Can Pro Sports Survive Prosperity?

Regional ReviewQuarter 3, 1999
by Robert Jabaily

ITEM: More than 127.5 million American television viewers sat around the national campfire to watch the 1999 Super Bowl. Advertisers paid an average of $1.6 million for 30 seconds of commercial time during the broadcast.

ITEM: Michael Jordan topped the 1999 Forbes Power 100 list, which measures a combination of “income and media buzz.” Oprah placed second; former President George Bush rounded out the field at number 100.

ITEM: After the 1998 season, pitcher Kevin Brown left the San Diego Padres to sign a seven-year, $105 million contract with the Los Angeles Dodgers. If the 33-year-old Brown averages 15 wins per season over the next seven years — no sure thing — the Dodgers will have paid him $1 million per victory.

ITEM: In early 1999, a Maryland businessman and a New York City banker offered $800 million for the NFL’s Washington Redskins franchise.

If ever there was a “golden age of sport,” this could be it. Business is booming, and the quality of play is as good, or better, than ever.

Nostalgia buffs might try to tell you that no one will ever top Babe Ruth and the ’27 Yankees or Bill Russell and the old Celtics or . . . fill in the blank. But the fact is that Michael Jordan and Mark McGwire match up very well against the heroes of yesteryear. You could, as Casey used to say, look it up.

The dollars and cents look good, too. Attendance is up, TV viewership is strong, franchises in major markets cost almost as much as the Manhattan Project, and superstar salaries sometimes exceed the GDP of a small country.

Yet, during the 1980s and 1990s, each of the “Big Four” — Major League Baseball, the NBA, the NFL, and the NHL — flirted with killing the golden goose. A succession of player strikes and owner lockouts cost both sides hundreds of millions of dollars in lost salaries and revenues — not to mention the incalculable loss of fan goodwill. And if the owner/player death dance isn’t enough to alienate fans, there is growing internal tension in all four leagues that pits owner against owner and player against player.

Meanwhile, fans just shake their heads and wonder why the millionaires and billionaires can’t find a way to share the wealth.

POWER PLAY

Two factors, in combination, are largely responsible for the enormous prosperity of big-time pro sports: a surge in demand and the market power of the leagues.

The “Big Four” are not actual monopolies. In fact, only Major League Baseball is exempt from federal antitrust laws. But the NBA, NFL, NHL, and MLB are able to generate tremendous revenues by using their market power to limit economic competition.

For starters, leagues restrict the overall number of franchises and guarantee each team a territorial monopoly. League approval and a steep franchise fee stand in the way of prospective new team owners, and leagues even have the power to block an owner from moving an existing team to a new city. (Unless, of course, the owner is Al Davis, who successfully sued the NFL when it tried to stop him from moving his Oakland Raiders to Los Angeles in 1979.)

Launching a new league is an option for anyone determined to own a pro sports team, but going head to head against the “Big Four” is no easy task. The one truly successful new league in modern sports history was the American Football League, and its survival proved the old adage that “timing is everything.” Conditions for starting a new pro football league were ideal in 1960: Fans were going wild for the game, the relationship between sports and television was beginning to flourish, and the NFL had been slow to expand into new markets.

But more often than not, new leagues fail. The American Basketball Association, the American Basketball League, and the World Hockey Association lasted only a few seasons. The United Baseball League never even made it to opening day. Lack of TV revenue and the competition for high-priced talent sealed their fate.


WINNER TAKE ALL

Because of their market power, sports leagues are well positioned to maximize revenue. Whether they’re bargaining with local politicians or TV executives, the “Big Four” often enjoy a tremendous edge.

If, for example, a team is angling for taxpayers to pick up the cost of a new stadium, the league’s de facto monopoly provides considerable leverage. “In real life, the threat is, ‘Build it or we will leave,’” writes Washington Post sports columnist Thomas Boswell. And although he is talking about baseball, Boswell’s observation applies just as easily to other pro sports.

Leagues have also learned how to get the most out of television networks. The TV sports gold rush began in 1964, when Commissioner Pete Rozelle convinced NFL team owners to let the league negotiate a joint television agreement on their behalf. (Rozelle’s initiative followed a 1962 Congressional antitrust exemption for league television contracts.) The NFL’s first national TV contract — a two-year, $28 million deal with CBS — seemed like a fortune at the time. But by 1998, the NFL had TV agreements with the four networks totaling $17.6 billion over eight years.

The Revenue Gap
The Revenue Gap

Licensed products — caps, shirts, cards, computer games, toys, snackfood, beverages, anything with a sports logo on it — are another rich source of revenue that experienced spectacular growth when the “Big Four” established league-wide marketing and merchandising units. NBA Commissioner David Stern pioneered the concept, but everyone else caught on fast. By the end of the 1990s, pro football led the pack with retail sales of NFL-licensed goods totaling $3.6 billion.

Business is brisk at the box office, too. NBA per-game attendance has increased by more than 70 percent since 1980, while the NFL has been at 95 percent of capacity for years. And if the 1994-95 strike did any lasting damage to Major League Baseball, you couldn’t prove it by looking at the Cleveland market, where a new ballpark helped the Indians to sell out every seat for the entire 1996 season — before opening day.

No wonder average ticket prices for all four leagues have climbed by at least 70 percent since 1991. NFL tickets have increased the most — 83 percent, from $25.21 in 1991 to $38.09 in 1998 — but NHL tickets are the priciest — $40.64 during the 1998-99 season. And those are average prices. Let’s not even talk about filmmaker Spike Lee’s $1,350-per-game courtside seats for Knicks games at Madison Square Garden, or NFL luxury suites that cost as much as $350,000 per season in 1998.

Rising revenues from TV, licensed goods, and gate receipts have meant flush times for players, too. Free agency gave them the power to channel a greater share of sports revenues from the owners’ pockets to their own, and they are now able to command salaries that are more in line with their market value. Average salaries in all four leagues top $1 million, and superstar earnings are in the stratosphere. Michael Jordan, the best paid athlete in 1997, earned $31 million in salary and $47 million in endorsements.

Yes, that’s a lot of money for playing a game, but superstars earn as much as they do because they generate phenomenal revenue for their teams. They are marquee players who capture fans’ hearts — and entertainment dollars — through a combination of exceptional talent and “star power.” Without them, pro sports would be less exciting and less lucrative.

Owners may fret over the high cost of attracting and keeping top talent, but the fact is that they are parting with their money willingly — if not always cheerfully or wisely — and they rarely pay more than they expect a superstar to generate in revenue. In a sense, superstar salaries are a measure of sports prosperity.

RICH VERSUS SUPER RICH

So, if times are so good, why is the modern sports scene so contentious? Economists James Quirk and Rodney Fort believe the market power of leagues is to blame. The authors of Pay Dirt and Hard Ball argue that the leagues’ monopoly profits have become “the prize package” at the center of most disputes.

Squabbling between owners and players makes most of the headlines, but as often as not the main event is really between owners — with side action between superstars and middle-class players becoming more of a factor every season. The dynamic varies from sport to sport, as does the outcome, but disagreements over the division of wealth are always the center of controversy.

Major League Baseball, for example, is thriving, but a growing revenue imbalance between markets is threatening the game’s overall prosperity and popularity. Forbes magazine estimated that the wealthy New York Yankees earned total revenues of $144.7 million for the 1997 season, while the perennially strapped Montreal Expos earned $43.6 million. The gap in 1997 media revenues was equally striking — $69.8 million for the Yankees versus $18.5 million for the Expos.

Revenues matter because wealthy teams almost always win the competition to attract and keep top talent. The Yankees’ star outfielder Bernie Williams earned $8.3 million for 1998 — an amount equal to the Expos’ entire 1998 payroll. The Yankees also won the 1998 World Series, while the Expos barely managed to stay out of the cellar in the National League East.

Baseball owners worry that the widening gaps in revenue and payroll will erode competitive balance on the field and create a permanent split between “have” and “have not” teams. They are concerned that the overall entertainment value of their product will suffer, especially in markets where fans know the home team is out of the running before the season opens.

In the owners’ collective nightmare, the same wealthy teams go to the playoffs every season, and fans begin to lose interest — even in prosperous markets — because a steady diet of wins can be almost as tedious as an endless string of losses. Ticket sales and TV ratings sag, revenues drop, and franchise values weaken.

It’s a sobering prospect, but players don’t buy it. The way they see it, owners are using competitive balance as an excuse to recapture revenues at the players’ expense. When owners claim financial difficulty, players raise their eyebrows and ask to see the teams’ financial records. Most teams, however, are privately held rather than publicly traded, which means owners are under no obligation to share their financials with anyone. So the books remain closed and players’ skepticism deepens.

The long history of mutual distrust between owners and players, coupled with the owners’ rising anxiety over revenues, salaries, and competitive balance, made the 1994-95 baseball strike almost inevitable. The real conflict, however, was a behind-the-scenes struggle between owners who lacked a strong common interest and a unified strategy for addressing their concerns. All the owners — rich and poor — agreed on the easy stuff. Their clear preference was to control labor costs and restore competitive balance by capping salaries, but for obvious reasons players were dead set against the idea.

Another option would have been for prosperous franchises to share some of their wealth with struggling teams, but rich owners were unwilling to part with more than a fraction of their revenues. So finally, unable to agree on any other strategy, MLB team owners decided to pick a fight with the players union. Their ultimate objective was to recapture revenue by forcing players to accept a salary cap, but the players refused to buckle. In the end, the players union was able to outlast the owners by convincing its members that they had compelling economic reasons for sticking together. The strike ended when a relatively small but influential group of owners pressed for a settlement after deciding that the battle for a salary cap was costing them more than they could possibly hope to gain.

The 1998-99 NBA lockout had similar origins but a very different outcome. At the heart of the dispute, wrote David Warsh of the Boston Globe, was the “inability to share out $2 billion in overall NBA revenues among 29 owners and 400 players.” When the lockout began, 57 percent of the league’s revenues were going to the players; owners wanted to roll that figure back to 53 percent. The lockout ended after both sides agreed to split the difference and settled on 55 percent.

NBA owners, executives, and players thought they had found a formula for fiscal sanity and labor peace when they originated the salary cap concept in 1984. But by the late 1990s, the cap had lost much of its effectiveness, largely because the so-called “Larry Bird exception” allowed teams to re-sign their own players at any price. As superstar salaries climbed, the “Bird” exception undermined the cap to the point where the Chicago Bulls were able to exclude Michael Jordan’s $31 million paycheck from their 1997-98 ceiling. On top of that, the annual team cap had mushroomed from $3.6 million in 1984 to $24 million in 1996.

By the end of the 1997-98 season NBA owners were ready to try something drastic. In an effort to reclaim a “fair share of the revenues,” they voted to lock players out of training camps and went so far as to set a deadline for canceling the entire season.

The owners prevailed, in part because they were willing to throw their undivided support behind NBA Commissioner David Stern, but also because the basketball players union was unable to convince its members that outlasting the owners was worth losing an entire season’s paycheck. Much of the pressure to reach a settlement came from middle-class players and rookies who were beginning to wonder why they should endure the economic impact of a lockout when the issues at stake mainly affected the earnings of superstars.

WINNERS SHARE

The NFL has been the most successful at sharing the wealth and smoothing out the imbalance between markets. Its history of cooperative action dates back to the early 1960s, when team owners agreed to give NFL Commissioner Pete Rozelle enough authority to convince, cajole, and coerce individual franchises into cooperating for the common good. Today, television and licensing revenues are shared equally, and gate receipts are shared generously, 60 percent for the home team and 40 percent for the visitors. The league also has maximum and minimum team payroll limits — no more than $64.3 million and no less than $55 million during the 1998-99 season.

The results of the NFL’s cooperative approach are plain to see. Pro football tops all other sports in the revenues it generates from TV agreements and the sale of licensed merchandise, and the gap between its richest and poorest teams is by far the narrowest of all four leagues. NFL franchises thrive in small markets such as Green Bay, Wisconsin (pop. 102,000+), and in otherwise marginal markets such as Pittsburgh, where professional baseball and hockey teams are barely hanging on and the NBA doesn’t even have a presence. According to a 1998 Harris Poll in USA Today, 28 percent of adult Americans rank pro football as their favorite sport — baseball finished second with 17 percent, and basketball came in third with 13 percent. Pro football’s popularity and prosperity reflect the fact that NFL owners and executives have managed to create a truly national market for their game. Fans who ordinarily just follow the hometown team in other sports, regularly tune to Monday Night Football regardless of who the featured teams are.

But even in the NFL, owners’ interests are diverging and cooperation is beginning to break down. Newer owners, who paid top dollar for their franchises during the 1990s and borrowed heavily to finance their purchases, are chafing under the old share-and-share-alike arrangement. Some are pressing to keep a larger share of the revenue their teams generate. And at least one, Dallas Cowboys owner Jerry Jones, has made separate advertising and licensing deals with competitors of official NFL sponsors and licensees. None of this sits well with league officials and longtime owners, who have prospered under the revenue-sharing arrangement.

The feud has been marked by lawsuits and a rising level of personal acrimony. Whether the tensions will degenerate into all-out war between the old order and the new is anyone’s guess.

REGULATION TIME

James Quirk and Rodney Fort have a proposal for revamping the business of pro sports. They think the time has come to try something revolutionary — true business competition.

Quirk and Fort contend that “essentially all of the many problems of the pro team sports business arise from one simple fact, namely the monopoly power of pro team sports leagues. . . . Eliminate that monopoly power and you eliminate almost every one of the problems of the sports business.”

The core of their proposal calls for a Justice Department antitrust action to break up each of the existing leagues — MLB, the NBA, the NFL, and the NHL — into four independent leagues, each with roughly eight teams. The leagues would compete against one another for everything — players, TV contracts, franchise locations, and fans. There would be no more territorial monopolies; so, in theory, any city that could support a team would have one, and the most lucrative markets would attract a cluster of competing teams. A very limited antitrust exemption would permit the competing leagues to coordinate post-season playoffs and championships.

Quirk and Fort believe that the introduction of market forces would narrow the difference between “have” and ‘have not” teams by reducing the revenue imbalance among league cities. Three or four teams competing for TV revenues and gate receipts in the New York market would make the “Big Apple” more like the “Twin Cities” in terms of each team’s revenue potential; and as the revenue gap narrowed, so would the payroll gap. Quirk and Fort also argue that cities would feel less pressure to provide stadium subsidies, because if an existing team threatened to move, another would be free to come and take its place.

The Players Take Their Cut

At bottom, say Quirk and Fort, eliminating sports monopolies will shift power “from the insiders — owners and players — to the rest of us — fans and taxpayers.” If team owners and general managers are compelled to make decisions in a competitive market environment, fans will reap the benefits.

The argument is powerful — in terms of economic theory, public policy, and popular appeal. Introducing more economic competition to the pro sports business would almost certainly diminish the market power of sports leagues and return a measure of control to fans and local officials.

But don’t expect greater business competition to be a cure-all. The appeal of pro sports often hinges on a mix of intangibles, and teams like the Cubs, the Red Sox, the Redskins, the Knicks, and the Canadiens have a hold over fans that might make them almost immune to competition. Sure, we are drawn to sports because we enjoy watching the world’s best athletes match skills, but we also go to games looking for links to our own past and to the distant past. To some of us, there will never be a team like the one we grew up with, regardless of where we move to and despite the fact that highly paid hired guns now wear the uniforms. It’s an emotional attachment that a new team in town might be hard-pressed to compete against.

Nor will increased business competition guarantee that pro sports will be less fractious. Owners and players have argued over money since the days of high-wheeled bicycles and handlebar mustaches, when the main bones of contention were health insurance, pension plans, and $1,000 raises. Splitting the loot has always been a source of conflict in pro sports and that isn’t likely to change — regardless of how much loot there is to split. Sometimes, fighting over money can be a sport in itself.


ALL IN THE GAME

Until now, pro sports have been remarkably resilient. Fans have come back after every strike or lockout.

But each dispute has taken its toll. You can hear it in the voices of fans who call the all-sports talk radio stations. Some are angry; others are disenchanted. Many are bewildered.

There seems to be a growing distance — emotional and financial — between fans and their “heroes.” Players used to work during the off-season to make ends meet. And not so long ago, even big stars lived in the same neighborhoods as their fans. Sometimes, they even played stickball or shot baskets with the neighborhood kids. But those days are gone, and they are never coming back.

Perhaps the biggest threat to big-time pro sports is that fans, especially young fans, have been finding new outlets for their entertainment dollars: the Internet, the movies, and popular music. In fact, the day might be coming when baseball, basketball, football, and hockey won’t even dominate the sports sector of the entertainment market. Fans are increasingly attracted to pro wrestling, NASCAR, soccer, and the X-Games — in large part because the stars of those sports seem more accessible.

Yet, despite all the changes, people keep going to ballgames or following the action on TV, because when all is said and done, sports reward fans by giving them whatever they seek. Those who look for greed, selfishness, and meanness will find all three in abundance. But if they are lucky, they might also experience something to talk about till the end of their days — the sight of Bobby Orr soaring three feet above the ice after his “flying” goal wins the 1970 Stanley Cup, or the everyday beauty of Junior Griffey’s smooth, sweet swing.

And even if nothing memorable happens on the field, or on the court, or on the ice, our games still offer us the chance to pass a few pleasant hours in the company of people we enjoy, or the opportunity to savor a season like the summer of 1998 when everyone wanted to know if Mark or Sammy had “hit one today.”

Robert Jabaily is an editor in the research department of the Boston Fed. he is working on a web site to teach students about economics through sports. look for it in early 2000.

HOW BASEBALL BECAME A BUSINESS Even 100 years ago, many of the issues were the same.
1846 The New York Nine and the Knickerbockers cross the Hudson River to Elysian Fields in Hoboken, New Jersey, where they meet in the first recorded game of organized baseball. One of the Knickerbockers, a bank clerk named Alexander Joy Cartwright, has helped devise the game’s rules and serves as umpire. But that doesn’t help his team. The Nine beat the Knickerbockers 23 to 1.
1857 Amateur ballclubs in and around New York City form the National Association of Base Ball Players to oversee the quality of play. Association rules bar players from receiving compensation or betting on games. Both rules prove difficult to enforce.
1858 For the first time, spectators pay to see a baseball game. All-stars from New York and Brooklyn meet at a neutral site on Long Island. Organizers charge an admission price of 50 cents to cover groundskeeping expenses. The game draws a large crowd of paying spectators.
1869 1869 The Cincinnati Red Stockings become baseball’s first professional team — players are paid openly rather than under the table. On a national tour, they post a record of 59 wins, no losses, and 1 tie. Two years later, they go into a long losing streak, their fans desert them, and their stars move to Boston to form a new team.
1875 William A. Hulbert, president of the Chicago White Stockings, wants to field a winning team. He lures four top players away from the Boston Red Stockings, but fears retaliation from other clubs.
1876 Hulbert organizes owners of several teams into the National League of Professional Base Ball Clubs. Each team pays annual dues of $100. The organizational philosophy emphasizes the interests of team owners and the league. Although some of its teams soon fail, the league survives and becomes known simply as the National League.
1879 National League players are breaking their contracts and jumping to other teams for more money. Team owners fear escalating salaries will drive them to financial ruin, so they reach an informal agreement not to tamper with one another’s best players.
1885 Nine members of the National League’s New York Giants, led by pitcher John Montgomery Ward, form the first players union — the Brother hood of Professional Base Ball Players. Their two major grievances are the reserve system, which forces a player to spend his entire career with the same team, and the $2,000 salary cap imposed by owners.
1889 Declaring that “Players have been bought, sold, or exchanged as though they were sheep instead of American citizens,” John Montgomery Ward launches the Players’ League. The league’s owners and players will share profits and there will be no reserve system.
1890 The competition for fans and players weakens both leagues. National League owners bluff everyone into believing that they are in better financial shape than they really are. Players’ League investors decide to cut their losses, and the venture folds after one season.
1893 Cincinnati sportswriter Byron “Ban” Johnson helps establish the Western League to give families an alternative to the rough play and foul language in National League games. In 1901, renamed the American League, it draws more fans than the National League, and its teams attract many of the National League’s top players.
1903 Team owners in both leagues decide that cooperation may be more profitable than competition. They reach an agreement that grants equal status to the American League and serves as the basic business framework for what would become Major League Baseball.

 

Stay Connected

contacts email alert Twitter RSS podcasts careers faqs videos
Regional Review Links