Ohtani’s Record-Breaking Deal:
This past offseason, Shohei Ohtani hit the free agent market. At the time, the largest contract in the MLB was Mike Trout’s 12-year 426-million-dollar deal. In accordance, the MLB community was expecting Ohtani to sign a contract worth between 500 and 600 million dollars. Hence, the world was shocked when the Dodgers signed Ohtani to a 10-year 700-million-dollar deal. Ohtani’s contract broke the internet. Even for a two-way superstar, the contract is larger than anything we ever expected to see.
With Juan Soto and other superstars approaching free agency in the immediate market, one might think that Ohtani’s contract will allow them to demand much more money. However, there’s one crucial detail that changes everything: Ohtani will receive 2 million dollars per year over the next 10 years, and then he’ll get 68 million dollars per year over the 10 years following the contract. In this article, I will show how this small detail changes the value of every player in the MLB.
My Initial Thoughts:
I initially didn’t understand why the Dodgers would agree to defer 680 million dollars. I assumed that Ohtani didn’t want to be paid while he was playing so that the Dodgers could afford to put a good supporting cast around him. 10 years later, only after he had left Los Angeles, the Dodgers will have to pay his massive salary and be financially handcuffed. From 2034 until 2044, the Dodgers will be paying 68 million dollars to a player who isn’t even on their team. We saw some evidence immediately when the Dodgers went out and signed fellow Japanese superstar, Yoshinobu Yamamoto to a 12-year 325-million-dollar contract. However, Los Angeles can easily avoid said issue by putting aside 68 million dollars for Ohtani every year he plays for them. While they’re not going to transfer the money to Ohtani until later, they can write the money off their books already now. If so, why did they defer this money?
A Deeper Look:
As every American unfortunately knows, inflation is part of life. Living expenses rise and in accordance, the dollar’s value drops. A dollar today is worth only 3 quarters of what it was worth 10 years ago. 10 years ago, the dollar was worth 4 fifths of what it was worth 20 years ago. 10 years ago, the highest-paid player in the MLB was Ryan Howard, who made 25.7 million dollars in 2014. Howard’s 25.7 million dollar earnings then, would be worth 34.2 million dollars today. 20 years ago, the highest-paid player in the MLB was Manny Ramirez, who made 22.5 million dollars in 2004. Manny’s 22.5 million dollar earnings then, would be worth 37.35 million dollars today. While Ryan Howard was paid more dollars than Manny Ramirez, Manny made more money. On the other hand, MLB teams don’t seem to be impacted by inflation. The Dodgers were valued at 399 million dollars in 2004, then at 2 billion dollars in 2014, and at 5.45 billion dollars today. If we convert that to the value of the dollar today, they were worth 662.3 million in 2004, 2.66 billion in 2014, and 5.45 billion today. Despite inflation, the Dodgers’ value is still rising steadily. As long as the team’s value rises more than the dollar drops, the player’s salaries are impacted by inflation much more than the team’s value is.
Shohei Ohtani will make 20 million dollars in normal fashion. However, 680 million out of the 700 million dollars he will be paid, will be downgraded by 10 years of inflation. Since 1984, over 10 years, the dollar lost between 21% to 29% of its value. We expected Shohei Ohtani to be given between 500 million dollars and 600 million dollars. We then thought that the Dodgers shocked us by giving him 700 million dollars. Nonetheless, if we would subtract 21% from the 680 million deferred dollars, the contract would be worth 557.2 million dollars over 10 years. As amazing as Shohei is, this number makes much more sense. A study done by the University of Michigan suggests that inflation will be so bad that Ohtani’s contract will be worth no more than 460 million dollars, but I like to be optimistic. This leaves us asking why the Dodgers wouldn’t simply pay Ohtani 557.2 (or 460) million dollars to begin with. Instead of complicating the contract, just pay him the actual value. I believe that it was a publicity stunt. As I previously mentioned, Ohtani’s contract broke the internet. Not only were people talking about how great the Dodgers would be with Ohtani, but there were infinite discussions regarding whether the Dodgers overpaid and how the contract would affect the market. Everyone, even those who don’t follow baseball, heard about Shohei Ohtani, the Dodgers, and the 700-million-dollar deal.
Going Forward:
The top free agent this upcoming offseason is Jaun Soto. Soto is a top-10 player in the MLB, arguably a top-5 player. Nevertheless, we can all agree that he’s worth less than Shohei Ohtani. During negotiations, every team will throw that fact in his face. I assume that if I, a 19-year-old kid, figured out that Ohtani’s contract is only actually worth approximately 56 million dollars per year, MLB teams should figure it out as well. Therefore, Juan Soto will be paid significantly less than 56 million dollars per year. That’ll affect the second-tier free agents, Pete Alonso and Max Scherzer will be paid significantly less than Soto. This will set off a chain reaction that will affect every free agent going forward. That’s how “this small detail changes the value of every player in the MLB.”
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