Nicholas Felton

and you're feeling lucky: Baseball season has started again. On your way home from Shea Stadium to take in the Mets' home opener — they beat the Phillies 1-0 in a thrilling fourteen-inning affair — you stumble across a scratch-off ticket worth $1,000. You resolve to invest the money the next morning in an asset of your choosing, not cashing out until exactly ten years later.

How might you have made the most of your good fortune? Not by investing in stocks: $1,000 invested in the Dow Jones Industrial Average on April 1, 1998, would have been worth $1,427 ten years later. Cash, in fact, would have produced a higher return: Putting your money in a six-month CD and rolling it over twice a year would have returned you $1,481. Better yet would have been a ten-year Treasury note, which would have yielded $1,564 by maturity. And better still would have been real estate: Even with your having to endure the beginnings of the housing crunch, $1,000 in home equity on April 1, 1998, would have been worth $2,167 ten years later. But your best investment option would have been to drive back to the stadium and buy a piece of the Metropolitans. The Mets, according to Forbes, were worth $193 million in 1998 but had appreciated to $824 million in April of last year: You would have more than quadrupled your money. And the Mets were hardly alone in this regard; the average major league team appreciated by almost 150 percent during this period, and so a portfolio of baseball investments worth $1,000 in 1998 would have been worth $2,476 in 2008. Unless you were drinking buddies with one of the founders of Google, you would have had trouble doing much better on your investment.

Why do baseball teams seem to thrive as seemingly every other investment fails? How can the Yankees, in the midst of a recession, get away with shelling out $161 million to three-hundred-pound pitcher CC Sabathia, or with charging $500 a head for premium seats at the new stadium? Will the baseball bubble ever collapse?

There are, arguably, some signs of weakness. More than half of baseball's thirty clubs are freezing or reducing season-ticket prices, according to USA Today. And while Sabathia and the Yankees' other new blue-chippers, Mark Teixeira and A. J. Burnett, have made out very well for themselves, an unprecedented number of free agents were still searching for a home as the snow began to thaw, including All-Stars like Manny Ramirez, Adam Dunn, and Ben Sheets.

A catastrophic collapse of the baseball market remains unlikely, however, for two reasons. First, major league baseball is a monopoly with a legal exemption from antitrust laws, and therefore it's not subject to the ordinary laws of supply and demand. In 1908 — the last time the Cubs won the World Series — there were sixteen major league baseball clubs for about 89 million American citizens, or one team per 5.6 million potential fans. But now there are thirty clubs for around 300 million Americans — just one to go around per 10 million of us. If not for its monopoly status, there might be forty or sixty major league baseball clubs, and the individual franchises would be less valuable. But because of it, buying a piece of a baseball club is a bit like marrying into the Rockefeller trust.

Second, and a little surprisingly, the sport has already begun to do something that so many other industries have struggled with: rationalize its pay structure. In the winter before its 2007 season, the industry spent a total of about $1.7 billion in commitments to free-agent contracts. But that amount dipped to "only" $1.1 billion last winter and should finish at around the same total this year.

To understand the origins of this correction, read Michael Lewis's 2003 book, Moneyball, which documented the success of the Oakland A's in building one of the game's winningest franchises in spite of a small payroll and a decrepit ballpark. The A's used statistical analysis — the term of art is "sabermetrics," after the Society for American Baseball Research — to identify inefficiencies in the market, such as the tendency of baseball clubs to overrate (and overpay for) statistics like home runs and underrate those like on-base percentage.

The thing about Moneyball, however, is that its lessons have nothing really to do with small-market clubs; higher-revenue franchises like the Yankees and the Mets are just as capable of applying them. And one large-market club in particular, the Red Sox, has done so especially successfully, having won two World Series titles since making the then-heretical move of hiring statistical guru Bill James in 2002.

Most clubs, indeed, having witnessed the turnaround of the Red Sox, have become extremely friendly toward statistical and analytical techniques. And ownership structures in baseball have also changed. Instead of being run as oversized family businesses or vanity offshoots of large corporations, most baseball clubs are now operated by smaller partnerships, sometimes including former investment bankers and hedge-fund managers who know how to manage risks and work the numbers.

But perhaps the principal inefficiency that baseball clubs have discovered in recent years is that they were paying too much for free agents. This inefficiency has not necessarily affected players at the top of the market, like Sabathia and Teixeira, whose talents are extremely scarce. Between 2005 and 2007, baseball averaged eleven free agents per year who signed new contracts paying them at least $10 million per season. That number hasn't decreased any: There were twelve such contracts signed in 2008 and there have been ten — as of this writing — thus far in 2009.

Rather, it's baseball's upper-middle class — those players who are good but often no better than their younger, cheaper counterparts — who have suffered the brunt of the correction. In 2007, there were twenty-nine free agents who signed contracts paying them between $5 million and $10 million per season. That number dropped to just eleven last year. Likewise, there were seventy-one free agents in 2007 who signed deals for $1 to $5 million per season but just fifty-three in 2008.

Meanwhile, teams have begun to hedge their risks by signing players — especially injury-prone pitchers — to contracts of shorter duration. Whereas in 2007, thirty-three players were signed to deals totaling three seasons or more in length, that number was just thirteen in 2008 (including only five pitchers) and won't be more than fifteen or sixteen in 2009.

Baseball's bubble is proving hardier than most, but it's not only because of luck and the law. The industry, in just a few years, has arguably made up for decades' worth of inefficiencies. If only the rest of the economy could be so lucky.

Nate Silver runs the political-prediction Web site FiveThirtyEight.com and is an analyst and writer for Baseball Prospectus.

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