Article: Ballplayers As Commodities

[Steven Buhr]

It was a minor story this week. Minnesota Twins (and former Cedar Rapids Kernels) pitcher Tyler Duffey was one of a handful of major league ballplayers that have come to agreements with a firm by the name of Fantex to “sell” a share of their future earnings in return for an immediate sum of money.You can read the AP story here and, for a description of how the investments in the players actually works, you can click this link to a year-old Fortune article.

 

 

The concept of exchanging an immediate known sum of money for some future undetermined, yet theoretically predictable, amounts is hardly new. Commercials for companies willing to “buy” your annuity payments are not infrequent. You can even find organizations willing to buy your life insurance policies and essentially gamble that you’ll die soon enough that they’ll make more money on the policy than they pay you for it.

 

 

Fantex also is making similar investments in a few professional golfers. That’s really nothing new, either. A lot of aspiring golf professionals get their early funding to travel around the country competing in tournaments from others who are willing to buy a share of their future winnings.

 

But this is a new thing for baseball. You don't find anyone doing any direct investment in ballplayers (outside of Latin America, anyway).

 

Before we go further with this, let's be clear about one thing. This kind of financial instrument is likely one of the more speculative (read: risky) you're likely to find. Seldom would the cliché "buyer beware" be more applicable than to investing with Fantex on a venture like this. That said, it's interesting to look at how such an initiative, should it become commonplace, could effect the financial underpinnings of the game.

 

Duffey and the other players involved have agreed to relinquish a percentage (generally about 10%) of their future on-field and off-field income to Fantex in return for a substantial immediate payment. (Duffey’s $2.23 million is the lowest among the ballplayers).

 

Duffey was a fifth round draft pick by the Twins in 2012 and reportedly received a signing bonus of about $267,000. Minor league salaries are notoriously low. For example, Duffey would have been getting something in the neighborhood of $1100 per month during his days with the Kernels in 2013.

• http://knuckleballsblog.com/blog/wp-content/uploads/2016/04/Duffey2015b-1414937-428x600.jpg
• Tyler Duffey

While on the Twins’ Major League roster, he’s making $525,000 this season, which is slightly above the big league minimum salary. He won’t be eligible for salary arbitration for at least another three years, which means that, in the interim, the Twins are unlikely to offer him contracts much higher than what he’s currently making.

 

With the way MLB teams currently operate, if Duffey were to perform very well for the Twins in the next year or two, it is likely that their front office would offer him a multi-year contract that would cover at least much of his arbitration-eligible years and possibly extend into his free-agency era. This gives the player some insurance against injury and/or poor performance and, in turn, the team controls their salary costs for an extended period.

 

More often than not, these agreements are viewed as “team friendly” and not only save the club money, in the long run, but improve the players' value on the trade market.

 

A lot of players in Duffey’s situation readily accept those deals (unless their agent is Scot Boras, who routinely recommends that his clients bet on themselves and go through the arbitration and free-agency process as soon as possible).

 

It’s easy to understand why a player would take the deal. Sure, you may cost yourself some money down the road, but you get security and you are still probably assured of seeing more money than anyone in your family has ever seen. And, after all, what other choice do you have if you do value some level of financial security?

 

None. Until now.

 

Even after his agent and the government get their share, Duffey is likely to pocket $1 million from his deal with Fantex, if it goes through (If Fantex can't raise the $2.23 million to pay Duffey from investors, the deal is cancelled). That’s likely going to give his agent a much better negotiating posture if and when the Twins decide they want to talk about an extension. Duffey would no longer be solely reliant on the Twins for financial security.

 

If this concept takes hold and becomes wide-spread, the whole process by which teams deal with their middle-to-lower tier of players could be affected. Currently, teams balance their payrolls between those they have to overpay (relative to their actual performance) by millions of dollars either on the free agent market or to preclude them from leaving to test free agency and those who they can underpay because they're still making close to the league minimum or they’re still playing under extensions they signed early in their careers.

 

If a concept such as Fantex gives players another option for attaining some level of financial security without having to agree to give up (or at least postpone) their big future paydays, that could have a challenging effect on clubs’ payroll management.

 

Officially, MLB has stated that these arrangements do not violate any MLB rules and the MLB Players Association has an agreement with Fantex that allows them to approach players. It will be interesting, however, to see if the subject finds its way onto the negotiating table this year as the two sides try to hammer out a new Collective Bargaining Agreement.

 

In the meantime, if you’re a believer in the future of Tyler Duffey as a big league pitcher, you may have a new – more substantive – way to express that confidence.

 

It’s too bad we couldn’t come up with a way to spread this concept into the minor leagues. I doubt we’d have to look too far to find some guys in Cedar Rapids or Fort Myers who would be happy to offer a couple percent of their future earnings in return for enough money to afford a pizza once in a while.

(This article was originally posted at Knuckleballsblog.com)

 

Click here to view the article

[DuluthFan]

 

With the way MLB teams currently operate, if Duffey were to perform very well for the Twins in the next year or two, it is likely that their front office would offer him a multi-year contract that would cover at least much of his arbitration-eligible years and possibly extend into his free-agency era. This gives the player some insurance against injury and/or poor performance and, in turn, the team controls their salary costs for an extended period.

 

I have to point out that the multi-year contracts have mostly gone to the elite players, not the marginal, or just average player. Duffy would have to put up elite level, all-star numbers to be considered for a multi-year extension. The Twins especially have been tight with the multi-year extensions for players under team control.

 

You can expect Duffey to be year to year through his arbitration years. The Twins have three starting pitchers under long term contracts already with a potential fourth's pending free agent (Milone) having just been sent to the bullpen.

 

Now the process does have some merit, but they must factor in arbitration salaries which contrary to popular belief is somewhat projectable. Twins Daily and other bloggers and analysts have predicted somewhat reliably the arbitration salaries of many players in the last couple years. You can bet that Fantex can or has done the same.

 

The potential PROBLEM I forsee is if and when Fantex and similar investors become involved in salary negotiations and arbitration. They could push or insist for higher contracts for their clients so they can get paid off. You could potentially see an end to arbitration settlements and more going the distance. No more hometown discounts in contracts or even early signings. Players will be encouraged by their investors to not take the deal but to go to free agency.

 

Taking the Duffey $2.23 million dollar amount and assuming the 10% per year cut, Duffy would need his earnings over his career to be at least $22.3 million dollars for Fantex to break even. I don't see him making that through his arbitration years, so he would need one or two year's worth of free agent money for Fantex to break even.

 

Could he even retire early if he wanted to? It's not like a normal agent's agreement where the agent is paid a portion of the salary. It's a loan from his 'agent' that has to be paid back. Does he have a regular agent as well as Fantex to pay? What if it doesn't look like Fantex is going to be able to collect enough to pay back it's initial investment? Could Fantex perhaps encourage it's client (Duffey) to throw a game or two?

[Rosterman]

Is it for his entire life. Does he pay 10% on whateverr he earns whenever? It is kinda like a signing bonus, in a way. But still don't see it. And we are talking about $23 mill being made by the player before investors start to see dollar one on their return. And besides giving a player a nice nestegg, which is a plus, what else do they do for the player except wait in the tree branch above like a vulture!

[hybridbear]

Interesting option for players. What happens if the players decide to retire early or get hurt? Then is Fantex just out the money?

[Otto von Ballpark]

 

Is it for his entire life. Does he pay 10% on whateverr he earns whenever?

From what I've read, it is for life, but only on baseball-related income.  So if he becomes a minor league coach and/or he's doing autograph shows when he's 50 years old, he will owe a portion of that income to Fantex, but if he becomes a real estate agent, that income would be protected.  (Presumably there is some "professional" baseball distinction made too, so a player could become a high school coach or something?)

[Otto von Ballpark]

 

Interesting option for players. What happens if the players decide to retire early or get hurt? Then is Fantex just out the money?

Yes, although more accurately, Fantex customers are out the money.  Fantex's deal with the player is conditioned on them selling enough initial "shares" to cover the up-front payment.  Although if post-playing coaching/managing/autograph/etc income counts too, there will still likely be a trickle of income going from the player to Fantex.

[Otto von Ballpark]

FYI, this was discussed a bit already on the main forum:

 

http://twinsdaily.com/topic/22226-investing-in-duffey/

 

Don't players already have the option of buying "insurance" on their careers?  That would cost more money upfront, but could cost a lot less long-term, and wouldn't involving duping naive fans via Fantex.

[jay]

 

Don't players already have the option of buying "insurance" on their careers?  That would cost more money upfront, but could cost a lot less long-term, and wouldn't involving duping naive fans via Fantex.

 

Injury insurance, but not performance insurance. Duping seems like a strong term to me. The player stocks are highly risky and many will decline in value, but it only takes one guy being decent enough through his arb years to be just a decent free agent and land a big contract for the stock to pay off at a high multiple.

 

Look at this year's free agent class and it's easy to envision how even a guy like Duffey could pay off. Mike Leake got 5/$80M. J.A. Happ got 3/$36M.

[Otto von Ballpark]

Injury insurance, but not performance insurance.

I thought Scherzer took out some kind of special insurance when he declined his extension with Detroit?

[Otto von Ballpark]

Duping seems like a strong term to me. The player stocks are highly risky and many will decline in value, but it only takes one guy being decent enough through his arb years to be just a decent free agent and land a big contract for the stock to pay off at a high multiple.

 

Look at this year's free agent class and it's easy to envision how even a guy like Duffey could pay off. Mike Leake got 5/$80M. J.A. Happ got 3/$36M.

But you are not buying a share of the future earnings, directly. You are buying a share of Fantex and you get whatever they deign to give you. That is the dupe, because most observers would assume the former.

[PseudoSABR]

If the shares can't be sold in a secondary market, it's pretty worthless -- the whole thing is a cynical investment, which makes betting on such players, well, prohibitive. 

[old nurse]

This should clear up why all around this is a bad ideas for investing, and being invested in

http://www.thestreet.com/story/12076758/1/salmon-bad-investment-of-the-day-fantex-edition.html