1	Show Me the Money: Economics and Professional Sports Raymond Sauer Clemson University
2	Topics How Did We Get Here? Economic factors shaping the growth in sport Play for Pay What drives the salaries of coaches & players? Unions, Salary Caps, & the Draft Union-monopoly negotiations: good for the game? The Franchise Monopoly Game Why billionaire owners “need” stadium subsidies
3	Some Price Changes to Ponder Item Price 1960 Price 2004 Loaf of (Basic) Bread $0.50 $1 Lakeside lot in Clemson $ 5,000 $250,000 1 acre Menlo Park, CA $10,000 $3m+ Bottle of Top Bordeaux $20 $500+ Avg Wage in MLB $65,000 $2.5m Washington Redskins $1.4m $800m (’98) NCAA Tournament TV rights $0 $545m/yr
4	Economic Changes in Past 100 Years Growth in wealth & income Sustained increase in income Grandkids are several times richer Decline in real price of necessities Can eat cheaply, clothing at thrift store Spend income on luxuries Increase in leisure time Work week fallen from 60 to 35 hours
5	Growth in Sport: Economic Factors Economics of superstars Applies to artists, musicians, athletes Sports are collectively enjoyed Individual value increases market size Water cooler talk: common values Did you see Pavarotti at the Met? Individual attention spans are limited Competition for nation’s attention The economic contest: Which sports will attract nation’s attention?
6	Growth in Sport (2) Americans’ response? Watch TV! Go to a ballgame Sustained increases in attendance for MLB, NFL, NBA from 1950-200 Demand for tickets, viewing on TV Decades long increases in prices Irony of the typical fan: “Obscene! I can’t afford these prices”
7	A Room at the Top for Whom? Athleticism: grace & power On display in figure skating & track Why aren’t these more prominent? Economics of superstars implies limits Today’s big three baseball, basketball, & football Why did they win the race to the top?
8	Structured Competition Big 3 in 1900: Baseball, boxing, horse racing Performance-based in boxing & horse racing Today’s ball sports were in their infancy Baseball got a head start National League (1876) Oldest professional league in world Replaced Players League & barnstorming clubs Managed by profit-driven owners Found ballgames a good place to sell beer Structured competition helped game survive
9	Economic Lessons from 20^th Century Sports 1. Appreciation of athleticism Sports are luxury goods in rich societies Add skyboxes, better sightlines, better seats Form is secondary 2. Centralization of control essential Structure increases market share Modern: media adds to advantage of numbers Performance-based competition loses 3. Lesson learned? This year NASCAR & ATP added cohesion to their series Churchill Downs’ long run plan is to integrate racing
10	Play for Pay: UMD Coaches Baltimore Sun, 4/28/04 “Williams, Friedgen pay on record” Williams: $1.3 million guaranteed Friedgen: $1.1 million w/ incentives of several $100k each Economist Andrew Zimbalist: “It's unjustified economically and inappropriate educationally and morally for [the coaches] to receive the kind of salaries they do."
11	Why Intercollegiate Athletics on a National Scale? Three theories Support from "off campus boosters" (¹ alumni) M. Sperber on the NCAA "a trade association for coaches” and administrators“ Are schools more valuable as vehicles for sports than education, or just mismanaged? Visibility in national marketplace athletic competition as advertising of competence Student demand Why would schools like Presbyterian College persist when sports budgets can amount to 5% of tuition?
12	Benefits of Athletic Competition National prominence More applications, more selective Graduates benefit from recognition positive feedback Winning gets attention Applications sensitive to athletic success NC St’s NCAA bb championships in 70s & 80s S. Carolina’s unbeaten run w/ G. Rogers in 1985 Doug Flutie & Boston College
13	What Generates Success? Good players & good coaching NCAA rules: can’t pay players Impact of Doug Flutie is unchanged Competition on other margins Must offer something else Reputation of school & coach Coaches ability to recruit talent NCAA rules raise the value of top coaches
14	Competition for Coaches What sets pay of Williams, Friedgen? Competence established Other schools value Williams’ services Unrestricted competitive bidding Salary = value of coaches’ contribution Is the football coach truly worth more than the school president? Is the school president on TV each Saturday? Media values have shaped sports, and schools
15	Average Salaries in MLB
16	What’s Driving MLB Salaries? 1. The advent of free agency 2. Demand-driven growth in the value of players George Steinbrenner: "You measure the value of a ballplayer by how many fannies he puts in the seats.“ These days, the seats include the couch in the den.
17	The Reserve Clause Several versions (since 1889) w/ common features: “If, prior to March 1, … the player and club have not agreed upon the terms of such contract [for the next playing season], then on or before ten days after said March 1, the club shall have the right to renew this contract for the period of one year on the same terms except that the amount payable to the player shall be such as the club shall fix in said notice” J. M. Ward: “the reserve rule gave the managers unlimited power, and they have not hesitated to use this in the most arbitrary and mercenary way”
18	An Exchange on the Reserve Clause Senator Kefauver: Let me ask you, first, do you think there should be some limit on the length of time of a reserve contract? Jackie Robinson: Yes; I do sir. Hearings before the Subcommittee on Antitrust & Monopoly, Senate Judiciary Committee, July 1958
19	Enter Marvin Miller Miller elected head of MLBPA in 1966 Former head of Steelworkers Union Better, he was both shrewd and smart Brookings Conference: “the most intense person in the room, and unquestionably the brightest too” Key move: agreement on arbitration neutral member selected by players & owners replaced appeals to commissioner
20	The Fall of the Reserve Clause: The Catfish A’s renege on Jim “Catfish” Hunter’s contract Top pitcher in baseball in early 70s In 1974 signed 2-year contract (rare) @ $100k Called for A’s to send 1/2 of contract to tax-deferred annuity Owner writes check for $100k instead gave owner tax write-off instead of Hunter Hunter claims contract invalidated
21	Catfish Issue goes to 3-member arbitration panel in Fall '74 2 votes predictable (Miller & owners rep) The arbitrator, Peter Seitz, is only vote that matters Seitz declares Hunter free agent Hunter signs 5 year deal w/ Yanks for $3.5 million!
22	The Fall of the Reserve Clause: Messersmith & McNally McNally & Messersmith refuse to sign contracts Messersmith plays for Dodgers at renewed terms McNally injured but willing to stand for principle Prior cases: owners dragged out negotiations Ex: in 1972 Ted Simmons held out for MLB average Cards renewed him at $18,000 Gave raise to $24,000 when he made the all-star team in 1972 here, McNally was offered $100k to sign in late summer even though it was known he was unable to pitch!
23	The Fall of the Reserve Clause: Messersmith & McNally (2) Signing would re-instate the reserve clause Not signing -> neutral arbitrator is forced to determine how far the reserve clause extends 1 year, or (through renewals) indefinitely? Peter Seitz' decision: 1 year renewal players that don't re-sign now "play out their option" can re-sign Opens Pandora's box majority of players are on 1 year contracts They will be free agents in one year!!! 300 announce they will play out their option in 1976
24	Out With the Old & In With the New Aftermath of Messersmith-McNally: Owners fire arbitrator Seitz Owners lock out players in Spring 1976 Contracts change over next decade Majority of contracts become multi-year Average salary increases over 700% Players’ share of revenues increased from 21% to 56%
25	Nature of CBAs & Labor Troubles CBA of 1977 established a pattern Owners want restrictions codified in CBA Players accept some guaranteed goodies in exchange In absence of CBA, de facto free agency Recent pattern in NBA & NFL: Veterans vote for rookie pay scales in draft No more Kevin Garnett contracts Accept cap at % of revenues, more for them Federal law exempts CBA restrictions from Antitrust Is this limited? See Clarett vs. NFL
26	Nature of CBAs & Labor Troubles All of MLB’s labor trouble since then stems from owners’ desire to take back the gains players realized in 1976* 1981 strike: free agent compensation scheme for owners 1990 lockout: salary cap + reduction in pension contributions 1994 strike: salary cap + more revenue sharing 2002 lockout: revenue sharing & “luxury tax” on high payrolls
27	The Franchise Monopoly Game Long History of Franchise Relocation 3 periods in MLB to 1903: frequent, to avoid bankruptcy Buffalo Bisons - > Boston Red Sox (AL) Balt. Orioles #3 -> NY Highlanders -> NY Yankees) 1903-1953: no relocations, no new teams 1953-2004: profit driven relocation & threats Credible due to league control of entry Auction among cities for biggest stadium subsidy
28	Quote of the day From Keith Olberman's Constitutional Amendment Prohibiting Corporate Welfare: any official of any government "who pays, suggests his government should pay, or promises a sports franchise, or ... money towards building a stadium or refurbishing an existing one, that official will be sentenced to a life of hard labor in a federal penitentiary." In Mike Lupica's Mad as Hell, 1996, pp. 40-41. Source: Raymond J. Keating, "Sports Pork," Policy Analysis No. 339, Cato Institute.
29	Trends In Stadium Financing 3 distinct periods 1) private finance in early 20^th Century 2) public finance (multipurpose monsters) 3) public finance plus corporate naming rights
30	New Stadium Boom of the 90s New Stadiums Very Profitable -- For Teams Extensive public construction/lease subsidies non-shared revenue streams (luxury boxes) New venues: revenue increments of $30-$40m ticket prices increase 50%-100% attendance increases as well How? Why? "throwback" vs. multi-purpose stadiums "mistake by the lake" increase in proportion of "premium" seats
31	How They Play the Game The Franchise Monopoly Game, that is managed (artificial) scarcity..... keep # franchises below free entry level ensures significant # of wannabe cities w/ demand growth, "auction" off new franchises plus relocation threats Auction among competing cities for best deal multi-hundred million $ franchise fees and stadium deals bordering on extortion are feasible only if a sufficient number of demanders exist for teams
32	Forms of Public Subsidies Infrastructure (ancient) roads, public transportation land (often land no-one wants) Flushing Meadows (Shea Stadium) The Meadowlands (Giants Stadium) Operating Costs w/ Public Stadiums sweetheart leases parking & luxury box revenue, etc property tax breaks (avoidance) tax-free municipal financing
33	The Case for Public Subsidies (1) Jobs & economic development investment will "pay off" creates jobs -- direct & indirect ML city needs ML team(s) attracts firms A credible case? Among dozens of reputable studies, none have found any significant economic impact Commissioned studies = “billboard economics”
34	The Case for Public Subsidies (2) Teams/stadiums create positive externalities profit-max owner not be compensated for external benefits provided by stadium many follow team but don't buy tickets newspapers sell w/ sports section but don't pay owners Surveys indicate significant “willingness to pay” Problem: incentive to overstate value of team Remedy: reverse the bias - how much in extra taxes? Use both methods to put upper & lower bounds Bottom line: compare value of sports investment with alternatives: education, roads & bridges, fire protection Direct economic impact is not sufficient to warrant millions in stadium subsidies
35	Open vs. Closed Systems of Competition The franchise monopoly game is feasible since US Pro Sports are a Closed Systems of Competition Entry controlled entirely by league owners. Artificial scarcity of ML franchises sets up subsidy wars Does this violate anti-trust law? Perhaps. Is the league the entity and all sports the market? If so, they are off the hook. Open systems of competition alter the margins of competition between cities Won’t see open systems in US w/o anti-trust action: Teams are worth much less in an open system