Fans of the World, Unite!: A (Capitalist) Manifesto for Sports Consumers 9780804769778

Citation preview

Fans of the World, Unite!

Fans of the World, Unite! A (Capitalist) Manifesto for Sports Consumers

STEPHEN F. ROSS STEFAN SZYMANSKI

stanford economics and finance An Imprint of Stanford University Press Stanford, California 2008

Stanford University Press Stanford, California ©2008 by the Board of Trustees of the Leland Stanford Junior University No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press. Library of Congress Cataloging-in-Publication Data Ross, Stephen F.    Fans of the world, unite! : a (capitalist) manifesto for sports consumers / Stephen F. Ross and Stefan Szymanski.       p. cm.    Includes bibliographical references and index.    isbn 978-0-8047-5668-6 (cloth : alk. paper)    1.  Professional sports—Economic aspects—United States.  2.  Sports team owners—United States.  3.  Monopolies—United States.  4.  Competition—United States.  I.  Szymanski, Stefan.  II.  Title. gv583.r675 2008 338.4'.77960973—dc22       2008005322 Printed in the United States of America on acid-free, archivalquality paper Typeset at Stanford University Press in 10.5/15 Minion Special discounts for bulk quantities of Stanford Economics and Finance are available to corporations, professional associations, and other organizations. For details and discount information, contact the special sales department of Stanford University Press. Tel: (650) 7361783, Fax: (650) 736-1784



Contents

Acknowledgments    vii

1. How Sports Fans Are Exploited    1 A Sports Fans’ Manifesto, 1   The Book, in a Nutshell, 3   Sports and the Public Trust, 5   The Inefficient Monopolists, 7   Can Intervention in the “Free Market” Be Justified? 9   Tax Subsidies and Restricted Entry, 11   Ticket Prices, 13   Television Blackouts, 14   Labor Market Restraints, 17   Operating the Club: Management and Ancillary Sales, 20   Why Do Fans Put Up With It? 22

2. Diagnosis and Suggested Cure    24 Our Twofold Remedy, 24   Conflict of Interest Between the League and the Owners, 25   Recognizing the Conflict: The Commissioner and Regulation of “Integrity” Issues, 31   Beyond the Commissioner, 35   Promotion and Relegation, 41   Holdup and the Need for Enforceable Rules, 45

3. Competitive Balance    51 American Values, Foreign Values, and the Concept of “Competitive Balance,” 52   Historical Origins of Competitive Balance as a Goal of Sports Leagues, 56   Is Competitive Balance Consistent with American Capitalist Values? 58   Actual Evidence Regarding the Appeal of Balanced Competitions, 59   How Our Proposals Affect Competitive Balance, 66

4. Borrowing from NASCAR: An Independent Competition Organizer    70 A Primer on the Economics of “Contest Theory,” 73   NASCAR’s Origins, 80   NASCAR’s Development, 83   Sleeping Dogs: The Absence of NASCAR Restraints on Entry and Labor Competition, 100   The Exception That Proves the Rule: Selection of Nextel Cup Sites, 102   A Few Caveats, 104

vi

Contents

5. Borrowing from Soccer: Entry by Merit    108 Origins of the Structure of a “Closed” League, 108   Problems with the Closed League Format, and Entry by Merit as a Solution, 110   How Entry by Merit Works in Soccer, 114   Origins of Entry by Merit in English Soccer, 119   Weighing Objections, 122

6. How a Restructured Sports League Would Work    129 Setting It Up, 131   Who Does What? 136   The Relationship Between the League and the Clubs, 137   Introducing Promotion and Relegation to the Major Leagues, 140   The Labor Market and Incentives, 144   TV and Media, 148   Ticket Prices, 149   Marketing Initiatives, 150

7. Comparing This Proposal to Other Remedies for Monopoly Power    153 The Inadequacy of Antitrust Law to Protect Sports Fans, 154  Direct Government Regulation, 158  Break Up the Monopoly Leagues, 159  Potential Need for Additional Regulation, 161  Continuing Application of Antitrust Laws to Restructured Sports Entities, 162 

8. Half-Loaf, Still-an-Improvement Compromise Suggestions    166 The Limits to Voluntary Reform, 167  The Commission System, 169  The Commissioner as the “Coasebuster,” 170  Commissioner as Volunteer Cheerleader, 172 

9. Fans, What We Can Imagine!    175 The Case of the Frustrated Billionaire, 179  The Case of the Compromising Monopolist, 179  The Case of Mayors with Backbone, 180  The Case of the Fed-Up Commissioner, 181  The Case of the Imperialist Media Baron, 182  The Case of Fans Arising, 183 

Notes    187 Index    211

Acknowledgments

The origin of this book dates back to a conference held in October 1997 on Player Market Regulation in Professional Team Sports organized by the International Center for Sports Studies in Neuchatel, Switzerland. It was then that we discovered a shared interest in understanding how organizational structures affect sporting outcomes and the rich diversity of international sports practice. Since then we have collaborated in the analysis of organizational problems in the English Premier League (soccer) and international cricket, as well as pursuing our interests in the institutions of the U.S. major leagues, rugby union, UEFA and FIFA (the European and world governing bodies of soccer), Formula One motor racing and the International Olympic Committee, and more besides. We have also developed our thinking through several earlier published works on this topic, including Open Competition in League Sports, 2002 Wisconsin L. Rev. 625, Antitrust and Inefficient Joint Ventures: Why Sports Leagues Should Look More Like McDonald’s and Less Like the United Nations, 16 Marquette Sports L. Rev. 213 (2006), and Governance and Vertical Integration in Team Sports, 25 Contemporary Economic Policy 616 (2007). This book is therefore the culmination of thought on a multitude of sporting problems, although it focuses exclusively on the problems of the U.S. majors. Along the way we have been helped by a number of individuals and institutions, of which only the most prominent will be mentioned here. First we must thank our former universities (University of Illinois College

viii

Acknowledgments

of Law and Imperial College, Tanaka Business School) for their consistent support. In particular the College of Law funded a six-month visit by Stefan Szymanski in 2000. We also thank our current employers, Penn State and Cass Business School, for their support. We have long benefited from the wisdom of many colleagues, and although it is invidious to be selective we must at least single out Wladimir Andreff, Dave Berri, Jeff Borland, Helmut Dietl, Rod Fort, Egon Franck, Bernd Frick, Clark Griffith, Herb Hovenkamp, Brad Humphreys, Stefan Kesenne, Kit Kinports, Robert MacDonald, Roger Noll, Ian Preston, Matt Mitten, Gary Roberts, Skip Sauer, Rob Simmons, Charles Tabb, Tommaso Valletti, Steve Weatherill, and, always last but never least, Andy Zimbalist. Over the years we have benefited from discussions with workshop participants at the University of Illinois and the annual meetings of the Sports Lawyers Association and the Western Economics Association. To those whose counsel goes unacknowledged we can only apologize. During the writing of this book Steve Ross’s brother Dave tragically passed away. He was a sharp thinker on matters sporting and Steve benefited from long hours of fruitful discussion with him on our book. He had looked forward to many more, and this is just one of many ways in which his loss will be felt by his family and friends. We thank Margo Beth Crouppen, Jessica Walsh, John Feneron, and all the staff at Stanford for their faith in this project. The biggest players in this game, however, have been our families—Kit, Elizabeth, and Sara Kinports and Hayley, Edward, William, and Kitty Szymanski—who have supported us more loyally than even the most dedicated sports fans. We could not have done it without you.

Fans of the World, Unite!

1

How Sports Fans Are Exploited

A Sports Fans’ Manifesto (with apologies to Thomas Jefferson)

When in the Course of Human Events, it becomes necessary for the millions of dedicated sports fans, who have given over countless hours of their lives and countless millions of their hard-earned dollars in support of the teams and the sports they love, to dissolve the political relationship of virtually total discretion given to those who own and control professional sports teams and clubs, and to assume, as have consumers of almost all other important goods and services, a greater equality of power, a decent Respect to the Opinions of Mankind requires that they should declare the causes which impel them to this demand for reform. We hold these Truths to be both self-evident and demonstrated by the course of human history, that among the various Pursuits of Happiness that Governments are instituted among us to secure, is the ability to participate in and view sporting contests; and that whenever any form of government or civil society becomes destructive of these ends, it is the Right of the People to insist upon sufficient new forms of government or private regulation based on such Principles, and organizing their Powers in such Form as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that the rules and customs of sports leagues long established should not be changed for light and transient Causes; and accordingly all Experience hath shewn that sports fans are more disposed to suffer, while Evils are sufferable, than to right themselves by abolishing the Forms to which they are accustomed. But when a long Train of Abuses and Usurpations, pursuing invariably the same Object, evinces a Design to systematically exploit sports fans in the exercise of the absolute Despotism that leagues possess, it is the Right of

 How Sports Fans Are Exploited the People, it is their Duty, to throw off these rules, customs, and structures of selfish, self-interested governance, and to provide new Guards for their future Security. Such has been the patient Sufferance of sports fans, and such is now the Necessity which constrains them to alter their former tolerance of these Systems of sports governance. The History of the present dominant sports leagues in the major commercial sporting countries throughout the World is a History of repeated Injuries and Usurpations, all having in direct Object the Establishment of an absolute Tyranny over sports fans. To prove this, and acknowledging that the owners who control each league have not of necessity engaged in each and every aspect of the conduct described below, let these Facts be submitted to a candid World. THE OWNERS have refused to implement rules and policies, the most wholesome and necessary for the Public Good. THEY have forbidden their administrators to implement policies of immediate and pressing importance, unless demonstrated to satisfy a minority of self-interested member clubs. THEY have maintained their tyrannical Power, by systematically crushing alternative leagues or competition organizers, through predatory practices and lucrative mergers. THEY have adopted policies to ensure their own place in premier competitions, notwithstanding persistent incompetence of club management and insufficient quality of on-field performance, by limiting the entry into the competition to a chosen few. THEY have systematically and deliberately suppressed entry into the premier competitions in each sport, with the Object and Design of creating an unmet demand among local communities, so that aforesaid Owners may demand and receive exploitive stadium deals from local taxpayers, with heartless disregard for the recurrent fiscal crises facing cities and counties. THEY have failed to respond adequately to the changing reality of American demographics, wherein almost two in five Americans live elsewhere from their place of origin, by restricting the ability of mobile Americans to follow their home team through live, out-of-market broadcasts, requiring fans to subscribe to expensive premium television packages, and, even then, limiting



How Sports Fans Are Exploited

fans by inefficient blackout rules, thereby placing said Owners’ short-run selfish interests over the general Public Good. THEY act collectively to shield themselves from competition from more efficient club operators, by guaranteeing teams perpetual membership in the premier competition without regard to the quality of the team, by denying entry opportunities to superior club Operators, and by sheltering clubs from competition within assigned geographic Territories, even from clubs in lowertier competitions that might compete for fans’ patronage. THEY restrain competition among themselves for players, not for the purpose of ensuring that athletes play for the club that most values their services, nor for the purpose of ensuring that the overall allocation of players to clubs maximizes fan appeal, but rather for the selfish Purpose of holding down Owner costs—which are unlikely to be passed on to consumers—and to provide Owners with “cost certainty,” thereby insulating themselves from the ordinary pressure that any business faces when it makes mistakes to invest more Resources to improve an inferior product. Therefore, sports fans of the United States, appealing to the Supreme Judge of the World for the Rectitude of our Intentions, do, in the Name, and by Authority of the good People of these United States, solemnly Publish and Declare, That sports leagues are, and of Right ought to be, public trusts to be operated by Owners and league administrators for the benefit of the Public, and that if those who control our sporting institutions will not Act to reform their institutions, then government should mandate such reform. Then for the support of this Declaration, with a firm Reliance on the Protection of divine Providence, we mutually pledge to one another our Lives, our Fortunes, and our sacred Honor.

The Book, in a Nutshell In modern and plainer English, we hope in this book to persuade you that sports fans have been and remain exploited by sports league owners, and that two significant but well-tested reforms would result in sporting competitions being organized and contested in a manner better designed to maximize their appeal to sports fans. In this chapter, we explain how



 How Sports Fans Are Exploited the best model for consumer protection is generally the forces of competition in the marketplace, and why the structure of leagues and the loyalty of fans for their favorite teams significantly insulate owners from market forces, exposing sports fans to exploitive opportunities. We note how sports leagues, in some ways, are worse for consumers of sports than monopolies are for consumers of other goods and services, because club owners operate less efficiently than a single-firm monopolist like Standard Oil or Microsoft. Because of our preference for free markets and skepticism about the ability of politicians or not-for-profit bureaucrats to be responsive to sports fans, we argue for a twofold remedy to the abuse of power by current sports team owners: (1) sports leagues should be restructured to vest control in a for-profit commercial enterprise that is separate and distinct from the owners of clubs participating in the competition, and (2) participation in each sport’s major league should be based on merit, demonstrated best by performance in the prior season. In this chapter, we’ll identify a variety of ways in which consumers are hurt by the absence of an independent competition organizer and the presence of a clear conflict between the interests of the league as a whole and the interests of specific owners. In Chapter Two we expand upon why we diagnose the problem as arising from the twin ills of limited entry and the conflict of interest between club owners and the best advantage of the sport. In Chapter Three, we address the American obsession with competitive balance as a critical goal for a sports league, and why our proposals would not prevent leagues from achieving a desired degree of balance. Our shield against claims that our proposal is attractive only in the ivory towers of academia is laid out in Chapters Four and Five, where we readily acknowledge borrowing our ideas from NASCAR and international soccer. In Chapter Four, we show how NASCAR organizes the stock car racing competition that has recently been America’s fastest-growing sport, and why NASCAR’s independence from the racing teams that participate in the competition has been critical to its success. In Chapter Five, we show how many of the problems facing American sports fans are not shared by their counterparts globally because of the entry-by-merit system used by almost



How Sports Fans Are Exploited

all soccer leagues throughout the rest of the world. Chapter Six provides a more detailed explanation of how our proposal would work, and responds to the skeptics’ perennial question—if this is such a good idea why hasn’t someone already tried it? Chapter Seven offers some compromise proposals if our central ideas are considered too radical for the first decade of the twenty-first century, and Chapter Eight discusses why our reforms are superior to other kinds of government intervention. Finally, Chapter Nine concludes with a summary of our argument and some imaginary scenarios for how our proposals might actually see fruition.

Sports and the Public Trust As consumers, most of us want to be able to purchase high-quality goods and services at reasonable prices. This is, indeed, an important aspect of the “pursuit of happiness” recognized as one of our inalienable rights. By and large, our consumer-oriented society has succeeded in this goal. We’ve learned by experience that—with some important exceptions—consumers are better off with free markets, our English ancestors having overturned a system based on tradition and aristocratic control (the feudal system) and our American ancestors having rejected the central planning of Lenin. Especially for goods and services that are not essential to our daily lives (in today’s affluent society, most of us purchase far more than we absolutely need), even if we have a favorite brand or service provider, if it gets too pricey, or quality suffers, or the seller fails to add new features offered by others, we will simply switch our patronage to a new seller. Realizing this, firms have a strong incentive to maintain low prices, high quality, and innovations responsive to consumer demand. In the words of a prominent judge and former law professor, a firm facing competition from other rivals “is unlikely to adopt policies that disserve its consumers; it cannot afford to. And if it blunders and does adopt such a policy, market retribution will be swift.”1 Market retribution will not be swift for most sports fans. The very nature of being a fan means that rival teams are not close substitutes, and therefore the majority of committed fans face little choice but to follow their



 How Sports Fans Are Exploited team, regardless of the quality of the team on the field.2 Sports fans will pay higher prices. They will vote for tax subsidies for their favorite team’s stadium. If quality suffers, fans suffer, but they rarely switch to another club or sport. When leagues or clubs fail to offer fan-friendly innovations, loyal fans continue to patronize their favorite team in sufficient numbers that the clubs’ owners face little pressure to compete. In a world where most fans enjoy their team through the medium of television, it might be argued that the substitution possibilities are far greater than in the past when consumers were largely tied to their city. This can certainly make a difference when it comes to the recruitment of new fans, and it is likely that a significant fraction of new fans, mostly adolescents, are attracted to the most successful team of the moment. However, this mechanism works only slowly and imperfectly to undermine the monopoly power of the incumbent teams. Meanwhile, the economic rents extracted from loyal fans by the sale of monopoly rights to broadcasters make the “do nothing” strategy of many franchise owners more profitable than ever. The relationship between a sports fan and a team owner or a league is not the same as that between a telephone company and its customers, or between the buyer of computer software and its supplier. In these cases, economic regulation may or may not be necessary to control the exercise of monopoly power on the part of the seller. In recent times, legislators and courts have gone to great lengths to ensure that such regulation is implemented with the lightest possible touch, trusting the natural relationship between a business and its customers to bring about a suitable economic solution. As long as the customer is king, one might say, nothing too much can go wrong. But in sports, no one wants market retribution to be swift. We hope that Los Angelenos and others who grew up as Dodger fans with Vin Scully’s Hall of Fame broadcasts will remain loyal despite management travails that have impeded recent performance. We honor members of Red Sox Nation who lived and died with years of ineptitude, which some believe was supernaturally imposed. With sports, the customer is not buying something that depends largely on the current behavior of the owner, but is rather buying into a tradition, which in some cases has been established for over a century. The “trust” that fans place in their favorite teams is what



How Sports Fans Are Exploited

makes sports the special entertainment and civil institution that it is. In this sense, the current owners are more than suppliers of a good or service produced for today; they form part of a chain between the past and the future. It is this relationship that the fans value. Should the current owners destroy the relationship by unwarranted reforms or gross exploitation of their position, there is little the fans can do to recover it in the future. What is the effect of this trust that fans place in their favorite teams and sports? In 1602, long before economists developed fancy models to demonstrate common sense, an English court declared that monopolies were contrary to the public interest because they raise price, reduce output, and lower quality. (The court invalidated a “patent” granting a monopoly to one of Queen Elizabeth’s cronies to produce playing cards, finding that because the grant was contrary to the public interest, Her Majesty must have been “deceived in her grant.” 3) As we demonstrate further on, this principle applies in spades (so to speak) to the sports industry. Many fans can get their desired sports entertainment—tickets to games, games on television, souvenir apparel, and merchandise—but only at higher prices. To maintain the scarcity of goods and services that allows for higher prices, leagues reduce output; in some cases through television blackouts but primarily through fewer franchises playing high-quality professional sports. Fans in major metropolitan areas might well support more teams; fans in smaller cities don’t have high-quality professional teams at all.

The Inefficient Monopolists Moreover, some of our previous work suggests a significant additional harm caused by monopoly sports leagues that is often overlooked: because club owners can’t agree on how to divide the spoils of leaguewide initiatives, which involve a sharing of profits among the clubs who control the league competition, clubs will forego new and desirable business opportunities that fans are willing to pay for.4 Thus, even when fans are willing to pay monopoly prices for prized sporting entertainment, sometimes they just can’t get it. We initially arrived at this insight into professional sports when both



 How Sports Fans Are Exploited of us were consulted by the British government as part of a challenge to the 1992 collective sale of all television broadcast rights for English Premier League soccer games to Rupert Murdoch’s Sky Sports satellite network. Murdoch acquired the rights to broadcast 60 of the league’s 380 games during the season; the rest were not to be televised. Restrictive broadcast schemes often serve as a device to increase sellers’ profits. In the United States, the NCAA restricted the number of broadcast college football games even more harshly; when the U.S. Supreme Court found the practice illegal in 1984, the number of televised games tripled while the rights fees per game fell from almost $1 million to $250,000.5 However, in the British soccer case it turned out that Murdoch was willing to pay even more money for the right to show more games (pure profit, at no cost to the league), but that the league rejected this offer. The best explanation we developed was that the clubs couldn’t agree on how to divide the spoils. Manchester United, for example, might have demanded a disproportionate share of the extra money, as they were likely to be appearing in many of the extra games. Leicester City, whose team might not be featured in too many televised matches, would be happy to split the money equally but unwilling to give Manchester United an even greater financial advantage. This story plays out on this side of the Atlantic as well, most notably with regard to franchise relocation. The citizens of Washington, D.C., have been willing and able for years to pay whatever it takes to support a new baseball team. Only after the Montreal Expos could find no other home, however, did baseball officials overcome the huge obstacles caused by the objection of the Baltimore Orioles owner to such a move (and even then, the deal featuring “side payments” to the Orioles in terms of cash and rights to a jointly run regional sports network is enormously complex).6 To most observers, it has been obvious that Washington should have a franchise, and no surprise that in their first season the Washington Nationals drew nearly 33,000 fans per game, compared to only just over 9,000 that the team drew as the Montreal Expos in their final season.7 Even allowing for a honeymoon effect, few would argue that Montreal is more of a baseball city than D.C. Over the first two seasons the Nationals have attracted as many paying fans (almost five million) as the Expos did in their last six seasons, all at significantly higher ticket prices.8 The fact that Orioles owner Peter Angelos was able to stand in



How Sports Fans Are Exploited

the way of such an obvious move for so long is a testament to Major League Baseball’s inefficient decision-making process. There are also strong parallels with the story of Oakland Raiders owner Al Davis and the missing NFL franchise in Los Angeles. Davis fought the NFL for years for the right to relocate his Raiders to L.A., which he finally did in 1984, only to return to Oakland in 1995. It made sense for Davis to leave L.A. and pick up further stadium subsidies from another city ($225 million from Oakland, in point of fact) even if the league as a whole lost potential TV income. Harvard law professor Paul Weiler blames the NFL’s TV revenue-sharing agreement for L.A.’s neglect. While a team in L.A. would significantly increase the value of the national TV broadcast contract, the team in L.A. would only receive one thirtieth of the benefit, since all TV income is divided equally.9 Few doubt that there is strong potential for a team in the second-largest U.S. broadcast market—indeed, just-retired Commissioner Paul Tagliabue had declared that putting a franchise there was a priority—and in all probability football will come back to L.A. one day.10 But from the league’s point of view, every season missed is a revenue opportunity missed; from the fans’ point of view, another season of unmet demand.

Can Intervention in the “Free Market” Be Justified? We recognize that our proposed reforms would significantly restructure American professional sports. However, providing a remedy to the twin blows of monopoly exploitation and inefficiency inflicted on fans by clubrun leagues justifies, in our view, significant reform. It is worth emphasizing that our call for government intervention if sports owners do not voluntarily reform their ways does not reflect a novel interference with “rights” of business leaders in a free market environment. The monopoly power currently wielded by sports leagues is not the result of “superior skill, foresight, and industry” that our antitrust laws recognize as legitimate for a business with monopoly power.11 Rather, each league has obtained and maintained its monopoly power through unfair and illegitimate means, of the sort that courts have condemned in other industries.12 Major League Baseball came into being as a result of a 1903 “Peace Agree-



10 How Sports Fans Are Exploited ment” that ended competition between the American League and the National League. Of course, if Anheuser-Busch and Miller Brewing sought a “peace agreement” to end competition in beer sales, they couldn’t possibly invoke the “free market” to justify their arrangement. Next, the combined leagues faced a threat from a new entrant, the Federal League, which sought to compete by the innovative construction of new ballparks for each of their teams. (The original tenant of Wrigley Field was the Chicago Whales of the Federal League.) This league was crushed, first by predatory tactics (such as blacklisting players signing with the new league and paying salaries that were only profitable if the new league went out of business) and then by payoffs (two owners were allowed to buy the Chicago Cubs and St. Louis Browns, while most others received huge cash settlements).13 This conduct was not that different from that which led the Supreme Court to break up Standard Oil.14 The last real threat was posed in 1959 by baseball innovator Branch Rickey, who proposed to fill the vacuum in New York City left by the departure of the Giants and the Dodgers by adding a new team in New York and teams in seven other areas not served by baseball. The American and National Leagues promptly responded by expanding to three of these markets and refusing to allow even minor league players to sign with a new major league. In another industry, this sort of conduct led to a finding that Alcoa had unlawfully monopolized aluminum,15 but it has been immunized by the courts when it comes to baseball.16 Other sports aren’t immune from antitrust laws, but that has not stopped them from maintaining their monopolies by equally anticompetitive means. The NFL’s monopoly was obtained when, in return for a promise to powerful Congressman Hale Boggs of New Orleans for an expansion franchise, Congress passed a last-minute rider to a tax bill allowing the NFL and AFL to merge.17 Later, the NFL’s plan to ward off the United States Football League was found by a jury to be illegal monopolization.18 Both the NHL and the NBA maintained their monopolies in the 1970s by a course of predatory spending (that is, raising salaries to unsustainable levels in order to exclude rival leagues or get them to merge on favorable terms) similar to the MLB response to the Federal League prior to World War I.19 The remainder of this chapter details our claim that consumers are being harmed by the policies of these sports league monopolies.



How Sports Fans Are Exploited

Tax Subsidies and Restricted Entry Perhaps the greatest harm in dollar volume resulting from sports leagues’ monopoly power comes from the billions of dollars in tax subsidies provided to owners in stadium deals. Club owners are able to exercise this monopoly power because they guarantee themselves permanent membership in a dominant sports league, and then restrict membership of new entrants to their terms. Absent a monopoly, the subsidy disappears. For example, during the brief period in the 1960s when the National Football League and the American Football League were rivals, they both sought to expand to Houston, Texas. The AFL’s Oilers won the bidding when their owner agreed to pay a significant sum to make improvements on a municipally owned stadium. Several decades later, once the NFL’s monopoly was reestablished, the same owner threatened to move to Jacksonville. To keep the Oilers in Houston, local officials had to promise to grant the club more favorable lease terms as well as refurbish the Astrodome, at taxpayer’s expense, with additional seating capacity and luxury boxes. Finally, in 1995 the Oilers did relocate to Nashville, in return for a whopping $240 million subsidy from Tennessee taxpayers.20 Of course, the only communities wealthy enough to provide generous tax subsidies are those large enough to support major league teams, so the scheme only works if some markets that could support a team are kept open. Former Commissioner of Baseball Francis T. Vincent once conceded in congressional testimony that he viewed the Tampa Bay market as a “baseball asset,”21 and he was correct: a number of teams used the threat of locating to Tampa Bay as leverage in persuading their home communities to fund new ballparks at taxpayer expense.22 A few years ago, after expanding to Tampa Bay and Phoenix under threat of litigation, MLB was faced with a problem. Other than Washington, D.C. (where the Orioles’ “veto” posed problems), there were no attractive markets to which teams could credibly threaten a move. As a result, clubs were finding it more difficult to obtain tax subsidies, and MLB publicly contemplated contracting the number of teams to maintain franchise scarcity.23 Although Washington, D.C.’s size made it the obvious choice for relocating the Expos, the interest shown by a variety of other cities in attracting

11

12 How Sports Fans Are Exploited a MLB team has once again demonstrated to MLB officials that they are back in the driver’s seat. As of May 4, 2007, the Florida state legislature had not approved the needed funding for the Marlins’ stadium.24 However, if the $490 million stadium package is finalized, the Marlins would garner a $60 million tax subsidy incentive plan, a proposal unanimously passed by the Florida Senate Commerce Committee 25 and later passed by the Florida House of Representatives.26 The proposed $490 million stadium would be funded through $250 million in community development spending and bed taxes pledged by the city of Miami and Miami-Dade County and $210 million from the Marlins.27 The City of Miami Commission has decided to relocate the proposed stadium to the Orange Bowl property.28 As long as there are more markets seeking teams than there are slots in the exclusive, invitation-only preserve of the “major leagues,” even less dominant leagues employing less restrictive expansion plans can secure tax subsidies. For a variety of cultural and political reasons, Canadian provincial and local governments are much less willing to match their American cousins in the sports corporate welfare department. Although the data are no longer quite as stark, as of a few years ago the Montreal Canadiens paid more in provincial and local taxes than all the American NHL teams combined paid in state and local taxes.29 All of this is occurring at a time when state and local budgets are being severely stretched by an economy with flat tax revenues and increasing demands for needed government services. When communities debate stadium subsidies, the focus is often on whether the subsidy is a “good investment” for the community that will be recouped in increased tax revenues from jobs and businesses attracted by the presence of a major league team. Some would compare the economic benefits of hosting a major league franchise to those of a new manufacturing plant or bank headquarters. It is commonplace for businesses to seek out a subsidy from local government as a reward for locating in a particular city. However, when it comes to sports franchises, the overwhelming independent economic evidence is that sports franchises deliver negligible economic benefits. As one well-known study put it, “Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has



How Sports Fans Are Exploited

uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development.”30 Although this issue is interesting and important, it is beside the point. Whether or not paying a monopoly price is a sound investment for fans and taxpayers, the key policy issue is whether they should have to pay a monopoly price in the first place. Most businesses seeking local subsidies to relocate are themselves operating in competitive, often global markets. Any subsidies they receive are likely to be passed on to consumers in the form of lower prices. In major league sports, however, subsidies go to monopolists. By way of analogy, most businesses would find it prudent to spend three or four times their current fees for telephone service, because even at those higher rates an investment in the telephone is essential. This does not lead to the conclusion that resurrecting the AT&T monopoly is a good idea. As a necessary by-product of a monopoly league’s decision to maintain limited and exclusive membership policies, many fans are deprived of topquality teams. Keep in mind that the alternative for fans in areas without major league sports is minor league sports. The decrease in quality is not like dropping down from a Mercedes to a Honda: imagine that if you didn’t want or couldn’t afford a luxury car your only other choice was a Ford Escort! Fans in many cities that could support a quality of sporting entertainment much greater than AAA baseball or top-level minor hockey are deprived of such a team. Fans in major metropolitan markets are sometimes deprived of any real competition for their patronage when the market would support multiple teams (for example, Chicago Bears and Blackhawks). New York may have two teams per major league sport, but fans in London usually have at least six Premier League soccer teams to choose from, along with multiple teams in the other British sports!

Ticket Prices To some degree, the very fan loyalty that shields major American sports from “market retribution” if price goes up or quality goes down means that high ticket prices may be fairly attributable to a superior product that

13

14 How Sports Fans Are Exploited developed such loyalty, rather than monopolistic practices. Chicago Cubs fans are not going to start patronizing the White Sox because of a “small, significant, non-transitory increase in price” for a ticket to Wrigley Field (the quote is the measure used by federal antitrust agencies to determine whether a merger is likely to harm consumers).31 Nonetheless, MLB recently changed its rules to bar even minor league farm teams from operating within fifteen miles of a major league ballpark, absent consent.32 This reflects a recognition that these teams must impose some constraint on major league clubs’ pricing power. Such an effect would be even greater if entry into the major leagues was based on merit rather than lifetime guarantee. With entry by merit, new teams would not be farm teams but independent clubs stocked with young talent and a few talented veterans, with a realistic chance of entering the major leagues if they succeeded in the lower-tier competition.

Television Blackouts The harm to taxpayers and fans in stadium markets is the textbook result of sports leagues’ monopoly power: increased monopoly profits through the creation of artificial scarcity. The effect of the monopoly on broadcast markets is more complex. The principal harm illustrates the other important and unfortunate aspect of sports today: when owners act collectively and without constraint by government or market rivals, they cause harm beyond that caused by a single profit-making monopolist. Television restrictions reflect the willingness of owners, who are primarily interested in their own club’s profits, to forego efficient and profitable opportunities because of their inability to divide the spoils. Broadcast rights to sporting events are assigned by common law precedent to the home team.33 With the exception of the NFL, where all broadcast rights are transferred to the league, each league has a similar master licensing agreement whereby national broadcast rights are marketed by the league, with each team retaining local rights and granting rights to the visiting team to broadcast the contest back into their home market.34 In some cases, such as baseball, the league retains the rights to market live webcasts via its website, www.mlb.com.



How Sports Fans Are Exploited

Because of the prevalence of local broadcasting and team loyalty, most fans living within the assigned territory of their favorite team can enjoy— for a price—most of the games they want to watch, either on free-to-air, premium cable, or pay per view. In an increasingly mobile society—only 60 percent of native-born Americans reside in the state in which they were born35—the principal harm caused by sports leagues’ market power in broadcasting comes from the significant limits on the ability of fans to watch out-of-market games. These “expatriate” fans might be able to watch a handful of their favorite team’s games (1) when selected for the broadcast by national networks, (2) if their favorite team plays the team in the market in which they now live, or (3) if their team is playing a team whose games are carried by a superstation. (Teams whose games are shown on superstations pay substantial fees to MLB to reflect their out-of-market broadcasts.36) These fans also may subscribe—for a substantial fee—to a premium package that broadcasts almost all games available on any of the myriad regional cable sports networks that have local rights. However, fans do not have the option of paying a lesser fee simply to watch their favorite team’s out-of-market games; nor can they watch their favorite team’s local announcers when their team is playing on the road and the game is also being televised by the home team. Absent the exclusive territorial arrangements agreed to by league owners, individual teams would either directly, or more likely via intermediaries, arrange for their own games to be available to out-of-market fans. Although eclectic fans, fantasy league participants, and those who enjoy a sporting wager may prefer the convenience and options afforded by the leaguewide package, others may prefer to save money because they watch only their favorite team. Fans wishing to see only their favorite team now pay for more games than they want, so sports leagues are currently using their monopoly power to effectuate a huge wealth transfer. Another significant group of less fanatic consumers would be willing to pay a more modest sum for their favorite teams’ games only. As to these fans, the current scheme reduces output. The games are still being played, and it costs virtually nothing to broadcast them to out-of-market fans, who, by definition, are willing to pay a monopoly price to watch their favorite team (otherwise their out-of-town

15

16 How Sports Fans Are Exploited “favorite” wouldn’t be a “favorite”). Unfortunately, the current territorial scheme fails to take advantage of this phenomenon. The explanation for this result—less output and less profits—lies in transactions costs. Each club is concerned that expatriate fans residing in their own local market will watch fewer games involving the local team if the option exists to watch out-of-town favorites. The efficient result would be to permit outof-market­ broadcasts, with the local team receiving some form of compensation. Transactions costs, however, make it difficult to agree on terms. As a result, money is “left on the table” because of an inability to agree on how to divide it. In addition to reducing output in live games, the territorial division reaches almost ridiculous proportions on matters that are economically more trivial but significant to expatriate fans. MLB requires satellite programmers to black out hundreds of games on regional Fox Sports channels, requiring expatriate fans to watch another team’s often biased broadcasters, even though both regional networks are owned by the same corporation. Similarly, YES Network highlight shows and other programming on the allYankee station cannot be shown, even to subscribers to MLB’s Extra Inning out-of-market package, when they potentially conflict with other programming shown in the subscriber’s local areas. The harm to local markets in these cases is extremely minor, yet MLB owners remain unwilling to make their products more attractive to consumers. A recent NBA example illustrates how anticompetitive owner restraints caused by transactions costs can frustrate innovations. Several years ago, Dallas Mavericks owner Mark Cuban invested in HDNet, a satellite-based station offering high-definition broadcasts. However, the NBA’s territorial rules with regard to club-sold broadcast rights precluded him from showing Mavericks games in high definition outside the Dallas media market. Surely affluent, techno-savvy fans around the country would have been willing to pay far more for high-definition games than existing rights holders would lose if these fans stopped watching the game on local television. But the difficulty in figuring out the required payments among thirty individualistic owners meant that most fans were unable to take advantage of this popular innovation.



How Sports Fans Are Exploited

Labor Market Restraints Sports media love to describe the battles between players and owners in terms of who gets the bigger share of the pie. However, what is often lost in the shuffle is the effect of this argument on consumers. Should fans care about league rules governing clubs’ bidding for player services? We think so, but not for the reason many might give. Contrary to conventional wisdom, higher player salaries resulting from free labor markets do not lead to higher ticket prices for fans. However, fans should care about labor market rules for two other reasons. Most importantly, a structure that facilitates agreement and avoids strikes and lockouts is greatly preferred to one that encourages industrial disruption. Fans care far more about having a season than any particular rules for playing the games or signing the players. In addition, the way in which players are allocated among teams can have an important effect on the overall appeal of the sport to fans. First, the myth. Teams play in arenas and stadia that are basically fixed in size. Once that size is set, the team prices tickets to gain as much revenue as possible. (While it costs Ford a fair amount to produce an extra car, the additional costs to a club of having additional fans in attendance is relatively small—a few additional ushers and janitors.) Teams will try to get as much money as possible from ticket sales, regardless of their payroll. If raising ticket prices by $5 would not drive fans away, the club would already be charging the additional $5. Conversely, if raising prices would indeed drive so many fans away that the club loses more than it takes in from die-hard fans, then the club couldn’t raise ticket prices even if payroll increased. Although each fan may care very much about how the labor market is structured for economic reasons discussed below, or for noneconomic reasons (sympathy for “workers” against “wealthy owners” or, conversely, outrage that professional athletes earn so much more than teachers), fans should not prefer labor restrictions that have the effect of suppressing salaries in the hope that the cost savings will be passed on in the form of lower ticket prices: their hope will not be fulfilled. Let’s turn back to why fans should care about labor restraints by invoking the baking analogy again. First and foremost, of course, pie-loving fans

17

18 How Sports Fans Are Exploited want to make sure that the bakery is open for business and not closed due to a strike. Also important, but often overlooked, is the fans’ interest in the tastiness or blandness of the pie. One of the problems with the current structure of sports leagues is that the owners have the incentive to collude in order to save costs, even if the pies are less appetizing. Economists and industry experts study and debate how players can be allocated among clubs to maximize revenue from greater patronage. Perhaps fans prefer star players to be spread among teams in an equal fashion, so that every team has a similar chance at competing for the championship; alternatively, fan interest may be heightened by the thrill of watching various “Davids” take on established “Goliaths.” Because clubs operate in markets of varying size, an allocation that results in large market teams consistently challenging for the title may be better for the sport as a whole. Others contend that the key is that each team have a reasonable chance at the championship every few years. The data have been carefully examined like a CSI murder scene, but there is no consensus as to the best approach. (We discuss this in more detail in Chapter Three.) Whatever the right model, though, consumers have a keen interest in ensuring that the “invisible hand” of the marketplace provides the correct economic incentives for players and owners to agree on labor market rules that make the product more attractive, not less. The current structure, however, provides precisely the wrong incentives. When the clubs hiring the players set the rules (either by agreeing among themselves or through collective bargaining with a players union), the “invisible hand” leads to rules primarily designed to reduce costs rather than produce the most exciting competition. Consider the experience of Major League Baseball. For over a century, owners argued that rules like the Reserve Clause, which outlawed any competition for a player’s services, were essential to promote the “competitive balance” that was necessary for the game to succeed. The fact that, even with the Reserve Clause, MLB displayed a marked competitive imbalance—from 1949 to 1962, the Yankees, Dodgers, and Giants won eighteen of twentyfour possible pennants—did not dissuade the owners from chanting their mantra. Finally, because of some clever legal work by union lawyers before a respected arbitrator, players won the right to receive competing bids for



How Sports Fans Are Exploited

their services,37 a right that players later modified in a new collective bargaining agreement allowing “free agents” to receive competing bids after six years of major league service.38 In ruling in favor of the players on a technical point of contract law, the arbitrator considered, and rejected as legally irrelevant, the owners’ claim that the standard player contract could not be read to permit free agency, because this would destroy competitive balance and baseball.39 What actually happened? Most scholars who have pored over the data agree that the owners’ claims were proven false. Indeed, the majority of studies suggest that competitive balance actually improved with free agency.40 (We explain in Chapter Six why we think this is so.) Owners persist in maintaining that competitive balance is important in maintaining fan appeal for sports. Indeed, the MLB owners added a specific provision to the MLB Constitution a few years ago that gave the commissioner broad powers to promote competitive balance. So, although statistical analysis is inconclusive as to whether competitive balance actually causes higher attendance or television ratings (and, if so, what kind of competitive balance maximizes interest), attendance did increase in the period after free agency and the owners keep insisting that competitive balance is important for the sport. If owners believe that competitive balance is important to maximize fan interest, then why would they have so fiercely resisted free agency, which led to increased competitive balance, and which may have led, or at least coincided with, greater attendance? The reason is that in the first seven years of free agency, while attendance was increasing by 57 percent, salaries were increasing by 316 percent! Owners obviously preferred the “good old days,” when drawing two million fans was a big success, but also when star players earned only $100,000. The 2004–5 NHL lockout further illustrates this point. The owners were unshakeable, and successful in breaking the players and obtaining a salary cap that gave them “cost certainty.” This certainly was not necessary to achieve competitive balance. Indeed, one would be hard put to design a scheme that achieved better competitive balance than the previous NHL structure: in the three prior seasons, twelve different teams were Stanley Cup semifinalists. The reason that the league was so balanced was that the disparity in front-office decision making was so varied. Teams in the bot-

19

20 How Sports Fans Are Exploited tom quartile in payroll routinely enjoyed postseason success, while some clubs with inflated salaries failed to perform.41 The reality of competitive business is that when a firm poorly invests, additional money is required to produce the goods and services consumers demand. The NHL owners’ recent labor agreement succeeds in shielding them from the rigors of competition: now, when a team whose payroll is at the level of the salary cap underperforms, its owner can truthfully tell loyal fans that there is nothing he can do about it. The real problem here is who makes the rules. As we detail in Chapter Four, it is significant that NASCAR, presiding over the fastest-growing sport, has virtually no rules limiting competition for the services of elite drivers, crew chiefs, or engineers. That’s because the ones who claim they are making the rules in the best interest of the sport—NASCAR—aren’t the ones spending the money to acquire elite talent. NASCAR makes money if the sport as a whole makes money. So, while NASCAR continuously tweaks elaborate engineering rules to promote a balanced competition, it recognizes that the free market works well for labor. What do you think would happen if control of stock-car racing was taken over by the racing teams? We’d have demands for salary caps faster than racing crews can change the tires!

Operating the Club: Management and Ancillary Sales We noted earlier the aphorism that competitive markets inflict “swift retribution” on those who mismanage firms or fail to provide consumers with the goods and services they demand. Thanks to the loyalty and devotion of their fans, major league clubs face much softer punishment, individually or collectively, when they likewise fail. Both the lifetime guaranteed membership in the league and the clubs’ ability to control the league in their own self-interest make this problem worse. Every sport has its legendary incompetent owner. Surely, most industries have incompetent owners, but they usually can’t remain in business for long. In sports they can, and for fans who develop a loyalty to their teams, there is no recourse but to suffer. If clubs had to maintain a high



How Sports Fans Are Exploited

level of competitiveness to remain in the major leagues, one of two things would surely happen: either the incompetent owner would be forced to sell the team, or his club would exit the league and fans could turn elsewhere. For over two decades, the only movement in the on-court performance of the Los Angeles Clippers has been between mediocre and terrible. Owner Donald Stirling is legendary for tolerating mismanagement and for refusing to invest in his team, content to pocket the revenues that simply come from showing up to play another NBA team each night during the regular season.42 The problems we have identified with current leagues—that clubs are granted perpetual monopoly status, and that the clubs run the league— interact to cause this problem. If the Clippers’ poor record could cost them the right to participate in the NBA, another team could form in Los Angeles and demonstrate superior talent to displace them. If Commissioner David Stern worked for an independent board of directors and not the owners, he surely would have forced Stirling out by now. (Stern faces a similar problem with the New York Knicks’ quirky owner, James Dolan.43) Licensing and marketing is another area where structure gets in the way of producing services for fans. For years, baseball clubs did little marketing. In the 1950s, owners rejected the recommendations from a study by the Wharton Business School to centralize activities, not wanting to cede power to the commissioner.44 Licensing revenues were trivial before 1984, but expanded over thirty times by 1989 under the aggressive efforts of Commissioner Peter Ueberroth.45 Today, however, the pendulum has swung completely in the opposite direction. Now that owners realize the significant revenues to be gained, all leagues centralize virtually all marketing. If a team wants to develop an innovative T-shirt, jersey, and so on, all licensing revenue is shared equally with the other teams, so they have a reduced incentive to do so. (Like Wal-Mart, any club keeps the retail markup for goods sold at the stadium store.) There is no doubt that each league has some very smart and expert marketing executives in New York. But if central planning by brilliant people were a great way to run an economy, we’d all be putting up statues of Lenin instead of seeing them fall down throughout Eastern Europe.46 As academics, the two of us, of course, are not going to second-guess the precise balance that skilled marketers would maintain

21

22 How Sports Fans Are Exploited between centralized marketing and local opportunities, and the extent to which profits from merchandise sales are properly attributed to the efforts and reputation of the league, or to the individual team selling the items. But completely centralized marketing with virtually no room for local profits (and therefore no incentive for local initiatives) makes sense only because, once again, the clubs—who run the leagues—can’t agree on a formula for sharing.

Why Do Fans Put Up With It? Although the answer to this question is complex and warrants separate academic treatment, we believe there are two principal explanations. One, to quote the real Jefferson, is that “all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.” This is particularly true with regard to entertainment, no matter how passionately it might be enjoyed or how important it might be. Avid sports fans simply enjoy the game, no matter how much they are exploited; those who decline to tolerate monopolistic abuses simply devote their leisure time elsewhere. There is another problem for rational and passionate sports fans, a flaw in the political process by which sports leagues might ordinarily be regulated, which economists and political scientists have labeled as “public choice theory.”47 Effective regulation of sports leagues in the public interest is a “public good” that benefits millions of sports fans, but for each of them to only a relatively modest extent. Such regulation harms owners in club-run monopoly sports leagues, and harms them a lot. These owners are prepared to spend considerable sums on lobbyists, and to personally intervene with local legislators to prevent adverse congressional action. Sports fans lack the individual incentive to do so. This chapter has surveyed a number of markets in which the major sports leagues exercise monopoly power, and do so to the detriment of fans. The catalog of excessive pricing and failure to provide entertainment that is responsive to consumer demand does not reflect on the character or integrity of owners or league officials. We do not question their decency; like



How Sports Fans Are Exploited

good capitalists they are simply responding to the incentives provided them by the current economic structure. Indeed, sports economic history suggests that league success is to some degree a testament to forward-looking owners who fulfilled their trusteeship by putting the long-term interests of the sport before their short-term economic interests. But these owners are always recognized as the exceptions that they are. Moreover, given the remarkable increase in the sheer size of franchise values these days, the typical owner is far less likely to look like Jerry Colangelo (a front-office executive and “basketball man” who bought the Phoenix Suns for $1 million, owned the franchise for over three decades, and chaired the NBA Board of Governors) and more like Jerry Jones (who provided the original owners of the Dallas Cowboys with a capital gain exceeding $300 million and has been working ever since to pay off debt and rapidly build the value of his own franchise, often at the expense of the NFL). Rather, we suggest that the problem lies in the current economic structure of sports leagues. Clubs who are guaranteed perpetual membership in a monopoly league, and who then get to set the rules for the competition themselves, have every incentive to act in their own self-interest and contrary to the interest of fans and taxpayers. The result is billions in tax subsidies for stadia, no competition for live gate patronage, inefficient packages of out-of-market games for the millions of fans who do not live in the immediate area of their favorite team, labor battles that disrupt the sport and are designed to cut costs rather than make the season as exciting as possible, and tolerance of mismanagement and inefficiency in club operations, licensing, and sale of merchandise. As we detail in the following chapters, the problem would be significantly mitigated by two significant reforms. First, like NASCAR, sports leagues should be organized by a company independent of the participating clubs. Second, like European soccer, the right to participate in the premier-tier competition should be based on demonstrated merit, not guaranteed. These reforms will interact to significantly reduce tax subsidies, allow some competition for fans’ patronage by ending the exclusive territorial monopoly clubs now enjoy, and ensure that broadcast, labor, and licensing rules are designed to be responsive to consumer demand rather than the self-interest of a voting majority of club owners.

23

2

Diagnosis and Suggested Cure

Among the laws that rule human societies there is one which seems to be more precise and clear than all others. If men are to remain civilized or to become so, the art of associating together must grow and improve in the same ratio in which the equality of conditions is increased. —Alexis de Tocqueville, Democracy in America, vol. 2, sec. 2, ch. 5

Our Twofold Remedy The focus of this book is on the ways in which sports leagues harm consumers. Chapter One provided a catalog of maladies that sports fans are forced to endure. In our view, owners take advantage of monopoly power to exploit consumers, and often do so in an inefficient way. In this chapter, we expand in greater detail on our diagnosis that a significant amount of consumer harm can be blamed on two critical features of North American monopoly sports leagues: (1) entry is limited and current owners are guaranteed a perpetual right to participate in the premier competition, and (2) the league is controlled by these same owners. To be sure, these two major problems interact with each other: the presence of competition from a rival league would force sports owners, as it would most joint venturers, to put aside selfish goals in the interest of survival in the marketplace. The remedy we offer to cure the malady we have diagnosed is also twofold and interrelated. First, we propose that sports leagues be restructured so that control over the competition and the league is vested in those with a financial interest in the overall welfare of the league and the sport, not the narrow interest that current owners have in the economic welfare of their own individual club. Second, we advocate government intervention to



Diagnosis and Suggested Cure

ensure that league membership is based on merit, not a permanent guarantee of monopoly status to current owners. The ability of clubs to obtain monopoly profits at fans’ expense is significantly aided by the “closed” structure of American professional sports leagues. This structure is not inevitable. The elite competitions in tennis, golf, and stock car racing all require those who take part to earn their right to participate through current performance, not by resting on their laurels or buying their way into the competition. Nor is entry by merit limited to “individual” sports (although car racing clearly requires a team effort): almost all of the world’s domestic soccer leagues function on the basis of “promotion and relegation,” where there is a second-tier competition from which the top teams are promoted, and to which the bottom major league teams are relegated each season.

Conflict of Interest Between the League and the Owners Let’s begin with a more extensive discussion of a real case alluded to in Chapter One: the lengthy litigation between the NBA and the Chicago Bulls over the number of games featuring superstar Michael Jordan that could be shown nationally on the WGN superstation.1 The litigation arose at the peak of the Bulls’ dynasty of six titles in eight years. The Bulls were primarily interested in broadcasting on WGN because it was a major free-to-air station in Chicago with a strong signal, and at the time was unaffiliated with networks who would be reluctant to preempt prime time programming. The other alternatives for the Bulls were lower-strength local stations. But WGN’s signal was transmitted by satellite to many cable subscribers throughout the country. The Bulls offered to share with the league any revenues attributable to the national broadcast, but the Bulls and the NBA couldn’t agree on the details. (The parties had differing views on the effect of Bulls’ telecasts on other teams’ local broadcasts, but ratings data introduced in evidence by the Bulls suggested that the effect was minimal.) Finally, after many years and millions of dollars in attorneys fees and related costs, the parties settled the case, agreeing on substantial restrictions on Bulls’ games. As part of the legal skirmishing, the NBA argued that it should be treated

25

26 Diagnosis and Suggested Cure as a single entity, as if each franchise were just an operating unit of the NBA. On this view, local owners should be no more free to decide how their broadcast rights should be sold than a local manager of a Wal-Mart store should be able to decide where the store is located: club owners are free only to do what the league allows. This view of the league is sometimes called the “single entity doctrine.”2 (Legally, this is a powerful defense; the Bulls had sued under the Sherman Antitrust Act’s provision banning “conspiracies in restraint of trade,” and precedents established that agreements among subdivisions within a single corporate or other economic unit did not constitute a conspiracy.3) The appeal of the single entity doctrine is that the members of a league cannot make the league product without some central coordination, such as agreement over the rules. The Bulls’ lawyers responded that the NBA had not specifically claimed any right of ownership of the local broadcasts of the Bulls. The NBA’s reply was that there was nothing to stop the remaining owners from introducing a rule that did assert ownership over the rights, so the decision to give each club control of local rights should be irrelevant to whether the league was seen as akin to a single corporate entity or a joint agreement among independent firms. The court of appeals rejected the NBA’s reasoning. Judge Frank Easterbrook’s explanation is worth reciting: Whether there are ways to achieve the NBA’s objective is not the question. Laws often treat similar things differently. One has only to think of tax law, where small differences in the form of a business reorganization have large consequences for taxation. Substance then follows form. Antitrust law is no exception: agreements among business rivals to fix prices are unlawful per se, although a merger of the same firms, even more effective at limiting competition among them, might be approved with little ado. Such distinctions are not invariably formal. The combined business entity might achieve efficiencies unavailable to the cartelists [emphasis added].4

In other words, the NBA owners were free to turn themselves into a single entity and adopt rules pretty much at their own discretion, but as long as they treated franchises as independent entities, then so would the courts. This was not only because the NBA formally consisted of separate business entities. Significantly, Judge Easterbrook observed that a true formal inte-



Diagnosis and Suggested Cure

gration into one “corporate family” “might achieve efficiencies unavailable” to the collectivity of separate owners. In so holding, the court affirmed a point long made by economists about cartels: they are not only organizations of businesses that try to act like a monopolist (which is usually illegal in itself), but they are actually worse than single-firm monopolists, in that they are lousy monopolists. The question of cartel efficiency, in the sense used here, is seldom raised in practice precisely because they are illegal. Cartels tend to restrict supply to the market and increase prices. For many economists, the problem with this is not so much that it is unfair to consumers (though that is obviously no good thing) but that it represents a wasted opportunity. Raising prices above costs may line the sellers’ pockets, but it will drive out potential buyers in the market, leaving wants and needs unnecessarily unmet. This is inefficient because the sellers would—if market forces so required—be willing to sell at a price equal to cost. Only the greed of the owners (expressed through the cartel) gets in the way. Fortunately for consumers generally, they are protected against cartel activity in two ways. As noted, conspiracies to restrain trade are illegal, so when wholly independent firms reach price-fixing agreements in the proverbial smoke-filled room at the O’Hare Hilton and then word leaks out, many are going to jail. Perhaps even more often, cartels fall apart because members can’t agree on precisely the best price with which to gouge consumers. Cartels thus are doubly inefficient. Inefficiency #1 is the restriction on output and consumer choice created by cartel agreements designed to replicate the options of a monopolist. Inefficiency #2 is the cartel’s inability to stick to its own agreements. But inefficiency #2 often cancels out inefficiency #1, so no one complains except the members of the cartel. (Indeed, some people even argue that government should worry less about antitrust enforcement on the grounds that inefficiency #2 is doing the job for them.) But sports leagues are different. They are run as cartels by the member clubs, but unlike a typical industrial cartel, there are important benefits to be derived from the operation of a league cartel.5 Sports leagues have to agree on rules, organize championships, coordinate schedules, and so on if they are to make the “product” at all. Without cooperation, league games

27

28 Diagnosis and Suggested Cure would be impossible. North American leagues have taken this core concept and stretched it much further, arguing for the need to coordinate economic strategy in order to create a more attractive league, and in particular the need for an adequate degree of competitive balance. Whether or not this extra coordination is necessary, Judge Easterbrook’s point is that a cartel is unlikely to reach efficient coordination because of the difficulty that owners have in reaching agreements (inefficiency #2). As Bob Costas caustically observes of baseball, “The owners, of course, couldn’t even agree on what to order for lunch.”6 This is because every coordination decision involves a potential conflict of interest for each owner, between what is good for the league as a whole and what is good for the owner’s team. The conflict was nicely summarized by another judge’s concurring opinion in the Bulls’ litigation. Judge Richard Cudahy analogized the NBA’s decision to have broadcasting rules set by vote of owners, who maintain rights to most of their own games, to allowing a company’s salespeople the power to vote on the bonuses each is to receive: Each salesperson has some incentive, of course, to promote the overall efficiency of the firm on which his or her salary, or perhaps the value of his or her firm stock, depends and therefore to award the larger bonuses to the most productive salespersons. However, in this scenario each salesperson has two ways of maximizing personal wealth—increasing the overall efficiency of the firm and redistributing income within the firm. The result of the vote might not be to distribute bonuses in the most efficient fashion. The potential for this type of inefficiency is particularly great when, as with the NBA, the league is “the only game in town” so that a team does not have the option of going elsewhere if it is not receiving revenues commensurate with its contribution to the overall league product. In any event, a group of team owners who do not share all revenues from all games might well make decisions that do not maximize the profit of the league as a whole [emphasis added].7

The problem is a familiar one to economists and social scientists, and is often referred to as “the problem of collective action.” A league is an organization that operates on behalf of its members. If the members make the decisions as well, they tend to put their own best interests ahead of the collective. Similar problems emerge in all organizations, from the town council to the United Nations. The fundamental problem is that any given deci-



Diagnosis and Suggested Cure

sion usually has implications for everyone, but each individual considers only the consequences for himself. For example, when we drive to a game, we consider the benefit this brings to ourselves and pay no attention to the fact that our car creates congestion for everyone else. We all think in the same way, and so the roads to the stadium are congested. Even if organizers offered to provide buses to drive people to the game, the collective action problem warns us that most of us will probably still choose to drive. Not only is this collective action problem well recognized in a variety of contexts (popular examples include pollution and global warming, depletion of natural resources, theft, antisocial behavior, and charitable donations), it is also well recognized in sports. Teams in the league cannot “supply the product” unless they cooperate with each other, but that need to cooperate conflicts with self-interested behavior. As we will argue further on, this conflict manifests itself whenever sensible reforms to enhance the quality of the league are discussed.8 Of course, the squabbling of owners is something that has gone on since the golden age of baseball and earlier. Nor is it hard to find the roots of dissent: any owner worth his salt is constantly scheming to attract new players. Every time an owner pulls off a coup to catch a star, at least one other owner, and often several, is left feeling cheated. Just over a century ago, New York Giants owner John T. Brush was engaged in almost permanent war with American League President Ban Johnson over the movement of players and the rivalry between the leagues, usually over the player contracts. Under Johnson’s leadership, the American League had set itself as a major league in conflict with the National League, which wanted to monopolize that position. After a period of head-to-head competition, the National League made peace with the American League in 1902, and part of that agreement was to allow the American League to maintain a team in New York, in competition with the Giants. So much did this infuriate Brush that he refused to let his team play the Boston Americans in what would have been the second ever World Series in 1904. Of course, the fans and the players were disappointed, and even Brush later regretted his decision, but by then it was too late. Afterward, the owners invented the “Brush rules” just to make sure that a single owner could not make such a crazy decision again.9 Dissent is more or less the natural state of affairs among the owners.

29

30 Diagnosis and Suggested Cure Andrew Zimbalist quotes a report commissioned by the baseball owners in 1955: A lack of planning and a failure to measure tomorrow’s effect of today’s hasty statement is responsible for most errors in public relations judgment. . . . A principal reason for this lack of anticipation is the almost complete absence of cooperation between the member clubs. . . . From time to time it appears that half of the club owners are officials or public dissenters on one or more matters of overall policy. . . . This disunity has been one of the blacker sports of present public policy methods.10

Likewise, Commissioner Ford Frick in his farewell message to the owners in 1964 pointed out: So long as owners and operators refuse to look beyond the day and the hour; so long as clubs and individuals persist in gaining personal headlines through public criticism of their associates; so long as baseball people are unwilling to abide by the rules they themselves make; so long as expediency is permitted to replace sound judgment, there can be no satisfactory solution.11

Some might argue that dissent has been minimized in other major league sports such as football and basketball, and later we discuss the ability of powerful commissioners such as Pete Rozelle and David Stern sometimes to overcome the instincts of quarrelsome owners and forge collective agreements. Our point is not that club-run leagues are incapable of overcoming the self-interested behavior of individual club owners, behaviors that conflict with overall league interests. Rather, we claim that overcoming these obstacles—including clubs’ efforts to “free ride” on leaguewide initiatives for their own profit as well as club owners’ use of their voting control of league policy to make decisions that are not in the best interests of the league—is far more difficult in owner-run leagues than in leagues where an independent entity organizes the competition. Indeed, even the famously collectivized NFL has suffered major internal disputes, such as the attempt to relocate the Raiders to Los Angeles, which resulted in a long and expensive lawsuit played out between Al Davis and the other owners. Likewise, when the NBA’s Clippers moved from San Diego to Los Angeles, they ended up being sued by the Lakers, who had recently moved from the L.A. Sports Arena to Inglewood. In short, even where peace may seem superficially to reign, conflict is never far from the surface.



Diagnosis and Suggested Cure

There is a tendency to think that team owners are a uniquely pigheaded and unreasonable breed. (Indeed, the few owners who are actually revered— the NFL’s Art Rooney and Wellington Mara or the NBA’s Jerry Colangelo come to mind—are usually praised precisely because they are so extraordinary in their reasonableness and willingness to sacrifice their short-term interests for the long-term good of the league and their own club.) It is more likely, however, that the nature of league competition breeds dissent. Sporting competitions themselves are examples of what is known as a zerosum game. In any game there are rewards and prizes for the players, but in win-lose situations, one player’s gain equals another person’s loss, which makes cooperation almost impossible. When owners gather to organize a sporting competition for their own clubs, such a “league” consists of an almost endless series of zero-sum confrontations. For most owners, the only question that arises when considering a change to the rules is whether it will put them ahead of their rivals. Ownership of a sports franchise is mostly about relatives, not absolutes. Since most changes to a league will improve the relative standing of no more than half the owners, there is an inbuilt tendency toward conservatism. In fact, it is tempting to argue that the only changes that are agreed on are the ones some owners have seriously miscalculated, since by definition they cannot all improve their relative standing at the same time. Self-interest leads not only to acts of omission, in the form of unwillingness to embrace progressive ideas that improve the sport but might make some of the owners worse off. Because within a league individual owners remain competitors in different markets—to acquire player talent, to sell broadcast and sponsorship rights—these owners collectively have an incentive to acts of commission, in the form of anticompetitive restraints, which also impair the quality of the sport.

Recognizing the Conflict: The Commissioner and Regulation of “Integrity” Issues The inefficiency of the cartel is large enough to cause significant harm to the interests of fans, as we argued in Chapter One. However, it is usually not large enough to destroy a league altogether. When the viability of the league

31

32 Diagnosis and Suggested Cure is at stake, the owners usually recognize they need outside help. Probably the most famous example of this is the installation of Kenesaw Mountain Landis as Commissioner of Baseball. Although Landis was named in the wake of the Black Sox scandal of 1919, this was simply the culmination of years of unsuccessful efforts to stamp out practices that affected the integrity of the competition. As Landis himself observed on his appointment, “The time had come where somebody would be given authority, if I may put it brutally, to save you from yourselves.”12 Eliminating gambling and match fixing by the players had been the prime motivation behind the organization of the National League back in the 1870s, but in the early years of the twentieth century the owners were unable to come to grips with the problem, and the governance structure that the owners had devised in 1903 to end competition between the National and American Leagues (a “National Commission” consisting of the two league presidents and a third party) proved unable to overcome the owners’ self-interest, which precluded steps to improve the quality of the game by ridding it of corruption. Before the very first World Series in 1903, the sports writer Fred Lieb described “bettors with fistfuls of folding money” laying bets on the first game. Daniel Ginsburg’s book, The Fix Is In, documents the numerous scandals leading up to 1919: • In 1904, Jack Taylor, a former Chicago Cubs star pitcher, admitted to

being paid $500 for losing a City Series game against the White Sox. He was later accused of throwing a game against Pittsburgh but was acquitted by the National League Board of Directors. • Rube Waddell, a pitcher for the Philadelphia Athletics, was accused of deliberately sustaining an injury to keep himself out of the 1905 World Series. • In 1908, it was alleged that a Giants employee tried unsuccessfully to bribe the umpire in a game to decide the National League pennant, but John T. Brush successfully persuaded the other owners to drop any proceedings. • In the same year, New York gamblers tried to bribe various Phillies to throw games against the Giants.



Diagnosis and Suggested Cure

• At the end of the 1910 season, players on the St. Louis Browns were al-

leged to have “allowed” Napoleon Lajoie to record seven hits in a game so that he would beat Ty Cobb for the batting title. • In 1912, Phillies President Horace Fogel accused the umpires, the National­ League president, and the Cardinals manager of conspiring to ensure that the Giants would win the pennant. • In 1916, Giants manager John McGraw accused his own players of trying to lose a game against Brooklyn, which would ensure that the Dodgers won the pennant at the expense of the Phillies. • In 1917, St. Louis Browns owner Phil Ball openly accused two of his players of deliberately losing to the White Sox.13 When evidence started to leak out that almost the entire Chicago White Sox team were implicated in a betting scam involving the 1919 World Series, drastic action was called for. The conspiracy to fix the World Series fit into a pattern of corruption that threatened to overwhelm the National Pastime. But it was evident that the National Commission was either unwilling or unable to take action, largely because of the pressures exerted by the owners themselves. In case after ineffectual case, owners’ self-interest prevailed over the long-term integrity of the sport. Harold Seymour, in his celebrated history of baseball, points out that the appointment of Landis was not merely a response to the Black Sox scandal, since there was already a serious movement in favor of reform before the scandal broke.14 In 1919, Albert Lasker, a major stockholder in the Chicago Cubs, put forward a plan to create a three-man committee of eminent persons not connected with the baseball business to be given “unreviewable authority” to control the game. According to Seymour, Lasker’s plan recognized “that the club owners were incapable of governing their own business, in view of their interminable politicking, their public squabbles, and the growing whisperings about game throwing. In effect, Lasker was saying that professional baseball was too important in America to be left to baseball men to run.” Initially, a majority of the owners was opposed to the idea, seeing rightly that it would undermine their control of the game. However, when the

33

34 Diagnosis and Suggested Cure Black Sox scandal broke, the National League owners panicked and looked to implement the Lasker Plan almost immediately. The plan was endorsed at a meeting in early October by the eight National League clubs plus three owners from the American League, but by late October they veered toward the idea of a single commissioner, with Landis as the front-runner. The main obstacle was the opposition of Ban Johnson, who rightly saw that a commissioner would completely undermine his standing as president of the American League (given that he did not own a team, this would also cast him adrift from Organized Baseball). He marshaled five loyal American League owners to oppose the plan, and the prospect emerged of a split, with the eleven owners in favor of reform threatening to start their own league. The reformers then picked off the “loyalist” owner of the Detroit Tigers, by threatening to put a rival team in the Motor City if there was a split. This caused the other four to capitulate as well. Thus Landis was appointed as the first commissioner of baseball, an “elected czar,” in November 1920. He was given full and undisputed authority to settle all disagreements among the owners. As Seymour noted, “The owners snapped shut the lock on the chains they themselves forged by agreeing to be ‘bound by the decisions of the Commissioner’ and ‘to the discipline imposed by him’ and to waive the right of recourse to the courts.”15 In stark contrast to the prevaricating of the National Commission, Landis showed himself to be completely uncompromising on the issue of match fixing, and willing to drive out a player associated with even the slightest whiff of scandal. Notoriously, he deliberately went beyond what a jury was willing to decide in the Black Sox case, expelling players even when they were found not guilty. As he announced the day following the acquittal of the players: Regardless of the verdict of juries, no player that throws a ball game, no player that entertains proposals or promises to throw a game, no player that sits in a conference with a bunch of crooked players and gamblers where the ways and means of throwing games are discussed, and does not promptly tell his club about it, will ever again play professional baseball.16

Landis was nothing if not true to his word. In 1921, he blacklisted Eugene Paulette of the St. Louis Cardinals merely on the grounds that he had asso-



Diagnosis and Suggested Cure

ciated with gamblers, even though no evidence of a connection with match fixing was ever made. In 1924, he blacklisted a Giants player and coach for trying to bribe the Phillies to throw a game, and in 1926 he came close to blacklisting two legends of the game, Ty Cobb and Tris Speaker, on the basis of dubious testimony about some connection to a gambler.17 There is no doubt that Landis was a zealot who saw it as his duty to clean up the game, and there is also no doubt that by the end of the 1920s the public had regained its confidence in the integrity of baseball. Here then, is a clear example of an outsider being able to achieve what the owners collectively could not. This is not to say that history has judged Landis to be the single-handed savior of Organized Baseball.18 While his aggression in the pursuit of player match fixing is unquestioned, he seems to have had little time for consideration of corrupt practices on the part of the owners. Most notably, he failed miserably in efforts to police the relationship between major and minor league clubs: the major league owners routinely overruled him through official policy that permitted the establishment of a farm system, for example.19 And history has judged Landis harshly with regard to his failure of leadership (and suggestions of outright racism) in maintaining the racial apartheid in baseball, which was broken only three years after his departure from office. Moreover, Landis’s tenure coincided with an altogether more uplifting phenomenon, the career of Babe Ruth. Spectators flooded to the baseball fields to watch the “Sultan of Swat” transform the game through his big hitting. Without Ruth, baseball would have been a much tamer affair in the 1920s, and the commissioner’s success on integrity issues may have not had the lasting beneficial effects that history now recounts.

Beyond the Commissioner The problem with Landis was the same problem that you would have if you appointed Stephen Ross, Stefan Szymanski, or any other fan to be commissioner, with unlimited powers to decide what should stand and what should not. Landis was probably no more opinionated and unreasonable than the rest of us, it was just that he, unlike the rest of us, had the power

35

36 Diagnosis and Suggested Cure to make his will law. The glory of the U.S. Constitution is the recognition that such unlimited powers lead inevitably to despotism. Landis’s career as a judge was littered with reversals of his peculiar decisions; the problem in baseball was that there was no power to reverse his decisions. He had power, without responsibility. In other sports, commissioners have carved out powerful positions and done much to influence the direction of the leagues they represented: Pete Rozelle of the NFL and David Stern of the NBA are the two that come most frequently to mind. But for the most part, commissioners suffer either from being too independent and arbitrary, in which case they invite a backlash from the owners, or else too closely controlled by the owners and hence unable to overcome the inherent inefficiency of the league cartel. Baseball’s Landis was only removed from office by death. Since 1944, the owners have reined in the power of the commissioner further and further. When Bud Selig, owner of the Milwaukee Brewers, was appointed as the ninth commissioner of baseball in 1998 (after six years as acting commissioner), all pretense of independence from the owners was abandoned. Yet observers have begun to sing Selig’s praises and credit him with some recent successes in managing Major League Baseball. Given MLB’s structure, how is this possible? One such former critic is Professor Andrew Zimbalist. Although in 2003 he and MLB chief operating officer Bob DuPuy were trading shots in the Sports Business Journal,20 by 2006 Zimbalist concluded that Selig had “transformed the nature of the commissioner’s office and changed the course of the industry’s governance” because of his special ability to “bring the owners together in a way that had never been done before in baseball.”21 Selig’s oft-derided perpetual telephone conversations with his fellow owners succeeded in “creating a common denominator for ownership cohesion,” and “lifted baseball’s fortunes by convincing the owners to behave as an incipient partnership and introduce revenue sharing.”22 Thus, while many criticized the selection of an owner as commissioner,23 Selig’s ability to minimize the inefficiency of the MLB monopoly now brings him praise. Although, as we explain further on, a significant degree of inefficiency remains inherent in MLB’s structure, the critical point for us is that Selig’s success is in spite of the ownership structure of the sport.



Diagnosis and Suggested Cure

Selig’s particular skill is not in innovative ways to improve or market the product; rather, it lies in being able to get the owners to approve ideas developed by others that are truly in the best interests of baseball. Selig himself opined that the late Bartlett Giamatti’s successor should be someone whose principal job was to “lead by suasion” and to understand that “there were 26 owners with sometimes 26 different agendas.”24 Bud Selig didn’t develop the idea and content for the highly successful MLB Advance Media subsidiary, but without his efforts “working the phones and advocating partnership and sharing, MLBAM would not have been possible.”25 Our contention is that the relevant debate should not be about whether Bud Selig has done a good job as commissioner but whether the excellent coalition-building skills he has displayed should be necessary in a well-structured league. Even in the vaunted NFL, the commissioner’s power is becoming increasingly limited by the club-run ownership structure. An essential part of NFL lore was Commissioner Rozelle’s persuasion of several big-market owners to agree to the collective sale of television rights, which resulted in an immediate reduction from $500,000 to $300,000 in the television revenues for the New York Giants; Wellington Mara’s foresight was repaid three years later when the rights were renewed for $1 million per team.26 The NFL has prided itself on revenue sharing that promotes the profitability of the league as a whole, but the status quo is under serious attack as some owners in large markets aggressively maximize short-term profits while others lack the market size or inclination to follow such a strategy. The problem is compounded by the NFL’s salary cap scheme, which pegs per team payrolls to overall league revenues: every time Dallas Cowboys owner Jerry Jones or Washington Redskins owner Daniel Snyder come up with new ideas for making money (such as charging fans to watch preseason practices), Cincinnati Bengals owner Mike Brown (who refuses to sell naming rights for the stadium, named after his legendary father, Paul Brown) has to pay more for players. Thus, like Selig, New England Patriots owner Robert Kraft observes, “We now have 32 owners, and everyone has their own agenda.”27 In this book, our proposed remedy relates in two ways to the power of the commissioner. First, we argue that the commissioner’s broad powers to act in the best interest of the sport should be extended to cover every aspect

37

38 Diagnosis and Suggested Cure of the management of the game, so that the show put on by the league is managed in the most efficient way possible. Second, we contend that management of the league must be accountable, but not to the owners. Whoever runs the league should be independent of the owners, because owners are no more capable of efficiently controlling a commissioner than they are of efficiently managing the operation of the league. There are many other ways of making managers (commissioners) answerable for their actions. In government there are the voters; in private associations, the members; and in business enterprise, the shareholders. In each case, appointed managers have executive power to run the day-to-day operations of the organization, but in each case the managers serve for a fixed term, and in the case of gross misconduct can be summarily removed from power. For this scheme to work, though, it is essential that those who have power to appoint and to impeach have the best interests of the game at heart. In prior years, some suggested that the interests of sports such as baseball should be placed in the hands of Congress, making important sports a public utility.28 On this model, Congress might appoint the commissioner, who would then be answerable at regular public hearings. A second option would be to invest an independent governing body with the power to oversee the sport and ensure that the leagues are run in the best interests of the game. A variation on this model is used in most sports outside of the United States, most notably in the case of soccer around the world.29 Within the United States, the best example would be the U.S. Olympic Committee, which oversees the development and training of athletes in combination with associations representing individual sports throughout the country. The third option would be to create a commercial enterprise, “League Inc.,” if you will, to oversee the administration of the league, whose stock might be floated on the New York Stock Exchange or possessed by private investors. Our preference is for the third option, flotation on the market, largely because a league is a commercial enterprise and therefore best run with commercial objectives. We believe that government ownership is unlikely to be effective, mostly because public servants are not well placed to make calculations about the effective promotion of business enterprise. Our lead-



Diagnosis and Suggested Cure

ers in Congress are elected to shape our laws and defend our rights, but they possess no special expertise over appropriate TV rights or sponsorship packages. Moreover, when the matter came to the location of franchises, politicians could defend the interests of their constituencies through horse-trading, but the efficiency of the outcomes they produced would be as much in question as for horse-trading among owners. A governing body organized in the style of the Olympic Committee is a serious option, but there are several potential flaws. While such organizations give voice to “the great and the good,” the heroes of the past and the grassroots administrators, such people are not always able to provide the right kind of leadership. In essence, the qualifications that make someone a great athlete are often not the ones that make a great leader. The achievement of athletic prowess requires by its nature a narrow and intense focus rather than the capacity to take a balanced view of matters in the round. Moreover, the history of international governing bodies such as the IOC (International Olympic Committee) and FIFA (Federation Internationale de Football Association) is littered with cases when strong-minded and unscrupulous individuals have taken advantage of the managerial inexperience of other members to create personal fiefdoms and pursue a corrupt agenda. We think that the governance of a league is best managed as a purely commercial business because most businesses succeed by meeting the demands of their customers, and meeting the needs of customers is where the league cartels have failed. In particular, ensuring that competition among the clubs provides the most attractive spectacle possible to the greatest possible number of fans is something that a commercially driven sports league would naturally pursue. A similar view was expressed in his autobiography by Fay Vincent, the commissioner of baseball (whose resignation in 1992 led to the eventual appointment of Bud Selig): “If baseball were a publicly traded company, I think it would make better decisions.”30 Consider the following: Incentives to compete. Whichever way you look at it, the major leagues reward failure. Teams that succeed are placed at the bottom of the list for draft picks; teams that fail get first choice. Teams that make money by providing

39

40 Diagnosis and Suggested Cure a service to fans are forced to share money with teams whose owners won’t invest in a winning team. This is a natural consequence of the operation of the cartel, since the easiest thing for all the owners to agree on is not to compete against one another. By contrast, League Inc. would seek to make the league as competitive as possible, rewarding teams that manifestly try to win and penalizing those that do not try. Revenue sharing. Currently revenue sharing goes either too far or not far enough. In most sports, only modest sums are shared, because the rich vote down any plan to help the poor. Even when revenue sharing is adopted, it often operates in such a perverse way that the small-market teams are better off losing and waiting for handouts rather than competing to win. For example, small-market baseball owners voted to significantly increase revenue sharing in recent years, with no requirement that these funds be used to improve the team. Indeed, reminiscent of the worst aspects of prereform welfare systems, low-revenue teams that prudently invest and see their own local revenues rise are “rewarded” with a substantially reduced share of centrally dispersed funds. In the NFL, by contrast, so much revenue is centrally allocated that teams no longer have incentives to seek out opportunities to meet the demands of the fans. League Inc. would tax and spend, but only in ways that were calculated to give the teams maximum incentives to compete and minimize incentives to slack off. League structure. Over the years, leagues have expanded in a haphazard manner, which has undermined the attractiveness of competition. Each expansion has been designed to meet objections from any and all owners, leading to a hotchpotch of peculiar divisions, unequal competition, and devalued championships. League Inc., freed of the veto of any particular club, would establish a divisional structure with factors such as size and franchise location designed to meet the interests of the fans. Labor contracts. Strikes and lockouts are a characteristic of many industries, but some are more prone than others. When either the employers or the unions are divided among themselves, it makes negotiating an agreement more difficult; mavericks on one side or the other tend to get in the way of building a consensus. This has been a characteristic of labor relations in major league sports, since owners have found it hard to agree on



Diagnosis and Suggested Cure

a bottom line. League Inc. would negotiate labor contracts centrally with the player unions, and clubs would be required to accept league rules as a condition for participating in the competition.

Promotion and Relegation So far our discussion has concerned only one of our proposed remedies for the manifest failings of the major leagues: the separation of ownership and control of major league management from the operations of the competing clubs. In so doing, we aim to eliminate the unproductive haggling that characterizes the governance of the major league monopolies. In a sense, our first proposal is to transform an inefficient monopoly into an efficient one. However, this in itself is not enough to protect the long-suffering consumer. To do this, we need to find a way to expose the major league monopolies to some form of competition. Competition is everywhere recognized as the most efficient remedy for the exercise of monopoly power. The problem with sports leagues is that successful leagues have an inherent tendency toward monopoly: major leagues are more attractive than their minor league competitors because watching the best is so much better than watching the second best. It is not marginally better; it is almost a completely different experience. This is one of the main reasons that we have tended to see leagues create structures that bring together the best players in competition with one another. One of us has long argued for a carefully structured breakup of the major leagues,31 which aims to preserve the best elements of sporting competition while fostering independent competition between leagues. In this book, we propose an alternative mechanism for ensuring competition: the adoption of an institution practiced in sports leagues in almost every country of the world apart from the United States, namely, promotion and relegation. Promotion and relegation is practiced when leagues are structured in clearly defined hierarchies and league rules require that the worst-performing teams, based on some agreed measure, are automatically sent down to their immediately junior league at the end of the season, to be replaced by the best-performing teams in that junior league. For example, in England

41

42 Diagnosis and Suggested Cure there are four main soccer leagues, the FA Premier League, the Football League Championship, League One, and League Two (in descending order). Each season, the three worst-performing teams in terms of points won (three points for a win and one for a tie) are relegated and replaced by the three best from below. 32 No doubt anyone not familiar with this mechanism will need some explanation of how the system operates. Those unfamiliar will also likely require some persuading that this system would work in the United States; we discuss this in detail in Chapter Four. For present purposes, we want to emphasize the fundamental point that this is a system based on entry and exit from a league based on sporting merit alone. Any team that is good enough can reach the highest level of league play, and any team lousy enough will get sent down from the majors. We think it ironic that promotion and relegation is not practiced in the U.S. leagues, as entry by merit seems to us to represent one of the fundamental principles of the American way. Entry based on merit through the promotion and relegation system is a powerful incentive mechanism for teams to compete. It is sometimes said that owners of major league teams are unwilling to invest in winning unless they can turn a profit by doing so, and often it may seem more profitable to maintain a roster of mediocre talent than to invest in a team that can be a contender. Owners of small-market teams may choose mediocrity because they cannot generate large enough increases in revenues to cover the cost of a winning team, while owners of large-market teams may choose mediocrity because they are confident that there is enough demand to see visiting teams regardless of the home team’s success. In both cases, owners can free ride on the investments of their fellow owners,33 safe in the knowledge that there is no penalty for failure. The threat of relegation forces each team owner to invest in a winning team if they want to remain in the major league. Given that investment in a winning team can also benefit the other owners, by bringing stars from visiting teams into town, one might have expected team owners to bring in this system by agreement among themselves. And yet they do not. This is an example of a phenomenon frequently found in the real world—actions that are collectively beneficial are not always individually



Diagnosis and Suggested Cure

profitable. Perhaps the best example in modern times relates to commercial fishing. For over five hundred years, the Canadian Grand Banks was one of the most productive fisheries in the world, yet in 1992 the fishery was closed down with all the main fish stocks exhausted (and so far without any sign of recovery).34 This has been a commercial tragedy for the Canadian fishermen, whose livelihoods have been destroyed, yet most environmentalists will claim that the fishermen brought this ruin on themselves through overfishing. The main problem was that the fisherman caught too many of the smaller, younger fish, thereby limiting reproduction. A simple solution was to use nets with larger holes so that smaller fish would escape. The fishermen agreed in principle to use these nets, but in practice the smaller fish kept on getting caught. Of course, everyone blamed everyone else for cheating on the system (especially foreigners, who people often think are especially dishonest), but in reality the problem was that while collectively it made sense to use the larger nets, individual fishermen could land bigger catches and therefore make more money by using smaller nets. Once all the small young fish had been caught, there were no more fish for anyone. The problem of collective action goes by many names (the tragedy of the commons, the prisoners’ dilemma) because it is so common. We all see it in sports leagues run by the owners. The classical solution to the collective action problem is to introduce what is called a “residual claimant,” someone who is responsible for the collective success of the enterprise and who will take action to make sure that each individual does not free ride. One literally striking example of the use of a residual claimant relates to the gangs that pulled barges on Chinese canals in the nineteenth century. An English traveler was shocked to see the violence with which the men were beaten by their foreman for shirking on the job, and he tried to intervene on their behalf. To his astonishment he was informed that the foreman was in fact in the employ of the gang, which acted as a cooperative and hired a foreman who was paid on the basis of the team’s productivity. Beat them too little and he would not make a salary because they would all shirk; beat them too much and his wages would also go down as productivity would fall. The gangs were thus confident that they were being beaten just at the right level!35

43

44 Diagnosis and Suggested Cure In major league sports, the owners would be extremely unlikely to vote collectively for promotion and relegation despite the numerous benefits that we identify, largely because they would fear the consequences for themselves. A residual claimant could solve this collective action problem. However, although promotion and relegation would certainly be seen to possess advantages by our league management organization (League Inc.), these advantages would not be large enough to guarantee that such a (residual claimant) league would introduce it. The reason is that promotion and relegation would reduce the monopoly power of the league management organization, which is precisely why promotion and relegation forms the necessary second part of our proposal. As we discussed in Chapter One, major league owners have managed to extract large public subsidies from the threat of relocation, a threat that is sustained by the major league monopolies. Our League Inc. would still be a monopoly, and hence would also seek to exploit this power using the relocation threat to generate profits for its shareholders (rather than for the clubs). It is therefore necessary to mandate a promotion and relegation system. This system would undermine the relocation threat because no team in the league would retain a guarantee of league membership. Any city seeking major league status could nurture a local club rather than have to buy from someone else. Thus both from the selling and the buying side the relocation threat would be undermined. Indeed, in leagues where this system operates, it is fair to say that relocation almost never occurs—no one can see the point. While public subsidies for stadia are not unknown, the scale tends to be much smaller than what we have seen in the North American major leagues.36

Holdup and the Need for Enforceable Rules While this is one of the main ways in which League Inc. would be capable of exercising monopoly power, we will consider other ways in Chapter Six. At this stage though, we need briefly to discuss the problem of relations between League Inc. and the clubs. In our model, the “league organizer” exercises considerable power over the sporting and commercial potential



Diagnosis and Suggested Cure

of the clubs. As we discuss further on, League Inc. officials rather than a supermajority vote of club owners would make the rules for determining the number and identity of clubs eligible to participate in the major league competition, negotiate with the players’ union, create the appropriate incentives for clubs to participate in the labor market, and assume principal responsibility for the sale and promotion of television and related media rights. Some would argue that this is the very reason that leagues need to be run by the clubs; otherwise, the argument goes, there is the threat that the league authority would abuse its power (economists call this process “holdup”). Imagine, for example, that the top division of the league contained twenty teams, of which two were relegated each season. Suppose that one team had a particularly difficult season, managing to evade relegation only in their last game, finishing eighteenth in the league. This kind of achievement would be likely to increase local support significantly and would in many ways be as satisfying for the fans as winning the league pennant. If, however, the league organizer then unilaterally announced that three teams instead of two would be relegated (perhaps because it would permit the promotion of a large-market club), this would not only be unfair, but it would significantly influence the decision making of clubs in the future. Without some reasonable certainty as to the rules of the game and the rewards associated with success, owners would have little basis on which to invest in their team. Without protection against “holdup,” clubs will not optimally invest in developing the sport. 37 As the example shows, holdup occurs when independent entities have the power to affect one another’s performance through unilateral decisions. Executives may forego otherwise profitable long-term investments in their own business in fear that unilateral decisions by others will harm their own enterprise. Holdup is a pervasive problem in business, not to mention people’s private lives. Holdup occurs when a producer unilaterally decides to cut the price at which it purchases inputs from dependent suppliers, or when suppliers unilaterally raise prices to dependent producers. Holdup occurs if a husband threatens to separate from his wife and children, abandoning his parenting responsibilities, or if a friend decides at

45

46 Diagnosis and Suggested Cure the last minute not to attend a dinner party that you have planned months in advance. In each case, the threat of holdup diminishes the incentive to invest in the activity (production, raising children, or organizing dinner parties) and therefore reduces the returns to each of these activities (that is, we all get lower-quality products, less socially skilled children, and lousy food at dinner parties). An economist with a superficial understanding of sports might suggest that our proposal is completely backwards. Textbooks often suggest that the way to deal with holdup is through vertical integration: allow the two independent business entities to merge into a single business unit. This sounds practical, since it immediately results in a united entity pulling together under the leadership of a single management team. But this is like arguing that the way to create long-term, stable relationships is to force people to get married. The problem is that it is people, not institutions, that make decisions, and forcing people to make joint decisions does not mean that those decisions will be any better than when they were made independently. After his retirement, Ford Frick, the third commissioner of baseball, said of the ills besetting the game: So long as the owners and operators refuse to look beyond the day and the hour; so long as clubs and individuals persist in gaining personal headlines through public criticism of their associates; so long as baseball people are unwilling to abide by the rules they themselves make; so long as expediency is permitted to replace sound judgment, there can be no satisfactory solution.38

Integration of league organization and club management is not a solution to the holdup problem in team sports. It just turns it into a different kind of holdup problem, where minority coalitions block reforms that would be good for the game as a whole but that conflict with their narrow selfinterest. The silent majority goes along with this, not because they do not recognize the harm, but because they know that one day they too will be in a minority, and are therefore reluctant to create enemies among the potential losers. With separation, the league and club do not have interests that entirely overlap—one cannot trust the club to put the interests of the whole league first any more than one could expect the league management to care only



Diagnosis and Suggested Cure

for the interests of a single club. The best guarantee that the league will not arbitrarily undermine (hold up) club interests is a system of league rules written into a long-term contract, which itself would ultimately be enforceable in a court of law. Indeed, this system of rule setting and dispute resolution works well for organizations such as NASCAR, and for sports governing bodies throughout the rest of the world (there is even an International Court of Arbitration for sport in Switzerland that specializes in resolving disputes involving governing bodies and their members). Of course, if contract rules prove too burdensome to clubs, either an insufficient number of owners will invest in teams, or a new competition organizer will take over with better terms. These examples illustrate how the organization we envisage would offer better leadership than the unruly owner cartels that have governed the majors up until now. In subsequent chapters we will explore these ideas more fully, but there are four important aspects of our solution that deserve special emphasis here: Why would owners ever agree to this? On the face of it, individual owners would lose power and influence, reducing the value of their business overnight. Our answer is simple: the owners might be willing to sell out their interest because the value of a major league governed by League Inc. would be significantly greater than the value of the existing cartels. Indeed, if this were not so, it would not be worth entertaining our proposal in the first place. We view this in much the same way as a developer might envisage taking over attractively located but poorly run bars and turning them into a set of themed brewpubs. In each pub the developer would install a local manager fully empowered to offer the best service possible to the local customers, taking account of their specific needs and interests, but at the same time benefiting from a centrally organized purchasing, auditing, and marketing function. How would an independent competition organizer add value to sports leagues? The main way in which the value of the major leagues would be enhanced is through the rationalization of competition. Each team would

47

48 Diagnosis and Suggested Cure be given a proper incentive to win, and so teams would become more competitive; as a result, the league would be more attractive. Incentives would be offered in the form of prizes. It is one of the great mysteries about sport that prizes are accepted as the best incentives for individuals (almost every individualistic sporting event involves a significant cash prize), but that team sports involve almost no prizes, except the honor of winning. We expect the winner of the U.S. Open golf or Wimbledon Tennis championships to receive a large cash prize—why not in team sports? The answer is that the cartels that run the leagues have not wanted to encourage too much competition. By eschewing prizes, the major league owners have limited competition, undermining the value of the contest. Removing this obstacle, the value of League Inc. would be greater than the sum of the value of the individual franchises. The owners can be persuaded to adopt our plan simply by offering them more than the current value of their franchises. To fund the introduction of substantial cash prizes (for example, we imagine the winner of the World Series might receive a substantial bonus), League Inc. would need a source of income. There are many ways this might be funded. The simplest would be to endow League Inc. with the national broadcast rights; alternatively, teams might sell their own rights but face a lump sum annual tax for entry into the competition. Either way, we do not see funding as a major problem. Significantly, the competition is enhanced because League Inc. is not only likely to provide prizes for the winners but also penalties for the losers. It is hard to escape the conclusion that the major leagues have simultaneously suffered from being too big and not big enough. They are too big because there is simply not enough talent to spread evenly around thirty teams in any sport, and so the leagues are faced with either creeping mediocrity or extreme imbalance. This situation is a consequence of treating all the teams as equals (as is inevitable in the cartel). League Inc. would introduce multiple levels of competition, so that weak teams at one level would get sent down to a lower level at the end of the season if they performed poorly, while strong teams at lower levels could be promoted. Not only does this further sharpen the incentive for teams to be competitive, it also generates a whole new level of excitement for the fans, who can now watch the struggle



Diagnosis and Suggested Cure

of teams to survive at their present level or achieve promotion at the end of the season. The concept of a meaningless game is almost entirely eliminated in this system. Moreover, this system is tried and tested, having been used by sports leagues all over the world for more than a century. Most notably, the system has been crucial to the preeminence of soccer in Europe. Couldn’t League Inc. turn into a corporate disaster like Enron? It may be objected that the pursuit of purely commercial objectives by shareholder corporations is equally capable of corruption and distortion, as we have found in cases such as Enron and WorldCom. However, such cases are brought to justice relatively quickly, because the problem is much simpler when commercial enterprises claim profits to be their principal goal. Business pursues profit, and in general businesses make profits by satisfying customers, exploiting customers, or fixing the books. Antitrust law prohibits exploitation, while corporate law, such as the recently enacted SarbanesOxley Act, prohibits fraud. In both cases, executives who fail to comply with the law are liable to end up in prison, as high-profile cases such as Martha Stewart’s have illustrated. In contrast, only rarely are managers of associations such as the IOC or FIFA likely to end up in prison, however corrupt they may be, because the complex objectives of such organizations make it harder to prove misconduct. If an executive is charged with looking after the “best interests” of a sport, then it is possible to dream up grounds to justify lavish expense accounts and complex financial transactions to buy influence and support. When making money for the company is the objective, fraudulent conduct is usually much easier to prove. For those who still worry, one variant of our proposal would be to install an independent governing body responsible for the best interests of the game, with a power of oversight over the management of League Inc. but no power to intervene except to impeach. This governing body might then also be charged with the distribution of resources for the development of the sport at the grassroots level. This model has essentially been adopted by the Fédération Internationale de l’Automobile (FIA), the world governing body of motor sport, in relation to Formula One racing. Whereas the FIA used to manage the championship directly, it was accused at the end of the 1990s of using its power as governing body to favor its own championship

49

50 Diagnosis and Suggested Cure over rival contests. Its solution was to float off Formula One as an independent for-profit business, while itself retaining responsibility for controlling safety at races and promoting motor sport in general. Is there any reason to believe that two professors’ “remedies” would work? Professors are paid to theorize, but most folks in the real world would like some practical examples of how ideas really work. Although our particular proposal is original, we readily concede that we did not make up the ideas of an independent competition organizer or league entry based on merit. Rather, in later chapters, we use the example of America’s fastest-growing sport, NASCAR, to show how effectively our proposed system can work; and then, we show how entry by merit has flourished in the world’s most popular professional sport, soccer.

3

Competitive Balance

Let common sense and common honesty have fair play, and they will soon set things to rights.

—Thomas Jefferson

Sports dominate the culture of modern societies. Through television, newspapers, and billboard advertising we are bombarded with information about sporting activities. Nothing symbolizes this dominance better than ESPN, the 24/7 cable sports channel, which has grown into a media empire since its founding in 1978. As is the case with so many aspects of consumer society, the United States has been at the forefront of the commercialization of modern sport. To be successful, a sport needs to embody the values of society at large. Societal values—as well as their political manipulation by captains of the sports industry—explain the American obsession with competitive balance as an overriding goal in the design of sporting competitions. In this chapter, we ground this obsession in the sociopolitical value of equal opportunity. In addition, we analyze the annoying data that appear to be inconsistent with the conventional wisdom that competitive balance is the principal and essential factor in league success, as reflected in documents such as the Major League Baseball Constitution. Our conclusion is that competitive balance is best viewed as a proxy for “outcome uncertainty” in sporting competitions; the most we can say is that this uncertainty may be one of several factors that determine a sport’s appeal. Finally, we explain how our twin reforms—entry by merit and rules developed by an entity separate from the clubs—increase the likelihood that the clubs participating in a league will achieve an “appeal-maximizing” level of outcome uncertainty.

52 Competitive Balance

American Values, Foreign Values, and the Concept of “Competitive Balance” Americans inherited games such as football, cricket, and golf, which were widely played long before the thirteen colonies decided to go their own way. Initially, Americans aped the manners and conduct of the British, but soon enough they became dissatisfied with playing someone else’s game.1 Thus baseball was substituted for cricket, football became a game played with the hands rather than the feet,2 and basketball was invented as an indigenous American sport. From their inception, American sports have been identified, by Americans and foreigners alike, with American values. Albert Spalding, one of the founders of modern baseball, went to great lengths to identify the sport with the national character, contrasting it favorably with cricket. Baseball, as the national game of America, “is the exponent of American Courage, Confidence, Combativeness; American Dash, Discipline, Determination; American Energy, Eagerness, Enthusiasm; American Pluck, Persistency, Performance; American Spirit, Sagacity, Success; American Vim, Vigor, Virility.”3 Ever since, commentators have looked for American virtues in other American sports, or associated a decline of American morals with misconduct on the field of play.4 Sociologists have discussed at great length the cultural meaning of sport.5 Ideological liberals point to values of pluralism inherent in sports, including equal treatment regardless of race, creed, or color—and freedom of expression. Conservatives emphasize the idea of playing by the rules, the construction of the national identity, and the character-building aspects of sports. Advocates of free markets see parallels in the rewards for excellence based on talent and effort and in the power of incentives, while Marxists and other social critics argue that the elitism inherent in sporting competition reflects the order imposed on society by dominant elites, who rigidly control the process of competition in their own interests. No doubt there is a grain of truth in each of these interpretations, but whatever ideology the organizers of sports seek to impose on the way the game is played, the success of American sports depends largely on their success in the marketplace.



Competitive Balance

Simply put, if fans do not identify with the sport, they will not pay to watch it, and the sport will fade away. Most American sports have been developed6 with moneymaking in mind. Commercial objectives are clearly identifiable within major league sports and professional leagues such as MLB, NFL, and the NBA. Even socalled amateur sports controlled by the NCAA—particularly big time college football and basketball—have been largely driven by commercial values in recent years. More than in any other country, sports in America require commercial success in order to survive. This, in turn, has led to a much greater emphasis on meeting consumer needs in America than abroad. The American experience can be usefully contrasted with the global experience of the world’s most popular sport, soccer. Although soccer dominates the sporting landscape in most countries, club owners make little money. In most countries, the annual income of the biggest soccer teams would be no more than $10 million. Since the 1990s, the income from soccer has grown substantially in the larger European nations, but even in these countries, few clubs register a profit. Indeed, the very idea of profiting from sport is deemed anathema in most of the world. Without the profit motive, few clubs invest in supplying a comfortable experience for the fans. The “beautiful game” is generally played in worn-out stadia, with few opportunities for eating or drinking and with uncomfortable seats; it is little wonder that, until recently, the social group most attracted to attending games has been young men looking for a fight. Yet soccer dominates, because fans go to watch it every week, and soccer club owners wield huge political influence. In many countries, clubs are sponsored by local businesses (for example, one of the biggest Italian teams, Juventus, has been underwritten by Fiat throughout its history), and public subsidies are given to keep ailing teams afloat. Soccer is a popular sport in the United States as well. Today, more children play Little League Soccer than Baseball. But professional soccer has never been commercially successful, and without commercial success soccer remains a minor league sport in the United States. Commercial success can be achieved by offering a product that is attractive, but that success will be significantly enhanced if the product em-

53

54 Competitive Balance bodies the values of those who buy. Sales of turkeys at Thanksgiving and champagne at New Year’s depend not only on the intrinsic qualities of the product but on the emotional significance of the events with which they are associated. Equally, sports generate more cash when they appeal at a level deeper than mere excitement or entertainment. The major league sports in the United States have succeeded in making an emotional connection with their fans, to the point where they are seen as embodying American values. What are these values? Successful American sports build upon values such as individualism, hard work, opportunity for all, and rewards based on merit.7 These are all values that, in the eyes of many Americans, distinguish this nation from the rest of the world. They require all competitors to have an equal opportunity to compete, while the ultimate winner must stand out for hard work and ability. Research on the attitudes of sports fans shows that they identify with situations where athletes triumph because of hard work and as a result enjoy substantial rewards. By contrast, athletes who fail are stigmatized for “not wanting it badly enough.”8 In recent years, this observation has led a number of commentators to speculate on the American attitude toward sporting competition. The relative failure of professional soccer in the United States is often attributed to the cultural values embedded in the game. As Franklin Foer observes, “Other countries have greeted soccer with relative indifference. The Indian subcontinent and Australia come to mind. But the United States is perhaps the only place where a loud portion of the population actively disdains the game, even campaigns against it.”9 One explanation for this hostility is simply the way that games are played. Michael Mandelbaum, a professor of American foreign policy at Johns Hopkins University, grandly described the difference of opinion as “The Atlantic Gulf ”: The organization of professional sports in the United States reflects the American commitment to equalizing the capacity to take advantage of opportunities. Individual games, and even more so championships that require victory in many games, are won by teams with more skilful players than their opponents have. All other things being equal, the most skillful players are likely to gravi-



Competitive Balance tate to the teams willing and able to pay them the most—and this is more or less how players are allocated among professional teams in the Old World. Baseball, football, and basketball, by contrast, deploy two mechanisms for equalizing the chances for each team to win a championship. One is the amateur draft . . . [the other] is the salary cap.10

In Mandelbaum’s view, equal opportunity in sport is an American ideal to be distinguished from the Old World hierarchies based on accumulated wealth and status. Thus the perpetual dominance of teams such as Manchester United and Real Madrid is un-American. But equally, the fact that either of these teams may end up drawing 0–0 against inferior opposition is for him a denial of the logic of competition, American style. In America, all start equal, but in the end there must be a winner, and the winner ought to be the team who played better, harder, or smarter. To achieve equal opportunities each team or player must be fairly matched with everyone else. Staging a sporting contest that meets the expectations of American fans, therefore, requires sporting and business regulations that ensure a level playing field; sporting competition cannot be left entirely to the free play of the market. Without intervention, American values cannot be upheld. Bob Costas, that shrewd observer of baseball, explains the problem. Railing against the failings of Major League Baseball as it entered the new millennium, he observes that the single biggest indicator of a team’s opportunity for success from one year to the next is whether the team has a payroll among the top few teams in the league. Period. This goes against what sports are supposed to be—and for the most part have been—about. In every game you’ve got, in every schoolyard game, the whole idea of picking sides is to make the game as even as possible to make it interesting. . . . Sports, more so than other enterprises, are designed to be fair. Teams are supposed to begin, to the greatest degree possible, on a level playing field.11

George Will, the famous political analyst and baseball observer, turns this ideological statement into a political program: The basic truth of baseball is the basic fact of political life: Life is unfair, but the unfairness is not irreducible. Baseball is like the Third World . . . think of the Los Angeles Dodgers as Saudi Arabia, and the Montreal Expos as Bangla-

55

56 Competitive Balance desh. The different sizes, affluence and traditions of major league markets gives certain teams advantages (larger attendance and broadcasting revenues) that must be at least partially compensated for if competitive balance is to be maintained.12

In practical terms, few Americans would argue against the provision of tax dollars to support compulsory education of children in order to ensure basic levels of numeracy and literacy. Such interventions are required to provide a reasonably level playing field. Revenue sharing and reverse-order­of-finish drafts are the sporting equivalents of such basic interventions to ensure a level playing field. The insistence on maintaining a competitive balance among teams in a league is to most Americans a fundamental tenet of a well-functioning sport. This issue lies at the heart of American attitudes to sport: just how much does one need to do to maintain a competitive balance?

Historical Origins of Competitive Balance as a Goal of Sports Leagues Many historians have pointed to the instability of the world’s first sports league, the National Association of Professional Baseball Players (NAPBBP), which existed between 1871 and 1875, as an example of the way that an absence of balance undermines the integrity of a sport.13 The NAPBBP was founded as a result of the split between amateurs (who did not want to be involved in a commercial business) and professionals. The NAPBBP created a schedule and a championship in which professional teams might play, but it was in many ways a disorganized and corrupt affair. Alcoholism and gambling were rife, teams folded with alarming frequency, and most clubs found it hard to maintain local support. In order to boost support, owners would tempt star players with promises of large salaries, and so economic competition was intense. The failures of the NAPBBP have passed into legend. Was it really such a bad competition? History is written by the winners, and as the NAPBBP struggled to survive, a new upstart emerged to replace it: the National League, founded in 1876 by the visionary William Hulbert. Hulbert had no



Competitive Balance

doubt that the failure to make money could be largely attributed to excessive competition for players, and he and his successors skillfully connected this idea with the need for competitive balance and the notion of the “level playing field” in American sports. We argue that this concept did not spring into the consciousness of the American sports fan. Rather, it is an idea that has been assiduously cultivated by the owners of the professional sports teams for over a century. The baseball owners performed the pioneering work when the modern game was founded. Three years after founding the National League, Hulbert introduced the Reserve Clause, a mechanism that guaranteed that no player could leave his club to play for another professional team without the consent of the owner. Hulbert was quite explicit about the motive for introducing the Reserve Clause: The financial results of the last season prove that salaries must come down . . . the principal cause of heavy losses to Associations is attributed to high salaries, the result of competition . . . it was proposed that each delegate be allowed to name five desirable players from his own club as a nucleus for a team in 1880, and that these chosen men should not be allowed to sign for any other club without permission. This would prevent unhealthy competition.14

Unsurprisingly, the resolution was passed. What might surprise an antitrust lawyer today is the openness with which Hulbert explains that the Reserve Clause is motivated by the need to restrict competition and raise profits. Under American antitrust law, any agreement between competing businesses to impose restrictions for these motives would automatically be deemed illegal. Antitrust law exists to defend competition. When Hulbert was writing, antitrust law did not act as a serious constraint on firm behavior, and common law judicial decisions increasingly justified cartel behavior as a legitimate means of fending off “ruinous competition.”15 In fact, the Sherman Antitrust Act, which imposed legal limits on the exploitation of monopoly power, outlawed cartels, and allowed victims to sue for injuries suffered, did not become law until 1890. By then, Spalding presented a rather different-sounding rationale for the Reserve Clause: “The necessity for such power of preserving the circuit of the league, by approximately equalizing its playing strength, is recognized.”16 Over time, the promotion of “approximate equality in playing strength” has become the core principle

57

58 Competitive Balance governing the rule making of the major leagues. The issue was explored in some detail by House Judiciary Committee Chairman Emmanuel Celler during congressional hearings in the early 1950s. The final report of these hearings argued that “a league in fact desires equal playing competition among its members.” To show that this is true, the committee compared total gate income for the National and American Leagues with the winning percentage of the pennant winning team. In almost every single case, a lower winning percentage meant higher gross receipts for the league. The committee interpreted this to mean that (1) a closer pennant race meant a more attractive contest for the fans and (2) the league would seek to equalize playing strength among the teams.17

Is Competitive Balance Consistent with American Capitalist Values? Foreigners have been quick to note the apparent difference in American attitudes between the business world and the sporting world. To outsiders it seems that Americans tend to espouse the unfettered rule of the free market in the former (with no intervention to maintain balance), while arguing for a program of socialist redistribution in the latter. (Owners often shared this view, disparaging balancing proposals by fellow owners by referring to them as “comrades.”18) A typical American response is that different problems call for different solutions. In business, the process of unfettered competition is a good thing because it ensures that businesses go as far as they can to meet the needs of their customers, and those businesses that survive tend to be the ones that do so the best. There is no need to mourn the demise of a business that offers a lousy service. By contrast, in sports, as we have already noted, each team needs its competitors in order to make a competition. However, it may be that the criticism (that American attitudes to business and sport are inconsistent), and the response (that the problems are different) are both misplaced. It is possible to argue that there is a consistent vision of fairness underlying American attitudes to market competition and sporting competition. Despite a dominant rhetorical commitment



Competitive Balance

to the free market, the American economy is in many ways highly regulated with extensive rules governing the manner in which products are supplied, the conditions under which employees must work, and the information that must be provided to regulators and consumers. Indeed, such rules are the foundation of a well-functioning market. Another way of putting this is that free markets work best when they are subject to the rule of law, and the law defines well the rights and obligations of market participants. The law of the jungle is not an environment conducive to successful dealing in the market; it is striking that those countries with the most developed systems of law also tend to be the richest. However, for a regulated system to work in the interests of all, it is necessary to adopt the right kind of rules.

Actual Evidence Regarding the Appeal of Balanced Competitions While the Celler Committee report seems to make a powerful case for competitive balance, it is alarming how quickly the evidence falls apart upon closer inspection. For example, if we look at five recent seasons for the National and American Leagues (2002–2006), once we take out the growth trend in average club revenues, repeating the test used in the Celler hearings shows no significant correlation between the team with the highest win percentage and the total gate receipts of the league. Divisionalization did away with pennant races, so perhaps this is not so surprising. But the creation of divisions and a playoff format (only introduced in 1969) itself reflects the league’s efforts to restructure its competition in order to keep as many teams in contention as possible. Although fans are attracted when there is a long-term prize at stake, this does not imply that the league should aspire to “equal playing competition.” If the object of the league is to generate income from selling sporting competition, it makes sense to go back to the psychological motivation of fans and spectators, to see how competitive balance might influence consumer choice. Studies of fan psychology suggest that the motivations for following a team and attending a game are many and varied.19 Identification with a community is one important category, which interacts with family and so-

59

60 Competitive Balance cial group memberships: a fan may support a team because it runs in the family or to fit in with like-minded fans in a larger social community. A second category falls under the heading of entertainment and aesthetics. People watch sport because of the whole experience: traveling to the game, the pregame tailgate, food and alcohol consumption inside and outside the stadium, gambling, and the aesthetic attractiveness involved in athletic exhibitions. A third category falls under the heading of escapism and “eustress.” Eustress refers to the pleasurable sense of uncertainty associated with the outcome of a game. Sporting contests provide drama, often at a much higher level than people experience in their day-to-day lives. There is a buzz associated with an exciting game and a close finish, which is particularly satisfying when it ends up in victory for one’s own team. It seems clear that competitive balance leads to outcome uncertainty, which can satisfy consumer demand for eustress, but other factors might make uncertainty less desirable. For example, people want to identify with success. Therefore, attaching oneself to a team is a more attractive proposition if that team is a perpetual winner. This can explain how teams like the New York Yankees can attract such a huge following; moreover, there are also attractions in joining the “anti” group (any team but the Yankees). Consequently, a dynasty, which implies unbalanced competition over time, can conceivably increase fan interest. Another factor that tends to drive leagues away from the idea of equal playing competition is the ability to associate a team with a location or community. Big cities are usually capable of attracting more fans, and satisfying fans’ desire for success is more generally profitable in a bigger city than in a smaller one. The revenue-generating potential of, say, Los Angeles is far greater than that of Tampa Bay. If all of Los Angeles feels pride when the Dodgers win, then the income generated at Dodger Stadium in a winning season will be much greater than the income generated at Tropicana Field when Tampa Bay is equally triumphant. These two factors alone make it unlikely that league revenues would ever be maximized by sharing out wins with complete equality across all teams. On careful reflection, moreover, the notion that clubs located in big cities have an unfair inherent advantage might appear obvious, but this impression may be mistaken. It might not just be city size that accounts for



Competitive Balance

different returns to winning; it might be that fans in some cities experience more intense commitment to a team (for example, because it is the only major league franchise in town) or, conversely, that success is more cheaply bought (because players want to live in a particular city). These kinds of factors suggest that perfect equality is unlikely to be desirable for the league. Appearing before judges and legislators, owners and league officials have played on the fear that the big city teams will be even more eager to win in the interest of maximizing appeal and revenues, leading to an unacceptably high level of competitive imbalance. According to this theory, the big city clubs need to be restrained from competing too aggressively for talent (as through a salary cap or luxury tax) in order to ensure that the league does not become too unbalanced. Economist Simon Rottenberg challenged this proposition in what is generally considered the first academic paper on sports economics, published back in 1956.20 He considered the arguments presented in the Celler hearings on the Reserve Clause, which the leagues defended as necessary to prevent talent migrating from the small city teams to the big city teams. Rottenberg argued on economic principles that this proposition was wrong, and that restraints such as the Reserve Clause would make no difference to the distribution of talent. (Sports economists refer to Rottenberg’s argument as the “invariance principle.”21) Rottenberg reasoned as follows: In a free market, players will migrate to the highest bidder, and the highest bid for a player will come from whoever sees the biggest potential increase in income from that player. Since the value of a player depends largely on his contribution to the success of the team, the ultimate distribution of players and wins will, in a free market, be the one that maximizes total league revenue. To see this, imagine it were not true. In that case, total league revenue could be increased by increasing the wins of one team while reducing the wins of another. This would require the transfer of at least one player, which, Rottenberg argued, would be achieved by a trade or sale of the player’s contract to the team that needed to be more successful. This trade would be profitable for both teams since the gain in revenue for the buying team would be greater than the loss in revenue for the selling team (because, by assumption, total league revenues are not yet maximized). In other words,

61

62 Competitive Balance transactions that increase league profits are also profitable to individual teams. Thus, Rottenberg concluded that free market trading would lead to a revenue-maximizing distribution of talent. Since leagues maximize revenue by distributing playing talent in a free market, additional restraints such as the Reserve Clause will make no difference to the distribution of talent (although they will tend to increase profits). A significant drawback in Rottenberg’s elegant analysis is that it assumes that markets work perfectly, and that there are no costs associated with identifying the revenue-maximizing distribution of talent. Momentary consideration of the perpetual squabbling that goes on between owners suggests that they would be unlikely ever to agree on an issue so close to their hearts as profits. This does not mean that restraints are justified. There is no guarantee that the distribution of talent under a reserve clause where owners cannot agree on the value of a player would be any better than a free market in which owners disagree. (Indeed, we argue in this book that club-run leagues have an incentive to adopt rules leading to a less desirable distribution of player talent.) Certainly, the case for legally sanctioned restraints that primarily serve to increase profits is a dubious one. In any event, all this “assumes a fact not in evidence,” as trial lawyers like to say; that is, whether there is any statistical evidence that improving competitive balance increases demand. Finding a convincing set of statistics is elusive. Over the years, economists have tried hard to find a relationship between attendance at league games and some objective measure of competitive balance but have failed to find the “killer” evidence they seek. One part of the problem is that, while it is clear that a game that is 100 percent predictable will not be attractive, it is much harder to support the proposition that a game in which the home team has a 60 percent chance of winning will attract more fans than a game in which its chances are only 50 percent. An obvious reason for this is that home fans like the home team to win, and indeed it is generally accepted that the presence of the home fans increases the probability that the home team wins. Consequently, researchers have struggled to uncover evidence that the uncertainty of outcome associated with an individual game has much impact on attendance.22



Competitive Balance

Home advantage is a reality in most sports leagues, but it might be argued that the ideal distribution would spread talent equally across teams on the grounds that this would create a more interesting championship race. We have already touched on the measure of championship uncertainty used in the Celler report (the championship winner’s percentage of wins), and a number of studies have found some evidence that demand increases when the championship race is closer. The problem with this is that a championship race can be very close in a league with two dominant teams and a bunch of doormats, but this is not what most people mean by competitive balance. In fact, this situation fits most closely with the soccer leagues of Europe, which are unquestionably very successful in their ability to attract fans. Traditionally, the Spanish soccer league has been dominated by two teams (Real Madrid and Barcelona) and the Italian league by three teams from two cities (AC Milan, InterMilan, and Juventus). And yet, these leagues are incredibly successful and popular. Moreover, when economists have tried to use measures of competitive balance that gives some weight to the performance of teams other than the top two or three, they have generally found little or no significant relationship with total demand. In a recent book, The Wages of Wins, the authors examined in detail the demand for competitive balance in basketball and came to the conclusion that “it is not clear whether the fans truly care about the level of balance in a league.”23 The usual response from those receiving a summary of serious empirical research is “What about the NFL?” The NFL has certainly built a reputation for competitive balance based on the famous slogan, “On any given Sunday any team in our league can beat any other team.” Since the 1950s, the NFL has overtaken MLB as the biggest revenue generator and the dominant TV sport, and it now claims preeminence as “America’s game.” Indeed, the NFL’s commercial success, in light of its commitment to parity, strongly reinforces the general notion that competitive balance is good for a sport. This notion is grounded, however, on two factual assertions: first, that the meteoric rise of the NFL is attributable to competitive balance, and second, that this success can be replicated by other leagues if they only had the will to do so. Let’s explore these claims. Compared to baseball or basketball, it is true that dynasties are less com-

63

64 Competitive Balance mon in the NFL. This can be attributed to a number of factors, including a draft system that ensures that poor-performing teams obtain access to the best new stars, the reliance of teams on a single individual, the quarterback, for their success, and the likelihood of career-ending injury. Taken together, this makes the NFL less prone to “checkbook competition” than baseball (given the importance of a single player, investment in the rest of the staff may help but is not nearly as important as squad development in baseball) and less prone to long-term dominance by a single player than basketball (some famous quarterbacks had very long careers, but a much greater number had careers shortened by injury). But while it is true that dynasties are relatively more rare in the NFL than in other major leagues, it is also true that MLB has featured a considerable amount of turnover in the championship winners over time. Despite the perceived dominance of the Yankees, seven different teams have won the World Series in the last ten years (1997–2006), the same as the number of Super Bowl winners over the period, and more than the five NBA champions. European soccer leagues provide a useful comparison: in the same period there have been only five different champions in Italy, four in Spain, and three in England. Observers often overlook another significant factor that makes the NFL appear so balanced: its short playing schedule. In any league, even the strongest team is sometimes beaten by the weakest team. However, such events are rare. It is a statistical fact that a rare event has a much bigger impact on the outcome of a 16-game schedule than it does on a 162-game schedule. Thus, the variance of win percentages is much greater in the NFL than in other major league sports, but this is largely due to the short season. While it would not be physically possible to play a 162-game schedule in the NFL, one can speculate on the outcome of a 16-game regular season in baseball. It is easy to imagine that entry into postseason play would be much more random. But is the NFL really very balanced over the season? One way to look at this is to consider what people believe about the uncertainty of outcome of the championship, based on the Las Vegas betting odds at the beginning of the season. Betting odds represent a combination of views, usually of informed market participants. If the league is very balanced, one would ex-



Competitive Balance

pect to see money spread evenly across the teams and reflected in balanced odds. However, this is far from the case. In most seasons, the odds on the favorite are typically about 5 or 6 to 1, while the odds on outsiders are as low as 200 to 1. These odds reflect similar levels of imbalance in fan expectations as one finds in other leagues, and does not suggest that gamblers expect any given NFL season to be very balanced.24 There is another reason why the NFL’s success with parity policies does not provide a model for other leagues to emulate. The NFL’s profitability is largely due to its success at marketing itself as a television sport. Indeed, the impoverished National Hockey League, with forty-two home games to offer fans, draws almost twice as many live fans as the NFL does.25 Fans not only watch a lot of NFL games but watch a lot of NFL games featuring teams other than their personal favorites. (Imagine the effect on the NFL if Congress enacted severe criminal penalties for any gambling on football or participation in fantasy leagues!) As a result, league popularity is not significantly affected if large-market teams perform equally to small-market teams. This is not true in other sports. Thus, television ratings for the Super Bowl do not significantly vary based on the presence or absence of small-market teams, while World Series ratings are significantly affected. In short, the NFL is just as happy if this year’s Super Bowl features the Pittsburgh Steelers and the Green Bay Packers or the New York Giants and the New England Patriots, while MLB will suffer if the contest is the Pittsburgh Pirates vs. Kansas City Royals as opposed to the New York Mets vs. Boston Red Sox.26 Despite the lack of evidence that existing or potential policies to improve competitive balance have a very large impact on the demand for sport, officials continue to agonize about this issue. Baseball, in particular, seems preoccupied with the proposition that small-market teams have little opportunity to compete with the large-market teams. We have already argued that even if there is redistribution, the large teams are likely to win more often than the small-market teams, because such an arrangement is likely to maximize league revenues. Although not entirely inconsistent with this observation, the Blue Ribbon Panel established by the commissioner in 1999 set as its standard not complete parity but the idea that “every well-run club should have the regularly recurring reasonable hope of reaching post-

65

66 Competitive Balance season play” and argued that revenue disparities were preventing this from being achieved.27 Much ink has been spilled on whether the latter claim was true. Suffice to say that some economists supported the panel in their contention that MLB had run into a competitive balance problem in the 1990s, while others argued that there was no evidence that recent results indicated a statistically significant change, and that random fluctuations could account for increased imbalances over a short number of years.28 Moreover, while baseball has been concerned about its declining popularity relative to football on TV and soccer in schools, no one was able to tie falling attendance to increasing imbalances.

How Our Proposals Affect Competitive Balance Let us accept for the sake of argument the claim that there has been a problem with small-market teams and competitive balance in baseball that required, and may require in the future, leaguewide corrective policies. The proposals we advance in this book would deal with this alleged problem in quite a different way from the existing restraints imposed by the league. Our proposals would solve problems by directly addressing the question of how to increase fan appeal, while the solutions proposed by owners have largely been driven by the desire to increase profits. Whatever the stated goal of league policy, major leagues tend to adopt redistributive measures that increase profits; this is scarcely surprising given that the leagues are owned by the clubs. From the league’s perspective, profit-enhancing redistributions are easier to sell to those clubs that are being asked to give something up. The problem with these giveaways is that it is not clear that the recipients will spend what they are given on building a better team. After all, if spending a handout of $10 million on new players will not generate more than $10 million of extra revenue, why should a profit maximizer do it? Indeed, only at the insistence of the players’ union did the owners agree in the current collective bargaining agreement to lower the rate at which a revenue-receiving club’s newly earned income would cause a reduction in shared revenue.29



Competitive Balance

In this book, we propose two reforms to the structure of the leagues, which would facilitate league policies more effectively than allowing club owners to restrain trade in the name of promoting competitive balance. First, we argue for a vertical separation between the clubs and the league management, so that the latter would have the right to impose rules on the clubs even if the clubs themselves did not consider them to be profit enhancing. Second, we argue that the league management should adopt a system of promotion and relegation, requiring the entry into the major leagues of strong-performing teams from minor leagues, replacing the weakest-performing teams in the majors, based on seasonal performance statistics (such as rank and win percentage). Despite the lack of evidence to date, we acknowledge the theoretical argument that league rules could have the effect of improving competitive balance in a manner that increased fan appeal. It is unlikely, though, that any innovation would make everybody happy;30 more likely, any such rule would benefit some clubs and hurt others, with a net positive result. A league governed by officials independent of clubs is much more likely to enact such a rule. Consider, for example, the current situation in the National Hockey League. Owners locked out players and prevailed in securing a new collective bargaining agreement featuring a tight salary cap, which achieved the owners’ twin goals of improved competitive balance and “cost certainty.” While the latter goal has been clearly achieved, and the former has to the extent that the Stanley Cup finalists from 2006 did not even qualify for the 2007 playoffs, the new scheme has worsened rather than improved the problem facing the league with regard to the continuing mediocrity of a number of large-market franchises. Returning from the lockout and operating under a salary cap, teams from Boston, Washington, and Chicago all failed to make the playoffs in 2006, and were unable to improve in 2007 because their payroll was already at the salary cap. Why would an independent league want to excuse these owners from spending more to improve their team? A cap on mediocre, large-market teams cannot possibly be designed to enhance competitive balance. Yet all club-run leagues seek such a policy, to enhance profits, not the fan’s experience.31 A system of promotion and relegation provides a different kind of solu-

67

68 Competitive Balance tion to the competitive balance problem insofar as it relates to underperformance in small-market teams. First, it provides an enormous boost to incentives. Poor-performing teams in a promotion and relegation system try much harder than those in closed major leagues. This is, of course, logical: a team that has no chance to compete in the postseason has a huge incentive to improve to avoid being relegated; a guarantee of perpetual membership eliminates this incentive. Actual evidence bears this out. Teams in the bottom half of a major league spend on average a smaller percentage of their income on players, while in a promotion and relegation system they spend more.32 Second, it creates an exciting contest at the bottom of the league as well as at the top. Fans of poor-performing teams seldom give up on their team as the season progresses, and if anything, the life-and-death struggle produces more “eustress” than vying for the championship.33 Third, promotion and relegation does a better job at furthering the equality of economic opportunity that lies at the heart of the American fixation with competitive balance. The disparities between large and small cities are minimized because entry by merit allows for new clubs in larger cities: a Brooklyn or New Jersey entrant might lessen the revenue advantage that the Yankees have over the Pittsburgh Pirates. Although teams in small markets are more likely to be relegated than teams in large ones, the result is a different kind of balance, a balance of opportunities for major league play among all cities. Today, the situation is almost entirely biased against small cities: those with teams lack the incentive to compete, and those without teams have no prospect of watching major league sports in their home town. While politicians and economists have become embroiled in a sterile debate over the amount of “competitive balance” a league requires, we would prefer to emphasize the multidimensionality of demand for sporting competition. Whether we call it eustress or uncertainty of outcome or some other catchall phrase, the excitement of sports should never be reduced to a single factor. Thus promotion and relegation is a mechanism that can contribute to the excitement created by a sporting competition. When combined with innovations like divisional play and a playoff system including wild cards, promotion and relegation significantly enhances outcome uncertainty: a club competes to win the divisional flag, to qualify



Competitive Balance

for the playoffs, and to avoid relegation. Few clubs will find themselves in the middle of the season with no chance for the playoffs and no risk of relegation. This aspect of promotion and relegation may explain in part the exploding popularity of European—and particularly English—soccer, despite the fact that a handful of teams continues to dominate the league. At the beginning of each season, there may well be only a handful of teams with a serious chance of taking the title. A considerable majority, perhaps as many as twelve or fourteen, however, have a realistic goal of finishing seventh or higher, thus entitling them to compete in lucrative and fan-appealing­ trans-European competitions. Meanwhile, a sizable number face a risk of finishing eighteenth or lower and being relegated if their play deteriorates. In short, as Premier League fans consider purchasing season tickets each summer, outcome uncertainty is quite high.34 In sum, a promotion and relegation system does much to promote American values: opportunity for all and reward for effort rather than the cozy cartel rules of the major leagues. We have argued in this chapter that while sports may need to reflect national values in order to be successful, it is in fact wrong to think that the major league’s emphasis on the promotion of competitive balance is necessary to their success. Although leagues have their own good reasons to promote this theory (given that most of the restraints they justify have the effect of increasing their profits at the expense of fans and players), we have shown that the argument has little basis either in theory or, more importantly, in fact. What the fans really want is more complex than competitive balance alone. We believe that the reforms proposed in this book would be likely to significantly enhance the fans’ attachment to their teams, and add to the excitement of the contest.

69

4

Borrowing from NASCAR: An Independent Competition Organizer

1.  The responsibility attached to the chief executive of each operation shall in no way be limited. Each such organization headed by its chief executive shall be complete in every necessary function and enable to exercise its full initiative and logical development. 2.  Certain central organization functions are absolutely essential to the logical development and proper control of the Corporation’s activities. —Two principles enunciated by Alfred P. Sloan in his design of the organization of General Motors, quoted in Alfred D. Chandler, Strategy and Structure: Chapters in the History of the American Industrial Enterprise, pp. 133–34

A recent court decision reaffirming baseball’s antitrust exemption was hailed by MLB’s general counsel as a positive step toward “contributing to the restoration and preservation of the overall health of the sport” because, in his view, the immunity protects MLB from antitrust lawsuits challenging “decisions made for the collective good” that may be contrary to the interests of an individual club or other party.1 We perceive a markedly different picture of the decision-making processes of monopoly sports leagues. As we detailed in Chapter One, the “collective good” of owners has often been at the expense of consumers. Indeed, in many ways fans are even worse off than their predecessors injured by the Standard Oil monopoly, because (unlike Standard Oil) sports leagues operate their joint ventures in the interest of each club rather than for the “collective good” of the business as a whole. The concept that an independent competition organizer is more effi-



Borrowing from NASCAR

cient has not been dreamed up by us in the pristine confines of ivory-tower academia. In developing what has recently been the fastest-growing North American sport—NASCAR—impresario Bill France Sr. recognized, according to one observer, that to achieve success “it would require a central racing organization whose authority outranked all drivers, car owners, and track owners.”2 Indeed, from the early chaotic conditions of independently owned racetracks setting different rules with no league competition, NASCAR developed into a national sport, in large part because an independent entrepreneur was able to identify the best locations for racing, establish complex rules designed to produce close races with cars perceived to be similar to those driven by fans, and determine the appropriate economic rewards that would attract the best drivers, engineers, and crews. Today, it is clear that NASCAR has succeeded beyond the wildest dreams of those who accepted France’s invitation to attend an organizational meeting in Daytona Beach in 1947. Attending a NASCAR race has become more than the mere viewing of a sporting contest—fans usually arrive Friday night and stay until Sunday night, giving the contest the air of a spectacle like a major state fair or outdoor rock concert. Fans reunite with people they see only at NASCAR events, a weekend devoted to spending lots of money on food, music, and souvenir sales3 prior to the Sunday race, a “unique” spectator sport because “it provides such an overwhelming sensory experience” in terms of auto and crowd noise and features “nose-to-tail, doorto-door-fender-rubbing action” among elite skilled drivers.4 Of the twenty largest-attended sporting events from 2004, seventeen were NASCAR races5 (although Nextel Cup fans pay the highest average ticket price in American sports6). When NASCAR took over direct negotiation for television rights from individual track operators in 2001, it quadrupled the sport’s annual broadcast revenue,7 and NASCAR’s ratings are now surpassed only by the NFL. Because NASCAR is a privately held company, no one knows its precise value; Forbes magazine, however, estimates that Big Bill France’s two sons are among the four hundred richest Americans, with estimated worth of $1.5 billion each.8 As CBS reporter Harry Reasoner observed during a 60 Minutes profile on Richard Petty, “If the aim of a professional sport, as is so often said, is to operate as a successful business, the most successful business in American sports is stock car racing.”9

71

72 Borrowing from NASCAR From the nascent days of professional stock car racing in the late 1940s to the multibillion dollar sponsorship juggernaut that exists today, the expansion of revenues and fan support has required NASCAR to continually adapt to changing economics and technology. At each important moment in the sport’s economic history, changes designed to improve the sport as a whole benefited some stakeholders and harmed others. In our view, while NASCAR’s popularity would not have been possible without the charisma and talent of popular drivers, NASCAR’s economic structure has been critical to its success. When it was necessary for NASCAR to change course to ensure sufficient economic rewards for attracting investment in racetracks, innovative automotive engineering, and driving talent, those made worse off by NASCAR’s ever-changing rules did not have a veto power. Unlike the complex machinations that MLB was required to undergo with Baltimore Orioles owner Peter Angelos to remove his opposition to the creation of a franchise in Washington, D.C., NASCAR had the incentive and ability to innovate and respond to changed circumstances in order to improve the popularity (and profitability) of the sport. To be clear, our argument is not that the other major sports leagues should necessarily emulate everything Bill France and his successors have done. In particular, NASCAR’s history is a lesson about which Americans should not need to be reminded concerning the aggregation of power in a single hand. (Most famously, after the exiled Cuban leader Fulgencio Batista resettled in Daytona Beach in 1959, racing columnist Max Muhleman wrote that “there were now two dictators living in Daytona.”10) In this chapter, we detail why NASCAR’s experience strongly supports our argument that sports are better off when the control of the competition is vested in an entity independent of those participating in the competition. To provide a basic framework, we begin by introducing some concepts regarding what economists call “contest theory,” which is an effort to think generally and rigorously about how to best organize competitions. This thinking allows us to see professional sports as a series of economic bargains where a competition organizer offers financial prizes to induce contestants to participate with a high level of quality. It also reveals the complexity of the task facing a competition organizer, and the inherent conflict of inter-



Borrowing from NASCAR

est between clubs (who seek maximum return with the least effort) and the organizer (who wants contestants to try as hard as they can to improve quality). Second, the chapter traces NASCAR’s origin as the independent organizer of stock car racing competitions in the United States. We consider how NASCAR’s structure facilitated important developments throughout its history, and pose counterfactual analyses of how these developments might have been affected if a more traditional governance structure existed. Third, we discuss the one area where NASCAR’s structure departs from our model: the possible effect upon NASCAR decision making of the France family’s control of International Speedway Corporation, a publicly traded company that operates many racetracks. In our view, site selection for premier cup races, as well as questions about the design of newer racetracks, demonstrate that this is indeed an exception that proves the rule, for it is the one area where NASCAR has an arguable conflict of interest and where there is no way to establish objective standards for “entry by merit.” The chapter concludes with a few caveats about NASCAR and why these should not deter our claim that the other major sports leagues, which are the focus of this book, should be reorganized with an independent competition organizer.

A Primer on the Economics of “Contest Theory” Economists try to think rigorously about how to organize economic activity in ways that promote efficiency and maximize social welfare. The following is a very brief and simplified overview of some interesting economic insights with regard to how sporting competitions might be optimally organized. We begin with a notion that may not be superficially apparent to North American sports fans. A sporting competition involves two interrelated but very different functions—those performed by one or more competition organizers, and those performed by individuals or teams participating in the competition. The separate functions are apparent in competitions like the Olympics, where the organizer is the International Olympic Committee and the participants are the individual athletes. As we demonstrate in this chapter, the separation is also apparent in stock car

73

74 Borrowing from NASCAR racing, where the organizer is NASCAR and the racing teams are the participants. The same distinct functions exist in other team sports as well. This distinction is less apparent, however, because the competition organizer—the sports league—is a joint entity controlled by the participating teams. Seeing a sporting competition as an economic bargain in which an organizer offers a prize to induce contestants to compete at a high level of skill reveals the very different goals that exist for organizers and contestants. The organizer seeks, for a given level of its own investment in the prize, to maximize the investment and effort by participants, for this will in turn increase the quality of the entertainment product, and hence the fan appeal and revenues for the organizer. More generally, in making decisions about how to organize the sporting contest, economic theory suggests that efficient decisions are more likely made by a business entity whose sole economic interest lies in the overall profitability of the sport. Economists have used the term “residual claimant” to describe an individual, company, or organization that retains the profit from an economic activity after all the participants have been appropriately rewarded for their contribution.11 In a sporting context, a residual claimant would organize the competition and keep all residual profits after distributing revenue to participants, stadium owners, and others who are necessary for providing the competition to sports fans. In the development of NASCAR, Bill France was the residual claimant; MLB, NFL, NBA, and NHL have no residual claimant. In general terms, the importance of residual claimants is not that they own the whole show (although that is often the case) but that they stand to profit significantly if the whole show, rather than any particular act, is a success. To illustrate the role of the league as a competition organizer, and the challenges and conflicts involved with getting participating teams to perform in a manner that maximizes fan appeal, consider the problems and solutions employed by the NBA in the early 1980s. The 1983–84 season was not one that would bring back fond memories for many basketball fans. The Chicago Bulls, Indiana Pacers, and Houston Rockets performed so poorly that they managed only 81 wins among them, compared to the 139 wins compiled by the three closest teams above them in the standings. Even with



Borrowing from NASCAR

the generous system that allowed sixteen of the twenty-three teams in the league to advance to the playoffs, these losers never gave their fans hope for postseason success, and well before the end of the season even mathematical hope was extinguished. At this point, the teams got even worse, managing to win only six of their last thirty games (that is, 20 percent) combined. To put this in perspective, these three teams had won nearly 35 percent of the games they had played up until the last ten. The Bulls went so far as to lose fourteen out of their last fifteen games. These teams clearly managed to hit a slump in their slump. For these clubs’ owners, though, every cloud had a silver lining, for at the time, the NBA used a reverse-order-of-finish draft pick system. The team finishing last in each conference tossed a coin to decide first and second pick, and subsequent selection was allocated on the basis of win-loss rec­ ords: the Rockets won the toss and chose first, and the Bulls had the third pick in the draft. This allowed Houston the chance to select future all-star and playoff MVP Hakeem Olajuwon, and won for Chicago the most valuable prize in basketball history, Michael Jordan. Some have argued that the 1984 NBA draft was the best in history, yielding Charles Barkley, Sam Perkins, and John Stockton as well as Jordan and Olajuwon. With hindsight, one might even go so far as to say that it would have been worth losing a few games to get closer to the front of the line when the draft began. Indeed, the Olajuwon-led Rockets went on to win two NBA titles, and we know what happened with the Bulls. It’s not hard to see that the draft system created an incentive to lose once teams were out of contention for the playoffs. The following season, under new commissioner David Stern, the NBA decided to change the system by introducing a draft lottery, which gave each of the seven teams that did not qualify for the playoffs an equal chance of getting first pick. Of course, the league would never admit that teams were deliberately losing to win better draft picks, but some detailed statistical research clearly points to this conclusion. The teams in question were unquestionably poor performers, but even poor teams win sometimes and from past records it is possible to estimate just how often they should win. Economists Beck Taylor and Justin Trogdon demonstrated that (1) the out-

75

76 Borrowing from NASCAR of-contention teams in 1983–84 were much more likely to lose at the end of the season than they should have in the 1983–84 season and (2) these same teams were no more likely to lose than they should have in the 1984–85 season.12 In other words, the distribution of results was consistent with the hypothesis that out-of-contention teams were trying to lose when they stood to gain something valuable (a higher draft pick) but stopped doing so when they no longer had any incentive to do so. This striking example confirms the rather obvious statement that people and organizations respond to incentives. However, it is worth considering exactly who was responding here. Were the players deliberately trying to lose? This is hardly credible. First, top players in any sport generally combine an above-average level of ability with an above-average level of motivation. Elite athletes love to win, whatever the context and whatever the financial rewards. Second, most players are ambitious, and they know that each good performance increases their chances of getting recognition in the future. Strolling around the court like a deadbeat is not good for one’s reputation even if the game means nothing. Third, trying to lose is not an easy trick to pull off without getting spotted. There are only so many turnovers and missed shots a player can deliver without the crowd starting to see that something is wrong. This is also why match fixing is also much harder to do than people generally imagine and why match fixers often get caught. Trying to lose is such a strange form of behavior in sports that only the most talented actors can do it without being fingered. Lastly, it’s not really the players that have the incentive to lose anyway; it’s the manager and the owner who want the draft pick to build their team. Owners and managers respond to incentives as much as players do and have many means by which they can manipulate the quality of the team on the court and hence the result. Such manipulations could involve benching, taking excessive precautions over minor injuries to star players, deliberately withholding winning tactics, and so on. Generally, the managers like to win because this also builds their careers. But what of the owners? Undoubtedly owners like to win, and the buzz of owning a winning team is one factor that drives so many business tycoons into dissipating a substantial part of their fortune in the acquisition of a sports franchise. However, having seen



Borrowing from NASCAR

a few million dollars vanish into the pockets of their ungrateful employees, most owners start to recover their business senses, the ones that got them their fortune in the first place. Owners like to make money. In the major leagues, the owners also make the rules. We are willing to bet that if one’s main interest in sports revolves around a team in a major league then this would be seen as natural as representative democracy or apple pie with ice cream. The main claim of this book is that it is not. There are all sorts of reasons why people who compete against each other should not be allowed to set their own rules. Few of us have any difficulty grasping this concept when it comes to job interviews, school tests, or bidding for lucrative government contracts. Most forms of organized competition, whether in education, business, or sports, involve a strict separation of two functions: (1) organization (setting the rules, deciding who wins, giving prizes, punishing cheats, arbitrating disputes, and so on) and (2) competition (pursuit of victory). A couple of sporting examples illustrate the point. One involves the design of the Masters Golf Tournament, one of the top four golf tournaments in the world, played annually at the Augusta National Golf Club. All of the world’s top players compete for a prize fund that totals around $7 million. In 2006, the tournament’s organizers were criticized by many players because the course had been lengthened. According to some players, the longer course favored big hitters, but by the final round the world’s five topranked golfers were all within four shots of each other, suggesting that the committee had designed a course that was capable of reflecting the talents of the players. Instead, imagine if the players themselves were to design the course by a majority vote; what would we expect to happen? It would only be human nature for players to advocate a course that gave them a chance of winning. The shorter the course, the higher the level of randomness that enters the competition. This would benefit the average player by reducing the premium on skill, strength, and accuracy. By the same token, it would reduce the quality of the tournament. To take this example to its ultimate limit, any one of us could get lucky and beat Tiger Woods in a round of crazy golf, but who would want to watch that? Sometimes it is better to give discretion to the competition organizer

77

78 Borrowing from NASCAR than to rely on fixed rules. The prestigious Wimbledon Tennis Championship is open to contestants based on world rankings, but a Committee of Management is allowed to offer wild-card invitations to deserving players who fall outside the rankings. Such an invitation was extended in 2001 to Goran Ivanisevic, who had been a runner-up on three occasions in the previous decades but who had slipped down the rankings due to injury. In the event, Ivanisevic won the tournament in a dramatic five-set encounter with Pat Rafter, obviously justifying the committee’s invitation. Now imagine if the players themselves decided on the entry by majority vote. Would they ever offer a wild-card place? Maybe they would, but only if the majority felt confident that it had a better chance of beating the wild-card player than the alternative. With his strong record at Wimbledon, Ivanisevic would have been unlikely to command such a majority. These examples illustrate the basic point that participants in a contest have an incentive to limit competition in order to raise their chances of winning. One way is to reduce the relevance of skill and effort in determining the outcome of the contest—such as a shorter distance between tee and hole in golf. Another is by limiting the quality of the competitors, such as excluding talented challengers. Because these kinds of restraints also make the competition less interesting to the spectators (and less likely to generate substantial revenues), the best way to organize a contest is to keep the contestants out of the management process. Input from participants provides an important perspective (as the NBA now realizes following its failed attempt to substitute a synthetic ball for the traditional leather ball without adequately consulting the players). In both tennis and golf, the players have formed associations that influence the structure of competitions. During key periods of growth, NASCAR relied on legendary driver Dale Earnhardt to serve as an effective liaison between the league’s management and the sport’s drivers. But committees of participating players do not have the power to change the rules of the competitions in which they participate— the final decision rests with independent competition organizers. To appreciate just how bad it is to have the contestants running the contest, consider what an ideal contest structure might look like. In this respect we mean ideal for the fans, the customers whose money is paying for every-



Borrowing from NASCAR

thing. Fans want to be entertained by a contest featuring athletic skill and grace, intense competition, and high drama. In team sports, the fans also want their team to win. From the organizer’s point of view, this all boils down to the supply of skill and effort. Fans are most likely to be satisfied if they watch contests involving the best players making the greatest possible effort to win. As we said before, this poses little problem when it comes to the players themselves, since in general talent rises to the top and the best players seldom need much motivation. The problem in team sports is the motivation of the owners. Fans, of course, prefer owners who are only interested in victory. Most fans have two main complaints about the owner of their favorite club: he doesn’t care enough about winning, and he is incompetent. To align the interests of owners and fans, this amounts to saying that owners should be rewarded for winning and pay a penalty for losing. In modern times, players clearly face these incentives, earning salary increases as well as many times their salary from endorsements (the prize), which are lost when they stop performing. In golf or tennis, the tournament winners get a big prize, and the players who consistently come near the bottom lose their eligibility. The essence of “contest theory” as applied to sport is to apply the same incentives to owners. For once, this is also a case where common sense coincides with economic theory. To get owners as well as players to exert maximum effort, the competition organizer needs to award a big prize. The smaller the prize, the smaller the incentive to win. Moreover, a good contest (one involving lots of effort) also involves ensuring that there is a clear relationship between performance and success.13 Using this criterion, it would appear that the major league owners— wearing their hat as competition organizers—have gone out of their way to design a lousy contest. The rules provide lots of ways to ensure that no one can be much better than anyone else; this includes reverse-order-of-finish drafts, revenue sharing, salary caps, roster limits, collective selling and territorial restraints regarding broadcast rights, luxury taxes, and similar regulations. All of these limit the incentive to be better than anyone else (the reward being muted), limit the punishment for being bad (revenue

79

80 Borrowing from NASCAR sharing and a perpetual right to remain in the major league guaranteeing significant income to the worst team), reduce the impact of effort on the probability of winning, and may even reward poor performance (as in the draft). Despite the best efforts of the players, owners have encouraged mediocrity: this is bad contest design. Why have they done this? Although the rules are allegedly implemented in the name of “competitive balance,” this is often pretextual, as Chapter Three demonstrated. The owners’ interest in tempering the competitive incentives that each of them face trumps any legitimate concern about maximizing fan appeal. From the fans’ point of view, the best way to achieve a balanced contest would be to create rules that establish a reasonably level playing field, and then reward success and punish failure so that only the best survive. Rules should be designed so that prize money is likely to be reinvested by teams in improved talent, which improves the quality of the competition for the benefit of fans while increasing overall league revenue. While contestants seek to get as much as possible for the least effort, the competition organizer wants participants to spend as much as possible without causing them to go bankrupt or drop out of the competition, in order to maximize quality of play. In addition, the organizer must establish a host of rules to promote an optimal level of competitive balance, an optimal number of competition participants, and incentives for contestants to maintain quality throughout the season. Contestants, unlike fans, would greatly prefer to receive guaranteed profits without the need to put forth a lot of effort. Major league owners have done precisely this, by punishing success and rewarding failure. Both common sense and economic theory tell us that cannot be right.14

NASCAR’s Origins Professor Mark D. Howell actually traces NASCAR’s roots back to the Whiskey Rebellion of 1794,15 when Alexander Hamilton’s efforts to raise funds to pay off Revolutionary War debts with a tax of 9 cents per gallon was rebuffed by farmers west of the Appalachian Mountains; the revolt was suppressed when George Washington personally led the nationalized



Borrowing from NASCAR

militia to the area surrounding Pittsburgh. The strong desire of near-subsistence Appalachian farmers to convert excess and expensive-to-transport grain to easily transportable liquor continued through the centuries, and was viewed by many in the region to be key to their surviving the Great Depression. Although Prohibition had ended in 1933, much of the Appalachian Piedmont of Virginia and the Carolinas continued to be “dry,” and the marginal profit on the sale of homemade “moonshine” was so narrow that for many federal taxes would have been prohibitive. Thus, many believed it necessary to market their goods in violation of state and local law.16 Henry Ford—without design, of course—played a critical role in the moonshine industry and the development of NASCAR, when he produced a powerful V–8 engine in the early 1930s. This gave moonshiners the ability to transport illegal liquor from the mountains to small Piedmont towns or to cities like Atlanta and, with some crafty automotive engineering, to outrun police and federal revenue agents.17 Soon, the driving and mechanical skills of the moonshiners took a sporting turn, with races around dirt tracks in plowed farm fields. Watching well-known local characters engage in a contest of wits and skill provided highly attractive regionalized entertainment. On a broader scale, races on the hard-packed and extremely wide beaches at Daytona began to attract serious tourism to the area. Among those attracted to Daytona was a mechanic named Bill France, who left Washington, D.C., with his young family in 1934 and stopped short of his Miami destination to ply his automotive skills in a small Florida beach town.18 He began racing throughout the region as well as promoting races on the Daytona beaches before all auto racing was interrupted by World War II. As veterans returned home and the postwar economy began to boom, the demand and opportunity for profit from auto racing also increased. Racing also began to become specialized, with wealthy car enthusiasts supplying capital for a car and parts, expert mechanics tweaking the engineering, and skilled moonshiners providing the driving. However, this new sport of stock car racing was in a state of disarray. The American Automobile Association (AAA), which at the time regulated open-wheel racing featured at the Indianapolis 500, looked down on the sport.19 Stock car races were characterized by dishonest promoters, fixed

81

82 Borrowing from NASCAR races, bounties given to drivers by gamblers and others to eliminate strong competitors, and a mishmash of technical standards for the sort of cars or engines permissible, requiring drivers and mechanics to constantly change their cars or face disqualification. Into this void stepped France, who in December of 1947 organized a partly social (free beer and pretty women invited) and partly business gathering of key drivers, mechanics, car owners, and regional racetrack operators. After a fair amount of socializing, France launched into extensive remarks, setting forth a vision for a competition with uniform rules at each track, guaranteed purses (promoters running off with the money was not unknown), and a points system to determine an annual champion.20 Of equal significance, he argued that stock car racing offered a simpler and more accessible form of racing than what he viewed as the “elitist” AAA with their expensive racing machines. He envisioned a competition allowing amateurs and hobbyists to take their regular off-the-showroom-floor models to the track. According to Neal Thompson, the simplification of “the technical intricacies of the sport was key to France’s marketing strategy and part of his attempt to appeal to the weekend warrior. The implication was that NASCAR was for everyone, and the drivers are just like you.”21 The sport was in such a state that anything new seemed attractive,22 and those in attendance agreed to reconvene the following day with drivers and mechanics adopting a set of uniform technical rules while owners and track operators met to arrange business details. The group named the organization the National Association for Stock Car Automobile Racing, with Bill France as president and a governing board composed of two representatives of drivers, mechanics, car owners, and track operators.23 By this point, France had decided to give up his participation as an active driver, and his interest in promoting races on Daytona’s beach was sufficiently limited in scope that he could devote substantial time, effort, and ingenuity into developing NASCAR. At the same time, the other stakeholders were primarily focused on their own activities. When France’s lawyer drew up legal papers incorporating NASCAR with France and making Vice President Bill Tuthill (a New York promoter) and France and his lawyer the only stockholders—a prospect that would prove immensely profitable for

Borrowing from NASCAR



France and his family—others acquiesced. Although none of them wanted to be at France’s mercy, they all enjoyed NASCAR’s success at bringing consistency and higher paychecks to their sport, and felt that they had little choice but to cede control to France. No one else wanted to handle the business side of the sport, and many lacked the skills, having left school at an early age.24 Within a short period of time, Big Bill France had assumed total control over NASCAR, and the stakeholders’ board was never to play a significant role in the organization of the competition. We are quite confident that France had no idea that he had positioned himself to be the “residual claimant” for NASCAR; likewise, when he created races, the points system for the annual championship, the prizes for winning championships, and the complex body of rules governing the race, he did not consciously employ the economic insights of “contest theory.” Nonetheless, he was able to succeed by pursuing a strategy consistent with these economic insights. Because NASCAR’s financial interest lies in maximizing overall revenue for the sport, it has largely succeeded in growing the sport to everyone’s benefit.

NASCAR’s Development Because this is a book about sports leagues generally, we won’t attempt a comprehensive economic history of NASCAR in this chapter. Rather, we focus on five important developments that contributed to NASCAR’s huge success today. These are: • Creating the perception that racing cars were “stock cars,” which fans

• • • •

could buy off the showroom floor, while implementing the reality of rules for racing non–stock cars that were cheap and competitive Creating incentives to attract the best drivers and induce their best efforts Providing substantial funding for all stakeholders from corporate sponsors Expanding NASCAR’s appeal from the South to the entire nation Tweaking rules to maximize NASCAR’s appeal to television viewers

83

84 Borrowing from NASCAR While all stakeholders played vital roles in NASCAR’s achievements, our claim is that NASCAR’s economic structure facilitated these successes. In detailing our case, we employ the device of “counterfactual history” to imagine what might have happened if, like the other leagues, NASCAR was governed not by Big Bill France as the residual claimant but rather by the original board of stakeholders. We suggest that many of these ideas would have been delayed or blocked. To be sure, NFL Commissioner Pete Rozelle was able to combine charm, skill, and a fortunate alliance with some visionary owners to secure owner approval of important innovations, which developed the NFL into the most valuable league in the world. Likewise, MLB’s recent resurgence has been credited to Commissioner Bud Selig’s patient ability to engage in telephone marathons to cajole his former owner colleagues into adopting policies that are in the best interests of baseball. These success stories, in our view, occurred in spite of the governance structure of these sports. NASCAR’s structure allowed Big Bill France to make these decisions himself. We defer for later consideration aspects of France’s “dictatorial” control that are not essential to our argument and clearly do not have to be “borrowed” by the other major sports leagues—specifically his union-busting activity and the conflicts of interest arising out of NASCAR’s control of a major racetrack operator. Still, most industry participants and observers seem to agree with France’s supporters, who argue that France’s “benevolent dictatorship has been a major reason for NASCAR’s surge in popularity” because of the France family’s ability to avoid the “cesspool of warring factions” that characterizes other sports.25 As veteran sportswriter Joe Menzer observed: Of course, there were many drivers who like the general idea [of a sanctioning body] but had a habit of doing their own thing whenever they felt like they could get away with it. [Drivers] embraced France at first but soon came to resent his heavy hand, feeling that he was trying to run the sport like a dictator—which in fact he was. The truth is that it was exactly what stock car racing needed at the time.26

Menzer likewise reports that one of the pioneering NASCAR journalists, Max Muhleman, was a severe critic but came to agree that the sport needed a



Borrowing from NASCAR

dictator.27 Even “King” Richard Petty, who led an unsuccessful revolt against France over safety issues when Talladega Speedway was set to open, came to the conclusion that “NASCAR got this big by being a dictatorship.”28

The Perception of the “Stock Car” Race One of NASCAR’s greatest successes has been in creating the perception in the minds of consumers that the cars featured in its races are the sort of “stock” cars that can be purchased from an automobile dealership. Although the slogan “win on Sunday, buy on Monday”29 has less force today than a half-century ago, the idea that a competition featuring slower cars and less sophisticated tracks—in comparison to open-wheel racing— would be more attractive to consumers reflects marketing genius. The only close sports comparison is the NCAA’s success in persuading millions of fans that a brand of football vastly inferior not only to the NFL, but also in comparison to many failed alternative professional leagues, can be popular and distinct because it involves “amateur student athletes” who are playing for the “intrinsic social and educational benefits” of intercollegiate competition. NASCAR’s success in this regard occurred neither by accident nor by Machiavellian design. When NASCAR began operations in 1948, the cars were all “modified” stock cars. There was no pretense that the race cars were the sort of automobiles one could buy off the showroom floor, because an insufficient number of cars were being produced as Detroit returned from its devotion to the war effort. Indeed, the whole origin of NASCAR lay in cars being specifically modified by moonshiners to outrun federal revenuers. Pressed to distinguish a product featuring what the AAA derided as “jalopies,” France decided that beginning in 1949 NASCAR would operate a series for both “modified” and “strictly stock” cars. The latter concept, to be sure, had the ostensible purpose of increasing the popularity of a sport the average person could relate to, seeing cars like the ones owned by themselves and their neighbors racing at high speeds. As a coherent sporting concept, this lasted one race. Radiators and wheel lug nuts available in stock cars were simply not built to withstand several hours of racing at top speeds. NASCAR allowed changes in carburetor jetting, water pump im-

85

86 Borrowing from NASCAR pellers could be altered, and “wheels, hubs, steering parts, radius rods and sway bars [could be] reinforced and strengthened in any manner.”30 Many non-stock modifications related to safety, including special drivers’ seats, roll bars, and puncture-proof fuel cells.31 As stock car racer/builder Ralph Moody observed, “If you are running 100 miles an hour in a stock car and something happens, you get killed. You have to put safety equipment in it.”32 From the outset, modifications were permitted in the name of safety or a fan-appealing competition,33 and because of NASCAR’s frequent rule changes, most cars in each race are closely matched.34 France continually tweaked the rules to achieve two goals. To make NASCAR attractive to drivers and car owners, the rules needed to be designed so that competitive cars would not be very expensive to buy and modify. At the same time, cars needed to preserve their stock appearance to maintain the attraction of the sport. This led legendary mechanic Smokey Yunick to ask, “How in the hell do you legislate a fraudulent concept?” and to conclude that stock car racing was at best “a good natured lie.”35 Although a sports reporter concluded recently that “the similarities between a race car and a regular passenger car pretty much end with the shell,”36 at every turn, NASCAR consistently acted in a manner designed to maintain the illusion of similarity between cars on the track and in the dealer’s showroom. At the same time, requiring the use of mass-produced parts served to significantly reduce owners’ operating costs.37 And despite significant criticism for his willingness to use “dictatorial” powers, the record shows little evidence that France’s decisions in regard to these two goals were, in hindsight, erroneous. Indeed, although stock cars had evolved into “fully-fabricated racing machines” by the mid 1950s, the original stock concept “remains part of the lore” of the sport.38 France’s constant manipulation of engineering rules to advance the sport was not limited to simple deviations from the “strictly stock” concept. France believed that a critical element of the sport’s popularity was the competition among fans’ favorite makes of stock automobiles. France took an active role in inducing Ford, General Motors, and Chrysler to assist car owners in developing winning race cars, and actively “tweaked” the rules to “even the odds” if one manufacturer fell behind the others.39 Thus, NASCAR bent the rules to allow a Chrysler engine to be used even though



Borrowing from NASCAR

it was not regularly available to consumers following GM’s withdrawal of support, lest Ford dominate the sport; later, France reversed himself and banned both the Chrysler and a modified Ford engine amid concerns that tires couldn’t keep up with the engine technology.40 Of course, many of these decisions were controversial because at any given time a rule change to increase the overall appeal of the sport is likely to benefit some competitors more than others. The first dominant NASCAR team paired driver Robert “Red” Byron (a popular disabled war veteran) and ace mechanic Red Vogt. Vogt was already legendary for his work on modifying prewar Fords. The movement to “strictly stock” was contrary to Vogt’s interest, limiting his talent at automotive engineering; eventually, he engaged in a long-term cat-and-mouse game with NASCAR officials over loopholes in their technical rules and efforts to devise hard-to-detect rules violations.41 France’s frequent rule manipulation to maintain a semblance of balance among the giant automobile manufacturers obviously displeased whichever one had the temporary engineering advantage. Imagine a “counterfactual world” where France did not have the discretion to change the rules by himself but instead needed approval of a supermajority of the originally designated board of stakeholders. Mechanics would have led the fight to resist original “strictly stock” rules, and those owners and drivers of cars with temporary engineering advantages would have exerted considerable effort to block efforts to take away the innovations that promised to make them dominant.

Incentives for Best Performance The lessons of contest theory that we discussed earlier in this chapter are best exemplified by how a competition organizer—in this case NASCAR—goes about providing the correct incentives to attract competitors and induce them to perform at the highest level. At NASCAR’s earliest stages, races featured a mixture of semiprofessional drivers, hopeful newcomers, and amateurs in their personal cars. Although Big Bill France had once declared that NASCAR should be a viable weekend activity for hobbyists, by 1951 his vision for a nationwide sport no longer allowed a racer to participate casually.42 The result, through trial and error (especially in earlier days when the absolute value of purses was smaller and non-NASCAR

87

88 Borrowing from NASCAR events were real substitutes), was the continuing increase of prize money for winning individual races as well as winning the NASCAR series championships. Although controversy remains as to whether the total pie of NASCAR revenues is equitably divided between racers and the France family (a topic we discuss below in the context of unionization), there is little claim that the reward structure failed to attract the best. Indeed, as the stakes have become higher, there has been a huge increase in the athletic ability of the contestants.43 Attracting the best talent doesn’t ensure the best competition. Competitors recognize that they can’t all win. This requires a careful balancing act by the organizer. If the chance of winning isn’t sufficiently great, drivers won’t show up. For example, in 1948 the final race of the NASCAR season (using modified racers, as “strictly stock” cars weren’t available until the following year) initially drew only six drivers. The rest, lacking any real chance of getting a sizable share of the prize money for season-long points winners, decided to participate in a non-NASCAR race where the individual track’s purse was greater. Bill France actually had to delay his race for a week to attract more participants.44 The approach to attract participants employed by club-run leagues is to guarantee each competitor a significant share of the sport’s revenue, no matter how poorly they perform. NASCAR has never taken this approach. The precise identity of those participating in each Nextel Cup race is determined by past success, although veteran teams can guarantee their cars a spot in the race based on continuing success in recent races. Other drivers compete in less-demanding competitions before seeking to move to the Nextel Cup circuit. All must continually perform at high levels to have any chance of sharing in NASCAR’s massive revenues. Ironically, one of NASCAR’s top drivers, Indiana-raised Jeff Gordon, gave up a promising career in the open-wheel Champ Car series in 1991 to join NASCAR’s second-tier Busch Series, because Champ Car owners, who, unlike NASCAR drivers, control their own competition, limited the number of cars and excluded Gordon.45 As in soccer, discussed in Chapter Five, we do not think it is an accident that those sports that are not controlled by the participants themselves de-



Borrowing from NASCAR

velop rules that determine entry based on competitive merit, while the owners of clubs in the four major North American leagues choose to guarantee themselves permanent membership in the lucrative premier competition. NASCAR’s role as the “residual claimant” means that it has the incentive to develop rules to attract the best competitors and to provide them with the appropriate incentives to ensure the most exciting competition possible for fans. Individual participants’ incentives are different. Who among us wouldn’t prefer a guaranteed 2–3 percent share of a multimillion dollar revenue stream to a potential share of a modestly larger revenue stream (larger because of slightly larger fan appeal from an entry-by-merit system) that had to be earned by effort and financial investment? Put another way, we think it clear that the current participants in the Nextel Cup would, if they could, vote to give themselves permanent rights to continue to participate. The public is protected from such a scheme by NASCAR’s structure—the rule is set by someone else. NASCAR’s balanced solution has been to ensure that purse money is not guaranteed but that it is widely distributed. As one illustration, at the same time Rusty Wallace was cashing his winner’s check for $87,555 for his 2000 Bristol 500 victory, twenty-seventh place finisher Dick Trickle earned $27,545.46 The yearlong points contest was historically kept tight by a scoring system rewarding consistency by giving only slightly fewer points to those who finish just below the top.47 The system has worked. Originally, the scheme gave NASCAR a competitive advantage in recruiting drivers from open-wheel racing, where points were awarded only to the top twelve finishers, and expanded the number of owners and drivers who could make a living competing on the NASCAR circuit.48 From 1975 to 2003, eleven championships were decided by fewer than 50 points, or the difference between first and twelfth on the final race.49 According to Robert Hagstrom, a financial advisor who wrote a book about NASCAR to demonstrate to clients why the industry was a worthwhile investment, NASCAR’s rules are designed to achieve “parity, safety, and cost savings.” Another purpose is to limit out-of-control costs: To stay viable NASCAR understands the need to maintain a sensible balance between costs and revenues. NASCAR does not want to see well-financed teams spend thousands of dollars to eke out a tenth of a second of speed. The

89

90 Borrowing from NASCAR sanctioning body knows that other less well financed teams, to stay competitive, would have to find a way to meet the challenge, thus ratcheting the overall cost of racing higher and higher. Furthermore, the concept of rapidly increasing expenses in order to gain an advantage that eventually is neutralized has no utility. Safe, competitive racing at a reasonable cost is the backbone of NASCAR.50

This observation illustrates another insight from contest theory. The competition organizer must be careful in offering an appropriate economic reward to participants: if it is too low, not enough talented people will participate, or those that do won’t try very hard. However, if the reward is too large, and if small increments of improvement can reap huge financial returns, there will be a “rat race” of overspending until so many participants lose money that the sport is harmed. To illustrate, consider how elite swimmers will shave their bodies to microscopically reduce friction because the minuscule advantage might be the difference in winning their race. (In economic lingo, the “discriminatory power of the contest” is high.) In contrast, baseball players have little concern that baggy clothing might take a fraction of a second off of their time running the base paths. Race car engines are like swimmers’ body hair, so NASCAR promulgates rules designed to limit wasteful spending on innovations that will not be noticed by fans. As we noted in Chapter Three, another important element of competition organizing is ensuring that the rules contain the appropriate amount of outcome uncertainty to maximize fan appeal. Here again, NASCAR’s rec­ ord supports our argument that parity of the sort used to justify restraints of trade in other leagues is not necessary. To be sure, many technical regulations are issued to achieve a goal of close, competitive races. Thus, NASCAR recently adopted a “single engine” rule that bars wealthier teams from bringing multiple engines to a race (the rule bars teams from substituting engines once the car is formally submitted for testing at the beginning of each race weekend). At the same time, NASCAR’s popularity has zoomed without anything like “parity.” Indeed, in the fifty-seven-year history (1949– 2006) of its premier stock car competition, with over forty drivers in most races, almost one-quarter of the championships were won by two drivers (Richard Petty and Dale Earnhardt, with seven titles each), thirty titles were won by seven drivers, and forty-four of the titles were won by fourteen driv-



Borrowing from NASCAR

ers who have won more than once.51 NASCAR recognizes that fans want to see the established stars, even if it creates what some perceive as an unfair advantage toward the richer racing teams; thus, NASCAR allows the top thirty-five in series points to automatically qualify for Nextel Cup races, although this puts marginal drivers at a significant disadvantage.52 In sum, although the expansion of discretionary authority by NASCAR officials to interpret the rules often infuriated stakeholders, it allowed NASCAR the flexibility to rein in strong competitors and produce close competitive races as well as giving NASCAR an edge in its ongoing relationship to the Big 3 automakers.53 As a student of the history of technology has noted, this was particularly critical because of the dynamic nature of automobile racing: as technology and tracks constantly change, it was likely that one model, or one team’s technology, might come to dominate. Thus, NASCAR needs to engage in the “artful enforcement of rules” in order to “provide consistently close action for race fans.”54 Manipulation of technical criteria is essential to achieving NASCAR’s long-term strategy of facilitating competition between Fords, Chevys, Dodges, and more recently Toyotas, in order to attract manufacturer support and develop fan interest.55 The foregoing examples tell the same story: setting the best rules for the sport is a very complicated matter. In each instance, the participants are far too interested in their own success to adopt the optimal approach. A board dominated by drivers, owners, and mechanics would likely demand guaranteed purses for current participants, points and prizes designed to minimize the need to invest in quality, and regulations reflecting a desire to achieve “cost certainty” (the goal of NHL owners leading to the 2004–5 lockout) rather than a careful balance of high quality without wasteful expenditure, or rules designed to rein in popular and innovative competitors in order to promote an unproven notion of “competitive balance.”

Sponsorships As NASCAR’s rules have continued to evolve to permit racing teams to substantially change a “stock car,” the cost of operating a team has skyrocketed. For decades, the cost of operating a team has exceeded the purse winnings for most teams.56

91

92 Borrowing from NASCAR NASCAR has more than solved this problem by its extraordinary ability to garner sponsorship income. As a competition organizer, it facilitates deals with teams, tracks, and drivers, while increasing the value of sponsorships by “educating” fans about the sponsors’ importance to the sport.57 Perhaps NASCAR’s greatest success has been to convince fans that by purchasing a sponsor’s products, they actually help finance their favorite driver’s racing operation. The results are overwhelming. NASCAR’s sponsorship revenue exceeds $1 billion.58 One study showed that corporations increase share value when they become NASCAR sponsors.59 The link between events, sponsorships, and driver participation works extraordinarily well. Dale Earnhardt became the richest driver not solely by racing success but by selling more T-shirts and other souvenirs. Everyone in the sport constantly refers to race cars by including both the sponsor and the car’s make (rewarding the continuing investment of automakers)—thus a NASCAR official or broadcast journalist will often refer to the success of “Jeff Gordon’s Number 24 DuPont Chevy.” As a result, 36 percent of fans in a James Madison University survey could name the corporate sponsor of every car in the top thirty.60 After a win at Bristol, Rusty Wallace changed hats twenty-two times to pose for postrace photographs with sponsors.61 Typically, contracts require drivers to spend Tuesday through Thursday attending sponsor-related engagements.62 Even among non-NASCAR fans, NASCAR drivers and crew are famous for their colorful flame-proof uniforms, covered from head to toe with sponsorship logos. NASCAR only limits racing teams’ opportunities to gain sponsorship to the extent necessary to preserve its own leaguewide sponsorships. (Hence, siding with Nextel, the sponsor of the premium cup series, NASCAR narrowly construed its sponsorship rules to prohibit AT&T from changing the logo for a car sponsored by Cingular Wireless, which AT&T had purchased and was seeking to rebrand.)63 Otherwise, it encourages sponsorships, revenues, and other licensing opportunities for tracks and drivers. NASCAR’s success with sponsorships actually enhances incentives for racing teams to invest in success, in a manner that costs NASCAR nothing. First, there are direct sponsorship incentives designed to maximize fan appeal and generate sponsorship interest: thus, R.J. Reynolds offered a $1 mil-



Borrowing from NASCAR

lion bonus to drivers who won three of the “big four” races—at Daytona, Talladega, Charlotte, and Darlington. Second, the dynamics of television coverage means that those challenging for the lead get far more air time than also-rans. Because sponsor logos figure so prominently on cars, a serious challenger’s sponsor gets far more exposure from network coverage of the race as well.64 NASCAR’s policies can be readily contrasted with those of club-run leagues. These leagues focus on ways in which licensing or sponsorship income might be centralized or revenue from successful innovators shared with others. One can imagine the reaction of our counterfactual NASCAR “board” of drivers, mechanics, and car owners after Richard Petty’s pathmarking STP sponsorship deal: it would not likely have been to encourage all other teams to get out there and compete.

Expanding National Appeal Cultural historian Mark Howell notes that NASCAR has always had an intangible appeal rooted in the mythology of the South.65 Almost every racer in NASCAR’s premier season was connected to Southern moonshining: most of the leading drivers and mechanics were from Atlanta, and the series champion, Red Byron, was “the rare NASCAR driver without a criminal record.”66 From 1949 to 1991, all but three series champions were born in the South.67 NASCAR was born into an environment where “moonshine-runnersturn-stock car racers were deemed by rural southern fans heroes because they symbolized a challenge” to the power establishment.68 The sport was attractive as a means of bringing some excitement to the lives of small town fans. The Great Depression affected the South deeper and longer than the rest of the country: when NASCAR stock car series began in 1949, there was no major league baseball in the South and few major cities; transportation was much more limited than in the rest of the country, and many small towns lacked even a theater.69 After World War II, automobiles had a much greater impact in the South, with more cars per driver and more highways per capita than the rest of the country.70 This economic reality blended with a rich history to give Southern fans their distinctive identity: one in four

93

94 Borrowing from NASCAR military-aged males had died in the Civil War (in contrast to one in ten who fought for the Union); in the 1930s, the South had 25 percent of the country’s population and only 10 percent of its wealth, with widespread illiteracy, terrible schools, and little electricity; many would not celebrate the Fourth of July, considering it a Northern holiday and questioning the propriety of celebrating on the day that the key Civil War battle for the city of Vicksburg was lost.71 The “rebel” identification with NASCAR continued for much of its history. Events known as the Rebel 300, Dixie 400, Mason-Dixon 200, Volunteer 300, and Southeastern 250 came into being during the era of greatest racial tension across the southeast. Big Bill France was active in the presidential campaigns of Southern segregationist George Wallace. His landmark deal with R.J. Reynolds to create the Winston Cup came at the perfect time to link an “outlaw industry” with an “outlaw sport”: both needed each other “to survive and thrive in a politically correct world where neither felt it belonged.”72 NASCAR blossomed as a Southern sport of escapist entertainment that combined regional identity, rebellion, and uniqueness during a time of social upheaval caused by the civil rights movement.73 However, the France family’s goal has always been to nationalize its product. Big Bill France spent much of 1949 flying around the country to develop the sport. In 1951, France suggested to the Detroit Chamber of Commerce that it help celebrate the city’s 250th anniversary with a 250mile race, designed to bring NASCAR north and cement ties with the auto industry.74 In the first six years of NASCAR’s existence, races were held in twenty-three states and Canada, and there were more races in New York than in Alabama, Arkansas, Louisiana, Tennessee, and Texas combined. During the late 1950s, there was a Southern retrenchment, caused by the need to reduce costs and solidify the sport where it was already popular in reaction to the sudden collusive decision of the Big 3 automakers to stop financial support.75 NASCAR got a big push into the mainstream from a lengthy article in Esquire magazine by noted writer Tom Wolfe about Junior Johnson, entitled “Last American Hero.” (The article was later made into a movie starring Jeff Bridges.) The vast amount of publicity surrounding legendary driver Dale Earnhardt’s tragic death on the last lap of the forty-third



Borrowing from NASCAR

running of the Daytona 500 in 2001 (where just three years earlier he had finally won after twenty years, attracting the unique turning out of every pit crew to congratulate him on the way to Victory Lane) further pushed the sport into the American sporting mainstream. That same year, cup races were held at new tracks outside Chicago and Kansas City. At the start of the 2005 season-ending Ford 400 at Homestead-Miami Speedway, the top four leaders were Tony Stewart (Rushville, Indiana), Jimmie Johnson (El Cajon, California), Carl Edwards (Columbia, Missouri), and Greg Biffle (Vancouver, Washington) (Stewart won). Except for the Pacific Northwest, Nextel Cup races are within a reasonable drive from every major American city. Among NASCAR’s top five television markets are New York City, Los Angeles, and Philadelphia (three of the top four media markets).76 NASCAR’s geographic expansion has required a careful balancing act by senior executives. NASCAR CEO Brian France declared,” We want our sport to look more like America.”77 Yet NASCAR President Mike Helton had to quickly backtrack from a statement that “the old Southeastern redneck heritage that we had is no longer in existence” to claim that NASCAR was “proud of where we came from.”78 Dale Earnhardt Jr.’s arboreally awkward comment in this regard—“We’re not moving away from our roots. We’re getting more roots”—sums up the difficulty.79 Thus, while Confederate banners continue to fly in the infield breeze, in 2003 NASCAR moved its traditional Labor Day race, the Southern 500 in Darlington, South Carolina, to make room for a second race during that prime holiday weekend at the California Speedway near Los Angeles. And while some complain that the skill of naming multiple sponsors in a fifteen-second interview is now valued more highly than knowing the precise combination of shocks and springs to maximize speed around Darlington’s tight curves, Junior Johnson is among those who see that if NASCAR “doesn’t spread out, it’s going to be a stagnant sport.” Measured in terms of dollars and overall fan appeal, NASCAR’s geographic expansion has clearly been good for the sport. But the move is not a win-win situation. Some Southern fans, or Northern admirers of Southern culture, view NASCAR’s efforts with some disdain,80 although, like hardcore American League purists aghast at the Designated Hitter rule, they still

95

96 Borrowing from NASCAR continue their patronage. Clearly, Southern racetracks have been the losers, and travel costs and wear-and-tear are not welcomed by all driving teams. When we think about how a NASCAR board including racetrack operators might have reacted to many France family moves to expand NASCAR’s range of support, our thoughts turn to the experience elsewhere. Major League Baseball remained limited to the northeast quadrant of the United States until 1958, only expanding after Walter O’Malley persuaded fellow owners to agree to his relocation from Brooklyn to Los Angeles. The National Football League owners did not agree to expand to football-crazy Texas until soon-to-be Dallas Cowboys owner Clint Murchison acquired the copyright to “Hail to the Redskins” and used it as leverage to overcome the fierce opposition of Redskins owner George Preston Marshall.81

Television Appeal NASCAR’s television appearances are critical to the sport’s success. Of course, like all sports leagues, NASCAR profits from the highly lucrative rights fees it receives. But, as noted above, because of NASCAR’s reliance on corporate sponsorships, more ratings not only translate into more revenue from NBC and Fox but more revenue to official NASCAR sponsors and sponsors of individual teams and tracks, as more consumers at home view corporate logos and promotions. At a time when the NFL was becoming a television-oriented league, NASCAR was still a minor sport. The sport’s premier event, the Daytona 500, was not televised live in its entirety until 1979. NASCAR’s national television debut benefited from the good fortune that the clearing weather Daytona experienced in January 1979 was not shared in much of the country. As Ben Shackleford describes it: Severe winter weather throughout the northeast put an unusually large number of viewers in front of their television sets. Of this number, the majority chose to watch the Daytona 500, aired live in its entirety for the first time. Sixteen million viewers, more than twice as many as watched a professional golf tournament airing at the same time, watched the race conclusion. In the dramatic final lap of the race, superstars Bobby Allison and Cale Yarborough wrecked into each other and out of the race. Following their skidding, high-



Borrowing from NASCAR speed wreck into the infield of the Daytona tri-oval, the two competitors climbed out of their cars and began fighting. Television crews raced to the scene and captured the violence in close detail. Not until other racers stopped their cars at trackside and got out to restrain Allison and Yarborough was peace restored. Clearly the men participating in the 1979 Daytona 500 were intensely competitive and unafraid to express their desire to win. It was a dramatic conclusion of an unusually entertaining race. In addition to seeing a fistfight between two stars of the sport, there had been numerous lead changes and heated pit stop action. For the first time many viewers were able to absorb just how big stock car racing had become and just how intense competition was among stock car racers. The venue was huge and packed with fans, the speed approached 200 miles-per-hour, the racing action was dramatic, and the scuffle between Allison and Yarborough was evidence of the passion with which competitors pursued this sport. Clearly for 120,000 fans packing the Daytona track, and for the racers brawling in the infield, this sport mattered. Most dramatically, fulfillment of violent potential . . . was revealed to audiences in graphic detail.82

From $3 million in total television revenue in 1985 for the twenty-eight races in the series, NASCAR revenues have jumped dramatically, as noted, with a record-setting eight-year multinetwork contract for $4.8 billion in 2005.83 Up until 2001, individual racetracks sold television rights to their race. (Under the common law, broadcast rights are granted to the owner of the facility where the sporting event occurs.84) Commencing with the 2001 season, NASCAR collectively sold broadcast rights. In legal terms, as a condition for participating in the Nextel Cup competition, racetrack owners were required to assign broadcast rights to NASCAR for reassignment. The result was a significant increase in rights fees; moreover, considering the promotional abilities of two major over-the-air networks (Fox and NBC for the 2001–7 contract, and Fox and ABC for the contract beginning in 2007), the new contract not only made NASCAR available to more fans but put the product in the hands of national marketing specialists “capable of massaging this Southern-fried sport into a nationwide darling.”85 To maximize its ratings and thus revenues, NASCAR not only sold the Nextel Cup series as a package deal divided between two major networks but also tweaked the location and design of the competition itself. For ex-

97

98 Borrowing from NASCAR ample, Nextel Cup expansion into Kansas City and Chicago coincided with the new television contract in 2001. Perhaps more significantly for racing fans, NASCAR has tried to garner the benefits of “postseason play” enjoyed by other sports by redesigning the Nextel Cup into a “season” of twentysix races, after which continued eligibility to participate in the “Chase for the Cup” would be limited to the top ten to fourteen teams (although all teams remain eligible to participate in the ten remaining races and receive prizes for performance in each race). The goal is to heighten interest in the races’ lead-up to the Chase to determine eligibility and, by recalibrating point totals to give the leading driver only a five-point advantage over the second-place driver, to tighten up the contest in order to determine the eventual cup champion.86 For example, after the “regular season” ended in 2006, Matt Kenseth led Jimmie Johnson by only nine points, but Kevin Harvick, Jeff Gordon, Kyle Busch, Dale Earnhardt Jr., and Denny Hamlin trailed by 342–413 points, respectively.87 The Chase bunched them together, with Johnson eventually winning the Nextel Cup; going into the last race, a victory by one coupled with a non-finish by the leader could have given at least six racers the cup title. In contrast, the 2003 pre-Chase season saw Matt Kenseth win the cup by such a large margin that fan interest lagged. This innovation appears to have been a success. Ratings and attendance immediately grew from prior years.88 Interest in the NASCAR schedule, which roughly follows the calendar year (the season kicks off with the Daytona 500 in February and concludes in Miami in November), is maintained at the end of the year despite the draw of the NFL for the attention of marginal racing fans. For example, the Ford 400 race hosted in Miami at the end of the season had developed into a “Super Bowl” atmosphere because of the Chase, according to the racetrack’s president.89 The collective sale, relocation of Nextel Cup races to sites within new media markets, and redesign of the season-long competition to include the Chase for the Cup are all innovations that appear to benefit the sport as a whole and would have been much harder to achieve if consensus among a board of track operators, drivers, owners, and mechanics were required. Although the gains from the collective sale were so high that all might well have been better off with the new television contract, those whose races



Borrowing from NASCAR

traditionally received higher ratings might have demanded—had they a veto power—an even greater share of the proceeds. Recall our discussion in Chapter Two about how the NBA limited the national cable appearances of the dynastic Chicago Bulls because of an inability to agree on how to divide up the profits, and how the English Premier League rejected an offer to telecast 50 percent more of their games for similar reasons. NASCAR implemented the Chase over the drivers’ objections. This is understandable: leaders didn’t like the fact that a wide margin earned during the earlier races would be compressed once the Chase began; near-misses wouldn’t like the idea of losing out on the Chase. Indeed, in 2004 Jeff Gordon’s 294 point lead over seventh-place sitter Kurt Busch was reduced to 30 points, and Gordon trailed Busch at the end. However, many drivers “begrudgingly admitted” that the new system “made every lap count.”90 One final and important note about NASCAR’s handling of television rights. Although we conclude that NASCAR’s approach has likely been good for sports fans, we readily note that collective sales of broadcast rights can, in theory, have positive or negative effects on fans and consumer welfare. A likely positive example was the pioneering package sale of all games in the upstart American Football League in the early 1960s to a national television network, allowing immediate nationwide exposure to a fledgling league. A negative example was the collective sale of exclusive broadcast rights to major college football games prior to 1984; after the Supreme Court struck down the agreement, the number of games on television tripled.91 Because the Nextel Cup is the premier competition in the NASCAR hierarchy, racing fans are unlikely to find other programming that is an adequate substitute for Nextel Cup competition. However, since the cup schedule features only one race per week, there is little risk that a collective sale will reduce the number of races shown on television. This allows NASCAR to reap substantial increases in rights fees without an anticonsumer reduction in output. (We consider in Chapter Six the policy implications of collective sales in the other major leagues. The point here is simply that the sale illustrates how a beneficial business innovation is facilitated by NASCAR’s status as an independent competition organizer.)

99

100 Borrowing from NASCAR

Sleeping Dogs: The Absence of NASCAR Restraints on Entry and Labor Competition In Arthur Conan Doyle’s classic mystery story “Silver Blaze,” master detective Sherlock Holmes deduces that the theft of a prize racehorse leading to a homicide must have been committed as an inside job, because the farm dog remained asleep in the barn during the theft and did not awake the family and neighbors with his bark. This popular story serves as a useful example of how important aspects of reality can be inferred from the absence of certain facts. Just as Holmes famously described the absence of the dog’s bark as “the curious incident of the dog in the night-time,” in the case of NASCAR the “curious incident of the competition organizer not controlled by clubs” is the absence of any rules limiting entry or restraining competition for labor. A key purpose in the organization of baseball’s National League as a joint venture was to significantly aid member clubs in holding down player salaries. The owners correctly predicted that by signing elite players to a closed and controlled competition, barnstorming rivals would fade away and there would soon be few substitute employers for premier baseball players. Thus a key element of their agreement was a substantial restriction on interclub competition for star players. As an independent competition organizer, Bill France had no interest in the employer-employee relationship between car owners and drivers. Indeed, consistent with contest theory, as long as top-quality cars and drivers were induced into NASCAR-sanctioned races by sufficient prize money, it was in France’s interest to have drivers be well paid so that their skills would continue to be developed and the most talented would be attracted to stock car racing. Moreover, the presence of a related but fundamentally different form of car racing—open-wheel racing of the sort highlighted by the Indianapolis 500—acted as a significant inhibitor on the ability of stock car competitors to hold down driver salaries. Today, NASCAR remains free of any significant limitations on bidding for talented labor (drivers, crew chiefs, lead engineers, and so on). Although NASCAR desires competitive contests at a reasonable cost as much as any



Borrowing from NASCAR

other competition organizer, there are no “free agent restrictions” or salary caps. Initially, labor competition began for non-driver talent. An observer noted the positive impact of this competition on parity, observing that “successful crew chiefs and crew members are often courted by other teams, in the hope that their magic can work on a troubled organization.”92 More recently, teams have begun bidding for the services of talented drivers as well.93 The open-entry model provides yet another aspect to competition, as some successful drivers can attempt to compete as owner-drivers. The result has been innovation rather than restraint. One example is Jeff Gordon’s insistence that he would enter the Nextel Cup series only if he could bring along his crew chief, Ray Evernham. Evernham assembled a team more like an NFL coaching staff, assigning one engineer to serve as the “offensive coordinator” to make Gordon’s car as fast as possible, while another engineer was the “defensive coordinator” assigned to keep the car from breaking down. He then brought in Andy Papathanassiou, an exStanford football player with a master’s degree in organizational behavior. Papathanassiou developed Gordon’s crew into outstanding athletes, assigning large, strong men as tire carriers and small, quick athletes as tire changers, and with practice reduced the pit time from twenty to sixteen seconds.94 Such an advantage is extremely important in auto racing; it could allow the fifth-place car to return to the track in first place (it is much more difficult to pass cars on the racetrack).95 These pit innovations in turn built on the professionalization of efficient crews famously developed by Wood Brothers Racing in the early 1960s.96 More generally, the significant movement of drivers, engineers, and crews among racing teams in a free labor market results in a “silly season” of frequent movement during the winter before the start of the NASCAR cup season with the Daytona 500 in mid-February, which facilitates the dissemination of technological innovation. NASCAR’s experience raises the question why other leagues spend so much time and effort trying to limit labor market competition in the name of competitive balance. The most persuasive answer, in our view, is that the competitive balance justification is largely a pretext to obscure the real goal of reducing labor costs, even at the expense of fan appeal. Consider the experience of Major League Baseball in the 1970s. Following the elimination

101

102 Borrowing from NASCAR of the Reserve Clause, competitive balance improved (contrary to the owners’ expectations), attendance increased 57 percent while salaries increased 316 percent. Although it is not clear how much of baseball’s increased popularity was caused by increased competitive balance, even if this were the sole causal factor, MLB owners would be better off with a less attractive game and pre-1976 salaries. MLB and other major professional sports owners thus face a conflict each time they gather to collectively run their leagues. A majority of teams might be individually better off playing under rules that lessened fan appeal but significantly reduced their costs. As long as teams can still make a sufficient profit to participate in the competition, NASCAR has no such conflict. Rules that make the competition more attractive will be adopted.

The Exception That Proves the Rule: Selection of Nextel Cup Sites The foregoing analysis of NASCAR decisions supports our central thesis that fans are better off, and the exercise of monopoly power by sports leagues is at least channeled into more efficient rules, when the competition is organized by an entity independent of participating teams, and when the ability to participate in the competition is based on merit and not the purchase of a perpetual guaranteed property right. There is one area, however, where NASCAR decisions have been severely criticized and subject to antitrust litigation: the selection of sites for the thirty-six Nextel Cup races. Because the leading racetrack operator, International Speedway Company (ISC), is a publicly traded company whose major stockholder is NASCAR, Inc., NASCAR has been accused of unfairly biasing its selection process by refusing to grant Nextel Cup races to more deserving racetracks in favor of less deserving sites operated by ISC. For our purposes, to the extent that these criticisms have merit, they bolster our central arguments that entry by merit and an independent organizer best serve fans. Although these two features are present with regard to most decisions made by NASCAR, neither is present with regard to site selection. Prior success in NASCAR competition and qualifying speeds during pre-



Borrowing from NASCAR

liminary races both provide objective means of determining which racing teams are “best” to participate in a specific Nextel Cup race, and Nextel Cup series points after twenty-six races provide the objective basis for determining the “best” teams to participate in the Chase for the Cup. Likewise, as we detail in Chapter Five, prior season performance determines which teams are best suited to participate in European soccer leagues. However, although in sports featuring match play the sites and the clubs are inextricably linked, there is, unfortunately, no objective way to determine the “best” sites for Nextel Cup races. Nor is NASCAR independent in selecting sites, given its ownership interest in ISC. Even so, the lack of independence in site selection is less clear-cut in NASCAR than in other sports leagues. It is not readily apparent why NASCAR, which sets the rules for a monopoly sport, cannot maximize its profit through the share of revenue NASCAR, Inc. takes from various revenue streams. Indeed, the current revenue-sharing formula was developed when ISC owned only two tracks; most of ISC’s expansion has come from the purchase of economically troubled tracks and the construction of new ones in areas of the country where NASCAR is seeking to grow.97 Economic theory, at least, suggests that NASCAR would not ordinarily find it in its self-interest to select a suboptimal site because it was owned by ISC. It is possible, however, that a variety of customs of the industry or other factors may indeed lead NASCAR to set up the rules so that profits primarily occur at the racetrack level. NASCAR’s conflict of interest with regard to its dual role as competition organizer and track operator has raised questions about two other important decisions made by the France family. An infamous union-busting incident came after Big Bill France won a showdown with all the leading drivers who refused to race at Talladega Speedway because of safety concerns. Replacement drivers competed, and the race was won at far less than qualifying speeds—several years later, restrictor plates were added to slow cars down at Talladega and Daytona. France’s motives are suspect when we consider the huge investment his International Speedway Company had made at the track.98 Somewhat more ambiguous is the suggestion that newer tracks in which ISC has an interest in Los Angeles, Las Vegas, and elsewhere

103

104 Borrowing from NASCAR have been designed without sufficiently banked curves for exciting racing. We claim no expertise in racetrack design, but simply note that because the critique alleges that the tracks were designed—like the multiuse football and baseball stadia of the 1980s that proved so unpopular—for use by both stock cars and open-wheel racing, NASCAR is open to criticism that ISC’s interest in maximizing racetrack rental income trumped NASCAR’s interest in the optimal stock car venue. Because the principal focus of this book is on structural reforms to traditional leagues, we will not dwell on how best to solve this particularly complex issue related to stock car racing. The outcome of any particular complaint is likely to be fact-specific, which might include the extent to which NASCAR’s site selection decisions can be objectively justified; whether there is any evidence that NASCAR has enhanced or could enhance profits by adopting a suboptimal site selection scheme to favor its partially owned subsidiary; and the existence of efficiencies either to NASCAR or ISC from overlapping ownership. For us, the critical point is that when this controversy is contrasted with the demonstrated success that NASCAR has shown as an independent competition organizer, the NASCAR experience dramatically supports the need for structural reform of the other major North American professional sports leagues. Even if NASCAR site selection is an area warranting some sport-specific reform, this problem does not arise with regard to sports featuring match play, because teams and sites are tied together.

A Few Caveats We do not suggest that NASCAR is the perfect embodiment of consumer satisfaction. Like other sports leagues, NASCAR has monopoly power, and while many of its decisions seem to reflect superior skill and industry (to use the term for desirable economic behavior in antitrust law), other decisions may have had the principal effect of sustaining this power by excluding competitors. Most blatantly, NASCAR’s original point system was seemingly designed to punish drivers participating in non-NASCAR races. (Regulations imposed by an analogous competition organizer for Formula



Borrowing from NASCAR

One open-wheel racing, such as barring participating drivers from participating in rival competitions, were held to be illegal by European competition authorities.99) We discuss in Chapter Seven the need for ongoing antitrust vigilance in ensuring that any monopolist—whether an independent competition organizer or a club-run league—does not abuse its monopoly power. NASCAR also exercised its economic power with regard to labor. As a percentage of revenue, drivers and crews receive far less than their counterparts in other major sports.100 Because NASCAR differs from the other major sports in the huge investment in equipment required, the mere fact that drivers and crew make less is not proof of exploitation (just as the fact that the NFL, with a much larger roster than other major sports, pays a greater percentage of payroll to its players, is not proof that the NFL Players Association is too powerful). However, we think it logical to infer that highly skilled racing employees, who have never been unionized, are not compensated as well as their counterparts in other North American sports, especially with regard to matters such as pensions and injury protection. (This concern is not new. In the early 1950s, star driver Tim Flock observed that France “was gittin’ to be a millionaire and we was still eatin’ cornbread and buttermilk.”101) Moreover, it is clear why there is no union: on two separate occasions Big Bill France engaged in union-busting tactics that would appear to be illegal (once famously rebuffing an effort by the Teamsters Union by publicly declaring that “no known Teamster member can compete in a NASCAR race, and I’ll use a pistol to enforce it”102). Whether or not a union buster would have an easier time working for an independent competition organizer than for a club-run league, the other leagues that are the focus of this book all have established unions, and so this criticism of NASCAR should not detract from the applicability of the independent organizer model to other sports. To be clear, we do not claim that NASCAR’s economic structure was the sole or even the principal cause of NASCAR’s success in recent years. Nor, as NASCAR may be hitting a plateau in its dramatic increases in attendance and television ratings, do we suggest that its structure immunizes the sport from outside forces or internal blunders. Our review of NASCAR’s history,

105

106 Borrowing from NASCAR past and recent, suggests that the sport’s economic structure facilitated, rather than inhibited, intelligent management combined with skilled and charismatic athletes. A final caveat is appropriate with regard to an issue that is ambiguous economically though not morally: NASCAR’s very troublesome record with regard to diversity in general and treatment of African-Americans in particular. Several African-American drivers seeking to break into NASCAR decades after Jackie Robinson’s heroic debut in Major League Baseball faced comparable hostility. While perhaps unsurprising in light of the fans’ continued and well-accepted demonstration of affection for the flag symbolizing a treasonous rebellion fought to preserve slavery, progressive leadership from the all-powerful France family was not forthcoming for many years. Today, a variety of public statements by CEO Brian France, funding for an inner-city drivers’ program, and other initiatives have failed to overcome years of blatant hostility. As the focus of this book is economic, we note that this is one area where we have no reason to believe that economic structure would have mattered; that is, we have no evidence that our counterfactual board of stakeholders would have acted any differently. As with any well-publicized sporting competition, NASCAR receives its share of criticism from those who simply disagree with business decisions. A leading racetrack owner, for example, has suggested that the prize for winning individual races should be higher, and that NASCAR should maintain its “rebel” image by tolerating postrace fighting or other conduct that might not be appropriate in polite company.103 Others have criticized the nationwide expansion, believing NASCAR is abandoning its Southern “base” and the particular excitement of short-track races. Obviously, we academics are not in a position to judge these controversies. What we can say is that these criticisms reveal the balancing that a good competition organizer has to do (rewarding winners makes participants try harder but may discourage those who finish farther back; behavior appealing to longtime fans in Darlington, South Carolina, may turn off potential new fans in Chicago or Los Angeles) and, further, that an independent organizer has the proper incentives (unlike track owners interested only in maximizing revenue for their own races) to make the correct call.



Borrowing from NASCAR

Careful thinking about how sporting competitions are organized reveals the desirability of an effective competition organizer to set the rules of the competition. Auto racing’s experience with NASCAR playing the role of such an organizer, and establishing innovative rules that govern drivers, racing teams, and racetrack operators, illustrates our contention that the most effective organizer is one that is independent of those who participate in the competition. As Robert Hagstrom correctly observes, “NASCAR has become an example of the capitalist model working at its best. It is a sport that is still built on opportunities, not guarantees.”104

107

5

Borrowing from Soccer: Entry by Merit

A “coercive monopoly” is a business concern that can set its prices and production policies independent of the market, with immunity from competition, from the law of supply and demand. An economy dominated by such monopolies would be rigid and stagnant. The necessary precondition of a coercive monopoly is closed entry – the barring of all competing producers from a given field. —Alan Greenspan, “Antitrust” in Capitalism: The Unknown Ideal, ed. Ayn Rand, p. 68

Origins of the Structure of a “Closed” League The most exciting format for any competition is undoubtedly the single elimination knockout tournament. In this system teams are drawn against each other, and the winner of each contest progresses to the next stage. Consequently, the fear of instant elimination causes each team to play each game as if it were the final. Knockout tournaments demand a lot of commitment from the fans, hanging on the edge of the precipice as long as their team remains in the picture. Perhaps the ultimate example of this in American sports is college basketball’s March Madness, whose sixty-fiveteam elimination structure format has made it one of the most popular events on the U.S. sporting calendar. Likewise, the play-off system in the NFL has contributed significantly to the appeal of this competition, to the point where the traditional National Pastime—baseball—decided to copy the play-off format. Outside the USA, the world’s most popular sporting competition, the FIFA World Cup, is based on an elimination format for



Borrowing from Soccer

the last sixteen, as is the UEFA Champions League, the most successful soccer competition in Europe. Outside of team sports, the single elimination format is the most frequently used format in tennis, and is popular in golf and a number of other sports. In the world of professional team sports, however, the knockout format suffers a major drawback. Elimination means not only elimination from the sporting competition but also from revenue-generating opportunities. Professionals not only want money to play, they also demand a fixed and reliable income. A club seeking to attract a star player would be unlikely to succeed if it offered to pay only as long as the team remained in contention. But fixed wages with uncertain income is a recipe for financial catastrophe. This is one of the main reasons that the league format was invented by William Hulbert way back in 1876. Hulbert was the founder of baseball’s National League, and the structure of competition he created was a direct consequence of the failure of the National Association of Professional Baseball Players, which had been created in 1871. One of the many failings of the National Association was that teams did not have an obligation to play each other, thus leaving teams uncertain of the number of home games from which they could generate income.1 By contrast, Hulbert insisted that teams complete their schedules and was willing to expel backsliders from the league, recognizing the necessity of a stable income structure, not only to make the team financially viable but also to provide the owner with an appropriate incentive to invest in the team. 2 Other leagues have copied Hulbert’s structure of a closed league with a fixed number of teams. The modern structure of most professional team sports competitions represents a trade-off between these two conflicting incentives. On the one hand, league systems dominate most forms of competition where players are paid to compete (note that in NCAA March Madness the players are not paid, and that while players receive a small amount of compensation for representing the national team in the FIFA World Cup, such payments are secondary to the national pride and media exposure value associated with representing one’s country). On the other hand, most leagues have adopted a play-off format for determining the champion because of the extra excitement this creates.

109

110 Borrowing from Soccer An additional benefit of using play-offs in a league system is that it keeps more teams involved in the competition for longer. If the champion is simply decided by the team with the highest win percentage, then teams that fall too many games behind lose motivation. The more teams that qualify for the play-offs, the greater the incentive to compete until the end of the season, and the greater the attraction of the competition for fans. Of course, if every team qualifies for a play-off, then regular season competition becomes a series of meaningless exhibitions. Thus, the league has to create an appropriate balance of incentives, which keep as many teams involved as possible during the season while retaining real meaning for regular season competition. Major League Baseball exemplifies the dynamic balancing act that sports leagues maintain to maximize interest in the regular season competition and preserve a highly popular postseason play-off series within the context of Hulbert’s structure of a closed league with a fixed number of teams. Although the World Series is perhaps the most venerable play-off in the world of league sports, the concept was not extended until 1969 when, as a response to expansion, the National and American Leagues were each divided into Eastern and Western Divisions, thus creating the League Championship Series. In 1994 Major League Baseball underwent a further reorganization, creating three divisions in each league and allowing two play-off rounds for the league pennant (the fourth play-off place being awarded as a wild card to the team with the highest win percentage in each league). The result of this restructuring is that many teams retain a chance of competing for the World Series throughout most of the season. Throughout a season there are often at least two teams fighting for the divisional title, while a further five or six teams can compete for the wild card, so that it is not unrealistic for as many as twenty teams out of the thirty to be in contention until near the end of the season.3

Problems with the Closed League Format, and Entry by Merit as a Solution This format may well solve the problem of maintaining interest among postseason contenders sufficient to create a viable pool of stable income.



Borrowing from Soccer

However, the traditional system of closed leagues still results in two major problems that beset sports fans. First, the closed league gives owners monopoly power over the number and location of major league franchises, permitting them to blackmail local communities into stadium subsidies and other forms of corporate welfare. Second, by guaranteeing current owners a perpetual right to compete in the premier competition, it permits owners to invest minimally in their clubs and wallow in mediocrity, while effectively riding on the backs of their fellow owners all the way to the bank with the profits necessarily derived from participating in the major league competition. The results of corporate blackmail documented in Chapter One are due to the owners’ power to restrict the entry of new franchises. Membership in the league is in the gift of the existing members, who typically grant the right of entry only in exchange for a substantial fee. The power to restrict entry is always a substantial source of economic profit in any business. The owners’ scheme of relocation and ransom can only work because viable markets for major league sports are deprived of an opportunity to obtain a major league franchise. Thus, owners exploit not only taxpayers in communities with teams but also communities without teams, who are deprived of any means of obtaining major league competition in their area. The result is the phenomenal appreciation of franchise values in MLB and the NFL. This is fundamentally different than the structure of team sports in the rest of the world, where membership in the league is contingent on success. As we will detail, public subsidies are virtually unheard of in English soccer’s Premier League, where the bottom three clubs each year are relegated to a lower-tier competition, and where three new clubs enter the top-tier competition each year without any payment of bribes to the other clubs, having invested instead in sufficient talent and coaching to have demonstrated on-field success at the lower level. As a result, although Manchester United’s franchise value compares favorably with any team in North America, and the average MLB team averages approximately 2.5 times the income of an average Premier League team, the least valuable MLB franchise is worth approximately seven times more than an English club threatened with relegation.4 Entry by merit is practiced by individual sports in the United States, and

111

112 Borrowing from Soccer there is no reason why it could not be adopted for team sports here as well. Imagine the public reaction if the current participants in the PGA Tour all agreed that henceforth they would only participate in tournaments with current cardholders, or anyone else to whom the cardholders sold their rights. Entry by merit also has significant benefits for enhanced fan appeal, not only for each sport’s premier competition but for a new second-tier competition as well. The risk of relegation would add an exciting component to the major league season, as teams whose fans now recognize by midseason that they have no chance of making it to the play-offs would still have to fiercely compete to remain in the major leagues. Although, as noted, the MLB structure permits as many as twenty teams to remain in contention for postseason play for most of the season, in order to preserve any incentive to compete during the season, there must be about ten teams whose season becomes essentially meaningless as the schedule winds down. Teams that fall out of contention have no reason to win, and fans have few reasons to turn up, unless it is to see rival teams that still have something at stake. This “discouragement” effect is visible in the attendance data. One way to track the effect is to compare the attendance figures game by game for bottom teams and compare them with the rest. It is not surprising that teams near the bottom of the league tend to get lower attendance figures than the rest; many fans do not like losers. Take, for example, the 1996 MLB season, which was the first full season after the strike (the 1995 season was shortened) and with the new play-off system in operation.5 The average attendance stayed steady at around 27,000 throughout the season. If we examine attendance for the five teams with the lowest win percentage game by game throughout the season, these teams averaged only 20,500, with the rest of the (more successful) teams averaging 28,000. Significantly, although this latter figure held steady throughout the season, the bottom five teams averaged around 21,000 in the early part of the season, but by the final ten games the bottom-dwellers averaged less than 15,000 per game. In other words, going out of contention deprived weak teams of around one quarter of their support. To give a concrete example, the 1996 California Angels started the season



Borrowing from Soccer

in disarray, having suffered the worst collapse in the club’s history by losing a lead of eleven games the prior August to tie the division with Seattle, and then losing a one-game play-off 9–1. The problems of the team were compounded by the uncertain relationship between the aging owner, Gene Autry, and the minority shareholder, the Disney Corporation. The threat of relocation was also looming, given that the L.A. Rams had cited the aging Anaheim stadium as a prime reason for their move to St. Louis. Despite all this, the team managed to hold its own in the early part of the season, and at the beginning of May they were vying with the Texas Rangers for the lead in the division. Then came a slump followed by a recovery, so that by the beginning of July they were averaging exactly .500. Throughout this period the team drew over 23,000 on average, even managing 24,000 in June. From July onward, however, another slump set in. Attendance held up, but the win-loss record fell away to only .449 in August, and then the crowds started to thin. In August they drew down only 21,000. For the last ten home games the Angels barely averaged over 18,000, finishing last in the division 19.5 games behind the Rangers. This loss of attendance involves a significant loss of income for the team concerned. According to the popular Fan Cost Index produced by Team Marketing Report, the cost in 1996 for a family of four going to the game was around $90. Considering that for the last ten games the average attendance was about 5,000 fewer than for the rest of the season, this equates to lost revenues on the order of $1.1 million, or about 7.5 percent of the club’s gate income for the season. If we add potential losses in media income due to reduced interest of advertisers, it is clear that not being in contention can create a significant financial dent for the team owner. (At the same time, while these revenue losses are significant, they are not so great as to justify the expenditure of huge sums to acquire highly prized talent sufficient to boost the club back into contention.) Equally, other teams in the league can suffer because they are deprived of an opponent committed to making a game of it. All around, a system in which some competitors have nothing to gain does not make for a great contest.

113

114 Borrowing from Soccer

How Entry by Merit Works in Soccer In the soccer world they do things differently. Teams performing badly in the league seldom suffer a loss in attendance once they are out of the contention for the title. If anything, teams at the bottom of the league tend to see their crowds get bigger as the season draws to a close. This is not some sentimental attachment to the underdog; rather, it is a hard-nosed calculation based on the life-and-death struggle that is the promotion and relegation system. In this system, the worst teams in the league are kicked out at the end of the season and replaced by the best-performing teams in the next division down. No argument, no negotiation; failure is brutally punished. In the English Premier League the bottom three out of twenty teams are relegated at the end of each season. Consider the Bolton Wanderers. Hailing from a smokestack town in Lancashire (in northwest England, near Manchester), the traditional powerhouse of English soccer, this venerable team has seldom had much success.6 The 1980s were a bad decade for them, and at the beginning of the 1990s they languished in the rough equivalent of AA baseball, the Third Division as it was then called. But then things started to look up. At the end of the 1992–93 season they achieved promotion to the second tier, and after only two seasons at this level they were promoted to the Premier League, at the end of the 1994–95 season. In the lower tiers, the first and second promotion places are awarded to the teams with the highest number of points scored (three for a win and one for a tie), but the third spot is allocated on the basis of play-offs among the next four ranked teams—this is how Bolton won their promotion. The 1995–96 season started with two defeats, and the club was soon routed to the bottom of the league. After eight of the thirty-eight regular season contests had been played, they had only one win and one tie to their name. By the midpoint of the season, they had only ten points (two wins and four ties), and they were beginning to fall adrift of the next team up. Now, Bolton fans probably never held a realistic hope of winning the Premier League Championship, but after only twenty-four games it was a mathematical impossibility. There are no play-offs for the title in the Premier



Borrowing from Soccer

League, but teams finishing in the top six ranks qualify to participate in pan-European competitions such as the UEFA Champions League and the UEFA Cup. Participation in these competitions is both lucrative and highly prized by the fans, so there is considerable interest in achieving these places. While it might still have been mathematically possible to gain one of these places even at this stage, no one could have been in any doubt that Bolton had missed out on a European adventure. Had Bolton been part of a closed U.S.-style league, the fans would pretty much have given up at this point. However, what happened next showed the value of the promotion and relegation system. Backs against the wall, Bolton miraculously started to win games. After their dreadful early run they managed to win four of their next six games. Of course, this gave them no chance of winning any honors, but it did suddenly put them back in contention with three other teams at the bottom of the division. With only six games to go, they were one win behind the next two teams and two wins from seventeenth place and survival. Not surprisingly, attendance rocketed. In the early part of the season they were drawing sell-out crowds of over twenty thousand. By the middle of the season they were barely managing sixteen thousand. For the last ten games of the season they averaged gates of nearly nineteen thousand. Sadly, on this occasion, things did not work out for Bolton. They won only one of their last seven games, finished bottom of the league, and were relegated. However, before dismissing this as a story of false hope and unrealistic expectations, consider the following. Bolton may have been relegated, but they had a mathematical possibility of surviving until all but the last game of the season, and this undoubtedly served to maintain the interest of the fans. Furthermore, although Bolton proved to be out of their depth this season, they learned from their experiences and immediately won promotion back into the Premier League. And even though they were once again relegated in the 1997–98 season, they returned in 2001–2 and have so far remained in the Premier League for five consecutive seasons, averaging crowds that are 35 percent higher than they saw in the early 1990s. Promotion and relegation is a hard school, but it certainly breeds teams that never give up trying.

115

116 Borrowing from Soccer The mere fact that the promotion and relegation system keeps teams trying until the end of the season does not in itself prove that it is a better system. Most people tend to view the issue in black-and-white terms. Outside of the USA, the promotion and relegation system is used in most sports leagues, professional and amateur, and people raised in such a system find it unimaginable to live without it. In the same way, most Americans (in our experience) react with considerable skepticism once the concept has been explained to them. As with any good argument there are pros and cons on either side. Although entry by merit had its origins in the specific history of English soccer, this history does not suggest that promotion and relegation is somehow especially suited to the rest of the world and ill suited to North America. In the rest of this chapter we discuss these pros and cons. Before doing so, however, we should first recognize that there is almost no chance of teams in a closed system voluntarily adopting such a system. Indeed, the reverse is true: teams in a promotion and relegation system often consider ways of reducing its impact or eliminating it altogether. The reason for this is simple: whatever the benefits of promotion and relegation to the quality of league competition or the entertainment of fans, the system is not in the interests of owners. Entry by merit deprives them of the ability to make money from bribes to enter the competition and forces them to constantly reinvest in team quality to ensure their club’s continued eligibility to participate at the highest level. Why would any self-respecting would-be monopolist want that?7 One man who thought he could make money in soccer was Alan Sugar, Britain’s answer to Donald Trump (he is the boss in the British version of “The Apprentice”). Sugar is a born trader: he began earning money at school and by his early twenties had built up a significant company, Amstrad, trading in electrical goods (the first three letters are his initials). His big break came with the advent of satellite TV in the United Kingdom at the end of the 1980s, as his company made and sold the dishes people needed to subscribe to Rupert Murdoch’s Sky Broadcasting service. Sugar was paid directly by Sky, which subsidized the cost of installing the dish as a means of buying an audience for the new subscription service. This obviously made



Borrowing from Soccer

Sugar close to Murdoch’s broadcast business, and they became even closer when Alan Sugar decided to buy Tottenham Hotspur, a major North London soccer club that had fallen into financial difficulties. This gave Sugar a seat at the negotiating table when the broadcast rights to the Premier League were sold, and several commentators in the know have asserted that Sugar’s advice was crucial to Sky winning the rights in 1992.8 This is in turn secured a significant subscriber base for Sky and, of course, increased demand for satellite dishes. By all accounts, Sugar was somewhat nonplussed to discover the responsibilities involved in running a major soccer club. 9 He claimed that he had always had an interest in soccer, but on several occasions interviewers found his knowledge of the club’s distinguished history to be somewhat less than encyclopedic. From the start, he lectured fans about the economic realities of the business. It was not possible, he told them, to run a soccer business by spending every spare pound of revenue on hiring the next would-be Pele or Beckham. Businesses, he told them, were there to make money, and if that meant that the team would not do so well in the league, then so be it. Predictably, this did not go down well with the fans. He could not be described as a popular owner (but then Sugar has never cared much for popularity) and seemed rather to enjoy the role of stern father teaching his children the realities of life. In one of his more memorable lectures he said, “I look at some of our fans as children. They’re always asking their dad for new toys and you have to explain you can’t afford them. I’m hoping our fans will grow up with me and understand that my medicine is good medicine.” One might imagine this kind of talk going down well at a gala dinner for baseball team owners. His main preoccupation in his public pronouncements was the behavior of his fellow team owners and managers. Why, he insisted, could they not be more like him, and control their spending? He confessed to be baffled by some of the decisions of his rivals. For example, when Newcastle United paid a record £15 million to purchase one of England’s top strikers, Alan Shearer, Sugar reportedly said, “Maybe I’ve lost the plot somewhere. . . . I’ve slapped myself around the face a couple of times but I still can’t believe it.” Most memorably, he coined the phrase the “prune juice effect,” whereby

117

118 Borrowing from Soccer every penny that came into the coffers of the Premier League clubs seemed to leave again as the wages of star players. In his view, only a proper sense of self-control could put a stop to this economic madness. Sugar gained control of Tottenham in 1991 and immediately sold the team’s star player for about $10 million in order to reduce the club’s debt. Refusing to purchase replacements, the club cut its spending relative to its competitors. True, Tottenham’s wage bill doubled over the next five years, but this was at a time when the wage bill at other Premier League clubs trebled. Sugar’s strategy was clear: he was willing to accept a lower position in the league (and the ire of the fans) in order to make some money. Because of fan loyalty (discussed in Chapter One), which makes owners keenly aware that market retribution will not be swift, however angry fans become, the fans continued to purchase tickets to attend matches at Tottenham’s stadium. Clearly, this is a strategy well understood by any North American major league team owner. The difference is that Sugar’s strategy came spectacularly unstuck in the 1997–98 season. Having maintained a comfortable midtable position for five years, the club suddenly found itself sinking into the relegation zone. By the middle of the season they were in sixteenth place, and when the general manager resigned it was clear that he laid the blame for their troubles on the lack of funds to buy players. Sugar was facing the threat of a financial meltdown. Teams in the second tier generate much smaller crowds, their TV rights are worth a tiny fraction of the Premier League rights, and it is not unrealistic to see income fall by as much as 50 percent with relegation. Financial failure becomes a realistic possibility when player wages can no longer be paid, and rival teams, which in normal circumstances will pay good prices to acquire Premier League standard players, become noticeably more reticent when there is the prospect of a fire sale. Alan Sugar then did precisely the thing that he said other clubs were crazy for doing: he went out into the market and bought. Only now, with his having a reputation for not wanting to win, players were noticeably more circumspect about signing on, fearing that it might have an impact on their career prospects. To get players, he therefore had to pay a premium, which



Borrowing from Soccer

made his strategy even more expensive. In the end, Tottenham avoided the drop, and not long afterward Sugar sold the club, declaring himself relieved to be leaving the limelight. Overall, he realized a tidy capital gain, as he had bought the club at a knockdown price and investors, by the end of the 1990s, were seriously thinking about soccer clubs as investment opportunities given the huge increases in broadcast income that were being realized. However, this example illustrates how a promotion and relegation system removes the safety net of a guaranteed slot in a monopoly league; like most other industries, profits are not a given but more likely a reward for success. The story also explains why owners of clubs in a closed system are extremely unlikely to vote for the introduction of the promotion and relegation system.

Origins of Entry by Merit in English Soccer If no owner would ever vote for it, how did the promotion and relegation system ever get started? The answer is to be found in the circumstances surrounding the foundation of the English Football League, the first-ever soccer league, way back in 1888. The English League was, as best we can tell, modeled on baseball’s National League.10 Contemporary accounts show that English football clubs were well aware of the league system in baseball and were persuaded of its merits. However, one critical difference around the foundation of these leagues was the general climate surrounding competition in each sport. In 1876 baseball was in crisis; some even talked of it dying out altogether. The major problems were gambling and match fixing; other problems included the frequent refusal of teams to play games they had agreed to schedule and regular bankruptcies provoked by unrealistic wage rates paid to the players. William Hulbert and his fellow founders saw themselves as saviors of the sport and believed their main hope of success lay in distancing themselves as much as possible from the existing clubs and organizations. Within this context, a closed, exclusive league seemed natural. In England the situation was different. The Football Association (FA), founded in 1863, had established a successful competitive structure built

119

120 Borrowing from Soccer around single elimination tournaments, the most important of which was the FA Cup. These cup competitions generated significant interest from paying spectators, and the FA Cup final was already established as the climax of the season. The FA had also created the concept of “international competition”; although at the time this meant only games between England and Scotland, it nonetheless formed the basis for contests that evolved into the FIFA World Cup. The twelve clubs that assembled to form the Football League, therefore, did so not in the context of a sport in crisis but of one that was booming. The founder clubs intended to create an additional form of competition that would provide a more stable source of income but not one that would supplant existing competitions, which their growing body of fans enjoyed. Thus the founders were careful to show due respect to the FA and to defer to all its rulings. They also made it clear that membership would be based on merit and that teams from outside the league would be permitted to apply. It may be that they were motivated by altruism to share the benefits of their creation with other members of the “football family,” but a more self-interested motive also existed. With only twelve clubs in the Football League, several of the larger clubs were excluded from the competition. The Football League was an immediate success, and within a year several alternative leagues were formed. By 1890 over sixty teams were involved in some kind of league competition. The Football League could not go to war against their rivals, which would have led to exclusion from the FA and the lucrative FA Cup. Instead, by promising inclusiveness, the Football League clubs ensured that their league would be accepted as the major league and that all other teams would aspire to entry. In other words, the clubs were obliged to face the risk of exit in order to secure a higher probability of long-term success. At the end of the first season the bottom four teams in the league were obliged to reapply for inclusion in the league, while teams from outside were permitted to apply. The decision was taken on a majority vote of the league members, and perhaps not surprisingly all four incumbents were reelected. In the following season, however, one club, Stoke, was voted out of the league and replaced by Sunderland, a move that significantly enhanced the league’s status. In the league’s third season it was decided to add two



Borrowing from Soccer

additional teams (one of which turned out to be Stoke), and all the incumbents were reelected. Then at the end of the 1891–92 season the league decided to expand to a second division, mainly by swallowing up the dominant teams in the rival Alliance League (in the previous season an all-star game between the two leagues had ended in a tie). The move was not intended to be a marriage of equals. Given the Football League’s status as the premier competition, its clubs were unwilling to compete on an equal footing with the Alliance clubs, even if the Alliance clubs mainly aspired to play alongside the league clubs. The compromise solution was to create a hierarchy of divisions, and in 1892 the league voted to create the First Division, comprising sixteen teams (mostly the league’s founder members), and the Second Division of twelve (mainly teams from the Football Alliance, which then folded). Having decided to create a hierarchy, the league then considered a mechanism to permit mobility within the hierarchy. Initially they agreed on a system known as “test matches.” The last decade of the nineteenth century saw a variety of different means used to determine eligibility for the First Division. The league experimented with a postseason play-off between the bottom teams in the First Division and the top teams in the Second, and a “minileague” roundrobin between these teams, finally settling in 1899 on a rule of automatic promotion and relegation based on final league position. This, then, is the origin of the promotion and relegation as it is known in most of the world’s sports leagues. The reason the system spread is mostly to do with the international popularity of soccer. By the end of the nineteenth century the game was already popular in much of Europe and South America (and also, in fact, on the East Coast of the United States; indeed, in 1894, National League baseball clubs started their own soccer league as a winter alternative to the newly popular American version of football). In almost every country apart from the United States the institutions of English football, as well as the game, were copied. National associations were established in the Netherlands and Denmark in 1889, followed by New Zealand in 1891, Argentina in 1893, Chile, Switzerland, and Belgium in 1895, Italy in 1898, and Germany and Uruguay

121

122 Borrowing from Soccer in 1900.11 A world governing body, modeled on the FA, was established in 1904 to standardize conduct and promote international competition. Most countries created a national cup competition modeled on the FA Cup, and a league competition, including the promotion and relegation system. Other team sports in Europe and elsewhere adopted the system, including European basketball, handball, field hockey, European ice hockey, rugby league, and in more recent times cricket and rugby union. Outside of the USA, almost the only sporting nation that did not automatically adopt the promotion and relegation system was Australia, where their version of football, called Australian Rules, bore more resemblance to the American closed league system. In 1998 the European Commission, in reviewing the operation of professional and amateur sport in the European Union, went so far as to identify the promotion and relegation system as “one of the key features of the European model of sport.”12

Weighing Objections Of course, being widely applied and approved in the rest of the world does not prove that the system is ideal any more than its absence from the U.S. major leagues proves that it is not. We have so far set forth a variety of benefits that would accrue from restructuring North American sports to ensure entry by merit. This reform would • Remove the power of current owners to blackmail communities into • • •

•

massive stadium subsidies Require mediocre major league teams to invest in player and coaching talent to avoid relegation to second-tier leagues Provide a means for fans in smaller cities to support talented management and rise to major league competition Impose competitive pressure on owners of franchises in large cities to maintain high quality lest the club face competition from a new club in their same area Provide a higher level of second-tier competition than now exists with minor league “farm” teams



Borrowing from Soccer

Of course, a balanced assessment of our proposal requires careful consideration of the kinds of objections frequently made by Americans when the system is first explained to them. In our experience these objections usually fall into three categories. First, skeptics worry that the system results in unattractive competitive imbalance as small town teams rise up, get crushed, and are relegated. Second, they fear that the possibility that some venerable major team might be relegated will lessen the quality of the major league competition. Finally, observers who ask the policy-related question often posed by eminent sports economist Roger Noll—Why is this proposal worth an adult’s time?—note that the owners will never adopt this suggestion. We address each of these concerns in turn.

Objection #1: Competitive Imbalance What’s the point of allowing small town teams to compete with the big city teams? They just get crushed and sent back down after a season or two, bringing more competitive imbalance into the league into the bargain. Although this is a common concern when Americans are invited to import the promotion and relegation system, the European experience suggests that it is simply not the case. To give a concrete example, of the fourteen teams that were promoted in the five English Premier League seasons from 2001 to 2006, only six were relegated back again the following year. Indeed, of the seven recently promoted clubs that remain in the Premier League, the average place in their first year of promotion was between eleventh and twelfth of twenty clubs. On average, the newly promoted clubs finished almost four places higher in the standings than the clubs they replaced. This may not prove that the promoted teams fared better than the relegated teams would have under the same conditions, but it certainly refutes the argument that these teams are mere cannon fodder. In contrast, over the same five-year period of MLB, only one team that finished in the bottom three the prior season recovered to success the following year (San Diego in 2004), and these would-be candidates for relegation finished three places higher than their cellar-dwelling status the prior season—thus performing worse than their English replacement counterparts.13 There is no evidence that competitive balance is worse in European soc-

123

124 Borrowing from Soccer cer leagues, in the sense that the outcome of individual games is more predictable, even though European leagues have minimal revenue sharing and have yet to adopt a variety of balancing rules, such as roster limits, used in North American leagues.14 The main reason for this was mentioned above: in a promotion and relegation system teams near the bottom try harder and get better results. One way in which they demonstrably try harder is in how much they spend. If we compare the share of franchise income spent on players, the more successful MLB teams tend to spend a bigger share. In 1996, the top fourteen (measured by their regular season winning percentage) spent 55 percent of their income on players; it was roughly the same amount at the bottom fourteen. But if we compare the top five to the bottom five teams, the successful teams spent on average 57 percent of their income compared to only 41 percent spent by the losers. In other words, the winners are trying just slightly more than the runners-up, but the losers weren’t trying very hard. In a promotion and relegation system the reverse tends to be true: top teams spend a smaller proportion of their income compared to the bottom teams. For example, in the 1995–96 Premier League season the top ten teams spent only 50 percent of their income on players, while the bottom ten spent 59 percent. The top five teams spent only 46 percent of their income on players, while the bottom five spent 58 percent.15 In a promotion and relegation system, teams at the bottom fight harder because they have much more to lose. As a result, individual games tend to be more balanced rather than less balanced. In addition, the system pro­ duces some particularly interesting games. For example, an end-of-season clash between a team challenging for the play-offs against a team at the bottom may not offer much of a spectacle in a closed league, but in a promotion and relegation system it can be hugely entertaining, and not infrequently the underdog fighting to survive will triumph. For example, in 2007 West Ham were sitting in a relegation slot and had to play their last match of the season against the runaway league champions, Manchester United. Away from home, in front of the largest crowd in the Premier League (seventy-five thousand), West Ham pulled off an astonishing 1–0 victory. At this point one might imagine a AAA baseball team joining the majors



Borrowing from Soccer

and then start to wonder how players from this level might compete given the scarcity and cost of free agents. The dynamics of the labor market in a promotion and relegation system are quite different. Given the differing levels of income in each division, teams that are relegated usually need to shed players quickly in order to balance their books, thereby helping to create a market for players that can be acquired by promoted teams. (There is one exception, which we discuss under Objection #2.) It is not quite a simple swap, but the important point is that almost all the best players appear in the top division: it is the clubs that move up and down while the players move from club to club. In the American context, one might then ask where these lower-level clubs could be found. In baseball, the minor league teams are now owned by the majors, while the principal supply of NFL talent comes from college football, and in basketball and ice hockey much of the talent is imported from abroad. Right now, it would appear that there are no teams to be promoted. This again runs into the incentive issue: given the profit implications, there is little reason for the major league teams to create conditions for a promotion and relegation system to work. If they wanted to, it would be possible to create a tiered system. Moreover, once the system was created, owners would emerge who were willing to build up new teams in the hope of one day playing in the majors. Perhaps the existing majors could be divided into senior and lower tiers. Create the conditions for it, and competition will inevitably emerge. Entry by merit also responds to one of the major pillars underlying a general concern about competitive balance or the lack thereof—the perception that teams with exclusive or semiexclusive franchises in huge cities are able to continuously dominate the league simply because of these advantages. Promotion and relegation eliminates this territorial exclusivity; thus, as several London teams suffered on the field, the owner of Harrod’s fashionable department store acquired a second-tier team, Fulham, and made sound investments to push it into the Premier League.

Objection #2: Quality of Major League Play How can it be good for the top league to see its best teams relegated to a lower level? Won’t the quality of competition at the highest level suffer?

125

126 Borrowing from Soccer Imagine if the New York Yankees were relegated to second-tier baseball. Given that there seem to be at least as many Yankee haters as there are Yankee fans, this situation might please a majority of fans. But the owners of other major league teams would not be pleased. When the Yankees come to town they draw big crowds, so a visit from them represents a substantial financial windfall for most of their rivals. Of course, against this must be offset the enormous gain this would represent for second-tier baseball, as well as the potential gain to fans in the larger New York metropolitan area if the Yankees’ demise spurred new closer-to-home major league contenders in Brooklyn or suburban areas. Nonetheless, on balance the relegation of the Yankees would probably not be altogether beneficial to the long-term health of baseball. However, the important truth is that such things seldom happen in a promotion and relegation system. In England, Manchester United, Arsenal, and Liverpool have dominated competition over the last twenty-five years; in Spain, Barcelona and Real Madrid have dominated; in Italy, AC Milan, Juventus, and Inter Milan have dominated. None of these teams were relegated in this period.16 More interestingly, there have been some periods when teams have risen from relative obscurity, thanks to the acquisition of some special talent or the financial support of a rich local benefactor, only to fall back into their former obscurity. If anything, the dynasties in a promotion and relegation system last longer, largely because the biggest teams are unwilling to share revenues or even up competition for talent, thanks to the terror of relegation. Nonetheless, these teams face a constant flow of new challengers, and this helps to maintain a healthy and exciting level of competition. When the rare relegation of a large-market team does occur, the result is hardly a huge loss for the sport. For example, in 2001 Manchester City was relegated; the club responded by increasing its payroll from £18 million to £24 million,17 thus winning the second-tier competition. The club has remained in the Premier League since its promotion in 2003. If, as we propose, there existed an independent organizer of the league, which aimed to create the most attractive competition feasible, then it might well be the case that this organizer would choose to undermine sporting



Borrowing from Soccer

dynasties like Manchester United or the Yankees. If so, this would be based on a hard-nosed calculation of the interests of fans as whole. As long as the incentives of the organizer are properly aligned with the general interest of fans, we see no reason to be concerned about whether dynasties survive or become extinct.

Objection #3: Feasibility The owners will never wear it. We have already argued that the intense sporting competition induced by promotion and relegation is financially bad news for the owners, and therefore they will never vote for it. In particular, as academic critics have been arguing for the last fifteeen years, owners have exploited their monopoly in North America by threatening to relocate unless local taxpayers provide a new stadium. Such threats are more or less unknown in the promotion and relegation system, since every town has at least one team, and larger towns have many. Promotion and relegation permits entry into the market for the top level of competition, and so no locality would feel it necessary to poach someone else’s team. If investments in success are to be made, they can be devoted directly to providing a better team rather than to unnecessary capital spending. The fundamental point that we have tried to make in this chapter is that promotion and relegation is a potentially welfare-enhancing improvement over the closed structure of the major leagues but has virtually no chance of being implemented by a committee of club owners. At this point the reader might still be skeptical about our arguments; this is, after all, a subject on which reasonable people might agree to differ. However, the decision as to whether to have such a system will never be based on considerations of overall public welfare; under the current governance structure in sports, adoption or rejection turns entirely on what makes more money for the owners. Almost everyone agrees that the major leagues are monopolies, and monopolists do not vote for competition any more than turkeys vote for Thanksgiving.18 This is why our book is entitled “Fans of the World, Unite!” Although we hope that the insights contained in Chapters Three, Five, and Six of this book will have some appeal to our friends among club management, ulti-

127

128 Borrowing from Soccer mately the fundamental elimination of monopoly power will have to come from public pressure. Hence we declared in Chapter One the proposition that “if those who control our sporting institutions will not Act to reform their institutions,” then democratic governments, created to promote the pursuit of happiness of its citizens, should mandate such reform.

6

How a Restructured Sports League Would Work

But each specific historical form of this process further develops its material foundations and social forms. Whenever a certain stage of maturity has been reached, the specific historical form is discarded and makes way for a higher one. The moment of arrival of such a crisis is disclosed by the depth and breadth attained by the contradictions and antagonisms between the distribution relations, and thus the specific historical form of their corresponding production relations, on the one hand, and the productive forces, the production powers and the development of their agencies, on the other hand.

—Karl Marx, Capital, vol. 3, ch. 51

Up to this point the writing of this book was easy, since we were largely doing what academics do best, namely, criticizing others from the safety of our ivory tower. However, we were not just being critical for the sake of it: we genuinely believe that there is a better way of doing things, and in this chapter we lay out one version of that better future. In doing so, we draw on the analysis of the first five chapters. In the first two chapters, we explained how the traditional ownership structure of major league sports is inefficient. We argued that the structure not only ends up exploiting fans and players but that it can do so in a way that benefits no one. Many people have argued that the major leagues are monopolies, which act against the public interest. Our point is that they are lousy monopolists: they not only fail to promote the sport in the best interests of fans, but they often fail to organize themselves in a way that

130 How a Restructured Sports League Would Work will maximize even their own narrow self-interests. We have identified the principal sources of this inefficiency as the lack of meaningful marketplace rivals and that owners of teams control the organization of the sporting competition. If competition-organizing functions were separated from team-management functions, we believe that the result would be betterorganized competitions. In Chapters Four and Five we showed how some of the ideas we advocate are already incorporated into the organizational structures of existing sports tournaments. In Chapter Four we showed how NASCAR developed using an incentive structure for drivers based on the separation of competition organization from racing. In Chapter Five we showed how the promotion and relegation system practiced in most of the soccer world maintains consistent excitement for the fans of participating teams. In this chapter we chart one version of the practical steps that would need to be taken to make these reforms a reality. In doing so, we have sat down with a clean sheet of paper and developed a set of arrangements that would implement our two main proposals: the separation of tournamentorganizing functions from participation in the contest itself and entry by merit. This chapter should give the reader a clearer idea of many of the implications of our claim. Needless to say, the world outside of the ivory tower is a dangerous place. By putting forward positive proposals rather than relying on carping, we open ourselves up to criticism in terms of desirability and practicality. One response to our blueprint would be to say that one didn’t like the sound of our brave new world. That would be fair enough, although of course we think that most people will, on reflection, see the advantages of what we propose. Perhaps a more likely response is that the system sounds good in theory but won’t work. We have spent some time and trouble thinking through the different problems that can arise, and this chapter explores some of the practical problems our scheme would likely encounter. Of course, even an antitrust lawyer and competition economist do not possess a monopoly of wisdom; maybe you the reader might see a better way of achieving our ends (and if you do, we would be happy to hear from you).



How a Restructured Sports League Would Work

Setting It Up The central plank of our proposal for reform is that the club owners who currently run their sports in their own interests be required to sell the assets necessary to reorganize the competition into a separate corporate entity. This entity, call it MLB, Inc. or NFL, LLC (here we will call it “League Inc.”), would, like NASCAR, hire the commissioner and other senior league officials, and would be run by a board of directors designated to maintain the confidence of investors and to promote the overall profitability of the sport. The clubs would no longer hold any financial interest allowing them to control the governance of League Inc. In exchange for losing control of a substantial portion of the business that they currently own within an integrated structure, the existing club owners would enjoy a significant capital gain from the proceeds of the sale of stock in League Inc., since it is the clubs that would be selling the shares. Moreover, it would not be inconsistent with our proposal for current owners to continue to share in the future profits of League Inc. with nonvoting equity investments. Here is one way this proposal could work. Current owners could create League Inc. as a separate corporate entity with a relatively small percentage of outstanding shares created as voting stock and most of the shares retained by club owners as preferred nonvoting stock. Under this scheme, current club owners would profit by receiving cash from the proceeds of the offering and by realizing potential capital gains from the appreciation of their preferred shares. Owners would retain ownership in their clubs, although obviously the franchise value of the clubs would be substantially reduced under this restructuring. Because reaping the benefits of vertical separation requires that club owners’ investment in League Inc. be nonvoting, the marketability of the preferred stock can still be facilitated by making it immediately convertible to voting stock if acquired by anyone not involved with club operations. Thus, once the market price had been established after the initial public offering, club owners could gradually sell off their nonvoting stock and capture almost all of the surplus from the restructuring. Alternatively, in light of the continuing growth of the value

131

132 How a Restructured Sports League Would Work of sports franchises, club owners could hold on to their stock, which, along with the value of their franchise, would continue to appreciate in value (MLB franchise values have tripled in the last decade). Alternatively, the initiative to restructure might come from outside the league. Under this scenario, a relatively small group of investors might form a new entity, which would initially be closely owned, combining those investors with sizable assets with those knowledgeable about the sports business. League Inc. would then tender an offer to acquire those rights necessary to organize the competition from current club owners. If an initial offer was not accepted by the three-quarter supermajority required by most league constitutions, the outside investors would need to negotiate with individual club owners in order to secure enough willing sellers. Once the tender was accepted, League Inc. could then enter into franchise agreements with clubs, and a collective bargaining agreement with the union. With the new structure in place, the owners could then turn to public equity markets, both to realize a gain on their successful organizational efforts and also to refinance debt or personal assets required to provide the initial cash payments to current owners. Now, few would contest the proposition that the owners of major league franchises are businessmen through and through, and therefore all objections to our proposal can be rolled up neatly into a single question: “If this is such a great idea, why haven’t the owners done it voluntarily?” Some professors of finance have made this point in the most forthright way possible. If we were right, they tell us, it would have happened already. This is a powerful argument, even if somewhat tarnished by the ridicule of the wider world (according to the famous joke, two professors of finance walk down the street and spot a $50 bill on the sidewalk; one of them is just about to pick it up when the other says, “Don’t bother, if it were really there someone would already have picked it up”). At the very least, it is incumbent on us to explain why it appears that money is currently being left on the table. If there are big capital gains to be made from restructuring the major leagues, then there are also big obstacles. Perhaps the biggest obstacle to voluntary restructuring is one we have already identified in criticizing the



How a Restructured Sports League Would Work

existing structure. With club-run leagues, huge transactions costs are involved in getting owners who control the competition to agree on how to divide the profits from dynamic innovations. Unlike joint ventures in other industries, monopoly sports leagues are insulated from marketplace pressures to reform inefficient business operations. In many other industries, competition from rivals forces each competitor to operate as efficiently as possible or face extinction. Even in markets where competition is not vigorous there exists a “market for corporate control.” An investor who identifies inefficiencies can offer shareholders a premium to sell, while still anticipating significant profits from completing a successful reorganization. Our argument is that transactions costs are likely to be an obstacle to making the league system efficient. And even though a promise of cash today and the opportunity to share in the gains from a more profitable business operation in the future provide incentives for parties to overcome transactions costs, the cost may still be greater than the incentives so that efficient restructuring does not happen. Thus, while corporate finance experts can offer myriad ways to implement the creation of League Inc. as a separate business entity, it does not mean that the owners would unanimously agree to do so. The assignment of rights necessary for League Inc. to organize a sports competition efficiently would most likely prove complicated. Even securing consent of a supermajority of club owners to change the league constitution would involve the difficult task of distributing the proceeds among the current owners. Faced with the cost of organizing this transaction voluntarily, the owners might choose to stick with the status quo. The willingness of owners to adopt our solution would in large part depend on exactly how much they expected to gain. How big a capital gain could the owners make? This hinges on how much better the new structure would prove to be at generating income. Suppose, for example, that the owners of MLB decided to adopt our proposal, and that by doing so the new MLB Inc. was able to create a business that was as financially successful as the NFL. Forbes magazine estimated in 2005 that the average MLB franchise was worth $286 million as opposed to $732 million for the average NFL franchise. Turn MLB into the NFL and the average owner would

133

134 How a Restructured Sports League Would Work enjoy a capital gain of $450 million. This kind of figure would probably be enough for the MLB owners to overcome transactions costs. However, this might be considered far too optimistic: the NFL’s popularity relative to baseball may not be entirely due to the better performance of the NFL commissioner at getting owners to act in the best interest of the league as a whole. One can easily imagine a restructuring that would release a substantial capital gain in aggregate, but which would not be large enough to secure consensus among the owners. For example, suppose that a vertical separation would result in efficiencies sufficient to increase the combined value of MLB and club assets to $10 billion, compared to the current estimate of $9 billion. The current thirty owners would then realize an average profit (realized either in cash or through increased valuation of preferred stock in League Inc.) of $33.3 million. Securing agreement on the distribution of these gains is where the problems begin. Even George Steinbrenner would likely approve the concept if, say, $400 million of the $1 billion increase went to the New York Yankees. Of course, the owner of the Kansas City Royals would initially insist on a pro-rata distribution, which would never be accepted. Given the potential revenue growth from an efficient restructuring, perhaps a skilled investment banking firm would be able to overcome these obstacles and secure agreement to proceed with a lucrative initial public offering. Yet if owners cannot agree on how to distribute the small amounts available from the increased sale of rights to out-of-market broadcasts, one cannot be too sanguine about the likelihood of voluntary restructuring. Another argument against the willingness of the owners to sell out their control over league decision making is that the owners are not interested in the money, and prefer the power involved in running a national pastime. In fact, most economic studies of the behavior of North American sports owners suggest that their conduct is much closer to the profit-maximizing model than the operation of a sports team as a plaything or for ego. Nonetheless, although owners—most of whom have succeeded in other businesses and are personally wealthy—would likely retain the perquisites of ownership of a club/franchisee in a competition organized by League Inc. (for example, owners’ box, accepting the presentation of the champions’



How a Restructured Sports League Would Work

trophy), they would have to give up the power to make the rules and instead would have to accept directives from others. Even if we are correct that restructuring leads to substantial efficiencies ($1 billion in our illustration for an average payout of $33 million), those efficiencies may be insufficient when their value is divided among the owners. The viability of maintaining a sports franchise as an indulgence is gradually getting beyond the reach of all but the super-rich. Hobby franchises used to be within the compass of every self-respecting millionaire; these days one would need to be closer to being a billionaire. A similar trend is observable with newspapers, movie studios, and record labels: these businesses are now too big to be treated simply as playthings. Indeed, as competition for the entertainment dollar becomes more and more aggressive, the financial calculations are becoming more and more delicate. Moreover, the ego gratification of a long-term owner acting as a “lord” of the sport may not be the same as that of the same owner having to deal with nouveau riche partners constantly seeking to maximize short-run profits because of the huge debt they incurred in paying today’s fantastic prices for newly sold franchises. So while it is not inconceivable that the average owner could fail to pick up a $50 bill, the likelihood of dropping $1 billion is somewhat smaller. Whether or not owners would agree to wholesale restructuring, elements of the organization we advocate exist already in embryonic form. (In Chapter Eight we discuss these elements in more precise detail.) As the major leagues have developed, they have been moving toward the type of structure we envisage. Baseball developed from a business model in which the league was managed as a cooperative, and even the “all powerful” paterfamilias who served as MLB’s first commissioner, Kenesaw Mountain Landis, was unable to wield centralized authority over business matters. Although the NBA and NFL began with a similar model and even weaker commissioners, the force and dynamic personalities of NFL Commissioners Pete Rozelle and Paul Tagliabue and NBA Commissioner David Stern have resulted in greater centralization in those sports. Indeed, the NBA has adopted a structure where millions of dollars in revenue sharing are dependent on clubs meeting performance standards set by the NBA league office.1 As we noted

135

136 How a Restructured Sports League Would Work in Chapter Two, a recent book details the success that MLB Commissioner Bud Selig has achieved by centralizing aspects of baseball’s business operations, particularly with regard to greater responsibility for collective bargaining negotiations and controlling all aspects of advanced media.2 And, as we explained in Chapter Four, NASCAR essentially operates a centralized competition organizing structure along the lines we sketch here.

Who Does What? In the organizational structure we propose, the clubs would participate in the annual on-field/ice/court competition on terms set by the league. League Inc. would decide, independently of the club owners: • The number of teams that should be permitted to compete • The number of teams to be promoted and relegated annually based on • • • • •

league performance The number of hierarchical divisions The rules operating in the labor market (these would in fact depend on bilateral negotiations between the league and the players’ union) The television, media, and sponsorship contracts for the league as a whole The size and conditions for economic “prizes” based on club perfor­ mance during the season The sharing of revenues with clubs to provide optimal incentives for the league and each club to promote attendance, broadcast rights, sponsorship rights, and merchandising revenue

Shorn of responsibility for resolving (or failing to resolve) these issues, the individual club owner would still be left with a number of important decisions: • How to win games and championships • How much to spend on player contracts and which players to hire, sub-

ject to the labor market rules • How to set ticket prices for the club • Organization of concession franchises • How much to invest in the local stadium

How a Restructured Sports League Would Work



• How much to spend on marketing the team and attracting fans to the

local stadium • Other marketing responsibilities allocated by the league based on rela-

tive efficiency of local promotion In deciding on this division of responsibility, our guiding principle has been that the decision maker should always be the party best placed and with the closest interest in getting the decision right. It is no accident that we place securing the playing success of the team at the top of the list of the owner’s responsibilities. We think that most fans would agree with us that the club owner should be focused on the playing success of the team and that, unburdened of responsibilities for leaguewide policymaking, the owner will in fact be best placed to manage the success of the team. Absent all the distractions that club management currently faces, it will soon become clear to owners that their best route to financial success will be to achieve the best performance possible in the league competition, subject to reasonable restraint that the franchise be commercially viable. In this way, the club owner’s incentives become more aligned with the fans’ interests. With regard to sponsorship rights and merchandising revenue, League Inc. will recognize that the more revenues local franchises can attract on their own initiative in this regard, the smaller the “prize” the league will have to offer in order to attract the best-quality talent. At the same time, clubs lacking in marketing initiative or marketing talent will not be able to wield their power—as current owners do—to prevent others from gaining an advantage through successful marketing. The league that has enjoyed the greatest success in getting fans to switch patronage to their favorite team’s sponsors—NASCAR—is the one that has the correct incentive: to divide responsibilities to promote efficiency and increased fan patronage rather than protecting club owners from more aggressive rivals.

The Relationship Between the League and the Clubs As we have made clear, the league organizer exercises considerable power over the sporting and commercial potential of the clubs in our model. Our views on the desirability of separating ownership and control of the

137

138 How a Restructured Sports League Would Work organization of league competition (“vertical separation” in the economics jargon) is somewhat at odds with conventional analysis suggesting that “vertical integration” is the solution to the holdup problem, as we discussed in Chapter Two. Holdup occurs when one party has the power to improve its own position by unilaterally changing its actions when the other party is already committed to a particular course of action. Holdup of the clubs by the league could involve actions such as changing the rules on promotion and relegation, expanding the number of teams in the competition, or rule changing that necessitates additional investments. We believe that this simply demonstrates the need for a sound league constitution, not dissimilar to the rules that determine the relationships between franchisors and franchisees in any industry. Franchising is particularly effective in businesses where there is a need to maintain a strong brand image globally, but where local market knowledge is also important. The most obvious examples are fast food and selling automobiles. Major league sports are similar in that the league as a whole can benefit from some centralized marketing, while team management is best left to the local club. When club management is separated from league management, no doubt disputes will arise and sometimes result in litigation, as is the case with fast food and automobiles. Disputes usually arise in relation to unexpected events that require contracts to be rewritten, and this can be a particular worry in unstable industries. Happily, major leagues are among the most stable industries known to man. (Sports fans who bewail the movement of franchises might consider how much more frequently businesses change identity, not to mention close down entirely, in most other industries. Even in the promotion and relegation leagues of Europe, most of the competing teams have been in continuous existence for more than fifty years, and a large fraction for over one hundred years.) One difference between franchising in fast food and major league sports is that in the former any franchisee faced with holdup has a ready alternative in the form of rival franchise chains, whereas the major leagues are, as we have discussed, largely monopolists. We doubt that this threat would lead to long-term underinvestment in the clubs, which is the real prob-



How a Restructured Sports League Would Work

lem posed by the threat of holdup. First, we believe that promotion and relegation will enhance rather than reduce investment incentives. Second, we believe that if League Inc. were to be so incompetent as to threaten the long-term stability of league clubs as a group, there is always the possibility that someone will start a new league, an event that is rare in the history of league sport but has occurred often enough when league policies have become absurdly inefficient. Separation does not mean that the clubs would cease to have any influence over league policies. For those accustomed to thinking in terms of team sports, it might seem odd to imagine the clubs as just one more party at the bargaining table. Normally, people imagine that the clubs are the league, when in fact they are just one, albeit very important, interest group. Once separated, the clubs would lobby the league organization for rule changes that suit their interests. Sometimes this would take place in coalition with the players’ union; more often the league would see itself as arbiter between the clubs and the players. But sometimes the clubs would get what they want from the league. While this might prompt some to imagine that the league organization would always be in the pocket of the club owners, the better way to think about this is that the clubs are now the “consumers” of League Inc.’s “competition organizing services.” Just as McDonald’s would be slow to implement changes without input from, or over the objection of, their franchisees (who are well organized to provide important input to corporate decision makers), prudent executives of League Inc. will want to include club executives in all important operational decisions. (In addition, to the extent that club owners still get valuable psychic income from participating in decisions, League Inc. executives might well create mechanisms to permit this participation—much as the British Prime Minister regularly consults Queen Elizabeth.) While League Inc. officials thus have every reason to listen to clubs, both to ensure that their own judgments are sound and to preclude the possibility of another competition organizer taking away their “consumers,” the reforms that we expect the league to introduce would preclude the sort of progress-blocking vetoes that characterize traditional club-run leagues today.

139

140 How a Restructured Sports League Would Work

Introducing Promotion and Relegation to the Major Leagues If PriceWaterhouseCoopers or the Harvard Business School were asked by the NFL or MLB to recommend the optimal number of teams that should compete to play in the Super Bowl or the World Series, there is good reason to believe that the numbers would not be thirty-two and thirty, respectively. But these leagues did not determine the size of the competition through rational computation. Rather, with the growth of population and increasing pressures for additional opportunities for communities to host a major league team, the leagues have responded by expansion and by creating divisional championships, then allowing winners to progress to play-offs. At the same time, as noted earlier, club-run leagues endeavor to underexpand, to preserve the option for clubs to relocate (or to threaten relocation) in order to gain subsidies from the current or future communities. Our two proposals work hand-in-glove to achieve a competition that is responsive to consumers’ demand for new clubs in a manner that minimizes exploitation. Unlike other proposals to curb the monopoly power of sports leagues by government regulation of the number of clubs in the major leagues (either by an agency or by ad hoc antitrust litigation), under our design League Inc. would establish the size of the premier league and the terms of entry. Unlike incumbent clubs, League Inc.’s incentive would be to maximize revenues (and hence fan appeal). The entry-by-merit requirement would limit League Inc.’s ability to directly exploit communities itself, by requiring that entry into the premier league be determined by competitive success and not by bribes to the competition organizer. Of course, an important implication of our proposals is that the decisions made by the championship organizer will not necessarily suit the interests of all owners at all times, even if the proposals do serve the best interests of all in the longer term. Equally, it will be the case that not all fans will benefit at all times from the system we advocate. Obviously, the fans of relegated teams will be, at least for the time being, worse off than if the promotion and relegation system did not exist. But fans of teams that are now constant celler-dwellers, where the owner, under threat of relegation,



How a Restructured Sports League Would Work

decided to increase investment in talent, would be better off, as would fans from areas unserved or underserved by a major league team today, who would be better off when a team closer to their community secured promotion to the major league. How many teams would there be in the top-tier league under our proposal? Some would prefer that the competition organizer maintain or even increase the size of the current major league competitions. Such an approach would allow more fans to have the opportunity to see their favorite team playing Major League Baseball, NFL football, and so on. Because “major league” status has been historically “conferred” on communities by the owners of the dominant leagues, such a status takes on a life of its own, apart from the economics of the sport. (For example, in the 1922 case that led the U.S. Supreme Court to declare baseball exempt from the antitrust laws, a significant portion of the lengthy brief filed by the Federal Baseball Club of Baltimore was devoted to proving to the justices that Baltimore was as much a “major league” town as others with major league franchises.)3 The competition organizer might conclude that the enmity resulting from a decision to sharply decrease the number of clubs in the premier competition would be more intense than the benefits (which we detail below) of a more elite contest. Moreover, to the extent that our proposal is implemented through legislation or court decree (the latter always being subject to legislative revision), the organizer may opt to avoid the risk of political interference that may occur if a major reduction in the size of the top-tier league were to be implemented. However, it is possible that more Americans overall would prefer a smaller league, where each season features more Yankees–Red Sox, Heat–Pistons, or Maple Leafs–Red Wings matches and fewer contests between powerhouses and doormats. Under the latter scenario, it may be possible that, despite the short-run harm to supporters of teams relegated to lower-tier competition, in the longer term the improved quality of the competition in the top tier and the opportunities for teams to gain promotion would ensure that even fans of relegated teams would likely be better off than under the current system, where their team is a perpetual no-hoper. Because the principal objective of the league organizer would be to max-

141

142 How a Restructured Sports League Would Work imize league revenues, smaller divisions, where clubs all play each other in a balanced competition, combined with promotion and relegation, might prove to be most attractive for the league as a whole. In our model, league revenues would consist primarily of broadcast income from conventional over-the-air TV contracts, cable, satellite, broadband Internet, and mobile phones, as well as any new broadcast technologies that might emerge in the next few years. The attractiveness of the league competition for broadcast media is based on the quality of the play. Public interest is particularly aroused by events that enable the biggest stars to meet head to head, and this is the secret behind the success of so many individualistic sports. For example, men’s tennis was never as successful on TV as during the Borg/ McEnroe rivalry, and women’s tennis grew significantly on the back of the Evert/Navratilova rivalry. The same is true for team sports, as demonstrated by the soccer World Cup, which brings together the world’s best players in a single competition. In the soccer world the national leagues are usually organized into divisions with memberships of about twenty. Because of promotion and relegation, every city and town can have at least one team, and usually cities of any significant size can have several, which participate in the league without having to organize an unmanageably large contest in which all teams have the chance to win the national championship in any given season. Much the same could be achieved in North American sports. The size of the divisions is designed to offer the right amount of competition at the right level. It might well be that in North America, with its large population, leagues might continue to operate a top division of thirty or more teams, but under our proposal this would be a conscious decision rather than the outcome of a higgledy-piggledy process of opportunistic expansion. We take no position on this question, only observing that League Inc. is well suited to make the right call, and that current owners have a conflict of interest that protects possibly deserving as well as undeserving incumbent teams, keeps out potentially deserving new entrants, and results in the outrageous system of corporate welfare in the form of stadium subsidies. Creating a promotion and relegation system from the starting point of the major leagues as they currently operate poses some additional chal­



How a Restructured Sports League Would Work

lenges, although these are hardly insurmountable. In football and basketball the feeder leagues are the colleges of the NCAA, but if cities were invited to establish teams that might enter a newly created second, third, or fourth division then one can easily imagine that there would be a good number of volunteers. The result would be a major gain for fans in mid-sized cities, who could now become fans of clubs with some potential to rise to the major leagues, instead of watching exhibitions between farm prospects of other clubs. Another group of beneficiaries would be fans in major metropolitan areas who may not live close to the local major league ballpark and who would be able to support a lower-tier team as well as the local major club. In the soccer world, while the top division is always organized on a national basis, lower divisions are often regional, and this might apply in the United States, depending on the perception of the most attractive rivalries. There is self-evidently unsatisfied demand for such teams, as the scramble to offer stadium subsidies using public money amply demonstrates. In baseball, the story is more complicated because of the farm system created by the major league teams as a way of monopolizing the top talent. Minor leagues existed from the beginning in organized baseball, and what “organized” meant was that the major league teams ensured that they could control the labor market, by agreeing to the rules under which major league teams could acquire talent. The farm system was invented by Branch Rickey, who as owner of the St. Louis Cardinals set about buying up minor league teams in the 1930s as a way of competing against cash-rich major league rivals. The idea worked so well that all the other owners followed suit, despite the opposition of Commissioner Landis. Making promotion and relegation a viable system for MLB would require either the major league teams to divest themselves of their minor league teams or to create a new set of teams.4 Part of the purpose of the minor league system is to enable the major league teams to groom new stars or to bring back existing stars who have suffered injury or a loss of form. You might imagine that promotion and relegation would require the abolition of option systems that enable this to happen, but in fact that is not strictly necessary. In most soccer leagues, young, injured, or out-of-form players are often “loaned” to lower division

143

144 How a Restructured Sports League Would Work teams, only to return to their top division employer when their skills are suitable for top-level play (and if this does not occur, they may then be sold to the lower division team). This kind of relationship does not compromise the league system, since teams in different divisions are not direct competitors in a given season. Only if the teams end up in the same division do such loan agreements become unworkable. More generally, it is important to stress that in a promotion and relegation system it is the clubs that are mobile between divisions, the players less so. This works because promoted teams regularly buy talent from relegated teams as each team meets the new competitive challenge associated with their new status. In this way, promoted teams are often surprisingly successful competitors (occasionally the owner of a promoted team refuses to buy; this is almost always punished by relegation at the end of the season). What is necessary to make the system work is an active player trading market, but the creation of such a market is usually a natural consequence of the system itself. The post–World War II tradition in baseball and other sports of prohibiting cash sales of players, however, would have to give way to permit these necessary adjustments among promoted and relegated clubs.

The Labor Market and Incentives The proper functioning of the labor market is essential to the creation of a sporting competition that is attractive to fans. This is self-evident in individualistic sports such as tennis and golf, where the championship organizers seek to attract the best entrants they can and to get the greatest possible effort from those entrants, by fixing the level of prizes and appearance fees. Without the appropriate financial incentives, there is a danger that fans will not get to see the best matchups, or that the contestants will not deliver their best efforts. Equally, a consumer-responsive league in professional team sports also requires the operation of an efficient labor market in order to enable teams to rise and fall by the merits of their managerial decisions, in particular their ability to deliver performance to their fans. An independent competition organizer would impose labor market rules to ensure efficient, welfare-enhancing competition for playing tal-



How a Restructured Sports League Would Work

ent. Within the cartelized structure of the major leagues today, the rules adopted by the clubs are motivated by other concerns. Principal among these is the desire to keep salaries down. The Reserve Clause, salary caps, and restrictions on cash trades have all been restraints intended to keep expenditure on salaries at the lowest feasible level, so that the teams can make more money. Such restraints provide no direct benefit to the fans. Although, of course, owners claim that these rules benefit fans by maintaining competitive balance among the teams, some analysts argue that in point of fact labor market restraints are themselves one of the greatest obstacles to competitive balance in the long term, since they deprive weaker teams of the opportunity to get better by investing in talent. Whatever the case, taking the responsibility for setting labor market rules out of the hands of the teams will likely benefit fans substantially. In the one lucrative league sport where the competition organizer is completely independent of the participants—auto racing’s NASCAR Nextel Cup competition—there are absolutely no labor restraints. The appropriate amount of competitive balance (the policy objective often used by sports leagues to justify labor restraints) is achieved by careful calibration of equipment, rules, and most significantly the structure of prize money awarded to winners. Moreover, the one league where labor restraints provide inferior clubs with room to improve is the NFL, which features nonguaranteed contracts and very high minimum payroll requirements for each club. Significantly, the NFL is the one league that has historically featured strong commissioners able to secure agreement among owners to put the league’s interest first. An independent competition organizer is likely to allow labor markets to allocate players efficiently within the confines of a calibrated prize. If, as proponents of labor market restraints claim, dominant teams distort competitive balance by excessive spending, their economic rewards can be reduced to inhibit their free-spending incentives. Complete parity could be achieved, for example, by requiring the sharing of all revenue (although we doubt League Inc. would find this to be the most profitable strategy). Unlike club-run leagues, however, the independent organizer has no incentive to go beyond the legitimate goal of creating the most exciting competition

145

146 How a Restructured Sports League Would Work possible. For the competition organizer, restricting player mobility in ways that undermine the fans’ interest in the competition makes no sense. League Inc. also has a much greater incentive to promote the long-term development of the sport than do individual clubs. A useful illustration concerns the nurturing of a fan base among poorer children. Individual MLB clubs invest heavily in developing talent from the Dominican Republic, because the owners’ rules concerning the Rule 4 amateur draft do not extend to youngsters from outside North America. As a result, individual clubs operate academies to identify and train Dominican boys, who can be signed at age sixteen to professional contracts. In contrast, there has been a precipitous decline in participation among African-American boys, but clubs have little incentive to invest heavily because any players developed through their system will be lost to the Rule 4 draft. League Inc. has an incentive either to change the rules to permit some means of encouraging clubs to invest in academies in impoverished neighborhoods in the United States,5 or to make the investment itself and develop a means to recoup its investment by selling negotiation rights to individual clubs. We recognize the potential concern that League Inc. would have excessive bargaining power in relation to the players, for reasons economic and legal. To the extent that the current strength of players’ unions reflects primarily their ability to take advantage of divisions among the ownership, unions might fear that they will lose bargaining power because our proposal removes these divisions by taking away the responsibility of the owners for organizing the competition. To the extent that unions currently perceive their strength to come from their ability to decertify under federal labor law and file an antitrust action against owners for conspiring to restrain competition in the labor market,6 this option would likely be foreclosed if league rules were imposed by a single corporate entity that was not a sham for otherwise competing club owners. Many fans are not sympathetic to the interests of the players’ union, but it is clear that union resistance would be a major hurdle in implementing any reform, so keeping the union happy requires some consideration. How a union might react to the prospect of a closed league’s increased ability to impose anti-player rules without fear of antitrust suit or divi-



How a Restructured Sports League Would Work

sions among owners is not relevant, we submit, to an analysis of the labor market strategies of an independent competition organizer that is required to use promotion and relegation. We think it is more likely that union leadership would recognize the opportunity to cut a better win-win deal with management negotiators responsible to a single corporate board than with one that must juggle the interests of multiple masters. As the inflation in NFL franchise values since the labor peace of the 1990s demonstrates, the management and owners of League Inc. would likely recognize the huge advantages of a quick and mutually agreeable arrangement with the players’ union. (Indeed, it is likely that the transition would feature strong pressure on management to secure prompt labor peace to permit more favorable restructuring of the initial financing for the purchase of the rights to organize the competition from existing owners.) To be sure, as management becomes stronger, the union loss of the antitrust and divide-and-conquer tactics may seem more significant. However, clever unions can protect themselves for the indefinite future. Thus, although the NFL Players Association today retains both the ability to decertify and sue under the antitrust laws and the opportunity to take advantage of owner divisions, its real clout lies in an agreement it secured back in 1993, providing that in the final year of any collective bargaining agreement the league salary cap would not be in effect. Other unions could likewise demand, in return for immediate labor peace, a “poison pill” provision, which would make it very difficult for management to take an aggressive anti-union stance. Moreover, to the extent that the reforms we propose here allow the league to take advantage of efficiencies that increase revenues, a portion of these revenues are likely to be shared with the players. Our proposal is offered in the context of today’s world of sports, not that of yesteryear. We readily concede that a major policy objection to our proposal, had it been offered in prior decades, might well be that the resulting increase in bargaining power for management and the withdrawal of antitrust litigation as a viable tool for the union would result in unfair exploitation of players. In today’s context, for the reasons stated above, we believe the more likely result will be, first, a league management that places a greater value on labor peace than on the indirect benefits that could con-

147

148 How a Restructured Sports League Would Work ceivably flow to league shareholders from seeking to unduly exploit these tactical advantages and, second, a joint recognition of league management and the players’ unions of the benefits of sharing the rewards of the increased efficiency that our structure will provide.

TV and Media The transformation of modern sports from fairground exhibitions to international businesses can largely be attributed to broadcasting. First radio and then television expanded the potential audience to cover almost the entire population of the nation, while enabling the leagues to profit through the sale of their broadcast rights. Television exposure, however, is something that is hard to manage, and some leagues have been more successful than others. The NFL has ridden to dominance in the United States on the back of network contracts by single-mindedly restructuring their game to maximize its attractiveness to their biggest customer. This strategy involved two key elements. First, the competitive balance pledge “On any given Sunday any team in our league can beat any other team” has been rigorously observed through a range of policies from revenue sharing to salary caps to nonguaranteed contracts. Second, at every turn the rules of the game have been altered to create the right atmosphere for the broadcasters. This has been achieved through the collective sale of broadcast rights, ensuring a unified approach across the league.7 Baseball, by contrast, has struggled to exploit TV effectively, largely because of the lack of a unified policy. Owners have clung tenaciously to their local broadcast markets, refusing to give these up to collective selling while refusing to compete among one another through maintenance of exclusive broadcast territories. Those games that have been sold collectively have often been poorly packaged or exploited for short-term profit. For example, the decision to move the World Series to prime-time viewing certainly boosted prime-time viewing, but by putting it beyond the bedtime of many children the owners may have sacrificed a significant fraction of their future audiences. Only recently has MLB moved toward a more comprehensive revenue-sharing formula, and this is not without its critics.



How a Restructured Sports League Would Work

Throughout this book one of our themes has been the inefficiency of joint decision making inside cartels, either in sports or in any other commercial activity. While the collective selling of the NFL is normally viewed as one of the most successful examples of collective action, this is often attributed to the strong leadership shown by Rozelle and his successor Paul Tagliabue as commissioner. We propose that control of broadcasting rights should pass entirely to the league organization, leaving the clubs responsible only for local revenue generation from the stadium. An important reason for this proposal is that we believe the money will be better allocated by the league once the central organization is independent of the participating clubs. Rather than pay all money out to shareholders, the league organization can be expected to use a significant fraction of the income to fund prizes for success in the league competition, as is the case in golf and tennis tournaments. This contrasts sharply with the egalitarian (nay, socialist) sharing of revenues practiced in the major leagues, which does little to promote investment by teams in generating better competition. The League Inc. organization might also spend substantial sums on promoting the development of the sport more broadly, something that the owners have traditionally found hard to justify given their short-term focus on profit. Of course, significant new opportunities are being opened up through the Internet and mobile telephony as well. MLBAM (Major League Baseball Advanced Media) was set up by the owners as an independently run corporation in 2001 to exploit the Internet; within five years the business was generating nearly $250 million per year and in 2006 was valued at somewhere in the region of $2 billion. This model would serve well in the league structure that we have outlined here.

Ticket Prices Fans see high ticket prices as one of the biggest problems in sports today. How will our proposal affect prices? Markets allocate scarce goods and services to those willing and able to spend the most to obtain them. Increasing income inequality, combined with the increased use of sporting exhibitions as opportunities for corporate entertainment, has fundamentally altered the demand for live sporting events in recent years, often putting

149

150 How a Restructured Sports League Would Work the price of attendance beyond the means of an average family. Seats now go to wealthier but more casual fans, who may value attendance less than die-hard club supporters but also may value the outlay of several hundred dollars far less then their middle-class counterparts. To some degree, making sports accessible to ordinary fans raises issues that are very similar to those confronting most modern societies in terms of health care, pensions, education, and other important services where demand outstrips supply. Our proposals will not recreate a world where entrance to the ballpark costs a dime, but they will have some positive effects. First, easier entry will have a desirable impact on the problem; basic economics teaches that increases in supply will lower price, and the existence of additional lower-tier competitions will likely accomplish this result to a modest degree. Second, to the extent that clubs or leagues indulge too much in short-term profit taking by failing to maintain and build their base among average fans, an independent competition organizer might well require clubs to offer some percentage of their seats on an affordable basis to average fans, assuming that the sellers were confident that the tickets would remain with average fans. This already occurs in U.S. college sports, where student tickets are priced far below market value but ticket bearers must bear identification proving they are students.

Marketing Initiatives The modern trend in sports marketing in North America features the increasing centralization of initiatives at the league level. To some extent, this reflects economies of scale as well as the ability of league offices to attract marketing executives who might not be willing to work with the smaller budgets and opportunities available to individual clubs. To the extent that leaguewide marketing initiatives remain efficient, we would expect League Inc. to maintain these programs and to preclude clubs from conflicting programs. Current leaguewide marketing programs are problematic in two respects, however. First, a leaguewide program might not offer a superior product or otherwise increase output but simply serve to raise prices by eliminating potential competition among the league’s clubs. As discussed



How a Restructured Sports League Would Work

in more detail in Chapter Seven, the likelihood of this occurring would be relevant in determining whether the assignment of marketing rights from the club to League Inc. in the overall franchise agreement would be lawful under the antitrust laws. Of greater potential interest for fans, club-run leagues have an incentive to shackle individual clubs’ marketing initiatives, not to promote a superior leaguewide product but to prevent particularly efficient clubs from gaining a competitive advantage on their rivals. League Inc. would not have such an incentive. For example, current licensing is entirely shared: there is limited incentive for an individual club to develop creative licensing schemes tailored to their club or their local market. (Royalties for licensing each club’s copyrighted or trademarked intellectual property is usually shared equally among all league owners; clubs that operate local retail outlets can profit of course from sales of merchandise with the same or perhaps a higher markup than Macy’s or any other department or sporting goods store.) League Inc., in contrast, would have every reason to permit these initiatives, subject to a revenue sharing that allows both the club and the league to profit. This chapter has outlined an organizational structure for a league where the competition itself is run by a body that is independent of the clubs that compete. This structure would lead to the implementation of two reforms, which would substantially improve the major leagues: competition for winning and competition to avoid relegation. In addition, the franchise agreements between league and clubs might involve any number of conditions imposed by League Inc. in order to ensure a well-run competition. For example, even though poor-performing teams on the field would automatically face the threat of relegation to a lower league, League Inc. would also have the incentive—one that fellow owners would never have—to suggest and if necessary force a sale of a franchise in the face of flagrantly poor stewardship of the local market. If, as has been claimed, the principal justification for baseball’s antitrust exemption is to allow MLB to act for the collective good, our proposal would do far more than a liability immunity for the status quo.

151

152 How a Restructured Sports League Would Work The clubs would benefit financially from the substantial prize money that League Inc. would offer to successful teams, while League Inc. would have the incentive to offer these prizes in order to ensure maximum effort from the teams. This is no different from the incentive redistribution mechanisms employed by NASCAR. The difference with existing league redistribution mechanisms is that current policies reward failure (as through draft picks) and penalize success (through enhanced revenue sharing), while prize mechanisms reward success and penalize failure. If our proposals were accepted, the competition organizer’s incentive would be to maximize revenue while assuring a viable competition, rather than seek “monopsony” profits (the ability to pocket the savings from paying players below their market value). The need for revenue sharing to correct for significant discrepancies in the size of markets would be mitigated to a large degree by promotion and relegation. To the extent that unrestrained competition in labor markets would result in competitive imbalance or (as hockey owners complain) excessive spending, the independent competition organizer could award shared revenue based on competitive success (thus eliminating the advantages of larger-market teams) or could reduce the economic rewards to winning and thereby reduce the incentives to spend into bankruptcy. We have set out our formula with a view to its adoption by the existing major leagues. We are not dogmatic about this design, and we do not claim that it is necessarily optimal in all times and all places. It may well be, for example, that some new sports are best incubated in club-run leagues, in large part because the participating clubs have the most at risk and no one else will be willing to serve as an independent competition organizer. It is the explosion in revenues from broadcasting, merchandising, and sponsorships, each associated with major league status, that creates the incentive to vertically separate firms to perform these services. For such leagues, our proposal points to a better future for the clubs, the players, and above all, the fans.

7

Comparing This Proposal to Other Remedies for Monopoly Power

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary. —Adam Smith, Wealth of Nations, Bk. I, ch. X, pt. 2

In Chapter One we documented the exploitation of consumers by the dominant major sports leagues; we attribute this exploitation to the lack of a sufficient competitive restraint on leagues to force them to act in ways that benefit their fans. The ensuing chapters detailed our two-prong solution: (1) entry into the major leagues by merit (rather than perpetual guarantee or bribery) and (2) the control of major league competitions by an independent competition organizer. We would like to think that these proposals might benefit not only the fans but also the many clubs that currently control the leagues, and that therefore the major leagues might voluntarily choose to adopt our proposals. However, since cartels usually create benefits for their members at the expense of consumers in a way that is often wasteful even of their own profit opportunities, it is likely that a sterner approach is required. If the owners are not interested in optimizing the management of their leagues, we believe there is a case for government to mandate fundamental welfare-enhancing reforms, without becoming involved in the

154 Comparing This Proposal to Other Remedies day-to-day management of the business. As our proposal seeks to protect consumers from the excesses of sports leagues’ monopoly power, readers might wonder why the antitrust laws are not available for just such a purpose. In this chapter, we detail the deficiencies in antitrust law that prevent it from adequately protecting sports fans. Next, we explore the alternative of direct government regulation of sports league business operations and why we believe this is an inferior alternative to our proposed structural reform. We also explore prior work proposing an even more radical restructuring of sports leagues to require multiple competing leagues. We briefly note the possibility of some modest government regulation that a fan-friendly Congress might consider even if our two-prong proposal were adopted. Finally, we note the need for vigilance in applying existing antitrust principles to ensure that League Inc. does not exercise power to unlawfully maintain a monopoly, and that the clubs do not unreasonably collude with one another to restrain trade.

The Inadequacy of Antitrust Law to Protect Sports Fans Casual observation and logical inference demonstrate that the antitrust laws do not effectively protect sports fans against exploitation. In Chapter One, we cataloged the many areas where monopoly sports leagues harm fans, including billions of dollars in stadium subsidies, restricted entry into the leagues despite open markets that have sufficient demand to support a major league team, high ticket prices that cannot be even partially constrained by competition from minor league or second-tier teams, television blackouts significantly restricting the ability of “expatriate” fans to watch their favorite teams’ games when fans move to other locales around the country, strikes and lockouts designed to cut costs (that are not passed on to consumers) rather than promote an allocation of players among teams that maximizes the sport’s appeal, continued mismanagement of some teams and suboptimal arrangements for licensing merchandise, and so on. These problems exist even though the National Football League, the National Hockey League, and the National Basketball Association are all fully subject to the antitrust laws. Indeed, antitrust’s irrelevancy is demonstrated



Comparing This Proposal to Other Remedies

by the fact that Major League Baseball, which has enjoyed over eighty years of judicially created exemption from the antitrust laws,1 appears to operate with the same problems that plague fans of the other major sports. Thus, neither the application of the antitrust laws to the other sports nor the nonapplication of the antitrust laws to baseball seems to have made any significant difference in addressing the problems identified in Chapter One. We believe there are at least five reasons why this is so. First, antitrust law does not deal particularly well with admission of new teams to a league. The exploitation of fans through tax-subsidized stadia, as we explained in Chapter One, is a function of each league’s ability to restrict entry at the whim of the owners of existing clubs in the competition. In most industries, there is no objective way to determine which firms ought to be able to participate in a dominant industry venture based on “merit.” If a court were to order a joint venture to admit a new partner, it would then have to regulate the terms of the admission (price, terms of dealing, and so on). This is why several of the leading cases requiring those who control an “essential facility” to admit others have arisen in industries that are otherwise subject to federal regulation, like railroads and energy companies.2 Indeed, the Justice Department has issued guidelines that express great caution in requiring joint ventures for research or purchasing or sales cooperatives to admit anyone.3 As a congressional committee report noted in revising antitrust standards for research and development joint ventures, the preferred course is to encourage others to form separate, competing ventures.4 In one football case, the court of appeals reasoned that to admit a team from Memphis to the NFL would marginally hurt the chances of a new league forming to compete with the NFL.5 There are a number of problems with using antitrust laws to order a league to admit new clubs. An antitrust plaintiff would need to show that increasing the size of the league is, on balance, a good thing; that expansion will not hurt the league’s ability to serve its current fans adequately. Even if this difficult hurdle could be overcome, why should the expansion necessarily include the plaintiff? For example, after the Braves relocated from Milwaukee to Atlanta, a Wisconsin state trial judge ruled, in the manner of a public utility regulator, that Milwaukee could support a MLB team and

155

156 Comparing This Proposal to Other Remedies that therefore MLB must replace the Braves in Milwaukee.6 Of course, the judge failed to consider whether other markets might be even more deserving of a team. (The decision was overturned on other grounds by the Wisconsin Supreme Court.) As a result of the difficulty that antitrust has with forced entry, sports leagues are able to maintain their monopoly power and restrict the number of franchises within a league. Second, both Congress and federal antitrust authorities seem to tolerate the existence of a single dominant league, thus immediately frustrating the principal way the antitrust law normally deals with membership in joint ventures, which is to encourage the existence of multiple ventures. While Congress prefers multiple research ventures to develop the latest technologies for the benefit of consumers,7 it responded to one of the most successful challenges to a dominant sports league—the American Football League of the early 1960s—by enacting an antitrust exemption to permit the NFL and AFL to merge into a single league.8 Third, antitrust authorities inexplicably tolerate agreements among sports leagues owners to divide the United States and Canada into discrete territories allocated exclusively to one or a few local teams, which have exclusive rights to broadcast their games into the territory. Exclusive territorial restrictions among small retail grocers and a leading brand of mattresses were deemed to be so anticompetitive that the Supreme Court condemned them summarily. In a very sophisticated opinion from 1953, a federal district judge held that sports leagues could indeed block games being shown in local areas at the same time a home game was being played in order to protect the live gate of the home team; clubs could not, however, otherwise restrict the ability of local stations to broadcast out-of-market games of popular teams.9 This decision was partially modified by Congress in 1961, when it enacted the Sports Broadcasting Act to exempt package sales of games to major networks (which is how all NFL games are now broadcast).10 However, this special act did not deal with the vast majority of MLB, NBA, and NHL games that are not sold as part of a league package to a national network. Yet all these other leagues continue to impose exclusive territories, and no one does anything about it. Fourth, the Supreme Court has built on a specific statutory exemption



Comparing This Proposal to Other Remedies

for labor unions and nonsports decisions requiring an “accommodation” of antitrust and labor statutes to create a complete exemption from the antitrust laws for any rules that owners may impose to limit competition among themselves for player talent.11 Unless players vote to abolish their union, the Supreme Court’s decision may be read to block any antitrust lawsuit against the owners, even if their scheme demonstrably harms fans by allocating players among teams in a manner that lessens fan appeal, and even if the scheme does nothing to alleviate the risk of strikes or lockouts. Finally, one of the major problems we have identified in this book—the inefficient response of sports club owners to consumer demand because their league is run in the individual interests of the majority of clubs rather than the sport as a whole—has traditionally not been the focus of antitrust scrutiny. To be sure, the Supreme Court has held that an agreement among competitors that “renders output unresponsive to consumer demand” is a “hallmark” antitrust violation.12 But the traditional focus of antitrust concern is monopoly profits, not the loss of business opportunities because of a sports league’s inefficient governing structure. The sports industry is perhaps unusual in the combination of market characteristics that render the problems identified in this book unlikely to be corrected by the threat of new entry: (1) a history and standard practice of operating as a joint venture (since the formation of baseball’s National League in 1876); (2) a general public acceptance of the inevitability of a single dominant league in each sport; (3) the fact that many local markets can only support a single team; and (4) the modern-day need for viable clubs in a handful of major media markets. All these contribute to an accurate perception by league owners that if they fail to serve consumer needs, market retribution will not be swift. Antitrust laws do effectively prevent sports leagues from engaging in the more blatant forms of anticompetitive behavior: blacklisting of players or others who threaten to compete, for example. (Later in this chapter, we discuss how antitrust laws would continue to apply to the restructured sports leagues we propose.) But sports leagues’ special characteristics explain why antitrust laws are unlikely to serve their intended role as a “consumer welfare prescription” to remedy sports fans’ ills.

157

158 Comparing This Proposal to Other Remedies

Direct Government Regulation Over the years, frustrated with the inability of antitrust law to adequately protect sports consumers, some have suggested direct government regulation of sports leagues. Congress could, for example, create a Federal Sports Commission, which would determine the appropriate number of sports teams, just as the Federal Communications Commission determines the number of television and radio stations that can broadcast.13 Such a commission could either directly pick the teams deserving of playing in the major leagues or allow the dominant sports league to make the decision based on approved criteria, subject to appeal (similar to the relationship between the New York Stock Exchange and the Securities and Exchange Commission). The legislation could also require that broadcast contracts and labor agreements receive commission approval. Although well intentioned, government regulation, we believe, is ill suited to protect sports consumers and, more to the point, is less attractive than the more market-oriented restructuring that we propose here. Two major reasons animate our concerns about government regulation. First, we doubt the relative ability of government regulators to make the sort of complex decisions required to organize a major sporting competition in an efficient manner, compared to industry experts whose economic incentives can be restructured to be more aligned with consumer interests. Second, we are fearful that the considerable power vested in a sports commission would present too tempting a target for “capture” by special interests. The efficient operation of a sports league requires a series of extremely complex trade-offs, requiring those who develop the product for sale to fans to account for many different considerations. More franchises increase national television audiences and attract new fans, while modestly diluting playing talent and reducing the number of games between highly attractive clubs. More telecasts or webcasts increase revenues from rights purchasers and sponsors but may affect live gate or ratings from other telecasts currently under contract. Merchandise often is sold because of league rather than club popularity and can often be efficiently sold collectively, yet individual club initiatives might allow for localized opportunities that league



Comparing This Proposal to Other Remedies

marketers will miss. Determining an optimal level of competitive balance and devising a mechanism to efficiently allocate players among clubs to maximize consumer appeal is enormously difficult. These trade-offs are challenging enough for skilled professionals to accomplish; we are highly skeptical that they can be improved on by government overseers, even if the latter are well-meaning, truly independent public servants. It is far better to allow industry experts with the proper economic incentives make these decisions. Second, the keen interest in sports and the money at stake make this a textbook example of the type of industry where regulation would likely lead to special interest capture.14 Clubs, broadcasters, major sponsors, and players’ unions, each relatively small in number, have huge stakes in how a “Federal Sports Commission” would decide issues like entry, assignment of broadcast rights, and labor rules. Senators and congressmen would be derelict if they didn’t use all their political skill to protect the interests of their own constituents, regardless of the effect on overall fan appeal or the sport as a whole. In contrast, average fans may care passionately about sports but lack the time, effort, and investment to hire expensive lobbyists to represent their interests. Many studies documented how in the post–World War II era regulators established by Congress to act in the public interest were indeed captured by the industries they were supposed to regulate.15 Conditions favorable to capture are all present in sports.

Break Up the Monopoly Leagues Prior work has suggested that the best reform is to attack the root cause of monopoly power through government intervention requiring a divestiture into multiple leagues, which could operate internally much as they pleased, cooperating with one another on essential items like a World Series.16 This approach would force rival leagues to compete against one another in expansion and franchise relocation, for players, and in broadcast markets. Competition would also lead owners in rival leagues to overcome the inefficiencies current leagues exhibit. Competition between rival leagues would indeed cure most of the prob-

159

160 Comparing This Proposal to Other Remedies lems that affect sports fans today and would probably make our proposals unnecessary. Entry by merit into major leagues would be expected. Consider the lack of a baseball team in Washington, D.C. Certainly the National League wouldn’t care that the American League’s franchise in Baltimore objected to placing a new team in the national capital area. Consider the Tennessee Titans, whose financial success makes it clear that Nashville can support top-tier football. Studies have also shown that television ratings for the network carrying the local team go up, and for other networks decline, when a team moves into a new media market. Thus, rivals NFL, AFL, and USFL would all likely have bid against each other rather than requiring taxpayers to pay hundreds of millions to the owner to secure a relocation. Owners would also have a much greater incentive to overcome the transactions costs problems that result in inefficiency if they faced competition from a rival major sports league. To the extent that an independent competition organizer remains significantly more efficient than even a joint venture facing competition, then one of the rival leagues could be expected to restructure in that format. Or, as we note in Chapter Eight, each league could voluntarily adopt a number of formal or informal practices designed to increase efficiency. There are two major problems with relying on a divestiture proposal to solve sports’ ills. First is a practical consideration. To date, neither government officials nor the public have displayed undue haste in embracing this proposal. In addition to overcoming the owners’ political power, implementing this concept would require an even more radical restructuring of the industry. Although the claim that stable competitive leagues are unworkable—that sports leagues are “natural monopolies” like the electric company—is controversial,17 it is undeniable that there are no established examples to build on. Our proposal, in contrast, represents a useful synergy between two proven structures: an independent competition organizer, as practiced by NASCAR, and entry by merit, as practiced globally by soccer leagues. In addition, there are policy concerns about how effective a divestiture strategy would be. If competition between multiple leagues led to the sport’s dominance by a single league, the result could be a less-appealing



Comparing This Proposal to Other Remedies

competition because of the imbalance between the leagues. Or the dominance could quickly become so significant that the other leagues folded, restoring the monopoly and all its consequential problems. To prevent this, government antitrust officials would have to be extremely vigilant in monitoring the industry to ensure that interleague rivalry did not “tip” to a single dominant league because of exclusionary and anticompetitive business conduct. In addition, for stable competition to exist among multiple leagues, antitrust officials would have to credibly inform clubs and leagues that competition-lessening mergers would not be tolerated. This might be problematic, for it is always difficult to predict the enforcement priorities of future administrations, and politically powerful sports owners always can go to Congress for an exemption. Yet credible antitrust enforcement is critical to stable competition among competing leagues; if the parties perceive that one league will emerge as a winner, all concerned are much more likely to engage in predatory or strategic behavior that makes this result a selffulfilling prophecy.

Potential Need for Additional Regulation If the proposals set forth in this book were adopted, major sports competitions would be controlled by an independent competition organizer with greater incentives than clubs now possess to promote the best interest of the sport. Even so, the organizer will likely remain free from productmarket competition from a rival league. Antitrust laws remain available to constrain blatant anticompetitive conduct by the competition organizer. However, there may be discrete areas where consumers remain subject to exploitation. One area in particular concerns shifts of broadcasts from widely accessible media such as networks available over the air, or as part of the standard cable package that virtually all sports fans possess, to cable or satellite packages that are more expensive to the consumer. For the past forty-plus years, the migration to platforms that are substantially less accessible to average fans has become a widespread phenomenon in Europe—but not in the United States. We attribute this in part to an unintended consequence

161

162 Comparing This Proposal to Other Remedies of the Sports Broadcasting Act of 1961 that could disappear if sports were restructured and control vested in a single independent competition organizer. This might justify additional regulation. Because sports leagues are currently controlled by separate clubs, any leaguewide sale of broadcast rights is considered a collective sale—an agreement among rivals for purposes of the antitrust laws. The Sports Broadcasting Act provides an antitrust exemption for collective sales of broadcast rights from leagues to over-the-air networks but not to pay or cable outlets.18 Thus, in the United States there is a powerful incentive for sports leagues to keep much of their programming on over-the-air networks: sales to these networks are immune from antitrust suit while sales to cable or satellite programmers would not be. In Europe, where there is no such incentive, almost all major programming is sold to cable or satellite unless direct government regulation mandates sale to over-the-air broadcasters. We fear that the same result would occur in the United States if a single competition organizer held the broadcast rights for most contests, for they would not need an exemption for collective sale. Congress may therefore wish to consider the value of following the European and Australian practice of specifically listing events that, in the public interest, should be maintained on easily accessible television.19 The major sports that have been the topic of this book have functioned successfully over the years with the de facto requirement that package sales to satellite or premium cable outlets should not be made where the effect would be to reduce the total viewership of games from what it would otherwise be. Thus, when the NFL first sold the rights to “Sunday Night Football” to ESPN, it made it clear that the over-the-air networks were not interested. We see no reason why an independent competition organizer should not be subject to the same limitation.

Continuing Application of Antitrust Laws to Restructured Sports Entities Because League Inc. would likely be the dominant provider of competition organizing services in each sport, it would potentially remain liable



Comparing This Proposal to Other Remedies

for attempted or actual monopolization under Section 2 of the Sherman Act. Courts have generally found that the dominant league in a major sport possesses monopoly power.20 However, League Inc.’s liability would be no greater than that faced by club-run leagues today. Antitrust law does not forbid the exercise of monopoly power, only its illegal maintenance. As the court noted in USFL’s lawsuit against the NFL, a monopolist “is free to set as its legitimate goal the maximization of its own profits so long as it does not exercise its power to maintain that power.”21 To prove illegal monopoly maintenance, a plaintiff must establish not only that rules are exclusionary but also that they are unnecessarily so—that is, that they are inefficient. Rules designed to promote consumer appeal or to achieve efficiencies are lawful.22 To be sure, League Inc.—like current club-run leagues—could not engage in blatantly anticompetitive acts such as blacklisting players who sign with rival leagues.23 In addition, foreclosing rivals from essential inputs would subject League Inc. to liability. Thus, League Inc. could neither tie up every television network (this was a principal, albeit unproven, theory in the USFL litigation) nor structure its player contracts so that in any given year it would not be feasible for a rival to have access to a sufficient number of players to viably compete.24 Likewise, League Inc. might be required, in the interest of maintaining the potential threat of competition, to permit clubs to retain control of their trademarks. Allowing clubs to keep their trademarks (subject to a limited assignment to League Inc. for licensing purposes, which now occurs) if they choose to join another league would enhance the opportunity for rivalry in competition organizing services and the possibility of League Inc.’s displacement by a more efficient rival. In similar fashion, although franchise agreements can reasonably be set for a sufficient duration to allow for long-term planning, unduly long franchise agreements could operate to monopolize if they precluded any ability to lure existing clubs to a new league.25 Because even in natural monopoly markets antitrust laws favor competition for the monopoly,26 it could be argued that the best way to promote competition in the market for competition organizing services (that is, two or more rival leagues) is to prohibit League Inc.’s control of player con-

163

164 Comparing This Proposal to Other Remedies tracts. If players were contracted to individual clubs, a new league entrant could compete by simply attracting the club owners, rather than develop a league of minimum viable scale by individually signing players. We do not believe, however, that League Inc.’s control of players—assuming that after any given season a reasonable number of player contracts will expire—is sufficiently anticompetitive to constitute monopolization. There are significant efficiencies in allowing League Inc. to negotiate as a single entity with the players’ union to devise an optimal scheme to allocate players among clubs participating in its competition. Collective action problems make such an agreement with club employers more difficult. Moreover, League Inc. might allocate a player to a particular club precisely because this allocation is efficient in the context of the club’s participation in the competition organized by the league. If League Inc. feared that an individual club might take all its players and participate in another competition, it might allocate players suboptimally in the short run. In our view, sound interpretation of the antitrust law should not require consumers to forego clear benefits to League Inc.’s competition in the short-run because of the possibility that entry into the market for competition organizing would be marginally facilitated if clubs employed players. At the same time, the Sherman Act should properly constrain clubs’ ability to jointly negotiate with League Inc. and rival competition organizers. If a rival can organize a competition more efficiently than League Inc., it is free to bid for individual teams to compete in its competition. A rival league could conceivably pursue a strategy of attracting clubs by offering them greater power and authority, similar to that now enjoyed in club-run leagues; in such a case, interleague competition could result in a structure no different from what currently exists. We believe that such a strategy would be unlikely to succeed. Precisely because club-run structures are less efficient, it is difficult to see how a new entrant could make an offer sufficient to attract so many clubs that League Inc. would not remain viable. To use two simple examples: if a new entrant made an offer aimed at attracting small-market clubs, League Inc. would remain viable on a smaller basis focusing on its large markets; if a new entrant made an offer aimed at the top clubs in major cities, League Inc. with its preexisting brand loyalty



Comparing This Proposal to Other Remedies

and infrastructure could add additional franchises in these major markets, which are likely to be capable of supporting additional teams. If we assume that League Inc. will remain as a viable entrant in the market, then clubs considering jumping to a rival that will give them more power will have to weigh the more attractive package offered against the profits lost because of the usually fierce interleague rivalry that will follow. Alternatively, a rival that develops a model that really is more efficient than League Inc.’s should be able to attract almost all the clubs through individual negotiations. Finally, although agreements among competing clubs would remain suspect under the antitrust laws, clubs participating in a restructured league should have much less of a need to agree on competition-restricting rules. Procompetitive joint ventures, such as joint scouting combines, multiclub training facilities, or joint marketing of products (like sponsorship rights) in markets where clubs lack market power, would pose little risk of antitrust liability. Horizontal agreements among clubs that threatened to increase price, reduce output, or render output unresponsive to consumer demand would also be subject to prohibition by League Inc. in a well-drafted franchise agreement. The eminent industrial organization economist F. M. Scherer famously analogized antitrust intervention to surgery.27 The procedure was to be avoided when possible but preferable to a life of pain or constant use of drugs. We believe Dr. Scherer’s prescription to be fully applicable here. Two operations—separating the competition organizer from the participating clubs, and requiring entry by merit—will require some significant disruption in tradition-laden institutions but are preferable to continued fan exploitation or constant monitoring through the judiciary or a regulatory agency. However, like the patient following major surgery, constant monitoring to ensure a “healthy lifestyle” is still required, in this case ensuring that League Inc. does not commit illegal monopolization and that the now fully independent clubs do not conspire to restrain trade.

165

8

Half-Loaf, Still-an-Improvement Compromise Suggestions

There will be no end to the troubles of states, or indeed, my dear Glaucon, of humanity itself, till philosophers become kings in this world, or till those we now call kings and rulers really and truly become philosophers. —Plato, The Republic, part VII, sec. 2

The quest for less exploitation and greater responsiveness to consumer demand is not an either/or proposition like pregnancy or virginity. Of course, we believe that our own proposals to separate the organizer of the competition from the participating clubs and to require entry by merit will achieve a structure for sports leagues that best serves sports fans. However, a number of improvements can be made within the existing structure of sports leagues, or with relatively modest reforms, to move in a positive direction toward more efficient league operations. We concede that critical aspects of our proposal are designed to benefit fans at owners’ expense and thus are unlikely to ever be adopted voluntarily. But we do not entirely despair of the enlightened self-interest of owners, since our suggested reforms could potentially make both fans and owners better off. This chapter describes the distinction between different types of reforms, then sketches three alternative structural improvements that current sports leagues might adopt. Although these improvements may not provide the same degree of benefit to sports fans as our farther-reaching proposals, they have the potential for significantly improving the operations of sports leagues.



Half-Loaf, Still-an-Improvement Compromise Suggestions

The Limits to Voluntary Reform Our two major reform proposals affect consumers in different ways. Club-run leagues and closed leagues both developed because sports leagues possess economic power in the marketplace (otherwise consumers would simply shift their patronage to others). The absence of entry by merit harms consumers in a traditional monopolistic way, by reducing output (that is, fewer teams) and raising profits (in the form of increased revenue from stadium subsidies and decreased costs for mediocre teams who don’t have to worry about relegation). The inefficiencies of club-run leagues, in contrast, are primarily due to transactions costs, which inhibit leagues from maximizing consumer appeal and thus revenues. It follows that voluntary reform to create a strong and independent competition organizer is more promising than hoping for incumbents to willingly adopt entry by merit. We acknowledge the slim likelihood that existing club owners would voluntarily adopt any form of entry by merit. One of the most valuable aspects of the multimillion dollar value of major league franchises is the permanent right of membership in the league. Giving up perpetual membership rights would be costly, and we see no easy or practical way to redistribute the gains from entry by merit, since this would probably require financial flows to incumbent owners from (1) fans of mediocre teams that now compete more aggressively, (2) fans of new teams in the second-tier league, and (3) broadcasters showing more exciting end-of-season relegation contests. Even if a means of redistribution could be devised, it would not necessarily be socially desirable—we typically do not compensate price fixers and monopolists for their loss of economic power. Additional revenues that flow into professional sports leagues from entry by merit are also, to a significant degree, likely to be transformed into additional costs, as mediocre teams would now be required to invest in player talent to avoid relegation. This would be clearly reflected in franchise values, as demonstrated by a comparison between franchise values in Major League Baseball (where membership is permanently guaranteed) and the European soccer leagues (which use entry by merit). For example, Forbes publishes annu-

167

168 Half-Loaf, Still-an-Improvement Compromise Suggestions ally an estimate of income and franchise value for major sports clubs. For 2006 it estimated that MLB franchises were worth 2.4 times their stated annual income, as opposed to only 2.1 times for the leading European soccer clubs.1 As a political matter, the federal government could make entry by merit easier to swallow by allowing major league clubs some tax write-offs to reflect the reduced franchise value, similar to those allowed companies in regulated industries that had enjoyed limited competition prior to the 1980s deregulation. But this is unlikely to be sufficient to induce voluntary adoption of this procompetitive reform. In contrast, our argument is that the lack of an independent competition organizer not only hurts fans but also “leaves money on the table” for owners. A prominent illustration is the significant losses suffered by MLB owners because of the delay in relocating and finding new ownership for the Montreal Expos franchise, delays primarily due to objections of a single owner, Peter Angelos of the Baltimore Orioles. Another, discussed in Chapter Two, was the NBA’s failure to maximize the appeal of superstar Michael Jordan by allowing Bulls games on a Chicago superstation. The New York Yankees induced superlitigator David Boies to leave his law firm to launch an antitrust challenge against MLB in a dispute over the Yankees’ keen interest in finalizing a lucrative shoe contract with adidas, while MLB officials were dawdling over this sponsorship opportunity.2 We believe the best way to minimize the inefficiencies caused by the inability of club owners to agree on an appropriate division of profits is to formally restructure sports leagues so that they are operated by an independent competition organizer. However, even under current structures, league officials working under the commissioner are, in a sense, unofficial independent competition organizers. Although they lack the formal power our proposal would confer on them, enlightened leadership from these officials can produce results similar to those that would occur under our proposal. We next sketch three possible alternatives: delegation by owners to an independent executive committee charged with the interests of the entire sport; increasing the (“hard”) power of the commissioner to intervene when transaction and bargaining costs are frustrating achievement of ef-



Half-Loaf, Still-an-Improvement Compromise Suggestions

ficient results; and expanding the commissioner’s role in publicly exhorting owners to act in the best interest of the sport (using “soft” power). Each of these suggestions has the potential to benefit fans, through greater innovations, and owners, who can profit from the increased revenues that occur when fan appeal is maximized.

The Commission System We appreciate the difficulty in persuading major league owners to part— even through an arm’s-length sale—with their interest in lucrative assets that generate significant revenues, such as national network contracts, the league’s Internet portal (MLB.com), and fees from national sponsorships. However, owners may come to be persuaded by our argument that league governance by thirty or more self-interested entrepreneurs leaves a lot to be desired. This was, indeed, precisely the conclusion that was reached by the Australian Football League in 1984, where the club-run league reorganized to create a commission to administer the league competition. According to a later summary by a consultant, the member clubs concluded that “in the interest of the competition as a whole and the intense inter-Club rivalry which exists and which is the very foundation upon which the competition survives, there was a need to introduce an independent body to administer the competition.” At the time, additional revenue-sharing schemes were necessary to rescue clubs from severe financial troubles, and the league’s ability to engage in “forward planning and strategic direction” was faltering. When the league reexamined the structure in 1993, the commission structure was maintained and strengthened. A consultant surveying stakeholders found widespread recognition that “it is necessary that an independent objective and unbiased Commission be charged with the responsibility of administering football in the interests of the game per se and not parochial interests.”3 To be sure, clubs retain significant powers under this structure—the commission operates subject to some major decisions, such as the appointment of the CEO and any club relocations, mergers, or expulsions made by club representatives. But most important decisions are now made by

169

170 Half-Loaf, Still-an-Improvement Compromise Suggestions officials with a duty to the entire league. The 1993 review recognized the “very real conflict that exists in the current structure between the legal responsibilities and fiduciary duties of individuals as directors of a particular Club but who also act as director of the AFL.” The review explained, “It is very difficult in considering particular issues at the AFL Board table to disregard the interest of the Club of which the AFL director is also a director. It is unrealistic to expect that he would do so. Many decisions are taken on the basis of emotion rather than logic.” The 1993 report thus recommended that, while certain fundamental powers be retained by the clubs (such as the power to expel members), the board of directors be abolished and replaced by the commission. This recommendation was adopted, and the commission is now responsible for administering the Australian Football League competition.4

The Commissioner as the “Coasebuster” One of the most powerful theories of law and economics, named for the legendary Ronald Coase, is that the allocation of legal rights to one party (for example, the creation of exclusive territories) will not affect the efficient distribution of resources in a world with no transactions costs.5 In such a world, if it were efficient to add a third MLB team in the New York metropolitan area, MLB would do so and compensate the Yankees and Mets sufficiently to allow the proposal to receive support from the ownersas-directors. However, the Coase Theorem alerts us to the fact that where transactions costs exist, the allocation of rights could well interfere with the efficient allocation of resources. In reality (as the Orioles’ objections to the Washington Nationals demonstrated), securing consensus on the harm to the Yankees and Mets from a new team and an equitable way to compensate them makes it unlikely that a negotiated agreement among owners to permit new entry in New York could be achieved. Sports league efficiency would improve if the commissioner were able to intervene when the ability to take advantage of an opportunity is being hampered by owners acting in the interests of their own club rather than the league as a whole. This power



Half-Loaf, Still-an-Improvement Compromise Suggestions

could derive from a sufficiently broad interpretation of his well-recognized authority to act “in the best interests of baseball.” This possibility is already recognized to a degree by major and minor league baseball clubs in the treatment of franchise relocation issues in the context of a higher-level club seeking to move into the territory of a lowerlevel club. Under various agreements, an arbitration process is established if parties cannot agree on fair compensation. These agreements reflect the recognition that if a higher-level club feels it can properly operate in a given market, this result is likely to be more profitable, as well as enhancing the consumer appeal of the game; at the same time, the need for these procedures reflects the recognition that parties may not be able to agree due to transactions costs on the appropriate compensation. In a dynamic market, franchise relocation at the major league level reflects the same problems. Similar problems arise with regard to exclusive broadcast territories. Fans as well as clubs would benefit if, instead of airtight geographic boundaries on broadcast rights, all teams were allowed to market their games anywhere, with compensation for games sold to consumers within the home territory of another team. If the owners could not agree on compensation, the commissioner would arbitrate the dispute. (The Federal Communications Commission has recognized the benefits of mandatory arbitration in related circumstances—where a company that both owns programming and provides retail television services cannot agree with a rival distributor about the price for programming content.6) Although the locus of power regarding broadcast rights is decentralized in all sports but football, the opposite seems true with regard to the marketing of Internet and intellectual property (IP) rights, which are almost entirely centralized. While centralized marketing may be preferable to a system where clubs retain all Internet and IP rights, complete centralization overlooks the obvious efficiencies from giving clubs some financial incentive to exploit the Internet and their own IP rights in ways that will maximize local appeal. At the same time, leagues might legitimately recover a percentage of locally generated revenue, which surely is derived in part from the leaguewide investment in the sport’s popularity. Here again, in-

171

172 Half-Loaf, Still-an-Improvement Compromise Suggestions tervention by the commissioner would appear to allow for more flexible and responsive marketing. Absent a direct conflict with rights sold by MLB, individual clubs could be encouraged to develop ideas for Internet or IP rights licensing, subject to general or case-by-case division of revenues determined by the commissioner. The legal power of a commissioner to impose an efficient solution on squabbling owners must depend on the precise language and interpretation of each league’s constitution. To give a flavor of the complexity, suppose that baseball owners found themselves unable to agree on a coherent division of sponsorship opportunities between the league and individual clubs, and the commissioner of baseball invoked his powers to declare certain areas to be within the exclusive domain of the league, while others would remain with the clubs subject to some revenue sharing of localized opportunities with the league as a whole. Dissenting owners could complain that the constitution explicitly gives owners the sole right to determine revenue sharing. The commissioner could note that his powers to protect the integrity of the game, including with regard to competitive balance, explicitly trump this limitation. Moreover, he could argue that the constitution provides that the interpretation of owners’ authority is explicitly given to his office, and the decision is “final and nonappealable.” In reality, a commissioner would resort to these formal powers only in extraordinary circumstances. Owners could facilitate efficient league decision making, however, by explicitly granting the commissioner the authority to intervene in the best interests of the sport when a proposed course of action would clearly benefit the sport as a whole and an inability to agree on the division of profits is the principal cause of the owners’ inability to act.

Commissioner as Volunteer Cheerleader Many regard Pete Rozelle, former commissioner of the NFL, as one of sports’ greatest executives. Rozelle’s principal accomplishment was— through persuasion rather than any formal power—to lead club owners into engaging in “LeagueThink,” the process of putting long-term league interests before short-term club interests.7 Other commissioners can today



Half-Loaf, Still-an-Improvement Compromise Suggestions

follow more aggressively in Rozelle’s footsteps. Even if relevant by-laws did not currently give the commissioner the authority to act in the manner suggested above in subpart (b), the commissioner indisputably has the authority to intervene by offering his services as an arbitrator and using his significant powers of persuasion to reduce transactions costs to facilitate a voluntary agreement among club owners. A recent example illustrates the informal powers of the commissioner. The New Orleans Saints owner had publicly indicated an interest in moving the club to San Antonio. Former NFL Commissioner Paul Tagliabue was quite skeptical about the public relations and other effects of such a move, which appeared to be exploiting the tragedy surrounding the damage to New Orleans caused by Hurricane Katrina. Formal authority to approve any relocation, however, is vested in the owners, and some have publicly indicated support for the move: although the league as a whole might be harmed by the bad publicity, as owners they look to their own self-interest in being able to move to more profitable locations. Tagliabue, however, promptly appointed an “advisory committee” of owners to review and make recommendations, and reportedly stacked the committee with allies hostile to the relocation. Of course the owners can do as they please, but Tagliabue’s actions make it harder to make decisions contrary to the league’s interest. In addition to individual intervention, the commissioner’s office can improve team efficiency by advice and recommendations. For example, the NBA has a vice president for team marketing and business operations. On the league’s behalf, he and his staff not only ensure a centralized and coordinated marketing effort of all league properties, including efforts to “protect the brand” and ensure contract compliance for national corporate marketing partners; in a hortatory capacity, he also disseminates market research and best practices, serves as an in-house consultant on all team business issues, and develops and executes university training programs for team personnel.8 A combination of “hard power” and “soft power” is illustrated in the current “mixed” structure of the Women’s National Basketball Association. Initially, the league was composed of clubs affiliated with some, but not all,

173

174 Half-Loaf, Still-an-Improvement Compromise Suggestions of the men’s NBA teams, and controlled as a single entity by a corporation owned by all the NBA owners and operated by a board of directors, a majority of whom were not operators of WNBA franchises. However, when the NBA sought the opportunity to obtain new investors interested in running a WNBA club independent of an NBA franchise, they decided to restructure the league so that the club owners also were given majority control of the WNBA’s operating company. Unlike a typical major league, though, the NBA maintains a strong ownership interest in the company as well as formal representation on the board of directors. In addition, the NBA approves all new investors, many of whom are attracted precisely because of the leadership of Commissioner David Stern and his NBA executive team. The formal structure gives the NBA the power to prevent self-interested WNBA owners from taking steps harmful to the league as a whole, and Commissioner Stern’s “soft power” probably enables him to implement any of his own initiatives that will demonstrably benefit the league as a whole, minimizing the risk that innovations that harm a small minority of owners would be blocked as fellow owners adopted a “scratch my back, I’ll scratch yours” philosophy. Ronald Coase teaches that efficient results can always be achieved if transactions costs can be overcome. Even in club-run leagues, commissioners can and do exercise considerable powerful influence to overcome transactions costs and persuade owners to act in the best interests of the league. In doing so, they not only earn the money being paid by the owner-employers but often benefit fans as well, for more profitable ventures often take advantage of the dynamic nature of sport to enhance the entertainment appeal for sports fans.

9

Fans, What We Can Imagine!

A dream you dream alone may be a dream, but a dream two people dream together is a reality. —Yoko Ono, Grapefruit: A Book of Instructions and Drawings

In this book, we’ve tried to enlighten, perhaps entertain, and most importantly persuade the patient reader that for too long fans and their elected officials have allowed sports league owners to abuse the public trust, which has allowed them to make millions of dollars through an extraordinarily tolerated and unregulated monopoly. Safe in the knowledge that market retribution will not be swift even if they fail to meet consumer needs, owners adopt rules in the interests of their own clubs, not only at the expense of sports fans but even at the expense of the league as a whole. Thus, owners • Restrict entry into their league so as to demand billions of dollars in tax

subsidies for stadia • Strictly limit the ability of out-of-market fans to watch their favorite

team, except through expensive leaguewide packages (and even then with ridiculous blackout rules) • Engage in disruptive labor-negotiating tactics and adopt player restraint rules that make it difficult for lousy teams to get better (even if their owners could afford to increase payroll) • Tolerate persistent mismanagement by guaranteeing fellow owners lifetime membership in the major leagues • Mishandle licensing and merchandise by insisting on centralized operations, lest a fellow owner’s individual innovation give that club a competitive advantage

176 Fans, What We Can Imagine! Although there is no perfect solution to the monopoly problem with regard to sports leagues, this book has detailed two major proposals, which will significantly inhibit the exercise of economic power by club owners. The first part of our twofold solution is to take the control of the league away from owners and place it in the hands of a business entity—such as MLB Inc. or NFL, LLC—whose shareholders would profit only from measures that benefit the league as a whole. At best, though, this solution replaces an inefficient monopolist with an efficient one; although this is better for fans, limits on the exercise of monopoly power are still required. Thus, our second proposal is that club participation in the major league should no longer be based on a lifetime guarantee, nor should that guarantee be replaced by the ability to bribe the now-independent league executives; rather, those clubs allowed to compete at the elite levels of major league sports should be selected on merit. In this way, the undeserving (worst) performers would be relegated to a lower-tier league, and the deserving (best) clubs in that lower-tier league would be invited to join the majors. With the major sports leagues governed by leadership independent of club owners and subject to a requirement that entry be based on merit, we predict: A significant reduction in tax subsidies as markets without major league teams realize that, with much less expense and far more enjoyment, they can make it to the big leagues by investing in the promotion of a lower-tier team, rather than bribing an existing team Consider Las Vegas. It is one of the largest cities in America not to possess a major league franchise, and even has a whole article on Wikipedia devoted to the subject.1 Several reasons are advanced to explain this apparent anomaly, including arguments about the negative associations with gambling and the unsuitability of the citizens (apparently, working weekends, as most Las Vegans do, is bad for sports franchises). With promotion and relegation such issues can be tested by the market, and if there is enough support for a team in a city then fans can see their team rise to the top on merit, regardless of whether league officials deem them to be worthy of the honor. A new and exciting second-tier competition plus greater interest at the end of each major league season to determine which teams are relegated



Fans, What We Can Imagine!

Fans are excited when the game matters. The problem with the major leagues is that unless a team is in contention at the end of the season the game does not matter, and often enough both teams are out of contention and nobody cares. Punishing failure through relegation creates excitement that is probably even more intense than being in contention for the title. Teams that miss out on World Series or Superbowl are likely to have another shot the next year, while teams that are relegated face the fear that they might not return to the highest level for years to come. Fans in midsize cities care about meaningful games as well. Second-tier competition for promotion is almost as intense as competition for the championship itself. In 2007, the Milwaukee Brewers’ Nashville affiliate had the best record in the Pacific [sic] Coast League, followed by the Oakland A’s Sacramento affiliate. Of course, players were subject to being recalled to their parent club at any time. Imagine the passion and excitement if this play-off game resulted in one of the teams moving up to the big leagues! More efficient marketing of television rights to end costly bickering among club owners over exclusive territorial rights In the modern era, pro sports have developed a symbiotic relationship with TV. Television succeeds when it brings the best games to fans. Territorial rules that serve only the interest of the club deprive TV fans of the opportunity to watch the best games and undermine long-term interest in the sport. Innovative packages catering to out-of-market fans would be quickly developed by an independent league, and cumbersome blackout rules would be history. Efforts to promote outcome uncertainty and fan appeal by changing the rewards for clubs rather than by restraining competition for players, with the resulting industrial discord Imagine an off-season meeting between the general manager and owner of a smaller-market club. As happens each year, the manager is trying to justify a payroll increase to improve the club’s performance. This time, a new directive from League Inc. indicates that clubs that are not improving on the field will lose previously granted revenue-sharing money. In addition, clubs that make the play-offs are guaranteed a multimillion dollar “prize.” The general manager walks away happy and proceeds to significantly im-

177

178 Fans, What We Can Imagine! prove the roster. Everyone expects a reward for winning, but while the players can make their fortunes through endorsements if they win titles, under the present regime team owners stand to gain little from title wins, and probably gain more from coming last and picking up early draft picks and revenue handouts. Subsidizing owners who fail and penalizing those who succeed is perverse, and an independently run league would make sure that incentives for owners also worked for the fans. Owners forced by the threat of relegation or competition from a new nearby club to make shrewd investments to appeal to their fans (ultimately with the possibility of the league forcing an owner to sell the franchise in the face of persistent mismanagement) The recent passing of longtime Chicago Blackhawks owner William Wirtz has created speculation that his sons’ new management will signal a new era for that storied but recently unsuccessful team. But if the Blackhawks were subjected to relegation, or another entrepreneur could use the suburban arena now used by a minor league hockey team for a second-tier club with a high payroll designed to earn promotion to the NHL, Wirtz’s heirs would be forced to either bring in new management and infuse the team with new investment or sell to someone who will. Despite the location of our professional homes in ivory towers, we are realistic enough to acknowledge that the most probable scenarios for implementation or any acceptance of the ideas set forth in this book likely lie in the compromises and “half-measures” we discussed in Chapter Eight: an evolutionary increase in the power of league commissioners to act in the best interest of the league, independent of the interest of the owners, not only with regard to traditional matters of integrity but also to business issues that affect the popularity and profitability of the sport. However, we do have imaginations, and have set forth a few hypothetical “case studies.” We offer them here for purposes of illustration and, just perhaps, inspiration.



Fans, What We Can Imagine!

The Case of the Frustrated Billionaire There are actually a number of billionaires in the United States (approximately one-third of the world’s one thousand richest people are American citizens),2 many of whom are quite skilled at identifying undervalued businesses, and some of whom are probably sports fans. It would obviously be much easier for our ideas to be implemented by Warren Buffett than by trying to organize a large number of investors in MLB Inc., a publicly traded company. Given the fantastic reputation of some billionaires, even George Steinbrenner might be persuaded to sell his interest in controlling MLB Inc. in return for enough nonvoting stock in the Buffett-run league. Or Buffett might lure the requisite three-fourths of owners to vote to support a restructuring offer that his Berkshire Hathaway Corporation might make. A billionaire with less patience than Buffett could buy up the sport and then resell the league operation for a nice profit.

The Case of the Compromising Monopolist Various efforts have been made over the years to compete with established major leagues. A couple have been completely successful (baseball’s American League and the American Football League), and a few others have resulted in mergers inviting some of the better franchises of the rival leagues to join the established one (the Cleveland Browns, San Francisco ’49ers, and Baltimore Colts of the All American Football Conference; the Edmonton Oilers, Hartford Whalers, Winnipeg Jets, and Quebec Nordiques of the World Hockey Association; and the New York Nets, San Antonio Spurs, Indiana Pacers, and Denver Nuggets of the American Basketball Association).3 Entry is not easy, because of the strong “brand loyalty” fans have to the established league, and the difficulty (especially with over-theair television that is free to fans) with the strategy common to new entrants in most businesses: entering with a product that may be perceived to have lower quality but also a substantially lower price. Rival league efforts to improve quality through bidding for player services have typically been met by significant spending increases by the established league in an effort to get

179

180 Fans, What We Can Imagine! the rival to fold—often reaching levels that make no economic sense unless justified by the established league’s ability to recoup losses once the challenger is eliminated.4 The stakes are quite high in these interleague battles. For new entrants, the books are riddled with unsuccessful entrants who were left with nothing to show for their troubles, but a successful merger can result in a fantastic return on investment for those entering a new league for a modest price (the entry fee for the American Football League was $25,0005). For established club owners, the operating costs during a war with a new league can skyrocket; in hindsight, accepting payments to let the rivals join the club might be far more profitable. Traditionally, though, upstarts are not allowed in. Either at the outset of the next credible merger, or perhaps shortly into an interleague war, a majority of the incumbent league’s owners might decide that the better course would be to learn from the example of the English Football League in 1891: allow the new clubs to enter, but in a second division, which would not compete with the established clubs yet from which perhaps two teams each year could be promoted. Admission to the lower-tier league would still fetch a hefty fee; indeed, if twelve clubs were admitted to the lower tier, the fee might well approach the amount that might be gained from two expansion teams. Especially where the current league was plagued with a small number of teams in small markets that were constantly underperforming, the rest of the owners might see this as a good way to deal with another problem as well: these small-market owners would then be preoccupied with staving off relegation instead of complaining about competitive balance.

The Case of Mayors with Backbone While a few former big-city mayors can look back with pride on a legacy of having brought a major league team to their city, there are many more cases of failed efforts to attract a team or mayors saddled with tax subsidies that prevent them from providing services their constituents demand. Moreover, for every mayor with a credible plan to attract a franchise to her



Fans, What We Can Imagine!

city, there are many more who already have teams, don’t want to lose them, and would just as soon not have to pay a ransom to prevent a relocation. Mayors could all agree with one another not to compete, but this strikes us as the sort of unstable cartel that is hard to police and unlikely to be effective. Better, the mayors could agree to use their considerable political power to pressure Congress to take action. Legislation requiring major leagues to permit entry by merit would be a huge victory for a large number of mayors. Those with major league franchises would be freed from the risk of relocation; a significant number without franchises would now have the chance to cut the ribbon at a ballpark in the second-tier league that would have a chance of hosting the Red Sox or Cubs if properly managed. And when their hometown team makes it to the majors, they’ll get their legacy with far less public investment.

The Case of the Fed-Up Commissioner As we noted in Chapter Two, MLB Commissioner Bud Selig is primarily hailed for his skills as a former owner in cajoling his former colleagues into acting in the best interests of baseball. His background and admired skill set are unusual among league commissioners. The more typical career path of a modern-day commissioner is to aggressively demonstrate skill and judgment in a senior league capacity before being promoted to the top position. (David Stern was a senior vice president and chief lawyer for the NBA; Gary Bettman was chosen by Stern as his replacement as vice president and general counsel for the NBA before being hired by the NHL; recently retired Paul Tagliabue was the NFL’s chief outside counsel with a major Washington law firm; his successor, Roger Goodell, had been promoted by Tagliabue to serve as the NFL’s chief operating officer for five years prior to his selection as the new NFL chief.) While Stern, Bettman, and Goodell all work for their respective owners, their legacies and perhaps their current compensation depend on the overall financial condition of their leagues. Subject to the ever-present risk of dismissal by petulant owners, they act as quasi “residual claimants,” trying to figure out how to get the owners to approve innovations, such as sharing

181

182 Fans, What We Can Imagine! revenue based on objective performance-based measures or rule changes to bring popular teams to as many road venues as possible. These successful executives are often persuasive, but not always. And as they get more successful, their tolerance for misguided owners who are unwilling to accept their recommendations could grow. At some point, tired of the multiple albatrosses of governance by their self-interested bosses and key franchises being mismanaged by inept owners, the commissioner might decide to pay a visit to Goldman, Sachs or J.P. Morgan himself. As veteran commissioners, Stern and Bettman could play a critical role in persuading a sufficient number of owners to agree to nonvoting stock in League Inc. and in drawing up the critical contract between the league and the clubs going forward.

The Case of the Imperialist Media Baron Successful owners of major media companies have used sports for their own devices for several decades. In the United States, Ted Turner transformed a local UHF station in Atlanta into the anchor of a huge empire, in large part by providing content to his innovative “superstation” by purchasing the Atlanta Braves. In Australia, two media magnates, Kerry Packer and Rupert Murdoch, transformed cricket and rugby league because of their desire to have additional programming for their media companies down under. As sports and telecommunications technologies grow and develop together, the utility of sporting contests as media content continues to grow. The NFL is the archetypical example of a sport where television and media revenues far outstrip revenues from live gate. NASCAR now uses technology to permit paid subscribers to create their own “channel” for their favorite drivers, while their Nextel sponsors have devised easy-to-use means for fans to use their cell phones to monitor the conversations between drivers and crews. As Internet applications continue to develop and eventually merge with television itself, this will only grow. Outside of the NFL and NASCAR, media rights remain divided between leagues and individual clubs. As we’ve previously noted, this division makes



Fans, What We Can Imagine!

good sense in circumstances where clubs can better manage the sale of local rights. But often clubs, which originally owned the rights, are reluctant to part with them, and owners continue to prefer a system of exclusive territories that makes it difficult to take advantage of the millions of Americans living outside of the media market of their favorite team. At the same time, the fees for national television rights for games to be shown at prime viewing time continue to escalate. A media magnate, tired of endless battles with rival networks for escalating rights fees, and who sees significant synergies in putting all media content under one roof, might decide that the best way to effectuate an integrated plan is to acquire the league (leaving clubs, of course, to continue to operate separately and compete against each other on the field and for player talent). It is not clear that this sort of deal would pass antitrust muster or that it would serve the public better than some other alternatives. Given the current failure of antitrust law to protect consumers against inefficient broadcast rights agreements by current owners (a topic we discussed in Chapter Six), if antitrust approval were conditioned on our entry-by-merit plan, this might well be a positive reform.

The Case of Fans Arising Our final, and most hopeful, imaginary scenario is political, not economic. In it, sports fans decide they have had enough with tax subsidies, labor unrest, inefficient management, frustrating television blackouts, and the like; they clamor for Congress to take action. Always anxious for highprofile hearings, important senators and representatives bring in powerful league officials and owners as well as media-savvy constituents, threatening reform legislation if no action is taken by the owners. Unlike what usually happens, voter interest does not dissipate, and fans and politicians become increasingly frustrated with owners’ refusals to give up any of their monopoly power. Seizing an opportunity, several representatives who wish they were senators, and several senators who wish they were president, decide to take the lead in pushing legislation to require separation of league

183

184 Fans, What We Can Imagine! organization from the clubs, and to mandate entry by merit. Under pressure, anxious to avoid having to work under the burden of federal law and seeing ways to make some money on a restructuring from a publicly traded League Inc. and on fees for entrants into a new second-tier league, the owners agree—being sure to allow the politicians to take some of the credit. How nice would that be!

Notes and Index

Notes

Chapter 1 1. Valley Liquors, Inc. v Renfield Importers, Ltd., 678 F.2d 742, 745 (7th Cir. 1982) (Posner, J.). 2. Statistical tests indicate that other leagues or entertainment products do not provide serious competition for major sports. Andrew Zimbalist, In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig (Hoboken, N.J.: Wiley, 2006), at 7. 3. Darcy v Allen, 77 Eng. Rep. 1260 (K.B. 1602). 4. We initially touched on this subject in Stefan Szymanski and Stephen F. Ross, Necessary Restraints and Inefficient Monopoly Sports Leagues, 1 Int’l Sports L. Rev. 27 (2000), and analyzed the problem in depth in Stephen F. Ross and Stefan Szymanski, Antitrust and Inefficient Joint Ventures: Why Sports Leagues Should Look More Like McDonald’s and Less Like the United Nations, 16 Marquette Sports L. Rev. 213 (2006). 5. NCAA v Board of Regents of the Univ. of Oklahoma & Univ. of Georgia Athletic Ass’n, 468 U.S. 85, 105–106 (1984), discussed in Paul C. Weiler and Gary R. Roberts, Sports and the Law: Text, Cases, Problems, 3d ed. (St. Paul, Minn.: Thomson West, 2004), at 868. 6. See, e.g., Henry Aaron, “Why I’m No Fan of the Stadium Financing Plan,” Washington Post, Nov. 7, 2004, at B5. 7. Ken Davidoff, “The National’s Pastime,” Newsday, July 4, 2005, at A38. 8. Data on attendance, ticket prices, and much else relating to Major League Baseball and other major league sports can be obtained from the outstanding website of Professor Rodney Fort, at http://www.rodneyfort.com/SportsData/ BizFrame.htm.

188 Notes to Chapter 1 9. Paul C. Weiler, Leveling the Playing Field: How the Law Can Make Sports Better for Fans (Cambridge, Mass.: Harvard University Press, 2000), at 189. 10. Gregg Patton, “A Guide to Super Bowl XXXIX,” Press Enterprise (Riverside, Calif.), Feb. 5, 2005, at S3. 11. United States v Grinnell Corp., 384 U.S. 563, 570–71 (1966). 12. The textual narrative is based largely on Stephen F. Ross, Antitrust Options to Redress Anticompetitive Restraints and Monopolistic Practices by Sports Leagues, 52 Case Western L. J. 133, 158–64 (2001). 13. Lionel S. Sobel, Professional Sports and the Law (New York: Law-Arts, 1977), at 1–7. 14. In Standard Oil Co. v United States, 221 U.S. 1 (1911), the Supreme Court found the defendant guilty of monopolization in violation of section 2 of the Sherman Act. Among the illegal activities engaged in by the Standard Oil Trust was the acquisition of control over numerous rival oil refineries and the elimination of other rivals by foreclosing their access to transportation and distribution facilities. 15. United States v Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945). 16. Federal Baseball Club v National League, 259 U.S. 200 (1922) initially held that the business of baseball was not interstate commerce, and thus not subject to the Sherman Act. Flood v Kuhn, 407 U.S. 258 (1972) acknowledged that modern definitions of commerce included the business of baseball, but that Congress’s “positive inaction” in leaving the Federal Baseball precedent untouched, combined with a consideration of baseball’s “unique characteristics and needs,” justified continuation of the judicially created exemption. Whether the Supreme Court would or should reaffirm Flood today remains an open question. See Major League Baseball v Crist, 331 F.3d 1177 (11th Cir. 2003) (finding that lower appellate court could not distinguish or overrule Flood but that “death of the business-of-baseball exemption would likely be met with considerable fanfare, save for the club owners who benefit from the rule”). 17. David Harris, The League (New York: Bantam, 1986), at 17. 18. United States Football League v National Football League, 842 F.2d 1335 (2d Cir. 1988). 19. Ross, Antitrust Options, at 164. 20. Ibid. at 157 n.70. 21. Baseball Antitrust Immunity: Hearing Before the Subcomm. on Antitrust, Monopolies and Business Rights, Senate Comm. on the Judiciary, 102d Cong., 2d Sess. 33 (Serial No. J-102-90) (1992). 22. See, e.g., John Kass and Daniel Egler, “Sox Will Stay If Legislature OKs



Notes to Chapter 1

Proposal,” Chicago Tribune, May 12, 1988, part 1, at 1; “Giants OK Deal to Leave— League to Vote on Sale to Florida Group,” San Francisco Chronicle, Aug. 8, 1992, at A1 (the San Francisco Giants owner, disenchanted with the current stadium and voter refusal to subsidize a new one, shops team around to any buyer with no regard for keeping the team in the area); Stefan Fatsis, “Seven Strikes and Still Swinging: St. Petersburg Still Hopes to Get a Major-League Team,” Cleveland Plain-Dealer, July 14, 1993, at 5F (detailing the emergence of local buyers to prevent relocation to Tampa of teams in Oakland, Minnesota, and Dallas-Fort Worth). Tax subsidies and favorable stadium deals have replaced local media revenues as the most important factor in franchise value and profitability, allowing midsize market clubs such as the Texas Rangers, Baltimore Orioles, and Cleveland Indians to earn above-average incomes. See Michael K. Oznian and Brooke Grabarek, “Foul!” Financial World, Sept. 1, 1994, at 1820. Of course, baseball’s commissioner, former Milwaukee Brewers owner Bud Selig, would never threaten to move to Tampa for such exploitive purposes. Rather, if sufficient tax subsidies were not forthcoming in Wisconsin for the Brewers, Selig threatened to move to Phoenix or Charlotte! See Andrew Zimbalist, Baseball Economics and Antitrust Immunity, 4 Seton Hall J. Sport L. 297, 303 (1994). 23. See John Wolohan, Symposium 6-4-3 (Double Play)! Two Teams Out: Contraction in Baseball, Major League Baseball Contraction, and Antitrust Law, 10 Vill. Sports & Ent. L. J. 5, 5 (2003). 24. See http://www.projectballpark.org/future/miami.html (providing a time­ line of stadium funding). 25. See Dara Kam, “Marlins Have Shot at Park,” Palm Beach Post (Fla.), Feb. 21, 2007, at 7A (citing the $60 million tax subsidy plan, the $490 million stadium figure, and action of the Florida Senate Commerce Committee). 26. See http://www.projectballpark.org/future/miami.html (citing action of the Florida House of Representatives). 27. See Jason Lieser, “Marlins’ Hopes for Aid Dealt a Blow,” Palm Beach Post (Fla.), May 6, 2007, at 3B (referring to the $250 million and $210 million figures). 28. See http://www.projectballpark.org/future/miami.html (referring to the action of the City of Miami Commission and the location of the stadium). 29. Tarik El-Bashir, “N.H.L. Seeks Aid to Keep Canada’s Sport in Canada,” New York Times, Sept. 25, 1999, at A1. 30. John Siegfried and Andrew Zimbalist, “The Economics of Sports Fa­ cil­ities and Their Communities,” Journal of Economic Perspectives, 14:3, 103 (2000).

189

190 Notes to Chapter 1 31. See section 1.0 of the federal merger guidelines, available at http://www. usdoj.gov/atr/public/guidelines/horiz_book/10.html. 32. Barry Witt, “A’s Fremont Ballpark Must Field Host of Hurdles: Environmental Impact on City, S.J. Giants’ Territorial Issues Blocking Home Plate,” San Jose Mercury News, Nov. 19, 2006 (quoting MLB Rule 52(a)(4): “No Major or Minor League Club may play its home game within the home territory or within 15 miles from the boundary of the home territory of any other Minor League Club”). 33. Pittsburgh Athletic Co. v KQV Broad. Co., 24 F. Supp. 490 (W.D. Pa. 1938). 34. Scott R. Rosner and Kenneth L. Shropshire, The Business of Sports (Boston: Jones and Bartlett, 2004), at 30. 35. See 2005 American Community Survey, Selected Social Characteristics: United States, at http://www.census.gov/acs/www/Area%20Sheets/ Area%20Sheet%20US.doc. See also 2004 American Community Survey, Percent of the Native Population Born in Their State of Residence: 2004 Universe: Native population, at http://factfinder.census.gov/servlet/GRTChart?_ bm=y&-geo_id=01000US&-_box_head_nbr=R0601&-_req_type=C&-ds_ name=ACS_2004_EST_G00_&-_grtChart=Y&-redoLog=false&-format=US30&-mt_name=ACS_2004_EST_G00_R0601_US30. 36. Paul D. Staudohar, “Baseball and Broadcast Media,” in Claude Jeanrenaud and Stefan Késenne (eds.), The Economics of Sport and Media (Northhampton, Mass.: Edward Elgar, 2006), at 190. See also Richard Sandomir, “TV Sports; Just How Super Are These Stations?” New York Times, Sept. 1, 1992, section B, at 13. 37. This was the famous Messersmith/McNally arbitration, in Twelve Clubs Comprising Nat’l League of Prof ’l Baseball Clubs, 66 Lab. Arb. Rep. (BNA) 101 (Dec. 23, 1975). 38. Marvin Miller, A Whole Different Ball Game: The Sport and Business of Baseball (Chicago: Ivan R. Dee, 1991), at 238–85. 39. Messersmith/McNally, in 66 Lab. Arb. Rep., at 110–11. 40. Stefan Szymanski, in “The Economic Design of Sporting Contests,” Journal of Economic Literature, 41, 1137–87 (2003), reviewed ten published papers that estimated the impact of free agency on competitive balance in the National League and the American League. Of the twenty studies, in seven cases there was no observed change, in nine cases competitive balance improved, and in only four cases was there evidence that competitive balance had deteriorated. 41. Stephen F. Ross, The NHL Labour Dispute and the Common Law, the Competition Act, and Public Policy, 37 U.B.C. L. Rev. 343, 388, 395–96 (2004).



Notes to Chapter 1

42. Richard Hoffer, “The Loss Generation,” Sports Illustrated, Apr. 17, 2000, at 58. 43. According to a source quoted in Mitch Lawrence, “Knickerblocker: Dolan Dismisses Stern Concern over Garden Mess,” New York Daily News, May 21, 2006, at 76, Commissioner Stern “knows it’s really bad to have a premier franchise, playing in the media capital of the world and playing in one of the marquee venues in the world, Madison Square Garden, and it’s the laughingstock of his league. He’s trying to get Dolan to make changes, but Dolan thinks [GM Isiah Thomas] is a genius. He’s the only person in the world who thinks that.” 44. Zimbalist, Selig, at 79. 45. Ibid. at 92. 46. Even the highly centralized Major League Soccer has recognized this, adopting a new policy that removes the league from dictating individual clubs’ marketing strategies. Tobias Xavier Lopez, “MLS Says It Will Back Off, Let Teams Set Own Goals,” Ft. Worth Star-Telegram (Tex.), May 26, 2006. 47. The path-marking works are James Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1962); and Mancur Olson, Logic of Collective Action (Cambridge, Mass.: Harvard University Press, 1965). See also R. Douglas Arnold, The Logic of Congressional Action (New Haven, Conn.: Yale University Press, 1990).

Chapter 2 1. Stephen F. Ross, “Antitrust, Professional Sports, and the Public Interest,” Journal of Sports Economics, 4:4, 324, 330 (Nov. 2003) (referring to Chicago Professional Sports Ltd. v National Basketball Association, 961 F.2d 667 (7th Cir. 1992)). 2. For arguments in favor of a single entity defense for sports league owners, see, e.g., Myron G. Grauer, Recognition of the National Football League as a Single Entity Under Section 1 of the Sherman Act: Implications of the Consumer Welfare Model, 82 Mich. L. Rev. 1 (1983); Gary R. Roberts, Sports Leagues and the Sherman Act: The Use and Abuse of Section 1 to Regulate Restraints on Intraleague Rivalry, 32 UCLA L. Rev. 219 (1984); John C. Weistart, League Control of Market Opportunities: A Perspective on Competition and Cooperation in the Sports Industry, Duke L. J. 1013 (1984). Critics of the single entity defense include Lee Goldman, Sports, Antitrust, and the Single Entity Theory, 63 Tul. L. Rev. 751 (1989); Michael S. Jacobs, Professional Sports Leagues, Antitrust, and the Single-Entity Theory: A Defense of the Status Quo, 67 Ind. L. J. 25 (1991); Daniel E. Lazaroff,

191

192 Notes to Chapter 2 Antitrust Analysis and Sports Leagues: Re-examining the Threshold Questions, 20 Ariz. St. L. J. 953 (1988); Stephen F. Ross, An Antitrust Analysis of Sports League Contracts with Cable Networks, 39 Emory L. J. 463, 465–68 (1990). 3. Copperweld Corp. v Independence Tube Corp., 467 U.S. 752, 769, 771 (1984). 4. Chicago Prof ’l Sports Ltd. Partnership v NBA, 961 F.2d 667, 671 (7th Cir. 1992). 5. For a thorough discussion of league cartels, which is still of relevance today, see Lance Davis “Self Regulation in Baseball, 1909–1971,” ch. 10 in Roger Noll (ed.), Government and the Sports Business (Washington, D.C.: Brookings Institution Press, 1974), at 349–86. 6. Bob Costas, Fair Ball: A Fan’s Case for Baseball (New York: Broadway, 2000), at 27. 7. Chicago Prof ’l Sports Ltd. Partnership v NBA, 95 F.3d 593, 604–05 (7th Cir. 1996). 8. On the problem of collective action, the classic reference is to the work of Mancur Olsen, e.g., The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, Mass.: Harvard University Press, 1965). There is a vast literature about how to address collective action problems, and much of this comes under the heading of “game theory,” which is a way of modeling decision making when choices are interdependent. The archetypal example is the celebrated “prisoner’s dilemma,” and probably the most famous book on the subject is Robert Axelrod’s The Evolution of Cooperation (New York: Basic, 1984). However, since then, economists have generated a lot of theoretical insights into how collective action problems can be overcome in some contexts; see, for example, George G. Mailath and Larry Samuelson, Repeated Games and Reputations: Long-run Relationships (New York: Oxford University Press, 2006). While sports economists have long recognized that team decision making is interdependent (e.g., Walter C. Neale, “The Peculiar Economics of Professional Sport,” Quarterly Journal of Economics, 78, 1 [1964]), there has been a tendency to assume that rational owners will find ways to overcome these problems. For example, the standard view in the literature has been to treat the competition for playing talent as joint profit maximizing exercise among the owners (see, e.g., Stefan Szymanski, “Professional Team Sports Are Only a Game: The Walrasian Fixed-Supply Conjecture Model, Contest-Nash Equilibrium, and The Invariance Principle,” Journal of Sports Economics, 5, 111–26 [2004]), leading to the claim that “the institutional structure of leagues has developed in an effort to minimize the possibility that actions by any one owner could harm the prof-



Notes to Chapter 2

itability of the league as a whole” (Rodney Fort and James Quirk, “Rational Expectations and Pro Sports Leagues,” Scottish Journal of Political Economy, 54:3, 377 [2007]). Of course, it is our contention that the leagues have to a significant degree failed in this endeavor. 9. Harold Seymour, Baseball: The Golden Years (New York: Oxford University Press, 1971), at 14–15. 10. Andrew Zimbalist, In the Best Interest of Baseball? The Revolutionary Reign of Bud Selig (Hoboken, N.J.: Wiley, 2006), at 208. 11. Ibid. at 209. 12. Zimbalist, Selig, at 35. 13. Daniel Ginsburg, The Fix Is In: A History of Baseball Gambling and Game Fixing Scandals (Jefferson, N.C.: McFarland, 1995), at ch. 5. 14. Harold Seymour, Baseball: The Early Years (New York: Oxford University Press, 1960), at 37, 249, 323. 15. Harold Seymour, Baseball: The Golden Age, vol. 2 (New York: Oxford University Press, 1971), at 311. 16. Ibid. at 330. 17. Ibid. at 373, 377–79, 386. 18. Harold Seymour, for one, is quite critical: “Neither does the myth that Landis ‘saved’ baseball stand up to the facts.” See Baseball: The Golden Age, vol. 2 at 420–21. 19. Zimbalist, Selig, at 44–47. 20. Compare Andrew Zimbalist, “Trading on Baseball’s Competitive Integrity,” Sports Business Journal, Aug. 18, 2003, at 38 (criticizing differential treatment of Red Sox and Yankees cash sales, Selig’s refusal to require Reds to spend revenue sharing income to improve, and lamenting Selig as a “compromised commissioner” and baseball’s lack of “intelligent and principled leadership”) with Robert DuPuy, “Criticisms of MLB, Selig Off by a Mile,” Sports Business Journal, Sept. 8, 2003, at 19 (calling Zimbalist a “purported economist” with “baseless” arguments). 21. Zimbalist, Selig, at xiii, 212. 22. Ibid. at 127, 167. 23. Senator Howard Metzenbaum was sufficiently critical to convene hearings as to whether Selig’s appointment should trigger legislation revoking baseball’s antitrust immunity. Senate Comm. on the Judiciary, Subcomm. on Antitrust, Monopolies, and Business Rights, Baseball’s Antitrust Immunity, 102d Cong., 2d Sess. (1992). 24. Zimbalist, Selig, at 136.

193

194 Notes to Chapter 2 25. Ibid. at 190. 26. Dan Rooney, My 75 Years with the Pittsburgh Steelers and the NFL (New York: DeCapo Press, 2007), at 100. 27. Stefan Fatsis, “The Battle for the NFL’s Future,” Wall Street Journal, Aug. 29, 2005, at R1, 3. 28. Andrew Zimbalist, May the Best Team Win (Washington, D.C.: Brookings Institution Press, 2003), at 153–56; John Dodge, Regulating the Baseball Monopoly: One Suggestion for Governing the Game, 5 Seton Hall J. Sports L. 35, 58 (1995). 29. Around the world, soccer is generally regulated by officials independent of professional clubs that participate in domestic leagues, but who are not truly “independent” in the sense we refer to in this book. International federations are dominated by leaders from domestic federations, who tend to have a bias toward international team competitions, which is the prime source of revenue for these domestic federations. 30. Fay Vincent, The Last Commissioner: A Baseball Valentine (New York: Simon & Schuster, 2002), at 290. He goes on to argue, “In a publicly traded company, the largest issues ultimately come down to this: Is this good for the shareholders? The shareholders would be owners, players, fans—everybody.” We differ from Vincent’s vision, in that he argues that the league itself should own the teams, while we propose “vertical” separation. However, we share the view that there needs to be a commercial organization whose interests are best served by making the sport as attractive as possible. 31. Stephen F. Ross, Monopoly Sports Leagues, 73 Minn. L. Rev. 643 (1989). 32. We have previously discussed these issues in more detail, in Stephen F. Ross and Stefan Szymanski, Open Competition in League Sports, 2002 Wisconsin L. Rev., 625. See also Roger Noll, “The Economics of Promotion and Relegation in Sports Leagues: The Case of English Football,” Journal of Sports Economics, 3, 169 (2002); and Stefan Szymanski and Tomasso M. Valletti, “Incentive Effects of Second Prizes,” European Journal of Political Economy, 21, 467 (2005). 33. An example of this free-riding is given in a paper by David Surdam on the effect of gate revenue sharing in the early years of the NFL, when one owner became notorious for free-riding on the quality of opposing teams, which brought in large crowds: “The American ‘Not-So-Socialist’ League in the Postwar Era: The Limitations of Gate Sharing in Reducing Revenue Disparity in Baseball,” Journal of Sports Economics, 3:3, 264–90 (2002). 34. See, e.g., Alexander Thompson, “Canadian Foreign Policy and Straddling Stocks: Sustainability in an Interdependent World,” Policy Studies Journal, 28:1, 219–35 (2000); and Edward Allison, “Big Laws, Small Catches: Global Ocean



Notes to Chapter 2

Governance and the Fisheries Crisis,” Journal of International Development, 13, 933–50 (2001). The idea that individual pursuit of self-interest might produce a collective disaster was forcibly expressed in Garrett Hardin’s famous article “The Tragedy of the Commons,” Science, 162, 1243–48 (1968). The application of this phenomenon to the operation of cartels is well known in economics, where the problem is known as the Prisoner’s Dilemma; see, for example, Avinash Dixit and Barry Nalebuff, “Resolving the Prisoner’s Dilemma,” ch. 4 in Thinking Strategically (New York: Norton, 1993). 35. On the significance of the residual claimant, see Armen A. Alchian and Harold Demsetz, “Production, Information Costs, and Economic Organization,” American Economic Review, 62, 777–95 (1972). The Chinese riverboat example is taken from Steven N.S. Cheung, “The Contractual Nature of the Firm,” Journal of Law and Economics, 26, 1–21 (1983). 36. See Stefan Szymanski and Andrew Zimbalist, ch.1 in National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer (Washington, D.C.: Brookings Institution Press, 2005). Subsidies for stadium construction in the rest of the world generally relate to competition to host major events such as the World Cup and the Olympic Games. This is a similar type of phenomenon, relating to the monopoly powers of governing bodies. 37. The classic reference on the hold-up problem is Oliver Williamson, “Transaction Cost Economics: The Governance of Contractual Relations,” Journal of Law and Economics, 22, 233–61 (1979). 38. Quoted from John Helyar, Lords of the Realm (New York: Villard, 1994), at 77.

Chapter 3 1. Stefan Szymanski and Andrew Zimbalist, National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer (Washington, D.C.: Brookings Institution Press, 2005), at 15–16. 2. In fact, what the rest of the world calls American football was modeled on the British game of rugby football, also played largely with the hands, which had separated from the game of Association football (soccer) back in 1871. See, e.g., Allen Guttmann, Sports: The First Five Millennia (Amherst: University of Massachusetts Press, 2004), at 114–16 on rugby, and 142–54 on football. 3. [Author’s note: Not to mention bombast, bullshit, and boastfulness] Albert Goodwill Spalding, America’s National Game (New York: American Sports Publishing Co., 1911), at 4. 4. James Michener associated violence in American sports with “the inher-

195

196 Notes to Chapter 3 ent violence of our society.” See Sports in America (Greenwich, Conn.: Fawcett Press, 1976), at 538. Allen Guttmann describes some of the negative impacts of Little League sports on children, including increased propensity to violence and cheating. See A Whole New Ball Game: An Interpretation of American Sports (Chapel Hill: University of North Carolina Press, 1988), at 95–100. When George Will wrote about baseball Commissioner Bart Giamatti’s decision to impose a lifetime ban on Pete Rose for gambling, he identified the moral health of baseball with that of the nation: “As he [Giamatti] spoke, the injury to baseball began to heal and a national sense of ethical standards was strengthened.” See George F. Will, Bunts (New York: Simon & Schuster, 1998), at 202. 5. See, e.g., Allen Guttman, Games and Empires (New York: Columbia University Press, 1994). 6. We say “developed” rather than “invented” because the original inventors of American sports tended to have the same kind of noncommercial motives as their British counterparts. For example, Alexander Cartwright and the Knickerbocker Club of New York were interested in developing baseball to promote respectable upper middle class sociability, like the rural cricket clubs of England; the footballers of Yale and the other Ivy League colleges were interested in aping the exclusive games of Oxford and Cambridge; the inventor of basketball, James Naismith, was interested in promoting “muscular Christianity” in the same way reformers in England had been promoting sports among the poorer sections of society from the 1850s. See, for example, Benjamin Rader, American Sports: From the Age of Folk Games to the Age of Televised Sports, 4th ed. (Upper Saddle River, N.J.: Prentice-Hall, 1999), at 50–53 on “fraternal baseball,” 81–85 on the influence of Oxford and Cambridge on the Ivy League, and 100–103 on muscular Christianity and basketball. For a more detailed history of the British experience, see Derek Birley, Sport and the Making of Britain (New York: Manchester University Press, 1993), esp. ch. 9. 7. Critics argue that such high-sounding principles are honored only in the breach. However, for the purpose of analyzing the application of such values to the rules governing sports, it makes little difference whether the underlying values are upheld in society at large. 8. Daniel Wann, Merrill Melnick, Gordon Russell, and Dale Pease, Sports Fans: The Psychology and Social Impact of Spectators (New York: Routledge, 2001), at 190. 9. Franklin Foer, How Soccer Explains the World: An Unlikely Theory of Globalization (New York: Harper Collins, 2004), at 240. 10. Michael Mandelbaum, The Meaning of Sports: Why Americans Watch Baseball, Football, and Basketball and What They See When They Do (New York: Public Affairs, 2004), at 26.



Notes to Chapter 3

11. Bob Costas, Fair Ball (New York: Broadway, 2000), at 58–59. 12. Will, Bunts, at 70. 13. See, for example, Szymanski and Zimbalist, National Pastime, at 23–25. 14. Quotes reprinted in D. Sullivan (ed.), Early Innings: A Documentary History of Baseball, 1825–1908 (Lincoln: University of Nebraska Press, 1995), at 114. 15. The U.S. Supreme Court was sufficiently concerned about the extent to which precedents under the common law of restraint of trade had permitted cartel behavior that it initially rejected any reference to that body of law, holding that the Sherman Act prohibited literally “every” contract in restraint of trade. See United States v Trans-Missouri Freight Ass’n, 166 U.S. 290 (1897). This approach proved untenable; it subsequently affirmed a masterful opinion by future President and Chief Justice William Howard Taft, sitting then as an appellate court judge, who explained why pro-cartel common law cases were wrong in “setting sail on a sea of doubt” in assuming the power to say how much competition was in the public interest. See United States v Addyston Pipe & Steel Co., 85 F. 271, 284 (6th Cir. 1898), aff ’d, 175 U.S. 211 (1899). Thus, anticompetitive price fixing was illegal “however reasonable the prices they fixed, however great the competition they had to encounter, and however great the necessity for curbing themselves by joint agreement from committing financial suicide by ill-advised competition.” Ibid. at 291. 16. Sullivan, Early Innings. 17. 1952 Report of the Subcommittee on Study of Monopoly Power of the House Committee on the Judiciary, HR Rep. No. 2002, 82nd Cong., 2nd Sess., at 95, 105, 229. 18. Scott R. Rosner and Kenneth L. Shropshire, The Business of Sports (Boston: Jones and Bartlett, 2004), at 45. 19. Wann et al., Sports Fans (ch. 2), review evidence on eight categories of motivation: group affiliation, family, aesthetic, self-esteem, economic, eustress, escape, and entertainment. 20. Simon Rottenberg, “The Baseball Players’ Labor Market,” Journal of Political Economy, 65, 242 (1956). 21. Stefan Szymanski, “Professional Team Sports Are Only a Game: The Walrasian Fixed Supply Conjecture Model, Contest Nash Equilibrium and the Invariance Principle,” Journal of Sports Economics, 5, 211 (2004). 22. Jeff Borland and Robert Macdonald, 2003, “The Demand for Sports,” Oxford Review Of Economic Policy, 19:4, 478–502, at 486. 23. David J. Berri, Martin B. Schmidt, and Stacey L. Brook, The Wages of Wins: Taking Measure of the Many Myths in Modern Sport (Stanford, Calif.: Stanford University Press, 2006), at 84.

197

198 Notes to Chapter 3 24. Stefan Szymanski, “Obstacles to Level Playing Field,” FT.com, Sept. 16, 2005, available at http://search.ft.com/ftArticle?queryText=szymanski&y=7&a je=true&x=12&id=050916002784. 25. See http://www.rodneyfort.com/SportsData/BizFrme.htm. 26. Nielsen ratings for the World Series are available at http://www.baseballalmanac.com/ws/wstv.shtml. Superbowl Nielsen ratings were taken from the Wiki­pedia page for each Superbowl, e.g., http://en.wikipedia.org/wiki/Super_ Bowl_XVI]. 27. Richard C. Levin, George J. Mitchell, Paul A. Volcker, and George F. Will, “The Report of the Independent Members of the Commissioner’s Blue Ribbon Panel on Baseball Economics,” July 2000, available at http://www.mlb.com/ mlb/downloads/blue_ribbon.pdf. 28. For example, Andrew Zimbalist has argued that when it comes to the claim that competitive balance fell in the late 1990s “the numbers prima facie are compelling.” See “Competitive Balance in Sports Leagues: An Introduction,” Journal of Sports Economics, 3:2, 114 (2002). By contrast, in Wages of Wins, Dave Berri and his coauthors argue that “baseball does not have a competitive balance problem” (at 63). One labor leader, MLBPA’s Eugene Orza, has opined that any increased imbalance came immediately after the 1994–95 strike, and was simply the typical and temporary effect of an industry-wide strike adversely affecting smaller companies more. Stephen F. Ross, “Light, Less Filling, It’s Blue Ribbon!” Cardozo L.J., 23: 1675, 1676 (2002). 29. See Andrew Zimbalist, May the Best Team Win (Washington, D.C.: Brookings Institution Press, 2003), at 103–5. A summary of the new agreement, including relevant revenue sharing, can be found in the press release issued by Major League Baseball announcing the 2006 agreement, available at http:// mlb.mlb.com/news/press_releases/press_release.jsp?ymd=20061024&content_ id=1722380&vkey=pr_mlb&fext=.jsp&c_id=mlb. 30. A decision which makes everybody better off and nobody worse off is so wonderful that economists give it a special name—they call it a “pareto” improvement, after the economist who first thought of the concept. The wonderful thing about pareto improvements is that no sane person can argue against them, and so they command more or less universal support. Alas, most decisions are not pareto improvements. Even a decision that makes most people much better off will not command universal support if it makes some people worse off. How to finesse and compensate is the major part of the art of political economy. 31. This is detailed in Stephen F. Ross, The NHL Labour Dispute and the



Notes to Chapter 3

Common Law, the Competition Act, and Public Policy, 37 U.B.C. L. Rev. 343 (2004). 32. Stefan Szymanski and Tommaso Valletti, “Promotion and Relegation in Sporting Contests,” Rivista di Politica Economica, 95, 3–39 (2005). 33. In Chapter Four we provide some striking evidence on this point. 34. The popularity of a system where teams compete for a variety of goals, including winning the season championship, participating in playoffs, and avoiding relegation, is documented with European data in Salil K. Mehra and T. Joel Zuercher, Striking Out “Competitive Balance” in Sports, Antitrust, and Intellectual Property, 21 Berkeley Tech. L. J. 1499 (2006).

Chapter 4 1. Thomas J. Ostertag, Baseball’s Antitrust Exemption: Its History and Continuing Importance, 4 Va. Sports & Ent. L. J. 54, 67 (2004). 2. Robert G. Hagstrom, The NASCAR Way: The Business That Drives the Sport (New York: Wiley, 1998), at 28. 3. Dave Caldwell, Speed Show: How NASCAR Won the Heart of America (Boston: Kingfisher, 2006), at 26–28. 4. Mark D. Howell, From Moonshine to Madison Avenue: A Cultural History of the NASCAR Winston Cup Series (Bowling Green, Ohio: Bowling Green University Press, 1997), at 1, 3. 5. Caldwell, Speed, at 87. 6. Ken Berger, “Gas Money: NASCAR’s One Family Financial System Is Like Nothing Pro Sports Has Ever Seen,” Newsday, Dec. 8, 2002, at B16. 7. Ibid. 8. See http://www.forbes.com/2007/09/19/richest-americans-forbes-listsrichlist07-cx_mm_0920rich_land.html. 9. Quoted in Howell, Moonshine, at 96. 10. Dan Pierce, “The Most Southern Sport on Earth: NASCAR and the Unions,” Southern Cultures, 7: 8, at 11 (summer 2001). 11. See Armen A. Alchian and Harold Demsetz, “Production, Information Costs, and Economic Organization,” American Economic Review, 62:5, 777–95 (1972). 12. Beck Taylor and Justin Trogdon, “Losing to Win: Tournament Incentives in the National Basketball Association,” Journal of Labor Economics, 20:1, 23–41 (2002). Their findings are also discussed in David Berri, Martin Schmidt, and Stacey Brook, The Wages of Wins: Taking Measure of the Many Myths in Modern

199

200 Notes to Chapter 4 Sport (Stanford, Calif.: Stanford University Press, 2006), at 146–48. 13. The founding contribution to the theory of contests is generally acknowledged to be Gordon Tullock’s model, developed in the 1960s and published in 1980 as “Efficient Rent Seeking” in James Buchanan Robert Tollison and Gordon Tullock (eds.), Toward a Theory of Rent Seeking Society (College Station: Texas A&M University Press, 1980), at 97–112. The application of the contest model to sport is articulated in Stefan Szymanski, “The Economic Design of Sporting Contests,” Journal of Economic Literature, 41, 1137–87 (2003). 14. For a more formal academic presentation of these issues, see Szymanski, supra. 15. Howell, Moonshine, at 119–21. A more casual allusion to this connection was made by noted author Tom Wolfe in a magazine article about hall-of-fame driver Junior Johnson, “Last American Hero,” reprinted in Tom Wolfe, “The Last American Hero,” in The Kandy-Kolored Tangerine-Flake Streamline Baby (New York: Farrar, Strauss & Giroux, 1965). 16. Neal Thompson, Driving with the Devil: Southern Moonshine, Detroit Wheels, and the Birth of NASCAR (New York: Crown, 2006), at 43. 17. Thompson, Driving, at 34–35. 18. Peter Golenbock, American Zoom (New York: Macmillan, 1993). 19. Thompson, Driving, at 229 (AAA viewed stock cars as a fad). 20. France adapted the idea from suggestions by the sports editor of the Charlotte Observer. Joe Menzer, The Wildest Ride (New York: Simon & Schuster, 2001), at 66–68. 21. Thompson, Driving, at 285. 22. Howell, Moonshine, at 16. 23. Thompson, Driving, at 234–35. 24. Ibid. at 241. Others would take a slightly more critical spin to the evolution of France’s control. Years later, prominent car owner Raymond Parks observed: “We weren’t businessmen, just car owners, drivers and mechanics that wanted to race. We had the know-how, but France had the lawyers [to draw up papers giving him control]. That’s how Bill France stole NASCAR from the [rest] of us that were there [in Daytona].” Ibid. at 243. On the other hand, Parks’s driver, Red Byron, saw France’s dictatorship as necessary for the sport. 25. Associated Press, “Nascar’s Money Machine; There’s Plenty of Wealth to Go Around, but France Family Gets Most of It,” Grand Rapids Press (Mich.), Dec. 25, 2002, at D7.



Notes to Chapter 4

26. Menzer, Wildest, at 85–86. 27. Ibid., at 116. 28. Thompson, Driving, at 353. 29. “Ford Scores Sales Success in South and West as Racing Image Grows,” Wards Automotive Reports, Slide No. 62F, Ford Motor Company Archives, Motorsports Collection, Dearborn, Mich. 30. As quoted from the 1950 rule book in Ben A. Shackleford, “Going National While Staying Southern: Stock Car Racing in America, 1949–1979” (PhD. dissertation, Georgia Tech, 2004), available at http://smartech.gatech. edu/handle/1853/7608, at 96. 31. Howell, Moonshine, at 86. 32. Golenbock, American Zoom, at 115. 33. Thompson, Driving, at 227–28. 34. Caldwell, Speed, at 31. 35. Thompson, Driving, at 297–98. 36. Caldwell, Speed, at 43. 37. Shackelford, “Going National,” at 22, 60. 38. Howell, Moonshine, at 22. 39. Caldwell, Speed, at 49. 40. Howell, Moonshine, at 35. 41. Thompson, Driving, at 296–97. 42. Ibid. at 332. 43. Caldwell, Speed, at 43. 44. Thompson, Driving, at 269. 45. Berger, Gas Money. 46. Menzer, Wildest, at 54. 47. Thompson, Driving, at 220. 48. Shackleford, “Going National,” at 81–82. 49. Caldwell, Speed, at 37. 50. Hagstrom, NASCAR, at 35–36. 51. Caldwell, Speed, at 36. 52. David Poole, “NASCAR Pushing Small Outfits to Curb,” Charlotte Observer, July 15, 2007. 53. Shackleford, “Going National,” at 84. 54. Ibid. at 118–19. 55. Ibid. at 121. 56. Hagstrom, NASCAR, at 48. 57. Ibid. at 60.

201

202 Notes to Chapter 4 58. Helen Huntley, “Bank of America, The New ‘Official Bank of NASCAR,’ Hopes Fans Share the Love,” St. Petersburg Times (Fla.), Nov. 28, 2006. 59. John M. Clark, Stephen W. Pruitt, and T. Bettina Cornwell, “NASCAR Phenomenon: Auto Racing Sponsorships and Shareholder Wealth,” Journal of Advertising Research, 44:3, 281–96 (Sept. 2004). 60. http://www.jmu.edu/kinesiology/pdfs/NASCAR.pdf. 61. Menzer, Wildest, at 55. 62. Hagstrom, NASCAR, at 147. 63. See Rick Minter, “NASCAR: Cellphone Car Sponsors Dial in a Truce; AT&T’s Logo Allowed Back on Car No. 31,” Atlanta Journal-Constitution, Sept. 8, 2007, at 9D. 64. Hagstrom, NASCAR, at 57. 65. Howell, Moonshine, at 5. 66. Thompson, Driving, at 257. Perhaps significantly, although Byron was born in the South, he was raised in Colorado. 67. Caldwell, Speed, at 104–5. 68. Howell, Moonshine, at 119. 69. Thompson, Driving, at 9. 70. Shackleford, “Going National,” at 105. 71. Thompson, Driving, at 17–18. 72. Menzer, Wildest, at 197–98. 73. Shackleford, “Going National,” at 17. 74. Hagstrom, NASCAR, at 47. 75. Shackleford, “Going National,” at 101. 76. Caldwell, Speed, at 20, 78, 87, 89. 77. Ibid. at 106. 78. Thompson, Driving, at 8–9. 79. Caldwell, Speed, at 78–79. 80. Mike Mulhern, “Lighten Up: Smith Says NASCAR Has Gotten Carried Away With Polishing Its Marketing Image,” Winston-Salem Journal (N.C.), Jan. 26, 2007, available at http://www.journalnow.com. 81. Locke Peterseim, “Not Just Whistling Dixie in D.C.,” ESPN.com, available at http://espn.go.com/page2/wash/s/closer/020315.html. 82. Shackleford, “Going National,” at 266–67. 83. Jeff Wolf, “Racing Season No Longer Has a Finish Line,” Las Vegas Review-Journal (Nev.), Dec. 9, 2005, at 9C. 84. Pittsburgh Athletic Co. v KQV Broadcasting Co., 24 F.Supp. 490 (W.D.Pa. 1938).



Notes to Chapter 4

85. Lee Spencer, “NASCAR Tries to Tackle the Big Boys—Television Coverage of Automobile Racing Events,” Sporting News, Sept. 17, 2001. 86. See NASCAR’s explanation at http://www.nascar.com/2007/news/headlines/cup/01/22/chase.changes/index.html. 87. Racing results are available at http://www.nascar.com. 88. Caldwell, Speed, at 92. 89. Scott Warfield, “Track Seeks Super Bowl Atmosphere,” Sports Business Journal, Oct. 3, 2006, at 8. 90. Caldwell, Speed, at 38. 91. Paul C. Weiler and Gary R. Roberts, Sports and the Law, 3d ed. (Edina, Minn.: Thomson West, 2004), at 868. 92. Hagstrom, NASCAR, at 184. 93. Most notably, Dale Earnhardt Jr. completed his contract in 2007 with his family’s company, Dale Earnhardt Enterprises, but after negotiations with his stepmother failed, he signed with another major racing team. 94. Menzer, Wildest, at 274–77. 95. Caldwell, Speed, at 54. 96. Shackleford, “Going National,” at 195. 97. See n.25. 98. See Menzer, Wildest, at 192. 99. See FIA Formula 1 Championship, Commission Notice [2001] OJ C169/5. 100.  Berger, Gas Money. 101.  Thompson, Driving, at 287. 102.  Menzer, Wildest, at 133. For a more detailed description, see Pierce, in n.10. 103.   Mulhern, “Lighten Up.” 104.  Hagstrom, NASCAR, at 202.

Chapter 5 1. See, for example, William Ryczek, Blackguards and Red Stockings: A History of Baseball’s National Association 1871–1875 (Jefferson, N.C.: McFarland, 1992). 2. See, e.g., David Voigt, American Baseball: From Gentleman’s Sport to the Commissioner System (Oklahoma City: University of Oklahoma Press, 1966), at ch. 5. 3. See http://soccernet.espn.go.com/tables?league=eng.1&&cc=5901 (provides detailed season standings for the 2002/2003, 2003/2004, 2005/2006,

203

204 Notes to Chapter 5 2006/2007 English Premier League seasons); http://mlb.mlb.com/mlb/standings/index.jsp?ymd=20011007 (provides 2001 season standings for MLB); http://sports.espn.go.com/mlb/standings?date=20020901 (gives standings for the 2002, 2003, 2004, 2005, 2006, and 2007 MLB seasons). 4. Stefan Szymanski and Tommaso Valletti, “Promotion and Relegation in Sporting Contests,” Rivista di Politica Economica, 95, 3–39 (2005). 5. The data analyzed here are courtesy of economist Daniel Rascher. 6. The bible for English soccer data is the Football Yearbook, currently sponsored by Sky Sports but historically sponsored by Rothmans. The data referred to here are taken from various issues. 7. The only plausible, if still improbable, scenario where a majority of clubs might consider adopting promotion and relegation would be a version of the events that led to its initial adoption by the English Football League in the late nineteenth century, which we detail below: a rival group of teams organizes and threatens to compete against the established league, and a majority of league owners decides that it would be better to offer the teams immediate entry as a second division of the established league rather than embarking on an interleague war. 8. See, e.g., Tom Bower, Broken Dreams: Vanity, Greed and the Souring of British Football (London: Simon & Schuster, 2003), at 30. 9. The following account is drawn from Stefan Szymanski and Tim Kuypers, Winners & Losers (London: Viking Press, 1999), at 290–94. 10. See Stefan Szymanski and Andrew Zimbalist, National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer (Washington, D.C.: Brookings Institution Press, 2005), at ch. 2. 11. List taken from http://www.fifa.com/en/history/history/0,1283,1,00.html. 12. European Commission, “The European Model of Sport.” Consultation paper of DGX (1998). 13. MLB standings are available at http://mlb.mlb.com/mlb/standings/ index.jsp?ymd=20011007 (2001); and http://sports.espn.go.com/mlb/standings? date=20020901 (2002–06); Premier League standings are available at http:// soccernet.espn.go.com/tables?league=eng.1&&cc=5901. 14. This is a complex issue, but the key difference in competitive balance between Europe and the United States is that dynasties are longer lasting in Europe so that the concentration of championships over time tends to be greater. But within any given season, results are no more unevenly distributed in European soccer than they are in the North American majors, and on some measures even less so. See Stefan Szymanski, “The Economic Design of Sporting



Notes to Chapter 5

Contests,” Journal of Economic Literature, 41, 1137–87 (2003), for some evidence on this issue. 15. MLB data are from the Fort website, http://www.rodneyfort.com/ SportsData/BizFrame.htm. Premier League data are from various issues of the Deloitte and Touche Annual Review of Football Finance. 16. Juventus were relegated in 2006, not on sporting merit but on grounds of corruption. 17. Deloitte and Touche Annual Review of Football Finance, 2006. 18. Conceivably the owners might vote for promotion and relegation if it meant that they could extract even greater subsidies from local taxpayers on the grounds of investing in players to avoid relegation. We think this possibility rather far-fetched because, unlike a stadium, investment in team performance is a highly speculative exercise. While municipal contributions to stadium funding are not unknown in Europe, we have not heard of any cases where local government has contributed to funding player acquisition.

Chapter 6 1. The approach is discussed in John Lombardo, “Study to Steer NBA Revenue Sharing,” Sports Business Journal, May 1, 2006, at 1. NBA owners, however, have sought to modify the terms to some degree. See John Lombardo, “NBA Set to Boost Revenue Sharing, Adjust Formula,” Sports Business Journal, Feb. 12, 2007. 2. Andrew Zimbalist, In the Best Interests of Baseball? The Revolutionary Reign of Bud Selig (Hoboken, N.J.: Wiley, 2006). 3. See Brief for the Plaintiff in Error, Federal Baseball Club of Baltimore, Inc. v National League of Professional Baseball Clubs, No. 204 (O.T. 1921). 4. Stefan Szymanski and Andrew Zimbalist, National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer (Washington, D.C.: Brookings Institution Press, 2005), at 92–93. 5. While also doing something to prevent public relations scandals that may occur from exploitive treatment in Latin American academies. The problems are summarized in Diana L. Spagnuolo, Swinging for the Fence: A Call for Institutional Reform as Dominican Boys Risk Their Futures for a Chance in Major League Baseball, 24 U. Pa. J. Int’l Econ. L. 263 (2003), although specific suggestions about subjecting Latin players to the draft is obviously within the context of the club-run system of MLB. 6. This is the successful tactic used by the NFLPA to win free agency in re-

205

206 Notes to Chapter 6 turn for a salary cap in the early 1990s. See White v NFL, 836 F. Supp. 1458 (D. Minn. 1993). 7. Recall, however, our discussion in Chapter Three on the particular characteristics of the NFL (playing only eight home games, relying on national television rights to a far greater degree than other sports) that cast doubt on the portability of the NFL strategy to other leagues. In addition, the contribution to competitive balance of nonguaranteed contracts and salary cap regulations that permit under-performing clubs to shed overpaid players and remake their rosters into contenders should not be overlooked.

Chapter 7 1. In Federal Baseball Club v National League, 259 U.S. 200 (1922), the court held that the “business of baseball” was not interstate commerce. In Flood v Kuhn, 407 U.S. 258 (1972), the court reaffirmed the exception, holding that baseball was an “anomaly and an aberration” but that the antitrust laws should not apply in light of baseball’s “unique characteristics and needs” and what the Court believed to be Congress’s “positive inaction” about overturning Federal Baseball. 2. See United States v Terminal Railroad Ass’n, 224 US. 383 (1912); Otter Tail Power Co. v United States, 410 U.S. 366 (1973). 3. Federal Trade Commission and United States Department of Justice, Antitrust Guidelines for Collaboration Among Competitors, available at http:// www.ftc.gov/os/2000/04/ftcdojguidelines.pdf. 4. See Conf. Rep. on S.1841, the National Cooperative Research Act of 1984, H.R. Rep. No. 98–1044, at 14 (1984), as reprinted in 1984 U.S.C.C.A.N. at 3139. 5. Mid-South Grizzlies v National Football League, 720 F.2d 772 (3d Cir. 1983). 6. State v Milwaukee Braves, 1966 Trade Cas. ¶ 71,738 (Wis. Cir. Ct., Milwaukee Co.), rev’d on other grounds, 144 N.W.2d 1 (Wis. 1966). 7. See NCRA Conference Report, n.4 supra. See also Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 3.2 (1992) (rev. ed. 1997). 8. See Pub. L. No. 89–800, § 6(b)(1), 80 Stat. 1515 (1966) (codified at 15 U.S.C. § 1291): “Antitrust laws shall not apply to a joint agreement by which the member clubs of two or more professional football leagues, which . . . combine their operations in expanded single league so exempt from income tax, if such agreement increases rather than decreases the number of professional football clubs so operating.”



Notes to Chapter 7

9. United States v National Football League, 116 F.Supp. 319 (E.D. Pa. 1953). 10. Sports Broadcasting Act, Pub. L. No. 87–331, 75 Stat 732, 15 U.S.C. 1291 (2001). 11. Brown v Pro Football, Inc., 518 U.S. 231 (1996). 12. National Collegiate Athletic Ass’n v Board of Regents, 468 U.S. 85, 107 (1984). 13. Prior legislation in this regard is cited and discussed in Andrew Zimbalist, Baseball and Billions (New York: Basic, 1992), at 183–85. 14. On the ways in which special interests can “capture” agencies so that their decisions operate contrary to the broader public interest, see Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, Mass.: Harvard University Press, 1965). 15. The theory of regulatory capture was laid out in Richard Posner, “Theories of Economic Regulation,” Bell Journal of Economics and Management Science, 5, 335–58 (1974). See also Gary Becker, “A Theory of Competition Among Pressure Groups for Political Influence,” Quarterly Journal of Economics, 98, 371–400 (1983); George Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science, 2, 3–21 (1971); Sam Peltzman, “Toward a More General Theory of Regulation,” Journal of Law and Economics, 19, 211–40 (1976). 16. One of us set forth this argument in considerable detail in Stephen F. Ross, Monopoly Sports Leagues, 73 Minn. L. Rev. 643 (1989). In May the Best Team Win (Washington, D.C.: Brookings Institution Press, 2003), at 155–56, Andrew Zimbalist calls for Congress to consider this proposal, and his own analysis suggests that the benefits outweigh the harms. The proposal is explicitly endorsed by other prominent sports economists in James Quirk and Rodney Fort, Hard Ball: The Abuse of Power in Pro Team Sports (Princeton, N.J.: Princeton University Press, 1999), at 177; and Roger G. Noll and Andrew Zimbalist, “Sports Jobs, and Taxes: The Real Connection,” in Noll and Zimbalist (eds.), Sports, Jobs & Taxes (Washington, D.C.: Brookings Institution Press, 1997), at 505. 17. Ross, Monopoly Sports Leagues, at 715–33. 18. The text of the statute only applies to sales of the rights to the “sponsored telecasting” of sports context. 15 USC §1291. In congressional testimony, NFL Commissioner Pete Rozelle, the act’s chief proponent, acknowledged in response to a direct question by the House Judiciary Committee’s chief counsel that the act did not apply to “pay or cable.” Telecasting of Professional Sports Contests: Hearings on H.R. 8757 Before the Subcomm. on Antitrust (Subcomm. No. 5) of the House Comm. on the Judiciary, 87th Cong., 1st Sess. 36 (1961)

207

208 Notes to Chapter 7 [hereafter Celler Hearings]. See NCAA v Board of Regents of the Univ. of Okla., 468 U.S. 85, 105 n.28 (1984); Shaw v Dallas Cowboys Football Club, Ltd., 1998–2 Trade Cas. (CCH) ¶72,216 at 11. 19. See, e.g., Broadcasting Act, 1996, ch. 55, 97–105 (Eng.); Broadcasting Services Act, 1992 (Austl.) (authorizing minister to list events required to be available on free-to-air television). 20. The authoritative Supreme Court case on point is Int’l Boxing Co. v United States, 358 U.S. 242, 251 (1959), holding that world championship bouts were in a separate market from other major professional boxing. This reasoning supports the lower court cases as well as a finding of MLB’s market power. See, e.g., Fishman v Wirtz, 807 F.2d 520, 531 (7th Cir. 1986) (relevant product market is live professional basketball); Los Angeles Mem’l Coliseum Comm’n v NFL, 726 F.2d 1381, 1393 (9th Cir. 1984) (relevant product market is NFL football); USFL v NFL, 644 F. Supp. 1040, 1056 (S.D.N.Y. 1986) (relevant product market is professional football), aff ’d, 842 F.2d 1335 (2d Cir. 1988); Mid-South Grizzlies v NFL, 550 F. Supp. 558, 571, n.33 (E.D. Pa. 1983) (same), aff ’d, 720 F.2d 772 (3d Cir. 1983); Philadelphia World Hockey Club v Philadelphia Hockey Club, 351 F. Supp. 462, 501 (E.D. Pa. 1972) (relevant product market is major league hockey). 21. See United States Football League v Nat’l Football League, 842 F.2d 1335, 1361 (2d Cir. 1988). 22. Aspen Skiing Co. v Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985). 23. See Radovich v National Football League, 352 U.S. 445 (1957). 24. See Philadelphia World Hockey Club, Inc. v Philadelphia Hockey Club, Inc., 351 F. Supp. 462, 508 (E.D. Pa. 1972) (provisions reserving all major and minor league players to NHL clubs or affiliates for three years constituted monopolization by precluding rival league from entry). 25. See XI Herbert Hovenkamp, Antitrust Law ¶1802g (New York: Aspen, 1998). 26. As the court noted in Hecht v Pro-Football, Inc., 570 F.2d 982, 991 (D.C. Cir. 1977); quoting Union Leader Corp. v Newspapers of New England, Inc., 284 F.2d 582, 584 n.4 (1st Cir. 1960) and citing Greenville Pub. Co., Inc. v Daily Reflector, Inc., 496 F.2d 391, 397 (4th Cir. 1974): To hold otherwise could effectively mean that a defendant is entitled to remain free of competition unless the plaintiff can prove, not only that he would be a viable competitor, but also that he and defendant both would survive. This result would be ironic indeed: we cannot say that it is in the public interest to have the incumbent as its sole theatre, or its sole news­



Notes to Chapter 7

paper, or its sole football team, merely because the incumbent got there first. Assuming that there is no identify of performance, the public has an obvious interest in competition, “even though that competition be an elimination bout.” 27. The reference is cited in R. Craig Romaine and Steven C. Salop, Slap Their Wrists? Tie Their Hands? Slice Them into Pieces? Alternative Remedies for Monopolization in the Microsoft Case, 13 Antitrust A.B.A. 15, 17 (summer 1999).

Chapter 8 1. For baseball, see http://www.forbes.com/lists/2006/33/Rank_1.html; for soccer, see http://www.forbes.com/lists/2007/34/biz_07soccer_Soccer-TeamValuations_Value.html. In fact, since Forbes considers the top teams in all the European leagues, few of which face the threat of relegation, the comparison based on a single league (e.g. the English Premier League) would probably be even less favorable. 2. This is detailed in Joshua Hamilton, Comment, Congress in Relief: The Economic Importance of Revoking Baseball’s Antitrust Exemption, 38 Santa Clara L. Rev. 1223, 1235 (1998). 3. D.A. Crawford, AFL Administrative Structure Review—Findings (Mar. 1993) (on file with author). 4. For this and additional background on the league, see http://www.footy. com.au/dags/FAQ2v1-5.html. 5. See Ronald H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960). 6. See, e.g., In the Matter of General Motors Corporation and Hughes Electronics Corporation, Transferors and the News Corporation Limited, Transferee, for Authority to Transfer Control, 19 FCC Rcd. 473 (2004). 7. See, generally, David Harris, The League (New York: Bantam, 1986). 8. See http://www.teamworkonline.com/fa_show.cfm?fname=20010501_ settings.txt.

Chapter 9 1. http://en.wikipedia.org/wiki/Sports_in_Las_Vegas. 2. Data from Forbes, http://www.forbes.com/2007/03/07/billionaires-worlds-richest_07billionaires_cz_lk_af_0308billie_land.html. 3. See NFL Franchise History: NFL Franchise Year-by-Year Genealogy, available at http://www.football.com/history/index.shtml (referencing the merger of the Cleveland Browns, San Francisco ’49ers, and Baltimore Colts). See Trou-

209

210 Notes to Chapter 9 bled WHA Folds and Its Teams Join the NHL, broadcast Apr. 1, 1979, available at http://archives.cbc.ca/IDC-1-41-1639-11345/sports/nhlexodus/ (referencing the Edmonton Oilers, Hartford Whalers, Winnipeg Jets, and Quebec Nordiques). See Remember the ABA, May 21, 2007, available at http://probasketball.about. com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=probasketball&cdn=sports&tm= 26&gps=50_20_994_611&f=00&tt=2&bt=0&bts=0&zu=http%3A//www.remembertheaba.com/ (referencing the New York Nets, San Antonio Spurs, Indiana Pacers, and Denver Nuggets). 4. This is discussed in Ross, Monopoly Sports Leagues, at 717–22. 5. See Ron Borges, “Wilson: Bills to Pay with Loan—Buffalo Owner Angry Stadium Money OK’d,” Boston Globe, Dec. 17, 2006, at D6.

Index

AAA, see American Automobile Association Adidas, 168 AFL, see American Football League; Australian Football League African Americans: baseball players, 35, 146; NASCAR drivers, 106 American Automobile Association (AAA), 81, 82, 85 American Football League (AFL), 10, 11, 99, 156, 180–81 American League (Baseball): correlation between winning percentages and gate receipts, 58, 59; history, 32, 34; “Peace Agreement,” 9–10, 29. See also Major League Baseball Angelos, Peter, 8–9, 168 Antitrust law: application to independent league management entities, 49, 162–65; baseball exemption, 10, 70, 141, 155, 188n16, 206n1; exclusive territorial arrangements, 156; exemption for broadcast rights sales, 156, 162; exemption for labor unions, 156–57; inadequate protection of fans, 154– 57; joint ventures and, 155, 156, 165; promotion of competition, 57, 156. See also Sherman Antitrust Act Atlanta Braves, 155–56, 182

Augusta National Golf Club, 77 Australia, sports leagues and media barons, 182 Australian Football League (AFL), 169–70 Australian Rules football, 122, 169–70 Auto racing, see FIA; NASCAR; Stock car racing Autry, Gene, 113 Balanced competition, see Competitive balance Ball, Phil, 33 Baltimore Orioles, 8–9, 160, 168 Baseball: as American sport, 52, 196n4; history, 196n6; minor league teams, 14, 124–25, 143–44, 171, 177. See also Major League Baseball Basketball: college, 108, 109, 143; invention, 52, 196n6; Women’s National Basketball Association, 173–74. See also NBA Bettman, Gary, 181–82 Black Sox scandal, 32, 33–34 Boggs, Hale, 10 Boies, David, 168 Bolton Wanderers, 114–15 Broadcast rights: baseball, 14, 16, 148; blackout rules, 16, 177; collective

212 Index sales, 148, 149, 156, 162; effects of monopoly, 14–16; exclusive territorial arrangements, 15, 16, 148, 156, 171, 182–83; fees, 182–83; of home teams, 14, 28, 182–83; NBA dispute with Chicago Bulls, 25–27, 28, 168; of NFL, 14, 37, 148, 149, 162; restrictive agreements, 8, 14–16; revenue sharing, 8, 9; shifts to more expensive channels, 161–62; transferred to independent league management, 48, 142, 149, 177 Brown, Mike, 37 Brush, John T., 29, 32 Buffett, Warren, 179 Byron, Robert “Red,” 87, 93 Cable television, 161–62 California Angels, 112–13 Canada, taxes paid by sports franchises, 12 Cartels: antitrust laws and, 57; efficiency, 27, 28, 31–32, 149; sports leagues as, 27–28 Celler, Emmanuel, 58, 59, 61 Champ Car racing, 88 Chandler, Alfred D., 70 Chicago Blackhawks, 178 Chicago Bulls, 25–27, 28, 74–75, 168 Chrysler Corporation, 86–87, 91 Cities: economic benefits of major league sports, 12–13; fan bases, 60–61; mayors, 180–81; multiple teams, 13, 68, 125, 142; small, 68. See also Subsidies, stadium Coase, Ronald H., 170 Coase Theorem, 170, 174 Cobb, Ty, 33, 35 Colangelo, Jerry, 23, 31 Collective action problems, 28–29, 42–43, 164, 192n8. See also Residual claimants College athletics: basketball, 108, 109, 143; football, 8, 85, 143, 196n6; ticket prices, 150. See also NCAA

Commissioners: career paths, 181–82; conflict of interest management, 32, 33–38; increasing powers, 170–72, 178; independence, 38–39, 168; Major League Baseball, 32, 33–37, 39, 84, 135–36, 172, 181; NBA, 36, 135, 173, 174, 181; NFL, 36, 37, 84, 135, 145, 149, 172–74, 181; NHL, 181; power, 37–38, 135–36, 171–74; as residual claimants, 181; soft power, 172–74; staff members, 168, 173. See also Independent league management Commission system, 169–70 Competitive balance: allocation of players among teams, 18, 61–62; consistency with free market, 58–59; effects­ of entry by merit, 67–69, 123– 25, 152; in English Premier League, 124; equal opportunity values and, 51, 54–55, 58–59, 68; evidence of appeal­, 59–66; historical origins of goal, 56– 58; invariance principle, 61–62; labor­ market restraints and, 101–2, 145; league revenue maximization and, 58, 59, 65; in Major League Baseball, 18–19, 55–57, 58, 59, 64, 65–66, 101–2, 123, 198n28; in NASCAR, 20, 88, 89, 90–91, 145; in NBA, 64; need for, 55–56; in NFL, 63–65, 148; in NHL, 19–20, 67; relationship to attendance, 58, 59, 62, 63; restructuring proposals and, 48–49, 66–69; in soccer, 123–24, 204–5n14 Congress: calls for intervention in sports league structure, 183; commissioner appointments, 38–39; House Judiciary Committee, 58, 59, 61, 207n18; Sports Broadcasting Act, 156, 162, 207n18; tolerance of monopoly sports leagues, 156. See also Antitrust law Consumers, see Fans Contest theory, 73–80, 87, 90 Corruption, 32–33, 35, 49

Costas, Bob, 28, 55 Court of Arbitration for Sport, 47 Cuban, Mark, 16 Cudahy, Richard, 28 Dallas Cowboys, 23 Dallas Mavericks, 16 Davis, Al, 9, 30 Daytona 500, 95, 96–97, 98 Disney Corporation, 113 Dolan, James, 21, 191n43 Dominican Republic, baseball players, 146 Doyle, Arthur Conan, “Silver Blaze,” 100 DuPuy, Bob, 36 Earnhardt, Dale, 78, 90, 92, 94–95 Earnhardt, Dale, Jr., 95, 98, 203n93 Easterbrook, Frank, 26–27, 28 Efficiency: of cartels, 27, 28, 31–32, 149; labor market, 144; of monopoly sports leagues, 7–9 English Football League, 119–20, 180 English Premier League: broadcast rights, 8, 116–17; competitive balance, 124; dominant teams, 55, 64, 126; fan interest, 69; franchise values, 111; history, 119–21, 180; London teams, 13, 117, 118–19, 125; owners, 116–19; player salaries, 117–18; promotion and relegation, 41–42, 69, 111, 114–15, 118–21, 123, 126; proportion of team income spent on players, 124 English soccer leagues, 41–42, 119–21. See also English Premier League Entry by merit: benefits for fans, 112, 114, 115, 122, 140–41, 176–77; effects on competitive balance, 67–69, 123–25, 152; in European sports leagues, 122; evidence of effects, 68; fan interest in contests, 48–49, 68–69, 112, 114, 115, 176–77; feasibility, 127; implementation, 140–44, 168; incentives

Index for team owners, 42, 48–49, 67–68, 178; in individual sports, 78, 111–12, 142; intro­ducing to current leagues, 142–43, 167–68, 180, 204n7, 205n18; legal mandate, 181; in NASCAR, 88– 89, 91, 102–3; objections to, 122–27; owner interests and, 116, 118–19, 127, 167–68; player moves among teams, 125, 143–44; quality of competition and, 125–27, 142; reform proposal, 4, 41–44, 176; relocation threats minimized, 44, 127; in soccer leagues, 41–42, 69, 111, 114–15, 118–22, 123, 126 Entry restrictions: harm caused, 13, 24, 110–13, 155; origins, 108–10; relocation threats and, 11–12, 111 Equal opportunity values, 51, 54–55, 58–59, 68 ESPN, 51, 162 European Commission, 122 European soccer leagues, see English Premier League; Soccer; UEFA Champions League Eustress, 60, 68 Evernham, Ray, 101 FA, see Football Association Fan Cost Index, 113 Fans: acceptance of current league structure, 22; broadcast restrictions and, 14–16; children, 148; closed league structures and, 13, 24, 110–13, 155; costs of attendance, 113, 149–50; development efforts, 146; discouragement effect, 112–13; effects of labor market restraints, 17–20; effects of monopoly sports leagues, 7–9, 11–16, 23, 24, 155; effects of restructuring proposals, 69; home field advantage and, 62–63; interest in promotion and relegation contests, 48–49, 68–69, 112, 114, 115, 176–77; in large cities, 60–61; loyalty, 5–7, 13–14; motives, 59–61; NASCAR, 71, 91, 92,

213

214 Index 93–94, 95–96, 106; of out-of-town teams, 15; pressure for change, 183; relationship to team owners, 6, 7; “Sports Fans’ Manifesto,” 1–3; ticket prices and, 13–14; unmet demand, 7–9 Federal Baseball Club of Baltimore, 141 Federal Communications Commission (FCC), 171 Federal League, 10 FIA (Fédération Internationale de l’Automobile), 49–50, 104–5 FIFA (Federation Internationale de Football Association), 39, 108–9, 120, 122. See also Soccer Fishing, tragedy of the commons, 43 Flock, Tim, 105 Florida Marlins, 12 Foer, Franklin, 54 Fogel, Horace, 33 Football: Australian Rules, 122, 169–70; college, 8, 85, 99, 143, 196n6; distinction from soccer, 52, 195n2. See also NFL; Soccer Football Association (FA), 119–20 Forbes, 167–68 Ford, Henry, 81 Ford Motor Company, 86–87, 91 Formula One racing, see FIA Fox Sports, 16 France, Bill, Sr.: background, 81; dictatorial power, 72, 84–85, 86; labor relations, 100, 103, 105; NASCAR founding, 71, 82–83; as NASCAR president, 82, 83, 84–87, 200n24; political activism, 94; as residual claimant, 74, 83, 89. See also NASCAR France, Brian, 95, 106 Franchises: agreements with independent league management, 132, 151, 163, 165; joint ventures, 165; local economic benefits, 12–13; relationship with leagues, 25–27, 138; rewards for poor performance, 39–40, 64;

values, 23, 111, 131, 133–34, 147, 167–68, 188–89n22. See also Entry by merit; Owners; Relocations Franchising, 138, 139 Free markets: competitive balance and, 58–59; invariance principle, 61–62; NASCAR labor market, 20, 100–101, 105, 145 Free riders, 30, 42, 194n33 Frick, Ford, 30, 46 Gambling, 32, 34–35, 56, 64–65 Game theory, 43, 192n8 General Motors, 86–87, 91 Giamatti, Bartlett, 37, 196n4 Ginsburg, Daniel, 32 Golf: entry by merit, 112; Masters Tournament, 77 Goodell, Roger, 181 Gordon, Jeff, 88, 98, 99, 101 Government regulation, see Antitrust law; Regulation Hagstrom, Robert G., 89–90, 107 Hamilton, Alexander, 80 HDNet, 16 Helton, Mike, 95 Hockey, see NHL Holdup, 45–46, 47, 138–39 Holmes, Sherlock, 100 Home field advantage, 62–63 House Judiciary Committee, 58, 59, 61, 207n18 Houston Oilers, 11 Houston Rockets, 74–75 Howell, Mark D., 80, 93 Hulbert, William, 56–57, 109, 119 Independent league management: added­ value, 47–49; advantages, 47–49; antitrust laws and, 49, 162–65; broadcast rights, 48, 149, 177; combined with entry by merit, 44, 140; as commercial enterprise, 38–41;

competitive benefits, 48–49, 67; competitors of, 163–65; compromise proposals, 169–74; contest theory and, 73–80; examples, 77–78; fan development, 146; franchise values and, 47, 131; governing body, 39; holdup threat, 45; incentives aligned with fans, 126–27; labor relations, 40–41, 45, 78, 144–48, 163–64; league structure, 40; NASCAR example, 47, 70–72, 91, 105–7; obstacles, 132–35, 168; powers, 44–45, 47, 49–50; prizes offered, 48, 79, 80, 136, 149, 152, 177; reform proposal, 4, 37–39, 176; regulatory oversight, 165; relations with franchise owners, 44–47, 145; revenue maximization goal, 131, 140; revenue sharing, 136, 145, 149; revenue sources, 48, 142; rules set by, 45, 136; voluntary restructuring by owners, 131, 132–35. See also League, Inc. Indiana Pacers, 74–75 Indianapolis 500, 81, 100 Intellectual property rights, 171–72; licensing, 21, 151, 163; trademarks, 151, 163 International Olympic Committee (IOC), 39, 73 International Speedway Company (ISC), 102–4 Internet, sports and, 171–72, 182 Invariance principle, 61–62 IOC, see International Olympic Committee ISC, see International Speedway Company Italian soccer league (Serie A), dominant teams, 63, 64, 126 Ivanisevic, Goran, 78 Jefferson, Thomas, 1, 22 Johnson, Ban, 29, 34 Johnson, Junior, 94, 95 Joint ventures, 70, 100, 155, 156, 157, 165

Index Jones, Jerry, 23, 37 Jordan, Michael, 25, 75, 168 Kraft, Robert, 37 Labor market: allocation of players among teams, 17, 18, 61–62; effi­ciency, 144; free agents, 18–19; in NASCAR, 20, 100–101, 105, 145; in promotion and relegation systems, 125, 143–44; rules set by independent league management, 144–48. See also Salaries, player Labor market restraints: competitive balance and, 101–2, 145; effects on fans, 17–20; in NFL, 145; Reserve Clause, 18, 57, 61, 62, 101–2; salary caps, 19, 37, 67, 145 Labor relations: independent league management and, 40–41, 45, 78, 144–48, 163–64; in Major League Baseball, 18–19, 66; in NFL, 145, 147; in NHL, 19, 67; strikes and lockouts, 17–18, 19, 67 Labor unions, see Unions Lajoie, Napoleon, 33 Landis, Kennesaw Mountain, 32, 33, 34–36, 135, 143 Lasker, Albert, 33 Lasker Plan, 33–34 Las Vegas, lack of major league team, 176 League, Inc.: antitrust laws and, 162–65; as commercial enterprise, 38; franchise owners as stockholders, 131–32; implementation, 131–32, 133, 182; labor­ agreements, 132, 136, 139, 146– 48; league size and structure, 140, 141–42; marketing role, 136, 149, 150– 51; relations with owners, 131–32, 136, 137–39, 151, 163, 165; responsibilities, 136–37, 149; revenue sharing, 136, 145, 149; revenue sources, 142. See also Independent league management

215

216 Index Leagues, see Independent league management; Monopoly sports leagues; Sports leagues Licensing, 21, 151, 163 Lieb, Fred, 32 Little League Soccer, 53 Local governments, see Cities; Subsidies, stadium Lockouts, see Strikes and lockouts Los Angeles Clippers, 21, 30 Los Angeles Lakers, 30 Major League Baseball (MLB): anti­ trust exemption, 10, 70, 141, 155, 188n16, 206n1; commissioners, 32, 33–37, 39, 84, 135–36, 172, 181–82; competitive balance in, 18–19, 55–57, 58, 59, 64, 65–66, 101–2, 123, 198n28; corporate sponsors, 168; expansions, 10, 96, 110, 140; franchise relocations, 8–9, 11, 155–56, 168, 171, 188–89n22; franchise values, 111, 133–34, 167–68; free agents, 18–19; history, 9–10, 32, 56–57, 96, 100, 109, 119; labor relations, 18–19, 66; licensing revenues, 21; National Commission, 32, 33; owners, 29–30; player salaries, 19, 100; play-off series, 59, 110; poorly performing teams, 112–13; proportion of team income spent on players, 124; racial segregation, 35; Reserve Clause, 18, 57, 61, 62, 101–2; revenue sharing, 21, 66, 148; rules limiting minor league competition with franchises, 14; scandals, 32–35; self-interest of owners, 46; talent development in Dominican Republic, 146; television broadcast rights, 14, 16, 148; ticket prices, 14; World Series, 29, 32, 64, 65, 110, 148. See also American League; National League Manchester United, 8, 55, 111, 124, 126 Mandelbaum, Michael, 54–55 Mara, Wellington, 31, 37

March Madness, 108 Marketing: centralized league functions, 21–22, 136, 149, 150–51, 171–72, 173; by individual clubs, 21–22, 151, 171–72, 191n46; intellectual property rights, 171–72; Internet rights, 171–72; joint ventures, 165; licensing, 21, 151, 163; merchandise sales, 22, 151; revenue sharing, 21 Markets, see Free markets; Labor market Marshall, George Preston, 96 Marx, Karl, 129 Masters Golf Tournament, 77 Mayors, 180–81 McGraw, John, 33 Media, relations with sports leagues, 182–83. See also Broadcast rights Media company owners, 182–83. See also Murdoch, Rupert Menzer, Joe, 84 Merit, see Entry by merit Milwaukee Braves, 155–56 Milwaukee Brewers, 177, 188–89n22 Minor league sports: baseball, 14, 124–25, 143–44, 171, 177; quality of teams, 13 MLB, see Major League Baseball MLB Advance Media (MLBAM), 37 Monopolies: harm to public interest, 7; illegal, 163; regulation of, 6. See also Antitrust law Monopoly sports leagues: artificial scarcity created, 7, 11, 14; breaking up, 41, 159–61; conflicts of interest, 28–31; control by owners, 23, 27–28; creation of, 9–10; efforts to manage conflicts of interest, 31–41; entry restrictions, 11–12, 13, 24, 108–13, 155; harm to fans, 7–9, 11–16, 23, 24, 155; inefficiency, 7–9, 168; insulation from competition, 6, 100, 133; maintenance, 10; relocation threats and, 127; rewards for failure, 39–40, 64, 75–77,

79–80, 152; single entity doctrine, 25–27; tolerance of owner incompetence, 20–21. See also Restructuring proposals Montreal Canadiens, 12 Montreal Expos, 8–9, 11–12, 168 Moody, Ralph, 86 Moonshiners, NASCAR origins and, 81, 85, 93 Muhleman, Max, 72, 84–85 Murchison, Clint, 96 Murdoch, Rupert, 8, 116–17, 182 NAPBBP, see National Association of Professional Baseball Players NASCAR: competitive balance, 20, 88, 89, 90–91, 145; corporate sponsors, 91–93, 96, 136, 182; counterfactual history, 84, 87, 91, 93, 106; criticism of, 84–85, 102, 106; Daytona 500, 95, 96–97, 98; economic structure, 84, 105–6; evolution, 72, 83; fans, 71, 91, 92, 93–94, 95–96, 106; free market for labor, 20, 100–101, 105, 145; governing body, 82, 83; incentives for performance, 87–91; independent central organization, 47, 70–72, 91, 105–7; inno­vations, 98–99, 101; International Speedway Company and, 102–4; monopoly power, 104–5; national expansion, 93–96, 106; Nextel Cup, 71, 88–89, 91, 92, 95, 97–99, 102–4; origins, 80–83, 85; pit crews, 87, 101; points contest, 89, 98, 99, 104; popularity, 71, 84, 105; prizes offered, 89, 106, 145; race locations, 95, 97–99, 102–4; racial discrimination, 106; revenues, 83, 88; rules, 82, 85–87, 90, 91; safety issues, 85, 86, 103; Southern associations, 93–94, 95, 106; “stock” car perception, 85–87; stockholders, 82–83; success, 71, 83–84; team costs, 89–90, 91; team qualification, 88–89, 91, 102–3; television

Index appeal­, 96–99, 182; television broadcast rights, 71, 96, 97, 99; television markets, 95; television revenues, 71, 96, 97, 99; ticket prices, 71 NASCAR drivers: athletic abilities, 88; discrimination against AfricanAmericans, 106; free market for, 101; relations with management, 78, 85, 100, 103, 104, 105; safety concerns, 85, 86, 103; salaries, 89, 105; sponsorships, 92; winners, 87, 90–91, 95, 98, 99 National Association of Professional Baseball Players (NAPBBP), 56, 109 National Basketball Association, see NBA National Collegiate Athletic Association, see NCAA National Football League, see NFL National Hockey League, see NHL National League (Baseball): correlation between winning percentages and gate receipts, 58, 59; history, 32, 56– 57, 100, 109, 119; “Peace Agreement,” 9–10, 29; soccer league and, 121. See also Major League Baseball NBA (National Basketball Association): Chicago Bulls broadcast dispute, 25–27, 28, 168; college basketball as feeder league, 143; commissioners, 36, 135, 173, 174, 181; competitive balance, 64; conflicts among owners, 30; draft system, 75–77; franchise relocations, 30; franchise values, 23; marketing, 173; monopoly, 10, 21; player salaries, 10; poorly performing teams, 21, 74–75; problems with league as competition organizer, 74–75; revenue sharing, 135; territorial broadcasting rules, 16, 25–27, 28; Women’s National Basketball Association and, 173–74 NCAA (National Collegiate Athletic Association): broadcasting restric-

217

218 Index tions, 8, 99; commercial values in, 53; as feeder leagues for professional sports, 143; football, 8, 85, 99, 143; March Madness, 108, 109 Newcastle United, 117 New Orleans Saints, 173 New York Giants, 29, 32, 33, 35 New York Knicks, 21, 191n43 New York Yankees, 64, 126, 168 Nextel, 182 Nextel Cup races: corporate sponsors, 92; entry by merit, 88–89, 91; locations, 95, 97–99, 102–4; ticket prices, 71. See also NASCAR NFL (National Football League): college football as feeder league, 143; commissioners, 36, 37, 84, 135, 145, 149, 172–74, 181; competitive balance, 63–65, 148; conflicts among owners, 30; draft system, 64; dynasties, 63–64; expansions, 96, 140; franchise relocations, 9, 30, 113; franchise values, 23, 111, 133–34, 147; labor relations, 145, 147; merger with AFL, 156; monopoly, 10, 163; outcome uncertainty, 64–65; player salaries, 37, 105; playoffs, 108; profitability, 65; revenue sharing, 9, 37, 40, 194n33; self-interest of owners, 37; stadium subsidies, 11; television broadcast rights, 14, 37, 148, 149, 162; television revenues, 9, 65, 182 NFL Players Association, 147 NHL (National Hockey League): commissioners, 181; competitive balance, 19–20, 67; game attendance, 65; labor agreements, 20, 67; lockout (2004-5), 19, 67; monopoly, 10; poorly performing teams, 178; salary cap, 19, 67; state and local taxes paid by teams, 12 Noll, Roger, 123 Oakland Raiders, 9, 30 Olajuwon, Hakeem, 75

O’Malley, Walter, 96 Outcome uncertainty, 51, 60, 64–65, 68–69, 178. See also Competitive balance Owners: conflicts among, 29–31; conflicts of interest, 77–78, 102; conflicts with leagues, 29; conservatism, 31; forward-looking, 23, 31; incompetent, 20–21; integrity, 22–23; as League, Inc. stockholders, 131–32; lobbying against regulation, 22; merit entry systems and, 116, 118–19, 127, 167–68; potential voluntary reforms, 131, 132–35, 167–68, 204n7; profit maximization motives, 134–35; relations with independent league management, 44–47, 137–39, 145, 163, 165; self-interest, 22–23, 31, 37, 46, 75–77, 79–80. See also Franchises; Monopoly sports leagues Packer, Kerry, 182 Papathanassiou, Andy, 101 Pareto improvements, 198n30 Parks, Raymond, 200n24 Paulette, Eugene, 34–35 Petty, Richard, 85, 90, 93 Phoenix Suns, 23 Plato, 166 Players, see Labor market Player salaries, see Salaries, player Playoff systems, 59, 108–10 Prisoner’s dilemma, 43, 192n8 Professional sports, see Sports leagues Promotion and relegation, see Entry by merit Public choice theory, 22. See also Collective action problems Public goods, 22, 43 Racing, see FIA; NASCAR; Stock car racing Rafter, Pat, 78 Real Madrid, 55, 63, 126

Reasoner, Harry, 71 Regulation: broadcasting, 161–62; of independent league management, 165; proposals, 158–59; as public good, 22; of soccer, 194n29; special interest capture, 158, 159. See also Antitrust law Relegation, see Entry by merit Relocations, franchise: local subsidies sought to prevent, 9, 11–12, 127, 155, 188–89n22; in Major League Baseball, 8–9, 11, 155–56, 168, 171, 188–89n22; in NBA, 30; in NFL, 9, 30, 113; threats, 11–12, 44, 111, 127; vetoes by other owners, 8–9, 168 Reserve Clause, 18, 57, 61, 62, 101–2 Residual claimants, 43–44, 74, 83, 89, 181 Restructuring proposals, 4, 24–25, 176; benefits for fans, 176–78; benefits for teams, 152; commissioners, 178; competitive balance effects, 48–49, 66–69; compromises, 135, 166, 168–74; government intervention, 9, 24–25, 153–54, 181, 183; hypothetical case studies, 178–84; implementation, 131–32, 161–62, 165; incentives for current owners, 47, 133–34; objections to, 147; obstacles, 132–35, 146; owners’ roles, 137–39; ticket prices and, 149–50; voluntary reforms­ by owners, 131, 132–35, 167– 68, 204n7. See also Entry by merit; Independent league management Revenue sharing: broadcasting revenues, 8, 9; by independent league management, 136, 145, 149; in Major League Baseball, 21, 66, 148; marketing revenues, 21; in NBA, 135; in NFL, 9, 37, 40, 194n33; perverse effects, 40; reducing need for, 152 Rickey, Branch, 10, 143 R.J. Reynolds, 92–93, 94 Rooney, Art, 31 Rottenberg, Simon, 61–62

Index Rozelle, Pete, 36, 37, 84, 135, 149, 172, 207n18 Ruth, Babe, 35 Salaries, player: caps, 19, 37, 67, 145; in English Premier League, 117–18; in Major League Baseball, 19, 100; in NASCAR, 89, 105; in NBA, 10; in NFL, 37, 105; in NHL, 19, 67; restraints­, 100, 145; subsidized, 205n18; ticket prices and, 17 Sarbanes-Oxley Act, 49 Satellite television, 8, 116–17, 161–62 Scherer, F. M., 165 Selig, Bud, 36–37, 84, 136, 181, 188– 89n22, 193nn20, 23 Seymour, Harold, 33, 34 Shackleford, Ben A., 96–97 Shearer, Alan, 117 Sherman Antitrust Act, 26, 57, 162–63, 164 Single-elimination tournaments, 108–9 Single entity doctrine, 25–27 Sky Broadcasting, 116–17 Sky Sports network, 8 Sloan, Alfred P., 70 Smith, Adam, 153 Snyder, Daniel, 37 Soccer: competitive balance, 123–24, 204–5n14; cultural values in, 54; distinction from American football, 52, 195n2; dominant teams, 55, 63, 64, 126; English leagues, 41–42, 119–21; franchise values, 167–68; international regulation, 194n29; league size and structure, 142, 143; player “loans,” 143–44; popularity, 53, 63, 69, 121–22; promotion and relegation, 41–42, 69, 111, 114–15, 118–22, 123, 126; team owner incomes, 53; UEFA Champions League, 109, 115; in United States, 53, 54, 121, 191n46. See also English Premier League; FIFA

219

220 Index Societal values, sports and, 51, 52–55, 196n4 Spalding, Albert, 52, 57 Spanish soccer league (La Liga), dominant teams, 55, 63, 64, 126 Speaker, Tris, 35 Special interest capture, 158, 159 Sports: commercial success, 52–54; individual, 78, 111–12, 142; societal values and, 51, 52–55, 196n4 Sports Broadcasting Act, 156, 162, 207n18 Sports fans, see Fans “Sports Fans’ Manifesto,” 1–3 Sports leagues: contest theory and, 73– 80; ideal contest structure for fans, 78–79, 80; as joint ventures, 70, 100, 157; media and, 182–83; new rivals, 180; problems with current structures, 175; problems with league as competition organizer, 74–75; ticket prices, 13–14; trade-offs in managing, 158–59. See also Competitive balance; Monopoly sports leagues; Restructuring proposals; and individual leagues Stadium subsidies, see Subsidies, stadium Standard Oil, 10, 70, 188n14 Steinbrenner, George, 134, 179 Stern, David, 21, 36, 75, 135, 174, 181–82, 191n43 Stirling, Donald, 21 Stock car racing, 81–82, 100. See also NASCAR Strikes and lockouts: NHL lockout, 19, 67; regulations preventing, 17–18. See also Labor relations Subsidies, for player salaries, 205n18 Subsidies, stadium: franchise values and, 188–89n22; harm caused, 11–13; outside United States, 195n36; reducing, 176; relocation threats and, 9, 11–12, 127, 155, 188–89n22

Sugar, Alan, 116–19 Supreme Court, U.S.: antitrust cases, 156– 57, 188n14, 208n20; baseball antitrust exemption, 141, 188n16, 206n1; NCAA football broadcast rights case, 8, 99 Tagliabue, Paul, 9, 135, 149, 173, 181 Talladega Speedway, 85, 103 Tampa Bay, Florida, 11 Taxes, 12. See also Subsidies, stadium Taylor, Beck, 75–76 Taylor, Jack, 32 Team Marketing Report, 113 Team owners, see Owners Teams, see Franchises Teamsters Union, 105 Television, see Broadcast rights Tennessee Titans, 160 Tennis: entry by merit, 78, 142; Wimbledon, 78 Texas Rangers, 113 Thompson, Neal, 82 Ticket prices, 13–14, 17, 149–50 Tottenham Hotspur, 117, 118–19 Tragedy of the commons, 43 Transactions costs, 16, 133–34, 160, 167, 170, 174 Trickle, Dick, 89 Trogdon, Justin, 75–76 Turner, Ted, 182 Tuthill, Bill, 82 Ueberroth, Peter, 21 UEFA Champions League, 109, 115 Unions: antitrust exemption, 156–57; contracts with independent league management, 41, 45, 146–48, 163–64; NASCAR and, 103, 105; players’, 66, 146–48; resistance to restructuring, 146 United States Football League, 10, 163 U.S. Olympic Committee, 38 Values, see Societal values Vertical integration, 46, 138

Vertical separation, see Independent league management Vincent, Francis T. (Fay), 11, 39, 194n30 Vogt, Red, 87 Waddell, Rube, 32 Wallace, George, 94 Wallace, Rusty, 89, 92 Washington, George, 80–81 Washington Nationals, 8, 11–12 Weiler, Paul C., 9 WGN, 25–27, 168 Whiskey Rebellion, 80–81 Will, George, 55–56 Wimbledon Tennis Championship, 78

Index Wirtz, William, 178 Wolfe, Tom, 94 Women’s National Basketball Association (WNBA), 173–74 Wood Brothers Racing, 101 World Cup, 108–9, 120, 122 World Series: betting on, 32; evening games, 148; history, 29, 32; play-off series and, 110; recent winners, 64; television audiences, 65 YES Network, 16 Yunick, Smokey, 86 Zimbalist, Andrew, 30, 36

221