I absolutely love sports and find the economics of thee most popular leagues and teams to be fascinating. Like any business, a sports franchise or the broad organized league have a goal to turn profit. George Steinbrenner is a classic example, where he bought the Yankees for $12 million and now sees its value north of $1 billion. Tiger Woods’ recent departure from golf demonstrates how athletes represent a brand with significant investment at stake. The most successful sports organization, the NFL, is considering expansion to other countries after its immense success in the United States. There is no denying how sports has become big business with an intent to maximize revenues rather than simply winning for the sake of local pride.
While this is relatively obvious, there are many economic stories in sports that can provide lessons for the broad economy. Let’s take an older example to start. A few years ago, the NHL was in severe trouble after a lockout followed by a decision to leave ESPN’s broadcast networks. Many questions whether the league would survive, as attendance dropped to record lows. The problem wasn’t lack of interest in hockey but a marketing problem, especially compared to NFL, MLB, and even the emerging NASCAR. Only a few short years later, the addition of exciting new ideas like the annual outdoor New Year’s game have led to a resurgence. The excitement from the Olympics guarantees new public interest in the game. The lesson here is that an exciting product isn’t all that exciting without altering public perception through innovative marketing ideas.
Let’s focus on the present. In reading this blog or rather any financial media, you’d see how serious an issue debt and over spending can be. Not surprisingly, this extends into the sports world…
It’s easy to get seduced by the glamour of top-tier soccer. There are no limits to how much teams can spend on players–hence the eye-popping 80-million-pound ($129.6 million) price tag for Cristiano Ronaldo last month. The teams themselves are seen as trophy assets–hence the sale of Manchester City to not one but two gold-plated buyers in as many years, namely Thai billionaire Thaksin Shinawatra in 2007 and Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan in 2008.
But there is a dark side that often gets lost amid the frothy deals and front-page splashes.
The glitzy soccer teams of England’s Premier League have seriously big debt piles, and even when chalking up record transfer fees or sky-high ticket prices, their revenues don’t make up the difference. (See “Most Valuable Soccer Teams.”) Although team accounts for the 2008-09 season have not been released, the numbers for 2007-08 show Manchester United’s debts at 699 million pounds–nearly three times the club’s annual turnover–and Arsenal’s debts at 416 million pounds, almost twice annual sales.
Falk Says N.B.A. and Players Headed for Trouble
Still, the signs are troubling, and the sides have rarely seemed so far apart. About half of the league’s 30 franchises are losing money, according to some estimates. Owners want a radical restructuring of the economic system, starting with a hard salary cap to replace the current soft-cap system. The union is in favor of maintaining the status quo.
In his annual All-Star address Saturday, Commissioner David Stern said the league was projecting a loss of $400 million this season, after annual losses of about $200 million in the previous four years. Although he declined to confirm the reported details of the league’s proposal, Stern made it clear that he was indeed seeking a reduction in salaries.
“We’ve shown the players the facts, and our current level of revenue devoted to player salaries is too high,” Stern said. “I can run from that, but I can’t hide from that. And I don’t think the players can, either.”
In concert with labor negotiations, the league is also working on a plan for greater revenue sharing — a measure that the union and many agents have been demanding for some time.
The economics of these sports are complicated but can be briefly summarized. Soccer lacks a salary cap to keep upper salaries in check. In order to compete, the top teams need to sign the best players and often use debt as a means of funding the eventual losses. The lower teams don’t sign the best teams and remain uncompetitive for long periods of time, perpetuating this cycle. NBA Basketball has also seen salary escalation but has a bigger problem of guaranteed monster contracts regardless of skill or performance. MLB is similar due to the incredible power of the players unions. The NFL, meanwhile, has the opposite problem. Player salaries and benefits are minimal, which causes problems for lower contract players later in life when they encounter problems from the harsh realities of the game and can’t afford it.
Sound familiar? It sure does to me. The NFL resembles big corporations failing to take care of their lower paid employees because of a lack of bargaining power. The NBA or MLB resembles the auto industry or public workers where excessive union power pushes compensation beyond the means of their companies or comparable industries (sports). Soccer resembles big finance, where giant top salaries are justified based on the dollars they bring in but still excessive. Another interesting example is excessive salaries in general. Athletes make tremendous amounts of money, and often draw the ire of the public. Compare this to bankers, who have been on a major collision course with public opinion. Both generally justify their salaries by the massive revenues they generate.
The reason I make these comparisons is it’s much easier to understand in sports than a complex business/labor world. While fun and exciting, sports can also be indicative of broad economic lessons. Will the results or consequences be similar? Time will certainly tell.