. On both sides. Tatis, Jr. is accepting less money than what he could almost surely get on the free-agent market at age 26 if he continues to play like one of the best players in baseball for the next five years ($450 million, perhaps?). San Diego is paying the third-largest guarantee in baseball history and risks injury, underperformance, decline,* and the opportunity costs that go with them (see, e.g., Tulowitzki, Troy or, more troublingly, Correa, Carlos). In return, the Pads get cost certainty and the assurance that, as a small-market team, the Padres will retain their franchise player for his entire prime.

Every team in MLB would have loved to have locked up Cal Ripken, Jr. or Alex Rodriguez for 14 years at age 22. But no regular shortstops from 14 seasons ago (2007) remain active – in any role – today.

The Padres are basically “fronting the risk of some unlikely tails in exchange for a discount on a long-term superstar.” It is a very good deal for both sides based on the data and on what it means. Only 15 hitters have posted a 140 wRC+ or better through age 21 with at least 600 plate appearances. Nine are Hall of Famers, which leaves out Shoeless Joe Jackson, Mike Trout, Albert Pujols, Juan Soto, and Tatis, Jr. For now. The only player who made that mark so young and faded away was Hal Trosky, who still provided 29.1 WAR from 1933-1940 before debilitating migraines did him in. Tatis, Jr. is getting paid life-changing, legacy money. Guaranteed. Four years before he could hit the open market.

The Padres are getting Fernando Tatis, Jr. for the long-term.

The deal is more than fair. To both sides.


Hedging the Upside

From an idea generated by Milton Friedman, dozens of colleges, including Purdue, Utah, and Northeastern, have created and entered into income sharing agreements with students, whereby tuition fees are reduced in exchange for a percentage of the students’ future earnings. Dave Ramsey thinks the idea is crazy (he thinks it’s debt, but it’s basically venture capital, as Friedman argued), yet it has clear merit, especially for those without a lot of money.

Michael Schwimer, a University of Virginia graduate and a pitcher of limited Major League success, saw the difficulties notoriously underpaid** minor league players had in making ends meet, and founded Big League Advance in 2016 to take the income sharing agreement concept to MLB. He raised over $150 million in capital from investors to advance to minor league players in amounts determined by a proprietary predictive analytics algorithm for the players to keep whether or not they make The Show in exchange for a slice of their income when they do. He trusted that his experience and the data would give him the edge needed both to be profitable and to help minor league players. 

Success requires great analysis in that 75 percent of BLA’s signees were not ranked within baseball’s top 300 when they signed and only 10 percent of minor leaguers reach the majors, even for just a cup of coffee.*** Schwimer attracted money from investors like mutual fund manager Bill Miller and participation from Cleveland Browns’ executive Paul DePodesta (made famous in Moneyball), who also took an ownership stake in BLA.

BLA signed Tatis, Jr. five years ago, when El Niño was playing in Single-A ball, as part of the fund’s $26 million in first-round investments spread across 77 players. The BLA analytics said Tatis, Jr. was the second-best minor leaguer in 15 years and could be a generational talent even though the various ranking services didn’t see him as nearly that good. BLA made him the best bid in its history, although the exact terms remain undisclosed. The fund now has agreements with nearly 350 players and over $150 million invested. 

The average BLA deal is for more than $400,000 and for about 8 percent of MLB earnings (that would be $27.2 million for the Tatis, Jr. contract). It is clearly a very long-term play. The deal with Tatis, Jr. will pay-off in a big way, obviously, but dozens of BLA players are out of the game without having made a big league appearance. “We know we’re going to lose money on over 80 percent of the players we do deals with,” Schwimer said. “We know that going in. But it’s all worth it because of finding a Tatís.”

Tatis, Jr. used the money to invest in himself. He was able to train better, live better in the minors, and eat better. He built an infield at his parents’ home in the Dominican so he could improve on defense. (It would seem that one inefficiency MLB teams could exploit is minor league pay; making sure minor league players live and eat well should provide teams with a competitive advantage).

The MLB Players Association is no fan of BLA, but it doesn’t represent minor league players, who are clearly underpaid. Hedging their upside makes financial sense all around. “I tell every investor, ‘If you invest in the stock market and you lose, you're losing money on Apple stock or whatever,’ Schwimer said. ‘If you invest in Big League Advance and lose, you have changed someone's life.’”

As Tatis, Jr. said in 2018, “If I’m a successful player and make big money, I’m not going to care about giving that money away. That will be nothing if I make all that big money.”


Barbell Strategy

Bilingual, handsome, and charismatic, Fernando Tatis, Jr. has national crossover appeal in a sport that isn’t “hot” and is increasingly local. As Jayson Stark says, “It’s the smile, the style, the highlight reel.” He is already baseball’s most visible endorsement star. He has with deals from Gatorade, Adidas, BMW, and more. He is featured on card number one of the 2021 Topps baseball card set. 

Tatis, Jr. was the most searched player during the 2020 postseason on baseball’s online video library, MLB Film Room, and added more Instagram followers than any other player during the 2020 season. He is also the cover star of the newest version of the video game, MLB The Show, making him the new face of the game . . . literally. He is already and officially the MLB Latino Face of the Game.

Because of Tatis, Jr., Alex Rodriguez says, “I’m so excited because we finally get a glimpse of what baseball could be. And I love it.” ESPN says his style “radiates joy.” Indeed, baseball is “relying on him.” He is the player Mike Trout most likes to watch. Peter Gammons says of Junior, “we wish Jack Buck were there to say, ‘I don’t believe what I just saw.’”

Critics of the Tatis, Jr. contract typically criticize it as leaving too much money “on the table.” That criticism underplays the risks of waiting to sign a big contract after arbitration (four years hence for Tatis) and also neglects the broader picture and Junior’s use of a barbell investment strategy variation. The basic idea of Nassim Taleb’s famous barbell strategy is to divide a portfolio into two parts, with the great bulk of the assets of an extremely conservative nature for safety (to protect against “left tail” events) and the remainder in highly speculative assets designed to try to capture the benefits of “right tail” events.

Taleb generally suggests putting something like 85-90 percent of a barbell portfolio into ultra-safe investments with the remaining 10-15 percent in many small, long-shot bets —basically, the highest-risk, highest-reward investments possible (note that the average investor can’t employ this strategy because s/he doesn’t have enough overall wealth to make enough long-shot bets within the “lottery ticket” allocation to make a big payoff sufficiently probable). 

Tatis, Jr. is guaranteed $340 million dollars – generational wealth. That he might have gotten $400-450 million by waiting a few years hardly matters to the life he and his family will live. It is a cardinal rule of financial planning, but one often ignored, that when you’ve won the game, you should stop playing. By signing this huge contract, Tatis, Jr. has won big financially and can concentrate exclusively on baseball.

Moreover, unlike virtually every other MLB player, Tatis, Jr. retains enormous potential upside through his endorsement potential. That’s the other end of the barbell.

Athletes can make a ton of money endorsing products. Despite a global pandemic, the top 100 athletes made $3.6 billion as pitchmen (and women) in 2020, a 9 percent decline year-over-year. LeBron James earns over $50 million per year that way. Cristiano Ronaldo and Usain Bolt make over $30 million per year. Top golfers and tennis players make similar money, sometimes more. Football (of the American variety) doesn’t have the same global footprint, but Tom Brady makes about $12 million per annum pitching stuff. Despite baseball’s broad international appeal, only Mike Trout and Bryce Harper earn more than $1 million in endorsement money a year, and they earn far less than Brady, much less the leaders. Manny Machado earns $30 million per year from the Padres but only $500,000 in endorsements.

Tatis, Jr. might be the guy to change that. In December, the 22-year-old, bat-flipping Dominican with frosted dreadlocks, mirrored shades, and an unbuttoned jersey signed a national endorsement deal with Gatorade, only the third such deal by a baseball player in two decades. And it’s not his only such deal.

He is now doing private equity deals, too. Earlier in 2020, Tatis Jr. became an endorser and investor in Hyperice — the $700 million performance recovery company many think can be a multi-billion-dollar player in the future.

Fernando Tatis, Jr. has signed a contract the guarantees his future luxuriously. He also retains incredible financial upside. He’s still betting on himself in a big way.


Slam Diego

Last August, the Padres became the first team to hit grand slam home runs in four consecutive games in baseball history. They also hit five in six games. “Slam Diego” was born. Today, the Preller Project, led by Fernando Tatis, Jr. and his “statue contract,” looks to turn the catch-phrase into a routine description. 

Slam Diego indeed.

What the Padres are doing is great for fans and great for baseball. Dayn Perry gets to the heart of the matter.

“For all the diversionary oxygen being devoted to pacing concerns and the dearth of balls in play and the like, the gravest current crisis in MLB is the overabundance of team owners who have no interest in winning as many baseball games as possible. Not only does treating cherished civic institutions like portfolio holdings disaffect fans (i.e., customers), but it also makes ongoing labor peace between players and owners much less likely. It's the hometown nine, not a tranche of debt instruments. When a team like the Padres gives primacy to the goal of winning – as they darn well should – it puts the lie to all those risible claims of financial woe emanating from most other C-suites around the league.” 

That an amazingly talented and popular young player is going to play at least his entire prime in one city is nothing but fantastic for the sport. That and other moves have allowed San Diego to “win the offseason.” With avarice disguised as a lack of capacity, owners who have majored in “I can’t” will be forced to concede that it was really, “I don’t want to.” No more hand-wringing allowed. That’s good for the game.

Seidler said this week that the Padres have set up the franchise “to be flexible so we have the opportunity to be opportunistic when it does make sense. We make decisions really with 10 years in mind, not year to year to year, although we are cognizant of the current year. I could not be happier with where we are in every way, business-wise, baseball-wise, and I’ll speak for the people of San Diego. …There’s nothing we can’t do.”

The Preller Project might fall short of a championship. It may fail utterly. Randomness is real and often pernicious. It makes losers of us all, sometimes. But the plan is well-conceived and has been well executed. Signing Fernando Tatis, Jr. for 14 years is a brilliant and important move.

The Padres have earned my enthusiastic support. I was already a fan. Now I’m a believer, too.

_____________

* The only two shortstops in the wild-card era who produced more than one season worth 4.5 WAR over the age of 30, according to Baseball-Reference, were Hall of Famers Derek Jeter (ages 32 and 35) and Barry Larkin (ages 31, 32, 34, and 35). A-Rod did it at age 31 and 32, but had moved to third base by then.

** In 2018, Major League Baseball lobbied Congress to exempt minor leaguers from making the minimum wage. In 2019, they were provided housing and a $10 per diem during spring training but no salary. Under pressure from Congress, MLB agreed to give raises and pay minor leaguers a spring training stipend of $400 a week. During the 2019 season, minor league players made anywhere from $1,160 a month to a slightly better $2,100 a month, depending on which level they played. MLB also announced that it would boost regular season pay for minor leaguers, starting with the 2021 season. Salaries are expected to range from $1,600 a month for Rookie ball up to $2,800 a month for the season – thus, up to perhaps $8,000 per year. The Major League minimum salary will be $570,500 this season, or a little over $3,500 per game.

*** Baseball scouting is intensely difficult and error-prone. Note that after Tatis, Jr. signed in 2017, an early scouting report was positive, but added, “Tatis clearly doesn’t have the same upside as [White Sox top 2015 international signing] Franklin Reyes.” Reyes was out of baseball that same year, never having played above Rookie ball.


Totally Worth It

This is the most important thing I read this week. This is the best. The most disturbing. The most horrifying. The coolest. The most interesting (it’s baseball related). The most incredible. The most amazing. The most delightful. The most consequential. The funniestMapping it out. A remarkable set of Warren Buffett stories. Uh-oh.

Next week will mark one year of TBL. Please contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Don’t forget to subscribe and share.

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Benediction

This week’s powerful benediction is “Chain Breaker,” recorded live from Harding Prison in Nashville by Grammy winner Zach Williams. The congregational signing is spectacular.

Thanks for reading.

Issue 52 (February 26, 2021)