Every year, teams fill out their 25 man major league rosters with a mix of the best 25 guys they can sign/afford or with cheaper home-grown stars. If your team is the Dodgers or Yankees you might just spend whatever it costs to fill those 25 spots in hope of outspending your competition to gain a competitive advantage. If your team is the Marlins or the Astros you will have the absolute smallest payroll and talent on the field that still attracts a few people to watch. If your team is the Athletics or the Rays you will mix the best possible roster on a limited budget and will depend on minor league development to fill in the holes.
For teams not named the Dodgers or Yankees you hope to hit prospect gold in the annual draft & international FA market. If you can develop top talent you can get premium production at a fraction of the cost of a ML Free Agent. Once players hit free agency they get expensive and most teams cannot afford the asking prices and need to fill out roster spots with cheaper options. Sure you can pick up FA bargains but in most cases you are paying a premium on past production. Instead, prospects get signed on potential production and can give surplus value.
Really what you want is surplus value. We can measure this by using Wins Above Replacement (WAR) as 1 WAR is worth just a little over $5MM in 2013. So for example Mike Trout provided 9.2 WAR in 2013 or $46MM in value, however since he was not yet arbitration eligible he was payed only $512K giving his team $45.488MM in surplus value. On the other hand Vernon Wells provided -.2 WAR or a negative value of $1MM but costed a total of $21MM. The Yankees decided to take a bet on Wells by paying a portion of that $21MM which at first seemed to be working but eventually proved to be a lot of wasted money. On the other hand, the Angles had surplus value in Trout and decided to dump Wells, eat most of the contract and willingly let the Yankees pay a portion of the tab. Of course we now know the Yankees have dumped Wells meaning a new team can sign Wells at league minimum which is much better then $21MM. These are extreme examples obviously as almost no prospect turns into Trout and Wells is one of the worst examples of a FA contract gone bad.
The baseball draft however can be a crap shoot, just because you draft someone #1 overall there is no guarantee that player will become Trout or even Wells. In 1997 the Toronto Blue Jays selected Vernon Wells with the 5th overall pick out of High School, in retrospect that was a pretty solid pick. Wells ranks #4 in career WAR from the 97 draft with 28.8, he was a very promising player when he broke in the league and provided a lot of surplus value for the Blue Jays. He played parts of 12 seasons giving them 23.9 WAR at roughly $42MM (plus maybe the $5MM in the Angles trade). The Yankees & Angles have paid Wells a combined $68MM for -.1 WAR and they owe him another $21MM for 2014. However the pick of the 97 draft goes to Astros for the 16th overall pick Lance Berkman who produced a career 51.8 WAR. The #1 overall pick in 97 was Matt Anderson by the Detroit Tigers who overall produced negative value and did not have a long career.
Prospects are fun because we hope they turn into Clayton Kershaws or Mike Trouts but more often they become Matt Andersons or Travis Sniders. Snider is my ultimate prospect love, he was a first round pick, he had power, a love of meat and even cute rosy cheeks. Snider got his first taste of the bigs at just 20 years old, he hit .301 in 73 AB and the dream was born. He was given the nickname “the franchise” and I believed he would save the Blue Jays. How could it not be, he was ranked the #6th overall prospect by Baseball America following the 2008 season. Then on April 13th, 2009 be gave me this as a birthday present, seriously check out #2 it went 426 ft:
However I would be eventually disappointed as his promise faded and everyone started to blamed the Blue Jays for rushing Snider to the majors too quickly. Every year following 2009 there was hope that he would stop chasing breaking balls and become the chosen one. Then on July 30th, 2012 Snider was sent to the Pirates for Brad Lincoln, he was reduced to a failed prospect traded for a relief pitcher. At age 26 it looks like the Pirates will give him one last go as a bench player to see if they can find some value or at the very least do this again:
Like many other fans I will be disappointed again when Baseball America or Keith Law ranks another prospect I follow in the top 10 and they fail to develop or transition into a legitimate major league player. It happens, baseball is a tough game and minor flaws get exploded at the major league level so many players fail to reach their full potential. Yet prospects allow us to dream, they allow us to believe that we can outsmart the Yankees or Dodgers by developing stars. Its been working for the Rays, now if only the fans would come appreciate what a great team they have been.