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.
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.
