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1. ARTICLES ACADEMIQUES  • ANDREWS – Disneyization  • BAADE ‐  MATHESON ‐ A Tale of Two Stadiums  • BAADE ‐  MATHESON ‐ Can New Orleans play its way past Katrina  • BAADE ‐ MATHESON ‐ Financing Professional Sports Facilities  • DAVILA ‐ FOSTER ‐ O REILLY ‐ Professional Sport Leagues Contrasting Views  • LAVOIE ‐ Faut‐il transposer à l’Europe ...  • MOORHEAD ‐  Revenue Sharing and the Salary Cap in the NFL  • PELNAR ‐ Antitrust analysis of sports leagues  • RASCHER ‐ NBA Expansion and relocation  • ROSS ‐ SZYMANSKI ‐ Governance and vertical integration in team sports         

 

SOCIAL SEMIOTICS

VOLUME 16

NUMBER 1

(APRIL 2006)

Disneyization, Debord, and the Integrated NBA Spectacle David L. Andrews Within his recent (and no doubt career-compromising) sojourn into considered sporting analysis, Michael Mandelbaum, the noted US foreign policy expert, pointed to basketball as the quintessential team sport of the post-industrial age, that ‘‘world of satellite televisions, computers, and the Internet’’ in which humanity, to varying degrees and with varying outcomes, is presently ensconced (Mandelbaum 2004, 200). According to Mandelbaum, basketball*/unlike its rigid and hierarchical industrial counterparts, baseball and football*/expresses the dynamism and flexibility of post-industrial [economic] existence. In basketball, as in other facets of post-industrial society, the fluid and innovative application of individual knowledge (or, in the case of basketball, individual skill), in addressing ever shifting problems and issues, is managed through the establishment of dynamic networks of horizontally linked operatives. For this reason, we are encouraged to believe that the gargantuan US Baby Boom generation has largely embraced basketball, since their entire lives are invested in the ‘‘postindustrial world that the game reflects’’ (Mandelbaum 2004, 200). While unquestionably engaging, and to a certain degree illuminating, Mandelbaum’s sporting schema ultimately appears a little forced, and certainly fails to provide anything approaching a compelling explanation as to how, and indeed why, specific sport forms become the active embodiments of particular American social and historical formations. I would concur in one respect, however: basketball*/most vividly in the highly corporatized, commercialized, and mass-mediated form delivered by the National Basketball Association (NBA) (the focus of this discussion)*/can only be understood in terms of its complex relationship with the social, political, economic, and technological forces and relations of the contemporary condition (herein referred to as the late capitalist moment). Moreover, the organization, delivery, and experience of cultural practices, such as sport, are in a dialectic sense actively engaged in the ongoing constitution of the conditions out of which they emerge; they are ‘‘always constituted with and constitutive of a larger context of relationships’’ (Grossberg 1997, 257). Thus, this analysis, however preliminary, of the structural and symbolic underpinnings of the cultural economy that is the NBA (and thereby its emergence as a culturally and commercially vigorous sporting entity), provides a vehicle through which it is possible to elucidate the broader turn to culture, and ISSN 1035-0330 print/1470-1219 online/06/010089-14 # 2006 Taylor & Francis DOI: 10.1080/10350330500487885

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cultural manufacture, associated with the moment, or condition, of ‘‘late capitalism’’ (Jameson 1991). In doing so, it illustrates the manner whereby sport has become commandeered by a phalanx of commercially-impelled cultural organizations and workers (i.e. sport management, marketing, advertising, public relations, and mass media broadcast companies and professionals), whose common aim targets the advancement of sport culture (in all its myriad manifestations) as a vehicle of multi-revenue stream capital accumulation. For the cultural laborers responsible for global popularization of the NBA are less the athletes through which this sport organization is embodied, and more the management, marketing, and mass-media-oriented cultural intermediaries (Nixon and Gay 2002) responsible for the spectacularization, televisualization, and globalization (Miller et al. 2001) of the league, its teams, and players. While each of these interrelated process is doubtless significant, this discussion focuses primarily upon the manner through which*/and in a complementary fashion to the Disney Corporation*/the NBA has been transformed into an ‘‘integrated spectacle’’ (Debord 1990 [1988]), through the strategic and commercially overdetermined mobilization of various forms and strategic initiatives of cultural labor.

Sport and Late Capitalism The work of Marxist economist Ernest Mandel represents an important precursor to, and influence upon, Frederic Jameson’s (1991) influential characterization of the late capitalist condition. Mandel prophesied the penetration of capital investment into, and hence the commodification of, ever more intimate realms of social existence. As he identified, late capitalism was organized around the ‘‘industrialization of superstructural activities’’ (be they leisure, sport, education, art, or health related) that are produced ‘‘for the market and aim at maximization of profit’’ (Mandel 1999). In this way, Mandel (1999) pointed to the centrality of culture*/both as process (through the symbolic manipulation of commercial consumption) and product (through the commodification of superstructural elements)*/to the instantiation and experience of late capitalism. Moreover, and propelled by late capitalism’s symptomatically flexible regime of capital accumulation, highly educated and well-compensated ranks of commercial cultural workers (Bourdieu 1998) have come to mobilize and manipulate the cultural realm as a pivotal source of commercial products. Whether in the guise of films, television, music, literary, or informational products, mass-mediated ‘‘cultural forms’’ have thus become a ‘‘central focus and expression of economic activity’’ (Connor 1989), and a definitive feature of the late capitalist condition. Within today’s mass-media-driven economy, professional sport organizations are ‘‘brazenly commercial enterprises, that make no pretense as to the cardinal importance of delivering entertaining products designed to maximize profit margins’’ (Andrews 2001, 154; emphasis added). Contemporary sport culture routinely exudes the ‘‘profit making’’ focus and ‘‘rationalized organizational

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procedures’’ exhibited by the more readily accepted forms of industrialized mass culture (Negus 1997). If popularity is any indication, then certainly sport can be considered a legitimate culture industry, in that it represents a lucrative site for the accumulation of capital via the manufacture of popular practices and pleasures for mass audiences. As Kellner noted: spectator sports have emerged as the correlative to a society that is replacing manual labor with automation and machines, and requires consumption and appropriation of spectacles to reproduce consumer society. The present-day era also sees the expansion of a service sector and highly differentiated entertainment industry, of which sports are a key part. (2002, 66)

Since late capitalism’s culturally inflected regime of accumulation is prefigured on the operationalizing of the mass media (simultaneously as both core product and process), sport’s evolution has become inextricably tied to the rhythms and regimes of an expanding media-industrial complex, which corroborates Real’s (1998, 15) identification of the ‘‘institutional alignment of sports and media in the context of late capitalism.’’ The ‘‘seductively consumerist union of commerce, sport and television’’ (Rowe 1996, 566) that has come to dominate, and indeed define, late capitalist sport culture, is arguably best exemplified in initiatives that led to the contextually symptomatic transformation of the NBA into a vibrant ‘‘massmediated . . . brand . . . produced, distributed, and consumed across the globe’’ (Hughes 2004, 180). The NBA’s commercial and cultural metamorphosis has to be understood in regard to the concerted ‘‘dedifferentiation of fields’’ associated with the economy’s turn to culture, and the attendant collapsing of sport into commercial television (and vice versa) that exemplifies the ‘‘new kind of dynamic’’ generating superstructures within this ‘‘third stage of capitalism’’ (Jameson 1991, xxi). As such, David Stern’s leadership of the NBA perhaps best illustrates the strategic initiatives responsible for the coming to fruition of distinctly late capitalist sport forms. Stern assumed the role of NBA Commissioner in February 1984 and, through a combination of pioneering organizational, media, and marketing directives, oversaw the cultural and commercial reformation of what had been a moribund sport league: Although one man can’t possibly be credited for every bit of growth over the past two decades, David Stern has single-handedly done more as commissioner of the NBA over a 20-year tenure than any other top executive in sports history. Franchise values have soared from $15 million to $300 million. Total gross revenues from licensed products have risen from $10 million to more than $3 billion. Overall league revenues have jumped from $118 million to more than $3 billion, and U.S. television rights now average $765 million annually, which is up 13,000 percent since Stern first took office on Feb. 1, 1984 . That doesn’t include even international broadcast rights, as games are now aired in 212 countries in 42 different languages. (Rovell 2004; emphasis added)

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Indeed, the transformation of the NBA has been such that the league has arguably come to represent the quintessential exemplar of ‘‘the high-flying entertainment-media-sports industry’’ (Marantz 1997). At this juncture, Bryman’s (1999) concept of Disneyization would appear an appropriate starting point for examining the NBA’s fusion of sport and the logics, practices, and products of the media entertainment domain*/indeed, the authors has carried out such an analysis (Andrews 2003), but, as is often the case, has subsequently questioned the wisdom of what was an uncritical appropriation of Bryman’s conceptualizing. On reflection, the discrete focus (the phenomenon of the Disney theme park) of Bryman’s framework necessitates using it, for present purposes, as an instructive point of departure, as opposed to a preordained interpretive destination. According to Bryman, Disneyization incorporates a multifaceted process (somewhat complimentary to Ritzer’s neo-Weberian concept of McDonaldization; Ritzer 1993, 1998), wherein the ‘‘process by which the principles of the Disney theme parks are coming to dominate more and more sectors of American society as well as the rest of the world’’ (Bryman 1999, 26). Far from being frivolous, as some may accuse, Bryman’s conceptualizing uses the Disney theme park as an environment illustrative of the ‘‘large social changes . . . in economy and culture . . . which are discernible in and have implications for (late) modernity’’ (Bryman 1999, 29). Thus, Bryman’s variously described Disneyizing principles, dimensions, or trends (these include spatial theming, the dedifferentiation of consumption, varied forms of merchandising, and the operationalizing of emotional labor) evoke, in dialectic fashion, the ‘‘cultural turn’’ that frames the condition of late capitalism (Jameson 1991, 1998). The pronounced spatiality of Bryman’s understanding prompted its considered application within themed restaurant (Beardsworth 1999), zoo (Beardsworth 2001), and, McDonald’s restaurant (Bryman 2003) settings. It is equally clear to see how the principles of Disneyization provide a useful conceptual basis for interpreting the stadia and event complexes (i.e. Baltimore Orioles’ Camden Yards facility), themed bars and restaurants (i.e. ESPN Sportszone), museums and Halls of Fame (i.e the National Baseball Hall of Fame and Museum in Cooperstown), and branded retail stores (i.e. Nike Town), which combine to form the built landscape of late capitalist sport. While indicative of, and indeed contributing toward, broad changes in ‘‘economy and culture,’’ Bryman’s (1999, 29) spatial preoccupation with theme parks disregards that which occupies Disney’s cultural and economic core. In short, he overlooks the role and function of the mass media products that constitute the integrative heart of Disney’s media entertainment complex. It is media content (the branded spectacles delivered via film, video, television, magazine, and web platforms), and not theme parks, that comprise the generative core of Disney’s global media entertainment empire. Within the contemporary televisually propelled culture, Disney inspired consumer imaginations and expectations are largely stimulated through the accumulated consumption of multiple mass media offerings. An intertextual economy of media productions thus represents Disney’s frontline in a commercial media[ted]

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offensive, through which the corporation attempts to penetrate the consciousnesses of, and seeks to extrude capital from, the global consuming masses. However, as well as being important cultural and economic entities in their own right, Disney’s media spectacles simultaneously act as pivotal points of crosspromotion (Wernick 1991) through which the corporation markets its subsidiary */or perhaps more accurately, derivative*/array of consumer products and experiences. In addition to the filmic and televisual outpourings one would expect from a contemporary media entertainment behemoth, Disney’s extended and ‘‘staggeringly powerful panoply of pop-cultural offerings’’ includes ‘‘theme parks, hotels, sport teams . . . retail outlets . . . Broadway shows, music publishing, a planned community . . . a cruise ship, and copious lines of merchandise produced under various licensing agreements’’ (Holbrook 2001, 142). The theme park is thus a derivative*/albeit an important one*/of a ‘‘Disney Universe’’ (Wasko 1996) driven and defined primarily by spectacular mass media content, and through which the desire for the sensual materiality and emotive possibilities of the Disney theme park experience (as offered in the form of character sightings and interactions, exhilarating rides, licensed merchandise offerings, etc.) is generated.

The Debordian Dualism The demands of understanding the Disney spectacle leads, almost inevitably, to a detour through Debord’s theorizing on the society of the spectacle (Debord 1990, 1994 [1967]). However, as Tomlinson (2002) warned, all too frequently Debord’s provocative treatise on the transformations in relations between capitalism, technology, and everyday life are the subject of little more than superficial invocation. This is routinely done through reference to the proliferation of massmediated spectacular events (i.e. Olympic Games, World Cup, Super Bowls, royal weddings, state funerals, presidential inaugurations, etc.), as if they, in and of themselves, encapsulate the complexities of spectacular society. In Tomlinson’s terms, this trite appropriation belies an ‘‘interpretive shorthand’’ used by academics, whose passing references to Debord signify an acknowledgement of the mediated spectacle ‘‘without any fully developed sense of the conceptualisation of the spectacle’’ (2002, 45). The tendency toward reifying the spectacle is soon eviscerated through actual recourse to Debord’s theses, which, somewhat repetitively, exhume the layered complexity and multidimensionality of the spectacle, and its position and function within spectacular society: ‘‘The spectacle appears at once as society itself, as a part of society and as a means of unification’’ (Debord 1994 [1967]), 12). According to Debord, the upper-case Spectacle (mediated mega-event) and the lower-case spectacle (relentless outpourings of the corroborating and/or parasitic culture industries) provide both the monumental and vernacular architecture of a spectacular society, in which the spectacle*/as capitalist product and process*/realizes a situation in

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which the "commodity completes its colonization of social life’’ (Debord 1994a [1967]), 29). Two decades after the publication of the original work, within Comments on the Society of the Spectacle (Debord 1990 [1988]), Debord assessed the continued veracity of his earlier prognostications. In this later project, he confirmed his original observations with one caveat: he identified a new, heightened stage in the evolution of the society of the spectacle, announced by the emergence of the ‘‘integrated spectacle’’ (Debord 1990 [1988]). This concept represented the synthesized extension of Debord’s earlier notion of the ‘‘diffuse’’ (characterized by neo-liberal freedom) and ‘‘concentrated’’ (marked by command economy alienation) spectacles, and is manifest in the seeming contradiction of increased governance of the marketplace (in terms of the commercial direction of social practices and subjectivities). Through the integrated spectacle, the ‘‘autocratic reign of the market economy’’ reached a new level of rational efficiency, such that the ‘‘spectacle has never before put its mark to such a degree on almost the full range of socially produced behavior and objects’’ (Debord 1990 [1988], 2, 9). Hopefully, it is evident how a Debordian inflected understanding of spectacular society can inform the understanding of the Disney Corporation, and lead to a more holistic understanding of the process of Disneyization. The spectacular structure and significance of this media entertainment behemoth evidences how, ‘‘Understood in its totality, the spectacle is both the outcome and the goal of the dominant mode of production’’ (Debord 1994a [1967]), 13). As a constituent and constitutor of spectacular society, any understanding of the process of Disneyization needs to address more closely Disney’s primary organizational objective: the ‘‘art of providing fantasy-enriched, sentimentally-compelling, fun-packed entertainment for their children-of-all-ages mass audiences’’ (Holbrook 2001, 142). Disney’s major film and video releases, and indeed sometimes re-releases, could be considered the corporation’s equivalent of media megaevents (the upper-case Spectacles) unceremoniously thrust*/via hugely expensive, and disconcertingly intrusive, marketing and advertising strategies*/into the popular consciousness of the global masses. These Disney Spectacles, and indeed the spectacular demeanor of the Disney brand as a whole, are simultaneously substantiated through a relentless tide and diversity of Disney products and services (the lower-case spectacles), which, through the various forms they take, result in Disney’s colonization of many aspects of social life. Disney can also be considered an integrated spectacle, for, across the breadth of its expansive media entertainment landscape, it seeks to control and direct consumers’ emotions and desires in the manner of a tautological system designed to enhance the aura of the Disney spectacle. Such is the emotive autocracy of Disney’s cultural economy. The promotional labor (Wernick 1991) responsible for the hegemony of the Wonderful World of Disney ethos allows the corporation to bask in the perpetual glory of its selfproclaimed wonderfulness . It also directs (not always successfully) the consuming public toward the uncritical celebration (not unsurprisingly, perhaps, the

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name of the planned community in Florida), and thereby perpetuation, of what is a preordained state of brand wonderment . The understanding of Disneyization developed herein is prefigured on the centrality of the spectacle (in all its various forms and guises) as the domineering vehicle and manifestation of cultural and economic existence. So, rather than the derivative theme park that provides Bryman’s focus, the process of Disneyization is herein understood to incorporate the spectacular principles and practices of Disney’s broader media entertainment operations that are coming to dominate more and more sectors of American society as well as the rest of the world. That is not to say Bryman’s notion of Disneyization is superfluous to the project of critically examining the enmeshed cultural and commercial logics of contemporary spectator sport in general, and the NBA in particular. Rather, Bryman’s four principles of Disneyization (theming, the dedifferentiation of consumption, merchandising, and emotional labor) represent important subprocesses contributing to the broader process pertaining to the media[ted] entertainment-based spectacularization of contemporary sport. Of course, any US spectator sports display many elements of this complex understanding of Disneyization. This is not least because sport has evolved into a multifaceted, and intensively marketed, vehicle for the production and delivery of mass-mediated entertainment. As Kellner identified, ‘‘Postindustrial sports . . . merge sports into media spectacle . . . and attest to the commodification of all aspects of life in the media and consumer society’’ (2002, 66). Spectator sport, like the Disney Corporation itself, evokes Debord’s conceptualizing in both the monumental (the proliferation of sport media mega-events) and vernacular (the social relations and experiences mediated by ancilliary commercial texts, products, and services) understandings of the integrated spectacle. Yet, as Kellner continued, ‘‘professional basketball has emerged . . . as the game that best symbolizes the contemporary sports/ entertainment colossus’’ (2002, 66). As such, it could be argued that the NBA is the most Disneyized of contemporary US sports.

The NBA’s Integrated Spectacularization In seeking to reverse the NBA’s potentially terminal cultural and economic decline experienced during the early 1980s, when the league was widely perceived to be too regional (it lacked significant national television exposure), too black (the preponderance of African American players was felt to alienate the game from the United States’ white consumer majority), and too druginfested (a litany of drug scandals resulted in the league being the forum for the most regressive form of racial pathologizing) (Cole and Andrews 1996), David Stern initiated the aggressive restructuring of what was a failing professional sport industry into a multifaceted marketing and entertainment conglomerate incorporating over 20 divisions, including NBA Properties, NBA Entertainment, NBA International, and NBA Ventures. This restructuring represented the newly

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instantiated corporate architecture through which cultural labor and processes*/used to advance the NBA as a manufacturer of multi-platform, multimanifest, mass(-mediated) entertainment products and experiences*/have been organized and operationalized. As the league’s primary ‘‘captain of consciousness’’ (Ewen 1976), Stern’s brief has been to mould the NBA brand into an exhilarating, exciting, and entertaining game played by talented, committed, interesting, and/or charismatic individuals and teams. Moreover, through the implementation of various disciplinary strategies (including accusatory anti-drug policies, various iterations of collective bargaining agreements between owners and players, and the subsequent enforcement of a salary cap; Staudohar 1989), Stern has made highly visible the league’s attempts to (at the very least symbolically) police the various excesses that plagued the popular perception and reception of the NBA and other professional sport leagues. He has become the figurehead leading the reconstitution of the NBA as a semiotically consistent and culturally acceptable compendium of branded entertainment-oriented personas, products, and services. Interestingly, and perhaps because it is easier to digest the authority and influence of a morally upright and seemingly benevolent guiding hand, rather than the collective structures and sensibilities actually responsible for what is primarily a commercial operation, routinely leads to the reification of professional sport administrators such as David Stern. Thus, the complex social relations of production responsible for both the material and cultural manufacture of mass entertainment products, such as the NBA, is effectively obscured. Stern, akin to Walt Disney, thus becomes the representative embodied architect of an entire organization (the NBA’s magic kingdom ), thereby adding to the personified aura of the spectacle. The NBA’s radical, and indeed rapid, transformation into a global media entertainment concern has allowed David Stern to freely acknowledge, and indeed celebrate, the similarities between the NBA and the Disney Corporation: They have theme parks . . . and we have theme parks. Only we call them arenas. They have characters: Mickey Mouse, Goofy. Our characters are named Magic and Michael [Jordan]. Disney sells apparel; we sell apparel. They make home videos; we make home videos. (David Stern, quoted in Swift 1991, 84)

However, mere acknowledgement of these parallels is insufficient. It is important to examine the precise nature of the NBA’s Disneyization, focusing primarily on the league’s integrated spectacularization. Differently put, the only instructive way that it becomes possible to consider the NBA as a Disneyized entity is by acknowledging the central importance of the league’s television output to what is unabashedly perceived to be a ‘‘major entertainment and consumer goods company’’ (David Stern, quoted in Lombardo 2004, 1). It is the NBA’s mediated mega-events (such as national network game coverage and, particularly, playoff and finals broadcasts) that propel popular consciousness of, and interest in, the league, its teams, players, and, equally importantly, its array of ancillary products. Hence, as within the ‘‘Disney Universe’’ (Wasko 1996), the

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NBA’s mass-mediated spectacles act as the integrative fulcrum of this multifaceted consumer entertainment complex. As such, the cultural work required for the entertainment-based reformation of the NBA needs to be considered. The past two decades have witnessed the transformation of the NBA through concerted and aggressive processes of media[ted] entertainment-based spectacularization , involving the mobilization of both the monumental and vernacular levels of the spectacle. In terms of the former, as with any commercial cultural entity looking to occupy a place within the consciousness of potential viewers [consumers], the NBA needed to occupy a regular and reliable place on national network television. In the late 1970s, the NBA’s national network presence was virtually negligible, with even the NBA Finals being shown on tape-delay. Thus, in order to facilitate the national popularizing of the league*/and before worrying about the nature of the programming being delivered to the American public*/David Stern recognized the need to harness television’s spectacularizing potential. Thus, during the 1980s, the league furthered its public persona through a more intensified relationship with the incumbent broadcaster, CBS, and by forging a presence on the fledgling cable system (on channels such as USA, ESPN, TBS, and TNT). Fortunato (2001) has described the relationship between the NBA and various television interests as the ‘‘ultimate assist.’’ However, the intensified televisualization (Miller et al. 2001) of the league was mutually beneficial, in that both the NBA and its broadcasters enhanced their symbolic and economic capital as a result of the increased audience interest generated in the revamped media spectacle of seductively telegenic rivalries (Magic Johnson versus Larry Bird; the Los Angeles Lakers versus the Boston Celtics), and exciting new players (particularly Michael Jordan and Dominique Wilkins). As an indication of the NBA’s rapid transformation from moribund anonymity to popular cultural centrality, during the 1979/80 season, CBS paid $18.5 million for the network television broadcast rights to the league, an annual figure that leaped to $150 million by the time NBC wrestled the rights away from CBS in 1990/91. The only recently interrupted relationship with the National Broadcasting Corporation (which broadcast the game on network television between 1990/91 and 2001/02 for a combined $3.1 billion) was most responsible for the advancement of the NBA as a popular media spectacle. Under the guidance of Dick Ebersol, chairman of NBC Universal Sports & Olympics and an acolyte of ABC’s influential Roone Arledge, NBC sports programming advanced a production strategy that recognized that sport broadcasts needed to compete with other forms of mass entertainment. Thus, NBC produced network sport spectacles that went far beyond the mere game/event coverage, incorporating and accentuating particularly emotive storylines, rivalries, and personas, such that the viewer would become invested in the spectacle at a number of different levels. In other words, NBC sought to make its sport programming more entertaining for the masses of casual viewers looking for televisual stimulus, as opposed to the relatively fewer sporting obsessives driven by their inveterate and often irrational personal passions. Through its advancement of what has been dubbed ‘‘the soap opera games’’ (Carlson 1996), NBC’s manipulating*/or, perhaps more

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accurately, contrived constitution*/of sporting spectacles for the purposes of accentuating viewer entertainment is most readily evident in the network’s Olympic Games coverage (Andrews 1998). The emotively imbued production values developed within the NBC Olympic crucible have become the hegemonic form of national network sport coverage, and can be evidenced in the broadcasting of events ranging from ice skating, to the X-Games, and even the sacrosanctity of ABC’s Monday Night Football. Predictably, therefore, NBC’s coverage of the NBA, albeit less intensively than their Olympic narrativizing, adopted similar production strategies: NBC personalized, as it spectacularized, the NBA, its teams, and its players, to the American viewing public. In 2002/03, the NBA broadcast rights were commandeered by*/in an ironic twist for this discussion*/Disney’s ABC networks, which paid $2.4 billion for a sixyear contract to show a significantly reduced number of games on the ABC national network. By introducing a self-imposed scarcity with regard to national network game coverage, ABC’s aim was perhaps to accentuate the monumental stature of the NBA spectacle (Debord 1994 [1967]), while simultaneously accommodating the vernacular, through expanded coverage on cable platforms (the ABC contract included provision for game coverage on Disney/ABC sport television’s ESPN cable outlet; additionally, NBA also signed a separate sic-year $2.2 billion contract with TNT).

The Primacy of Emotional Labor The narrativized sport spectacle is, to large extent, only as compelling to a viewing audience as the emotive resonance of the objects that provide the focus of highly personalized storylines. For this reason, Bryman’s (1999) concept of emotional labor is perhaps the most salient constituent element of Disneyization to the evolution of the spectacularization of the NBA. Emotional labor refers to highly contrived and rehearsed practices whereby service workers express what are perceived to be socially desired expressions and behaviors, during the course of interactions with the consuming public (Bryman 1999). Within the theme park context, manifestations of emotional labor are readily apparent in the willing smiles and demeanors of service workers. Although somewhat less obvious, highprofile sport leagues similarly seek to ensure that the embodied representations of their organization (in this case, playing personnel) exhibit what are perceived to be engaging (commercially desirable) public personas. Unlike in the Disney scenario, the NBA’s leading personalities do not have to be uniformly wholesome; they simply need to project an identifiable character that would most successfully interpellate the subjectivities of sufficient swathes of the consuming populace. Hence, through its own promotional invectives, those of network, cable television, and radio broadcasters, and even the ancilliary influence of corporate advertisers using (and thereby contributing to the advancement of) players’ celebrity, the NBA’s rampantly intertextual marketing machine has conjured forth a phantasmagorical world of embodied identities and narratives

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incorporating tropes routinely associated with the experiential sweep of human existence (triumph and tragedy, falling and redemption, success and failure, heroism and villainy). Thus, the NBA is both humanized and personalized to an audience eager any kind of emotive gratification (either resonant or dissonant). The very essence of basketball lent itself to the reengineering of the NBA into a manufacturer of personality dramas and cults: it is an extremely telegenic sport, in as much as the ‘‘The athlete’s face*/and emotions*/aren’t shielded by a helmet as it is in football’’ (longtime Deputy Commissioner of the NBA, Russ Granik, quoted in Moore 1994, 1B). As a consequence, during the early to mid 1980s, Larry Bird’s whiteness and Magic Johnson’s disarming black smile and style were intensively mined as part of the remodeling of the NBA into a racially ambiguous*/and thereby accessible to mainstream American sensibilities*/popular cultural space (Cole and Andrews 1996). Bird and Magic came to represent, however spuriously and unrepresentatively, the public face of this cosmetically managed NBA. However, it was Michael Jordan’s imaged identity that was to play an even more instrumental role in what could be described as the racial disassemblage of the NBA into a viable commercial product (Andrews 2001). In short, Jordan’s imaged identity harnessed and nurtured the racially acceptable semiotic space initiated by the Bird/Johnson dyad, and ushered in an even more lucrative era of popular acceptance for the NBA. While the search for the next Jordan (an imperious African American player whose countenance massages rather than challenges America’s racial anxieties) continues, ironically, but perhaps not surprisingly, within the late capitalist context, numerous commercial interests have also sought to engage, and thereby capitalize upon, what is considered to be the resistant and oppositional tendencies exhibited among America’s youth cultures (Smith and Clurman 1997). Specifically, the NBA’s seemingly endless supply of African American ‘‘anti-Jordans’’ are cast by the promotional messages emanating from shoe, fast food, and mobile phone companies alike as seductive frames from which to engage the sensibilities of predominantly white American youth. As Goldman and Papson (1996, 1998) identified, these embodied signs speak to the manner in which the perceived culture of urban (read African American) America has been commercially colonized as a mechanism for addressing middle class concerns, and indeed pretensions, about authenticity. They are compelling examples of what Dyer-Witheford (1999) described as ‘‘market-racism.’’ Therefore the semiotic system of the NBA reinforces the historically grounded discourses of acceptable and unacceptable blackness (Carrington 2000, 2001) in a manner that draws further parallels to the more reactionary outpourings of the Disney Corporation (Giroux 1994). In terms of the production of the vernacularity of the NBA spectacle, it is also important to consider Bryman’s (1999) interrelated concepts of theming, merchandising, and the dedifferentiation of consumption, all of which point to the spectacle’s colonization of evermore aspects of everyday existence (Debord 1994 [1967]). In terms of its expansive semiotic economy, the NBA has been transformed into a complex network of branded commodity signs (those pertaining to the league itself, its franchises, and, perhaps most importantly, its cultural economy of superstar players) from which the consumer is

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encouraged to derive a positive and consistent sensory experience (Goldman and Papson 1996; Klein 1999). In this vein, the NBA’s aggressive merchandising practices now mean the league, its teams, and players can be experienced in multifarious commodified forms, the most obvious being through engagement with NBA televised game coverage, in-house promotional programming and commercials, a 24-hour cable channel (NBA TV), pre-recorded videocassettes, books, magazines, computer games, and an extensive array of related sports apparel and merchandise. The theming of NBA-related personas, commodities, services, and experiences reached its most explicit expression within a joint venture between the NBA and Hard Rock Cafe ´ that resulted in the opening of the NBA Cafe ´: a restaurant at the Universal Studios theme park in Orlando, Florida, and the seemingly unavoidable corollary of a collision between ever-converging entertainment universes. In this way, as late capitalism’s propensity for advancing the ‘‘dedifferentiation of fields’’ (Jameson 1998, 73) continues unabated, the spectacular principles and practices advanced by the NBA as a media entertainment complex suggest a moment in which ‘‘the spectacle has spread itself to the point where it now permeates all reality’’ (Debord 1990 [1988]), 9). In conclusion, the monumental NBA spectacle (network television coverage) acts as a generative and unifying locus for the diverse ancilliary products and services (the ‘‘panoply of pop-cultural offerings’’; Holbrook 2001, 142) through which the NBA brand enters into everyday consciousness and experience. Thus, in Debord’s oft-cited but in this case most appropriate words, the various ways though which the NBA can be experienced (in other words, consumed) thus exemplifies the ‘‘historical moment at which the commodity completes its colonization of social life . . . commodities are now all there is to see; the world we see is the world of the commodity’’ (Debord 1994 [1967], 29). The integrated spectacle of the NBA also contributes to the increased governance of the consumer marketplace through the commodification of particular objects and associated modes of behavior. As with the Disney Corporation, through the entirety of its media entertainment offerings (from the spectacular network game coverage, through the serial ‘‘I love this game!’’ promotions and their recent iterations, to the deifying replica shirt, and the lionizing tendencies of NBA.com), the NBA represents a tautologious semiotic system designed to control and direct consumer emotions toward the goal of enhancing the aura of the NBA spectacle. As Debord noted, ‘‘The spectacle is essentially tautological, for the simple reason that its means and its ends are identical. It is the sun that never sets on the empire of modern passivity’’ (1994 [1967], 15). The NBA can thus be considered an emotive autocracy because, while not always successful (as witnessed by periodic semiotic aberrations and inconsistencies), its various cultural offerings seek to direct the consuming public toward an uncritical engagement with, and thereby perpetuation of, its own virtuosity. This even becomes apparent in the manner in which the league’s global (in terms of its global diffusion as a mediated and merchandised spectacle) and international (regarding the increased numbers of non-US-born players on NBA teams) growth is celebrated (cf. Andrews 1997).

DISNEYIZATION, DEBORD, AND THE INTEGRATED NBA SPECTACLE

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Herein, the NBA spectacle, like other tautologous semiotic systems before it (of which Disney and the British colonialism are the most obvious like-minded imperial projects), revels in its own manifest destiny. In Debord’s terms, the NBA ‘‘covers the entire globe, basking in the perpetual warmth of its own glory’’ (1994 [1967], 15), in a way not dissimilar to the discursive constructions of other, less benign, American-led overseas incursions. University of Maryland, USA

References Andrews, D. L. 1997. The [Trans]National Basketball Association: American commoditysign culture and global localization. In Politics and Cultural Studies Between the Global and the Local, edited by A. Cvetovitch and D. Kellner. Boulder, Co.: Westview Press. 72/101. */*/*/. 1998. Feminizing Olympic reality: Preliminary dispatches from Baudrillard’s Atlanta. International Review for the Sociology of Sport 33(1):5/18. */*/*/., ed. 2001. Michael Jordan Inc.: Corporate sport, media culture, and late modern America. Albany, N.Y.: SUNY Press. */*/*/. 2003. A propos de la NBA. In L’aventure des «grands» hommes. Etudes sur l’histoire du basket-ball, edited by F. Archambault, L. Artiaga and P.-Y. Frey. Limoges, France: University of Limoges Press. 271/92. Beardsworth, A., and A. Bryman. 1999. Late modernity and the dynamics of quasification: The case of the themed restaurant. The Sociological Review 47:228/57. */*/*/. 2001. The wild animal in late modernity. Tourist Studies 1(1):83/104. Bourdieu, P. 1998. Acts of resistance: Against the new myths of our time . Cambridge: Polity Press. Bryman, A. 1999. The Disneyization of society. The Sociological Review 47(1):25/47. */*/*/. 2003. McDonald’s as a Disneyized institution. American Behavioral Scientist 47(2):154/67. Carlson, M. 1996. The soap opera games: Determined to make every event a tearjerker, NBC overplays the personal stories. Time, 5 August, p. 48. Carrington, B. 2000. Double consciousness and the black British athlete. In Black British culture and society, edited by K. Owusu. London: Routledge. 133/56. */*/*/. 2001. Postmodern blackness and the celebrity sports star: Ian Wright, ‘‘race’’ and English identity. In Sport Stars: The cultural politics of sporting celebrity, edited by D. L. Andrews and S. J. Jackson. London: Routledge. 102/23. Cole, C. L., and D. L. Andrews. 1996. ‘‘Look*/Its NBA ShowTime !’’ Visions of race in the popular imaginary. In Cultural Studies: A research volume. Vol. 1, edited by N. K. Denzin. Greenwich, CT: JAI Press. 141/81. Connor, S. 1989. Postmodernist culture: An introduction to theories of the contemporary. Oxford: Basil Blackwell. Debord, G. 1990 [1988]. Comments on the society of the spectacle. Translated by M. Imrie. London: Verso. */*/*/. 1994 [1967]. The society of the spectacle. Translated by D. Nicholson-Smith. New York: Zone Books. Dyer-Witheford, N. 1999. Cyber-Marx: Cycles and circuits of struggles in high-technology capitalism . Urbana, Ill.: University of Illinois Press. Ewen, S. 1976. Captains of consciousness: Advertising and the social roots of the consumer culture . New York: McGraw-Hill.

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Fortunato, J. 2001. The ultimate assist: The relationship and broadcast strategies of the National Basketball Association.. Cresskill, NJ: Hampton Press. Giroux, H. A. 1994. Animating youth: The Disneyfication of children’s culture. Socialist Review 24(3):23/55. Goldman, R., and S. Papson. 1996. Sign wars: The cluttered landscape of advertising . Boulder, Co.: Westview Press. Grossberg, L. 1997. Bringing it all back home: Essays on cultural studies . Durham: Duke University Press. Holbrook, M. B. 2001. Times Square, Disneyphobia, and hegeMickey: The Ricky principle, and the downside of the entertainment economy-It’s fun-dumb-mental. Marketing Theory 1(2):139/63. Hughes, G. 2004. Managing black guys: Representation, corporate culture, and the NBA. Sociology of Sport Journal 21(2):163/84. Jameson, F. 1991. Postmodernism, or, the cultural logic of late capitalism . Durham, N.C.: Duke University Press. */*/*/. 1998. The cultural turn: Selected writings on the postmodern 1983/1998 . London: Verso. Kellner, D. 2002. Media spectacle . London: Routledge. Klein, N. 1999. No logo: Taking aim at brand bullies . New York: Picador. Lombardo, J. 2004. Stern: NBA in talks to put more playoffs on ABC. Street & Smith’s Sports Business Journal, 20 September, p. 1. Mandel, E. 1999. Late capitalism. 6th impression ed. London: Verso Classics. Mandelbaum, M. 2004. The meaning of sports: Why Americans watch baseball, football, and basketball and what they see when they do . New York: PublicAffairs. Marantz, S. 1997. The power of air. The Sporting News, 24 December, pp. 12/20. Miller, T., G. Lawrence, J. McKay, and D. Rowe. 2001. Globalization and sport: Playing the world . London: Sage. Moore, D. 1994. Transition game: League no longer flourishing, but foundation remains strong. Dallas Morning News, 3 Novermber, p. 1B. Negus, K. 1997. The production of culture. In Production of culture/cultures of production, edited by P. D. Gay. London: The Open University. 67/118. Nixon, S., and P. D. Gay. 2002. Who needs cultural intermediaries? Cultural Studies 16(4):495/500. Real, M. R. 1998. MediaSport: Technology and the commodification of postmodern sport. In Mediasport, ed. L. A. Wenner. London: Routledge. 14/26. Ritzer, G. 1993. The McDonaldization of society: An investigation into the changing character of contemporary social life . Thousand Oaks: Pine Forge Press. */*/*/. 1998. The McDonaldization thesis: Explorations and extensions . London: Sage. Rovell, D. 2004. How Stern showed NBA the money, 22 January [accessed: 1 February 2004]. Available from sports.espn.go.com/nba/columns/story?id=1714434 Rowe, D. 1996. The global love-match: Sport and television. Media Culture & Society 18(4):565/582. Smith, J. W., and A. Clurman. 1997. Rocking the ages: The Yankelovich report on generational marketing . New York: Harper business. Staudohar, P. D. 1989. The sports industry and collective bargaining . Ithaca, N.Y.: ILR Press, Cornell University. Swift, E. M. 1991. From corned beef to caviar. Sports Illustrated, 3 June, pp. 74/90. Tomlinson, A. 2002. Theorising spectacle: Beyond Debord. In Power games: A critical sociology of sport, edited by J. Sugden and A. Tomlinson. London: Routledge. 44/60. Wasko, J. 1996. Understanding the Disney universe. In Mass media and society, edited by J. Curran and M. Gurevitch. 2d ed. London: Arnold. 348/68. Wernick, A. 1991. Promotional culture: Advertising, ideology and symbolic expression . London: Sage.

Working Paper Series, Paper No. 06-14

A Tale of Two Stadiums: Comparing the Economic Impact of Chicago’s Wrigley Field and U.S. Cellular Field Robert A. Baade†, Mimi Nikolova††, and Victor A. Matheson†††

August 2006

Abstract Supporters of sports stadium construction often defend taxpayer subsidies for stadiums by suggesting that sports infrastructure can serve as an anchor for local economic redevelopment. Have such promises of economic rejuvenation been realized? The City of Chicago provides an interesting case study on how a new stadium, U. S. Cellular Field, has been integrated into its southside neighborhood in a way that may well have limited local economic activity. This economic outcome stands in stark contrast to Wrigley Field in northern Chicago which continues to experience a synergistic commercial relationship with its neighborhood.

JEL Classification Codes: L83, O18, R53 Keywords: sports, stadiums, development, baseball, Chicago, economic impact



Robert A. Baade, Department of Economics and Business, Lake Forest College, Lake Forest, IL 60045, 847-735-5136 (phone), 847-735-6193 (fax), [email protected] ††

Mimi Nikolova, Department of Economics and Business, Lake Forest College, Lake Forest, IL 60045 †††

Victor A. Matheson, Department of Economics, Box 157A, College of the Holy Cross, Worcester, MA 01610-2395, 508-793-2649 (phone), 508-793-3708 (fax), [email protected]

Introduction The past 15 years have witnessed an unprecedented boom in stadium construction. By 2006, 89 of the 120 major league teams in the “Big Four” North American sports, football, baseball, basketball, and hockey, played in facilities built or significantly refurbished since 1990. These stadiums and arenas were constructed at a cost of more than $17 billion of which roughly $12 billion was provided by public sources (Matheson, 2006). The stadium building boom is not a uniquely American phenomenon. Germany spent over 1.4 billion euros building or rehabilitating 12 stadiums for the 2006 FIFA World Cup. At least 35% of this sum was provided by local, state, and federal taxpayers (FIFA, 2006). Most economists have been critical of public funding of sports facilities. Numerous academic studies of stadiums and arenas, professional franchises, and major sporting events such as the World Cup, Olympics, and championship or All-Star games have uniformly found little or no gains in income, employment, or tax revenues as a result of professional sports. (See Siegfried and Zimbalist (2000) for an overview of such research). These economists speculate that spending on sports merely substitutes for other expenditures that would have occurred in the economy in the absence of sports. It is asserted, furthermore, that the crowds and congestion that accompany big games serves to displace non-sports activity. Finally, money spent at sporting events is less likely than other sorts of spending to remain and recirculate in the local economy (Matheson, 2006). Professional sports franchises, therefore, may enhance the quality of life in a host community without exerting a measurable impact on the economy. Teams may represent

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a nice cultural amenity for a city, but the direct economic benefits from professional teams do not seem to justify large taxpayer subsidies. On the other hand, supporters of stadium construction suggest that professional sports franchises promote economic development even if the teams themselves do not directly provide many jobs or increased tax revenues to host communities. It has become increasingly common for sports boosters to defend taxpayer subsidies for stadiums by stating that sports infrastructure can play an important role in the recovery of blighted areas by serving as an anchor for local economic redevelopment. Stadiums, it is said, promote the establishment of ancillary business such as bars, restaurants, and retail shops that capitalize on the crowds that arrive on game days. The economic studies apparently overlook these important neighborhood effects. The purpose of this report is to assess how and to what economic effect the location of a modern sports stadium in a neighborhood has had on host cities in the United States. The spatial implications are not trivial and have served in many instances to impede neighborhood development rather than promote it.

A Brief History of Integrating Stadiums into Cities in the United States Earlier in the twentieth century, stadiums were woven into dense urban fabrics. Rather than the stadium defining and shaping an area the stadium was viewed as subordinate to a larger urban design and function. The existing urban grid established the shape and location of many urban ballparks. The Baker Bowl, for example, home to Major League Baseball’s (MLB) Philadelphia Phillies until 1938, was also known as the

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“Hump” because it was built on an elevated piece of ground to accommodate a railroad tunnel running under center field. Professional sports in the United States have been undergoing an economic revolution inspired by a confluence of circumstances both inside and outside the industry. These changes have affected both the supply and demand for professional sports, which, in turn, have had implications for where and how professional sporting events are packaged and presented. Nowhere are these changes more apparent than in the design and location of stadiums and arenas, and two developments in that regard should be noted. First, financial imperatives have worked to all but eliminate the multipurpose, circular stadiums built several decades ago in cities such as Cincinnati, Pittsburgh, and Philadelphia to host both football and baseball. More stadiums and arenas now exist in cities in the United States as a consequence. Second, the pursuit of greater profit by individual teams has reversed the trend toward locating sports facilities in suburban areas where relatively cheap real estate made large tracts of land for parking for automobiles economically feasible. Stadiums and arenas have been migrating back to the cities with promises of fan spending spilling over into the commercial corridors of the neighborhoods through which fans flow to reach transportation centers or remote parking. Cities have used this promise of increased commercial activity to persuade fans to lend financial support to an aggressive city strategy to remake their centers into cultural and entertainment destinations. Cleveland, for example, has developed the Gateway complex, which includes both Jacobs Field for MLB and the Gund Arena for the National Basketball Association, to lure people back to its downtown. Atlanta, Baltimore, Denver, Indianapolis, Minneapolis, and Nashville, to

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name a few other cities, have opted for placing stadiums in or near the central business district in an effort to revitalize their cores. Have the city promises of economic rejuvenation been realized? While some cities have realized a benefit, in other cases economic development has been retarded by the new playing facility. The City of Chicago provides an interesting case study on how a new stadium, U. S. Cellular Field (the new home of the MLB Chicago White Sox), has been integrated into its southside neighborhood in a way that may well have limited economic activity within that neighborhood. This economic outcome stands in stark contrast to Wrigley Field on the north side of Chicago which continues to experience a synergistic commercial relationship with its neighborhood.

Chicago: A Tale of Two Stadiums Chicago is the home to two MLB teams, the White Sox and the Cubs. Both teams have been in existence for over 100 years, and each has strong ties to the Chicago community along with legions of die-hard fans. Until the White Sox won MLB’s championship in 2005, the White Sox and Cubs had also shared a common bond of futility in the post-season with neither team having won the World Series since the 1910s. The similarities end when one arrives at each team’s respective stadium, however. Wrigley Field is a shining example of how a sports facility can integrate itself within a local neighborhood and provide positive economic spillovers to the nearby community. U.S. Cellular Field, on the other hand, provides the classic case of the sports stadium as a “walled fortress” that internalizes all economic activity in order to maximize revenues for the franchise at the expense of local economic development. Unfortunately for the

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proponents of sports-based development, the White Sox model is the path that is most often followed by team owners desiring new stadiums to replace aging or economically obsolete facilities, and the features that make Wrigley Field such a good fit for the local community are unlikely to be replicated at other stadiums. Wrigley Field was built in 1914 on Chicago’s north side, and is, along with Fenway Park in Boston, one of the two oldest remaining stadiums in MLB. As can be seen in the aerial photographs of the area, Figure 1, the stadium is nestled into a neighborhood that is densely populated with restaurants and bars, retail shops, and residential housing. Wrigley is famous for the apartments bordering the stadium from which the occupants can look down into the stadium and watch games as they are played. Many of these buildings, in fact, actually sell tickets to non-resident customers for rooftop viewing. Wrigley predated the automotive culture and the exercise of monopoly muscle by professional sports leagues in the United States, and almost no large parking lots are within easy walking distance of the stadium as a consequence. Fans either arrive by mass transportation or park on neighborhood streets. Local residents also do a brisk business selling spots in garages down back alleys. The footprint of the stadium itself is also rather small. While Wrigley Field seats nearly as many fans as U.S. Cellular, its concourses and walkways (as well as its restroom facilities) are much smaller than those at the newly constructed U.S. Cellular Field. The smaller concourses significantly limit the variety and the number of vendors selling merchandise and food at Wrigley Field translating into lower revenues for the

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Cubs’ owners. The White Sox generate approximately 35% more in non-ticket revenue per fan in attendance than the Cubs.

FIGURE 1: Aerial Photograph of Wrigley Field and Its Neighborhood

Note: Restaurants, bars, coffee shops, and hotels are marked by corresponding symbols.

An aerial photo of U.S. Cellular, Figure 2, presents a completely different picture. Built in 1991, the stadium itself is much larger than Wrigley Field. Modern sports teams rely much more on the sale of concessions and other paraphernalia for revenue than teams back in the day when Wrigley Field was constructed. Therefore, most modern stadiums like U.S. Cellular are designed to bring as much fan spending inside the stadium

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walls as possible. Of course, with expansive shopping, eating, and drinking options available within the stadium, fewer entrepreneurs have an incentive to locate businesses outside the stadium in order to cater to White Sox fans.

FIGURE 2: Aerial Photograph of U.S. Cellular Field and Its Neighborhood

Note: Neighborhood restaurants, bars, coffee shops, and hotels (or lack thereof) are marked with corresponding symbols.

The other striking difference between Wrigley and U.S. Cellular is, of course, the availability of onsite parking around the White Sox’ stadium. Massive parking lots surround U.S. Cellular Field on the south, west, and north while the stadium is bounded

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on the east by a major interstate highway. Like supplying expansive concessions services, supplying adequate parking also serves to increase the revenues of the team at the expense of local businesses. Because of the size of the parking lots, fans are dissuaded from walking to local bars and restaurants either before or after the game simply due to the physical distances involved. One final unique quality differentiates Wrigley Field and the Cubs from the White Sox and, indeed, the rest of Major League Baseball. Most MLB teams play 5 to 6 games per week during the season including 3 or 4 weekday games. In order to accommodate the schedules of their fans, the vast majority of these weekday games are played at night. For example, in 2006 the White Sox, a typical team in MLB, play 81 home games of which only 26 are day games that start before 3:30 in the afternoon. On the other hand, the Cubs were the last team in the Major Leagues to add lights to their stadium, and they still continue to minimize the number of night games they host, playing 52 of their 81 games during the day in 2006. Playing day games encourages the creation of local establishments in the neighborhood of Wrigley Field for several reasons. First, since baseball games usually last around 3 hours, during night games fans leave stadiums late at night limiting their interest in visiting local eating and drinking establishments (or at least limiting the amount of time they can patronize a bar). On the other hand, afternoon games discharge fans in the late afternoon or early evening leading to a huge flow of patrons towards neighborhood bars and restaurants. Second, afternoon games allow the team to share the area with neighboring business without crowding out other activity. The congestion associated with 40,000

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baseball fans will tend crowd out other economic activity around a baseball stadium during home games. It is therefore difficult for restaurants or theaters in the neighborhood of a stadium to attract non-sports fans during games. Since these types of businesses tend to attract customers at night, sharing a neighborhood with a sports team that plays 50 or 60 night games per year, like the White Sox, frequently makes attracting patrons very difficult. The Cubs crowd out local business through night games only half as often as a typical MLB team. Finally, playing games during the day allows fans to park on local streets and in personal garages while local residents are at work rather than necessitating the creation of large parking lots that detract from the creation of local businesses. The neighborhood contrast between Wrigley and U.S. Cellular Field as it relates to economic development has broader application, and points, once again, to the influence of the automobile and the growing appetite for revenue made possible, at least in part, by the exercise of monopoly power by sports leagues in the United States. The contrast between Fenway Park’s neighborhood and that of stadium neighborhoods in Cleveland and Seattle provides additional evidence of these realities.

Fenway Park and Stadium Neighborhoods in Cleveland and Seattle Yawkey Way in Boston, the “street” that borders Fenway Park on the west, teems with pedestrian traffic on game day. Yawkey Way exemplifies the synergistic relationship between stadium and neighborhood in the same way that Waveland Avenue and Wrigley Field do in Chicago. Fenway Park, like Wrigley, was fit into the existing urban grid rather than redefining it. The neighborhood surrounding Fenway Park has

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been a participant rather than spectator to commercial activity induced by the MLB Red Sox. This commercial tradition has undergone modifications along with the stadium, but the essential commercial relationships have remained intact. Newly constructed stadiums in the United States in recent times often have redefined the neighborhood in ways that would promote team commercial interests at the expense of the neighborhood. U.S. Cellular Field provides one example but is hardly unique. New stadiums have been constructed with the team’s bottom line in mind, and the neighborhood’s participation in economics, it is fair to say, are subservient to that aim. The parking-lot borders for U.S. Cellular Field represent not only an additional source of revenue for the White Sox, but they also provide a defense against what many perceive as a lack of safety in the area. Fans have been provided safe, convenient parking but an asphalt moat now exists that effectively separates the neighborhood and the ballpark. New stadiums either through accident or design have appropriated revenues that in older stadiums were claimed by the neighborhood. The expanded food and drink options within the new stadium walls serve to diminish the importance of neighborhood restaurants and bars. The same can be said of the impact of “stadium stores” that sell team paraphernalia. There is no need to shop for a cap or pennant in the neighborhood when those items more conveniently can be purchased within the stadium’s walls. While it may not be the intention of the team to take business away from the community, the functioning of the new generation of stadiums does exactly that. There are examples of how the team’s commercial intent toward the neighborhood is not so benign. There are laws, for example, that prohibit the sale of

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souvenirs by vendors not associated with the team within a certain number of feet of stadiums in Cleveland, Ohio. Similarly the sale of “official” team paraphernalia without the explicit consent of the team is not allowed in many, if not all cities, in the United States. Explicit consent, of course, can be purchased, and the vendors then become partners in the team’s commercial enterprise. It should also be noted that sports does not enjoy a synergistic relationship with many other industries, and one key identified by many economists to urban growth, industry clustering, is impaired by the presence of sports. This outcome occurs in part due to the temporal-intensive nature of the sports industry. Sports events are occasional and seasonal, and stadium dead time is the standard. Game day, however, involves intensive use of public infrastructure by throngs of fans, which serves to crowd out other commercial activity during that time. The commercial interests that remain in the stadium neighborhood are those that are most compatible with sports, but parking and drinking establishments hardly constitute the backbone of a vibrant, growing urban economy. The economy of the neighborhood may actually be diminished to the extent that economic activity most compatible with the stadium replaces higher-growth, nonseasonal activity. A survey of the commercial activity in Pioneer Square in Seattle as a consequence of the Kingdome (now replaced by two newer stadiums) being located there provides several important lessons with regard to the economic impact of stadiums on host neighborhoods. First, bars that had a sports theme and a location adjacent to the stadium derived substantial benefits. Sports bars/restaurants adjacent to the stadium reported as much as 1,700 percent in revenues on game days (Baade, 2000).

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Second, the increase in the bar/restaurant business generally was inversely related to the establishment’s distance from the stadiums. Unless the bar had a particularly compelling sports identity, three or four blocks walking distance from a stadium was sufficient to eliminate most of the positive economic impact. Proximity, however, is no guarantee of success. If the bar/restaurant was not on a main pedestrian thoroughfare, the impact was muted. For example, one restaurant less than two blocks away from the stadium, but removed from the constellation of bars frequented by fans after a game, attempted to build a clientele through sports promotions with no success and changed ownership four times in a couple of years due to a lack of business. Third, the success of the sports bars/restaurants is highly sensitive to the success of the teams. Not only does a winning team attract more fans to the stadium, but apparently fans supporting mediocre or losing teams are in no mood to celebrate. Several sports bars that gushed about the positive impact of the Mariners and Seahawks sounded a much more sober note in describing the impact of the teams in years in which they did not compete for a championship. Other businesses did not share the enthusiasm or the success of the sports bar entrepreneurs for the stadiums and its teams. Ethnic restaurants, art galleries, professional services, legal services, and most retail outlets reported a decline in their business. Some professional service establishments, including law offices, have considered changing their location because of the difficulties they encounter meeting clients on game days. The culprit cited by all firms adversely affected by the Kingdome was inadequate parking (Baade, 2000).

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Conclusions and Policy Implications Public subsidies for new sports stadiums in the United States have been justified on the grounds that they induce economic activity in their host neighborhoods. This article questions that proposition. The type of economic development induced by stadiums may not be in the best economic interests of the neighborhood. Stadiums both old and new enhance to some degree bar/restaurant commercial activity. Modern stadiums, furthermore, are dependent on vehicular traffic, and the parking lots necessary to accommodate the heavy traffic flows on the occasional game day, may diminish the prospects for neighborhood economic development through crowding out commercial activities that compete for scarce public space in the form of sidewalks, streets, and parking lots. Finally, while teams ballyhoo the potential that a new sports facility for raising the economic profile of neighborhoods, the new generation of stadiums either through accident or design may actually diminish neighborhood economic activity through offering within their walls goods and services that compete with those offered by businesses in the stadium’s environs. Chicago’s two professional baseball teams provide a compelling example of how new stadiums in serving the financial interests of their teams potentially dim the economic prospects for host communities.

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References Baade, R.A. (2000): The Impact of Sports Teams and Facilities on Neighborhood Economies: What is the Score? In: W.S. Kern (ed): The Economics of Sports. Kalamazoo, Michigan: W.E. Upjohn Institute for Employment Research. FIFA: Destination Germany: Venues (http://fifaworldcup.yahoo.com/06/en/d/) Accessed 1 August 2006. Matheson, V.A. (2007): Economic Impact Analysis. In: W. Andreff and S. Szymanski (eds): The Elgar Companion to the Economics of Sports. London: Edward Elgar Publishing. Siegfried, J. and A. Zimbalist, (2000): The Economics of Sports Facilities and Their Communities. Journal of Economic Perspectives 14(3), pp. 95-114.

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Can New Orleans Play Its Way Past Katrina?

By Victor A. Matheson and Robert A. Baade

February 2006

COLLEGE OF THE HOLY CROSS, DEPARTMENT OF ECONOMICS FACULTY RESEARCH SERIES, PAPER NO. 06-03

Department of Economics College of the Holy Cross Box 45A Worcester, Massachusetts 01610 (508) 793-3362 (phone) (508) 793-3710 (fax) http://www.holycross.edu/departments/economics/website

Can New Orleans Play Its Way Past Katrina? By Victor A. Matheson† College of the Holy Cross and Robert A. Baade†† Lake Forest College February 2006

Abstract Hurricane Katrina devastated the city of New Orleans in late August 2005, and debates are now underway across the country concerning strategies for reconstructing the City. A key to redevelopment involves encouraging former citizens and businesses to return. Both of New Orleans’s professional sports teams, the National Football League Saints and the National Basketball Association Hornets, have taken up residence in other cities, and the question of what the city should provide in the way of financial accommodation to encourage them to return should be considered in devising a reconstruction plan. Infrastructure to facilitate professional sports and mega-events constitutes a significant fraction of capital budgets for even the largest cities. New Orleans has hosted a disproportionate share of mega-sports events in the United States given its size and demographics. An important question concerns whether these events have contributed enough to the New Orleans economy to justify reinvestment in infrastructure to restore New Orleans’s place as a leading host of professional sports and mega-events in the United States. A careful review of the evidence suggests that the redevelopment efforts of New Orleans are better directed at first providing infrastructure that will encourage the return of its middle class citizenry and the restoration of its culture. Playing host to professional sports and megaevents does have symbolic significance, but it is arguable that the city cannot afford to invite guests until it has the means to accommodate them. JEL Classification Codes: H25, H71, H40, L83, Q54 Keywords: sports, public finance, economic impact, New Orleans, Hurricane Katrina



Victor A. Matheson, Department of Economics, Box 157A, College of the Holy Cross, Worcester, MA 01610-2395, 508-793-2649 (phone), 508-793-3710 (fax), [email protected] ††

Robert A. Baade, Department of Economics and Business, Lake Forest College, Lake Forest, IL 60045, 847-735-5136 (phone), 847-735-6193 (fax), [email protected]

I. Introduction Hurricane Katrina devastated New Orleans physically and economically after making landfall on August 29, 2005. Full recovery, which generally follows natural catastrophes in the United States given the inflow of funds for reconstruction, seems less certain in the Crescent City. Citizens and businesses that abandoned New Orleans have exhibited a reluctance to return. The city’s professional sports teams are included among those enterprises that left New Orleans in the wake of Hurricane Katrina. The National Football League (NFL) Saints played home games in three different cities during 2005; the National Basketball Association (NBA) Hornets have taken up residence in Oklahoma City for their 2005-2006 home games; and the Arena Football League’s Vodoo have abandoned their entire 2005-2006 schedule. Saints owner Tom Benson recently announced that the team would return home for the 2006 season, but their future in the city after the 2006 is unclear (Duncan, 2005). Benson and the city have had a contentious relationship due largely to the fact that the Superdome could not compete with the new generation of NFL stadiums as a revenue producer, prompting Benson to threaten relocation in the absence of a new playing facility. This relationship has soured further as a consequence of the damage Katrina inflicted on the Superdome making the need for a new or renovated stadium even more pronounced. The purpose of this paper is to analyze the extent to which the city of New Orleans should direct its development dollars toward its sports infrastructure. Has New Orleans benefited economically from its role as host to major professional sports teams and a disproportionate number of mega-sports events given its size and demographics?

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Do commercial sport enable a rebuilding of New Orleans’s storm-ravaged infrastructure or does it force civic trade-offs made even more painful by the storm? Independent scholarship in general has not supported the thesis that professional sports induce significant increases in economic activity for host cities. New Orleans, however, may be different. The city is smaller and less affluent than other host cities in general, and it may be that the frequency with which large sports events are hosted by New Orleans makes the area an exception to the experience of most cities with regard to sports and economic development. The gravity of the city’s economic situation in the wake of Katrina necessitates an individual and more complete appraisal as strategies for economic redevelopment are explored. Answers to the questions raised in this introduction require a review, among other things, of the damage Katrina wrought, the amount of redevelopment money the city must commit, and the evidence with regard to the impact sports has on host city economies. Given the need for these assessments, the paper is organized as follows. The second section of the paper provides an inventory of Katrina’s damage. Part three discusses a blueprint for the redevelopment of New Orleans and the role of the leisure industry in that redevelopment effort. The fourth part of the paper provides information on the cost of sports infrastructure and teams subsidies in New Orleans. The fifth part of the paper reviews scholarly work as it relates to the economic impact of sports in general. The impact sports and mega-events have had on New Orleans is the subject of the sixth part of the paper. The seventh part of this report assesses whether New Orleans can afford sports reconstruction. Conclusions and policy implications constitute the paper’s final section.

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II. Measuring Katrina’s Devastation Hurricane Katrina, which swept into New Orleans and the Gulf Coast on August 29, 2005, caused far and away the largest damages in real dollar terms of any hurricane in U.S. history, with uninsured losses topping $100 billion (Bloomberg News, 2005) and insured losses estimated at $34.4 billion (Powell, 2005). Its final death toll of over 1,400 also places it among the worst natural disasters ever suffered by the United States. New Orleans was particularly hard hit by the storm, as flood waters remained for weeks after Katrina while levies were repaired. Rebuilding New Orleans is an epic undertaking matching in scope and expense in real terms the rebuilding of San Francisco after the 1906 earthquake or Chicago after the fire of October 8, 1871. The cost of reconstructing New Orleans has been placed at more than $100 billion dollars (Tennessean News Service, 2005). Projects that were rejected prior to Katrina such as a sea wall south of the city to contain water from the Gulf of Mexico are now being seriously considered, but the estimated cost of this project alone is $2.5 billion (Tennessean News Service, 2005). The damage to highway infrastructure has been monumental as a consequence of roads sitting under water for weeks following the storm. The housing stock experienced devastation that more closely resembles what has been associated with world wars than hurricanes. New Orleans according to the U.S. Census Bureau had 188,000 occupied housing units prior to the storm, and approximately 80 percent of that housing was severely damaged by the storm. Some of the extensive housing damage can be explained by the fact that more than half of the cities 100,000 owner-occupied homes in its 73 neighborhoods were built before 1950 (Tennessean

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News Service, 2005). The replacement housing will be constructed with potential hurricane damage in mind, and that will escalate the cost of replacing residential infrastructure considerably. The damage to middle class neighborhoods has substantial implications for the redevelopment effort both as it relates to production and consumption. Without a middle class New Orleans will not have the workers it needs to run the economy that existed prior to Katrina, and the spending necessary to restore the economy to pre-hurricane levels will be deficient. Katrina devastated the housing stock, schools, and other infrastructure vital to normal life for all socio-economic classes. The extent of the damage to the social infrastructure must also be carefully assessed since the return of middle class workers and consumers is essential to the revitalization of the New Orleans economy. Even before Katrina, by nearly every measure of economic development, New Orleans lagged behind other large American cities. As seen in Table 1, for example, labor force participation rates and employment/population ratios in New Orleans are lower than the national average for most demographic groups. Table 1: LFP Rates and Employment/Population Ratios in New Orleans compared to National Averages Age (Gender) LFP rate, Hurricane Damaged Empl./Pop. Ratio, Hurricane Areas (National %) Damaged Areas (National %) 16-24 years (Men) 55.0% (65.0%) 46.1% (55.5%) 16-24 years (Women) 57% (62.0%) 46.0% (54.0%) 25-64 years (Men) 77.0% (82.0%) 72.9% (78.9%) 25-64 years (Women) n.a. 64.4% (66.7%) Source: Gabe, et al. (2005). Hurricane damaged areas in Louisiana have poverty rates above the national average (21.4% vs. 12.4%), and New Orleans residents are less likely cities (55% vs.

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66%) to live in owner-occupied housing than residents of other large cities (Gabe, et al., 2005). Finally, the educational attainment of younger adults (age 18 to 34) for stormdamaged areas is generally below that for the rest of the nation. For example, 22.9 percent of young adults in hurricane damaged areas had not completed a high school degree compared with 20.6 percent nationwide, while only 22.5 percent had completed a college degree compared with 29.3 percent nationwide (Gabe, et al., 2005). These figures suggest several things worth noting that have implications for the likelihood that people displaced will return. First, Katrina hit the economically disadvantaged hardest. Statistics indicate that other places in the nation to which they have relocated will improve their opportunities for employment. Second, significant portions of the middle class were displaced in the storm-ravaged area; 47.4 percent of those displaced had education equivalent to some college or above (Gabe, et al., 2005). Third, 45 percent of those displaced did not live in homes that they owned indicating that a significant portion of the people displaced by Hurricane Katrina have weak financial ties to the communities they abandoned. A significant permanent displacement of the population affected by the storm will undermine or may substantially alter the sociodemographic character of neighborhoods mostly adversely affected by the storm. It should also be noted that virtually entire neighborhoods and parishes were wiped out by the storm, and devastation of that magnitude may well negate any pull that community loyalty and ties may exert in bringing people back. It has been estimated, for example, that Orleans Parish and St. Bernard Parish lost 65.9 and 89.8 percent of their populations over the period October 2005 to January 2006 (Greater New Orleans Community Data Center, 2005).

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The report of the Bring Back New Orleans Commission recommended that all of New Orleans not necessarily be rebuilt. It might well be that if that recommendation is followed, the post-Katrina New Orleans will be smaller than the pre-Katrina New Orleans, and that has implications for the ability (willingness) of sports to serve as a catalyst for economic redevelopment. Prior to considering what sport potentially can contribute to the redevelopment effort, it is logical to identify a blueprint for redevelopment. That topic will be discussed in the next section of the paper.

III. A Blueprint for the Redevelopment of New Orleans and the Role of the Leisure Industry The New Orleans economy serves the nation as a tourist center and transportation hub for water transport in particular, and therefore, any economic redevelopment effort should focus on those traditional industries, an opinion endorsed by members of an ad hoc committee of urban experts assembled under the auspices of the Urban Land Institute. Of course, commercial sport is one important aspect of the tourist/leisure industry, and could play a role in the economic revitalization of New Orleans. A logical predicate to a discussion sports tourism is to provide some background on the importance of the tourism industry overall to New Orleans. Much of the tourism industry in New Orleans is “high-ground” based in the French Quarter, the Central Business District (CBD), and the Garden District. The Urban Land Institute committee, which met on November 18, 2005 opined:

New Orleans should concentrate its rebuilding efforts on the sections of the city that occupy the high ground, while securing lower-lying areas for potential long-term rebirth…

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…it’s not practical to redevelop every acre of New Orleans in the short term, considering that 300,000 residents and 160,000 jobs have been lost. It’s also not socially equitable to allow residents back into neighborhoods that do not have adequate levee protection and may be toxic… (Carr, 2005). Prior to the storm New Orleans attracted more than 10 million visitors who spent in excess of $5 billion per year according to the New Orleans Metropolitan and Tourism Bureau. Even though New Orleans is a relatively small city, it ranked fifth in the United States in the number of conventions hosted (Tennessean News Services, 2005). Tourists will not likely return to a city that cannot provide essential services, and in the absence of tourists, the New Orleans economy will flounder compared to pre-Katrina times. One part of the blueprint for restoration of the New Orleans economy will require restoration of housing and essential services for its middle class, followed by a reinvigoration of the tourist trade, followed by a revitalization of those businesses that cater to tourism. The extent to which professional sports and mega-events contribute to the tourist trade must be assessed in determining the fraction of scarce capital resources that should be devoted to the restoration of the infrastructure necessary to accommodate professional and mega-sports events. The last few years before Hurricane Katrina struck, the city of New Orleans hosted two major league professional sports teams, several minor league teams, and a division one collegiate athletic program at Tulane University. In addition, since opening in 1975, the Superdome has hosted numerous sporting events of national significance including the NFL’s Super Bowl in 1978, 1981, 1986, 1990, 1997, and 2002, the National Intercollegiate Athletic Association Men’s Basketball Final Four in 1982, 1987, 1993, and 2003. In addition, the Superdome annually hosts the Sugar Bowl, one of

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college football’s top post-season matches and a game which has determined college football’s national champion nine times since 1975. Replacing the infrastructure for professional sports and mega-sports events can be justified if the benefits provided by the facilities exceed the costs incurred in the reconstruction. Both costs and benefits have to be measured over time since the facilities provided a stream of benefits as well generating costs associated with operations and maintenance (O&M). Comprehensive economic analysis would include not only the explicit benefits but also the implicit benefits and costs, which are difficult not only to measure but in many cases to identify. Before proceeding with quantitative analysis of how much should be spent for infrastructure reconstruction, the analysis should be framed by considering the potential for economic development through hosting professional sports or mega-sports events that utilize the infrastructure New Orleans possesses to accommodate such activity. Data exist over a period of time for New Orleans and other metropolitan areas for the number of establishments, annual payroll, and number of employees, collected and arrayed according to the North American Industrial Classification System (NAICS). These data are presented at highly aggregated levels (NAICS 2-digit) all the way through to highly disaggregated levels (NAICS 4-digit) in Table 2. The more disaggregated are the data, the more incomplete the data set. These limitations compel the construction of a more aggregated picture of the potential contribution of professional sports and mega events than is optimal, but reasonable conclusions can be drawn based on the data that are available. In Table 2, information is recorded on professional sports’ fraction of the three measures of economic activity previously identified.

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Table 2: Aggregate Measures of the Fraction of New Orleans Economic Activity in Total Represented by Spectator Sports for 2003 Ratio/NAICS Number

NAICS 71: Arts, Entertainment, and Recreation

Industry Employees/New 4.07% Orleans Total Annual Industry Payroll/New Orleans 3.48% Total Industry Establishments/New 1.74% Orleans Total Source: County Business Patterns, (2003).

NAICS 711: Performing Arts, Spectator Sports, and Related Industries

NAICS 7112: Spectator Sports

1.16%

0.62%

1.39%

0.34%

0.94%

0.20%

All data point to the fact that the economic activity accounted for through the “Arts, Entertainment, and Recreation” industry for New Orleans is small. The contribution of “Spectator Sports” is less than 1 percent by any of the measures identified in Table 2. The annual payroll percentage is not atypical for cities in the United States. The annual payrolls represented by spectator sports for Cook County, the county in which the Chicago is located, and for Fulton County, the county in which Atlanta resides, are 0.25 percent and 0.89 percent, respectively. Despite the hefty salaries paid professional athletes, the spectator sports industry typically accounts for less than 1 percent of a city’s payroll, and, by that measure, the industry is not economically vital to cities in the United States, including New Orleans.

IV. The Cost of Sports Infrastructure and Team Subsidies in New Orleans The competition to host sports mega-events and/or a professional sports team is often as fierce as the competition among athletes on game day. Sports infrastructure is

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vital in not only attracting commercial sport but in retaining teams or events. Prior to Hurricane Katrina, New Orleans appeared to be on the verge of losing their NFL franchise, the Saints. Tom Benson, the owner of the Saints, had rejected reportedly the state’s final offer to keep the Saints in New Orleans in late April of 2005. Details of the offer to keep the Saints in New Orleans were revealed by Superdome Commission Chairman Tim Coulon shortly after Benson nixed the state’s proposal. A newspaper story reported that: In their “final” offer, state negotiators, led by Coulon, asked the Saints to pay $40 million – or a little less than 25% -- of a Superdome renovation now estimated to cost around $174 million. The state also offered to continue to pay the current annual cash subsidy – totaling $50 million – until completion of the first phase of renovation for the 2007 season. After that, under the state’s proposal, the cash payment would have dropped to $14 million, then to $9.5 million when the renovation was complete for the 2008 season, but rising 2% annually from there. (USA Today, 2005) That plan would have required the state to raise $12 million in new taxes. The Saints wanted the new schedule of cash payments to begin at $13.5 million in 2008, Coulon said. “It’s beyond the threshold of pain,” Thornton (Superdome General Manager Doug Thornton) said of the Saints latest offer, which would require $4 million in new taxes over what the state offered even if the Saints also agreed to pay $40 million toward renovations. “What we were trying to do is reach a framework of an agreement, and to get any taxes passed would be a Herculian effort.” (USA Today, 2005) The state’s offer to the Saints to include the annual cash subsidy would place the team in the top half of the financial standings in the NFL. The fact that the state required that the Saints pay $40 million, or less than 25 percent of the total cost of Superdome renovations, places the Saints below the average, 27.2 percent, for team contributions for NFL stadiums built since 1995 (Baade, 2004). The fact that Benson would reject such an

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offer speaks volumes about the financial realities of the NFL and the inordinate transfer of business risk from teams to their host cities. The acute aversion to financial risk practiced by NFL teams has consequences for host cities, and they have achieved tragic proportions in the case of New Orleans. The behavior of the Saints follows a well worn financial path, and the behavior of Tom Benson is rational and understandable in light of the incentive structure he and his fellow owners have authored. Indeed, Mr. Benson “acknowledged a challenging economic marketplace but cited the increasingly competitive economics of the NFL,” as the reason for turning down the state’s April 2005 offer (ESPN, 2005). The risk for Tom Benson is the $81 million he is required to pay if he breaks his Superdome contract, which he can do following the 2006 season (Konigsmark, 2005). The $81 million represents the subsidies that the Saints have received since 2001. That risk pales in comparison to the $1 billion written offer Benson claims to have received for the team in 2005, a 1,400 percent increase over the $70 million price Benson paid for the Saints in 1985 (Robinson, 2005). The lucrative offer Benson received for the team reflects at least in part the money-making potential of NFL teams, which is explained in large part by the subsidies cities extend to attract a supply of teams that is limited by the NFL and its owners. Why would Benson consider leaving New Orleans? The answer, of course, is a more lucrative offer or better economic prospects by locating in another city such as Los Angeles, which has been without a team since 1995. The fans in New Orleans have done their part as they sold out the Superdome 36 straight times before that streak ended late in 2004 (AOL, 2005). But the financial resources of New Orleans fans are limited, and so is

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the number of corporations. Prior to Katrina, among NFL cities, New Orleans was the fourth in population trailing only Jacksonville, Buffalo, and Green Bay, and the fourth poorest, trailing Buffalo, Tampa Bay, and Phoenix. Even if New Orleans’ per capita income were to recover to its pre-Katrina levels, if as few as 25 percent of the population were to not return, New Orleans would be smaller than any other host city except for Green Bay, Wisconsin in any of the big four professional American sports leagues. Corporations play a major role in keeping a team financially competitive. It is one thing to provide luxury seating; it is another thing to fill those seats. New Orleans does not serve as a headquarters for many major corporations, and there is not the market for loges and club seats that can be found in the other NFL cities with whom New Orleans competes. One writer somewhat whimsically stated the NFL financial equation in the following way: Instead of fans, the NFL seeks corporations...While the NBA and Major League Baseball have guaranteed contracts for their players, the NFL with its exorbitant TV rights deals and corporate backing has practically given their owners guaranteed dollars… The way business is done now is the owner convinces his buddies who own the largest businesses in their respective cities to buy majority (sic) of the season tickets and luxury boxes. The result: a term exclusive to the NFL, the guaranteed sellout. Saints owner Tom Benson can’t do that in New Orleans because there are no major corporations other than Entergy to back him. (Terrebonne Parrish Courier, 2005) Whimsy aside, New Orleans is at a considerable disadvantage in supporting and, therefore, retaining an NFL franchise or any franchise in one of the four major professional sports leagues in the United States. The lack of financial capacity creates a relative shortfall in team revenues, which explains the cash subsidies and tax concessions New Orleans has had to provide to retain the NFL Saints and the NBA Hornets. New

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Orleans had a total capital budget of $74,627,540 in 2002 (City of New Orleans, Ordinance #23,957, November 2001). The estimated cost of replacing the Superdome is $600 million. Spreading that cost over 30 years would constitute 27 percent of the capital budget for 2002 without considering debt service on the bonds to finance replacing or renovating the structure. Following Katrina any plans for replacing the Superdome have been scuttled, but the city will have to provide for a portion of the costs involved in repairing the facility and the adjacent New Orleans Arena. It is unclear how much the State of Louisiana will be spending to renovate the dome. Following Katrina, state officials made clear that they intended to update the facility so that it would be competitive with the newer structures that exist in the NFL. There will be new audio and visual equipment, more luxury seating, concession stands and wider concourses. The Superdome was one of many buildings damaged by the storm and Louisiana had a $500 million insurance policy on state buildings along with $100 in flood insurance. The Federal Emergency Management Agency (FEMA) will also contribute to the rebuilding effort, but the funds will have to be efficiently allocated. Given the very small percentage of economic activity in New Orleans accounted for by the sports industry, it may not be prudent to devote a disproportionate share of scarce redevelopment funds to that sector. An even stronger argument can be made against refurbishing the Superdome to accommodate the financial needs of the NFL Saints since their owner has consistently sought economic concessions from a city and state that were financially stressed even prior to Katrina. The economic incentive for the Saints owner to keep the team in New Orleans has been severely compromised by

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Katrina. Lacking the financial wherewithal to support professional sports following Katrina, it is not reasonable to expect that the team will make the financial sacrifices that are necessary as New Orleans attempts to rebuild. There exists no motivation to recoup fixed or sunk costs by the Saints since their investment in infrastructure has been minimal. This points to a larger problem with the financial structure of the professional sports industry throughout the United States. The existence of substantial subsidies for infrastructure undermines the team commitment to their host cities. Absent any meaningful risk to their own capital, what incentive do teams have to stay in a city that experiences a catastrophe on the scale wrought by Hurricane Katrina? There is no question that the financial risk accompanying hosting professional sports in the United States is disproportionately borne by the host community. Katrina provides striking testimony to the reality of how subsidies for sports infrastructure have contributed to that financial vulnerability. The argument for subsidies for professional sports has been based on the economic impact it provides. The “public good” argument that has been used as a rationale for subsidies is critiqued in the next section of this report.

V. Theory Regarding the Economic Impact of Sport Independent scholarship arguing against sports as a catalyst for economic development is abundant. See Noll and Zimbalist (1997) for examples. The debunking of the theory that commercial sport serves as a catalyst for economic development is based on economic realities based on budgetary fundamentals and substantial leakages from the inflow of funds that provide the basis for those who assert sport teams and mega-events

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stimulate the host economy to a nontrivial extent. The often spectacular economic impact estimates advocates for subsidizing sports infrastructure advance fails to accurately estimate the economic impact sport has for at least three reasons. First, often the costs associated with hosting the event, building the structure, or accommodating the team are treated as expansionary expenditures. Such a tactic ignores the budgetary reality that money spent on such endeavors precludes spending that money on something else. The benefit from the use of that money for some other purpose, for example building a levee as opposed to a stadium, represents a cost to the community and should be considered in evaluating the efficacy of any project. Second, the money spent on attending a sports event by residents of the home team community necessarily precludes them from spending that money on other things. Furthermore, local expenditures on professional sports may actually reduce total spending in the economy as opposed to simply reallocating money among competing ends. Professional sports, which use national resource markets as opposed to locally owned and operated resources for alternative entertainment or recreational activities, may foster a net outflow of money. Most of the money spent on a night at a professional sports event goes to the athletes and owners of the team who may not live in the community in which they play. Value created in the community by the event or team play may not be value that the community recognizes in the way of increased incomes, which are spent again in the community as might be the case with locally owned and operated entertainment. Professional sports may be a model better described as the circus coming to town for a temporary stay and leaving with a portion of the income spectators created through their economic activity within the community.

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Third, to properly gauge the benefit to the public sector, the incremental tax revenues collected should be net of the incremental explicit costs incurred in hosting the event or team. The Super Bowl, for example, places a heavy security burden on the host city, and that cost needs to be identified in estimating the net benefit to the city from hosting the event. Taken together the implication of the three qualifiers noted is that the appropriate measure of the benefit imparted by the subsidy is the measure of net value added. The inability or unwillingness to recognize the difference between gross expenditures in conjunction with an event and the net value added it induces explains the substantial disagreements relating to the economic impact of sports teams and mega-events on host community economies. Once the economic impact economic of sport is properly measured, independent scholarship indicates that most teams and mega-events fail to increase net value added for the host community. Previous research indicates that the New Orleans Superdome has had a statistically significant, positive impact on economic activity in New Orleans, but that positive impact has been offset by a statistically significant, negative impact induced by the NFL Saints (Baade and Dye, 1990). This result is not surprising. The utilization of the Superdome has increased over time, and it has been successful in providing a venue that accommodated events that brought visitors and spending to New Orleans from outside the metropolis. Professional football, on the other hand, induced substitute spending that ultimately deflected resident spending to areas outside New Orleans. The team, furthermore, drained scarce city resources through subsidies that became income for non resident players, coaches, and owners. The team, as the primary tenant,

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influenced Superdome scheduling and effectively prevented the facility from being utilized for other events that could have expanded the New Orleans economy. The spectator sports industry, in light of the preponderance of scholarly evidence, is properly viewed as a lagging rather than a leading economic activity. Sports yields hedonic value, in other words, and the quality of life benefit it imparts is a luxury affordable in affluent communities rather than an activity that helps a community achieve affluence. Sport for the most part is properly viewed as a luxury good and not a productive resource. New Orleans has had an ongoing debate about how much it should spend on sports infrastructure and to what effect. Katrina has already had an impact on those deliberations, as it should, because the risks and substitution effects associated with subsidizing commercial sports activities have been enhanced by the storm for reasons that are discussed in the next section of the paper.

VI. Spectator Sport and the Revitalization of New Orleans The damage wrought by Katrina on New Orleans exceeded that of any other hurricane and rivals in destructive scope the most significant natural disasters in the history of the United States. What separates the disaster in New Orleans is the extent to which human failure contributed to the storm’s destructive force. The forty-two breaches of levees coupled with the failure of government to adequately respond have elevated the perception of risk. That heightened perception will have implications for the redevelopment of New Orleans because the extent to which the investment vital for reconstruction will occur is in part dependent on the risk assumed by investors. A part of

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the reconstruction debate will focus on the Superdome and New Orleans Arena, and it is important to assess, therefore, what the public can expect in the way of a return on those investments. The devastation of the middle and lower-middle classes has a profound impact on the professional sports industry in New Orleans. These classes provided workers for the leisure industry as well as other industries, and their abandonment of New Orleans has impaired the ability of the City to adequately meet the needs of service establishments in the French Quarter and CBD that cater to the needs of tourists. The loss of the middle class has diminished consumption in New Orleans, and businesses that serve the retail needs of this class as well as the tourist industry has been acutely stressed. The labor shortage makes it doubtful that the Superdome could host a major event at this juncture. Each event at the Superdome requires approximately 2,500 workers, but work at the Superdome and New Orleans Arena is occasional and seasonal in keeping with their events calendars. Family income is augmented by work undertaken in conjunction with Superdome and New Orleans activity. The massive destruction of the housing stock in New Orleans in neighborhoods such as the Lower Ninth Ward, Gentilly Terrace and Woods, and Lakeview requires income to restore that far exceeds that which can be provided through working events occasionally hosted by the Superdome and New Orleans Arena. The lack of housing in New Orleans has significant implications for the ability of the leisure industry in New Orleans in general and the spectator sports industry in particular to function. A good fraction of the workers at the Superdome and the New Orleans Arena, even if an event could be physically hosted in those facilities now, would very likely have to come from some place other than the most devastated areas of New

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Orleans where the middle class lived. The leakage of money from New Orleans through athletes repatriating their incomes to their primary residences would further be enhanced by ordinary workers doing the same thing in some appreciable amount because of a lack of housing in many New Orleans neighborhoods. Post-Katrina, it is even less likely that income generated through commercial sports activities would remain in the City. Likewise, the devastation in New Orleans has made it less likely that professional athletes would remain in the community to spend their money. The lack of social services and the physical destruction which has transformed New Orleans physically would compel many with the financial wherewithal to live elsewhere. Thus, Katrina likely enhanced the size of the substitution effects noted in the previous section of the paper and enhanced the risk of investment in sports infrastructure substantially. The money spent on professional sports infrastructure in this environment of acute housing shortages can only lengthen the restoration of the housing stock and ultimately frustrate the financial interests of the sports establishment. Some form of housing has to be provided for workers, and the speed with which housing requests have been met has been painfully slow. Nearly six months after the storm, of the 135,000 requests for FEMA trailers, only about half have been filled (Steinhauer and Lipton, 2006). Money spent on sports infrastructure is money not spent on housing. Less housing means fewer local residents working at the Superdome and New Orleans Arena. Reconstructing the sports facilities, furthermore, at this point deflects construction work from where it is needed most. The scarcity of habitable houses in New Orleans for people of relatively modest means has resulted in a significant increase in the prices of such housing.

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Restoring the Superdome and New Orleans Arena sends the message that New Orleans is on the road to healing. The message, however, is a tease if those renovated facilities cannot host events for which local residents provide the necessary labor. A better reconstruction strategy would be to repair and replace the damaged housing stock first. It is hard to imagine the benefit to the city of New Orleans of repairing sports facilities that the owners will not use due to the compromised economics of events hosted by those structures, especially for commercial sport. If there are few residents, there will be few fans. Few fans translates into little spending, and since tax dollars are derived from the demand for goods and services, tax revenues generated by governments through activities at the facilities will be less, perhaps appreciably less, than before Katrina. Indeed, declining business activity following the terrorist attacks on 9/11 had already resulted in deficit spending by the Louisiana Stadium and Exposition District to meet its cash subsidy obligations to the Saints and Hornets. The shortfall had led to serious discussions about tax increases for car rentals and hotels in addition to sales tax and cigarette tax increases prior to Katrina’s arrival. Under present conditions no tax increases are possible, and it is better from the city’s point of view to have the teams play elsewhere rather than assume those obligations. If the Saints and Hornets fostered deficit state spending pre-Katrina of approximately $15 million,1 surely those deficits would increase substantially following Katrina. The costs to continuing to host professional sports outweigh the benefits and will continue to do so until the economy can be reinvigorated beyond pre-Katrina levels.

1

It is interesting to note that the size of the deficit that existed in 2004 of about $19 million approximated the cash subsidies extended the Saints and Hornets annually (Barrett Sports Group, 2004).

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The professional sports teams in New Orleans would have to be motivated by something other than their financial self interest to help New Orleans move beyond Katrina. The evidence is overwhelming that the owner of the New Orleans Saints has operated pre- and post-Katrina out of financial self interest. Prior to the storm, Benson sought a new stadium. The evidence indicates that he was reluctant to accept a refurbished Superdome because Benson apparently believed that an updated Superdome could not generate sufficient income to allow him to be financially competitive in New Orleans. When evaluating the nature of the negotiations between Benson and city, the problem for Benson is New Orleans and not the Superdome. Benson has the option to move the team to Los Angeles, but Paul Tagliabue, the Commissioner of the NFL, and the League would have a massive public relations problem if he allowed that move. While the NFL may share revenues, cities that host teams are hardly given a free ride. The quid pro quo for having access to revenues generated by NFL teams playing in the New York and Chicago markets is to build state-of-the-art stadiums that allow each team to contribute as much as they can to the pool of stadium-generated revenues. Eventually the NFL will find a way to move the Saints out of New Orleans rather than have the team become a ward of the League.

VII. Can New Orleans Afford Sports Reconstruction? The massive destruction of the housing stock in New Orleans is the single largest obstacle to the restoration of the New Orleans economy to pre-Katrina levels. The middle class labor force fled New Orleans in substantial numbers, and absent a labor force, restoration of productivity activity to pre-Katrina levels is impossible. Absent

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productive activity and the income it generates, spending cannot occur that will support businesses that cater to consumer needs. State and local government tax revenues have fallen sharply, but, as is true following most natural disasters, the funds for rebuilding come from the federal government and from private citizens throughout the United States and world. Clearly those funds should be directed toward housing, but the risks associated with replacing the housing stock are substantial. The middle class that abandoned New Orleans has to be convinced that it is safe to return, and they need to have assurances that the water surrounding the New Orleans bowl is contained. Insurance companies will have to be convinced as well so that home insurance can be provided at affordable prices. How to do that with a dependable system of levees and the reclamation of wetlands is beyond the scope of this report. The focus here is on where the reconstruction of sports facilities fits into the redevelopment blueprint. The conclusion is that New Orleans cannot afford the reconstruction of sports facilities on a scale that will keep the Saints in New Orleans at this time. Expenditures on the sports facilities that are undertaken should be consistent with attracting those Superdome related activities that have contributed to the New Orleans economy. The evidence indicates that the Superdome did account for significant net value, but the Saints did not. It should be kept in mind, however, that the reconstruction of the Superdome in the short run should be undertaken only after spending on housing. Indeed, for a short time longer at least the workers who maintain the hotels and provide restaurant and bar business are housed in the hotels. A Superdome and convention center that is up and running tomorrow would bring in guests who displace the workers that provide guest services. Labor supplies would be forced to come, perhaps, from outside

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the metropolis, and these non resident workers would spend the income they earn outside New Orleans. The appropriate development strategy for the short and long run is to replenish the housing stock where appropriate and then rebuild those businesses that attract nonresident spending. Providing physical accommodation for professional sports teams does not advance the economics interests of New Orleans in the short term. Doing so would exacerbate the economic problems that currently exist.

VII. Conclusions and Policy Implications Hurricane Katrina induced a massive outflow of residents and businesses from the city of New Orleans. Included among those businesses that fled are the city’s two major professional sports teams, the NFL Saints and NBA Hornets. The capital costs necessary to encourage the return of the Saints and the Hornets for the long term are substantial. The images of the NFL and NBA will be damaged if the Saints and Hornets do not at least make cameo appearances, but in the longer term, the teams and their leagues will demand greater revenue streams than can be generated in their current facilities. The fact that New Orleans and the State of Louisiana were directly subsidizing the teams indicates that pre-Katrina the teams were not generating revenues in their venues that allowed them to be financially competitive in their leagues. This paper has concluded that it would be singularly unwise in the post-Katrina world to direct substantial funds at refurbishing the Superdome and New Orleans arena to make the teams financially competitive. This conclusion applies to both the short and longer term. Team financial needs cannot be accommodated until after the New Orleans economy progresses beyond pre-Katrina levels, and it is unclear if that will ever happen.

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Capital expenditures on the Superdome replace capital expenditures on housing and schooling and other middle class amenities that will bring the middle class back. That is obvious to anyone viewing the situation in New Orleans. What is not so obvious is the fact that professional sports teams do not contribute in a net sense to a city’s economy. Scholarly evidence indicates that while the Superdome did contribute to the New Orleans economy the Saints did not as a consequence of powerful substitution effects. Those substitution effects would only be enhanced if the city and state tried to make financial accommodations in an effort to retain the Saints and Hornets in both the short and longer terms. Cities in general should be mindful of the fact that subsidies for professional sports teams eliminate the financial incentives teams would have to remain in the community following a natural or manmade disaster. Businesses that have risked their own capital and built infrastructure have a financial stake in their host community. There is an incentive to recoup their fixed capital costs. The Saints and Hornets have no such incentive, and the incentive is limited for most professional sports teams throughout the United States. Paradoxically, cities have contributed in a very substantial way to the incentive for teams to abandon a city in the face of a disaster on the scale of Katrina. Given the fact that calamities of the scale of Katrina compromise economies for a very long time, demographics will not support retaining a team no matter how state of the art a renovated playing venue the city offers. The owner of the New Orleans Saint, Tom Benson, was making his way out of New Orleans before Katrina, and the storm has undoubtedly increased his perception of risk and diminished his financial prospects in New Orleans to a point that it is not in his financial interest to stay there

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New Orleans will be rebuilt at the grassroots home by home and business by business. The rebuilding of New Orleans will not occur purely out of economic incentive but because people are attached emotionally to their city. The economic motivation comes from recouping their fixed costs. If businesses cannot cover their variable costs of operation in relatively short order, they will leave. The best way to cover the variable costs is to encourage consumers to return to the community, and therefore, government’s role should be to do what they can to encourage the return of the middle class. To this end, the order of capital expenditures in New Orleans should be levees, housing, middle class amenities, infrastructure for nonresident businesses, and last those industries that cater to the entertainment needs of the middle class. The role of sports in the economic recovery of the city is dubious other than serving as a symbol that the city remains vital. The repair of the Superdome and the New Orleans Arena is an expensive tease in that regard, but does little to provide what is needed for the community to recover from the storm. Sports and the hosting of megaevents may actually undermine longer term recovery through deflecting capital spending from where it is needed most and crowding out those workers and residents who are involved in the essential rebuilding process. Any activity which contributes to an increased outflow of funds must be avoided. The cost of leisure options is too great. Sport may provide hedonic value, but at this juncture hedonic value and the economic interests of the sport elites must, out of financial and developmental necessity, take a back seat in the interest of the greater good.

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REFERENCES AOL, (2005), Accessed on November 6, 2005, http://aolsvc.news.aol.com/special1/article.adp?id=20051105173509990002&cid=706. Baade, Robert A. and Richard F. Dye (1990), “The Impact of Stadiums and Professional Sports on Metropolitan Area Development, Growth and Change, Spring, 1-14. Baade, Robert A., et al., (2004), “A Cost-Benefit Analysis of the Hudson Yards MultiUse Athletic and Exhibition Facility,” Mimeograph. Barrett Sports Group, LLC, (2004), “Report for the State of Louisiana, Louisiana Stadium and Exposition District, Analysis of Current Financial Obligations,” Mimeograph, May 18, 2004, p. 17. Bloomberg News, (2005), “Katrina cost: $100 billion,” Chicago Tribune, October 1, 2005. Carr, Martha, (2005), “Rebuilding should begin on high ground, group says, The TimesPicayune, November 19, 2005. County Business Patterns, (2003), NAICS, http://censtats.census.gov/cgibin/cbpnaic/cbpdeti.pl, accessed January 31, 2006. Duncan, Jeff, (2005), “Saints to play at home next year,” The Times-Picayune, December 31, 2005. ESPN, (2005), “Saints owner Saints owner halts negotiations with state, http://sports.espn.go.com/nfl/news/story?id=2048952, April 29, 2005. Gabe, Thomas, Gene Falk, Maggie McCarty, and Virginia W. Mason, (2005), “Hurricane Katrina: Social-Demographic Characteristics of Impacted Areas,” CRS Report for Congress, November 4, 2005. Glaeser, Edward L., (2006), “A smaller New Orleans,” Boston Globe, February 1, 2006. Greater New Orleans Community Data Center, (2006), “Post-Disaster Population Estimates” Post-Katrina Estimates and Impact Data, http://www.gnocdc.org. Konigsmark, Anne Rochelle, (2005), “Superdome major part of New Orleans Comeback,” USA Today, December 29, 2005. Noll, Roger and Andrew Zimbalist, (1997), Sports, Jobs, & Taxes, Brookings Institution. Powell, Eileen Alt (2005), “Powell, Eileen Survey Foresees $34.4 B in Katrina Claims, Associated Press, October 4, 2005.

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Robinson, Charles, (2005), “Saints on the March?” Yahoo! Sports, http://sports.yahoo.com/nfl/news?slug=cr-owners052405&prov=yhoo&type=lgns, May 24, 2005. Steinhauer, Jennifer and Eric Lipton, (2006), “Storm Victims Face Big Delay to Get Trailers,” New York Times, February 9, 2006. Tennessean News Services, (2005), “Rebuilding of New Orleans incredibly big, far from easy: Massive job will take billions of dollars and tons of national resolve,” Nashville Tennessean, September 5, 2005. Terrebonne Parrish Courier, (2005), Accessed May 16, 2005, http:www.houmatoday.com/apps/pbcs.dll/article?AID=/20050515/SPORTS/505150331/ 1034/SPORTS02. USA Today, (2005), http://www.usatoday.com/sports/football/nfl/saints/2005-04—29stadium-issues_x.htm?POE=SPOISVA

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Financing Professional Sports Facilities

By Robert A. Baade and Victor A. Matheson

January 2011

COLLEGE OF THE HOLY CROSS, DEPARTMENT OF ECONOMICS FACULTY RESEARCH SERIES, PAPER NO. 11-02*

Department of Economics College of the Holy Cross Box 45A Worcester, Massachusetts 01610 (508) 793-3362 (phone) (508) 793-3708 (fax) http://www.holycross.edu/departments/economics/website *

All papers in the Holy Cross Working Paper Series should be considered draft versions subject to future revision. Comments and suggestions are welcome.

Financing Professional Sports Facilities

By Robert A. Baade† College of the Holy Cross and Victor A. Matheson†† College of the Holy Cross

January 2011

Abstract This paper examines public financing of professional sports facilities with a focus on both early and recent developments in taxpayer subsidization of spectator sports. The paper explores both the magnitude and the sources of public funding for professional sports facilities. . JEL Classification Codes: L83, O18, R53, J21

Keywords: Stadiums, arenas, sports, subsidies

This paper was prepared for publication in Financing for Local Economic Development, 2nd ed., Zenia Kotval and Sammis White, eds., (NewYork: M.E. Sharpe Publishers). The authors wish to thank the editors for their kind invitation and helpful comments.



Department of Economics and Business, Lake Forest College, Lake Forest, IL 60045, 847-735-5136 (phone), 847-735-6193 (fax), [email protected] ††

Department of Economics, Box 157A, College of the Holy Cross, Worcester, MA 01610-2395, 508-793-2649 (phone), 508-793-3708 (fax), [email protected] 2

Introduction The past 20 years have witnessed a massive transformation of professional sports infrastructure in the North America and the rest of the world. In the United States and Canada alone, by 2012, 125 of the 140 teams in the five largest professional sports leagues, the National Football League (NFL), Major League Baseball (MLB), National Basketball Association (NBA), Major League Soccer (MLS), and National Hockey League (NHL), will play in stadiums constructed or significantly refurbished since 1990. This new construction has come at a significant cost, the majority of which has been borne by taxpayers. Construction costs alone for major league professional sports facilities have totaled in excess of $30 billion in nominal terms over the past two decades with over half of the cost being paid by the public. See Tables 1 through 5 for lists of newly constructed or refurbished stadiums in various American sports leagues. It should be noted that these figures understate the total level of public subsidies directed towards spectator sports, as they exclude subsidies not directly related to infrastructure and also ignore minor league and collegiate sports as well as other popular professional sports such as golf, tennis, or auto racing. North America is not alone in its largesse directed to sports facilities. South Africa spent $1.3 billion on building and upgrading 10 soccer stadiums for the 2010 World Cup following on the heels of Germany‟s 2.4 billion euro investment in stadiums and general infrastructure for the 2006 edition of the event. The Summer Olympic Games require the greatest financial commitment of all the mega-sports events with the typical outlay in the neighborhood of $10 billion, but in some instances the sums have far surpassed that amount (Preuss, 2004). China reportedly incurred costs in excess of $58

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billion to host the event in 2008 (Upegui, 2008). Such sums of direct public investment to build infrastructure for private businesses or events are generally rare in other sectors of the economy. For this level of public investment, it is reasonable to ask the extent to which professional sports serve to promote local economic development.

Professional Sports as a Mirror of Economic Development Organized sports are as old as history itself. Typically, however, the construction of sports stadiums and the creation of professional sports franchises have served as a reflection of economic development rather than a means to it. The grandeur of the Roman Colosseum is a clear testament to the wealth and engineering skills of the Roman Empire, but it was certainly not designed to enhance local incomes. Roman poet Juvenal coined the phrase “bread and circuses” in circa 100 A.D. to describe the use of food subsidies and lavish entertainment to distract and pacify the masses. This term has come to symbolize the decline of civic duty in the Roman Empire in favor of frivolity and shallow desires. According to Juvenal, Roman politicians decided that the most effective way to ascend to power was to buy the votes of the poor by giving out cheap food and entertainment, i.e. bread and circuses (Sperber, 2001). Under the Roman emperors, the Colosseum was simply another way, albeit a costly one, to limit public dissent. There is no evidence that it was expected to promote local economic growth. Rome was not alone in its pursuit of spectator sports. Ball games were played in ancient Egypt, the Greeks created the now famous Olympic Games in 776 B.C., and Native Americans played handball in the Mayan empire and the forerunner of lacrosse in what is now the northeastern portion of the United States. Although many ancient sports

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such as archery, chariot racing, horseback riding, and wrestling can be seen as offshoots of professional military training, typically participants would have been considered amateur athletes. While contestants in these games may have been rewarded by government, religious leaders, or the spectators themselves for superior athletic performance, the rise of the truly professional athlete did not come about until the late 1800s (Matheson, 2006). The first sport in the U.S. to give rise to fully professional athletes was baseball. Following the codification of the rules by Alexander Cartwright in 1845, baseball grew in popularity both as a spectator and participatory sport. While some players on particular teams received compensation for their play, it was not until 1869 that the Cincinnati Red Stockings formed the first team comprised entirely of professional players. Their success on the field led other teams to adopt their strategy. By 1871, the National Association was formed with 9 teams, including the Boston Braves, the forerunner of today‟s modern Atlanta Braves. Not surprisingly, the rise of the professional athlete occurred during the time of the industrial revolution, which provided substantial increases in income for the average worker. As the country grew wealthier, spectator sports rose in popularity, as people both had both higher incomes to pay for these activities and an increased availability of leisure time. In addition, improvements in transportation allowed for the formation of intercity sports leagues. Early stadium construction in the U.S. reflected the economic landscape. Playing facilities were located in the major population centers in the east. They offered few amenities compared to modern stadiums, reflecting the lower income of the fan base and the concentration of population and economic power in the Midwest and Northeast. For fifty years between 1903

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and 1953, all 16 teams in Major League Baseball were located east of St. Louis and north of St. Louis and Washington, D.C. Similarly, except for a single season by a Los Angeles club, all 56 teams that played at least one season in the National Football League between its founding in 1920 and 1945 were located in the industrial Midwest or the Northeast corridor. Large stadiums, or course, were constructed during the early 20th century to accommodate the growing number of fans of baseball, football, and other sports. While the franchises that these old stadiums served still exist to this day, most succumbed to physical and economic obsolescence. Fans of the Boston Red Sox and Chicago Cubs, however, can watch their home games in the last two remaining professional baseball facilities from that era, Fenway Park and Wrigley Field, built in 1912 and 1914, respectively. In addition, several college football stadiums from that time period are also still in current use, including Harvard Stadium (1903), Yale Bowl (1914), Rose Bowl (1922), and Los Angeles Coliseum (1923). The relocation and expansion of sports leagues into the southern and western United States reflects the growing importance of these regions in the overall American economy. After half a century of stability, in the 1950s MLB franchises relocated from major cities on the east coast to destinations far distant from the old centers of economic influence – the Philadelphia A‟s moved to Kansas City and then Oakland, the Brooklyn Dodgers and New York Giants headed west to Los Angeles and San Francisco, respectively, the Boston Braves went to Milwaukee and then south to Atlanta. Similarly, league expansion in the 1960s and 1970s created franchises in areas that had experienced rapid economic growth over the past half century, such as Southern California, Seattle, and Texas. The most recent wave of expansion in the 1990s brought new teams into the fast-growing Sunbelt regions of Florida and Arizona. Just as efficient railroad service allowed for travel between cities in the East, the advent of widespread passenger air service allowed for the development of truly nationwide sport leagues. Although this discussion has concentrated on the history of professional baseball, similar patterns of relocation and expansion can be observed in all of the other major sports. Again, stadium construction and

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franchise relocation reflected economic development in the country rather than the other way around. Baade (2010) noted that geographic considerations were not the only factor in the construction of new sports facilities. Economy-wide fluctuations during the last century clearly influenced sports facility construction. Except for Yankee Stadium in New York and Soldier Field in Chicago, virtually no new stadiums were constructed between World War I and 1946, a time dominated by the Great Depression and World War II. The pace of stadium construction accelerated from the 1950s through the mid-1970s, as growing prosperity and technological development enabled the construction of steel-and-concrete playing facilities during the ten years from 1965 through 1975, replacing many existing facilities. Sports remain a very clear indicator of economic development to this day. Studies investigating national success at international sporting events such as the Olympics and World Cup suggest that economic factors play clear roles. For example, Bernard and Busse (2004) find that all other things equal, a 1% increase in GDP per capita compared to the world average will increase the number of Olympic medals won by roughly the same amount. Similar results are found in other sports, for example, men‟s and women‟s international football (Hoffmann, Lee and Ramasamy, 2002; Hoffmann, et al., 2006). In all cases, higher income is presumed to affect sporting success by providing athletes with better sports infrastructure, better access to specialized training, and more leisure time to pursue their athletic endeavors. For individual professional teams local market income is also an important factor in predicting both franchise location and team success. For professional leagues without significant limitations on team payrolls, such as Major League Baseball and most European soccer leagues, successful teams tend to be located in large metropolitan areas with high incomes. It comes as no surprise that MLB‟s New York Yankees, who reside in the country‟s largest and richest metropolitan area, have an unprecedented record of success over the past century. Similarly,

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English Premier League teams Arsenal and Chelsea, both of which call London home, are perennial contenders for their league‟s title. Wealthy, populous hometowns provide teams with a large potential revenue stream necessary for purchasing talented players.

While local economic development is clearly a factor in both the emergence of professional sports as well as sports success, from a public policy standpoint it is important to ask whether the reverse is also true. Does a healthy spectator sports environment lead to local economic development, or is it simply a byproduct of normal economic development? The answer to such a question provides guidance on whether public subsidies for professional sports facilities are a wise investment. This question will be examined in the next section.

Economic Development Effects of Sports Leagues, Teams, and Events If one believes the boosters, sports teams and so-called “mega-events” bring a substantial economic windfall to host cities. Promoters envision hoards of wealthy sports fans descending on a city‟s hotels, restaurants, and businesses, and injecting large sums of money into the cities lucky enough to host these teams and events. In terms of one-off events, for example, the NFL typically claims an economic impact from the Super Bowl of around $400 to $500 million (NFL, 1999; W.P Carey Business School, 2008), and Major League Baseball (MLB) attaches a $75 million benefit to the All-Star Game (Selig, et al., 1999) and up $250 million for the World Series (Ackman, 2000). Multi-day events such as the Summer or Winter Olympics or soccer‟s World Cup produce even larger numbers. For example, consultants placed a $12 billion figure on the 2010 World Cup in South Africa (Voigt, 2010) and estimated an economic impact of over $10 billion Canadian for the 2010 Winter Olympics in Vancouver (InterVISTAS Consulting, 2002).

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See Table 6 for a list of published ex ante economic impact estimates for a variety of large sporting events. Regular season games and year-round franchises also prompt eye-popping estimates of potential benefits. The St. Louis Regional Chamber and Growth Association estimated that the St. Louis Cardinals baseball team brought $301 million in annual economic benefits to the region on top of another potential $40 to $48 million in gains from a post-season appearance (St. Louis Regional Chamber and Growth Association, 2000). The New Orleans Saints of the NFL generated an estimated $402 million impact on the state of Louisiana in 2002 (Ryan, 2003) while the NBA‟s Seattle Supersonics claimed that they pumped $234 million into the area‟s economy annually prior to their move to Oklahoma City (Feit, 2006). Of course, as noted by Baade, Baumann, and Matheson (2008), “leagues, team owners, and event organizers have a strong incentive to provide economic impact numbers that are as large as possible in order to justify heavy public subsidies.” Sports leagues frequently utilize rosy economic impact statements and dangle mega-events such as the Super Bowl and baseball‟s All-Star Game in front of cities in order to encourage otherwise reluctant city officials and taxpayers to provide significant public funding for new stadiums to the benefit of existing owners. Unfortunately, the methodology used to formulate estimates of economic impact is fatally flawed, resulting in a consistent bias toward large, but unrealized, impacts. Economic impact predictions are done in a reasonably straight-forward fashion. In the case of either an event or a franchise, the total number of visitors to the event or the team is estimated along with an average level of spending for each sports fan. The number of

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fans multiplied by the average spending results in an estimate of direct economic impact. Once the direct economic impact is determined, a multiplier is applied, which accounts for money re-circulating in the local economy. For most sports-related spending a multiplier around two is used, roughly doubling the direct economic impact. Although this methodology is easy to understand, typically researchers point to three primary flaws in most economic impact studies. The first common error is the failure to account for the substitution effect. While it is undeniable that sports fans around the country and around the world spend significant sums on spectator sports, in the absence of such entertainment opportunities, their spending would be directed elsewhere in the economy. A night at the ballpark means more money in the players‟ and team owner‟s pockets, but it also means less money in the pockets of local theater or restaurant owners. Most economists not associated with teams or event organizers advocate that any spending by local residents on local sporting events be eliminated from economic impact analyses. The next common criticism is crowding out. The crowds and congestion associated with major sporting events tend to reduce other economic activity in the local area, as sports fans displace other individuals. As with the substitution effect, sports tend to affect the allocation of economic activity across businesses and different sectors of the economy but not the total amount of activity that occurs. As a case in point, while Olympic visitors flocked to Beijing for the 2008 Summer Games, other visitors stayed away in droves. The number of tourist arrivals to the city in August 2008, the month of the Games, was the same as the number of visitors the previous year and total visitor arrivals for the entire year was significantly lower than the previous year. Crowding out

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effects are clearly visible for major sporting events held in Hawaii as well. An analysis of flight arrival data by Baumann, Matheson, and Muroi (2009) shows that sporting events like the Honolulu Marathon and NFL Pro-Bowl, both of which attract tens of thousands participants and spectators, lead to only small increases in the total number of tourists to the islands as the athletes and fans displace other vacationers. Finally, money spent in local economies during either regular season games or special events may not stay in the local economy. The nature of professional sports is that the athletes generally command as wages a large share of revenues generated by sporting events. However, the athletes themselves are typically unlikely to live in the metropolitan area in which they play. (Siegfried and Zimbalist, 2002). Therefore, the income earned by athletes is not likely to re-circulate in the local economy, leading to a lower multiplier effect. In the extreme, spending at a sporting event could actually reduce local incomes, as money is diverted from an activity with a high multiplier, for example a dinner at a locally owned and operated restaurant, towards sports, an activity with high leakages. Researchers who have gone back and looked at economic data for localities that have hosted mega-events, attracted new franchises, or built new sports facilities have almost invariably found little or no economic benefits from spectator sports. Typically, ex post studies of the economic impact of sports have focused on employment (Baade and Matheson, 2002; Feddersen and Maennig, 2009), personal income (Baade and Matheson, 2006a), personal income per capita (Coates and Humphreys, 1999; 2002), taxable sales (Porter, 1999; Coates and Depken, 2009; Baumann, Baade, and Matheson, 2008), or tourist arrivals (Lavoie and Rodriguez, 2005; Baumann, Matheson, and Muroi, 2009). These studies and a multitude of others generally find that the actual economic impact of

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sports teams or events is a fraction of that claimed by the boosters, and in some cases actually show a reduction in economic activity due to sports. See Table 7 for a list of published ex post economic impact estimates for a variety of large sporting events. Even if the immediate direct economic impact of spectator sports is negligible, proponents of sports-based economic development suggest that the long-term effects may be large. Mega-events “put cities on the map,” and new stadiums can serve as anchors in dilapidated areas to promote local growth. Here too, however, the data are not convincing. While tourists may flock to host cities during major sporting events, the surge in visitors tends to be short-lived. As noted by Matheson (2009), “in Sydney, the host of the 2000 Summer Olympics, foreign tourism actually grew at a slower rate than in the rest of the Australia in the three years following the Games. Lillehammer, Norway, the site of the 1994 Winter Olympics experienced a wave of bankruptcies in the years following their moment in the spotlight, as 40% of the full-service hotels in the town went bankrupt.” At least in part, a portion of the blame for the poor, long-term benefits of spectator sports is the fact that the capital used in staging sporting contests is not easily convertible to other uses. While the construction of general infrastructure, such as modern airports, highways, and mass transit systems, provides economy-wide benefits, such architectural and technological marvels as Beijing‟s “Water Cube,” the 17,000 seat state-of-the-art swimming facility built for the 2008 Summer Olympics, has little use following the Games. The facility is now open to the general public for free swimming, making it the world‟s most expensive lap pool. Similarly, in South Korea most of the new stadiums built for the 2002 World Cup sit unused today.

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Giesecke and Madden (2007) have quantified the effects of infrastructure spending in Sydney for the 2000 Summer Olympics and have concluded that the “redirection of public money into relatively unproductive infrastructure, such as equestrian centers and man-made rapids, has since cut A$2.1 billion from public consumption.” While the long-run benefits of sporting events and stadium construction may never arrive, the debts that localities incur in hosting professional sports must still be paid. Montreal was still paying off its debts from the 1976 Olympics three decades later, and the Astrodome in Houston still carried millions of dollars of debt despite being vacant for a nearly a decade. Perhaps the most tragic tale is that of Greece, which suffered massive financial setbacks in 2010. Greece's federal government had historically been a profligate spender, but in order to join the euro currency zone, the government was forced to adopt austerity measures that reduced deficits from just over 9% of GDP in 1994 to just 3.1% of GDP in 1999, the year before Greece joined the euro. But the Olympics hosted by Athens broke the bank. Government deficits rose every year after 1999, peaking at 7.5% of GDP in 2004, the year of the Olympics, thanks in large part to the 9 billion euro price tag for the Games. For a relatively small country like Greece, the cost of hosting the Games equaled roughly 5% of the annual GDP of the country. Unfortunately, as has been seen in other cases, the Olympics didn't usher in an economic boom. Indeed, in 2005 Greece suffered an Olympic-sized hangover with GDP growth falling to its lowest level in a decade. While it‟s hard to place all of the blame for

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the 2010 Greek meltdown on the Olympics, the lingering debts from the Games undoubtedly exacerbated an already difficult situation. Even if commercial sport does induce an increase in economic activity, the efficacy of sport as a developmental tool needs to be considered. The litmus test arguably should not be whether sport induces an increase in economic activity, but rather is it the most efficient method for improving the economy. Focusing on employment, Baade and Sanderson (1997) observed that the cost of creating a full-time equivalent job through sports subsidies far exceeds the cost of job creation through other subsidies. More specifically, it was noted that the cost of job creation through sports is far greater than jobs created through the Public Works Capital Development and Investment Acts of the 1970s or Alabama‟s much maligned subsidies to convince Mercedes-Benz AG to locate some of their manufacturing in that State. It is also important to note that as many as 98 percent of the jobs created through sports subsidies are in the relatively low-paying, non-manufacturing sector. Numerous funding mechanisms have been used by local authorities for funding stadium construction. Table 8 shows the funding mechanisms for NFL stadiums built between 1992 and 2006. While a variety of revenue sources are used for football stadium construction, three types are most common: personal seat licenses (PSLs), excise taxes on hotels or rental cars, and general funds including sales taxes. Personal seat licenses (PSLs) involve a payment by a prospective season ticket buyer to the stadium builder in exchange for the purchaser gaining the right to buy a seat ticket in the new stadium. Personal seat licenses are a source of public works revenue unique to the sporting world, and they serve several purposes. First, they turn consumers‟

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future willingness to pay for tickets into an immediate source of capital that can be used to defray current construction costs. Second, they allow teams to avoid revenue sharing agreements with the rest of the league. In the NFL, teams are required to share 40% of gate revenues with visiting teams while other revenue sources, such as PSLs, are not subject to the revenue sharing arrangement. All things equal, PSLs should raise nonshared revenue and lower ticket prices reducing overall revenue sharing payments to the rest of the league. The other major sports leagues in the U.S. have lower revenue sharing percentages, and therefore PSLs are much less common in other sports. Finally, PSLs satisfy the “user pays” principle of public finance. A stadium financed by PSLs is a stadium that is financed by the very people who will be using the stadium and benefitting from the new team the stadium is designed to attract or from the enhanced amenities that new stadiums provide. Other funding mechanisms used to finance events and stadium construction, however, more often violate commonly held principals of public finance. Taxes on rental cars, hotels, and central-city restaurants, the second common tool used to repay stadium bond issues, while seemingly shifting the expense of the stadium to out-of-town visitors, in fact, simply make those revenue sources unavailable for use elsewhere in the city. Furthermore, only a tiny fraction of the hotel rooms or rental cars used in a city over the course of a year are purchased by visitors engaging in sports tourism. Thus, restaurant goers, for example, may serve to simply subsidize better seating for football fans. The use of general sales taxes or lottery proceeds, the third common source of funding for sports infrastructure, violates most people‟s notions of vertical equity by placing an undue burden on poorer residents. Both revenue sources are strongly

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regressive while the benefits provided by subsidized stadium construction accrue primarily to the wealthy. Live attendance at major sporting events is dominated by wealthy individuals, and the revenue generated by sporting events for the most part ends up in the pockets of millionaire players and billionaire owners. Even tax increment financing or ticket taxes or surcharges are not without their critics, as few other businesses are allowed to use taxes collected on their customers to pay for their own capital expenditures (Baade and Matheson, 2006b).

The Final Justification: Quality of Life If sports teams and events bring little in the way of direct economic benefits, do potential indirect benefits exist? Here the evidence is much more favorable to athletic supporters. Clearly sports are an entertainment option favored by many. Although the professional sports industry in the United States is only roughly the same size as the cardboard box industry, cardboard boxes don‟t warrant multiple channels on cable television, have a dedicated section in most newspapers, and are not the focus of frequent discussions around the office water cooler. Sports serve as a municipal amenity that can create social capital and improve the quality of life. Obviously, estimating a more esoteric measure such as societal well-being is more difficult than analyzing more concrete data such as employment or government revenues. Still, the data hint at clear quality of life benefits from sports. For example, the 2008 Olympics instilled a sense of pride in the Chinese people. Some 93% of the Chinese citizens surveyed by the Pew Research Center thought that the Games would improve the country‟s image (Matheson, 2009). Similarly, Maennig‟s (2007) ex-post analysis of the

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2006 World Cup in Germany concludes that claims of „„increased turnover in the retail trade, overnight accommodation, receipts from tourism and effects on employment [are] mostly of little value and may even be incorrect. Of more significance, however, are other (measurable) effects such as the novelty effect of the stadiums, the improved image for Germany and the feelgood effect for the population‟‟ (Maennig, 2007, p. 1). Numerous scholars, starting with Carlino and Coulsen (2004), have used hedonicpricing techniques to attempt to quantify the quality of life aspects of sports. If the presence of an NFL franchise, for example, is a vital cultural amenity for residents in the area then the value of the franchise to local citizens should be reflected in a higher willingness to pay for living in a city with a team. Carlino and Coulsen (2006), for example, find that rental housing in cities with NFL franchises command 8% higher rents than units in other metropolitan areas after correcting for housing characteristics. Others such as Feng and Humphreys (2008) and Tu (1995) find localized effects of stadiums and arenas on housing prices but also that these effects fade quite quickly as the distance from the stadium grows. Conversely, Coates, Humphreys, and Zimbalist (2006) find that Carlino and Coulsen‟s results are highly dependent on model specification. Kiel, Matheson and Sullivan (2010) find that the increase in housing costs does not extend to owner-occupied housing and also find that the presence of stadium subsidies lowers housing values, a finding also uncovered by Dehring, Depken, and Ward (2007). Other researchers have employed contingent-valuation methods to attempt to determine the “feel-good” effect that residents derive from spectator sports. While the existence of positive benefits from sports teams and events are more commonly identified in the contingent valuation literature than in the ex post examination of direct economic

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impact, here too the assessed value of sports tends to be smaller than the public subsidies that are handed out to professional sports (Johnson, Groothuis, and Whitehead, 2001). Improving citizens‟ quality of life is clearly an important goal for public policy makers, and there is evidence that sports are a valued amenity for local communities. Evidence of significant direct economic benefits from sporting events, franchises, and stadiums is lacking, however. While public-private partnerships can be justified on quality of life grounds, voters and public officials should not be deluded by overoptimistic predictions of a financial windfall. Sports may make a city happy, but they are unlikely to make a city rich.

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References Ackman, D. (2000) “In Money Terms, The Subway Series Strikes Out,” Forbes Magazine, October 21, 2000. Allmers, S. and Maennig, W. (2009) “Economic Impacts of the FIFA Soccer World Cups in Frnace 1998, Germany 2006, and Outlook for South Africa 2010,” Eastern Economic Journal, Vol. 35, No. 4: pp. 500-519. Baade, R. (2010) “Getting in the Game: Is the Gamble on Sports as a Stimulus for Urban Economic Development a Good Bet?” (Washington, D.C.: The Brookings

Institution), forthcoming. Baade, R., Baumann, R. and Matheson, V. (2008) “Selling the Game: Estimating the Economic Impact of Professional Sports through Taxable Sales,” Southern Economic Journal, Vol. Vol. 74, No. 3: pp. 794-810. Baade, R. and Matheson, V. (2000a) “An Assessment of the Economic Impact of the American Football Championship, the Super Bowl, on Host Communities,” Reflets et Perspectives, Vol. 34, No. 2-3: pp. 35-46. Baade, R. and Matheson, V. (2000b) “High Octane? Grading the Economic Impact of the Daytona 500,” Marquette Sports Law Journal, Vol. 10, No. 2: pp. 401-415. Baade, R. and Matheson, V. (2001) “Home Run or Wild Pitch? Assessing the Economic Impact of Major League Baseball‟s All-Star Game,” Journal of Sports Economics, Vol. 2, No. 4: pp. 307-327. Baade, R. and Matheson, V. (2002) “Bidding for the Olympics: Fool‟s Gold?” in Transatlantic Sport: The Comparative Economics of North American and

19

European Sports, eds. Carlos Pestanos Barros, Muradali Ibrahimo, and Stefan Szymanski, London, Edward Elgar Publishing: pp. 127-151. Baade, R. and Matheson, V. (2004a) “An Economic Slam Dunk or March Madness? Assessing the Economic Impact of the NCAA Basketball Tournament,” in Economics of College Sports, eds. John Fizel and Rodney Fort, Westport, CT, Praeger Publishers, pp. 111-133. Baade, R. and Matheson, V. (2004b) “The Quest for the Cup: Assessing the Economic Impact of the World Cup,” Regional Studies, Vol. 38, No. 4: pp. 341-352. Baade, R. and Matheson, V. (2006a) “Padding Required: Assessing the Economic Impact of the Super Bowl,” European Sports Management Quarterly, Vol. 6, No. 4: pp. 353-374. Baade, R. and Matheson, V. (2006b) “Have Public Finance Principles Been Shut Out in Financing New Stadiums for the NFL?” Public Finance and Management, Vol. 6, No. 3: pp. 284-320. Baade, R. and Matheson, V. (2008) “Striking Out: Estimating the Economic Impact of Baseball‟s World Series,” International Journal of Sport Management and Marketing, Vol. 3, No. 4: pp. 319-334. Baade, R. and Sanderson, A. (1997) “Employment Effect of Teams and Sports Facilities,” in Sports, Jobs, & Taxes, eds. Roger G. Noll and Andrew Zimbalist, (Washington D.C.: The Brookings Institution Press): pp. 92-118. Baumann, R., Matheson, V. and Muroi, C. (2009) “Bowling in Hawaii: Examining the Effectiveness of Sports-Based Tourism Strategies,” Journal of Sports Economics, Vol. 10, No. 1: pp. 107-123.

20

Bernard, A. and Busse, M. (2004) “Who Wins the Olympic Games: Economic Resources and Medal Totals,” Review of Economics and Statistics, Vol. 86: pp. 413-417. Carlino G. and Coulson, E. (2004) “Compensating differentials and the social benefits of the NFL,” Journal of Urban Economics, Vol. 56, No. 1: pp. 25-50. Coates, D. (2006) “The Tax Benefits of Hosting the Super Bowl and the MLB All-Star Game: The Houston Experience,” International Journal of Sport Finance,” Vol. 1, No. 4: 239-252. Coates, D. and Depken, C. (2009) “The Impact of College Football Games on Lacal Sales Tax Revenue: Evidence from Four Cities in Texas,” Eastern Economic Journal, Vol. 35, No. 4, pp. 531-547. Coates, D. and Humphreys, B. (1999) “The Growth Effects of Sports Franchises, Stadia, and Arenas,” Journal of Policy Analysis and Management, Vol. 14, No. 4: pp. 601-624. Coates, D. and Humphreys, B., (2002) “The Economic Impact of Post-Season Play in Professional Sports,” Journal of Sports Economics, Vol. 3, No. 3: pp. 291-299. Coates, D. and Humphreys, B. and Zimbalist, A. (2006) “Compensating differentials and the social benefits of the NFL: A comment,” Journal of Urban Economics, Vol. 60, No. 1: pp. 124-131. Dehring, C., Depken, C., Ward, M. (2007) “The Impact of Stadium Announcements on Residential Property Values: Evidence from a Natural Experiment in Dallas-Fort Worth,” Contemporary Economic Policy, Vol. 25, No. 4: pp. 627-638.

21

Feddersen, A. and Maennig, W. (2009) “Regional Economic Impact of the 1996 Summer Olympic Games – Wage and Employment Effects Reconsidered,” Working Paper 025, Chair for Economic Policy, University of Hamburg. Feit, J. (2006) “Key Amendments: Council Member Nick Licata Challenges Sonics Subsidy,” The Stranger, Seattle's Only News Section, Feb 23 - Mar 1, 2006. Feng, X. and Humphreys, B. (2008) “Assessing the Economic Impact of Sports Facilities on Residential Property Values: A Spatial Hedonic Approach,” International Association of Sports Economists, Working Paper 08-12. Finer, J. (2002) “The grand illusion,” Far Eastern Economic Review, Vol. 7: pp. 32–36. Giesecke, J. and Madden, J. (2007) “The Sydney Olympics, seven years on: an ex-post dynamic CGE assessment,” Monash University, CoPS/IMPACT Working Paper Number G-168. Hoffmann, R., Ging, L. and Ramasamy, B. (2002) “The Socio-Economic Determinants of International Football Performance,” Journal of Applied Economics, Vol. 5: pp. 253-272. Hoffmann, R., Ging, L., Matheson, V., and Ramasamy, B. (2006) “International Women‟s Football and Gender Inequality,” Applied Economics Letters, Vol. 13, No. 15: pp. 999-1001. Hotchkiss, J., Moore, R. and Zobay, S. (2003) “Impact of the 1996 Summer Olympic Games on Employment and Wages in Georgia,” Southern Economic Journal, Vol. 69, No. 3: pp. 691-704.

22

Humphreys, J. and Plummer, M. (2005) “The Economic Impact on the State of Georgia of Hosting the 1996 Summer Olympic Games,” Athens, Georgia, Selig Center for Economic Growth, The University of Georgia. InterVISTAS Consulting, (2002) “The Economic Impact of the 2010 Winter Olympics and Paralympic Games: An Update,” Victoria, British Columbia, British Columbia Ministry of Competition, Science and Enterprise. Kiel, K., Matheson, V. and Sullivan, C. (2010) “The Effect of Sports Franchises on Property Values: The Role of Owners versus Renters,” College of the Holy Cross, Department of Economics Working Paper No. 10-01. Johnson, B., Groothuis, P. and Whitehead, J. (2001) “The Value of Public Goods Generated by a Major League Sports Team: The CVM Approach,” Journal of Sports Economics, Vol. 2, No. 1: pp. 6-21. Lavoie, M. and Rodríguez, G. (2005) “The Economic Impact of Professional Teams on Monthly Hotel Occupancy Rates of Canadian Cities: A Box-Jenkins Approach,” Journal of Sports Economics, Vol. 6, No. 3: pp. 314-324. Maennig, W. (2007) One year later: A re-appraisal of the economics of the 2006 soccer World Cup. International Association of Sports Economists Working Paper Series, No. 07-25. Matheson, V. (2006) “Professional Sports,” in Encyclopedia of American Business History, Charles Geisst, ed., (New York: Facts on File): pp. 403-408. Matheson, V. (2009) “Bid‟s rejection could be for the best,” Chicago Tribune, October 4, 2009.

23

Matheson, V. (2011) “Mega-Events: The Effect of the World‟s Biggest Sporting Events on Local, Regional, and National Economies,” in The Business of Sports, Vol. 1,” Dennis Howard and Brad Humphreys, eds., (Westport, CT: Praeger Publishers, 2008): pp. 81-99. Revised tables from Megaeventos deportivos. Estudios sociológicos y análisis de casos, Ramon Llopis-Goig, ed., (Valencia, Spain: Editorial UOC, S.L., 2011.) National Football League, (1999) “Super Bowl XXXIII Generates $396 Million for South Florida,” NFL Report, Vol. 58, No. 7. National Football League, (2003) “Super Bowl XXXVII generates $367 million economic impact on San Diego County,” http://www.nfl.com/news/story/6371262, May 14, 2003, accessed October 15, 2006. Porter, P. (1999) “Mega-Sports Events as Municipal Investments: A Critique of Impact Analysis,” in Sports Economics: Current Research, eds. Fizel, J., Gustafson, E. and Hadley, L., Westport, CT, Praeger Press. Preuss, H. (2004) Economics of the Olympic Games, London, Edward Elgar Publishing 2004. Ryan, T. (2002) “The Economic Impact of the New Orleans Saints,” Working paper, University of New Orleans. Saint Louis Regional Chamber and Growth Association, (2000) “RCGA Estimates Economic Impact of Cardinals Playoff Run,” www.stlrcga.org/00_1002.html, accessed 9/5/2002.

24

Selig, B., Harrington, J., and Healey, J. (1999) “New Ballpark Press Briefing: July 12, 1999,” www.asapsports.com/baseball/1999allstar/071299BS.html, accessed August 29, 2000. Siegfried J. and Zimbalist, A. (2002) “A Note on the Local Economic Impact of Sports Expenditures,” Journal of Sports Economics, Vol. 3, No. 4: pp. 361-66. Sperber, M. (2001) Beer and Circus: How Big-Time College Sports Is Crippling Undergraduate Education, (New York: Holt Paperbacks) Tu, C. (2005) “How Does a New Sports Stadium Affect Housing Values? The Case of FedEx Field,” Land Economics, Vol. 81, No. 3: pp. 379-395. United States Tennis Association, (2002) “2000 U.S. Open Nets Record $420 Million in Economic Benefits for New York,” www.usta.com/pagesup/news12494.html, accessed January 9, 2002. Upegui, O. (2008) “The Total Cost of Beijing‟s Summer Olympic Games,” http://epiac1216.wordpress.com/2008/08/03/the-total-cost-of-the-beijingssummer-olympic-games/). Voigt, K. (2010) “Is there a World Cup Bounce?” http://www.cnn.com/2010/BUSINESS/06/11/business.bounce.world.cup/index.ht ml, posted June 11, 2010, accessed August 15, 2010. W.P. Carey Business School, (2008) “Economic Impact Study: Phoenix Scores Big with Super Bowl XLII,” http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1597; posted April 23, 2008; accessed November 30, 2009.

25

Table 1: New NFL Stadiums since 1990

Team New Orleans Giants/Jets Kansas City Dallas Indianapolis Arizona Philadelphia Green Bay Chicago New England Houston Detroit Seattle Pittsburgh Denver Cincinnati Cleveland Tennessee Buffalo Baltimore Tampa Bay San Diego Washington Oakland Carolina Jacksonville St. Louis Atlanta

Cost (000s) Public Public Built (Nominal) Cost Percent 2011 $ 505 $ 490 97% 2010 $ 1,600 $ 0% 2010 $ 375 $ 250 67% 2009 $ 1,150 $ 325 28% 2008 $ 720 $ 720 100% 2006 $ 71 $ 267 72% 2003 $ 285 $ 228 80% 2003 $ 295 $ 251 85% 2003 $ 600 $ 450 75% 2002 $ 325 $ 33 10% 2002 $ 300 $ 225 75% 2002 $ 300 $ 219 73% 2002 $ 300 $ 201 67% 2001 $ 230 $ 150 65% 2001 $ 365 $ 274 75% 2000 $ 400 $ 400 100% 1999 $ 283 $ 255 90% 1999 $ 290 $ 220 76% 1999 $ 63 $ 63 100% 1998 $ 220 $ 176 80% 1998 $ 169 $ 169 100% 1997 $ 78 $ 78 100% 1997 $ 250 $ 70 28% 1996 $ 200 $ 200 100% 1996 $ 248 $ 52 21% 1995 $ 121 $ 121 100% 1995 $ 280 $ 280 100% 1992 $ 214 $ 214 100% $10,537 $6,380 61%

Stadium Superdome (repair and rehab) New Meadowlands Stadium Arrowhead Stadium (rehab) Cowboys Stadium Lukas Oil Stadium University of Phoenix Stadium Lincoln Financial Field Lambeau Field Soldier Field Gillette Stadium Reliant Stadium Ford Field Qwest Field Heinz Field Invesco Field Paul Brown Stadium Browns Stadium LP Field Ralph Wilson Stadium (rehab) M&T Bank Stadium Raymond James Stadium Qualcomm Stadium FedEx Field Oakland Coliseum (rehab) Bank of America Stadium Everbank Field Edward Jones Dome Georgia Dome 29 of 32 teams

26

Table 2: New MLB Stadiums since 1990 Team

Stadium

Built

Miami Minnesota NY Mets NY Yankees Kansas City Washington Cardinals San Diego Philadelphia Cincinnati Pittsburgh Milwaukee Detroit Houston San Francisco Seattle Arizona Los Angeles Angels Tampa Bay Atlanta Oakland A's Denver Cleveland Texas Rangers Baltimore Chicago White Sox

Marlins Field Target Field Citi Field Yankees Stadium Kaufmann Stadium (rehab) Nationals Park Busch Stadium PETCO Park Citizens Bank Park Great American Ball Park PNC Park Miller Park Comerica Park Minute Maid Park AT&T Park Safeco Park Chase Field Angel Stadium (rehab) Tropicana Field Turner Field Oakland Coliseum (rehab) Coors Field Progressive Field Ballpark at Arlington Camden Yards U.S. Cellular Field 26 of 30 teams

27

2012 2010 2009 2009 2009 2008 2006 2004 2004 2003 2001 2001 2000 2000 2000 1999 1998 1998 1997 1997 1996 1995 1994 1994 1992 1991

Cost (000s) (Nominal)

Public Cost

$ 525 $ 544 $ 600 $ 1,300 $ 250 $ 611 $ 365 $ 457 $ 346 $ 325 $ 262 $ 400 $ 300 $ 265 $ 357 $ 518 $ 349 $ 118 $ 208 $ 235 $ 200 $ 215 $ 175 $ 191 $ 110 $ 167 $ 9,393

$ 370 $ 392 $ 164 $ 220 $ 175 $ 611 $ 45 $ 304 $ 174 $ 280 $ 262 $ 310 $ 115 $ 180 $ 15 $ 392 $ 238 $ 30 $ 208 $ 165 $ 200 $ 168 $ 91 $ 135 $ 100 $ 167 $ 5,511

Public Percent

70% 72% 27% 17% 70% 100% 12% 66% 50% 86% 100% 78% 38% 68% 4% 76% 68% 25% 100% 70% 100% 78% 52% 71% 91% 100% 59%

Table 3: New MLS Stadiums since 1990 Team

Stadium

Built

Houston San Jose Kansas City Portland Vancouver New York Philadelphia Salt Lake Colorado Toronto Chicago Montreal Dallas L.A. Galaxy/Chivas New England Seattle Columbus

Dynamo Stadium Earthquakes Stadium Wizards Stadium PGE Park (rehab) BC Place Stadium Red Bull Arena PPL Park Rio Tinto Stadium Dick's Sporting Goods Park BMO Field Toyota Park Saputo Stadium Pizza Hut Park Home Depot Center

2012 2012 2011 2011 2011 2010 2010 2008 2007 2007 2006 2006 2005 2003

Gillette Stadium Qwest Field Columbus Crew Stadium 17 of 18

2002 2002 1999

28

Cost (000s) Public Public (Nominal) Cost Percent $ 110 $ 50 45% $ 60 $ 0 0% $ 160 $ 80 50% $ 31 $ 31 100% $ 365 $ 365 100% $ 190 $ 90 47% $ 120 $ 77 64% $ 115 $ 16 14% $ 131 $ 66 50% $ 63 $ 63 100% $ 98 $ 98 100% $ 14 $ 0 0% $ 80 $ 80 100% $ 150 $ 0 0% $ 325 $ 300 $ 29 $ 2,340

$ 33 $ 201 $ 0 $1,249

10% 67% 0% 53%

Table 4: New NBA Arenas since 1990 Team

Stadium

Built

Orlando Brooklyn Nets Charlotte Memphis Phoenix

Amway Center Barclays Center Time Warner Cable Arena FedEx Forum U.S. Air (construction and rehab.) Toyota Center AT&T Center Ford Center American Airlines Center Air Canada Centre Conseco Fieldhouse Philips Arena Pepsi Center Staples Center New Orleans Arena American Airlines Arena Verizon Center Oracle Arena (rehab) Wells Fargo Center TD Garden Rose Garden Key Arena (rehab) Quicken Loans Arena United Center Madison Square Garden (rehab) EnergySolutions Arena Memphis Pyramid Target Center 27 out of 30

2010 2010 2005 2004 1992/ 2004 2003 2002 2002 2001 1999 1999 1999 1999 1999 1999 1998 1997 1997 1996 1995 1995 1995 1994 1994 1991

Houston San Antonio Oklahoma City Dallas Toronto Indianapolis Atlanta Denver Lakers/Clippers New Orleans Miam Washington Golden State Philadelphia Boston Portland Seattle Cleveland Chicago New York Salt Lake City Memphis Minneapolis

1991 1991 1990

29

Cost (000s) Public Public (Nominal) Cost Percent $ 480 $ 430 90% $ 637 $ 150 24% $ 265 $ 265 100% $ 250 $ 250 100% $ 157 $ 157 100% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

235 186 89 420 265 183 214 160 375 114 213 260 121 206 160 262 75 152 175 200

$ 93 $ 65 $ 104 $ 6,115

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

192 158 89 210 183 63 35 59 114 213 60 121 35 75 152 -

82% 85% 100% 50% 0% 100% 29% 22% 16% 100% 100% 23% 100% 0% 0% 13% 100% 100% 0% 0%

$ $ 65 $ 52 $ 3,126

0% 100% 50% 51%

Table 5: New NHL Arenas since 1990 Team

Stadium

Pittsburgh New Jersey Phoenix Dallas Columbus Minnesota Toronto Atlanta Denver Los Angeles Carolina Ft. Lauderdale Washington Nashville Philadelphia Ottawa Buffalo Tampa Bay Montreal Vancouver Boston Chicago St. Louis Anaheim San Jose NY Rangers

Consol Energy Center Prudential Center Jobing.com Arena American Airlines Center Nationwide Arena Xcel Energy Center Air Canada Centre Philips Arena Pepsi Center Staples Center RBC Center BankAtlantic Center Verizon Center Bridgestone Arena Wells Fargo Center Scotiabank Place HSBC Arena St. Pete Times Forum Le Center Bell Rogers Arena TD Garden United Center Scottrade Center Honda Center HP Pavillion Madison Square Garden (rehab) 26 out of 30

Built 2010 2008 2003 2001 2000 2000 1999 1999 1999 1999 1999 1998 1997 1997 1996 1996 1996 1996 1996 1996 1995 1994 1994 1993 1993 1991

Cost (000s) Public Public (Nominal) Cost Percent $ 321 $ 130 40% $ 375 $ 210 56% $ 180 $ 180 100% $ 420 $ 210 50% $ 175 $ 0% $ 130 $ 130 100% $ 265 $ 0% $ 214 $ 63 29% $ 160 $ 35 22% $ 375 $ 59 16% $ 158 $ 98 62% $ 212 $ 185 87% $ 260 $ 60 23% $ 144 $ 144 100% $ 206 $ 0% $ 188 $ 6 3% $ 128 $ 55 43% $ 160 $ 120 75% $ 230 $ 0% $ 160 $ 0% $ 160 $ 0% $ 175 $ 0% $ 170 $ 35 20% $ 123 $ 123 100% $ 163 $ 133 82% $ 200 $ 0% $ 5,451

30

$ 1,974

36%

Table 6: Examples of Mega-Event ex ante Economic Impact Studies Event

Year

Sport

Impact

Super Bowl (Miami)

1999

Football

$393 million

Super Bowl (San Diego)

2003

Football

$367 million

Super Bowl (Arizona)

2008

Football

$501 million

MLB All-Star Game

1999

Baseball

$75 million

MLB World Series

2000

Baseball

$250 million

NCAA Men‟s Final Four (St. Louis)

2001

Basketball

$110 million

U.S. Open

2001

Tennis

$420 million

World Cup (Japan)

2002

Soccer

$24.8 billion

World Cup (South Korea)

2002

Soccer

$8.9 billion

World Cup

2010

Soccer

$12 billion

1996

Multiple

2010

Multiple

Summer Olympics (Atlanta) Winter Olympics (Vancouver, BC)

$5.1 billion 77,000 jobs $10.7C billion 244,000 jobs

Source: Matheson (2011)

31

Source Sports Management Research Institute, NFL (1999) Marketing Information Masters, NFL (2003) W.P. Carey Business School (2008) Selig, et al. (1999) Comptroller of New York City, Ackman (2000) St. Louis Convention and Visitor‟s Bureau, Anderson (2001) Sports Management Research Institute, U.S. Tennis Assoc. (2002) Dentsu Institute for Human Studies, Finer (2002) Dentsu Institute for Human Studies, Finer (2002) Grant Thornton South Africa, Voigt (2010) Humphreys and Plummer (2005) InterVISTAS Consulting (2002)

Table 7: Examples of Mega-Event ex post Economic Impact Studies Event

Years

Variable

Impact

MLB All-Star Game

1973-1997

Employment

down 0.38%

Super Bowl

1973-1999

Employment

537 jobs

1996

Employment

293,000 jobs

1996

Employment

3,500 - 42,000 jobs

1996

Employment

Approx. 75,000

World Cup

2006

Employment

Not statistically significant

Super Bowl

1970-2001

Personal Income

$91.9 million

1972-2000

Personal Income

1970-1999

Personal Income

World Cup

1994

Personal Income

World Cup

2006

Personal Income

Summer Olympics (Atlanta) Summer Olympics (Atlanta) Summer Olympics (Atlanta)

MLB playoffs and World Series NCAA Men‟s BB Final Four

$6.8 million/game down $44.2-$6.4 million down $4 billion

Multiple Events

1969-1997

Personal Income/capita

Not statistically significant Not statistically significant

Daytona 500

1997-1999

Taxable Sales

$32 - $49 million

Super Bowl Multiple Events (Florida) Multiple Events (Texas) Multiple Events (Texas)

1985-1995

Taxable Sales

1980-2005

Taxable Sales

1991-2005

Gross Sales

1990-2006

Sales Tax Revenue

no effect down $34.4 million (avg.) Varied - pos. and neg. Varied - pos. and neg.

NFL Pro-Bowl

2004-2008

Tourist arrivals

6,726 visitors

NHL regular season games

1990-1999

Hotel Occupancy

Slight increase

Source: Matheson (2011)

32

Source Baade and Matheson (2001) Baade and Matheson (2000a) Hotchkiss, et al. (2003) Baade and Matheson (2002) Feddersen and Maennig (2009) Allmers and Maennig (2009) Baade and Matheson (2006a) Baade and Matheson (2008) Baade and Matheson (2004a) Baade and Matheson (2004b) Allmers and Maennig (2009) Coates and Humphreys (2002) Baade and Matheson (2000b) Porter (1999) Baade, Bauamann, Matheson (2008) Coates (2006) Coates and Depken, (2009) Baumann, Matheson, and Muroi (2009) Lavoie and Rodriguez (2005)

Table 8: Sources of Public Funds for NFL Stadium Construction, 1992-2006

Atlanta

Year Built 1992

Public Contribution 100%

Jacksonville

1995

100%

No

St. Louis

1995

100%

No

Carolina Oakland Washington Baltimore Tampa Bay Buffalo

1996 1996 1997 1998 1998 1999

21% 100% 28% 80% 100% 100%

No No No No Yes No

Cleveland

1999

90%

Yes

Tennessee

1999

76%

Yes

Cincinnati

2000

200%

Yes

Denver

2001

75%

Yes

Pittsburgh

2001

65%

No

Detroit

2002

73%

Yes

Houston

2002

75%

Yes

New England

2002

10%

No

Seattle

2002

67%

Yes

Chicago

2003

75%

No

Green Bay

2003

85%

Yes

Philadelphia

2003

80%

Arizona

2006

72%

No Yes

Referendum

Public funding source

No

2.75% Hotel tax Sales tax, hotel tax, ticket charge, general funds 2.5% hotel tax, general funds ($257 mil.) Personal Seat License (PSL) PSL

Source: Baade and Matheson (2006b)

33

Lottery 0.5% sales tax General funds Hotel tax, car rental tax, sin taxes, PSL Hotel tax, PSL ($72 mil.) 0.5% sales tax, ticket charge, PSL ($25 mil.) Sales tax Ticket charge ($14 mil.), PSL ($42 mil.), other 1% hotel tax, $2 car rental tax Hotel tax, car rental tax, ticket charge, sin taxes, PSL Sales tax, 2% hotel tax, 10% ticket charge, lottery, PSL ($17 mil.) 2% hotel tax, PSL ($60 mil.) 0.5% sales tax, ticket charge ($92.5 mil.) 1% hotel tax, $3.50 car rental tax

Professional Sport Leagues: Contrasting Views on How to Structure the Business of Sports

3. Professional Sport Leagues: Contrasting Views on How to Structure the Business of Sports Antonio Dávila, IESE Business School, George Foster, Stanford University, Norm O’Reilly, University of Ottawa

3.1 Introduction The business structure of professional sports has experienced large changes over the last decade. For instance, (i) the average estimated value of a National Football League (NFL) franchise has grown from US$288 million in 1999 to over US$1 billion in 2009 (Forbes, 2009), (ii) the National Hockey League (NHL) saw a season-long strike in 2004-2005 that cost it a full season and redefined many aspects of the way the league is run, (iii) since Carson Yeung’s purchase of Birmingham in October 2009, 50% of EPL’s (English Premier League) 20 clubs are now foreign owned (CNN WorldBlog, 2009), and (iv) large-scale professional leagues are emerging in new markets such as the Kontinental Hockey League (KHL) in Russia and the Indian Premier (cricket) League (IPL) who both began play in 2008. Professional sport is going through a period of enhanced business structure and criteria in its management. This growth and professional management that have characterized the evolution of professional sports is extending to all the industry, through business training, research, and management. As evidence, according to the North American Society for Sport Management (NASSM, 2009), there are now over 275 sport management programs in the United States, another 13 in Canada, and another 40 in Europe and around the world. In terms of literature, there are now more than a dozen academic journals devoted to the field, hundreds of trade journals focused on sports with high readership, and vast global resources in media, sponsorship, and ticket sales. The exact size of the industry is uncertain but estimates suggest that sport contributes between 2% and 3.5% of GDP globally, with previous studies (McKinsey, 2004) reporting that sport has become an “international entertainment industry with global revenues of more than US$38 billion in television rights and ticketing alone” (p. 1). Specific to the United States, Humphreys and Ruseski (2008) have estimated that the economic scope of the sports industry ranges – depending on the metric and assumption chosen – from US$44 to US$73 billion in 2005. Globally, market research group NPD (2009), estimates that the worldwide sales of sports equipment, apparel, and footwear were US$284 billion in 2008. Yet the differences across leagues and geographies are still significant. In fact, each league – whether in Europe, North America, Australia or Asia – typically has its own unique structural IESE Business School 51

Football Economics. Proceedings of the Armand Carabén Workshop on Sports Economics

elements, financial details and management policies. However, there are similarities geographically which allow us to group leagues based on their location, particularly when looking at North American versus European large professional sport. While North American leagues are often closed leagues based on a franchising model, European leagues use open structures with promotion, relegation, and enrollment into European-level tournaments depending on the final standing in the national league12. North American teams compete for one championship annually (e.g., Super Bowl, Stanley Cup, etc.) while European super-clubs (e.g., Manchester United, FC Barcelona, etc.) can potentially compete for as many as seven different championships each year, including the Premier League and the Champions League. These are but two examples, yet they provide evidence of the variations that exist. These variations and distinctions and a discussion of their potential implications are the purpose of this paper. The paper compares the ‘rules of the business game’ across multiple dimensions of four North American leagues and four European leagues. In doing so, it articulates their differences and similarities and analyzes the resulting implications on the strategies and economic performance of these leagues. The leagues considered are: • North America – National Football League (American football) – National Hockey League (ice hockey) – National Basketball Association (basketball) – Major League Baseball (baseball) • Europe – English Premier League (football-England) – La Liga (football - Spain) – Ligue 1 (football - France) – Bundesliga (football - Germany) The North American and European leagues are chosen based on their overall size as the largest leagues on their respective continents in terms of their revenues and reach13. While this paper focuses on these leagues, it is important to recognize that there are hundreds of other professional sport leagues in all regions of the world. Many regions outside of Europe and North America have very successful leagues such as the Nihon Yakyβ Renmei (baseball) in Japan, the Australian Football League (AFL), the National Rugby League (rugby league) in Australia, and the Indian Premier League (cricket) in India.

12 Yet some European leagues have started to move towards closed leagues such as the basketball Euroleague decision to guarantee the presence of certain flagship teams in the league regardless of their national performance. 13 Lega Calcio in Italy is one of the top four leagues in Europe. Its structure is similar to the other European soccer leagues included for which data was available more readily.

52 Public-Private Sector Research Center

Professional Sport Leagues: Contrasting Views on How to Structure the Business of Sports

The selection of the 18 dimensions on which the leagues are compared is based on what are believed to be most relevant factors in shaping the business landscape of professional sport leagues as supported by the literature and the experiences of the authors. The selected professional leagues are characterized by: (i) the professional status of the athletes in the league, (ii) their high profile in the media, (iii) the business ecosystem around each which includes national and/or international marketing and broadcasting partners, and (iv) their business-oriented management mentality14. In carrying out our work specific to professional sports, it is important to recognize that such an environment does differ from the other two traditional sports markets: Olympic sport and grassroots sport (see O’Reilly & Seguin, 2009 for a specific nation example of how this landscape breaks down).

3.2 Background: Related Literature Academic research on professional sport is a relatively new focus in the sport management literature, which itself is a relatively new academic field itself. The top academic journal in the field – the Journal of Sport Management – is only in its 23rd volume, while the majority of the field’s recognized peer-reviewed journals are less than 10 years old, many having been launched in the past 5 years. Within this body of literature, professional sport focused papers are less common than those focused on collegiate (NCAA) sport, grassroots sport and Olympic sport. Increasing attention is also being paid to professional sport in economics (Andreff and Szymanski, 2006). Some economists have carried out some work that uses sports as a research setting while others focus squarely on the industry. This effort has furthered the field considerably. Examples of this work includes Ferguson et al. (1991) who looked a profit maximization in team sport, Jones (1969) who outlined the economics of the NHL; Noll (1974) who explored the role of governments in the sport business, including an assessment of the public funding of new professional sport facilities; and El-Hodiri and Quirk (1971) who developed an economic model of professional sport, where they examined whether these structures justified the anti-trust legislation to which some professional sport leagues in the United States are privy to. At the same time, Sloane (1971) articulated the football club as a utility maximiser. A few years later, the demand for minor league baseball was the research topic of Siegfried and Eisenberg (1980). There are also smatterings of publications in various other places, including management, psychology, and sociology journals, over the past 40 years. Recently, authors (e.g. Baade, 2008) have explored the role of professional sport in the economic development of cities, regions and countries. There are a variety of research outputs related to North American professional sport that have relevance to this work. A few are

14 Most of the organizations in these leagues have a for-profit status, comprised of teams or events that are for-profit. However, there are some exceptions in the European market with teams such as FC Barcelona or Real Madrid that are not-for-profit sports organizations (associations). However, we noted that even if they are not-for-profit, these organizations are run with a business mentality.

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summarized briefly here. First, using data covering a period of more than 30 years, Cousens and Slack (2005) tracked each of the four major North American professional sport leagues noting the increasingly similar nature of their institutional arrangements (e.g., salary caps, revenue sharing), outlining key points in their history where major structural or philosophical changes took place. Other researchers have also explored the differences that remain between professional sport leagues, such as Rascher and Rascher’s work (2004) on the NFL which observed that the NFL’s revenue sharing plan (with a club-to-club range of approximately 40% to 60% of gross revenue) is much higher than the other three North America leagues and is its main differentiating factor. Similarly, Stark (2002) researched Major League Baseball (MLB) and noted that it has the fewest institutional arrangements of the four North American leagues. Some researchers take a marketing based lens, such as Mason (1999) who developed a conceptual view of the sport product and Gladden and Funk (2002)’s work on brand associations in sport and through sport. Additional research articles exist in sport finance, social issues in sport, gender in sport, fan affinity, economic impact, and more (Andreff and Szymanski, 2006). One particular area of research in professional sport has been the area of competitive balance, which often refers to teams in a league being closely matched to provide for exciting performance outcomes in each game (the UOH or uncertainty of outcome hypothesis) (Humphreys, 2002) while – more recently – others have suggested alternative measures such as the Hope construct (O’Reilly et al., 2008). Noting the importance of this concept, Levin et al. (2000) noted that, “perhaps the most fundamental issue in the sports literature is the extent to which competitive balance among the teams is affected by institutional arrangements” (p.393). Notably, the literature on competitive balance assumes that the goal of the professional sport team is to promote or maximize fan welfare based on the notion that fans prefer games with uncertain outcomes which, in turn, stimulates fan interest (Zimbalist, 2002). Additionally, Sanderson and Siegfried (2003) suggest that some fans may be willing to pay more to see a winner, whereas other fans may be more loyal to their team (win or lose). Consequently, the marginal revenue for acquiring talent may be greater for some teams than for others, leading to a lack of competitive balance if owners are assumed to be profit maximizing. In practice, professional sport leagues take vastly different approaches to competitive balance vis-à-vis economic viability of the league and its franchisee, where the mechanisms they put in place vary from those to enhance competitive balance (e.g., NFL sharing media revenues equally amongst all teams) or to reward the top teams (e.g. English Premier League (EPL) rewarding top teams in its allocation of television rights dollars) (see Table 1). In this regard, the EPL’s television rights are allocated 50% to all teams, 25% to high performing teams (on-the-field) and 25% to teams most frequently on television. Fort and Quick (1995; 2004) discuss the objectives of owners from a finance point of view and the resulting impacts on outcomes such as competitive balance, incentives, and cross-subsidization. This is often called ‘owner’s intent’. Others have taken a more practical approach to viewing the professional sport club, with one pair of authors modeling – based on a wide range of variables – the antecedents to franchise profitability in the National Hockey League (Nadeau & O’Reilly, 54 Public-Private Sector Research Center

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2006) and the ability to generate revenue in all 4 major North American professional sport leagues (O’Reilly & Nadeau, 2006). In a related study, Rosen and Sanderson (2001) took a human resources paradigm to understanding labor markets in professional sport, and the athlete as an asset. 3.2.1 Professional Sport Globally, professional sport has traditionally been most prominent in North America and Europe, with the United States and the major countries of Europe being home to the highest profile leagues, clubs and players. However, this is changing and examples of professional sport flourishing and being innovative are found all across the world. Recent examples include the rapid rise, despite having to play their 2nd season in another country, of the Indian Premier League (IPL) (cricket) and a new basketball league in China (the CBA – Chinese Basketball Association). There are also the ‘globalization’ efforts of the major sports into the other major markets, such as the National Football League (NFL) playing regular season games in the United Kingdom. Professional team sport is typically organized by leagues, whose Board of Directors are comprised of a representative of each team in the league. Leagues are typically based in one country, although there are examples of leagues that have teams in multiple countries (such as the MLB, NBA and NHL including both US and Canadian teams). League sizes typically range from as low as 8 to 10 teams (such as the IPL or the Canadian Football League (CFL)) to as high as 32 in the NFL or even 92 if you consider the Premier League and the Football League (all linked by relegation) in England. In reality, if we consider all the leagues supervised by national football federations in Europe and the fact that technically all the teams in these leagues can make it to the top national league, European leagues include hundreds of teams. Based on these various considerations, this paper takes a first step in seeking to better understand – through comparison and contrast – the business structure of professional leagues. This will involve an informed comparison along a variety of dimensions for each of the individual leagues, as well as by their groupings of North American, European, and Global leagues. Note that the primary comparison of this paper is between the North American and European professional sport leagues, with information on the Global leagues provided for context and further learning15.

15 At times, financial data in professional sport is available to the general public or researchers. If provided to the researcher by an organization, the researcher is typically required to sign disclosure and, as such, cannot publicly share the data. However, sometimes data is available, typically for the following reasons: (1) The organization is public, such as the Green Bay Packers of the NFL, (2) The organization is required to disclose financial statements at either the club or association level. This is typically the case for European leagues, (3) A legal event happens which requires the public disclosure of the financials of the parties involved, or (4) Third party organizations use secondary data and their own proprietary metrics to estimate the key financial variables of professional sport (i.e., team valuations, profit, revenue, player salaries). This is typical when ownership is private and financials are not disclosed (the case in most North American clubs). An examples is Forbes in North America. In the case of the 4th reason (third party estimates), it is very important to understand that these numbers are not 100% accurate. Researchers (see Nadeau & O’Reilly, 2006), however, have used valid reports (e.g., Levitt Report or Popper Report in the NHL and the Blue Ribbon Report in MLB) to assess the accuracy of Forbes data finding that, although the data is not exact, the trends and relative differences amongst clubs are useful for analysis.

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3.3 Method A sample of professional sport leagues was selected for study based on their size, scope and business focus. Although there are many professional sport leagues operating globally, this sample of leagues was selected because it provides an interesting setting to examine structural differences and their performance implications. Further, the size and interest levels in these leagues means there is typically more information about their structure publicly available. These leagues do not necessarily represent the largest international professional sports organizations (or leagues, for that matter), yet each is based on the fundamental principle of athletes competing in a multi-event format for a team or club within their league. Other professional sports leagues of comparable size and scope that are not considered within the study include, for example, (i) NASCAR (National Association for Stock Car Auto Racing) with estimated revenues of US$3 billion (including a US$473 million annually TV deal), the sport include 38 races within North America some of which attract more than 250,000 fans to the track and drivers race against each other for the prestige of each event and the overall championship (Nextel Cup), (ii) Formula One with estimated revenues of US$3.9 billion (Deloitte, 2009) from 18 Grand Prix races around the world, in addition to the individual championship, it includes a team championship based on the results of the two drivers that make up each team, and (iii) the PGA (Professional Golf Association), whose three tours (PGA, LPGA, Senior’s Tour) had revenue of US$971.9 million in 2007, which included US$367.7 million in television revenues (Sport Business Journal, 2008). Other sports such as rugby and cricket are also significant businesses in markets around the world. The 18 institutional arrangements, dimensions or factors listed were selected based on our belief that they are, as a group, representative of key structural differences across leagues and most relevant to analyze the potential performance implications within leagues. It is important to note that the list is not exhaustive and we do not claim that these factors are the only ones that matter nor do we suggest that they are the only ones that should be examined. They reflect our beliefs based on previous literature as well as our interactions with managers in the sports industry. Yet, it provides an initial extensive comparison of the leagues on factors where some information is readily available and that broadly cover the reality that faces professional sport league business. The factors identified are broken down by themes (sport structure, business factors, player factors, and league factors) in order to be presented in a coherent manner as summarized below: Structure of competition, ownership and governance factors (1) Structure of Competition – how the game is organized impacts the business side (2) Ownership – structure, style, rules, voting rights (3) Decision rights at the league level – who decides what 56 Public-Private Sector Research Center

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(4) Globalization – is league growing or pursuing international growth (5) Fan clubs – extensiveness, priority and revenue Government and federations factors (6) The role of federations – decisions outside the league structure (7) The role of government – how does the government influence professional sports (8) The role of professional sports in society – how are professional sports interpreted Revenue sources and revenue sharing factors (9) Broadcasting rights – how are rights fees revenues divided up (10) Marketing, sponsorship and merchandising – significance and sophistication of off-field sources of revenue (11) Competitive balance taxes – mechanisms, if any, in place to provide for parity (12) Revenue sharing mechanisms – methods and policies to share league and club revenues Labor relation factors (13) Players’ salary structure – how are players paid (14) Player transactions – how are players moved from one club to another (15) Free agency – are players eligible to become free agents and what are the related rules (16) Talent draft – how is young talent allocated to each club (17) Development system – how is future talent developed and at what level (18) Players’ background and career path – demographics of players An important aspect to keep in mind prior to addressing the specific factors is that the beliefs and values across leagues in North America and Europe are different. North American leagues are premised on the belief that competitive balance attracts fans to the game. The extreme example of this view of professional sports is the NFL. Its business and sporting rules that impact business (such as the draft system or the athlete contracting system) are often designed to enhance the competitive balance among teams. Balance in the field is assumed to give a IESE Business School 57

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chance to every team in the league, make the outcome of every game highly uncertain (aka ‘any given Sunday’), and give each club ‘hope’ of making the playoffs. These characteristics are viewed as enhancing the overall attractiveness of the league (not to mention the economic viability of all franchises, including those in small markets). This view is found in the NBA and in the NHL architecture (and to a lesser extent MLB) where rules are designed to enhance the balance among team members. In contrast, European soccer leagues work under the belief that teams with very uneven chances to win are the way sports should be organized. For instance, the ratio between the budgets of the teams with the highest and the lowest budget is more than 10 where in North America it is usually less than 2 (see Table 2 and Figure 1 for revenue differentials between leagues). These dichotomous beliefs may reflect different objectives. It is often argued that North American leagues are run with a business objective to optimize the value generated for the sport. European leagues blend a similar business objective with a tradition of sports as social expressions that reflect competition among parties and as such business considerations should play a boundary role. Teams such as Real Madrid and FC Barcelona are examples of such a blend of objectives. Both teams are organized as non-profit sporting organizations owned by the hundreds of thousands members who pay a fee to be members but do not expect any personal economic pay-offs.

3.4 Comparison of Institutional Arrangements This section compares and contrasts the institutional arrangements across the 4 European and 4 North American leagues, across the 18 identified dimensions. This section describes league practices, while section 3.5 analyzes the potential business performance implications. Within each institutional factor we highlight its main aspects. It is not our objective to be comprehensive and describe every detail of business rules, many of which are very specific. For instance the NFL-NFLPA agreement (league-players’ association) is a 100-page-plus document covering aspects all the way from salary caps to players’ continuous education. The corporate structure of leagues is quite similar across the eight leagues, although with significant differences regarding decision rights delegated to the league. The league is run for the teams and each team typically has one vote. The teams select a CEO or commissioner who runs the league on behalf of the teams with the objective of increasing the long-term value of the teams. European football leagues have the complexity that federations add to their functioning. This complexity comes from three layers, the national federation, the UEFA (Union of European Football Associations), and FIFA (Fédération Internationale de Football Association). For instance, in the case of EPL, the Football Association (national association) has veto power over chairman and CEO appointments as well as new rules.

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It is also relevant to mention that the role of players’ unions is also quite distinct league to league. While in North American leagues, players associations play a significant role; this is not the case in European leagues. Players’ unions such as FIFPro (International players’ union) have little involvement in governing the sport, while those in North America such as the NHL Players Association (NHLPA) and NFL Players Association (NFLPA) are highly influential16.β 3.4.1 Structure of Competition, Ownership and Governance The first set of factors that distinguish European and North American leagues is the structure of their leagues. The distinction in terms of sporting competition is clearly along continents. European leagues are open leagues while North American ones are closed. This distinction has implications beyond the sports to the array of business tools available to manage the sports. Ownership distinctions follow the Anglo-Saxon / Continental Europe clustering. Anglo-Saxon teams are quite homogenous (except for the peculiar ownership structure of the Green Bay Packers) with for-profit structures and shares owned by a small group of owners. Continental Europe mixes for-profit structures with publicly traded teams and non-profit organizations. Finally, governance factors range from the NFL structure where the league holds a large part of decision rights to La Liga where the league holds very few business rights. Yet, while North American leagues share certain business practices foreign to European leagues, the latter are moving towards sharing mechanisms that in some instances put them closer to the NFL than other North American Leagues. 3.4.1.1 Structure of Competition The structure of competition is probably the most visible difference to fans across North American and European leagues with significant consequences for the business side of sports in both contexts. In North America, the leagues have a similar sporting structure. They are all closed whereby the same teams participate each year. The only exceptions are when new teams are added via expansion or where a former team moves (i.e. plays in a new city) or ceases operations (usually due to financial reasons). Table 3 lists examples of league expansions and relocations in the American leagues. Each team is a franchise for which the league grants the rights to be part of the league. With league approval based on established league decision rules, franchises can be moved from one city to another, they can be sold to different owners and new franchises can be added. But, a franchise is not penalized (i.e. forced to leave the league) for a poor season and participates the following year. In contrast, the European leagues have relegation. The three bottom teams from the leading league are relegated to the next lower-tier league. Promotion rules for the teams from the lower level league vary. While at La Liga it is the top three teams in the lower league that get promoted

16 This minor role of players’ associations in Europe might be changing given the economic situation and the fact that teams in certain leagues are behind with their payments to players which is giving players strong incentives to collaborate.

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based on the number of points at the end of the season, the EPL and Calcio promote the top two teams from the next tiered league while teams 3rd to 6th go into a playoff with a 90 minute final that selects the third team promoted17. At Bundesliga the bottom two teams are relegated while the top two from the lower league are promoted. The third bottom club and in the league and the third top team in the lower league play a two-leg playoff game to decide the third spot. Although a number of models exist, this practice is also common outside North America. For example, the soccer league in Argentina uses a weighted average of club performance over the last 3 years to determine relegation teams. A second difference in the structure of the competition involves the number of tournaments that teams participate in. North American leagues normally play just one annual competition with a playoff format that differs by league. European teams compete in multiple competitions. One season-long competition is based on points accumulated. Other tournaments include the Champions League, the UEFA Europa Cup, world competitions such as the Club World Cup, and regional competitions. Thus, while North American leagues must have one champion, the European leagues may have multiple champions each year. A third difference lies in the way in which the competition is carried out. European soccer leagues have 18 to 20 teams that normally play each other twice; once at home and once at the competitor’s home (round-robin structure). Conversely, North American professional sport teams may not play against each other at all in a given season while other clubs (typically division rivals in close geographic proximity) may place each other many times in a season. Most importantly, the North American leagues use a play-off structure that follows the regular season where the top performing teams from the regular season qualify and are able to participate in an elimination-style tournament for the League Championship18. European leagues use this playoff structure in their cup tournaments that include teams across divisions. Yet, the round-robin league format (no playoff) is the dominant competition in Europe. Fourth, the role of minor league structures differs across leagues. The MLB (as does the NHL) has an associated minor league structure19. Baseball teams in MLB have affiliated teams that play in “minor” leagues. There are typically three ‘farm teams’ per MLB franchise, one at each of the AAA, AA, and A levels20. These leagues have a much lower profile with less talent and much lower media presence, yet they maintain the closed league structure. Each of the teams in these leagues is affiliated with a specific MLB team. This affiliation is used for talent development (see section 4.4.5). MLB teams can pick players from their affiliates (and send players that are going through a drought to get back in shape in a less demanding environment) at any point

17 If the difference between the 3rd and 4th teams is more than 10 points, the 3rd team is automatically promoted in the Calcio. 18 Some European leagues tried the North American play-off at the end of the regular season in the 1980s but was quickly discarded. 19 University sports programs play a similar role for the NBA and NFL and to a lesser extent for MLB and NHL. The prominent role of these programs is totally absent in European leagues. 20 The minor league structure is integrated into the structure of the MLB and there cannot exist MLB teams without affiliated teams. In contrast, European teams which have affiliated teams choose to do so for organizational reasons.

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during the season making their overall roster size (MLB team plus affiliates) much larger21. This minor league structure is somewhat reproduced in some leagues in Europe where clubs have the main team in the top league and other teams in lower leagues. The main team has the right to get players from its teams in lower leagues during the season,22 although this right is seldom used. The main purpose is talent development and these talent-development teams usually go all the way down to eight-year old kids’ teams. Moreover, most teams competing in these lower leagues have no affiliation to any team in the main league but are independent and can theoretically reach the top league.23 3.4.1.2 Team Ownership Although owners (individuals, syndicates, publicly traded, etc.) differ by club, the element of ‘owner intent’ holds regardless of league, location and sport. Owners’ interests (win a championship, build other related business, grow profit, enhance team value, etc.) are the principle driver(s) of the management decisions and practices that follow for their clubs. In contrast to other types of ownership where the economic objective is fairly clear, ownership in sports mixes an economic purpose together with an aspiration to win, to become a public figure, or to be socially recognized as successful because of the trophy that owning a club represents. North American teams, in their legal structure, are all for-profit ventures. While the NFL only allows individuals or syndicates to own teams and at the individual level these multiple objectives are intertwined, other leagues such as the NHL allow for corporations to be owners. Some of these corporations have abandoned sports over time as these multiple objectives were not necessarily aligned with the traditional business objective of value creation. European teams are mostly legally structured as for-profit ventures. However, their ownership structure differs. It combines teams with concentrated ownership with clubs that have disperse ownership and teams that are publicly traded. In addition, there are teams that are non-profit sporting organizations run without a profit purpose but to have the most competitive team. 3.4.1.3 Decision Rights at the League Level Decision rights delegated up to the leagues is another important difference. The NFL is at one extreme again. They manage centrally most strategic decisions all the way from broadcasting rights, to NFL TV channel, to internationalization, or where to locate an expansion team. The 32 team owners sit above the league commissioner and are the final decision makers, yet the commissioner and his office design the strategic plans and execute them. The other North American leagues have a significant amount of decision rights compared to European leagues.

21 A regular MLB team has 25 players expanded to 40 with the difference playing in these affiliated teams. These 40 players can play in the team at any point during the season. 22 There are certain restrictions. For instance, in La Liga players from the affiliated teams that can play in the main team without being part of the 25 players registered at the league have to be younger than 23 years old and do not have a professional license. Those older than 23, cannot play in the affiliated teams if they play more than 10 games. 23 Affiliated teams in European leagues have no possibility of promoting to leagues where other teams from the same club compete.

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Negotiations with players union are carried at the league level. Decisions about economic rules are also at the league level and even sporting rules are taken at the league level. For instance, the NHL changed certain sporting rules to make the game more fan friendly and increase the average goals per game. These changes have made the NHL different from other ice hockey leagues. The NBA has also sporting rules that are different from the ones in other basketball leagues. European leagues range from the EPL where certain strategic decisions such as commercializing broadcasting rights are delegated to the league all the way to La Liga entrusted mostly with operational decisions such as scheduling the games or assigning referees. Sporting rules are under the control of FIFA that also establishes certain business rules such as transfer regulation. 3.4.1.4 Sports Globalization Leagues are also taking different views on how to globalize their sport. Most leagues are maturing in their home markets whether it is North America or Europe. Thus, they are looking to overseas markets as ways to reinforce their growth. Yet, their views on how to go global differ. North American leagues typically take a league perspective while keeping the idiosyncratic element of each sport. Through its NFL Europe venture (1997-2007; following from its antecedent which began in 1991), the NFL learned that the most attractive European markets are Germany (where most of the franchises ended up moving) and the UK. The NFL also learned that international growth will most likely occur by bringing the best NFL overseas. The league has identified countries where success is more likely to happen and it is focusing on those countries to spread the sport. They are doing it through regular games overseas and considering the possibility of having each team play a game during the season overseas. The NHL and the NBA face a different challenge. Both leagues play sports with large a following in other parts of the world. Their challenge is not as much to get people to become fans, so as to coordinate with leagues in other countries and with international federations to enlarge the pie for the sport and the league. The NHL is also moving some official games out of North America. The MLB has had certain countries with a strong presence and keeps on building on these countries. With a few exceptions (e.g., EPL’s global media rights strategy), European football normally does not go international taking a league perspective. Rather, the efforts are made at the team level. Each team is experimenting with different strategies from creating local football schools, exhibition games, and even considering a franchise in other countries. Some of them go after the North American market while others focus on China or Japan. Some go to both markets with exhibition games one year in each market. The senior football league in North America (Major League Soccer (MLS)) is a local venture with little if any involvement from European teams. Only the EPL is somewhat of an exception where the league is taking some steps to globalize, for instance suggesting the possibility of moving some regular season games overseas (which has met resistance from other country federations). Yet, soccer has the advantage of its global reach with fans from top European clubs throughout the world and reaching their teams through broadcasts.

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3.4.1.5 Fan Clubs The premier league clubs in Europe are far ahead of their North America counterparts in launching, developing and leveraging fan clubs as a source of revenue, brand and growth. Indeed, this is an area that has been identified by many North American professional sport teams as a high priority. Teams such as Real Madrid have hundreds of thousands of members who pay a yearly fee just to be associated with the team and take advantage of certain benefits such as easier access to tickets when the games are not sold out. They also have fan clubs around the world that get together because of their passion for the team even if they are thousands of miles away from the stadium. These communities around football are also spreading to the web world where social networks are emerging around this passion (www.footbo.com). North American teams have not worked as effectively at creating these physical and web social networks. Fans typically get together informally without the team knowing it or being able to influence the get-together. 3.4.2 Government and Federations Another set of significant differences separate European and North American leagues. These are around the role of the government and federations. In North America, these two institutions have little role other than the rules that govern any other industry or for profit organization. 1953’s monopoly exemption for baseball is probably the most relevant government intervention in the sports industry. In contrast, federations and governments have a significant role in Europe. FIFA and UEFA set a very significant number of sporting but also business rules for soccer in Europe. Not only do these non-profit organizations have the power to set rules but they also act as leagues in that they organize competitions and capture a larger share of the value than traditional leagues do because they do not have the teams acting as “board of directors” like North American leagues do. Supra-national federations even confront governments with certain of their rulings as FIFA is currently doing in trying to limit the number of foreign players in a team. Governments also interfere more often into sports. Some times it is through rulings such as the Bosman ruling (on player transfers) or economic decisions (such as the percentage of revenues from soccer lotteries appropriated by teams). 3.4.2.1 The Role of Federations A relevant point regarding the structure of European leagues is the role of football federations. Federations are non-for-profit organizations that regulate the sporting, social, and economic aspects of the sport. Many federations were created a hundred years ago to manage amateur sports. Nowadays, this original structure has been adapted to the needs of professional business oriented sports without abandoning its original grassroots’ objective.24

24 This transition is not unique to federations. The International Olympic Committee is probably the best example of this move from amateur to professional sports.

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This transition has not been without clashes. Traditionally, national federations were running the professional leagues until teams associated into structures independent of the federation much like the North American sports and run for the benefit of professional teams in the league. Federations are responsible for the sporting side such as scheduling referees, registering players or disciplinary rulings. England’s Football Association has veto power over the election of the CEO and chairman of English Premier League. Federations have a broad perspective taking care of professional football but most importantly the grassroots efforts to support football among amateur players and kids. Federations have an embedded structure with FIFA (International Federation of Football Associations) at the top governing football worldwide, then UEFA at the European level, then the national federation (such as RFEF in Spain or the Football Association in England) and even regional federations (county associations). FIFA at the world level and UEFA at the European level play an important role for professional sports. FIFA defines sporting and a significant number of business rules that the leagues have to abide. For instance, Glasgow Rangers from the Scottish league asked to join the much more lucrative EPL to find the Football Association rejecting the demand. Opening national leagues to teams from other leagues will see the power of the federation structure challenged as a league could grow to become a Champions League type. UEFA controls the European level competitions (Champions League and Europa Cup) as well as the national team competition (Euro Championship).25 UEFA has professionalized itself quickly to keep control of what is probably the best soccer league in the world (the European Champions League). In contrast to leagues, whether national European ones or North American, teams do not manage UEFA. Rather, the traditional UEFA role as manager of the sport (back when it was amateur) has put teams as reporting to UEFA. Yet, powerful teams are constantly challenging its power to gain a larger share of this important revenue source. 3.4.2.2 The Role of the Government Governments play a role in professional sports both in North America and Europe. Yet their roles are distinct. The most well-known intervention of the U.S. government was the “monopoly exemption” to the baseball league in 1953. Yet, government intervention in North America is low compared to Europe. Much government involvement in North America professional sports happens through stadium financing. Closed leagues with a limited number of franchises leaves certain significant markets without a team (something that in an open league is less likely to happen as larger markets will develop competitive teams because of access to more resources). Los Angeles has been without an NFL team since 1996 even though it is the second largest market in the U.S. Having a professional team is often seen as a helping the local economy not only through more business but mainly through its signaling value. Teams often use the competition among various cities to host a professional team to demand public money to fund the building or refurbishing of a stadium. Local governments have often given public money to

25 It also manages the Euro Cup for national teams.

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build stadiums although it is not always the case (the San Francisco Giants saw their request for public funding turned down four times in popular votes). The intervention of government in Europe is much more visible. On the one hand, the European Commission has overruled FIFA regulations (the Bosman ruling being the most visible example). On the other hand, national governments have discretion over a significant amount of policies. For instance, Spain ruled that foreigners were taxed at 25% during their first five years in the country rather than 43% pike the rest of the population. The ruling was intended to attract foreign talent, yet the rule was called the “Beckham rule” because it was issued in time for Real Madrid to hire David Beckham. The fact is that each league faces very different business rules (from taxes to labor). In addition to European leagues facing different business environments, governments intervene in a number of different ways. For instance, certain countries force leagues to show free to air a certain number of games even if it means lower revenues for the TV operators (and ultimately for the teams). They also subsidize leagues sharing with them the proceeds from soccer lotteries. An additional way in which governments subsidize soccer teams is through stadium financing (either when the country hosts an international competition, building public stadiums, stadium naming rights, rezoning permits, or soft loans). 3.4.2.3 The Role of Professional Sports in Society Sports in Europe are more than entertainment. It is a social movement. The tag line for FC Barcelona “more than a club” illustrates this characteristic. Teams represent more than sport, they signal political positions and channel emotions among communities. They are even used by governments to try to manage the mood of the country. They are the excuse to celebrate as well as to be violent (Argentinean soccer is probably the best example of violent behavior associated with soccer fans—back in the 1920s, soccer fields were surrounded with barbwire). The social implications of soccer have often been seen as a reason for government intervention beyond what it would do to save other industries. 3.4.3 Revenue Sources and Revenue Sharing The contrasting beliefs across the Atlantic regarding what makes sports attractive is best reflected in their views on economic competitive balance. North American leagues use various mechanisms to share revenues across teams and subsidize weaker teams in other to make them more competitive at least from an economic perspective. These sharing mechanisms are now starting to permeate the European model. Traditionally, revenue sharing has been mostly absent (except for certain ticket sharing) in Europe. Only recently the EPL defined sharing rules for broadcasting rights and Bundesliga has put certain restrictions on the economics of the teams. At the other extreme, La Liga has almost no balancing mechanisms in place.

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3.4.3.1 Broadcasting Rights Broadcasting revenues have become a large component of professional leagues’ revenues. Highprofile and successful teams such as Barcelona and Real Madrid make about 35% of their revenues from broadcasting rights. This percentage might go above 50% for the elite teams in the Italian league and below 20% for smaller teams. In North America, these percentages range from 40% to 45% for NFL teams with relatively low local (unshared) revenue, to a reported 18% on average for the NHL clubs. Although some large market MLB clubs like the New York Yankees garner significant revenues from local and regional broadcasting rights, small market MLB clubs without a history of success have sizably less revenue from broadcasting rights (Nadeau & O’Reilly, 2006). See Figure 2. Broadcasting rights differ across leagues in two main aspects, the negotiation of broadcasting rights (‘source of pool’) and the distribution of broadcasting revenue (‘distribution of pool’). La Liga is at one end where each team negotiates its own rights and keeps the cash generated. At the other end the NFL negotiates the rights at the league level and distributes broadcasting income as part of central revenues equally among the 32 teams. Both the NFL and EPL have central pools only, while the other leagues have both central pools and local pools. Some European Super-Clubs (i.e., FC Barcelona, Real Madrid) negotiate all of their own media deals and, hence, have local pools only. The La Liga market has gone through a period of consolidation and 18 out of 20 teams have sold their rights to the same media company that distributes them to televisions and internet. The dynamics of the market have led to a situation where the rights of all teams are pooled together and are sold as packages very much as the NFL model, but the distributor is not the league but an external company. Moreover, each team receives the amount of money that they negotiated directly with the consolidator rather than following a distribution rule of the money generated from the pool. Real Madrid and FC Barcelona received about €160 million per season each compared to €50 million for Valencia or €20 million for Athletic Bilbao (2008). Broadcasting rights for the EPL are negotiated at the league level and sold broken down into six live packages and an additional five packages for highlights, near to live, and clips. Half of the revenues are distributed equally among teams. Teams relegated over the previous two seasons get half of the payment (parachute payments). Another 25% is distributed based on each team’s number of appearances on TV. The final 25% is divided based on performance: the winner gets 20, second 19, and so on until 210 parts are distributed. EPL gets about £670 million per year for its rights within the UK. Ligue 1 (France) also sells the rights for all the teams broken down into 12 packages. The national rights are worth €668 million per season and they are distributed among teams much like the EPL: 50% is shared equally among Ligue 1 teams, 30% based on league position, and 20% on TV appearances divided among the 10 teams with most coverage. Bundesliga uses a similar approach negotiating rights for all teams and distributed through packages. Its rights bring the league €412 million a year. About 75% of the rights go to teams in the first division with the remaining going to second division teams. The revenues associated with the rights are probably the

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most equitable in Europe26 and are split with a similar philosophy as EPL or Ligue 1 based on sharing, maximum and minimum payments, and performance averaging performance over the last three years. Calcio sells its broadcasting rights through the league.27 The international rights 2010-2012 were sold for €181 million. Packages are often broken down into live packages, highlights, or delayed; national and international rights are also sold separately. Platform-based packages are not that common (only Calcio does it) mainly because the rights are difficult to define across platforms.28 The remaining three North American leagues have broadcasting models that have central pools and local pools. Each of MLB, NBA and the NHL has league deals with national networks in each of the United States and Canada. These deals are typically with one of the large free-to-air networks (e.g., NBC, CBS, Fox, and ABC in the US; CBC or CTV in Canada) or with a cablebased sport channel (e.g., ESPN, TNT and ESPN2 in the US; TSN or SportsNet in Canada). However, and this differs from the NFL, these leagues allow each franchise to sign their own regional and local television deals which are worth significantly more in major markets (e.g., New York, Toronto, Los Angeles, Chicago) than in minor markets (e.g., Ottawa, Pittsburgh, Minnesota). 3.4.3.2 Marketing, Sponsorship, and Merchandising Merchandising in the four European leagues is run by teams that keep the money and little is shared at the league level. However, leagues have signed sponsors such as Barcalay’s title sponsor for EPL or BBVA for La Liga (€20 million per year). European leagues have an additional organization, the National Federation that has significant revenue from marketing, sponsorship and merchandising. National Federations manage the national team that is one of the most business-generating teams in countries participating in the lucrative Euro Cup and World Cup, each happening every four years with qualifying rounds through the previous two years. Conversely in North America, some leagues (NFL) share most of the marketing revenues while others (MLB) share very little. At the NFL all licensing revenues go to the league and are equally distributed across teams. Table 4 presents the Green Bay Packers’ annual report. Notably, the Green Bay Packers received approximately 57% of their 2007-2008 revenues from central sources. Compare this to EPL teams where revenue sharing is limited to TV money. Although specific numbers are uncertain, it is widely accepted that large market teams like the New York Yankees, Toronto Maple Leafs, Dallas Cowboys and Los Angeles Lakers have large revenue sources from marketing while smaller market teams like the Minnesota Twins, Ottawa Senators and Utah Jazz (Salt Lake City) have limited revenue potential in these areas. A recent evolution in North

26 It might be argued that this equitable split penalizes the big German teams in European competitions where they have not done well in the last few years. However, the German league is the second European league in size. 27 Calcio Series A moved from each team selling their own rights to collective selling by the league. 28 Another important source of broadcasting revenue for teams competing in Europe comes from their participation in UEFA tournaments.

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America is the naming rights of the stadium which has led to deals upwards of US$25 million per year and is kept by the teams. An interesting case in point is the NHL that had a season-long strike in 2004-05 that lead to a restructuring of the business rules of the game. Prior to the strike, NHL teams had often suffered from significant financial problems. The strike led to a redefinition of these rules including issues such as: (1) introduction of a salary cap, (2) subsidies for teams in smaller markets through revenue sharing via a complex system based on mid-point of club average revenue. 3.4.3.3 Competitive Balance Taxes The effort of North American leagues to balance the competition is reinforced through “taxes” where rich teams are penalized economically and these penalties are used to subsidize poorer teams. These competitive taxes are built on top of other balancing policies such as revenue sharing rules, salary caps (budget restrictions), or draft mechanisms. While the NFL and the NHL do not add these “luxury” taxes, the MLB and the NBA do so. The MLB tax teams that exceed the salary cap (US$162 million in 2009) at a rate that varies between 22.5% (teams going over the cap for the first time), 30% (for those teams exceeding a second time) and 40% (teams above for the third or more times) the amount above the cap. The New York Yankees paid US$26 million in taxes in the 2007 season. The NBA taxes teams US$1 per each dollar that exceeds a certain amount29. While leagues differ in the redistribution rules for this ‘tax income’, the intent is to redistribute it to promote competitive balance. The concept of competitive balance is much less relevant in Europe where leagues favor dominant teams. These teams simultaneously compete in and dominate their national league and play in European competitions where the balance is more pronounced. The performance in these competitions is often associated with the quality of the national league and national pride (much like the feeling around World Cups). 3.4.3.4 Other Revenue Sharing Mechanisms North American leagues use various mechanisms to balance the business playing field (as noted in the previous sections on broadcasting, marketing and competitive balance taxes). In addition to these mechanisms, North American leagues use additional revenue sharing rules. The primary example is the NFL. In most categories, it shares revenue with a ratio of 1/32 for each of the 32 clubs. An illustrative example is its home/away ticket sales revenue share where up until 2002, the share was done 60% - 40% with the home team sharing with the particular visiting team. However, the sharing was changed so that the home team gets 60% and the total of the 40% of all games and all visiting teams is put into one pot and divided amongst the teams in equal 1/32nd shares. The NBA complements the luxury tax on rich teams with an additional pool coming out

29 This amount is estimated at 61% of Basketball Related Income (BRI) adjusted for previous year’s BRI and divided by the number of teams.

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of teams’ local revenues. EPL teams share no ticketing revenues with the visiting team while Calcio gives the visiting team 5% of ticketing revenue. Yet, revenue differences in North America are large. A typical NFL team gets approximately 40-45% of its revenues from revenue sharing, while this percentage for a typical NBA, MLB or NHL team is considerably less. For instance, while the NFL splits ticketing 60% - 40% as previously described, the home team keeps all ticketing at the NBA much like it in Europe. 3.4.4 Labor Relations Factors The role of labor unions negotiating on behalf of players and the rules around labor costs also set apart North American and European leagues. Europe relies more on unregulated markets (“capitalism”) to structure teams-players relationships, changes in players’ labor regulations come mostly from government regulation (such as the Bosman ruling). Contracts have no restrictions other than the ones that national and European labor laws impose. North American leagues impose additional restrictions around maximum labor costs or minimum salaries; these restrictions come mostly from the leagues without government intervention. Differences around transactions are also significant as well as the role of unions. 3.4.4.1 Players’ Salary Structure Differences across the salary models in both sides of the Atlantic are quite important. It reflects in a vivid way the contrasting objectives of the various leagues. At one extreme, the NFL pursues enhancing competitive balance. At the other extreme, the European leagues value flagship teams. The budgets devoted to players’ salaries are more similar the more the league believes in economic balance. Leagues achieve this balance through revenue sharing mechanisms (as described in section 4.3) and payroll related policies such as payroll cap (usually known as salary cap) or payroll floors (minimum payroll to receive subsidies). The NFL has a hard salary cap, where the collective bargaining agreement between the league (NFL) and the players association (NFLPA) determines the percentage of revenues that are allocated to players’ salaries with both a maximum and minimum team salary established. In addition the minimum salary of a rookie is set. The MLB has a soft salary cap and those teams that exceed it are charged with a luxury tax that is then distributed to poorer teams. The NBA has a soft salary cap, meaning that there are exceptions that allow teams to exceed the established cap. These exceptions make it easier for teams to break the cap in order to keep flagship players that have had a long career within the team and deserve a larger contract but the cap would not allow it. Table 5 reports the salary structure of NBA teams. The NBA has an additional mechanism to control players’ costs. These costs are fixed at a percentage of Basketball Related Income (BRI). Yet, the exact amount is not known until the end of the season. Therefore, the league withholds a certain amount from players’ salaries that is put in an escrow account and distributed back to the players at the end of the season or back to the teams if the percentage was IESE Business School 69

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exceeded. Then NBA also has a minimum and a maximum salary. The minimum is set for a rookie and this minimum salary goes up as the player cumulates years in the NBA. The maximum is set at 48% of BRI. The NBA also has a payroll floor set at 75% of the salary cap. The salary cap has various exceptions. There most notable exception to the salary cap is the “Larry Bird Exception” where a team can hire their own veteran players who become free agents30 even if it goes over the salary cap and limits to the player’s maximum salary. The NHL established a salary cap after the 2004-05 lock out. The salary cap is hard but estimated as the average player salary over the length of the contract. This rule has led to practices such as long, front-loaded contracts. European leagues are a striking contrast to the NFL in terms of salary structure. They do not have salary caps, there are no upper or lower limits on players’ salaries, and certain leagues, such as EPL, allow their teams to sign as many players as they want (others have limited rosters). Restrictions on the European soccer labor market have been reduced over time. The traditional limit on the number of foreign players was turned down by the European community for EU players with the Bosman ruling.31 Restrictions for non-EU players vary across leagues. EPL and Bundesliga have almost no restrictions, while La Liga and Ligue1 limit the number of non-EU players (3 for La liga) although this limitation has become flexible when certain non-EU countries sign special agreements to bypass this limitation. European and North America players both face different taxation and employment regulations according to the country and state/province they belong to or are playing in. For instance, foreign workers in Spain pay 25% income tax during their first five years in the country while in France or Germany these workers pay the same income tax percentage as a national of about 45%32. In North America, players must pay more income tax in home games played in certain states with high state income tax (e.g. New York, California) as compared to states with no state income tax (e.g. Texas, Florida). 3.4.4.2 Players’ Transactions The four European leagues share the same players’ transaction rules because their teams compete in the same European labor market (although subject to different labor and tax laws). A typical player contract includes a fixed salary plus bonuses tied to individual as well as team performance. The player may also release the use of his image for the team to manage. The contract also specifies its length. The length is a crucial aspect because the contract has to be honored regardless of whether the player gets injured or the team is relegated. The team can only dismiss the player if it pays the remaining of the contract. Another important aspect is the rescission clause that

30 The policies around free agents are discussed in more detail in section 4.4.3. At this point, it suffices to interpret free agent as a player who finishes his contract and is free to move to other teams. 31 The Bosman ruling also declared a player to be a free agent once his contract expired breaking the previous rule where even after the end of the contract a transfer fee existed. 32 This favorable tax structure in Spain disappeared for players hired after January 1, 2010.

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specifies the amount of money that the team shall receive if another team wants to buy the contract. This clause is often set high enough to discourage any team from buying the contract without negotiating with the team. If a transaction is of interest to both parties, the team holding the contract can reduce the transfer amount below the rescission clause to make the transaction happen. In addition, the player may also get a one-time fee associated with the transfer. For instance, FC Barcelona upgraded Messi’s contract in Fall 2009 increasing the rescission clause to €250 million. The transfer fee may be contingent on issues such as the players’ success at the new team, the success of the new team, future transfers of the player, etc. For transfers of players older than 23 years’ old or reaching their second transfer, 5% of the transfer fee is distributed to teams involved in the development of the player (ages 12 to 23). Trades may happen during summer (12-week window) and the winter (4-week window) that happens mid-season when teams may adjust their roster given injuries or performance. An additional aspect of European leagues is FIFA’s Article 17 that allows a player to break his contract at his will after two (older than 28) or three years for an amount well below the rescission clause. Trading in North American leagues is different. First, certain leagues such as the NFL do not guarantee the contract for its full duration, so the injury cost is on the players’ shoulders. This policy has led to front loaded contracts in the sense that the player gets a signing bonus in his first year that is then amortized over the term of the contract. Other leagues such as the MLB have guaranteed contracts. But the most significant difference is that trades in North American sports seldom involve the transfer of money (the almost exclusive exchange currency in Europe) but other players and draft picks. This policy is enforced at the league level that has to approve every trade. The non-money trades together with salary cap considerations often leads to complex trades in leagues such as the NBA where several players and draft picks are simultaneously traded. It is also common to have various transactions and more than two teams involved in making a trade happen. 3.4.4.3 Free Agency North American and European leagues use various types of contracts that structure the relationship between players and teams. A free agent is a player who is not under contract and can freely sign a contract with a team. In some cases, a player can become an unrestricted free agent within a few years (MLB) and in others they are not eligible until they are 27 years of age or have played at least 7 seasons (NHL). Some leagues are restrictive (NFL) while others are open (MLB). In the case of the MLB, a player becomes a free agent after six years in the league. When a free agent changes teams, the original team receives draft picks as compensation. Different rules apply to players in the minor leagues. In the case of the NFL, it recognizes two types of free agents (a) unrestricted who can sign with any team without the prior team demanding any sort of compensation, and (b) restricted free agents where the prior team has the right to match the player’s best offer. For the 2009 season, a player with 4 or more accrued seasons whose contract is set to expire is an unrestricted free agent, while a player with 3 accrued seasons is restricted.

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The NHL and the NBA have a similar distinction where the current team of a restricted free agent may make the player an offer improving his salary or matching what he gets from another team. If the player ends up moving, the original team gets compensation in draft picks. The contract of a restricted free agent has expired but does not meet the requirements to be an unrestricted free agent. In contrast, the European leagues treat free agents as unrestricted with the ability to sign with any team in any league. This rule applies to players older than 23. Until that age, a transfer fee has to be paid even if the contract has expired. This fee has a development cost rationale. 3.4.4.4 Talent Draft European soccer leagues do not have a draft system as North American leagues typically do. European teams compete against each other for talent all over the world. They are free to sign any player from any place in the world as long as they respect FIFA’s transfer regulations and register the player within the two periods to hire players into the squad set by the national association. The first period goes from the end of the season up until the beginning of the following one for a total of twelve weeks at most. The second period happens in the middle of the season and lasts for about four weeks. In North America, the entry draft is a vitally important aspect of success and player recruitment in the NBA and NHL, where the most 1st round draft picks become regular stars in the league and demand high salaries (up to the rookie salary cap) and effort from the teams to sign them. The NFL and MLB also have entry drafts although they are not as evidently successful in terms of predicting player success when drafted high (although high rookie salaries and high club risk in signing draft picks is a reality). North American player drafts are league-leveling competitive balance mechanisms. The draft regulates the way in which new players join the league. Players that want to come into the league because of their personal interest and meet the league requirements are listed for teams to choose. The league then establishes the order in which teams pick from the list. Teams that pick first can choose the most talented players coming into the league while teams coming later have less talent to choose from. The ordering of the draft is another balancing mechanism. Weaker teams are given first priority to choose in an effort to move talent into these teams. The draft can become so important that players’ transactions often include draft picks as part of the transaction. Although some players do enter the league by other methods (e.g., via minor league systems, walk-ons, etc.), the draft is the main way for a player to join the league. Once in the league, the player may move between teams following the transaction rules. Players coming into the league often have their salary restricted by a rookie salary cap. 3.4.4.5 Development Systems The feed of talent into the leagues differs across the Atlantic as well as within the North American leagues. European soccer leagues compete in a global market for talent that FIFA,

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the international football federation, regulates within the limits of labor laws.33 The talent reaches European leagues through two main routes. The first route is the team’s own talent development system. The most important teams in Europe invest significant resources in developing talent within their soccer schools. They have teams for children as young as eight years’ old. Scouts can identify talent in kids as young as twelve or thirteen years’ old. Promising kids are nurtured through the teams at different development leagues. This route is very attractive because those players that reach the main team through the development system take a position that otherwise would have to be filled with a player coming from another team and a transfer fee. However, labor laws in Europe do not allow a person that has not reached eighteen years of age to sign a contract. Thus, competition among teams to grab young talent has become more intense as players without a contract are free agents. Thus, a seventeen-yearold player can be taken from the development system of a team at no cost, often offering a contract to his parents to move to the location of the new team34. The original team has the right to a training compensation fee estimated based on the years the player has been at the club, the categories at which he played, and the ratio of players trained per professional player (FIFA, 2007). The second route to bring talent to European leagues is to purchase it from non-European countries; mostly from Latin America and Africa. Teams in these leagues make a significant percentage of their revenues from selling their most talented players to European leagues. For instance, 35% of Argentinean teams’ 2008 revenues came from transfers compared to 5% from ticketing and 19% from broadcasting rights. The transaction process is comparable to the one described in section 4.7 where the player has a rescission clause that the European team negotiates to hire the player. The transaction amount associated with the clause goes to the selling team.35 These two routes are intertwined. Scouts from European teams are spending more time in these developing countries to identify talent below the contracting age with the idea of bringing this talent within their development system earlier rather than later. Even if FIFA bans the transaction of players younger than eighteen years’ old into Europe, it has made exceptions. The case of Leo Messi in FC Barcelona is a case in point. He went to FC Barcelona’s development system when he was thirteen from Argentina. The argument for these transactions is that they give these youngsters opportunities to develop that they would otherwise miss. In North America, the system works differently. Following the entry draft (previous section), the player either makes the professional club and, if not, they are typically sent to a minor league club (or, in the case of hockey, back to their junior or college team) to continue their

33 It is not unusual for FIFA regulations to have to ‘accommodate’ country/trading block labor law. For instance, FIFA has been toying with the “6+5” rule where 6 of the players at the beginning of a game should be players eligible to play in the national team. The objective was to strengthen the national teams forcing teams from the country to have players getting exposure to top level competition. Yet, the rule goes against labor laws in Europe where workers with EU nationalities can work in any EU country without restrictions. 34 Transfer is granted if the transfer is for “non-soccer” related reasons. 35 As well as intermediaries, people that hold rights over the player’s transfers, and the player himself.

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development. They remain the property of the club during this period. This is the common route in MLB and NHL. However, the NFL does not have a strong development system although some players will play in other minor professional leagues like the Arena Football League or the Canadian Football League but neither of these are official or formal relationships with an NFL club. 3.4.4.6 Players’ Background and Career Path Young players follow different paths in each sport before becoming a member of a professional club via the entry draft or signing. The typical career paths in the various North American leagues are: • NBA – players are required to play one year of college minimum or in a European league. In the NCAA, this is often dubbed the “one and done”, as star players often enter the draft after one year. Prior to the ‘one and done’ rule, players could enter directly from high school (e.g., Kobe Bryant, Lebron James). As the percentage of players coming from outside the traditional North American college route increases, the European or Asian leagues route is becoming more common. While the North American route requires players to have a high school education and at least one year of college, the European or Asian routes do not require such an educational background • NFL – Three years minimum after high school is the rule and most players tend to play their entire college career before entering the draft. The objective is to force players to mature physically before entering a game that is fundamentally physical. • NHL – most players do not go the college route. They must be at least 17 years old on draft day and most come from the Canadian Junior Leagues (Ontario Hockey League, Quebec Major Junior Hockey League, Western Hockey League) or US High School Hockey or European Leagues, while some do come from college and the NCAA. • MLB – minor leagues, drafted young with intense scouting. Sometimes via college. Players tend to play multiple years in the minors before going to the MLB with very few exceptions. • European football (soccer) leagues – No rules on player backgrounds. European leagues have no rules on players’ background or career paths, resulting in comments on the weak educational background of some of the best players ever. Farm systems are starting to emphasize the educational side of kids much like sport as seen in the North American college system.

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3.5. Business Implications The previous section described important differences in the structuring of the business of sports in both sides of the Atlantic. The picture that emerges is a very different approach to sports management and industry structure. This difference is summarized in the idea of whether the argument of economic competitive balance leading to sporting balance leading to product attractiveness holds. This section moves from the descriptive nature of section 4 to the implications that structure has on the behavior of the various actors and the performance consequences of those behaviors. The arguments that are presented should be read as hypotheses rather than conclusions. Performance itself is a multi-dimensional concept. The 2008 crisis has put several European soccer clubs in significant financial trouble, yet players’ salaries in Europe have seen steep increases over the last ten years. Soccer is the most popular global sport in contrast to North American sports that in general are limited to a few regions or clearly behind soccer at the global level. From the perspective of “customers” and people practicing, soccer is ahead of the game. Thus, the multiple facets of sports make performance to be an elusive concept. Second, the differences are numerous as it has become evident in the previous section. The structures are path dependent and behave as systems with complementarities and dependencies that reinforce certain configurations. The hypothesis should be read more as summaries of the arguments rather than bivariate relationships. 3.5.1 Implications of Structure of Competition, Ownership and Governance Closed versus open leagues, single versus multiple competitions, unique versus diverse ownership structures of teams, the structure of decision rights between teams and leagues, globalization strategies, and the existence of fan clubs create industry structures that shape the behavior of the actors in the industry and their performance. The behaviors that emerge are the response to these various forces without a single one of them dominating. 3.5.1.1 Implications of Structure of Competition North American teams do not face relegation and managers can emphasize long term planning and economic viability. Furthermore, this closed league structure provides stronger incentives to cooperation than leagues with relegation. Without the threat of being demoted from the league, low sporting performance teams can focus their efforts to developing and improving the team over various seasons, often using league mechanisms such as draft picks. In Europe, the mindset of lower ranking European league clubs is to avoid demotion at any cost (due to the significant decreases in marketing and broadcast revenues associated). This threat emphasizes short term management and “betting the club” with costly hires mid-season to avoid relegation.36 Relegation together with a transaction window half way through the season, long-term player contracts, and no salary cap structure puts a lot of pressure on lower ranking teams to spend in an effort to avoid the economic damage associated with relegation. This behavior can be expensive from

36 If this “betting the club” move fails and the team is relegated, the economic troubles are compounded. Leeds United is one notable EPL example of a club that dropped from the EPL to the Championship and then to League 1.

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an economic perspective. If relegation is not avoided, these teams see their revenues drop dramatically while their cost structure drops much move slowly. The English Premier League uses TV parachute payments in an effort to ease this big disequilibrium in the income statement structure. However, other leagues do not do so. Closed leagues provide incentives for teams to cooperate to make the league viable and successful. The attractiveness of a particular team depends to a large extent on the success of the league as a whole. Closed leagues also insure that bad luck (or bad management) does not kick out the league flagship teams. Open leagues miss this collective view to a much larger extent as league success is not associated necessarily linked to team success. The cooperative behavior that closed league structures lead to have two opposing forces. On the one hand, it lowers internal competition that is often associated with less progress and innovation. On the other, it enhances collaboration to compete against other leagues. The profitability of North American leagues compared to their European counterparts favors the latter argument, while the worldwide fan base of soccer supports the former. Multiple competitions provide alternative sources of revenue to teams. However, most teams in national leagues do not participate in European competitions where a lot of value is distributed. The fact is that most teams compete in the round-robin league tournament and the knock-out national competition. However, the relevance of European competitions for top level clubs has moved the knock-out national competition to a role that is not always attractive for them from an economic perspective. Multiple competitions also put significant demands on the players of top level teams that may have to play twice as many games even if the roster is of equal size. The scheduling flexibility that North American leagues have is absent from European leagues where all teams play each other twice. The implication is that North American leagues can define calendars with attractive games if needed. The play off structure also offers the attractive feature of seeing the most competitive teams in a set of final games. 3.5.1.2 Implications of Ownership The homogeneity of ownership structures in North America facilitates the functioning of the leagues. Decisions are made with objectives common to businesses such as growth, margins, market share or value creation. While, certain owners may have other objectives such as being a public figure or winning, business objectives increasingly dominate decisions. This structural dimension interacts with more decision rights granted to the league where the business criteria of the majority of owners dominates any other criteria that particular owners may have. The behaviors implicit in this business mentality may explain the economic performance of North American teams. In contrast, European teams have diverse objectives. In addition to mixing for profit and non-for profit teams, within for profit teams certain owners value business criteria while others see their teams as pet projects and are willing to spend beyond reasonable business criteria to win. The behavior of extremely wealthy owners who want to win at almost any cost and with little if any 76 Public-Private Sector Research Center

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financial restrictions is quickly translated into the prices in the players’ market. This salary inflation puts additional pressure on the economics of other teams. Non-profit teams pursue objectives other than value creation. In addition to winning, they emphasize social aspects of sports (which sometimes are used as a way to enhance value creation to invest in winning). They invest in social projects that do not necessarily have economic returns. They do not require a return on their investments (other than breaking even). Moreover, their governance structure is different from that of an owner. While an owner is putting his or her own wealth at stake, the president of a non-for profit team is judged on various criteria such as winning or political clout with the economic criteria being just another (even minor) criterion. The figure is closer to a politician that to a businessperson. And the incentives are closer to the former who is willing to leverage the team if it provides him with power (usually through success on the field). A final aspect associated with ownership is the non-sports related business where the owner is willing to lose money in the team to facilitate business deals in other industries (typically in real estate). 3.5.1.3 Implications of Decision Rights Decision rights are an important management aspect in any organization and professional sports is no different. The North American model centralizes many decision rights at the league level. This solution has several advantages. First, coordination is easier. The league manages to enhance the overall value of the league rather than the interests of individual teams. The league enforces a level of cooperation that is absent when key decision rights are at the team level and additional organizations such as federations have some of the decision rights. This cooperation focuses the effort of the teams in executing an agreed plan rather than having each team focus its efforts on achieving individual objectives. Second, the league is a single entity when negotiating with players’ unions, televisions, or any other entity that wants to make business with the league. It presents a coherent and unique set of demands. This is in contrast to multiple negotiations happening when different objectives and interests are being pursued. Third, knowledge sharing is faster and more transparent when the league has more power. The cooperation imposed by the single entity facilitates sharing best practices. In contrast, dispersed decision rights reinforce the competitive view. Teams try to hide their best practices to gain advantage vis-à-vis other teams. When a team adopts a new practice (such as opening soccer schools in other countries) the practice is quickly copied even if its success is uncertain. Fourth, concentration of decision rights facilitates the hiring of management talent. Commissioners are often managers with deep top management experience. Their teams often have highly experienced and qualified managers. When decision rights are delegated to teams, the resources IESE Business School 77

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to hire talent divided among several dozen teams. Powerful teams have more access to management talent increasing the difference between weak and strong teams. Finally, delegation of decision rights has the advantage of experimentation. Each team is toying with different ideas much like in a market economy. Innovation and creativity are enhanced (at the cost of inefficiency). Concentration of power at the league level decreases experimentation but experiments are likely to be better designed. 3.5.1.4 Implications of Globalization Globalization strategies are an interesting aspect of league management. North American leagues have more decision power and can deploy a coordinated plan to go international. They also have the power to change the business rules to enhance international expansion if they believe that it is the best way to go. They coordinate their efforts to go to certain markets and they devote management talent that brings together the resources of all the teams to planning and executing their efforts. European football benefits from a lot more experimentation where each team tries different formulas that other teams quickly copy if successful (or if they might be successful). It also benefits from the effort of international federations (FIFA and UEFA) that have plenty of resources. These international federations (that also help more established sports such as basketball through FIBA) do not work with the benefit of professional teams in mind, yet they spread the sport worldwide creating the demand that later on these teams can pick up. 3.5.1.5 Implications of Fan Clubs Fan clubs are a way to monetize the passion of fans beyond merchandising, marketing and broadcasting revenues. Fans pay directly to the team as a way to show their commitment to, and passion for, the team in exchange for certain benefits. European teams are far ahead in monetizing this source of revenue than their North American counterparts. The challenge going forward is how to expand the number of fans who are also members of the team (and pay a yearly fee) especially for fans far from the team’s home city. The second challenge is how to segment these fans to extract differential rents depending on their willingness to contribute to the club. This segmentation will be based on traditional socio-economic and geographic factors but also on emotional factors vis-à-vis the club. Each segment will receive different benefits according to its profile. 3.5.2 Government and Federations The markedly different structures of the society vis-à-vis sports across the Atlantic have also implications for the behavior and resource allocation of sports’ actors. Federations have significant power in Europe with decisions that in North America are at the league level. Yet, federations have objective functions very different from those of leagues. Governments also have different views on sports. While North American governments see sports as just another industry, Europe sees it as part of society’s knitting and intervenes accordingly. These views are consistent

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with the role of sports in society. While in the US professional sports are a form of entertainment, in Europe they may even play political roles. 3.5.2.1 Implications of The Role of Federations Federations are organizations that mark a significant difference between North American and European professional leagues. They reflect the differing views on sports across the Atlantic. While professional sports have been accepted as part of the sporting landscape for more than a hundred years in North America, the amateur nature of sports has only recently been replaced in Europe with a professional interpretation. Federations were created to manage amateur sports with the main objective of spreading the practice of sport at all levels. UEFA and FIFA have power comparable to that of leagues in North America. They can ban players and teams from competing in soccer tournaments. They issue sporting and business rules that leagues and teams abide by. They oversee professional as well as amateur soccer. Yet they are non-profit organizations with the goal of spreading soccer around the world. These objectives set them apart from North American leagues that work exclusively for the teams. FIFA and UEFA often clash with professional teams which argue that they appropriate value they create and use their resources (players in national competitions) at a symbolic cost. These federations have to walk the fine line between satisfying teams (their main source of revenues), pursuing their objectives outside professional sports, and maintaining an authority granted by history. While federations’ investment in amateur sports might be interpreted as a diversion of resources away from the professionals who create it, this investment creates fans that otherwise might not exist to support professional soccer. The presence of federations adds to the complex European professional sports industry. The intersection of teams with business, sports, and social objectives with the behavior of federations designed to support amateur sports but ruling professional sports leads to performance that is necessarily evaluated in multiple dimensions. 3.5.2.2 Implications of the Role of the Government The role of government in North America is limited to the role of public funding. Some people see it as simply transferring tax money to professional sports owners. However, if professional sports events bring additional economic activity to a region, then this transfer provides benefits beyond the sports industry actors. An important debate in sports economics evolves around this question. The answer appears to be that additional economic activity happens when spectators come from out of town. The role of government in Europe is much more complex. The fact that most clubs have consistently being bailed out (through different mechanisms)37 creates a significant moral hazard

37 Few relevant teams have failed. Less relevant teams have failed more often and dropped to lower level leagues within the country as a restart.

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problem. Teams take additional risks knowing that they are “too popular to fail.” This role of government differs across countries with Germany being more careful about this kind of behavior while Spain and Italy tend to be more prone to it. Yet, it creates market dynamics where failure is not punished. This structural factor leads teams to behave in ways that are not fully aligned with those of regular market organizations. Governments also have broader agendas such as promoting the health and welfare of its citizens that they use as ways to collaborate with professional sports beyond the traditional role of a government in an industry. They may justify outlays for sport initiatives by attributing their effort to helping reduce obesity or to curb inner city crime. These government outlays may well be positive net-investment projects when the broader social benefits are taken in to account. 3.5.2.3 Implications of the Role of Professional Sports in Society The sociology of sports is very different across the Atlantic. Professional sports in North America are an industry. It is an industry that emotionally binds people to a larger extent than other consumer products, but an industry that has to compete in the market for entertainment against other sports and entertainment products. Professional sports in Europe and soccer in particular permeate society. They are entertainment but also a way to bind people around political and social concepts. Celebrations bring millions of people to the streets to see the players. This role beyond the mere entertainment means that sporting failure can quickly be interpreted as a political move against a certain group. This view enhances the “too popular to fail” view of sports. 3.5.3 Implications of Revenue Sources and Revenue Sharing Revenue sharing mechanisms have significant influence on the structure of professional leagues. Higher central revenues leverage the economic playing field that might translate into competitive balance and a more attractive product. Teams in less attractive markets get enough resources to be competitive. However, sharing mechanisms also generate incentives at the team level. Teams that see their revenues guaranteed might free ride on the effort of other teams. Other league rules are set to limit this behavior, yet the incentives are there. Competitive balance gives to teams in smaller markets, teams that have lower revenue potential, more options to win. 3.5.3.1 Implications of Broadcasting Rights Broadcasting rights reflect the differing views on the essence of competition. TV rights are equally shared among NFL teams with the objective of balancing the competition. At the other extreme, each team in La Liga sells its rights independently. The allocation method for the NFL enhances economic balance, while the allocation for La Liga feeds into dispersion, where richer teams have higher budgets making them even more competitive. Revenue sharing is one of the most relevant economic rules to ensure the sustainability of teams and the budgeting balance across teams (the other rules are associated with cost management). 80 Public-Private Sector Research Center

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Revenue sharing, with broadcasting being one of the most prominent ones has a significant impact on the revenue side at the team level. Equal sharing leads to teams with comparable economic strength that enhances the likelihood of competitive balance on the field. We argue that this equal sharing “props up” the weaker clubs who are mismanaged (see Figure 1). Equal sharing also reinforces the financial viability of the teams, giving teams a high certainty about a significant percentage of their revenues and therefore decreasing the variance of their revenues. Keeping revenues at the team level amplifies the virtuous and vicious circles that teams may get into. When a team happens to do well (either because of good management or luck), revenues quickly follow, providing the team with additional resources to buy additional talent, leading to more success. Conversely, when performance deteriorates, it translates into lower revenues and lower talent, reinforcing the negative loop. Another consequence is an incentive to focus on what is best for the team and not what might be best for the league. Short-term optimization of team revenues may weaken the league as a whole, compromising the long term attractiveness of the teams in the league. Finally, revenues at the team level mimic best the “perfect market” within the league. The Darwinian nature of economic competition exposes teams to the rewards and punishments of market forces as well as the creativity associated with competition. 3.5.3.2 Implications of Marketing, Merchandising and Sponsorship The implications of revenue sharing described for broadcasting rights are compounded when adding marketing, merchandising and sponsorship. The NFL again shares a sizable portion of these revenues equally among teams. For marketing and sponsorship, these revenues can occur at both the league level and the club level, where contracts at the league level are typically for larger amounts and are equally shared. Other North American leagues have some level of sharing. European leagues have little sharing. North American leagues have an interesting tension that is resolved through the power granted to the league. The league is run with the interest of each team equally weighted. If this equal sharing is strongly correlated with the overall value of the league, then the league’s view enhances value vis-à-vis other leagues. Yet, each team belongs to a different owner who has individual value creation as one of the relevant objectives. Teams in attractive markets will want to set rules where they keep most of the value that they generate and do not share it with teams in weaker markets. This tension between powerful teams keeping the value that they generate versus the league looking for the viability of all teams in the league and its overall value is resolved through decision rights. Those leagues with more decision rights also use revenue sharing mechanisms to enhance the competitive balance, while leagues with less decision rights have powerful teams that capture a significant piece of the value which leads to higher competitive dispersion. At one extreme is the NFL, while other North American leagues have weaker leagues. In Europe, the EPL is working towards a North American model starting to play somewhat with revenue sharing mechanisms while other leagues have little if any economic power to set rules. 3.5.3.3 Implications of Competitive Balance Taxes Competitive balance taxes are rarely found outside North American sports. Their objective is to subsidize those teams in smaller markets that cannot expect to reach the level of revenues that IESE Business School 81

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teams in big markets can achieve. However, these subsidies do not provide incentives for good management, in fact the opposite is often true which is counter to the typical thinking on revenuegeneration incentives. The subsidies come from “taxes” to the richest clubs and can take two different forms. First, is ‘revenue taxes’ where the clubs with the highest revenues are “taxed” and those tax dollars are shared. The second type of tax is ‘payroll tax’ where the clubs with the highest payrolls are taxed when they choose to spend beyond the various caps (league dependent). The rationale behind these taxes is to subsidize the small market clubs and provide league-wide economic viability, where each team in the league has the potential to generate an attractive product. A more level economic field does not necessarily lead to a league with all teams having an equal chance to win at the beginning of the season. Although they are not rewarded by the revenue incentive structures, differences in management quality and marginal revenues become more salient and may lead to certain teams dominating the sporting side during a few years. Yet, an economically balanced league is believed to lead to a more attractive average product where each game can be interesting. As noted, competitive balance taxes are an approach to provide resources to weaker teams in order for them to be competitive enough. Yet, they do not remove all the incentives to richer teams from being creative in generating additional revenues. In a more balanced revenue sharing model such as the NFL, the team that is able to come up with a new way to enhance revenues only gets 1/32 of centralized revenues. However, this encourages teams to focus their growth and revenue-generating efforts on local revenues which are not shared. 3.5.3.4 Implications of Other Revenue Sharing Mechanisms Revenue sharing mechanisms work to the same objective as previous revenue sharing mechanisms (sharing of broadcasting rights, marketing and merchandising and luxury taxes). Figure 1 is also a relevant illustration here. The objective of revenue sharing mechanisms is to subsidize weaker teams so that they have resources to field a competitive team to create an attractive product. European leagues are much less supportive of what has often been called a “socialist” system relying on much more of a Darwinian/capitalistic system. Behind this capitalistic approach to professional sport management, there is a dominance of a few teams per national league that meetin European competitions an a more level field. Being competitive at the European level requires an investment much larger than that needed to compete at the country level. 3.5.4 Implications of Labor Relations Factors Labor relations emphasize the objective of economic competitive balance in North America. They are also designed to guarantee to the largest extent possible the economic sustainability of the league and the teams within it. To do so, risk is shared with players through salary caps and wealth that players appropriate in Europe are transferred to teams in North America. The fact that the government does not bail out failed teams in North America might explain why strong player unions would accept this wealth transfer. This transfer helps league sustainability when alternative survival mechanisms are absent. 82 Public-Private Sector Research Center

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3.5.4.1 Implications of Players’ Salary Structure The salary structure has significant implications on the structure of the labor market and the distribution of rents. First, the existence of a strong players’ association that negotiate with the league establishes a contracting environment very different from that of individual players negotiating directly with teams. Because an association represents the majority of the workforce, it often allocates income from the best players to the less talented players through minimum salaries. Second, the existence of a salary cap limits the income that players can extract from the sport. Proponents of salary caps argue that this mechanism helps the long-term viability of the league. The argument being that it protects teams from overspending and putting teams at financial risk. The threat of relegation (and its economic implications) or the personal utility from winning may lead managers to take too many risk. In other words, salary caps protect teams from mismanagement (such as excessive risk-taking). However, protection from mismanagement is absent in most industries except certain cartels, an observation that highlights the “legal monopoly” status of North American teams. Third, salary caps within the context of other institutional arrangements such as revenue sharing and minimum salary expenses enhances the economic balance that, at least in North America is often equated with the attractiveness of the league. Fourth, salary caps are just another way for rich teams to subsidize weaker teams (much as the revenue sharing mechanisms). The cap limits the ability of rich teams to pay for talent and attract better players away from weaker teams. Salary caps have often been associated with economic viability of teams and the league itself in addition of providing a more balanced economic starting point. The former is an important argument that led the NHL to a season-long strike and constantly illustrated in European leagues when teams in the bottom half of the league which suffer relegation and often either run into significant economic troubles (and further relegated) or are bailed out by local or regional governments. 3.5.4.2 Implications of Players Transactions The main difference across the Atlantic is the absence of money as a relevant aspect in North American trades. This difference is viable because these are closed leagues where all teams are supposed to want a competitive team. European leagues are part of a world system under FIFA where teams in certain parts of the world (mainly Latin America and Africa) benefit greatly cashwise from transfer payments for players. A player-for-player transaction is of lower interest to them. The absence of money makes transactions more complex in that trades involved assets worth lump sums whether it is a draft pick or a player. It also precludes a strategy where a team would become a talent developer living off players’ development. Money trade would be a transfer within the league comparable to a revenue sharing mechanism.

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European leagues work almost exclusively through transfer payments. Contracts having to be honored, the existence of a rescission clause and FIFA’s Article 17 gives power to players who have proved their talent. While a high rescission clause may lock a certain player into a team, FIFA Article 17 gives the player power to force the team to negotiate if he feels that he can be more valuable in another team. 3.5.4.3 Implications of Free Agency The mechanisms of free agency are similar across leagues on both sides of the Atlantic once it kicks in. Players who become free agents can negotiate with any team without no restrictions. However, the mechanisms to achieve free agency are somewhat different. European leagues restrict free agency through the rescission clause and the term of the contract. This structure benefits players with negotiating power because of their performance on the pitch or their media power. These players can negotiate longer contracts that protect them against injury risk, a lower rescission clause that keeps them “on the market” and forces renegotiation as their value goes up (or a higher compensation if a large clause isolates them from the market). FIFA’s Article 17 gives the player additional bargaining power. Players with lower status may have to sign shorter contracts and absorb injury risk. The free agency structure in Europe provides strong incentives to perform earlier in the players’ sporting career with significant compensation and risk bearing pay-offs; however, the incentives associated with this mechanism quickly decrease once the player proves his talent and signs a long term contract. Free agency in North American sports is somewhat different in its objective. When a player joins the league, he is bound by significant restrictions in terms of the number of years he must remain with the team who drafted him (in addition to his maximum salary, if a rookie salary cap exists). But once this period expires, he automatically becomes a free agent. This period of restricted free agency supports weaker teams and may allow them to keep certain players (for a limited number of years) that they may not afford later on. 3.5.4.4 Implications of Talent Draft The coming of talent into the league is another significant difference across leagues. European leagues keep their competitive market design here also. As long as the player has no contract, any team is free to sign him. Because talent can be spotted as early as 12-year-old kids, the competition among teams to hire talent is moving down to younger kids. Rescission clauses and long contracts reinforce this trend where competition for talent is moving down to kids. The entry into North American leagues is highly regulated through the draft system. The draft system creates a market at a certain point during the year where teams and new players trade. This regulated market enforces certain rules such as minimum age or education requirements. These rules limit talented players from starting to earn earlier yet it protects them from early burn-out. But the main aspect of the draft system (together with trading restrictions during the early years) is to give weaker teams the option to field a competitive team. The draft system is a direct mechanism to balance players’ talent across the league (although no mechanisms exist to 84 Public-Private Sector Research Center

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balance talent at the sports and business management positions) in contrast to other mechanisms that work indirectly through the economic resources. 3.5.4.5 Implications of Development Systems European leagues rely on development systems to a larger extent, while North American teams rely on rules to join the league and the existence of career paths outside the league such as college sports (and European leagues for NBA and NHL). The development system in European leagues has two main purposes depending on the stature of the team. Top teams use their farm system as a way to reduce costs. They believe that their investment in several hundred kids to find a few top level players is profitable. Bringing up their own talent saves on transfer fees and for those players who are good but not good enough to make it in a top team, the transfer fee to mid-level teams still brings some revenue. However, the competition among top teams has moved to kids where teams hire the player’s parents to bring the kid into their farm system and away from a competitor. The team losing the kid has to decide to let him go or make a better offer to the parents. Fàbregas or Piqué were part of the FC Barcelona farm system and hired away into the farm systems of EPL teams (Piqué was later brought back to FC Barcelona for a substantial transfer fee). Mid-level teams (and teams in Latin America and Africa) use their farm systems as important sources of revenues. However, the hiring away of kids (through the hiring of parents) into the farm systems of top teams is becoming a challenge going forward (that FIFA is starting to regulate). Development systems in North America (NHL and MLB) are intended to give players the chance of playing if they are coming out of an injury or having sporting problems. The idea is to give flexibility to the teams in managing their resources. 3.5.4.6 Implications of Players’ Background and Career Path The rules in North American leagues (NFL and NBA mainly) put some demands on the age and the educational background of their players. While this education is not a guarantee of good behavior or smart life decisions, they give players the chance to get an education. European teams (there is little legislation at the federation or league level) are only now starting to consider education as an important aspect of their deal with the sport. But in this case is not done out of league requirements but corporate social responsibility. The existence of certain requirements imposes restrictions on players who have to wait until they have met the criteria before they start getting rents out of their talent. These requirements also work against the teams in that they limit their access to talent. However, they are intended to support the long term viability of the league avoiding burning out talent if they are demanded top level performance at too young age. In Europe this decision is delegated to the individual player and the team which has to discipline itself to sacrifice short-term demands on talent to protect its growth.

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3.6. Conclusions North America and European soccer leagues are among the most professionalized sports around the world. Yet, their business structure differs in a large number of dimensions. These differences come from the path that these sports have followed over their history. The concept of sport as an amateur activity structured around federations contrasts with the view of sports as a profession that has been accepted in North America for several decades. The differences also come from the distinct role that sport plays in society. While in Europe, soccer has often been a vehicle to reflect social identities from political to local identities, in North America professional sport has been seen more as an alternative entertainment product. These differences have relevant consequences to value creation, value appropriation and the interplay between these two forces. Sports in North America are an alternative and very successful form of entertainment. While fans may be very engaged with their team and emotionally attached to it, in a relative sense, sport is less of a social movement than in Europe. Figure 3 provides an illustration of a potential reason why North American professional sport is often viewed critically by European sport managers who tend to describe its structure as overly socialist. Figure 3 classifies teams into four quadrants according to their revenue (high/low) and the attractiveness of their local market (high/low). The four resulting quadrants show how league collective bargaining agreements (and their revenue sharing mechanisms) are typically established with what could be viewed as a socialist lens as motivating incentives (from a revenue perspective) for effective club management are not in place. There are teams with low market attractiveness that even if their management is excellent they have limited revenue upside (top right quadrant). At the other extreme, there are teams in attractive markets that do not perform as well as they should but keep on surviving because of the socialist approach to league management (bottom right). There are teams with low market potential and low revenue compared to their possibilities that also survive supported by the socialist system (bottom left). Finally, there are the star clubs in attractive markets and well managed which do not capture all the value they created (top right). The paper describes and analyzes these differences. The conclusion that emerges is business models that differ to a large extent with different actors in the industry benefiting or losing from the current structure. The attractiveness of each model depends very much from the perspective that is taken, whether it is overall value creation, the owners’ point of view, the players’ interests or some broader social welfare.

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Figure 1. Club Revenue Differentials by Sporting League $450

Manchester United

$400

Washington Redskins

$350

New York Yankees

$300

Los Angeles Lakers Toronto Maple Leafs

$250 $200 $150 $100

Los Angeles Galaxy

$50 $0

1

5

9

EPL

13

MLB

17

NFL

21

NHL

25

NBA

29

MLS

Revenues by Club : • • • • • • •

EPL = English Premier League MLB = Major League Baseball NFL = National Football League NBA = National Basketball Association NHL = National Hockey League NBA = National Basketball Association MLS = Major League Soccer

*2008 or 2009 Data (Forbes or Deloitte) - presented in US$

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Figure 2. Revenue mix across sports $6,000

Other Sponsorship Merchandise Concessions & Parking Luxury Suites Ticket Gate - Central Ticket Gate - Local Local Media Rights National Media Rights

$5,330

$5,000 $4,269

$4,000 $2,932

$3,000

$2,336

$2,238

EPL

NHL

$2,000 $1,000 $0

NFL

MLB

NBA

Sources: NFL: Total revenues for 2002-2004 season from 1/27/2005 issue of Forbes. Central Revenue percentage from EPLAnnual Report. MLB NFL NHL NBA MLS Green Bay Packes 2004 MLB: Total revenues for 2004 season from 4/2005 issue of Forbes. Percentages based on team by-team revenue and expense forecasts for the 2001 season in the Congressional disclousure as reported by USA Today on 12/2001. NBA: Total revenues for 2003/2004 season from 2/16/2004 issue of Forbes. Estimated breakdown of revenuesources. EPL: Revenues and revenue percentages from Debiitte & Touche 2002-2003 Annual Review of Football Finance. NHL: Total revenues for 2003/2004 season from 11/29/2004 issue of Forbes. Revenue percentage from 2003 Levitt Report.

Figure 3. North American Professional Sport Club Management Competency

Low

High

High

Penalty for Good Management Performance

Large Penalty for Good Management Performance

Low

Revenue Generation

Attractiveness of Local Market

Subsidized for Poor Management Performance and Small Market

Subsidized for Management Incompetence

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Table 1. EPL TV revenue sharing CLUB

‘07-08

‘06-07

Manchester United

US$96.4M

US$62.5M

Chelsea

US$89.1M

US$60.4M

Arsenal

US$91.5M

US$56.7M

Liverpool

US$88.7M

US$55.5M

Everton

US$82.3M

US$49.5M

Aston Villa

US$82.7M

US$43.0M

Blackburn

US$78.6M

US$43.0M

Portsmouth

US$79.0M

US$45.0M

Manchester City

US$77.6M

US$41.1M

West Ham United

US$72.0M

US$41.3M

Tottenham Hotspur

US$70.4M

US$53.4M

Newcastle

US$76.7M

US$41.5M

Middlesbrough

US$66.9M

US$40.1M

Wigan

US$65.3M

US$36.0M

Sunderland

US$65.8M

US$12.7M*

Bolton

US$62.6M

US$48.1M

Fulham

US$61.3M

US$39.9M

Reading

US$59.9M

US$46.2M

Birmingham

US$58.3M

US$12.7M*

Derby County

US$57.0M

---

EPL TOTALS

US$1.6B

US$983.5M

NOTES: * = denotes parachute payment for clubs promoted from the Coca-Cola Championship. Total payout to the 20 EPL clubs, excluding parachute payments, was US$1.5B, up from US$907.3M in ‘06-07. Source: Sports Business Daily (http://www.sportsbusinessdaily.com/article/120914)

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Table 2. Budget of European football leagues La Liga (€)

English Premier League (£)

Real Madrid

345

Manchester United

167

Barcelona

315

Chelsea

152

Valencia

139

Arsenal

133

Atlético de Madrid

138

Liverpool

122

Sevilla

90

Newcastle

83

Villarreal

68

Tottenham Hotspur

74

Deportivo de la Coruña

65

Manchester City

62

Athletic de Bilbao

53

West Ham

60

Espanyol

45

Everton

58

Racing de Santander

33

Bolton Wanderers

54

Mallorca

30

Aston Villa

49

Osasuna

29

Blackburn Rovers

43

Almería

23

Charlton Athletic

42

Getafe

18

Birmingham City

40

Valladolid

18

Sunderland

39

Málaga

14

Fulham

37

Sporting de Gijón

12

West Bromwich

35

Wigan Athletic

35

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Table 2 (continued) Ligue 1 (€)

Bundesliga (€)

Lyon

200

Bayern München

287

Marseille

80

Schalke04

150

Paris SG

75

Hamburger SV

138

Bordeaux

60

VfB Stuttgart

132

Monaco

55

Werder Bremen

112

Lens

50

Borussia Dortmund

107

Saint-Etienne

50

Hertha BSC Berlin

78

Lille

47

Bayern Leverkusen

75

Rennes

45

VfL Wolfsburg

75

Sochaux

40

Eintracht Frankfurt

66

Toulouse

40

FC Nüremberg

61

Auxerre

35

Hannover 96

50

Nancy

30

MSV Duisburg

40

Caen

28

VfL Bochum

38

Strasbourg

28

Arminia Bielefeld

33

Nice

27

Karlsruher SC

30

Valenciennes

25

Hansa Rostock

30

24.5

Energie Cottbus

25

Le Mans Metz

24

Bretagne

23

08-09 data for La Liga, 05-06 data for EPL, 07-08 for Ligue 1, 07-08 Bundesliga Sources: Deloitte Football Finance, La Ligue, LFP, German Money League.

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Table 3. Examples of Expansion and Relocation38 in North American Leagues Recent Expansions NFL

MLB

NHL

NBA

1995

Carolina

1993

Florida

1998

Nashville

1989

Minnesota

1995

Jacksonville

1993

Colorado

1999

Atlanta

1989

Orlando

1999

Cleveland

1998

Arizona

2000

Columbus

1995

Toronto

2002

Houston

1998

Tampa Bay

2000

Minnesota

1995

Vancouver

2004

Charlotte

Recent Relocations MLB • 1970: Seattle Pilots to Milwaukee (Brewers). • 1972: Washington Senators to Arlington (Texas Rangers). • 2005: Montreal Expos to Washington, D.C. (Washington Nationals). NFL • 1982: Oakland Raiders to Los Angeles. • 1984: Baltimore Colts to Indianapolis. • 1988: St. Louis Cardinals to Phoenix. • 1995: Los Angeles Raiders to Oakland. • 1995: Los Angeles Rams to St. Louis. • 1996: Cleveland Browns to Baltimore (Ravens). • 1997: Houston Oilers to Memphis (Tennessee Oilers, then Titans). NBA • 1971: San Diego Rockets to Houston. • 1972: Cincinnati Royals to Kansas CityOmaha (Kings). • 1977: New York Nets to New Jersey. • 1978: Buffalo Braves to San Diego (Clippers).

• • • • • •

1979: New Orleans Jazz to Salt Lake City. 1984: San Diego Clippers to Los Angeles. 1985: Kansas City Kings to Sacramento. 2001: Vancouver Grizzlies to Memphis. 2002: Charlotte Hornets to New Orleans. 2008: Seattle SuperSonics to Oklahoma City (Thunder).

NHL • 1976: California Golden Seals to Cleveland (Barons). • 1976: Kansas City Scouts to Denver (Colorado Rockies). • 1980: Atlanta Flames to Calgary. • 1982: Colorado Rockies to East Rutherford (New Jersey Devils). • 1993: Minnesota North Stars to Dallas (Stars). • 1995: Quebec Nordiques to Denver (Colorado Avalanche). • 1996: Winnipeg Jets to Phoenix (Coyotes). • 1997: Hartford Whalers to Raleigh, North Carolina (Carolina Hurricanes).

38 Note that relocations rarely occur in European cities due to the concept of relegation, where a team or city that declines results in the club dropping to a lower league but still remaining in that city.

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Table 4. Green Bay Packers’ income statement GREEN BAY PACKERS STATEMENTS OF INCOME Fiscal Year Ended March: US$Millions 2005/2006

2006/2007

2007/2008

OPERATING INCOME National revenue Television

87,334

84,658

87,584

Road Games

12,919

14,123

15,138

Other NFL Revenue

15,073

26,092

32,853

115,328

124,874

135,576

Home Games (net)

28,451

28,996

30,889

Private Box (suite) income

11,289

11,778

12,059

Sales and Maketing Revenue

Total National Revenue Local Revenue

41,446

40,710

50,256

Local Media

4,053

4,278

4,463

Concessions & Parking (net)

5,052

5,574

5,495

Other

2,790

1,859

2,593

Total Local Revenue

93.083

93,198

105,758

208,411

218,073

241,335

102,868

110,690

124,651

Team Expenses

33,674

17,710

26,459

Sales and Marketing Expenses

21,353

20,739

26,008

Operations/Maintenance (net)

6,309

7,222

7,567

23,274

27,464

35,227

Total Operating Income OPERATING EXPENSES Player Costs

General + Admin Expenses Total Operating Expenses

184,481

183,827

219,915

Profits from operations

20,930

34,246

21,420

Other income (Expense)

8,100

6,150

14,369

Income Before Provision For Income Taxes

29,031

40,396

35,789

Provision for Income Taxes

11,000

18,400

12,425

Net Income

18,031

21,996

23,364

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Table 5. NBA payroll per team – 2008/2009 Season Team

Payroll

1. New York Knicks

US$96,643,646

2. Dallas Mavericks

US$94,830,398

3. Cleveland Cavaliers

US$90,833,539

4. Portland Trailblazers

US$79,887,114

5. Boston Celtics

US$79,188,973

6. Los Angeles Lakers

US$78,245,793

7. Phoenix Suns

US$76,001,311

8. Toronto Raptors

US$73,197,890

9. Houston Rockets

US$72,981,100

10. Milwaukee Bucks

US$71,088,614

11. Detroit Pistons

US$71,084,287

12. Washington Wizards

US$70,542,500

13. Miami Heat

US$69,952,802

14. Indiana Pacers

US$69,668,818

15. Orlando Magic

US$69,672,979

16. Denver Nuggets

US$69,422,003

17. Sacramento Kings

US$68,739,818

18. Oklahoma City Thunder

US$68,341,605

19. Atlanta Hawks

US$68,168,841

20. San Antonio Spurs

US$67,993,153

21. Chicago Bulls

US$67,705,816

22. Golden State Warriors

US$67,416,431

23. Philadelphia 76ers

US$67,242,522

24. New Orleans Hornets

US$66,842,294

25. Minnesota Timberwolves

US$65,980,450

26. Utah Jazz

US$65,841,407

27. New Jersey Nets

US$62,666,523

28. Charlotte Bobcats

US$62,507,774

29. Los Angeles Clippers

US$62,174,296

30. Memphis Grizzlies

US$55,093,507

Source: http://www.eskimo.com/~pbender/index.html

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3.7 References Andreff, W. and S. Szymanski, Handbook on the Economics of Sport (2006) Edward Elgar Publishering, Cheltenham, UK. Baade, R.A., Professional Sports as Catalysts for Metropolitan Economic Development, Journal of Urban Affairs, 18, (2008), 1, 1 – 17. CNN WorldBlog (2009). English Premier League International, posted October 8th, 2009 at http://worldsport.blogs.cnn.com/2009/10/08/english-premier-league-international. Cousens, L., & Slack, T., Field-level change: the case of North American major league professional sport, Journal of Sport Management, 19(1), January 2005. El-Hodiri, M. & Quirk, J., An Economic Model of a Professional Sports League, Journal of Political Economy, 79(6), (1971), 1302-1319. Ferguson, D. G., Stewart, K., Jones, J. C. H., & Le Dressay, A. (1991). The pricing of sports events: Do teams maximize profit? The Journal of Industrial Economics, 29(3), 297-310. Forbes (2009). Rankings of Professional Sport Clubs, downloaded from www.forbes.com/lists on September 10th, 2009. Fort, R. & Quirk, J., Cross-Subsidization, Incentives and Outcomes in Professional Team Sports Leagues, Journal of Economic Literature, 33, (1995), 1265-1299. Fort, R. & Quirk, J., Owner Objectives and Competitive Balance, Journal of Sports Economics, 5, (2004), 20-32. Gladden, J.M. & Funk, D.C., Brand associations in team sport: empirical evidence from consumers of professional sport, Journal of Sport Management, 2002. Humphreys, B., Alternative Measures of CB in Sports Leagues, Journal of Sports Economics, 3(2) (2002), 133-158. Brad Humphreys & Jane Ruseski, 2008. “The Size and Scope of the Sports Industry in the United States,” IASE Conference Papers 0833, International Association of Sports Economists. Jones, J. C. H. (1969). The economics of the National Hockey League. Canadian Journal of Economics, 2(1), 1-20. Levin, R. C., Mitchell, G. J.,Volcker, P. A.,&Will, G. F. (2000). The report of the Independent IESE Business School 95

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Members of the Commissioner’s Blue Ribbon Panel on baseball economics. New York: Major League Baseball. Mason, D., What is the sports product and who buys it? The marketing of professional sports leagues, European Journal of Marketing, 33,3/4, (1999), 402-418. McKinsey (2004). “Playing to win in the business of sports”, McKinsey Quarterly, June. Mullin, Hardy and Sutton (2000), Sport Marketing, 2nd Edition – will be available at the University Bookstore. Nadeau, J. & O’Reilly, N., Developing a Profitability Model for Professional Sport Leagues: The Case of the National Hockey League, International Journal of Sport Finance, 1(1), (2006). Noll, R. G. (1974). Alternatives in sports policy. In R. G. Noll (Ed.), Government and the sports business. Washington: Brookings Institute, 1974, p. 411-428. O’Reilly, N. & Nadeau, J. Revenue Generation in Professional Sport: A Diagnostic Analysis, International Journal of Sport Management and Marketing, 1(4), (2006). O’Reilly, N., Kaplan, A., Rahinel, R., and Nadeau, J. (2008). “If You Can’t Win, Why Should I Buy a Ticket?: Hope, Fan Welfare, and Competitive Balance”, International Journal of Sport Finance, 3(2), 106-118. O’Reilly, N. & Seguin, B. (2009). Sport Marketing: A Canadian Perspective, Thomson Nelson Publishing, Toronto, Ontario Nadeau, J. Revenue Generation in Professional Sport: A Diagnostic Analysis, International Journal of Sport Management and Marketing, 1(4), (2006). NASSM (2009). Sport Management Programs. Downloaded on Nov 5th, 2009 from http://www. nassm.com/InfoAbout/SportMgmtPrograms. NPD Group (2009). Global Sports Market Estimate. Research Publication. Rascher, D.A., & Rascher, H., NBA expansion and relocation: a viability study of various cities, Journal of Sport Management, 2004, 18, 274-295 Resnikoff, A. (2008). “The Impact of Relegation Risk on Valuations in the English Premier League”, Stanford University Research Study, Winter. Rosen, S. & Sanderson, A., Labour Markets in Professional Sports, The Economic Journal, 111, 469, (Feb., 2001), F47-F68. 96 Public-Private Sector Research Center

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Sanderson, A. & Siegfried, J., Thinking about CB, Journal of Sports Economics, 4(4), (2003), 255-279. Siegfried, J. J., & Eisenberg, J. D. (1980). The demand for minor league baseball. Atlantic Economic Journal, 8, 59-66. Sloane, P. J. (1971). The economics of professional football: The football club as a utility maximiser. Scottish Journal of Political Economy, 18(2), 121-46. Sports Business Journal (2008). “Tours produce 9% rise in revenue”, Published May 12, 2008 : Page 06. SportsPro (2009). “American sports’ biggest earners”, Henley Media Group, London, UK, September Issue, 24-27. Stark, J. (2002) Brewers, Pirates Gain Most Under Revenue-Sharing Plan, www.espn.com/ baseball (retrieved 9 September 2004).Zimbalist, A. CB in Sports Leagues, An Introduction, Journal of Sports Economics, 3, (2002), 111-121.

3.8 Discussion by Michelle Centenaro (European Club Association) and Stefan Kesenne (University of Antwerpen) Michele Centenaro The paper by Antonio Dávila, George Foster and Norm O’Reilly is a very comprehensive study that covers the main differences between the European and North American leagues. But I wonder why, in Europe, you only scrutinized football. I know that football is the top league, the main league, but I think there are also examples and interesting initiatives in other sports, like basketball, rugby or even Formula 1, because of recent developments in terms of competitive balance. They might also give a different perspective to the European picture. Descriptive reporting has the advantage and the beauty of providing data that can make comparisons and draw some conclusions. Mine are dictated by experience, even if they might seem naïve or simple. The two approaches - the two methods - have big differences. There is no doubt about that. The reason is genetics. I apologize if I misuse the word. I mean that it is going to be very difficult for these approaches to change. Like genetics, you are the way you are. And it was interesting to listen to Professor Szymanski mentioning the fact that we believe that Europe is trying to copy the United States. If this is true, we have to ask why we do not have a European superleague and why we do not apply salary caps. I think that, in the United States, they are also trying to copy Europe. And this is something new that I did not know, so it is quite interesting. I think it has positive and negative aspects. IESE Business School 97

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The first genetic difference is really the essence of the idea of sport and how sport –particularly with reference to football – is really innate in Europe. I believe it is part of our genes, it is part of our blood. But this historical and social role, the cultural background, makes a huge difference. I could also see a difference in the speeches by professor Dávila, Foster and O’Reilly. They use different words – more business-professional on the European side and more sports-oriented on the other side. The concept of promotion and relegation in sports is a fundamental pillar that we will discuss later on. The fact that the league is open changes the whole thing. The other element is the role of the competitive balance. There is also the concept of pyramids and solidarity across all levels. The European pyramid of football goes from the base to the top and it is all linked. In the United States, the pyramid starts, but at some point it breaks. Then you have the professional leagues. It also relates to the fact that football is probably one of the most widely practiced sports in the United States at youth level, and up to a certain level. And then players have a harder time going professional. So this link, which is dictated by this pyramid and solidarity system, this idea that when somebody gives you something, you give something back in return is very important and constitutes a really a big difference compared to the American system. Finally, the nature and objective of football clubs as opposed to the American situation: for an American club owner, the main objective is to do business, not to lose money, to be profitable. And then of course, sometimes for a club and often for a football club, it is more important to win. The clubs want to win. Even the bottom club in the league thinks about it. There is also another physical difference. The United States is one country and Europe is made up of 53 countries if you think in football terms or 27 if you think in terms of the European Union. And so there are 27 or 53 different brains, and every brain has its own taxes and laws and systems. How can you drag them all together? It is really difficult. That is why clubs play for many objectives in the season, with the added importance of domestic competitions. There are domestic values, there is the championship, there is the cup, there is the qualification to play in Europe and, at the same time, players play in Europe at another level. Some clubs, like FC Barcelona, also play the FIFA club world championship. So there was one point in the paper I couldn’t fully agree with: when the authors say that the role of player representation is more influential in North America than in Europe. It may seem so, but in my opinion, the situation in Europe is the way it is as a result of the Bosman ruling. I think that, recently, there has been a shift from the power of clubs to the power of players. The best example is Article 17 of the FIFA regulations. I would not only say players, I would also say agents - even more so. Eventually, I would like to make a point on competitive balance and financial imbalance. In a study carried out by UEFA in late 2007 and early 2008, while I was working there to decide on what the future format of the European competitions should be, we compared domestic TV revenue, commercial revenue and Champions League revenue with UEFA Cup revenue. We took 12 different markets from large to small, and divided the clubs into tier 1, tier 2 and tier 98 Public-Private Sector Research Center

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3, depending on the level of income they obtained every year. It is not difficult to guess which teams we were looking at in terms of spending power. We see that the role of TV revenue for the tier-1 clubs and the role of Champions League contribution is rather limited compared to the role of what we called here, “other commercial revenue”, which means sponsorship and merchandising, - basically everything that has to do with the power and the strength of the brand, like big football clubs. This also means that the so-called fan bases really make a big difference in revenue collecting between big, medium and small clubs. Big clubs have a huge fan base and that is also the reason why they work much more than they do in the United States in terms of exploiting and developing their brand, because the larger the fan bases are, the more they can sell to their sponsors and association. The difference between the United States and Europe is that clubs sell to sponsors their association with the image of the club as a brand. In Europe, how can you sell an association with the image of a league? What does a league mean? Another difference between the two models is that, whereas in the United States the commercial rights are sold collectively, this is not the case in Europe. And this is what causes a huge rebound in terms of the so-called competitive imbalance. As a very last and controversial remark, I would say that, in the United States, they need unpredictability desperately because it is a closed league. Europe, on the other hand, is an open league, so clubs play for at least three different objectives. There are the groups that play to win, the groups that play for Europe and the groups that play to avoid relegation. The importance of big clubs, as highlighted by Professor Seabright, attracts a lot of attention. You need the big superstars, who are also good for the small ones, because they bring business to this sport. In conclusion, there are huge differences between the American and the European systems and I would say their very nature would make it very difficult to change them in their own territory. Stefan Késenne In the paper, the authors present a very extensive overview of the important differences in management structure between the four major leagues in North America and four rich national leagues in Europe – England, Spain, Germany and France. My first question is why France and why not Italy? The Italian league is more important than the French league in terms of money. Then the authors distinguish between no less than 15 institutional arrangements that are shaping the business landscape. Of course, I will only concentrate on a few factors in my comments. First of all, I want to draw attention to the very peculiar international dimension of European football. The European football industry, with its many national football leagues, is characterized by an open European player market but by nationally protected football product markets. This is very important from an economic point of view. When the European Union was established, we first liberalized the product market, but the labor market was still relatively closed because of all kinds of cultural and language barriers. In sports, we did the opposite, and this led to huge imbalances in European football. Since the Bosman ruling in 1995, all the best players run off to rich football countries. And this is quite understandable because a team like Ajax, for instance (it is a pity that Johan Cruyff is no longer there), was a former European top cup-winning team. IESE Business School 99

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This is not the case anymore because Ajax cannot compete with Manchester United or FC Barcelona or Real Madrid, because they are playing in the very rich domestic league, whereas Ajax has to play in its own small Dutch league. So Ajax could not play in the premier league even if it wanted to. So this national product market is still protected, whereas the player market is open. And from an economic point of view, this is a very strange situation. We also observe very large and growing gaps between budgets, which already existed before the Bosman verdict because of the huge booming TV rights. Ajax and Anderlecht are good examples of that. Anderlecht is nowhere in Europe anymore - just a very weak team. They won a European cup in the past, but now that is no longer possible. How can they compete with Manchester for players if they cannot play in the same product market as Manchester? One possible solution, although we still think that Europe is maybe not right for it, is to also open the European football product market - not only the player market, but also the product market - by creating a European superleague, or several European divisions on top of the national divisions. Then the championship, the champions of the national competitions should leave the national competition and only play in the European league. Some people say we already have the European Champions League. But the Champions League is only making things worse because it is adding to the growing imbalance in Europe. We just have to look at the price system in Europe in the Champions League. If Anderlecht wins the European Champions League, which is a probability tending toward zero, it will earn less money than Manchester United if they win the Champions League. This is because the prize money is based on the size of the domestic league and the amount of TV money they can raise. So this European Champions League is also creating huge imbalances within the national leagues because Anderlecht or Club Brugge in Belgium can make it to the Champions League. Then they make a lot of money even if they do not win one game, they can increase their budget by between 10% and 20%, and then they come back, they take that money back home. And then they have to play against other teams with small budgets. For instance, the smallest team in the Belgian first division has a budget of €3 million. Anderlecht has a budget of €40 million, which is nothing compared to FC Barcelona, which is more than 10 times the budget of the smallest team in the first division. So this situation has also been made worse by the European Champions League. There are some data that show what is going on. We just need to have a look at the ratio of the average budgets of the large and small countries. I compared England and the Netherlands, Germany and the Netherlands and Belgium. So in 1995, England’s average team budget was 3.8 times as large as the average budget for Dutch teams. In 2002 and 2003, it was already 7.6 times as large. If we compare England with Belgium, the change has been from 7 to 15. For Germany and Holland, it was from 2.8 to 4.7; and for Germany and Belgium, from 5.4 to 9.2. If we then compare the big leagues, England and Germany, there has hardly been any change (from 1.3 to 1.6). Holland and Belgium, two small countries, go from 1.9 to 2.7, so no large changes there. Another table that shows what is going on is one that lists the teams that made it to the semifinals of the European Champions League. If you look at the Big 4, i.e., England, Germany, Italy and Spain, between 1994 and 1998, those that made it to the semifinal of the Champions League were only 55% of all teams, whereas between 1999 and 2003, the Big 4 teams were 95% of the 100 Public-Private Sector Research Center

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teams making it to the semifinals. So we can see what is going on. Another point to take into account is that the players leave the country. Even France, which is the fifth league in Europe, is not able to keep players in their national clubs. It is evident that there is a clear break in 1995, the year of the Bosman verdict, which saw an increase in the number of French players that played in the Big 4. As for competitive balance, I would like to point out that the budget gaps and the competitive imbalance in European football are more pronounced than in U.S. major leagues, as stated by the authors. Maybe it is also caused by the difference in the clubs’ objectives: profit maximization versus win maximization. In a win-maximizing league there is more imbalance than in a profitmaximizing league. So the question is whether sports clubs are profit or win maximizers. So far, this is an unanswered question because all the tests that I know of are based on the ticket-pricing rule. This ticket-pricing rule is exactly the same under both the profit-maximization and the winmaximization hypothesis, so this test cannot distinguish the two objectives. Therefore, there is now more doubt in the United States as to whether or not teams are profit maximizers. More and more experts also think that American teams are more win maximizers than profit maximizers. Ticket prices are higher in the win-maximizing leagues than the profit-maximizing leagues and this might also justify imposing a maximum ticket price, because these teams are, in most cases, local monopolists, so they can set ticket prices. On top of that, win-maximizing teams will set higher prices than profit-maximizing teams, even if the pricing rule is exactly the same. The NFL is probably the best example of revenue sharing. But then it has been shown in the literature that under the profit-maximizing hypothesis, we cannot expect any positive effects on competitive balance of gate revenue sharing. Whereas, in the NFL, you have a 60% to 40% revenue share for the home and visiting team, respectively, provided these teams are profit maximizers. Then, depending on the model that you use, it has no impact on the competitive balance, as Simon Rottenberg’s balance proposition shows; nor even a negative effect on competitive balance, as Stefan Szymanksi and I have stated. You can show that, in the win-maximizing hypothesis, revenue sharing improved competitive balance, but not under profit maximization. As for the sale and distribution of broadcast rights, it has been shown that performance-based sharing of rights is the best guarantee for improving competitive balance. I also think that there is a widespread misunderstanding that it is necessary to monopolize the sale of TV rights in order to share the rights. You can still share the rights even if they are sold individually. So you should not link the two. The sharing is the important factor, not the way they are sold. Moreover, I think it is important to mention that several court cases in Europe, one in the Netherlands and one in Germany, at least, have concluded that the legal owner of the TV rights are the clubs, not the league. So, in fact, the clubs have the right to keep the television rights to themselves and sell them individually. They cannot be forced to hand over their rights to the league. Regarding salary caps, the NBA model, which applies the same maximum payroll to every team, seems to improve the competitive balance, as has been shown in theory, although there are problems with enforcement. On the other hand, the G-14 type of salary cap, proposed by the association of the 18 most successful clubs in European football, did not mean a better competitive IESE Business School 101

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balance in either the profit-maximization hypothesis or the win-maximization hypothesis. The reason is that this gentlemen’s agreement was not meant to improve the competitive balance; it was meant to guarantee the financial health of the clubs because their ratios were becoming excessive - even exceeding 100%, as shown in the case of FC Barcelona. The authors point out that the budget ratio between the richest team and the poorest team in European football is more than 10, while in the U.S. major leagues, it is more than 2. The question, then, is whether there is an optimal competitive balance somewhere. What are the determinants of competitive balance? If we do a simple exercise with only three groups of spectators in a two-team league, where there are supporters of the large mock team X, supporters of the small mock team Y, and the more neutral supporters who do not care who is winning, we see that the winning percentage of the strong team should be only twice the winning percentage of the small team. Also, the larger the group of neutral TV spectators, the more balanced the competition should be. Therefore, attention must be paid when allowing too large differences in winning percentages, because they are certainly not optimal from a welfare point of view.

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Marc Lavoie Professeur titulaire Département de science économique et Centre de recherche sur le sport dans la société canadienne Université d’Ottawa Janvier 2003

Faut-il transposer à l’Europe les instruments de régulation du sport professionnel nordaméricain ? Workshop de Brive, La régulation du marché du travail sportif professionnel après l’arrêt Bosman: approche socio-économique 6-7 février 2003

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Faut-il transposer à l’Europe les instruments de régulation du sport professionnel nord-américain ?

Introduction Le phénomène de la mondialisation, en tout cas une certaine forme de mondialisation, semble affecter tous les domaines, y compris le domaine sportif. De fait, ce qu’on appelle mondialisation ressemble souvent davantage à un phénomène d’américanisation ou d’anglicisation. Ce qui est bon pour les États-Unis ou les pays anglosaxons serait bon pour l’Europe ou pour le reste du monde. Dans le domaine sportif, certains économistes pensent que le système sportif européen actuel, construit sur le principe des ligues ouvertes avec promotion et relégation est condamné par les forces inéluctables du marché à disparaître (Noll 1999, p.24; Downward et Dawson 2000, p. 171; Hoehn et Szymanski 1999). Certains acteurs voudraient activement participer à cette évolution, ou participent déjà à ces changements, en devenant la partie visible de la Main invisible. Ils voudraient remplacer le système européen par des ligues fermées, dépourvues de promotion et relégation. Outre la pression purement économique exercée par ceux qui bénéficient des retombées économiques engendrées par les rencontres entre les grands clubs, notamment les grands clubs eux-mêmes, certains agents qui touchent des commissions, et enfin les entreprises de télécommunication qui diffusent ces rencontres, sans compter les requins qui voudraient lancer et profiter de ces ligues fermées, divers arguments sont avancés pour justifier de telles propositions. On nous dit que les ligues fermées seraient plus équitables au niveau sportif, qu’elles engendreraient davantage de stabilité financière, qu’elles permettraient d’éviter les banqueroutes, qu’elles sont l’incontournable résultat de l’évolution économique. De fait, en Europe, il existe déjà une ligue quasi fermée au basket-ball, avec la constitution de l’Euroligue, bien que cette ligue se situe au niveau européen, et non au niveau national. Et un projet de Superligue de football européenne a déjà avorté. La question de la transformation des ligues européennes en ligues fermées préoccupent bien des gens, à commencer par les économistes et les sociologues du sport. Il est hautement significatif que le Conseil économique et social de la France se soit penché sur cette question, Sport de haut niveau et argent, lors de sa séance du 29 mai 2002, et qu’il se soit prononcé en faveur de la préservation d’une organisation à structure pyramidale, à l’européenne, et contre les ligues fermées à l’américaine. C’est aussi mon avis. Pourquoi abandonner ou permettre l’abandon d’un système qui permet à une communauté d’accéder au plus haut niveau sportif? L’épopée du club de football de Calais jusqu’à la finale de la Coupe de France en 2001(?) été mentionnée partout dans le monde. Le maire de Calais a été interviewé sur toutes les radios, même dans des pays comme le Canada qui n’ont guère de tradition en football. Une telle aventure, qui enflamme l’imagination et exalte tous ceux qui s’intéressent au sport, n’aurait été aucunement possible dans le cadre d’une ligue fermée à l’américaine. A des degrés moindres, de tels résultats se répètent régulièrement, autant en France qu’en Angleterre, un club semi-professionnel ou amateur réussissant à battre sur une journée un club de la ligue nationale la plus prestigieuse. Ces exploits démontrent que le sport se joue avant tout sur le terrain, et que l’argent ne peut pas décider de tout. C’est une éclatante et extraordinaire leçon de vie pour tous, moins jeunes et jeunes surtout.

3 Il est vrai que les ligues fermées, même si elles sont parfois considérées au niveau national, risquent surtout d’être introduites au niveau européen, où les épopées de petits clubs sont moins vraisemblables, bien que le club d’Auxerre, avec sa petite population, constitue un contre-exemple remarquable. Sous l’angle purement sportif, il semble difficile de justifier la présence de grands clubs à une grande compétition sportive européenne, présence exclusive ou garantie, sous le seul prétexte que ces grands clubs ont une plus grande audience, des ressources financières supérieures, ou une meilleure réputation. L’ancien sportif que je suis se hérisse devant de telles propositions. Avec cette logique, pourquoi ne pas réclamer la présence automatique de l’Angleterre, de l’Allemagne, de l’Italie et de l’Espagne au Mondial du football? De fait, Downward et Dawson (2000, p. 172) rapportent qu’une forte majorité de Britanniques sont favorables à la constitution d’une Superligue, mais à la condition que les clubs y aient accès sur la base du mérite sportif, autrement dit selon le système de relégation et promotion. Ainsi les préoccupations du grand public semblent rejoindre celles d’universitaires qui, comme Primault et Rouger (1999, p. 192), pensent que les ligues fermées remettent en cause la raison d’être de la compétition sportive, ou qui, comme Ross (1999, p. 111), croient que les ligues fermées vont inévitablement abuser de leur position dominante et donc qu’elles devraient être bannies en vertu du Traité de Rome. On m’a demandé de faire une réflexion générale sur la transposition du modèle nord-américain aux ligues sportives européennes, en tenant compte de l’arrêt Bosman, qui a libéralisé sans contrepartie le marché européen du travail sportif.1 Je vais faire ceci un deux temps. D’abord, dans un premier temps, je vais présenter quelques chiffres, avec quelques anecdotes, afin que tous comprennent que le mode de régulation nord-américain est loin de constituer une panacée, et qu’il ne garantit aucunement la solidité financière des clubs sportifs. Ceci sera en même temps un prélude à la seconde partie, plus théorique, puisqu’elle permettra de débattre brièvement des objectifs des propriétaires des clubs sportifs, dont dépendent bien des résultats de la théorie économique du sport. Dans un second temps, je vais passer en revue les différents outils de régulation qui ont pour objectif soit de rétablir l’équilibre compétitif soit d’assurer des profits pour tous les propriétaires d’équipe. Quelques chiffres sur la situation financière des clubs sportifs professionnels nord-américains 1

Il semble néanmoins, à l’automne 2001, sous la pression de l’UEFA, que l’Union Européenne ait accepté le principe voulant que les jeunes joueurs commandent des frais de transfert, afin de dédommager leur club initial pour ses efforts et ses dépenses de formation. Ceci signifie qu’on en revient partiellement au système antérieur à l’arrêt Bosman, et donc, si je comprends bien, au système qui prévalait en France. La différence majeure entre l’avant et l’après Bosman, pour un pays comme la France, c’est qu’un nombre illimité d’étrangers européens peut maintenant évoluer pour chaque équipe..

4 Si je comprends bien la situation du football français, l’arrêt Bosman n’a eu qu’un impact mitigé en France, puisque les footballeurs français, depuis 1973, étaient déjà libres de changer d’équipes pourvu que leur contrat soit venu à échéance. C’est l’autre élément de l’arrêt Bosman, l’élimination des quotas sur le nombre de joueurs européens étrangers, qui aurait eu davantage d’effet sur la situation financière des clubs français. Pourtant, les équipes de la plus haute ligue du football français, la Ligue nationale de football (LNF), sont en moyenne déficitaires. “Le résultat net comptable du football français de D1 est négatif. Le déficit qui se monte à 53,66 ME (352 MF) est probablement imputable en partie à cette inflation de la masse salariale destinée aux joueurs” (Conseil 2002, p. II-117). Ceci signifie que le déficit moyen d’une équipe est de 2,5 ME, soit un peu moins de 10% du chiffre d’affaires. Je ne sais pas s’il s’agit d’un déficit final, après paiements des intérêts sur la dette et en tenant compte de calculs d’amortissement, ou s’il s’agit du solde avant paiement des intérêts, des impôts sur les sociétés, et de l’amortissement, ce que les anglo-saxons appellent le EBITDA (earnings before interest, taxes and amortization). Quoi qu’il en soit, ceci nous donne un ordre de grandeur. Comme l’exprime la phrase citée ci-dessus, les pertes financières des équipes françaises sont imputées aux hausses des salaires, et aussi à l’espoir que le club sera un jour coté en bourse, et que sa valeur en bourse reflétera alors la valeur des joueurs obtenus sur le marché des transferts. Le document du Conseil économique et social fait remarquer que les coûts en salaires des joueurs représentent de 55 à 70 % du chiffre d’affaires des clubs.2 On y souligne aussi le fait que la masse salariale a explosé dans les années 1990: entre les saisons 1995-96 et 2000-2001, les coûts en joueurs seraient passés de 118 ME à près de 300 ME, autrement dit ils ont été multipliés par 2,5, pour un accroissement moyen annuel de 20,4 %. Certains attribuent cette hausse à l’ouverture illimitée des clubs aux joueurs européens. La situation des équipes nord-américaines, celles des quatre sports majeurs, est somme toute assez similaire, comme le montre la lecture du Tableau 1, qui illustre l’évolution de divers indicateurs sur la dernière décennie. On y note aussi une détérioration des bilans, et une forte hausse de la masse salariale consacrée aux joueurs. Ainsi, au base-ball, les revenus ont doublé tandis que les salaires ont triplé; au basket-ball et au hockey sur glace, les revenus ont triplé alors que les salaires ont plus que quintuplé. La seule exception est le football américain, où les revenus et les salaires ont tous deux approximativement triplé, augmentant ainsi dans les mêmes proportions. On note aussi que si au base-ball et au football les salaires n’ont augmenté qu’au rythme annuel de 12 ou 13 % par année, au basket-ball et au hockey ces mêmes salaires ont augmenté à un taux qui avoisine celui des salaires du football français des années 1995-2000, soit à un taux de 18 ou 19 %.3 Pourtant le basket-ball opère depuis longtemps sous un régime de plafonds aux masses salariales, tandis que le hockey 2

3

Andreff (2000, p. 189) parle plutôt de 50 %, mais les chiffres concernent la fin des années 1990.

Il faut toutefois ajouter que le taux de croissance des salaires dernièrement n’est que d’environ 6,5 %, pour la NBA (en 2000-2001) et pour la LNH (en 2000-2001 et 2001-2002).

5 sur glace a mis en place en 1995 une nouvelle convention collective, dont la plus grande proportion des changements favorisait les propriétaires d’équipes. Évidemment le résultat de tout ceci, c’est que la part des salaires des joueurs dans le chiffre d’affaires des équipes n’a cessé de croître au cours de la décennie, atteignant entre 50 et 60 %, un chiffre là encore comparable à la part des salaires dans le cas du football français. La conséquence de tout ceci, encore une fois à l’exception du football américain de la NFL, c’est que les profits (bruts), en dollars, des équipes n’ont cessé de décroître au cours de la décennie. Cependant, comme on peut le voir au Tableau 1, les taux de profit (bruts) des équipes sportives ont diminué dans les quatre sports majeurs nord-américains. Il faut préciser qu’il s’agit des profits des équipes, calculés avant paiements des intérêts, des taxes sur les sociétés et des flux d’amortissement (EBITDA). De fait les tous derniers chiffres disponibles tracent un tableau encore plus sombre de la situation: au baseball, en 2001, les équipes n’auraient fait en moyenne que des profits de 2,5 millions de dollars par année, tandis qu’au hockey, durant la saison 2001-2002, les profits moyens auraient été carrément nuls en moyenne.4 Avec l’aide de la ligne portant sur l’importance relative et absolue de la dette moyenne des propriétaires des équipes, on peut calculer un estimé des profits nets des paiement en intérêts. En postulant un taux d’intérêt moyen de 7 %, on obtient la ligne des Profits nets estimés. On voit que les équipes de base-ball et de hockey font des pertes, les équipes de basket-ball rentrant tout juste dans leur argent, tandis que seuls les propriétaires des équipes de football font des profits nets. La dernière ligne du tableau explique pourquoi différents investisseurs continuent à mettre leur argent dans des équipes sportives. Si les rendements sur les opérations courantes sont nuls ou négatifs, les propriétaires peuvent encaisser des plus-values substantielles lorsqu’ils vendent leur équipe. Le marché des équipes professionnelles a donc participé à la bulle des marchés boursiers, même si les équipes sportives ne sont pas cotées directement en bourse. C’est la hausse auto-entretenue des valeurs des équipes sportives qui a rendu profitable la détention d’équipes sportives au cours des dernières années. De fait, on observe un fort roulement dans la propriété des équipes sportives. Au cours des dix dernières années, 25 des 30 équipes sportives dans la LNH et dans le MLB ont connu un nouveau propriétaire. Le portrait tracé est-il approprié? Autrement dit, puisque les chiffres présentés sont des estimés fournis par les journalistes de revues financières, et non les chiffres officiels, peut-on s’y fier? D’abord, il faut préciser que les économistes du sport nord-américains se méfient énormément des chiffres fournis par les propriétaires d’équipe ou les ligues professionnelles. Les chiffres officiels du base-ball majeur disent, qu’entre 1995 et 1999, l’ensemble des propriétaires d’équipes de base-ball aurait perdu sept millions de dollars par année en moyenne, sur la base du EBITDA, ou sur une version modifiée de ce cash-flow (Levin et al., tableau 30), soit environ 6 % du chiffre d’affaires. Pour l’année 2001, le commissaire du base-ball majeur prétend que les équipes ont perdu en moyenne une somme identique (les journalistes de Forbes calculent un profit EBITDA de 2,5 millions), et que les pertes ont atteint 17 millions de dollars par équipe en tenant compte des intérêts, des impôts et de toutes les formes d’amortissement.5 J’ai tout de même préféré présenté les chiffres 4

Toujours selon les chiffres de la revue Forbes. Je n’ai pas inclus les tous derniers chiffres disponibles, d’abord parce qu’ils sortaient de la décennie 1990, mais aussi parce que les chiffres sur les masses salariales n’étaient pas toujours indiqués. 5

Selon un article de Forbes, de Michael Ozanian, daté du 4 janvier 2002.

6 non-officiels, car les propriétaires du base-ball majeur incluent parfois dans leurs dépenses des coûts qui se rapportent à d’autres activités! De fait, on constate à la lecture des états officiels que les Autres dépenses ont augmenté à un rythme encore plus rapide que celui des salaires des joueurs, ce qui laisse entendre que nombre de ces dépenses sont artificielles ou inutiles. De plus, les équipes ayant de forts revenus ont des Autres dépenses qui sont plus du double de celles des clubs moins fortunés, alors qu’en théorie cesAutres dépenses devraient être assez voisines. Enfin, dans le cas de l’amortissement, ce qui est amorti c’est le capital humain des athlètes, qui apparaît bien comme une dépense complètement fictive. Dans le cas du hockey, je ne dispose de chiffres officiels que pour une seule équipe, les Sénateurs d’Ottawa. Tandis que les journalistes de Forbes annoncent des pertes de 2,1 et 4,5 millions de dollars américains, respectivement pour les saisons 1999-2000 et 2000-2001, les chiffres fournis dans un prospectus de mise en vente de l’équipe donne des pertes de 5,3 et 3,7 millions (en dollars américains) pour les mêmes saisons. Les chiffres semblent donc approximativement corrects. Ce que l’on peut donc conclure sur la question, c’est que les chiffres donnent à tout le moins un portrait indicatif; ce qui est certain, c’est que la situation des propriétaires d’équipes sportives nordaméricaines s’est détériorée au cours de la décennie des années 1990, sauf peut-être au football de la NFL. Pour pouvoir mener sans crainte une franchise des ligues majeures, il faut pouvoir l’acheter sans s’endetter, ou disposer d’un excellent crédit auprès des banquiers. De fait, au sein de la Ligue nationale de hockey (NHL), trois équipes se sont récemment mises sous la protection de la loi sur les faillites: les Penguins de Pittsburgh en 1998, et les Sabres de Buffalo et les Sénateurs d’Ottawa en janvier 2003. 6 Dans tous les cas, l’endettement des propriétaires, résultant de déficits accumulés non épongés, était la cause de la faillite. Ces équipes évoluent dans des amphithéâtres ultra-modernes. Elles n’étaient pas moins bien gérées que les autres; leurs propriétaires avaient simplement une capacité à emprunter insuffisante, en raison, comme c’est le cas de Rod Bryden, le propriétaire des Sénateurs d’Ottawa, d’autres activités économiques qui réclament des dépenses de recherche et développement qui engendrent un endettement considérable. Quelques réflexions sur les hypothèses de départ en économie du sport J’insiste, peut-être un peu lourdement, sur tous ces chiffres pour, d’une part montrer que l’évolution des 6 Les données les plus douteuses sont probablement celles qui mesurent la valeur de chaque franchise. Par exemple, il semble que la franchise en faillite de Buffalo ne sera revendue que pour 35 millions de dollars (américains), tandis que celle d’Ottawa, en faillite aussi, ne serait rachetée que pour 90 millions de dollars canadiens, soit moins de 60 millions de dollars américains, mais en incluant le Centre Corel, dont le coût de construction avait été de 200 millions de dollars canadiens. En 2001, la franchise du Canadien de Montréal et le Centre Molson avait été vendus pour l’équivalent de 320 millions de dollars canadiens, mais la valeur estimée de ces deux actifs était alors de 500 millions. La bulle spéculative du marché des équipes professionnelles est en train de se dégonfler.

7 masses salariales des équipes semblent être, dans une certaine mesure un phénomène universel, qui ne dépend certainement pas exclusivement de l’arrêt Bosman, et d’autre part afin d’aborder un point qui me tient à coeur, et qui va certainement avoir des répercussions sur les suggestions qui vont être présentées dans les prochaines sessions. Il s’agit des hypothèses qui sous-tendent l’analyse économique du sport, en particulier l’hypothèse de la maximisation du profit. Dans son article sur les différences entre les sports européens et nord-américains, Rodney Fort (2000, p. 451) conclut “qu’il est raisonnable de supposer que les équipes en Europe maximisent les profits économiques”. Ainsi, il rejette l’hypothèse de la maximisation de l’utilité, mise de l’avant par Sloane (1971), où la satisfaction des dirigeants dépendrait autant des profits que du rendement sportif. Une variante extrême de cette hypothèse, c’est que les dirigeants n’incorporent dans leur fonction d’utilité que la performance sportive de leur équipe, mais en tentant de balancer leurs comptes, en visant un profit nul. Késenne (1996, 1997, 2000a) a mis de l’avant cette variante, et il en a analysé les conséquences dans de nombreux articles. Selon Késenne (1997, p. 8), le club “est principalement intéressé par la constitution d’une équipe forte de façon à gagner le plus de matchs possible, sans être poussé dans le rouge. Faire des bénéfices n’est pas l’objectif le plus important”. De fait, la maximisation de la performance sportive sous la contrainte d’une norme de profit minimum, supérieure à zéro, donne des résultats tout à fait identique au cas où le profit minimum serait zéro (Késenne 2000b, p. 62). Cette hypothèse de maximisation des victoires sous contrainte de profit minimum a été endossée par de nombreux auteurs européens, notamment Cairns, Jennet et Sloane (1986), Bourg (1998,p. 171), Késenne et Jeanrenaud (1999, p. 2), et Primault et Rouget (1999). Elle me semble appropriée dans le cas du sport européen Lavoie (2000), et il est possible qu’elle le soit aussi dans le cas du sport nord-américain (Lavoie 1997, p. 52-59). Fort pense que deux raisons poussent les auteurs européens à privilégier l’hypothèse de la maximisation des victoires: le fait que les ligues européennes fonctionnent sous le principe de la promotion et relégation, et aussi le fait que certaines études, comme celle de Szymanski et Smith (1997), semblent montrer que les équipes européennes font peu ou pas de profit. Je pense quant à moi que si les auteurs européens croient, ou à tout le moins croyaient, que les équipes européennes cherchent généralement à maximiser les victoires, sous contrainte budgétaire, plutôt qu’à maximiser leurs profits, c’est parce que c’est clairement la motivation première de la majorité des dirigeants sportifs, dont un grand nombre proviennent ou même opèrent dans le cadre d’organisations sportives à but non lucratif, pour lesquelles le gain économique n’est pas une fin en soi (la distribution de dividendes est même parfois interdite), tandis que la performance sportive ou la promotion à une division supérieure est la raison d’être de l’organisation sportive. A la limite, même si l’organisation opérait dans une ligue fermée, elle continuerait à poursuivre la maximisation de la performance sportive, en tentant de respecter sa contrainte budgétaire. Après avoir rédigé le présent paragraphe, je me suis aperçu que Késenne présentait un justificatif très similaire à son hypothèse de maximisation des victoires sous contrainte de profit minimum: We believe that this model offers the most realistic approach for Europe, where most sports clubs are nonprofit organizations whose main interest is to win as many matches as possible and, if possible the league championship. Only a small number of big clubs, in particular those floating on the stock exchange, are more business-like and have to guarantee a certain profit rate to satisfy the shareholders. However, the final objective of these big clubs is to win the

8 championship and to participate in the European Champions League. (Késenne 2000b, p. 634). La référence de Késenne aux actions émises par certains clubs sportifs soulève un argument que Fort aurait pu utiliser pour justifier son rejet de l’hypothèse de la maximisation du rendement sportif. Un argument qu’il n’utilise pas, mais qu’il aurait pu utiliser, c’est que la structure de financement de certains clubs européens a considérablement évoluée au cours des derniers dix ans (Andreff 2000). Certaines équipes sont entre les mains de magnats des affaires, qui sont peut-être davantage motivés par l’appât du gain que par celui de la performance sportive. D’autre part, un assez grand nombre d’équipes, surtout au football et surtout en Angleterre, sont maintenant cotées en bourse et font appel à l’épargne des actionnaires. On pourrait alors croire que les dividendes, et donc les profits dégagés par l’équipe, sont la préoccupation première des dirigeants. La piètre performance de la bourse en général, et des actions des équipes sportives tout particulièrement, va peut-être relativiser ce type d’apport financier dans le futur, ainsi que la pression que pourraient exercer les actionnaires. Autrement dit, la bourse a toujours existée, mais ceci n’a jamais empêché certains économistes, comme Gardiner Means ou John Kenneth Galbraith, de prétendre que les dirigeants d’entreprises avaient d’autres objectifs que la maximisation des profits. Fort (2000, p. 444) lui-même prétend que les auteurs des études européennes qui portent sur les transferts de joueurs démontrent que ces transferts se font sur la base des recettes marginales générées par les joueurs transférés, ce qui est conforme à un comportement axé sur la maximisation des profits, et non sur la base des recettes du club relativement aux recettes de la ligue. Je doute que l’on puisse distinguer empiriquement entre ces deux hypothèses. A mon avis, le fait que ces études démontrent que les transferts reposent sur des considérations marginales ne fait que refléter l’empressement de certains de ces auteurs à vérifier les préceptes de l’analyse économique dominante. Le second argument invoqué par Fort est d’ordre tautologique. Si l’analyse marginaliste est adoptée, alors les ligues où les équipes opèrent selon les préceptes de la maximisation de la victoire constituent des équilibres sous-optimaux instables, qui vont être renversées par l’arrangement optimal, celui des ligues avec maximisation des profits. Fort, à mon avis, commet un sophisme, qu’il répète à au moins deux reprises. Son argumentation théorique en faveur de la maximisation du profit se déploie en postulant la validité de l’analyse marginaliste: “Unless marginal decision making analysis is abandonned altogher, it should be expected ....” (Fort 2000, p. 444). Mais c’est justement le problème: on ne peut présenter une argumentation logique défendant la maximisation des profits en postulant que les acteurs rationnels vont tous adopter la maximisation des profits pourvu qu’ils soient suffisamment rationnels et qu’ils disposent d’une information adéquate. Fort postule ce qu’il veut démontrer, et ensuite il s’émerveille de voir que son raisonnement démontre la futilité de poursuivre un objectif de maximisation des victoires sous contrainte budgétaire. Il serait sans doute bien surpris d’apprendre que de nombreux économistes hétérodoxes rejettent à la fois l’hypothèse de la maximisation des profits, l’universalité du principe des rendements décroissants, et le marginalisme. Le débat entre maximisation du profit et maximisation des victoires est le reflet au niveau du domaine sportif des débats antérieurs, de portée plus générale, entre maximisation des profits et maximisation des ventes, ou entre maximisation du taux de profit et maximisation du taux de croissance des ventes (Lavoie 1987, ch. 8). Finalement, Fort (2000, p. 440-1) rejette l’argument empirique construit autour des faibles profits ou des profits nuls constatés au sein des équipes européennes. Ces faibles profits comptables et les mises en

9 faillite de certains clubs ne démontrent en rien que les équipes maximisent les victoires et non les profits. Selon Fort, c’est le profit économique qu’il faudrait observer. Fort fait remarquer, à juste titre, que des niveaux de profit comptable similaires sont observés dans le cas des équipes nord-américaines. Fort en conclut que, puisque les équipes américaines maximisent les profits, il doit en être de même pour les équipes européennes! Mais encore une fois, tout ceci repose sur un sophisme. Les chiffres ci-dessus montrent effectivement que les propriétaires d’équipes sportives nord-américaines font peu de profits, et qu’ils font même des pertes. On pourrait aussi bien conclure que tant les équipes européennes que la majorité des équipes sportives nordaméricaines cherchent à maximiser les victoires, sous contrainte de profit non-négatif. Certains propriétaires d’équipes nord-américaines ont mentionné que leur objectif fondamental était de gagner le championnat, ou d’aligner la meilleure équipe possible, étant donné les contraintes existantes à la mobilité des joueurs, quels que soient les coûts. De fait, certains propriétaires ont volontairement accepté de dégager des déficits financiers dans l’espoir de voir leur équipe décrocher un championnat, comme ce fut le cas du propriétaire (Wayne Huizenga) des Marlins de la Floride en 1997, au base-ball. Une fois cet exploit accompli, le propriétaire décida de démanteler son équipe, puis de la vendre. Il avait réalisé son objectif – gagner un championnat. Quant à moi, je reste persuadé que de nombreux propriétaires des clubs nord-américains cherchent à maximiser le nombre de victoires, sous une contrainte minimale de profit (qui peut être positive, nulle ou négative, selon les agents), et qu’à tout le moins cette hypothèse reste encore la plus valable dans le contexte européen. C’est donc cette hypothèse qu’il convient d’utiliser, à mon avis, pour analyser les effets de l’introduction de différents outils de régulation dans le cadre sportif européen. De plus, il n’est pas certain que la loi des rendements décroissants s’applique intégralement. Que ce soit dans le sport nord-américain ou européen, une faible amélioration de la performance peut donner lieu à de formidables accroissements de revenus, aussi bien à court terme qu’à plus long terme, en créant un effet de seuil qui pourrait fidéliser les partisans du club. La participation victorieuse à des séries éliminatoires en Amérique du Nord permet d’engranger des revenus supplémentaires considérables, tout comme en Europe la réussite en compétitions de coupe ou au championnat national permet d’accéder à des parties ou à des compétitions additionnelles, qui sont extrêmement lucratives.7 Ainsi, du moins dans le cas des équipes situées dans le premier tiers, une stratégie de maximisation des victoires n’est sans doute pas très éloignée d’une stratégie de maximisation du profit. Szymanski et Smith (1997) concluent précisément dans leur étude empirique des équipes de football anglaises qu’il n’existe pas vraiment d’arbitrage entre rendement financier et rendement sportif. D’autres auteurs, notamment Whitney (1993), rejette aussi l’universalité de la loi des rendements décroissants pour les clubs sportifs. La proposition d’invariance et le système de réservation Sans présumer de savoir si l’on voudrait imposer certains des outils de régulation du modèle nord-américain aux ligues européennes, qu’il s’agisse des ligues nationales ou pan-européennes, sous la forme de ligues fermées ou de ligues ouvertes, voyons quels sont dans les faits ces outils de régulation nord-américains. Tout d’abord, il est important de rappeler deux éléments. Comme les économistes du sport le savent bien, la proposition d’invariance de Rottenberg (1956) est souvent invoquée pour prétendre que les contraintes 7 La victoire peut cependant être coûteuse si les dirigeants de clubs avaient promis des primes de performance démesurées correspondant à des succès au niveau européen.

10 aux mouvements des joueurs ne peuvent avoir d’impact sur la répartition du talent et l’équilibre sportif. Elle n’a d’impact que sur la répartition des revenus entre joueurs et propriétaires, et entre propriétaires de grands marchés et de petits marchés. Autrement dit, la définition exacte du régime qui régit les droits de propriété sur les joueurs ne saurait modifier les inégalités de performance sportive inhérentes aux forces du marché. On dit souvent que cette partie de l’hypothèse d’invariance de Rottenberg est une application avant l’heure du fameux théorème de Coase (1960). Le même résultat va être atteint, quelle que soit la répartition des droits de propriété. Or ce théorème repose sur un postulat, celui de l’absence des coûts de transaction. Coase (1988, p.15) a été fort étonné des enseignements que la majorité des économistes ont tiré de son théorème; ce qui lui semble essentiel, c’est qu’en général il existe des coûts de transaction, et donc qu’en général la loi et le régime des droits de propriété vont précisément modifier l’allocation des ressources. Le théorème de Coase ainsi réinterprété signifie que les restrictions à la mobilité des joueurs vont avoir un impact sur la répartition du talent des joueurs et sur les inégalités de résultat sportif, et donc que la proposition d’invariance de Rottenberg est un cas un cas d’exception peu probable. Je prends quant à moi le contre-pied de la position dominante chez les économistes sportifs. Pour la majorité de ceux-ci, la libéralisation du marché des joueurs en Amérique du Nord n’a pas modifié la répartition du talent parce que la proposition d’invariance a toujours été vérifiée. Je pense au contraire que c’est le cas parce que la proposition d’invariance n’a jamais tenu, une position défendue notamment par Daly (1982) et Daly et Moore (1981). Ainsi, il me semble pas approprié de se fier à l’expérience américaine pour évaluer les effets de l’Arrêt Bosman en Europe. La déclaration qui suit, par exemple, ne me semble pas refléter adéquatement la complexité du système nord-américain. “Quelles leçons tirer de l’expérience américaine où un tel système de réservation des joueurs a été remplacé par la liberté des agents il y a 25 ans?... Dans les principales ligues américaines, le système de réservation des joueurs, qui est compatible au système de transfert en Europe, a déjà été aboli dans les années 1970... Il existe d’abondantes preuves empiriques que l’équilibre compétitif a même été amélioré....” (Késenne, 2000, p. 96). On ne peut pas dire que le système nord-américain de réservation a été aboli dans les années 1970. Il est vrai que la clause de réserve dans le contrat standard des joueurs a été abolie dans les quatre sports majeurs, mais le système de réservation a été préservé sous une forme mitigée, comme l’illustre le Tableau 2. Les quatre sports majeurs ont conservé le principe du repêchage amateur, qui confère des droits exclusifs aux équipes. De plus, les joueurs ne deviennent des joueurs autonomes libres qu’après un certain nombre d’années dans les ligues majeures, quel que soit le nombre d’années passées dans les ligues mineures. Ce nombre varie de 4 à 6 saisons (avec un nombre approprié de parties jouées) au football, basket-ball et baseball, tandis qu’au hockey les joueurs doivent atteindre l’âge de 31 ans, ayant pour la plupart accumulé une dizaine de saisons dans la LNH. De plus, fréquemment, notamment dans le cas des joueurs autonomes restreints, il existe des restrictions supplémentaires sur les équipes qui voudraient engager des joueurs autonomes, par exemple des quotas. Finalement, bien que ce ne soit pas indiqué au Tableau 2, l’existence de certaines exceptions aux règles de plafonds salariaux fait qu’il est extrêmement coûteux pour les équipes d’acquérir des agents libres de qualité. On entend souvent dire que la libéralisation du marché des joueurs en Amérique du Nord a mené à la

11 réduction du taux d’exploitation des joueurs, en particulier celui des joueurs vedettes. C’est le cas, il n’y a aucun doute. Mais on lit aussi parfois que la libéralisation du marché des joueurs, l’apparition des joueurs autonomes dans les quatre sports majeurs nord-américains, n’a eu aucun effet sur l’équilibre sportif, et qu’elle aurait même contribué à améliorer la parité sportive. De fait, c’est ce que concluent plusieurs chercheurs américains, et c’est aussi ce qu’on peut lire dans un article tout récent, celui de Depken (2002). Celui-ci observe l’évolution de 1920 à 2000 du degré de concentration de certains indicateurs de performance au baseball (le nombre de coups de circuits, les retraits au bâton, le nombre de points comptés). Il conclut qu’en général l’apparition du marché des joueurs autonomes n’a eu aucun impact ou a réduit la concentration de ces indicateurs de performance. Ses calculs omettent cependant une variable essentielle. Depken, et plusieurs autres comme lui, oublient d’inclure le fait que les inégalités sportives ont passablement diminuées, dans les quatre sports majeurs, avec l’apparition du repêchage amateur. Leurs calculs de régression omettent la variable du repêchage! Or toutes les études récentes démontrent que le repêchage amateur, dans l’ordre inverse du classement de la saison antérieure (reverse-order draft ), a effectivement l’effet qui était celui recherché officiellement par ses concepteurs. Au baseball, Butler (1995) démontre que c’est le repêchage amateur, introduit en 1965 au base-ball, qui est le facteur clé qui expliquerait la diminution tendancielle des écarts de performance. Grier et Tollison (1994) ont montré que le repêchage amateur au football de la NFL permet effectivement aux mauvaises équipes d’améliorer leur performance sportive. Le pourcentage de victoires des équipes de football s’explique par le pourcentage de victoires des années précédentes et par le rang moyen au repêchage des années précédentes. Avec le même type de régressions, Richardson (2000) démontre que le repêchage, introduit en 1969, a le même effet au hockey de la NHL . Cet effet prend au moins trois ans à s’exercer, ce qui est compatible avec ce que l’on sait du hockey, puisque la plupart des joueurs repêchés dans les rangs amateurs prennent habituellement de trois à quatre ans avant d’atteindre la Ligue nationale de hockey. Si l’on se fie à la proposition d’invariance, le repêchage amateur universel ne devrait avoir aucun impact sur la performance relative des équipes.8 C’est pourtant le cas. Autrement dit, la restriction imposée par le repêchage universel amateur, qui attribue automatiquement les meilleurs joueurs amateurs aux pires équipes de la ligue, combinée aux autres restrictions à la mobilité négociées dans les conventions collectives, plus le fait que les ligues nord-américaines réprouvent fortement les échanges de choix au repêchage et les transferts de joueurs contre espèces sonnantes et trébuchantes (contrairement au cas européen), semble effectivement modifier le classement des ligues nord-américaines.9 Par contre, le passage d’un système basé 8

Au baseball, le repêchage amateur n’est pas universel, seuls les joueurs des États-Unis, de PortoRico et du Canada étant concernés. Ceci a conduit les auteurs du Blue Ribbon Report à recommander la mondialisation du repêchage amateur. Cet aspect de la convention collective au baseball n’a pu être tranché lors de la dernière négociation de 2002, si bien que le sujet est encore à l’étude. Certains croient que la couverture partielle du repêchage amateur a contribué à l’affaiblissement de la parité sportive à la fin des années 1990, les équipes riches pouvant se permettre de faire signer des contrats à tous les talents potentiels, et de leur payer des bonis, chose que ne peuvent faire les équipes financièrement dépourvues, s’accaparant ainsi de tous les joueurs “étrangers” talentueux. 9

De fait, comme le mentionnent Fort et Quirk (1995, p. 1282), les ventes de joueur contre argent

12 sur la clause de réserve permanente à un système basé sur les restrictions temporaires des conventions collectives semble n’avoir provoqué aucun changement négatif sur la parité sportive des équipes (Butler 1995). C’est sans doute parce que ces restrictions limitées, combinées au repêchage amateur, et aux autres instruments de régulation mis en place avec cette libéralisation, continuent à modifier la répartition du talent, par rapport à la répartition qui existerait dans un monde dépourvu de restrictions et règles. Pour conclure sur cette question, je dirais que les possibilités égales pour tous de faire signer un premier contrat à un jeune joueur est un élément clé pour s’assurer que la répartition du talent et des revenus des clubs soient différente de celle qui prévaudrait si le marché des joueurs était complètement libéré. Une liste des outils de ré gulation des ligues nord-américaines Quels sont donc les outils de régulation des ligues sportives nord-américaines? A la lecture des tableaux 2 et 3, on peut en distinguer une dizaine: · · · · · · ·

Le repêchage universel amateur, dans l’ordre inverse du classement; Le repêchage intra-ligue, , à un coût fixe, des joueurs marginaux excédentaires qui ne peuvent rester sur la liste des joueurs protégés. Les restrictions à la mobilité des joueurs, pour un certain nombre de saisons; Les restrictions imposées aux équipes qui voudraient engager des joueurs autonomes; L’arbitrage salarial, pour les joueurs dénués d’autonomie; Des plafonds aux salaires individuels, particulièrement dans le cas des recrues, plafonds qui sont fonction du nombre d’années d’expérience; Des salaires individuels minimums, parfois en fonction de l’expérience acquise;

comptant sont réprimées au football américain depuis le début des années 1960, tandis que celles au base-ball le sont depuis 1976, autrement dit peu après l’abolition de la clause de réserve, ce qui, à mon avis, n’est pas un hasard. Au basket-ball, les échanges avec argent comptant sont limitées à 3M$ depuis 1983. Au hockey, des sommes d’argent sont rarement impliquées,mais des sommes substantielles ont été impliquées lors d’échanges entre 1988 et 1992 (Lavoie 1997, p.66-7).

13 · · · · · · ·

Des plafonds à la masse salariale d’une équipe; Des planchers à la masse salariale d’une équipe (qui accompagnent les plafonds); Des taux d’imposition sur les propriétaires, imposés sur l’excédent de la masse salariale du club par rapport à une masse salariale cible maximale; Des taux d’imposition sur les joueurs, lorsque la masse salariale de la ligue excède un pourcentage cible; Le partage des revenus colligés par la ligue, principalement ceux provenant de la télédiffusion des matchs; Le partage des revenus aux guichets colligés par chaque club; La redistribution des revenus vers les clubs moins nantis, par prélèvement sur les clubs nantis, en particulier ceux défavorisés par l’évolution du taux de change.

On pourrait aussi ajouter qu’au football, le calendrier des rencontres est déséquilibré, et que les équilibres les plus faibles, selon les résultats de l’année précédente, affrontent en moyenne des équipes moins fortes. C’était aussi le cas au hockey lors de la première expansion de la LNH, en 1967-68 et 1968-69. L’objectif est de donner à ces équipes de meilleures chances de participer aux séries éliminatoires. L’étude du Tableau 2 permet aussi de constater qu’il existe en fait deux modèles nord-américains des ligues fermées. Au hockey et au base-ball, les règles régissant la mobilité des joueurs sont plus sévères, mais une partie des joueurs dépourvus d’autonomie bénéficient de la possibilité de l’arbitrage salarial et il n’existe pas de plafonds à la masse salariale des clubs; au football et au basket-ball, les restrictions à la mobilité des joueurs sont moins grandes, mais les joueurs non-autonomes n’ont pas droit à l’arbitrage salarial et il existe des plafonds à la masse salariale des clubs et des individus. Quelles sont les conséquences de ces différents outils de régulation sur la parité financière et sportive? Bien que la parité n’ait pas vraiment changé au cours des années, l’accroissement de la corrélation entre masse salariale et résultats sportifs au base-ball, dans la seconde moitié des années 1990, a déclenché une réaction des fans et des autorités (Hall et al. 2002; Levin et al. 2000). Les partisans des équipes sportives sont beaucoup plus conscients qu’ils ne l’étaient des écarts de revenus et de masses salariales qu’ils ne pouvaient l’être autrefois, d’abord et avant tout parce que l’information est davantage disponible et bien davantage diffusée, les bulletins de nouvelles du sport ressemblant souvent davantage à des rapports financiers. Le Tableau 4 montre que notre indice de parité financière – le rapport des revenus des deux clubs les plus riches par comparaison aux revenus des deux clubs les plus pauvres – semble revenir à sa valeur tendancielle de la décennie, et ce dans tous les sports. On constate aussi que le football présente le meilleur indice de parité financière, autant pour la décennie que pour les dernières années. Ceci n’est pas pour nous surprendre, puisque le football de la NFL partage près de 85 % de ses revenus totaux. Quant à la corrélation entre masse salariale et performance sportive, la lecture du Tableau 5 nous permet de constater encore une fois que le football fait bande à part: bien que les données soient plus partielles pour le football, on constate clairement que la masse salariale d’une équipe de football est un bien piètre indicateur de la performance sportive. La corrélation est même négative pour certaines années. D’autres données montrent que le football présente les compétitions les plus équilibrées, même quand on tient compte du fait, comme on fait avec l’écart-type idéal, que plus le nombre de matchs est grand, plus grande est la probabilité que les équipes les plus puissantes finissent par l’emporter (Lavoie 1997, p. 99).

14 Si l’on voulait un modèle d’équité financière et sportive, c’est donc du côté du football qu’il faudrait se tourner. La distinction majeure du football de la NFL, par rapport aux trois autres sports majeurs, c’est que le partage systématique des revenus. Pourtant les économistes ont fréquemment affirmé que le partage de revenus n’aurait aucun impact sur la répartition du talent (Fort et Quirk 1995, Vrooman 1995), et certains économistes croient même que le partage du revenu pourrait avoir des conséquences néfastes sur la parité sportive (Hoehn et Szymanski 1999, p. 220). Késenne (2000b) a récemment réétudié la question à l’aide d’un modèle général. Dans le cas de propriétaires qui maximisent les profits, le cas des revenus partagés qui ne dépendent aucunement de la performance d’une équipe (les revenus nationaux négociés par la ligue), il n’y a aucune ambiguïté: ces revenus partagés n’ont aucune influence sur la performance sportive des clubs; ils servent uniquement à renflouer les poches des propriétaires. Le cas le plus embêtant est celui des revenus partagés qui sont influencés par la performance du club, comme les revenus aux guichets ou les revenus locaux des médias. Késenne (2000b) confirme qu’en général les revenus partagés n’auront pas d’impact sur la parité de la ligue, à moins que les clubs provenant des gros marchés aient un pouvoir d’attraction plus grand que ceux provenant des petits marchés, pour une performance sportive identique. Ceci est possible, mais ce n’est pas certain, et donc on peut s’attendre à ce que l’impact du partage des revenus soit limité. En fait, si une partie des revenus qui dépendent de la performance individuelle des clubs ne sont pas partagés, le partage des revenus pourrait avoir un impact négatif, car ce sont les clubs des plus grands marchés qui perdraient le plus à accepter une réduction de leur performance sportive. ne sont pas et il pourrait même être négatif. Si on croit au principe de la maximisation des profits, on ne peut donc prôner le partage des revenus pour améliorer l’équilibre sportif entre les équipes. Ce partage des revenus ne peut qu’améliorer la situation financière des propriétaires, ceux des équipes moins fortunées en particulier. Pour qu’il en soit autrement, il faut que le partage des revenus soit accompagné de règles supplémentaires comme les plafonds et les planchers sur la masse salariale globale de chaque équipe, règles qui contraignent les propriétaires d’équipes à adopter des comportements incompatibles avec la maximisation des profits. Sans ces instruments de régulation additionnels, le partage des revenus ne peut avoir d’efficacité que si les équipes cherchent à maximiser leur performance sportive sous contrainte de profit minimum, comme l’a montré Késenne (1996). Les propriétaires qui disposent de davantage de revenus vont les utiliser pour améliorer la performance sportive de leur club. Dans ce domaine, les hypothèses qui sous-tendent le modèle – les hypothèses sur l’objectif des propriétaires – jouent donc un rôle fondamental. C’est pourquoi il est important de bien identifier cet objectif. Conclusion Il est probable que la majorité des clubs européens opèrent selon le principe de la maximisation de la performance sportive sous contrainte d’une norme de profit minimum. C’est ce principe qui doit conduire à choisir les solutions appropriées aux problèmes des clubs européens. Sous ces conditions, il est clair qu’une forme du système de réservation et le partage des revenus vont modifier la parité financière et sportive des équipes, au bénéfice des équipes moins fortunées. A mon avis, c’est dans cette direction que les efforts devraient s’orienter. Il faut aussi décider si l’on veut conserver le système européen avec promotion et relégation, ou passer au système nord-américain des ligues fermées. Outre les aspects purement moraux évoqués en introduction, deux autres éléments militent en faveur des ligues ouvertes. Le système des ligues fermées nord-

15 américaines a conduit à une concurrence exacerbée entre les villes, qui a entraîné les abus dont se plaignent un grand nombre d’économistes du sport, c’est-à-dire le chantage des propriétaires pour que les municipalités ou les gouvernements régionaux financent, à coups de centaines de millions de dollars, la construction de stades et d’amphithéâtres. Aux États-Unis, dans les années 1990, il s’est dépensé pour 9 milliards de dollars en construction et rénovation d’installations sportives des ligues majeures. Près de 64% de ces coûts ont été subventionnés par le secteur public. Sitôt ces installations construites, les propriétaires d’équipe exigent la diminution des coûts de location, quand les installations appartiennent au secteur public, ou ils exigent des rénovations supplémentaires, afin d’avoir des installations encore plus luxueuses et plus rentables. Plusieurs économistes prétendent que la solution à ce chantage est de faciliter la création de ligues rivales dans chacun des sports majeurs (Rosentraub 1997). Le système européen de promotion et relégation permet d’éviter ce chantage, puisque ce système permet à toute communauté suffisamment déterminée d’accéder à la ligue du plus haut niveau. Au pire, un propriétaire excédé avec le manque de coopération des autorités municipales va menacer de construire son propre stade dans une banlieue voisine, plutôt que d’utiliser celui de la municipalité. Deuxièmement, les efforts des ligues majeures pour conserver leur monopole ont conduit ces ligues à mettre en oeuvre l’accroissement du nombre de franchises dans la ligue monopole, chaque équipe existante bénéficiant du paiement des droits d’entrée des nouvelles équipes. Selon certains spécialistes, ces expansions ont dilué le talent disponible pour chaque équipe des ligues majeures, et ont donc diminué la qualité du jeu offert au plus haut niveau. Ce serait le cas notamment au hockey, où le nombre d’équipes au plus haut niveau est passé de 6 à 30 en l’espace de 30 ans. La situation eut été véritablement catastrophique n’eut été de l’arrivée de nombreux joueurs européens, notamment les joueurs russes et est-européens dans les années 1990. Par contre, en Europe, le nombre d’équipes de football au plus haut niveau est resté sensiblement le même, le système de promotion et relégation ne donnant pas naissance à la même dynamique d’expansion préventive.

16 Références Andreff, W. (2000), « L’évolution du modèle européen de financement du sport professionnel», Reflets et perspectives de la vie économique , vol. 39, no 2-3, 179-195. Bourg, J.-F. (1998), «Dualisme et rapport salarial dans le sport professionnel», in: J.-F. Bourg et J.-J. Gouguet, Analyse économique du sport, Paris, Presses Universitaires de France. Breillat, J.-C., D. Primeau et A. Rouger (1999), «Les conséquences de l’arrêt Bosman», Problèmes économiques , n° 2619, 2 juin, pp. 32-33. Butler, M.R. (1995), «Competitive balance in major league baseball», American Economist , vol. 39, n° 2, pp. 46-51. Cairns, J., N. Jennet et P.J.Sloane (1986), «The economics of professional team sports: A survey of theory and evidence», Journal of Economic Studies, vol. 13, no 1, 3-80. Coase, R.H. (1960), « The problem of social cost», Journal of Law and Economics , vol. 3, Octobre, 1-44. Coase, R.H. (1988), The Firm, the Market, and the Law, Chicago, University of Chicago Press,. Conseil économique et social (2002) Sport de haut niveau et argent, avis adopté le 29mai 2002. Daly, G.G. (1981), «The baseball player’s labor market revisited», in: P.M. Summers, ed., Diamonds are Forever: The Business of Baseball, pp. 11-28. Daly, G.G. et W.J. Moore (1981), «Externalities, property rights and the allocation of resources in major league baseball», Economic Inquiry , vol. 19, n° 1, pp. 77-95. Depken, C.A. (2002), «Free agency and the concentration of player talent in Major League Baseball», Journal of Sports Economics , vol. 3, no 4, novembre, 335-353. Downward, P. et A. Dawson (2000), The Economics of Professional Team Sports , Routledge, Londres. Flynn, M.A. et R.J. Gilbert (2001), «The analysis of professional sports leagues as joint ventures», Economic Journal, vol.111, Février, F27-F47. Fort, R. (2000), «European and North American sports differences?», Scottish Journal of Political Economy , vol. 47, no 4, Septembre, 431-455.

17 Fort, R. et J. Quirk (1995), «Cross-subsidization, incentives, and outcomes in professional team sports leagues», Journal of Economic Literature, vol. 33, septembre, 1265-1299. Grier, K.B. et R.D. Tollison (1994), «The rookie draft and competitive balance: The case of professional football», Journal of Economic Behavior and Organization, vol. 25, n° 2, pp. 293-298. Haan, M, R.H. Koning et A.van Witteloostuijn, (2002), «Market forces in European soccer», document de travail, Groningen, 25 janvier 2002. Hall, S., Szymznski, S. et A.S. Zimbalist (2002), « Testing causality between team performance and payroll: the cases of Major League Baseball and English soccer », Journal of Sports Economics, vol. 3, no 2, mai, 149-168. Hoehn, T. et S. Szymanski (1999), «The americanization of European football», Economic Policy, vol. 14, no 28, 205-240. Késenne, S. (1996), «League management in professional team sports with win maximizing clubs», European Journal for Sport Management, vol. 2, n° 2, pp. 14-22. Késenne, S. (1997), «L’affaire “Bosman” et l’économie du sport professionnel», Problèmes économiques, n° 2503, 15 janvier, pp. 6-10. Késenne, S. (2000a), « Les conséquences de l’arrêt Bosman pour le football européen», Reflets et perspectives de la vie économique , vol. 39, no 2-3, 95-102. Késenne, S. (2000b), «Revenue sharing and competitive balance in professional team sports», Journal of Sports Economics , vol. 1, no1, Février, 56-65. Lavoie, M. (1987) Macroéconomie: théorie et controverses postkeynésiennes, Dunod, Paris. Lavoie, M. (1997), Avantage numérique: l’argent et la Ligue nationale de hockey , Hull, Vents d’Ouest. Lavoie, M. (2000), «La proposition d’invariance dans un modèle où les équipes maximisent la performance sportive», Reflets et perspectives de la vie économique, vol. 39, no 2-3, 85-93. Levin, R.C.,G.J. Mitchell, P.A.Volcker et G.F. Will (2000), The report of the independent members of the Commissioner’s Blue Ribbon Panel on Baseball Economics , New York, Major League Baseball. Noll, R. (1999), «Competition policy in European sports after the Bosman case», in S. Késenne et C. Jeanrenaud (eds)., Competition Policy in Professional Sports: Europe after the Bosman Case , Standaard Editions, Université de Neuchâtel, pp.17-43.

18 Primault, D. et Rouger, A. (1999), «How relevant is North American experience for professional team sports in Europe?», in S. Késenne et C. Jeanrenaud (eds)., Competition Policy in Professional Sports: Europe after the Bosman Case, Standaard Editions, Université de Neuchâtel, pp.17-43. Rosentraub, M.S. (1997), Major League Losers, New York, Basic Books. Ross, S. F. (1999), «Restraints on player competition that facilitate competitive balance and player development and their legality in the United States and in Europe», in S. Késenne et C. Jeanrenaud (eds)., Competition Policy in Professional Sports: Europe after the Bosman Case, Standaard Editions, Université de Neuchâtel, pp. 91-114. Rottenberg, S. (1956), «The baseball players’ labor market», Journal of Political Economy, vol. 64, n° 4, pp. 242-260. Richardson, D.H. (2000) «Pay, performance and competitive balance in the National Hockey League», Eastern Economic Journal, vol. 26, 393-418. Sloane, P.J. (1971), «The economics of professional football: the football as a utility maximizer», Scottish Journal of Political Economy , vol. 17, juin, 121-145. Szymanski, S. et Smith, R. (1997), «The English football industry: profit, performance and industrial structure”, International Review of Applied Economics, vol. 11, no 1, 135-153. Vrooman, J. (1995), «A general theory of professional sports leagues», Southern Economic Journal, vol. 61, n° 4, pp. 971-990. Vrooman, J. (1997), «A unified theory of capital and labor markets in major league baseball», Southern Economic Journal, vol. 63, n° 3, pp. 594-619. Whitney, J.D. (1993), «Bidding till bankrupt: Destructive competition in professional team sports», Economic Inquiry, vol. 31, n° 1, pp. 100-115. Zimbalist, A.S. (2002), « Competitive balance in sports leagues: an introduction », Journal of Sports Economics, vol. 3, no 2, mai, 111-121

19 Tableau 1: Évolution de diverses mesures financières sur une décennie, MLB,NBA, NFL, NHL, 1989-2000, moyenne par club Baseball (MLB)

Basketball (NBA)

Saison

1990

2000

19891990

19992000

1990

2000

19891990

19992000

Revenus (en millions)

51,7 $

105,9 $

22,5 $

79,9 $

46,9 $

127 $

20,9 $

60,6 $

Salaire des joueurs (en millions)

17,3 $

55,7 $

9,1 $

49,2 $

19,3 $

64,8 $

6,0 $

34,5 $

Taux de croissance annuel des salaires

12,5 %

Football (NFL)

18,5 %

Hockey (NHL)

13 %

19 %

Profits EBITDA (en millions)

7,0 $

4,3 $

4,8 $

5,6 $

8,9 $

14,5 $

3,0 $

1,9 $

Part des joueurs

33,5 %

52,6 %

40,5 %

61,5 %

41,2 %

51,0 %

28,7 %

57,0 %

Part des profits

13, 5%

4,1 %

21,3 %

7,0 %

18,9 %

11,4 %

14,3 %

3,1 %

Dette/Valeur

43 %

34 %

24 %

47 %

Dette (en millions)

113 $

74 $

112 $

71 $

Profits nets estimés (en millions)

-3,6 $

+0,4 $

+ 6,8 $

-3,1 $

Taux de profit Gain en capital, rendement annuel

5,8 %

1,6 %

7,75 %

7,0 %

2,7 %

10,75 %

6,7 %

3,1 % 12,5 %

6,8 %

1,4 % 12 %

Source: Les chiffres sont tirés de divers numéros des revues Financial World et Forbes, et les ratios ont été calculés par l’auteur. La part des profits est définie comme étant le rapport des profits bruts (avant paiement des intérêts et avant dépréciation) aux revenus totaux, tandis que le taux de profit est défini comme le rapport des profits bruts à la valeur au marché de l’équipe, selon l’évaluation faite par les revues Financial World et Forbes. Ce n’est donc pas un taux de profit sur la valeur historique, qui serait plus élevé. Le ratio dette/valeur est calculé à partir de la même mesure de valeur au marché.

20 Tableau 3: Partage des revenus, quatre sports majeurs nord -américains

Base-ball

·

·

· · Basket-ball

· · ·

Football

·

· · Hockey

· · · ·

Les revenus des médias nationaux et les revenus provenant des licenses sont partagés, soit environ 20 % des recettes totales . Cependant, environ 75 M$ de ce montant, soit en moyenne 5M$ par club, sera ajouté aux revenus des 15 clubs pauvres, et le même montant est soustrait aux équipes riches (forme modifié du split pool). Ce montant est destiné à croître avec le temps. Le programme spécial de partage des revenus collecte 34 % des recettes locales nettes des équipes (guichets, loges, médias locaux), et les distribue également aux équipes (straight pool), environ 175 M$. Estimation des montants partagés: 44 % (selon l’ancienne formule,Vrooman 1995; avec la nouvelle formule ce chiffre n’a aucun sens,en raison du split pool). 39 % des recettes viennent des guichets, 23% des loges et autres, 16 % des médias locaux, et 20 % des médias nationaux (Major League Baseball 2001) Les revenus aux guichets ne sont pas partagés (42 % des revenus). Seuls les revenus des médias nationaux (et non locaux) sont partagés. Les revenus des médias nationaux représentent environ 25 % des recettes totales, et les médias locaux 15 %. Estimation des montants partagés: 28 % Les revenus aux guichets (mais excluant les recettes des loges et les revenus additionnels des sièges de luxe) sont partagés sur une base 60/40 club local/club visiteur, ce qui signifie que 80 % de ces recettes sont équitablement partagées. Ces recettes représentent autour de 25% des revenus totaux. Les recettes provenant des médias nationaux (peu de médias locaux) sont entièrement partagées, et elles représentent environ 65 % des revenus totaux. Ainsi, au total, environ (20+65) 85 % des recettes totales seraient partagées. Les revenus aux guichets ne sont pas partagés (40% des revenus). Les revenus des médias nationaux (et non locaux) sont partagés, mais ceux-ci représentent au mieux 6 % des recettes totales. Les trois équipes canadiennes de petits marchés reçoivent 3M$ par année. Estimation des revenus partagés: 7,5 %

21 Tableau 4: La proportion entre les revenus totaux des deux équipes les plus riches et des deux équipes les plus pauvres, les quatre sports majeurs nord -américains, 1989-2002 Base -ball

Basket-ball

Football

Hockey

1997/98, 1997

3,1

2,7

1,6

2,6

1998/99, 1998

3,5

3,4

1,6

2,7

1999/2000, 1999

3,7

2,7

1,7

2,3

2000/2001, 2000

3,2

2,5

1,7

2,4

2001/2002, 2001

2,8

Moyenne 1989-2002

2,85

2,4 2,7

1,56

2,72

Source: Les chiffres récents sont tirés de divers numéros de la revue Forbes, tandis que les données moyennes sont calculées à partir des chiffres de Lavoie (1997), eux-même tirés de la revue Financial World. Ces chiffres correspondent aux revenus apres partage des revenus. Les chiffres officiels du MLB pour 2001 donne un ratio de 2.9.

22

Tableau 5 Taux de corrélation entre les masses salariales et les pourcentages de victoires MLB, NBA, NFL, NHL, 1980-2000 Base-ball

Basket-ball

Football

Hockey

1980 à 1989

.226

1989/90, 1990

.178

.721

.373

-.064

1990/91, 1991

.277

.327

.093

.314

1991/92, 1992

.154

.424

.370

.526

1992/93, 1993

.463

.235

.429

.610

1993/94, 1994

.450

.357

-.286

.550

1994/95, 1995

.446

.441

.066

.300

1995/96, 1996

.615

.415

-.122

.464

1996/97, 1997

.688

.311

.341

1997/98, 1998

.744

.482

.338

1998/99, 1999

.689

.386

.237

1999/2000, 2000

.532

.499

2000/2001 Moyenne 1990 à 2000

.471 .409

.410

.139

.400

Source: Données fournies gracieusement par Chris Dlugozima, un étudiant d’économique à la State University of New York at Stony Brook. Voir aussi Zimbalist (2002) pour les données les plus récentes au hockey, et Hall, Szymznski et Zimbalist (2002) pour les trois dernières saisons au base-ball, ainsi que les données des années 1980.

23 Tableau 2: P r i n c i p a les caractéristiques des convention collective des quatre sports collectifs majeurs nord-américains Sport

Hockey (NHL)

Base-ball (MLB)

Basket-ball (NBA)

Football (NFL)

Durée

Signée en janvier 1995 pour 5 ans, mais, renouvellée en juin 1997, et valide jusqu’en septembre 2004

Signée en septembre 2002, valide jusqu’en décembre 2006

Signée en janvier 1999, valide jusqu’en 2004

Signée en février 1998, et renouvellée en 2002 jusqu’en 2007

Repêchage universel Plafond salarial

Repêchage, mais seulement aux ÉtatsUnis, au Canada et à Porto Rico

Repêchage, mais seulement 2 rondes Plafond salarial

Repêchage universel Salaire fonction de la ronde au repêchage (slot system)

Pour la très grande majorité des joueurs entre 23 et 30 ans, mais avec un droit de refus pour les propriétaires

Entre la 3ème et la 6ème saison de MLB; + les meilleurs joueurs avec 2 saisons d’expérience

Aucun arbitrage Plafonds individuels sur tous les salaires, selon le nombre d’années d’expérience dans la NBA (entre 10 et 14 M$)

Aucun arbitrage

Restrictions à la mobilité des joueurs

Joueurs autonomes libres à 31 ans. Joueurs autonomes r e s t r e i n t s après trois saisons ou à 25 ans, avec compensation spécifique par l’équipe qui engage le joueur (maximum de 5 choix au repêchage) et droits de premier refus pour l’équipe

Joueurs autonomes libres après 6 saisons Quotas sur le nombre de joueurs autonomes pouvant être engagés par une équipe, selon le nombre total de joueurs autonomes libres disponibles

Joueurs autonomes libres après 5 saisons. Joueurs autonomes restreints après 4 saisons, avec droits de premier refus pour l’équipe

Joueurs autonomes libres après 4 saisons, mais avec compensation générale sur les pertes nettes, sauf pour un joueur de franchise, dont le contrat à long terme est garanti, et un joueur dit de transition

Salaire minimum

180 000 $

Recrues

Arbitrage salarial

Plafonds à la masse salariale (cap)

Taxe de luxe ou taxe de rétablissement de l’équilibre sportif

· ·

Aucun plafond

Aucune

· ·

300 000 $ en MLB 50 000 $ si renvoyé aux ligues mineures Aucun plafond

Au delà d’un seuils entre 117 et 136 M$ par club en 2003-2006, le taux d’imposition sur les salaires excédentaires sera de 22,5 % pour un premier dépassement, 30 % pour le second et 40 % pour le 3ème

350 000 $

Plafond à 48% des revenus, mais avec exceptions; si la part des salaires dépasse 55 %, taxe d’engagement (escrow tax) imposée aux joueurs Plancher salarial Oui, si la masse salariale excède 60,5 % des revenus, auquel cas les propriétaires dont l’équipe dépasse ce taux paient une taxe de 100 % sur les salaires excédentaires

Continuation du slot system

· ·

250 000 $ Minima selon l’expérience

·

64 à 65,5 % des revenus bruts soit 71M$ par club en 2002 plancher salarial de 60 M$

·

Aucune

Revenue Sharing and the Salary Cap in the NFL: Perfecting the Balance Between NFL Socialism and Unrestrained Free-Trade I. II.

III.

THE PRE-GAME SHOW: AN INTRODUCTION ................................ 642 FIRST AND TEN: THE EVOLUTION OF REVENUE SHARING IN THE NFL – FROM ITS ORIGINS TO THE LEAGUE’S CURRENT SYSTEM ....................................................................................... 647 A. The Emergence of the “League Think” Philosophy ............. 647 B. The Evolution of the Revenue Sharing System: Historical Challenges............................................................................ 649 C. The Current Revenue Sharing System in the NFL ............ 651 1. The Master Agreement’s Contribution to the Revenue Sharing System ............................................... 652 2. The Second Category of the Revenue Sharing System: Television Revenue and Gate Receipts. .......... 656 3. Television Revenue: The Foundation of the NFL Revenue Sharing System ............................................... 659 THIRD AND LONG: THE HARMFUL EFFECTS OF “LOCAL REVENUE” AND THE DESPERATE NEED FOR REVENUE SHARING REFORMS ..................................................................... 660 A. Unshared “Local Revenue” and the Erosion of the NFL’s Collective Mentality ............................................................. 660 1. “Local Revenue” as the Cause of “Franchise Free Agency” ........................................................................... 664 B. The Widening Revenue Gap and the Salary Cap System .. 666 1. The Failure of the Salary Cap System and the Resulting Competitive Inequalities on the Field.......... 669 C. The NFL’s Current Reaction to the Problems Posed by “Local Revenue” and the Widening Revenue Gap .............. 671 D. Labor Unrest: Why are Revenue Sharing Reforms so Crucial to the Successful Extension of the Current CBA and its Salary Cap System? ................................................ 676 1. The On-going Labor Negotiations: Recent Developments and Their Implications for Revenue Sharing Reforms............................................................. 678 641

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FOURTH AND GOAL: SUPPLEMENTAL REDISTRIBUTION - A PROPOSED REFORM TO THE NFL’S REVENUE SHARING SYSTEM ....................................................................................... 682 THE POST-GAME SHOW: A CONCLUDING SUMMARY ................... 684 I. THE PRE-GAME SHOW: AN INTRODUCTION

Since its inception in 1961, the revenue sharing system utilized by The National Football League (“NFL”) has been instrumental in propelling the League to the forefront of professional sports in America.1 In the early 1960s, Commissioner Pete Rozelle ushered in an era of collectivism among the individual team owners that came to define the NFL’s economic approach for the next four decades. Relying on the collective outlook that became known as the “League Think” philosophy, Rozelle convinced the individual owners that by pooling their resources and sharing their profits, they would be able to provide a product that, as a whole, was much more valuable than the sum of its parts.2 The idea took off in 1961 when Rozelle successfully persuaded the individual owners to give up their local television broadcasting rights and instead sell all broadcasting rights together as a national package; the proceeds were then split evenly among each NFL team.3 From 1961 onward, the League’s continued commitment to the equal sharing of television revenues has remained the foundation of the NFL’s revenue sharing system.4 Furthermore, the financial parity that resulted from this collective philosophy enhanced the competitiveness of the League as a whole, thereby fostering the massive popularity still enjoyed by the League today.5 For nearly forty years, the NFL’s revenue sharing system remained largely unchanged as NFL owners were content to rely on the success that revenue sharing brought to the League as a whole.6 During this period, the individual owners were completely satisfied with the revenue they received under the revenue sharing system, and they were largely unconcerned with trying to garner any type of 1. Sanjay Jose’ Mullick, Browns to Baltimore: Franchise Free Agency and the New Economics of the NFL, 7 MARQ. SPORTS L.J. 1, 1 (1996). 2. Id. 3. Id. 4. See Stefan Fatsis, Can Socialism Survive? The All-For-One, One-For-All Ethos of Pro Football Has Made It the Envy of Other Sports; The NFL Is Fighting To Make Sure It Stays That Way, WALL ST. J., Sept. 20, 2004, at R1 [hereinafter Fatsis, Can Socialism Survive?]. 5. Mullick, supra note 1, at 12. 6. Fatsis, Can Socialism Survive?, supra note 4.

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competitive financial advantage over their fellow owners.7 In recent years, however, there has been a significant erosion in the NFL’s collective mentality largely due to the development of sources of unshared revenue, known as “local revenue,” which enables certain teams to gain a competitive advantage by utilizing this unshared revenue that is unavailable to some of their less fortunate counterparts.8 Although the NFL and its member-clubs shared more than eighty percent of the roughly $5.5 billion in total League revenue generated during the 2004 season, there has recently been a dramatic increase in unshared local revenue, which is threatening the future financial parity of the League.9 Furthermore, because most sources of local revenue are directly tied to a team’s stadium ownership and its market size, the League’s current revenue sharing system has created an environment in which the most profitable teams are better situated to capitalize on unshared local revenue, thereby exacerbating a widening revenue gap between those teams at the top and those at the bottom. The current revenue sharing system utilizes a two pronged approach to distribute League revenue, but it also carves out an exception for sources of unshared local revenue. The two prongs of the revenue sharing system can be distinguished by the source of revenue and amount shared under each category, as well as the various documents that govern their existence. The first category comprises the sharing of revenue generated by licensing and sponsorship agreements, and this category is governed by a recently approved accord among NFL owners known as the “Master Agreement.”10 The second category covers the sharing of all revenue that is generated by the actual playing of games on the field, and this category is governed by a combination of provisions in the Collective Bargaining Agreement (“CBA”) and the NFL Constitution and Bylaws (“NFL Constitution”).11

7. 8. 9. 10.

Id. Id. Id.; Mullick, supra note 1, at 1. The Master Agreement is basically an extension of the NFL Trust, which was a virtually identical agreement among owners regarding the sharing of licensing revenue with origins dating back to the emergence of the “League Think” philosophy in the 1960s. See Stefan Fatsis, Dallas Owner Again Challenges NFL’s Licensing, WALL ST. J, Apr. 2, 2004, at B3 [hereinafter Fatsis, Dallas Owner]. Cf. Daniel Kaplan, Tagliabue: NFL Trust Survival ‘a Done Deal,’ STREET & SMITH’S SPORTS BUSINESS JOURNAL, Mar. 29, 2004, at 1 [hereinafter Kaplan, Tagliabue]. 11. See NFL CONST. art. 10.3; see also NFL, NFL COLLECTIVE BARGAINING AGREEMENT 2002-2008 art. XXIV, §§ 1-4, available at http://www.nflpa.org/Agents/

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This second category, which includes television broadcasting deals and gate receipts from stadium attendance, is responsible for a strong majority of the total revenue shared between the League and its individual franchises.12 Furthermore, while these categories can be viewed as two components in a greater revenue sharing system, it is important to note that they were not developed together, but instead are separate outgrowths of the NFL’s greater collective mentality. As a result, the system does not necessarily fit flawlessly together, which makes any comprehensive analysis of the overall system a somewhat difficult task. Nevertheless, under their respective governing documents, both categories treat League revenue in a similar fashion by distinguishing those revenue sources that are subject to sharing from those local revenue sources that remain unshared. While this distinction is not as readily apparent in the Master Agreement, the relevant provisions within the CBA clearly separate total League revenue into “Defined Gross Revenue” (“DGR”), which is subject to revenue sharing, and “Excluded DGR,” which is not.13 In addition to this comprehensive approach to revenue sharing, the NFL’s greater financial model also includes a salary cap system that is similarly intended to preserve the League’s financial equality and to guarantee the players their fair share of League profits. Although these two semi-socialist initiatives can arguably be differentiated as separate and distinct financial systems, revenue sharing and the salary cap are in many ways inseparably connected, and therefore any attempt at a complete analysis of one system necessarily requires a simultaneous examination of the other. The salary cap system, which sets both a floor and a ceiling on what a team can (or must) spend on player salaries, is interrelated with the League’s revenue sharing system because each year the salary cap’s floor and ceiling are set at a percentage of DGR.14 main.asp?subPage=CBA+Complete [hereinafter CBA]; Fatsis, Can Socialism Survive?, supra note 4, at R2; Ira Miller, Revenue-sharing Rates as a Hot Topic, S.F. CHRONICLE, Mar. 28, 2004 at, C2 [hereinafter Miller, Revenue-sharing Rates]. 12. Miller, Revenue-sharing Rates, supra note 11, at C2. 13. See NFL CONST. art. 10.3; CBA, supra note 11, art. XXIV, § 1(a); Fatsis, Can Socialism Survive?, supra note 4, at R2. For a detailed discussion of DGR and Excluded DGR see discussion infra Part.II.C.2. 14. See CBA, supra note 11, art. XXIV, §§ 2-4; see also Jarrett Bell, NFL Tug-ofWar Over Revenue, USA TODAY, July 6, 2004, at 1C; Fatsis, Can Socialism Survive?, supra note 4, at R5. The salary cap system, which has been widely credited with maintaining the competitive parity within the NFL, is not usually considered to be part and parcel with the League’s greater revenue sharing system, and instead is normally regarded as a separate and distinct financial model. The salary cap system, however, is also responsible for governing how League revenue is shared with players, and therefore should also be

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Therefore, much like under the revenue sharing system, Excluded DGR is not considered when calculating the salary cap’s annual floor and ceiling. This characteristic of the salary cap system has recently attracted significant criticism from the NFL Players Association (“NFLPA”) because it essentially deprives the players of a portion of League revenue that they would otherwise be guaranteed by the salary cap’s floor.15 As a result, the treatment of local revenue has become a major hurdle in the on-going negotiations to extend the current CBA, which expires after the 2007 season.16 Finally, it is also important to examine how the growth in local revenue has contributed to the salary cap’s failure and to the widening revenue disparities, which together severely threaten the future financial viability of the lowest-revenue teams. This note argues that the League must reform the current revenue sharing model in order to correct the widening revenue gap between the lowest and highest revenue teams, which if not adequately addressed soon could severely impair the future popularity and success of the NFL. Part II describes the emergence of revenue sharing in the NFL; its evolution due to past challenges initiated by profit-oriented owners; and the details of the current revenue sharing system in place today. Part III establishes how the emergence of unshared “local revenue” has eroded the NFL’s collective mentality, thereby causing a variety of problems for the League. Part IV proposes a solution intended to effectively alleviate the League’s growing financial inequalities while at the same time maintaining the important incentives created by a reasonable amount of unshared revenue. In particular, this section proposes a redistributive formula that allows for a healthy level of unshared local revenue, but simultaneously prevents extreme financial inequalities by redistributing excessive local revenue to those teams most in need. On March 8, 2006, just before this note went to press, the NFL owners and the NFLPA reached a last-minute labor agreement, which included significant reforms to the revenue sharing system, and considered as part of the NFL’s greater revenue sharing system. See discussion infra Part III.D explaining how revenue sharing and the salary cap are interrelated. 15. See Daniel Kaplan, NFL Impasse on CBA Likely to Reach 2006, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Nov. 28, 2005, at 1 [hereinafter Kaplan, NFL Impasse]; Liz Mullen & Daniel Kaplan, NFL Sides Agree: Deal Must be Done March 1, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Jan. 16, 2005, at 3 [hereinafter Mullen & Kaplan, NFL Sides Agree]; Jarrett Bell, NFL Tug-of-War, supra note 14, at 1C. 16. See discussion infra Part.III.D describing the NFLPA’s position regarding the sharing of local revenue, and the tentative agreement recently achieved by the League and the NFLPA to share “total football revenue.”

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therefore has important implications for much of the analysis presented in this note.17 With their backs against the wall, the owners were forced to postpone the official start of the 2006 season and extend the March 3rd free agency deadline in order to find a way to reach an agreement that now preserves the current salary cap system, which would have otherwise expired at the official start of the 2006 season.18 Largely surrendering to the demands of the players union, the owners not only approved a six-year collective bargaining agreement, but they also reached a corresponding revenue-sharing deal, which the NFLPA had astutely required as a condition of its final offer for reaching a new labor pact.19 Although the details of the new revenue sharing plan are still emerging, the owners appear to have adopted a plan that is extremely similar in its general approach to the redistributive formula that this note proposes as a solution to the various problems associated with local revenue and the widening revenue gap.20 While portions of this note’s analysis may have been rendered somewhat moot by the League’s recent course of action, these developments also largely validate many of the arguments raised throughout the analysis. Furthermore, as a whole, this note remains pertinent in its comprehensive analysis of the NFL revenue sharing system. In particular, the League’s newly adopted plan appears to be somewhat of a quick-fix, which will still face many of the same issues raised in this note, and has already garnered criticism from both ends of the revenue sharing debate.21 Finally, it is worth noting that the new guard of profit-oriented owners, who strongly opposed the idea of increased revenue sharing, appear to have reluctantly embraced the “League Think” philosophy by putting the League ahead of 17. Daniel Kaplan, NFL Owners to Set Revenue-Sharing Plan, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Mar. 20, 2006 at 1 [hereinafter Kaplan, NFL Owners]; Daniel Kaplan, Chaos and Compromise in Dallas, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Mar. 13, 2006 at 1 [hereinafter Kaplan, Chaos and Compromise]; Liz Mullen, Winding Road To NFL Labor Peace, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Mar. 13, 2006 at 1 [hereinafter Mullen, Winding Road]. 18. Before the new labor agreement was approved, the now-defunct CBA would have lasted through the 2007 season, but the current 2006 season would have been the last one subject to the salary cap, which would have therefore expired along with the start of the 2006 season. 19. Kaplan, NFL Owners, supra note 17, at 1; Kaplan, Chaos and Compromise, supra note 17, at 1; Mullen, Winding Road, supra note 17, at 1. 20. See Kaplan, NFL Owners, supra note 17, for a detailed description of the new revenue sharing plan as of March 20, 2006. 21. See Kaplan, NFL Owners, supra note 17; Kaplan, Chaos and Compromise, supra note 17 (discussing unhappy owners, who are already expressing various criticisms of this new plan, including some of the lowest-revenue owners who have criticized its failure to include all local revenue within the revenue shared between teams).

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themselves, and recognizing that the value of their individual franchise is directly tied to the overall health of the League. II. FIRST AND TEN: THE EVOLUTION OF REVENUE SHARING IN THE NFL – FROM ITS ORIGINS TO THE LEAGUE’S CURRENT SYSTEM A. The Emergence of the “League Think” Philosophy The NFL’s collective “League Think” philosophy emerged in the early 1960’s as the brain child of then Commissioner, Pete Rozelle.22 Rozelle convinced the League’s founding owners, such as George Halas of the Chicago Bears and Wellington Mara23 of the New York Giants, to relinquish their control over local television broadcasting rights, and instead combine these rights into a national package.24 According to Rozelle’s plan, the League would then sell this national package to the television networks, and the proceeds of the sale would be split evenly among each NFL franchise.25 Rozelle argued that by pooling resources and sharing revenue, the “League Think” philosophy would stabilize the competitive balance within the League, thereby making its product more marketable over the long run; and as a result, ensuring the viability of the League as a whole.26 Explaining that the profitability of each individual team was necessarily tied to the success of the League as a whole, Rozelle convinced the owners that their individual profits would increase by putting the interests of the League ahead of their own.27 The NFL owners ultimately agreed to sell their television rights to CBS as a national package, but the resulting contract between the NFL and CBS was voided by a 1961 federal circuit court decision finding that the contract violated antitrust laws.28 22.

at 1.

See Fatsis, Can Socialism Survive?, supra note 4, at R3; Mullick, supra note 1,

23. The author would like to pay his respect to the family of the late Giants owner Wellington Mara, who passed away on October 25, 2005 at the age of 89. In addition to being a wonderful person, Mara has been widely recognized as one of the NFL’s most influential and beloved owners, whose foresight helped pave the way for the League’s revenue sharing system and the resulting success still enjoyed by the NFL today. See Daniel Kaplan, Pro Football Loses a Giant Leader, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Oct.31, 2005, at 4 [hereinafter Kaplan, Pro Football Loses]. 24. Fatsis, Can Socialism Survive?, supra note 4, at R3. 25. Id. 26. Mullick, supra note 1, at 1. 27. Id. at 1-2. 28. See United States v. NFL, 196 F. Supp. 445, 446-47 (E.D. Pa. 1961); Fatsis, supra note 4, at R3; see also WTWV, Inc. v. NFL, 678 F.2d 142, 144 (11th Cir. 1982)

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Responding to the circuit court’s decision, seventy-two days later Congress passed the Sports Broadcasting Act, which enabled professional sports leagues to negotiate television deals as single units, thereby creating an antitrust exemption that has revolutionized the sports industry.29 In 1962, armed with the recently enacted antitrust exemption, the NFL and CBS entered into a contract whereby CBS paid the NFL $4.65 million per year for two years in exchange for the exclusive rights to broadcast all NFL games played during that period.30 As a result, the popularity of the league exploded with television ratings soaring fifty percent in the second year of the contract.31 Furthermore, the NFL’s next contract with CBS reflected the League’s rapidly growing popularity through a payout of $14.1 million per year, more than triple its previous contract.32 Over the next two decades, the NFL continued to grow, especially with the 1970 merger of the NFL and its upstart rival, the American Football League (“AFL”).33 Despite the League’s continued growth, however, the NFL’s business model and that of the individual teams changed very little.34 Throughout the 1980s, the NFL owners were content to sit back and collect their ever-increasing, equal shares of the national television deals,35 while also sharing the gate receipts generated by crowded stadiums.36 The profits accumulated by the individual teams were heavily dependent on the revenue generated by the league as a whole, and the individual owners were not overly concerned with gaining a competitive advantage by increasing their own team’s relative revenues.37 According to current Baltimore Ravens President Dick Cass, “ ‘There were not as many revenue opportunities . . . .’ Most owners ‘didn’t control the stadiums, they didn’t control concessions, they didn’t control parking. Sports (describing the history behind the decision in U.S. v. NFL and stating that the contract with CBS was actually meant to mimic a similar broadcasting agreement already arranged by the NFL’s upstart competitor, the American Football League (“AFL”)). 29. WTWV, 678 F.2d at 144; Fatsis, Can Socialism Survive?, supra note 4, at R3. 30. Fatsis, Can Socialism Survive?, supra note 4, at R3. 31. Id. 32. Id. 33. Id. 34. Id. 35. In 1982, the NFL signed national TV deals with CBS, NBC, and ABC, which when combined generated a total of $1.89 billion in revenue for the NFL through the 1986 season.. NFL TV Rights: The Escalation of Television Rights Fees for the NFL:, SPORTS ILLISTRATED.COM, Nov. 8, 2004, http://sportsillustrated.cnn.com/2004/football/nfl/wires/11/ 08/2024.ap.fbn.nfl.tv.rights.chart.0268 (on file with author). 36. Fatsis, Can Socialism Survive?, supra note 4, at R3. 37. See Mullick, supra note 1, at 12-13.

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sponsorships weren’t a big deal.’ ”38 Under this business model, the opportunities for teams to generate their own revenue were virtually nonexistent, and the only way for teams to maximize their profitability relative to other teams was to cut costs—namely, player salaries.39 B. The Evolution of the Revenue Sharing System: Historical Challenges While the general structure of the NFL’s cooperative approach remains an integral part of the League today, challenges to the League’s collective mentality, which began in the 1990s, have revolutionized the predominant business model currently utilized by the NFL and its owners. As current NFL Commissioner Paul Tagliabue explains, the NFL remains committed to maintaining its cooperative structure because “ ‘[c]learly, the attractiveness of the league is not dependent on any one team or small group of teams . . . . It’s a total league. That was the philosophy from the early ‘60s onward, and it’s continued.’ ”40 The business model followed by the NFL owners, on the other hand, has drastically evolved in recent years due largely to an emerging faction of owners who believe that teams should be given greater control over their revenue in order to better market themselves.41 One of the first and most influential owners to challenge the NFL’s “League Think” philosophy was Jerry Jones, an oil and gas tycoon who paid $140 million for the Dallas Cowboys franchise in 1989.42 Initially, Jones focused his confrontations with the League over the issue of national sponsorship and marketing deals, which at that time were exclusively controlled by the League’s profitable arm, NFL Properties.43 Jones criticized his take from the national sponsorship deals as inadequate for the marketing power of his particular franchise.44 Jones basically felt that he could do a better job of marketing his team by negotiating local deals, instead of relying

38. 39. 40. 41. 42. 43. 44.

Fatsis, Can Socialism Survive?, supra note 4, at R3. Mullick, supra note 1, at 13. Fatsis, Can Socialism Survive?, supra note 4, at R3. See id. at 3-6. Id. at 3. See Miller, Revenue-sharing Rates, supra note 11, at C2. See Fatsis, Can Socialism Survive?, supra note 4, at R3-R4; Miller, Revenuesharing Rates, supra note 11, at C2.

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on the League to market his team as part of the total package of the League.45 In 1995, Jones directly challenged the League by entering into local sponsorship deals with Pepsi and Nike, despite the League’s supposedly exclusive deals with Coke and Players Inc., the licensing arm of the NFLPA.46 The brash move by Jones prompted the NFL to file a law suit against the Cowboys for $300 million.47 The League labeled Jones’s conduct as “ambush marketing deals” and sought a ruling that would enjoin the Cowboys from violating their agreements with NFL Properties regarding the NFL’s exclusive control over team logos.48 Jones responded by filing a $700 million counterclaim against the League, accusing the NFL of preventing teams from marketing themselves.49 In late 1996, the two sides ultimately reached a settlement that allowed the Cowboys to keep their new sponsorship deals. More importantly, it opened the door for other NFL teams to secure their own local sponsorship deals.50 Jones’s ability to successfully challenge the League in the area of local sponsorship not only created a new source of unshared revenue for individual teams, but more significantly, it marked the beginning of an erosion in the collective mentality that has dominated the League for so many years.51 The current ramifications of this settlement between Jones and the NFL are illustrated by the coexisting marketing deals currently held by both individual teams and the League as a whole. For example, Pepsi and Coors are now the “official” soft drink and beer of the NFL, giving each company the right to use the NFL logo and the logos of the 32 individual franchises in national advertising.52 Individual teams, however, now may arrange their own local deals with other vendors, such as Coke and Budweiser.53 While Jones’s victory over the NFL was limited to the area of sponsorship and marketing deals, his incentive-based arguments have gained some support from a few of the other owners, and the League has ultimately been forced to re-evaluate the twoprong current revenue sharing system. 45. 46. 47. 48. 49. 50. 51. 52. 53.

Sam Farmer, NFL Reviews Matter of Trust, L.A. TIMES, Mar. 28, 2004, at D1. Id. Id. Id. Id. Id. Fatsis, Can Socialism Survive?, supra note 4, at R4. Id.; see Fatsis, Dallas Owner, supra note 10, at B3. Fatsis, Can Socialism Survive?, supra note 4, at R4; Fatsis, Dallas Owner, supra note 10, at B3 (stating that Coke is poured in 19 NFL stadiums whereas Pepsi is only poured in 12 stadiums).

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C. The Current Revenue Sharing System in the NFL The current revenue sharing system in place in the NFL today can be separated into two basic subsections or categories. The first category comprises the sharing of revenue generated by licensing agreements such as sponsorships and marketing deals, as well as League merchandise sales. This licensing element is governed by the recently enacted “Master Agreement,” which is an extension of the “NFL Trust,” an agreement between owners with origins dating back to the collective mentality that emerged in the 1960s.54 Under the Master Agreement, the NFL retains most of its control over the team logos used by the 32 individual franchises, and the League has reserved some of its power to determine how each individual franchise can use its own logo.55 The new agreement, however, does not simply preserve the status quo regarding local sponsorship deals, but instead also gives individual teams greater freedom to control their own local marketing revenue.56 Nevertheless, because the Master Agreement was not unanimously approved by all the team owners, there is some uncertainty about whether the agreement will be binding on those owners who voted against it.57 The second more commonly known category of the revenue sharing system is comprised of all the revenue that is generated by the actual playing of the games on the field.58 Unlike the Master Agreement, this category is not governed by a single document, but instead by a combination of provisions from both the NFL Constitution and the CBA. This second category, which includes the television deals covering the rights to broadcast NFL games as well as the gate receipts generated by stadium attendance, comprises the strong majority of the total revenue shared among individual NFL franchises.59 Although this second category generates the vast majority of the revenue shared by NFL teams, both aspects of the revenue 54. 55.

See Fatsis, Dallas Owner, supra note 10, at B3. Id. Under the NFL Trust, the League actually owned each team’s logo, and teams had to get League permission before entering into their own sponsorship deals. Kaplan, Tagliabue, supra note 10, at 1. Under the newly enacted Master Agreement, teams now legally own their own logo, which was intended to insulate the Master Agreement from any legal challenges by those owners who voted against it. Id. See, e.g., infra text accompanying notes 81-84. 56. See id. 57. See Farmer, supra note 45, at D1; Fatsis, Can Socialism Survive?, supra note 4, at R1. 58. See CBA, supra note 11, art. XXIV, §1(a)(i)(1). 59. See Miller, Revenue-sharing Rates, supra note 11, at C2.

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sharing system represent the collective “League Think” philosophy that has played such a central role in the success of the NFL.60 Despite their common goal, however, the monetary disparity between these two categories cannot be ignored. For example, under the system in place at the end of the 2004 season, the licensing element only generated between $4 and $5 million for each team, whereas the national television deals alone generated $80 million per team.61 Notwithstanding the actual disparity in the contribution that each category makes to the overall revenue shared by the individual NFL teams, it is important that they be recognized as part of the same general system because they are inseparably connected by the League’s greater collective mentality. Furthermore, as a number of owners noted when voting in favor of the Master Agreement, its approval was a significant gesture in reaffirming the importance placed upon the League’s commitment to revenue sharing.62 1. The Master Agreement’s Contribution to the Revenue Sharing System The new Master Agreement determines which categories of licensing are exclusively controlled by the League and conversely, how individual franchises can supplement their income with unshared licensing and sponsorship agreements.63 Under the Master Agreement, the most significant sponsorship category exclusively controlled by the League is on-field sponsorship deals.64 The NFL currently has on-field deals with Gatorade, the Pepsi-owned sports drink, and Motorola Inc., which supplies head sets worn by NFL coaches.65 These two companies are the only corporate sponsors whose brands are allowed on NFL sidelines.66 While the Master Agreement clearly restricts the ability of individual owners to enter into sponsorship deals that might conflict with League-wide sponsors, the agreement also recognizes the victory Jerry Jones achieved in 1996 by providing some flexibility for individual teams to negotiate their own local sponsorship deals.67

C2.

60. 61.

Id. Farmer, supra note 45, at D1; Miller, Revenue-sharing Rates, supra note 11, at

62. 63.

See Miller, Revenue-sharing Rates, supra note 11, at C2. See Fatsis, Dallas Owner, supra note 10, at B3; Kaplan, Tagliabue, supra note

10, at 1. 64. 65. 66. 67.

Fatsis, Dallas Owner, supra note 10, at B3. Id. Id. Id.

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These local sponsorship deals serve as an important source of unshared revenue, which has increasingly drawn the attention of team owners seeking to obtain a competitive advantage over the rest of the League. According to the Master Agreement, the League can sell the rights to use the 32 team logos collectively only within an exclusively League-controlled sponsorship area.68 Otherwise, the individual teams legally own their own logos and are free to negotiate their own local marketing deals using their logos.69 Furthermore, teams can establish their own retail shops to sell team apparel, and unlike the massive quantity of merchandise sold by the League itself, any apparel sold at team stores generates unshared revenue streams.70 Therefore, teams that create their own retail shops can take advantage of their marketability by keeping all of the revenue generated by these stores. Under the Master Agreement, the individual franchises and the NFL itself equally share all the revenue that is generated by League merchandise sales and exclusive League-wide sponsorship deals.71 In recent years, the individual teams received between four and five million dollars a year, but that figure is expected to at least double under contracts already signed by the League.72 The NFL agreed to extend its sponsorship agreement with Pepsi in 2002, under which Pepsi is obligated to pay $440 million in rights, fees, advertising, and marketing through 2011.73 Pepsi will pay the League an average of sixteen million dollars a year, which is about one-third more than under its previous contract; other advertising obligations could push the total value of the deal over $550 million.74 Furthermore, the League also recently extended its sponsorship deals

68. 69.

See id. See id. As further explored below, this is a somewhat significant difference between the Master Agreement and its predecessor, the NFL Trust. See, e.g., infra text accompanying notes 81-84. 70. See Daniel Kaplan, Divide on Revenue Sharing Persists in NFL Trust Debate, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Feb. 23, 2004, at 1 [hereinafter Kaplan, Divide on Revenue Sharing]; Farmer, supra note 45, at D1 (stating that New England, Washington, Dallas, and Tampa Bay have all established retail shops to sell team gear). 71. Kaplan, Divide on Revenue Sharing, supra note 70, at 1; Kaplan, Tagliabue, supra note 10, at 1. 72. Miller, Revenue-sharing Rates, supra note 11, at C3; see Jeff Duncan, Licensing Deal to Continue As Is, TIMES-PICAYUNE, Mar. 31, 2004, at 2. The statistics used above to illustrate the monetary value of licensing revenue shared in recent years were calculated under the NFL Trust not the Master Agreement, but overall numbers should not be significantly different under the Master Agreement. 73. Fatsis, Dallas Owner, supra note 10, at B3. 74. Id.

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with Gatorade and Visa, which should further contribute to the increasing amount of shared licensing revenue.75 Despite mounting concern that there should have been an overhaul of the entire revenue sharing system before proceeding with the Master Agreement, in the spring of 2004 the owners passed the fifteen year-long agreement by a vote of twenty-six to three (with three abstentions).76 Prior to the vote, the Raiders, Redskins and Cowboys, which at the time were the three teams expected to vote against the agreement, all expressed their belief that they would be bound only if they voted in favor of the agreement.77 Following the vote, however, the question still remains whether the agreement is binding on those owners who voted against it. Jerry Jones has publicly maintained that he is not bound by the Master Agreement because he voted against it.78 The League, on the other hand, expressed the converse view that any vote on matters of League policy requires a three-quarters majority, or twenty-four team owners, at which point the policy takes effect and becomes binding on all NFL teams.79 Other team owners have supported the League’s position. As Cleveland Browns President Carmen Policy explained, “[a]nybody who feels a league, a partnership, cannot bind itself by a three-fourths vote is calling for anarchy.”80 Furthermore, the League specifically structured the Master Agreement to inoculate its ultimate approval from any legal challenges by owners like Jerry Jones.81 In particular, the Master Agreement gives individual franchises ownership of their own logos, and teams no longer need League approval before entering local sponsorship deals.82 Additionally, the League also tried to placate owners like Jones by expanding the geographic constraints placed on each team’s marketing territory, an area within which a given team is

75. 76. 77.

Id. Id.; see Miller, Revenue-sharing Rates, supra note 11, at C2. Miller, Revenue-sharing Rates, supra note 11, at C2. Oakland Raiders President Amy Trask articulated the Raiders’ position when she said, “[o]ur general counsel has advised the league that on April 1 [2004] the right to our marks and logos reverts to us.” Kaplan, Tagliabue, supra note 10, at 1. 78. Fatsis, Dallas Owner, supra note 10, at B3 (mentioning that Jones said that turning over marketing rights to the League has been an individual club decision in the past, and quoting Jones as saying, “[league-wide deals] are well and good as long as each club, of its own volition, participates in those deals . . . . I’m saying I have my logos and marks and can do what I want with them.”). 79. Id. 80. Miller, Revenue-sharing Rates, supra note 11, at C2. 81. Kaplan, Tagliabue, supra note 10, at 1. 82. Id.

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free to enter into their own local sponsorship deals.83 Previously, teams were prevented from marketing beyond a seventy-five mile radius around their home city, but the Master Agreement now allows teams to market throughout their entire state, provided they do not reach within a seventy-five mile radius around an in-state competitor’s city.84 When considering these characteristics of the Master Agreement, it would seem that there is not an especially great probability of an owner challenging the Agreement. It is impossible, however, to predict whether an owner like Jerry Jones might be offered a deal attractive enough to entice him into challenging the Master Agreement. In the end, the question of whether the Master Agreement is binding on those owners who voted against it remains unanswered, but if the conflict were to come to a head, there could be major ramifications throughout the League. The likelihood that Jones would prevail on such a challenge is relatively slim because the argument articulated by the League and owners like Policy has plenty of merit. Furthermore, there are policy reasons why Jones’ argument should fail, such as preventing an increase in significant economic inequalities, which threaten the competitive balance that has been so instrumental to the NFL’s success.85 Although there is no clear answer regarding what would happen if Jones challenges the Master Agreement, League sources have speculated that Jones might initiate a challenge by seeking a Cowboys sponsor which conflicts with an exclusive category reserved for League-wide action under the Master Agreement.86 A likely scenario would be for Jones to negotiate a local on-field sponsor that conflicts with the League-wide on-field sponsorship deals already negotiated with companies like Gatorade and Motorola.87 If Jones indeed decides to challenge the Master Agreement, the League would most likely respond by filing a lawsuit against Jones for violating the terms of the Agreement. The question would then become whether a three-quarters vote by the team owners is in fact binding on every team regardless of whether a specific team voted against the Master

83. Id.; Daniel Kaplan, Texans Lead The NFL in Marketing Statewide, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Sept. 13, 2004, at 3 [hereinafter Kaplan, Texans Lead]. 84. Kaplan, Tagliabue, supra note 10, at 1; Kaplan, Texans Lead, supra note 83, at 3. 85. See discussion infra Part III.B for a description of the widening revenue gap in the NFL and its potential consequences for the success of the League. 86. Fatsis, Dallas Owner, supra note 10, at B3. 87. Id.

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Agreement. Finally, in the event that Jones successfully challenges the limitations of the Master Agreement, there would not only be a substantial monetary loss for the NFL’s revenue sharing system, but more importantly, it would create a symbolic rift in the foundation of the League’s revenue sharing philosophy. 2. The Second Category of the Revenue Sharing System: Television Revenue and Gate Receipts. The second category of the revenue sharing system, which comprises the vast majority of the total amount of revenue shared each year, consists of all the revenue generated by the actual games on the field. This general subsection of the revenue sharing system is governed by a series of provisions in both the CBA and the NFL Constitution. The CBA establishes “Defined Gross Revenue” (“DGR”), as revenue composed of “all sources, whether known or unknown, derived from, relating to or arising out of the performance of players in NFL football games.”88 Furthermore, in defining DGR, the CBA identifies those sources of revenue that are explicitly included and excluded in DGR.89 This distinction between DGR and Excluded DGR plays an extremely important role in the revenue sharing system because those sources of revenue that fall within the definition of DGR are shared among the 32 NFL franchises, whereas the individual franchise generating the Excluded DGR keeps all of that revenue.90 The two major revenue sources that are explicitly set forth in the definition of DGR are: (1) the proceeds from the sale of television broadcasting rights and (2) “gate receipts . . . including ticket revenue from ‘luxury boxes,’ suites[,] and premium seating subject to gate receipt sharing among NFL Teams.”91 88. 89. 90.

CBA, supra note 11, art. XXIV, § 1(a). See id., art. XXIV, § 1(a)(i)-(iii). While the CBA does not explicitly state that DGR is meant to establish the revenue sources subject to the revenue sharing system, that implication may be inferred when the provisions of the CBA relating to DGR are considered in relation to the CBA as a whole and to the applicable provisions of the NFL Constitution. Nor does the CBA expressly state that Excluded DGR is not subject to the revenue sharing system, but that assertion may similarly be inferred by considering the CBA as a whole. DGR also plays an important role in establishing the NFL’s salary cap, which has had a huge impact on the ability of low-revenue teams to compete with their wealthier counterparts. Despite the salary cap’s intention of helping to level the playing field for lower-revenue teams, the cap has actually allowed an increase in the inequalities that exist for lower-revenue teams. See discussion infra Part III.B. 91. CBA, supra note 11, art. XXIV, § 1(a)(i)(1)-(2) (emphasis added); see NFL CONST. art. 10.3 (stating, “[a]ll regular season (and preseason network) television income will be divided equally among all member clubs of the League”); Fatsis, Can Socialism Survive?, supra note 4, at R2.

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While the equal sharing of television broadcasting rights is relatively straightforward, the sharing of gate receipts is more complex and deserves further explanation. First, it is imperative to distinguish between “ticket revenue” from luxury boxes, which is “subject to gate receipt sharing among NFL teams,” and non-ticket luxury box revenue, which is not subject to revenue sharing, and is therefore coveted by owners as a source of supplemental unshared revenue.92 This distinction is based on the idea that luxury boxes can be sold in such a way that they are not considered part of normal ticket sales, and thus are not considered gate receipts subject to revenue sharing.93 Next, it is important to establish the precise manner in which gate receipts subject to revenue sharing are actually shared among the individual franchises. The NFL Constitution provides, “The home club shall deliver to the League office the greater of $30,000 for each regular season and preseason game, or [forty percent] of the gross receipts after the following deductions . . . .”94 While this provision establishes a floor of $30,000 that must be shared by the home team for every game, in today’s market, forty percent of gross receipts will invariably exceed $30,000, thereby automatically triggering the forty percent option.95 Under the old system of gate receipt sharing, the ticket revenue for a particular game was shared roughly sixty-forty between the home and visiting team respectively with none of the ticket revenue reaching beyond the two teams participating in that particular game.96 Although it would appear that gate receipts should be shared according to the sixty-forty split, certain deductions afforded to the home team cause the visiting team’s share to diminish to thirty-four percent of gross receipts. The NFL Constitution establishes that in addition to deductions for federal, state, and municipal taxes on ticket sales, the home team is allowed a significant deduction for “stadium rental allowance equal to fifteen percent (15%) of the gross receipts

17.

92.

See CBA, supra note 11, art. XXIV, § 1(a)(i), (iii); Mullick, supra note 1, at 15-

93. See discussion infra Part III.A explaining the role that unshared non-ticket luxury box revenue plays in the revenue sharing system. 94. NFL CONST. art. 19.1(A). 95. See Alan Ostfield, Seat License Revenue in the National Football League: Shareable or Not?, 5 SETON HALL J. SPORT L. 599, 604 n.22 (1995) (stating that for the $30,000 option to kick in, gross receipts would have to be less than approximately $89,000, which is extremely unlikely considering that the average gross receipts for 1990-1995 was around $1.5 million). 96. Id. at 603-04.

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after deducting the taxes.”97 As a result of these deductions, the home team ends up giving the League thirty-four percent of the gross receipts for each home game (forty percent of the eighty-five percent remaining after the deduction for the stadium rental allowance).98 Under the old system of gate receipt sharing, which was in place through the 2001 season, the League would then remit the thirty-four percent directly to the visiting team that played in that particular game.99 In 2001, however, the NFL adopted a resolution amending its Constitution with the following language, “beginning with the 2002 NFL season, all regular season and preseason game visiting team shares shall be pooled and shared equally among the 32 Member Clubs.”100 This amendment to the revenue sharing of gate receipts should increase the redistributive effect of the League’s revenue sharing system, and serves as a further indication of the NFL’s commitment to the “League Think” philosophy. Under the old system, a popular team like the Dallas Cowboys could take advantage of the sellout crowds that it helped draw to opposing stadiums by keeping the entire thirty-four percent of gate receipts for itself. Conversely, perennial cellar-dwellers like the Arizona Cardinals, who drew far smaller crowds while on the road, experienced a competitive disadvantage because their visiting team share (“VTS”) was undoubtedly smaller than that of the Cowboys. By pooling each team’s VTS, and then redistributing the total amount equally among the individual franchises, the 2001 modification of gate receipt revenue sharing should help ensure greater financial equality throughout the league. In opposition to this redistributive effect, financially-minded owners like Jerry Jones would argue that individual teams should be able to take advantage of their marketability, and should not be forced to carry the burden of less marketable teams. Despite the apparent justification for such an argument, the redistribution of revenue from teams at the top to teams at the bottom has become necessary for the continued economic success of the League; especially because the current economic inequality in the NFL has reached such critical

97. 98. 99. 100.

NFL CONST. art. 19.1(A)(1)-(2). See Ostfield, supra note 95, at 603-04. Id. NFL, NFL RES. G-1 (2001) (stating that “the term ‘visiting team share’ shall mean the portion of gross receipts currently required (in the absence of a waiver) to be paid to visiting clubs under Article 19.1(A) of the NFL Constitution and By-Laws in respect of regular season games”).

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levels that the future viability of lower-revenue teams is in serious doubt.101 3. Television Revenue: The Foundation of the NFL Revenue Sharing System The two major revenue sources explicitly identified in DGR, television revenue and gate receipts, compose the entire second category of the revenue sharing system. As previously noted, these two revenue streams generate the vast majority of the League’s shared revenue, which amounted to a total sharing of more than eighty percent of the approximately $5.5 billion in total League revenue from the 2004 season.102 While gate receipts undoubtedly play a critical role in the League’s revenue sharing system, it is the national television deals that operate as the heart and soul of revenue sharing in the NFL. From the first equally shared national television deal arranged in 1961 to the current national television package, the equally shared proceeds generated by the NFL’s television broadcasting rights have always been the single largest contributor to the League’s revenue sharing system.103 Furthermore, the League’s television revenue has grown exponentially over the years, starting at $4.6 million for the two year contract signed in 1961, and climbing all the way to $17.6 billion for the recent eight year package that expired after the 2005 season.104 This tremendous growth in the NFL’s equally shared television revenue represents a self perpetuating indication of the League’s success as a whole. The competitive parity resulting from the League’s revenue sharing system in general has unquestionably bolstered the success and popularity of the NFL by ensuring that in any given year almost every team has a chance to make the playoffs.105 As a result of the League’s immense popularity, television networks have been willing to pay endlessly increasing sums of money to secure NFL broadcasting rights, which in turn has ensured the sustainability of the League’s revenue sharing system, and thereby the continued success of the League as a whole.

101. See discussion infra Part III.B for a detailed analysis of the NFL’s current economic inequality. 102. Fatsis, Can Socialism Survive?, supra note 4, at R1. 103. Farmer, supra note 45, at D1; Miller, Revenue-Sharing Rates, supra note 11, at C3; Mullick, supra note 1, at 12. 104. Jarrett Bell, NFL Tug-of-War, supra note 14, at C1. 105. Fatsis, Can Socialism Survive?, supra note 4, at R1.

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The equal sharing of television revenue has become a symbol of the League’s unparalleled success, and its commitment to the “League Think” philosophy. Under the NFL’s current television package, the League will get more revenue in one year than Major League Baseball will get in six.106 In contrast to the extreme financial and competitive inequalities that have plagued other professional sports leagues like Major League Baseball, the NFL’s ability to maintain its unmatched popularity has largely been the result of the League’s commitment to revenue sharing.107 The recent emergence of new sources of unshared revenue, on the other hand, which fall within the definition of Excluded DGR, have completely transformed the financial realities of the League by enabling individual franchises to gain a competitive advantage through the exploitation of unshared revenue.108 Furthermore, the drastic increase of these sources of unshared revenue has led to extreme levels of financial inequality throughout the League, which now threaten the continued viability of the NFL’s current economic system. III. THIRD AND LONG: THE HARMFUL EFFECTS OF “LOCAL REVENUE” AND THE DESPERATE NEED FOR REVENUE SHARING REFORMS A. Unshared “Local Revenue” and the Erosion of the NFL’s Collective Mentality The advent of these unshared revenue sources enumerated in Excluded DGR has not only drastically altered the landscape of the revenue sharing system in the NFL, but has also revolutionized the business model followed by team owners throughout the League.109 Abandoning the old passive business model where owners promoted equality and were content to rely on revenue sharing as their primary source of income, teams have increasingly sought to maximize their competitive advantage by exploiting as many sources of unshared revenue as possible. Art Model, who joined the League in 1961 as the majority owner of the Cleveland Browns and left this past April after selling his share of the Baltimore Ravens, articulated this change in the League’s mentality when he said, “The values have changed. We

106. 107. 108. 109.

Id. at R2. Mullick, supra note 1, at 12. See Fatsis, Can Socialism Survive?, supra note 4, at R1-R2. See Mullick, supra note 1, at 14-18.

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were comrades in arms. We were partners. That doesn’t happen now. Everything is revenues and profits.”110 With the growing emphasis on profits, teams have increasingly turned to Excluded DGR, which contains the following list of unshared revenue sources: “revenues derived from concessions, parking, local advertising and promotion, signage, magazine advertising, local sponsorship agreements, stadium clubs, luxury box income other than that included in subsection 1(a)(i)(1).”111 Aptly labeled “local revenue,” these unshared revenue sources have been harnessed by expedient owners to supplement their income, and they have had a profound impact on multiple facets of the NFL with mixed results for the League as a whole. While the incentives created by these sources of unshared revenue have helped the League grow by promoting the construction of new stadiums, the drastically increasing nature of local revenue, which is generally more easily utilized by larger market teams, has led to a widening revenue gap between the League’s rich and poor teams.112 Following the lead of business-driven owners like Jerry Jones, owners throughout the league have recognized that most of the major sources of local revenue stem directly from the ability of individual franchises to gain control over the stadiums in which they play.113 With owners drooling over the unshared revenue streams generated by controlling stadium parking, concessions, signage, and luxury box income, the League has experienced a significant trend with regard to the construction of new stadiums and the renovation of old ones.114 Since 1995, sixteen new NFL stadiums have opened throughout the League, and a seventeenth is due to open by the 2006 season.115 Furthermore, the League has contributed $650 million to eight

110. 111.

Fatsis, Can Socialism Survive?, supra note 4, at R2. CBA, supra note 11, art. XXIV, § 1(a)(iii). The language “other than that included in subsection 1(a)(i)(1)” is referring to “ticket revenue from ‘luxury boxes’ . . . subject to gate receipt sharing.” Id. 112. See discussion infra Part III.B explaining that unshared local revenue has been a major cause of the widening revenue gap. 113. See Fatsis, Can Socialism Survive?, supra note 4, at R6-7; Mullick, supra note 1, at 14-18. 114. See Fatsis, Can Socialism Survive?, supra note 4, at R4; Mullick, supra note 1, at 14-18. See discussion infra Part III.C describing the League’s efforts to facilitate the construction of new stadiums. 115. Fatsis, Can Socialism Survive?, supra note 4, at R4. The new stadium set to open by the 2006 season is being constructed in Mesa for the Arizona Cardinals.

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stadium projects that are being funded by a combination of public and private sources.116 In their relentless pursuit of local revenue, profit-hungry owners have discovered creative ways to not only help finance stadium projects, but to make the completed stadiums even more lucrative with regard to unshared local revenue. It is in this context that the distinction between luxury box “ticket revenue” and non-ticket revenue becomes extremely significant. Luxury boxes, which provide first class amenities like catering and a private bar, are usually leased to a corporate customer for extended periods of time (usually at least an entire season), typically giving the lessee access to the luxury box for all stadium events including those performances unrelated to the NFL, such as rock concerts or other professional sporting events.117 Therefore, any franchise that owns its own stadium can keep most of the substantial revenue generated by these expensive luxury box lease arrangements.118 Conversely, teams that have unfavorable leases with a municipality or other entity that owns the stadium are at a competitive disadvantage because they are missing out on enormous streams of unshared revenue.119 The importance of luxury box revenue is illustrated by the desire of the New York Giants to build a new $700 million stadium next to its current twenty-nine year old venue.120 In addition to sharing their stadium with their cross-town rivals, the New York Jets, the Giants do not own their stadium, and therefore are forced to split the luxury box revenue three ways.121 However, were the Giants to build their own stadium they would not have to share that revenue with anyone, giving them at least two-thirds more than they currently receive. Back in 1995, when the boom in new stadiums was reaching 116. Id. See discussion infra Part III.C concerning the League’s plan to help facilitate the construction of new stadiums under what has become known as the NFL’s G3 Program. 117. See Gavin Power, Luxury Boxes Do Score Big, S.F. CHRONICLE, June 24, 1995, at D1. 118. See Mullick, supra note 1, at 16-17. 119. See Giants Want A Stadium That Says ‘Amenities,’ N.Y. TIMES, Feb. 13, 2005, § 8, at 1 [hereinafter Amenities, N.Y. TIMES]. 120. Id. Explaining that the Giants need to keep up with Dallas, Washington, and Philadelphia, all of which own their own stadiums, John Mara, the executive vice president of the Giants said, “The three teams in our division are all in the top quartile.” Id. Blaming their unfavorable lease for the Giants’ competitive disadvantage, Mara stressed the importance of luxury box revenue explaining, “Right now we have 112 boxes, but we have a three-way split with the Jets and the sports authority. We would contemplate having 200 boxes.” Id. On April 14, 2005, the Giants signed an agreement with the state of New Jersey to build their new stadium. Kaplan, Pro Football Loses, supra note 23, at 4. 121. See Amenities, N.Y. TIMES, supra note 119, at 1.

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its height, Leigh Steinberg, a sports attorney, speculated that a popular NFL team playing in a stadium with 150 luxury boxes could easily earn an additional twelve million dollars per year from luxury box income alone.122 This figure has undoubtedly increased dramatically over the last ten years as luxury boxes have become more and more opulent, commanding higher prices. Not surprisingly, the New York Jets had a new stadium proposal of their own to build a $1.4 billion stadium on the lower west side of Manhattan.123 Their proposal illustrates how luxury box income can serve as an important source of funding to finance the construction of new stadiums. The Jets promised that if their new stadium was built, there would be no increase in regular ticket prices during the stadium’s first season because they knew that they could rely on luxury box income to offset the need for any hike in ticket prices that might otherwise be necessary to help fund the construction of their new stadium.124 Therefore, unshared luxury box revenue has not only become an integral element in the financial success of an individual franchise, but also serves as an important way for NFL teams to partially finance their new stadiums. Jerry Jones is quick to proffer his view that these stadiumrelated sources of unshared revenue are good for the League. Stressing his incentive based arguments, Jones explained, “If you don’t have some unshared revenues, those stadiums never get built because of all the debt. You think people are going to build those stadiums if they were sharing the revenue 32 ways? No. Why did they get built? Because of the incentive.”125 While it is hard to argue that unshared local revenue has not had some positive effects on the current state of the NFL, it is important to weigh the positives and negatives associated with unshared revenue in determining what is best for the future of the League. There is no doubt that in today’s economy there is a need for some unshared revenue in order to provide incentives for teams to market themselves and to help generate beneficial externalities like stadium construction. Too much unshared revenue, on the other hand, is detrimental to the League because it will inevitably lead to a widening gap between revenue-rich teams 122. 123.

Mullick, supra note 1, at 4-5; Power, supra note 117, at D1. Steven Zeitchik, The Jets and Steelers: A Tale of Two Stadium Plans and Their Cities, N.Y. SUN, Feb. 3, 2005, at 3. Since the first draft of this paper was completed, the Jets’ stadium proposal, which was also part of New York City’s bid to host the 2012 Summer Olympics, was rejected by the State of New York, which denied the public funding needed for the stadium’s construction. 124. Id. 125. Bell, NFL Tug-of-War, supra note 14, at 2-3C.

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with favorable stadium situations and revenue-poor teams with unfavorable stadium situations. 1. “Local Revenue” as the Cause of “Franchise Free Agency” At first glance, all this additional revenue and all these new stadiums might appear to be nothing but a good thing for the League, but upon closer inspection it becomes clear that there are some significant concerns lurking just behind the glare of the bright new stadium lights. The incessant quest for unshared revenue by NFL owners has been largely responsible for a phenomenon known as “Franchise Free Agency.”126 This phenomenon, which is characterized by the recent relocation of numerous franchises seeking more lucrative stadiums in which to play, has not only drawn the attention of significant scholarly analysis, but has also prompted Congress to propose numerous bills attempting to prevent franchises from arbitrarily abandoning their home city simply to secure a more profitable venue.127 This string of proposed bills was largely the result of lobbying on the part of the NFL in response to two Ninth Circuit decisions in the 1980s involving the relocation of the Raiders franchise from Oakland to Los Angeles.128 In the first decision, the court held that the NFL violated the Sherman Antitrust Act when the NFL owners unanimously voted against approving the relocation.129 At that time, any team relocation required a three-quarters majority approval by team owners, as provided for in Article 4.3 of the NFL Constitution.130 Despite recognizing that territorial allocations were necessary for the viability of the NFL, the court concluded that the restraints necessary for the NFL to survive could have been achieved through a less restrictive rule.131 The court explained that there might be a reasonable basis for preventing a team’s relocation if the League properly considered “objective factors . . . such as population, economic projections, facilities, regional balance . . . [f]an loyalty and location 126. 127.

See Mullick, supra note 1. Don Nottingham, Keeping the Home Team at Home: Antitrust and Trademark Law as Weapons in the Fight Against Professional Sports Franchise Relocation, 75 U. COLO. L. REV. 1065, 1078-79 (2004). 128. L.A. Mem’l Coliseum Comm’n v. NFL (Raiders II), 791 F.2d 1356 (9th Cir. 1986); L.A. Mem’l Coliseum Comm’n v. NFL (Raiders I), 726 F.2d 1381 (9th Cir. 1984); Nottingham, supra note 127, at 1075-76. 129. Raiders I, 726 F.2d at 1401; Nottingham, supra note 127, at 1075-76. 130. Raiders I, 726 F.2d at 1401; NFL CONST. art. 4.3; Nottingham, supra note 127, at 1075-76. 131. Nottingham, supra note 127, at 1075.

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continuity.”132 In the second suit, the court awarded treble damages to the Raiders and to the Los Angeles Coliseum, which was the proposed venue for the Raiders’ relocation, based on the projected disparity in the team’s profits and the Coliseum’s loss of lease income.133 The combination of these two Ninth Circuit decisions has proved to be a serious deterrent to the League in its decisions whether to oppose subsequent franchise relocations because of the League’s fear of costly antitrust litigation and the possible liability that would result from any decision rendered against the NFL.134 As a result, the League has turned to Congress in an attempt to gain an antitrust exemption. Since 1985, Congress has considered seven different bills that have taken various forms in their common attempts to protect fans and communities from losing their home teams, but none of these bills have passed.135 Some of these bills support an antitrust exemption that would enable the NFL to veto any proposed franchise relocation without any threat of antitrust litigation, while others rely on the dictum in the first Ninth Circuit decision that suggested the NFL could avoid future antitrust liability by using objective guidelines when considering the approval of a franchise relocation.136 Despite Congress’ inability to enact any of these bills into law, the prevalence of the proposed legislation indicates that “Franchise Free Agency” is a legitimate concern for the nation as a whole. Furthermore, the large scale of this political response is undoubtedly driven by significant unrest among NFL fans, which poses a direct threat to the future popularity and success of the League. In addition to the negative reaction that franchise relocation has on the NFL’s fan base, the lure of unshared local revenue generated by favorable stadium deals has eroded the NFL’s “League Think” philosophy, and, in certain circumstances, has hurt the League as a whole. The relocation of the Rams from Los Angeles to St. Louis serves as a perfect example of the detrimental effect that an individual team’s pursuit of local revenue can have on the League.137 The advent of unshared local revenue has created a situation where an individual owner’s best interests are no longer necessarily aligned with the best interests of the League. In the case of the Rams, the franchise moved from the much larger market of Los Angeles to the 132. 133. 134. 135. 136. 137.

Id. at 1076-77 (quoting Raiders I, 726 F.2d at 1397). Id. at 1076. See id. Id. at 1077-79. Id. See id. at 1070.

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much smaller market of St. Louis mainly because St. Louis offered a better stadium situation that would generate more unshared local revenue for the team.138 While the team itself benefited from the move, the League as a whole suffered because St. Louis’s smaller market means that fewer people watch the Rams on television, and this reduced audience thereby generates smaller television ratings when compared to the ratings that could have been achieved had the Rams remained in Los Angeles.139 Since the Rams only absorbed a small portion of that decrease due to the revenue sharing system, the increase in local revenue made the move worthwhile for the team, but the aggregate effect for the rest of the owners made the move more costly for the League as a whole.140 Consequently, the emergence of local revenue has indirectly prevented the League from capitalizing on the Los Angeles area fan base and the enormous revenue opportunities presented by the nation’s second largest market. As a result, the League cannot maximize its evenly shared television revenues, which thereby hurts the revenue sharing system, and more importantly the League as a whole.141 B. The Widening Revenue Gap and the Salary Cap System The most detrimental consequence resulting from the emergence of unshared local revenue has been the widening gap between the League’s revenue-rich teams and its less prosperous counterparts.142 While the teams at the top like the Washington Redskins and the New England Patriots can generate upwards of $250 million in annual revenue, teams at the bottom like the Arizona Cardinals and Indianapolis Colts struggle to produce just over half the annual revenue enjoyed by their wealthier brethren.143 Furthermore, this revenue gap is about twelve times what it was in 1990, 144 and the increasing nature of these revenue disparities illustrates a disturbing

138. 139. 140. 141.

Id. Id. Id. From speaking with Steve Underwood, the Executive Vice President, General Counsel and Executive Assistant to the Owner of the Tennessee Titans, the author has gained first hand knowledge of the significance that NFL insiders place on the current financial void left by the League’s inability to place a franchise in the nation’s second largest market, Los Angeles. 142. Fatsis, Can Socialism Survive?, supra note 4, at R2. 143. Bell, NFL Tug-of-War, supra note 14, at 1C; Fatsis, Can Socialism Survive?, supra note 4, at R2. 144. Fatsis, Can Socialism Survive?, supra note 4, at R2.

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trend that must be addressed by the League before it inflicts permanent damage on the popularity of NFL. The major source of this widening revenue gap, much like “Franchise Free Agency,” is the increasing need for owners to secure beneficial stadium deals in order to capitalize on unshared local revenue.145 As in the case of the New York Giants, teams that are stuck in unfavorable stadium arrangements cannot take advantage of local revenue, and therefore experience a significant competitive disadvantage.146 This point is illustrated by the situation of the Indianapolis Colts, who according to a Forbes report published in 2003, ranked twenty-ninth in franchise value ($547 million) the previous year, while leasing the NFL’s smallest stadium (the RCA Dome with 56,127 seat capacity) in the twenty-fifth largest market.147 Furthermore, the Indianapolis market lacks the number of corporate supporters that enable other franchises to flourish through the use of premium seating and luxury boxes, both of which are important sources of unshared local revenue.148 Conversely, the NFL’s most valuable franchise, the Washington Redskins, was valued by the Forbes report at an astounding $952 million in 2002.149 Along with Jerry Jones, Redskins owner Daniel Snyder is one of the largest proponents of increasing unshared revenues in order to encourage teams to capitalize on savvy management techniques that are more readily available in a less restricted market.150 Under Snyder’s leadership, the Redskins, who own their own stadium and play in the NFL’s largest venue (FedEx Field with 86,484 seat capacity), have utilized a vast array of local revenue sources to become the first NFL team to surpass $200 million in annual revenue.151 In addition to their exploitation of the more obvious sources of local revenue like luxury box sales, concessions, and parking, the Redskins have also capitalized on their marketability, which not only enabled Snyder to negotiate a thirty year, $205 million stadium naming-rights deal, but has also facilitated the creation of a dozen “Redskins Store” outlets, which also generate significant unshared revenue.152 By comparing the enormous local revenue 145. 146.

Bell, NFL Tug-of-War, supra note 14, at 1C Id. at 3C. For a detailed discussion of the Giants stadium situation see supra text accompanying notes 120-121. 147. Id. 148. Id. 149. Id. 150. See Fatsis, Can Socialism Survive?, supra note 4, at R4-R6. 151. Bell, NFL Tug-of-War, supra note 14, at 3C. 152. Id.

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opportunities of a larger market team like the Redskins, who own their own stadium, and the limited local revenue possibilities for a smaller market team like the Colts, who do not control their stadium, the source of the NFL’s current revenue gap becomes readily apparent. Although the increasing economic inequalities in the NFL seem relatively clear, it is also important to recognize some of the arguments against revenue sharing made by those owners who have financed some or all of their stadium acquisitions through private debt. These owners argue that one must think in terms of net profits, not total annual revenue, because the large amount of debt incurred to buy the stadium initially negates much of the apparent advantage.153 For example, the Philadelphia Eagles, who in 2003 moved into a new $512 million stadium, must allocate more than thirty million dollars a year to service their debt.154 This argument criticizing too much revenue sharing is adeptly characterized by a statement attributed to Daniel Snyder of the Redskins. Snyder reportedly said, “I’ll share my revenue whenever they’re ready to share my debt.”155 Owners like Snyder, who has roughly $300 million in debt left from his $800 million acquisition of the Redskins and their stadium in 1999, argue that since they were the ones who put up the initial capital, they are entitled to reap the benefits of stadium ownership.156 While there is undoubtedly some merit to these arguments, it is important to note that in the context of acquiring a large market NFL stadium or franchise, there is little in the way of the risk that would normally be associated with a leveraged investment, largely because of the current economic state of the League as a whole. In 2003, every single franchise experienced a net profit; furthermore, the revenue of the League as a whole has increased by a factor of greater than five over the past fifteen years.157 The strength of the League’s current economic outlook is illustrated by the fact that traffic on the NFL’s Internet site surpasses that of other pro leagues, its television broadcasts outpace prime-time averages, and its especially devoted fans buy more than ninety percent of available tickets.158 Furthermore, the League generated somewhere around $5.5 billion in

153. See Fatsis, Can Socialism Survive?, supra note 4, at R6; Bell, NFL Tug-of-War, supra note 14, at 4C. 154. Fatsis, Can Socialism Survive?, supra note 4, at R6. 155. Id. 156. Id. 157. Id. at R1-R3. 158. Id. at R3.

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total revenue last year, which is the most income produced by any of the four major U.S. professional sports leagues.159 When one considers these astounding statistics in relation to the structural reality of the League, it is impossible to ignore that the value of an individual franchise is completely dependent on the success of the League as a whole because without the League, each individual franchise would be worthless. Although the owners who financed their own stadiums would argue that they deserve greater returns because they bore the risk of their leveraged investment, this argument is largely mitigated by considering the minimal amount of risk actually incurred. Therefore, since an individual owner does not bear much financial risk when his franchise leverages its investment in stadium infrastructure, asking the more profitable teams to share a small portion of local revenue with their less prosperous counterparts is not an unreasonable request, especially because the value of an individual franchise is necessarily tied to the success of the League as a whole. 1. The Failure of the Salary Cap System and the Resulting Competitive Inequalities on the Field While the competitive advantage gained through stadium ownership serves as the largest catalyst for the widening revenue gap, the economic disparities that exist between the individual teams also adversely affect the ability of lower-revenue teams to remain competitive on the field. Significantly, the revenue-strapped Colts paid more than seventy percent of their revenues to player salaries in 2003, whereas richer teams spent only thirty-eight percent on salaries.160 The discrepancy in the percentage of income that a given team can spend on player salaries has a huge impact on the ability of lowerrevenue teams to compete with higher revenue teams in the highpriced free agent market.161 As Colts President Bill Polian explains, “We can’t keep as many people as some teams can . . . . The issue is cash. If you have cash that your stadium is generating every year, you can commit that to bonuses to retain or get players in the free agent market. That’s the name of the game.”162 Despite the League’s adoption of a salary cap, which was meant to help level the playing field, the statistics seem to support 159. 160. 161.

Id. at R1. The four major leagues are baseball, basketball, football, and hockey. Bell, NFL Tug-of-War, supra note 14, at 1. See Fatsis, Can Socialism Survive?, supra note 4, at R5; Bell, NFL Tug-of-War, supra note 14, at 1C-2C. 162. Bell, NFL Tug-of-War, supra note 14, at 1C-2C.

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Polian’s claim that lower-revenue teams cannot compete with higher revenue teams in the free agent market. According to data supplied by the players union, the Redskins committed more than seventy-seven million dollars in signing bonuses between the 2003 and 2004 seasons, whereas the Arizona Cardinals spent only twenty-two million dollars during that same period.163 Owners critical of too much revenue sharing have been quick to point out that those teams in a superior financial position have not necessarily experienced a competitive advantage on the field, as evidenced by the fact that teams like the Cowboys have not made the playoffs for a number of years.164 Notwithstanding the inability of the Cowboys to “buy” their success, it would be completely ridiculous to argue with the statement made by Atlanta Falcons owner Arthur Blank, that “[a]t some point there is a correlation between what you’re paying your players and your ability to compete.”165 In order to fully understand the competitive inequalities that exist in the free agent market, it is important to explain how the salary cap works, and how revenue rich teams can take advantage of a system that ironically was intended to help the lower-revenue teams remain competitive. The salary cap, which sets both a floor and a ceiling on what a team can (or must) spend on player salaries in a given year, is calculated as a percentage of DGR.166 Therefore, as the League’s revenues have steadily increased, fueled largely by the construction of new stadiums, so too has the salary cap.167 Last year’s salary cap was set at $80.6 million with a $67.3 million floor, which is a significant increase from the $34.6 million cap set in 1994, the year of its inception.168 Instead of helping lower-revenue teams remain competitive, this dramatic increase in the salary cap has actually hurt the lower-revenue teams stuck in unfavorable stadium situations 163. 164. 165. 166.

Fatsis, Can Socialism Survive?, supra note 4, at R5. Id. at R6. Bell, NFL Tug-of-War, supra 14, at 4C. See CBA, supra note 11, art. XXIV, §§ 2-4; Bell, NFL Tug-of-War, supra 14, at 5C; Fatsis, Can Socialism Survive?, supra note 4, at R5. The salary cap system, which has been widely credited with maintaining the competitive parity within the NFL, is not usually considered to be part and parcel with the League’s greater revenue sharing system, and instead is normally regarded as a separate and distinct financial model. The salary cap system, however, is also responsible for governing how League revenue is shared with players, and therefore should also be considered part of the NFL’s greater revenue sharing system. See discussion infra Part III.D explaining how revenue sharing and the salary cap are interrelated. 167. Bell, NFL Tug-of-War, supra 14, at 5C; Fatsis, Can Socialism Survive?, supra note 4, at R5. 168. Bell, NFL Tug-of-War, supra 14, at 5C; Fatsis, Can Socialism Survive?, supra note 4, at R5.

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because their revenue has not increased proportionally.169 Therefore, these lower-revenue teams have been unable to keep pace with their wealthier counterparts, who have experienced a significant competitive advantage through the use of unshared local revenue. Further exacerbating the inequalities that exist under the salary cap are the loopholes in the system that allow teams to amortize the cost of signing bonuses over the life of the contract, which basically means that for accounting purposes, a team can spread out how much the bonus counts against the cap for each individual year of the contract.170 Under this system, teams can spend well above the cap by giving free agents larger signing bonuses and smaller annual salaries.171 Therefore, teams with more local revenue are in a position to spend much more on signing bonuses, which in turn gives them a significant advantage in attracting talented free agents.172 As mentioned above, this system allowed the Redskins to offer seventyseven million dollars in signing bonuses during the same period in which the Cardinals could only offer twenty-two million dollars.173 The glaring nature of this loophole is further illustrated by the comments of Michael Duberstein, a research director with the NFLPA, who indicated that teams have been able to spend two billion dollars above the cap over the past decade by amortizing costs.174 C. The NFL’s Current Reaction to the Problems Posed by “Local Revenue” and the Widening Revenue Gap The widening revenue gap created by both the emergence of local revenue and the salary cap system has sparked considerable debate amongst the NFL owners. The owners of lower-revenue teams like the Colts and Cardinals have expressed their belief that under the League’s current economic model these less prosperous teams cannot compete with their revenue-rich counterparts who are better equipped to capitalize on the local revenue opportunities created by stadium

169. Bell, NFL Tug-of-War, supra 14, at 5C; Fatsis, Can Socialism Survive?, supra note 4, at R5. 170. Fatsis, Can Socialism Survive?, supra note 4, at R5. 171. See id. 172. Id. Signing bonuses are also attractive to potential free agents because the money is guaranteed, whereas the annual salary offered by a player-contract is not guaranteed to the player, and the team can decide to release that player without being responsible for the remaining value of the contract. 173. Fatsis Can Socialism Survive?, supra note 4, at R5; see supra text accompanying note 163. 174. Fatsis, Can Socialism Survive?, supra note 4, at R5.

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ownership.175 According to lower-revenue teams, the revenue gap is reaching such a critical level that their future economic viability will soon be in serious doubt, and therefore the League must find a way to better redistribute some of the local revenue that has created this economic discrepancy.176 Conversely, the owners of high-revenue teams like the Redskins and Cowboys argue that if teams are forced to include their local revenue in the total amount of revenue shared by the League, it will eliminate any incentive for less prosperous teams to market themselves.177 As Cowboys owner Jerry Jones explains, “The big concern I have is not how to equalize the disparity in revenue[,] but how to get the clubs that are not generating the revenue to see the light.”178 There is some merit to Jones’s argument since poor management decisions by lower-revenue teams might be partially to blame for their inferior economic position. However, in deciding whether to reform the current revenue sharing system, the NFL must also consider some of the economic factors that are beyond the control of the lower-revenue owners, such as stadium ownership and market size. Since a team’s potential marketability is directly tied to the size of its local market, teams like the Cowboys and Redskins can take advantage of their larger markets to increase their unshared local revenue through both local sponsorship deals and local stadium revenue.179 At the same time, playing in a large market does not necessarily guarantee that a team will be able to capitalize on sources of local revenue, because that team might be stuck in an unfavorable stadium situation, as illustrated by the experience of the New York Giants.180 Therefore, when evaluating the need for revenue sharing reforms, the NFL should not only consider the inherent economic disparities that exist between small and large market teams; it must also factor in the realities surrounding every team’s ability to secure a beneficial stadium deal. The NFL has taken a variety of steps to help address some of the problems that have been created by the emergence of local revenue and the resulting increase in the revenue gap. Some of these League 175. 176.

See discussion supra Part III.B.1. See Miller, Revenue-Sharing Rates, supra note 11, at C2. As Colts owner, Jim Irsay argued, “There are many teams that realize they cannot go forward like this. It’s become that big of an issue.” Fatsis, Can Socialism Survive?, supra note 4, at R2-R3. 177. Fatsis, Can Socialism Survive?, supra note 4, at R6. 178. Id. 179. See discussion supra Part III.B. 180. See supra text accompanying notes 121-122.

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initiatives are specifically designed to combat the increasing economic inequalities within the NFL, while others focus more on addressing some of the indirect effects of local revenue, such as “Franchise Free Agency.” In order to facilitate the construction of new stadiums, the League adopted a program set forth in Resolution G-3 of 1999 (“G-3 Program”), which has loaned $650 million in League money to help eight different stadium projects, all of which were funded by a combination of public and private financing.181 This G-3 Program is meant to promote stadium construction, which could potentially benefit lower-revenue teams by enabling them to build new stadiums and thereby better capitalize on local revenue. Although the program does seek to eliminate some of the local revenue-related incentives that contributed to the emergence of “Franchise Free Agency,” this program may actually reduce the overall amount of shared revenue, and is therefore not well suited to address the overarching problems created by the widening revenue gap. In order to qualify for G-3 financial assistance from the League, a stadium project must be financed by public-private funding, and the amount that the League will contribute is directly tied to the amount of the individual franchise’s private contribution (“Private Contribution”) to its own stadium project.182 The allocation of League funds to the financing of a G-3 stadium is technically in the form of a loan, but it is repaid directly out of the visiting team’s share (“VTS”) of the luxury box and club seat revenue.183 Similarly, in the context of a non-G-3 stadium, luxury box and club seat revenue can also be exempted from VTS, provided it is used for the direct financing of the non-G-3 stadium’s construction.184 However, notwithstanding this similar treatment of certain luxury box revenues, there are additional benefits that accrue to those owners who qualify for the G-3 Program. In particular, the G-3 Program should reduce a team’s cost of capital by eliminating some of the transaction costs that would otherwise be 181. NFL, NFL RES. G-3 (1999) [hereinafter NFL RES. G-3]; Fatsis, Can Socialism Survive?, supra note 4, at R4; Glenn Dickey, Mayor Sets Stadium Deadline, S.F. CHRONICLE, Oct. 24, 2004, at C1. The original G-3 plan established in RES. G-3 was set to expire after the 2002 NFL season, but the League extended and reaffirmed the G-3 Program in NFL RES. JC-1 (2003) retaining all of the original principle parameters set forth in RES. G-3. 182. NFL RES. G-3, supra note 181; NFL RES. JC-1 (1) (2003) [hereinafter NFL RES. JC-1] (stating “the League shall make a loan to the affected Club to support such project based on the amount that the affected Club has committed to such project as a private contribution (the ‘Private Contribution’)”). 183. NFL RES. G-3, supra note 181; NFL RES. JC-1, supra note 182; Dickey, supra note 181, at C1. 184. NFL RES. G-3, supra note 181; NFL RES. JC-1, supra note 182; Dickey, supra note 181, at C1.

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required to secure financing from a private institution. Therefore, under the G-3 Program, the League is in essence simply making private loans easier for the individual owners to obtain by exempting ticket revenue that would otherwise be shared with the visiting club, and instead using that revenue to pay off the loan. This arrangement promotes stadium construction because owners can partially finance the building of their new stadium with revenue that they otherwise would have been forced to share with the visiting teams had they remained in their old stadium.185 One of the principle intentions of the NFL’s G-3 Program is to encourage large market teams to stay in their home city (instead of moving to a smaller market) by offering favorable loans that help the teams finance their public-private stadium projects.186 This is implied by the language establishing the precise amounts that the League will loan to a participating franchise under the G-3 Program. The exact provision is enumerated in the subsequent Resolution JC-1 adopted in 2003, which extended the life of the G-3 Program, and provides in part: That the amount of such League loan shall be either 34% or 50% of the Private Contribution, determined by the size of the television market in which the stadium involved is being constructed, with League loans at the 50% level to be made available to facilitate stadium construction projects for NFL clubs currently operating in the six largest national television markets, and with the League loans in all other television markets limited to 34% of the Private Contribution.187

While the G-3 Program helps both small and large market teams finance public-private stadium construction, the program favors large market teams by providing them with much larger loans. This favorable treatment given to the largest market teams is meant to provide incentives for those teams to remain in their home cities, which benefits the entire NFL by enabling the League to capitalize on the increased television revenue generated by these larger markets. The G-3 Program undoubtedly provides universal benefits that help all franchises looking to utilize public-private financing in the construction of a new stadium. Furthermore, by encouraging teams to remain in the largest markets, this program should help to increase the League’s television revenue, which is shared equally, and therefore should benefit the League as a whole. However, an increase

185. This arrangement provides the incentives for stadium construction at the expense of the revenue sharing system by funneling revenue away from the sharing system, and into the pockets of individual clubs. 186. NFL RES. G-3, supra note 181; NFL RES. JC-1, supra note 182; Dickey, supra note 181, at C1. 187. NFL RES. JC-1, supra note 182 (emphasis added).

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in equally shared television revenue confers the same benefit upon every team notwithstanding their relative financial positions. This program therefore does not help to alleviate any of the inherent economic inequalities that exist in smaller market cities. In fact, this program might actually exacerbate the economic disparities that currently exist in the League today by helping large market teams better capitalize on local revenue at the expense of smaller market teams who, under this program, do not enjoy the same level of League subsidies. Instead of redistributing some of the advantages enjoyed by large market teams that can more easily utilize their marketability to generate more local revenue, the G-3 Program actually has the effect of giving the large market teams an additional leg up on their smaller market counterparts. In addition to the G-3 Program, the NFL has also created a “supplemental” revenue sharing pool, which would appear far better suited to combat the widening revenue gap that threatens the League’s current competitive balance. The so-called “supplemental” revenue sharing pool, created under the salary cap system, redistributes roughly forty million dollars a year in local revenue to a small number of lower-revenue teams.188 Typically, each year six to nine teams draw from the “supplemental” pool, which has grown from eighteen million dollars to its current mark of forty million dollars.189 Despite its potential to help alleviate the League’s widening revenue gap, the “supplemental” revenue sharing pool has proven insufficient to keep pace with the dramatically increasing nature of the economic disparities in the NFL.190 For example, $8.5 million is the most that any team has drawn from the pool in a single year.191 Moreover, when this figure is considered in relation to the gap in annual revenue between the NFL’s richest and poorest teams, which has well exceeded the $100 million mark, the “supplemental” pool’s inadequacy in dealing with the exponentially increasing economic disparity becomes apparent.192 Notwithstanding the League’s marginal attempts to counteract the various harmful effects that stem from the recent growth in local

188. Bell, NFL Tug-of-War, supra note 14, at 4C; Fatsis, Can Socialism Survive?, supra note 4, at R6; Miller, Revenue-Sharing Rates, supra note 11, at C2. 189. These statistics are derived from the observations of Harold Henderson, who is the NFL’s Executive Vice President for Labor Relations. See Bell, NFL Tug-of-War, supra note 14, at 4C. 190. Id. Since 1990, the size of the revenue gap has increased by a factor of about twelve. Fatsis, Can Socialism Survive?, supra note 4, at R6. 191. Bell, NFL Tug-of-War, supra note 14, at 4C. 192. Id.

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revenue, these emerging unshared revenue streams no longer simply threaten to bend the rules of the NFL’s collective philosophy. Instead, the revenue sharing system itself appears to be on the brink of a complete fracture. In response to the current economic realities of the League, Commissioner Tagliabue has appointed a twelve member special committee to examine a wide array of financial concerns, with one of the focuses being revenue discrepancies and the issue of whether teams should share more of their local revenue.193 Nevertheless, despite these clear indications that the current revenue sharing system requires significant reform, when establishing the special committee, Tagliabue claimed that revenue sharing is only one of many topics, and that the bigger concern of the committee and that of the League as a whole is extending the NFL’s current CBA, which is set to expire after the 2007 season, with the salary cap component expiring after the 2006 season.194 As further explored below, failing to extend the current CBA could cause irreparable damage to the success of the NFL, and therefore the on-going labor negotiations undoubtedly deserve the League’s undivided attention. The NFL, however, would be well advised to simultaneously consider revenue sharing reforms because any progress in reaching a labor agreement will necessarily require the League to address the same central issue behind the revenue sharing debate—namely, the manner in which local revenue will be treated. D. Labor Unrest: Why are Revenue Sharing Reforms so Crucial to the Successful Extension of the Current CBA and its Salary Cap System?195 Commissioner Tagliabue is completely warranted in his concern about extending the CBA, but contrary to his opinion, the issues surrounding the extension of the labor agreement cannot be completely divorced from the debate over what to do about local

193. 194.

Id.; Fatsis, Can Socialism Survive?, supra note 4, at R6. Bell, NFL Tug-of-War, supra note 14, at 2C; Fatsis, Can Socialism Survive?, supra note 4, at R6. See discussion infra Part III.D.1 for an analysis of the recent developments in the on-going CBA negotiations and the resulting implications for the League. 195. Portions of the analysis in this section may have been rendered somewhat moot by the last-minute extension of the CBA, and the corresponding revenue sharing reforms. Nevertheless, the overall analysis remains extremely significant because it sets the stage under which the new deal was struck. In particular, it establishes how the hostile negotiations created leverage for the NFLPA, and ultimately forced the owners to concede to the demands of the union instead of facing the daunting possibility of moving forward without a new labor deal or salary cap in place.

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revenue.196 Gene Upshaw, executive director of the NFLPA, has indicated that there is a slight distinction between the debate among owners over how revenue should be shared between teams and the issues presented by the CBA negotiations regarding how overall League revenue should be shared with players.197 In particular, Upshaw remarked, “I don’t care if their revenues are shared or unshared . . . I just want our share.”198 While the labor union does not appear to be concerned with the resulting inequality in the competitive balance of the League, the NFLPA is very concerned with the dramatically increasing nature of unshared local revenue.199 Under the current CBA’s salary cap system, each year players are guaranteed around sixty-five percent of the League’s total DGR, but since local revenue is part of Excluded DGR, it is outside the reach of the salary cap system.200 The players argue that they deserve some of the exponentially increasing local revenue currently shielded from their reach by the Excluded DGR provision, and Gene Upshaw has made it clear that the NFLPA will not agree to an extension of the current CBA with its definition of DGR still intact.201 Furthermore, in describing the revenue sharing model that is currently in place under the CBA, Upshaw explained, “[w]e’ve outgrown that model to a model that to us looks like it should [include] all revenue.”202 Thus, the sharing of local revenue is in fact a labor issue, and because the CBA expires in two years, the issue must be addressed soon, otherwise the NFL could experience a work stoppage that would unquestionably damage the profitability of the League and that of each individual franchise.203 196. 197.

Bell, NFL Tug-of-War, supra note 14, at 4C. See id., at 5C; Kaplan, NFL Impasse, supra note 15, at 1; Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3. 198. Bell, NFL Tug-of-War, supra note 14, at 5C. 199. Id.; Fatsis, Can Socialism Survive?, supra note 4, at R7. In the recent negotiations that ultimately produced a new last-minute CBA and revenue sharing plan just before this note went to print, the NFLPA took a much more proactive role in forcing the owners to address the issue of revenue sharing between teams. See Kaplan, Chaos and Compromise, supra note 17, at 1. In particular, the union was concerned that the widening revenue gap could inflict such damage on the overall League that the players might lose out on revenues under any new labor agreement that did not include revenue sharing reforms. Id. The NFLPA actually conditioned its final offer for a new labor deal on the owners’ ability to approve adequate revenue sharing reforms. Id. 200. CBA, supra note 11, art. XXIV, §§ 1-6; Bell NFL Tug-of-War, supra note 14, at 2C; Fatsis, Can Socialism Survive?, supra note 4, at R7. 201. Bell, NFL Tug-of-War, supra note 14, at 5C; Fatsis, Can Socialism Survive?, supra note 4, at R7. 202. Fatsis, Can Socialism Survive?, supra note 4, at R7 (emphasis added). 203. As indicated by the recent developments and the current direction of the ongoing labor negotiations, the League could theoretically address the sharing of local

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1. The On-going Labor Negotiations: Recent Developments and Their Implications for Revenue Sharing Reforms The League and the players’ union initially made some progress in their negotiations to extend the current CBA, but as of fall 2005 the negotiations appeared to have reached a stalemate.204 Significantly, at some point during the labor talks, the owners and the players union tentatively agreed that local revenue will no longer be excluded from the revenue that is shared with players.205 Instead, both parties have agreed that any new labor agreement will guarantee that the players receive a percentage of “total football revenue” as opposed to a percentage of DGR.206 If this agreement does in fact come to fruition, players would be entitled to a portion of those previously unshared revenue sources currently shielded from their reach by the existing CBA’s Excluded DGR provision. Despite this initial progress, however, the future outlook of these on-going negotiations appears far less promising.207 After initial negotiations yielded a consensus on the sharing of total football revenue with players, subsequent talks have hit a major stumbling block that now threatens to preclude any possibility of reaching a new labor pact before the current CBA expires. In particular, both sides have been unable to agree upon the exact percentage of total football revenue that should be reserved for the players. While the union is currently asking for sixty-four percent of total football revenue, the League has refused to relinquish more than fifty-seven percent, and with total revenues estimated to reach $5.7 billion this year, these opposing positions correspond to a monetary difference of nearly $400 million, or $12.5 million per team.208 revenue with players, while at the same time leaving the sharing of local revenue between owners an unanswered question. Such an approach would hopefully provide a quick fix for one part of the League’s twin-headed monster (revenue sharing reforms & CBA negotiations), but, at the same time, would most likely open an entire new set of problems. 204. See Kaplan, NFL Impasse, supra note 15, at 1; Daniel Kaplan, NFL Owners Told How Signings Would Work With No New CBA, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Nov. 21, 2005, at 34 [hereinafter Kaplan, NFL Owners Told]; Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3; Peter King, Let There Be Labor Peace: NFL on CBA, SPORTS ILLUSTRATED, Sept. 26, 2005, at 86. 205. This tentative agreement to include local revenue only applies to the sharing of revenue with players, and the question of how exactly local revenue will be treated for purposes of revenue sharing between owners remains an unanswered. 206. Kaplan, NFL Impasse, supra note 15, at 1. 207. Id.; Daniel Kaplan & Liz Mullen, NFL Owners to Hear Same Old Story on Stalled Labor Talks, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Nov. 14, 2005, at 4 [hereinafter Kaplan & Mullen, NFL Owners to Hear]; Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3. 208. Kaplan, NFL Impasse, supra note 15, at 1.

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Furthermore, multiple NFL insiders have begun to express their frustrations with the current standoff, and there is little optimism that a deal will be completed before teams start making off-season moves in anticipation of the 2006 season, which officially begins on March 3, 2006.209 Despite a mounting sense of urgency, both sides have recently confirmed their unwillingness to compromise, while at the same time recognizing the need to reach an agreement before the March deadline.210 Specifically, the League attempted to break the stalemate by offering a nominal increase over its original offer of fifty-seven percent, but the NFLPA rejected the League’s revised offer claiming it was so inadequate that it did not deserve a counteroffer.211 The League has been similarly resistant to the idea of any significant concessions to the players union, and has specifically refused to even consider meeting the union halfway.212 Therefore, despite recognizing the importance of reaching an agreement in the near future, both sides remain so sharply divided that it appears unlikely that they will be capable of reaching an agreement before the salary cap expires on the third day of March. If the two parties are unable to reach a deal before March 3, 2006, which marks the start of the 2006 season and the upcoming draft and free agency period, this failure will have an immediate impact on the ability of teams to sign both their draft picks and current free agents because teams will not be able to amortize signing bonuses over the life of the contract for purposes of complying with the 209. Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3. The official start of the 2006 season and its corresponding free agency deadline was actually March 3, not March 1 as was reported in the above source. See Kaplan, NFL Owners to Set Revenue-Sharing Plan, supra note 17, at 1; Kaplan, Chaos and Compromise, supra note 17, at 1; Mullen, Winding Road, supra note 17, at 1. Furthermore, the owners and the NFLPA agreed to extend the March 3 deadline just before its expiration, in hopes that the two sides could reach a suitable compromise within a reasonable amount of time. Kaplan, NFL Owners to Set Revenue-Sharing Plan, supra note 17, at 1; Kaplan, Chaos and Compromise, supra note 17, at 1; Mullen, Winding Road, supra note 17, at 1. When faced with the very real and daunting possibility of realizing the various negative consequences outlined in the text below, the owners ultimately conceded to the demands of the union by agreeing to guarantee that under the new CBA, the players will receive the extra percentage points, which had previously been so adamantly rejected by the owners. See Kaplan, NFL Owners to Set Revenue-Sharing Plan, supra note 17, at 1; Kaplan, Chaos and Compromise, supra note 17, at 1; Mullen, Winding Road, supra note 17, at 1. 210. Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3. 211. Id. (stating that the exact amount of the League’s revised offer was never released). 212. Kaplan & Mullen, NFL Owners to Hear, supra note 207, at 4; Daniel Kaplan & Liz Mullen, Two Issues and Little Progress for NFL, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Oct. 3, 2005, at 4 [hereinafter Kaplan & Mullen, Two Issues].

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2006 salary cap.213 Instead, teams will only be able to amortize bonuses over the two remaining years of the current labor agreement plus an additional two years, as provided for in the current CBA, which would make the total amortization period only four years.214 Such a shortened amortization period could wreak havoc for teams trying to comply with the cap, especially because bonuses play such a big role in signing draft picks and free agents.215 This result could be extremely detrimental to the popularity of the League because in order to comply with the 2006 salary cap, teams might be forced to either release their highly paid players or allow their draft picks to go unsigned, and either option will lead to widespread unrest among fans. Furthermore, Denver Broncos owner Pat Bowlen, who is one of the League’s lead negotiators, has expressed his concern that once the salary cap expires on March 3, 2006, the entire salary cap system could be lost forever.216 Although both parties have apparently agreed to use total football revenue in calculating the players’ guaranteed share of League income, recent press coverage of the on-going negotiations has not specified how League revenue will be treated for the purposes of revenue sharing between teams. In fact, the NFL and Commissioner Tagliabue are apparently maintaining their previous position that revenue sharing reforms can wait until after a new labor agreement has been reached.217 The NFLPA, however, has taken the opposite position, and general counsel Richard Berthelsen, has emphasized

213. Daniel Kaplan, On the Brink?, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Jan. 30, 2006, at 19[hereinafter Kaplan, On the Brink?]; Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3. 214. Mullen & Kaplan, NFL Sides Agree, supra note 15, at 3 215. Id. (illustrating the increased difficulties that teams face in signing new players while still complying with the shortened amortization period by citing an increase in length of 36 pages for the contract signed by the first draft pick over the last two seasons). 216. Id.; Kaplan, On the Brink?, supra note 213, at 19. In the few days that immediately preceded the March 3 deadline, the owners were forced to recognize the true extent of the free agency mess created by the shortened amortization period because the immediacy of the deadline left them with no other choice but to start making cuts in order to free-up cap room in anticipation that the 2006 free agency period would in fact be hamstrung by this shortened amortization period. See Kaplan, Chaos and Compromise, supra note 17, at 1. Furthermore, when also considering the owners’ fear of losing the salary cap forever, which became an increasingly likely scenario as the March 3 deadline rapidly approached and was then extended, the combination of these two issues undoubtedly created significant leverage for the players union, and ultimately played a critical role in compelling the owners to surrender to the demands of the union. See id. 217. Daniel Kaplan, NFL No Closer to Solving its Double Trouble, STREET & SMITH’S SPORTS BUSINESS JOURNAL, Oct. 10, 2005, at 3; Kaplan & Mullen, NFL Owners to Hear, supra note 207, at 4; Kaplan, On the Brink?, supra note 213, at 19; Kaplan & Mullen, Two Issues, supra note 212, at 4.

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that the League must reach a revenue sharing deal before committing to a new labor agreement.218 The union’s rationale for this position is based on the belief that low-revenue teams are unlikely to approve any new CBA if they are unsure about whether the owners’ own revenue sharing structure will address the financial inequalities that currently plague the NFL.219 Moreover, the players union is further complicating negotiations by insisting that it should have some input in the revenue sharing debate because the players have a stake in maintaining the League’s overall competitive parity.220 Therefore, despite reaching an apparent compromise to share total football revenue with players, both sides of the labor negotiations remain sharply divided over exactly how much total revenue should be guaranteed to players. While this tentative agreement would resolve the NFLPA’s concerns regarding the sharing of local revenue, the current dispute over percentages appears serious enough that it might preclude both parties from ultimately achieving their tentative arrangement. Furthermore, despite some disagreement among owners, there has been no indication that the League is seriously considering any immediate reforms to the sharing of revenue between teams.221 Instead, the League has placed an emphasis on accomplishing a new labor agreement before addressing any reforms to the revenue sharing model. This approach by the League, however, could potentially have devastating consequences for lower-revenue teams. In particular, if the League relents to the NFLPA’s demands and ultimately guarantees the players sixty-one percent of “total football revenue” for the 2006 season, the salary cap would jump from its current level of $85.5 million per team to slightly more than $100 million.222 Therefore, if the League reaches a new labor agreement without implementing any reforms to the current revenue sharing system, such a dramatic increase in the salary cap would be devastating for lower-revenue teams because they are already struggling to keep pace with the annual increases to the current salary cap.223 Furthermore, if this scenario becomes a reality, higher218. 219. 220. 221.

Kaplan, NFL Owners Told, supra note 204, at 34. Id. Kaplan, On the Brink?, supra note 213, at 19. The new last-minute CBA and revenue sharing reforms, which were approved just before this note went to press, indicate that the owners were ultimately forced to agree upon revenue sharing reforms in order to placate the NFLPA and thereby reach a new CBA that maintains the current salary cap system. 222. King, supra note 204, at 86. 223. See discussion supra Part III.B.1 describing the failure of the salary cap, and the inability of lower-revenue teams to keep pace with the increases in the cap, and further

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revenue teams will enjoy an even greater advantage because they will be able to directly utilize their unshared local revenue to corner the market for talented free agents, which would thereby destroy the League’s competitive parity. IV. FOURTH AND GOAL: SUPPLEMENTAL REDISTRIBUTION - A PROPOSED REFORM TO THE NFL’S REVENUE SHARING SYSTEM On the one hand, there is no doubt that the NFL’s collective approach to its revenue sharing system played an integral part in the continually growing success and popularity of the League as a whole. On the other hand, the existence of some unshared revenue is also undeniably important in today’s economy because it provides incentives for teams to market themselves. Forcing the individual teams to share all of their local revenue would not be beneficial for the League as a whole because it would completely eliminate any incentive for teams to seek a competitive advantage, thereby enabling some teams to simply coast on the coattails of their more committed brethren. Maintaining the status quo, however, is also not an option because the extreme economic disparities that exist between high and low revenue teams will soon render the future economic viability of the lowest-revenue teams untenable. Furthermore, the owners cannot avoid reforming the current revenue sharing system because the NFLPA demands a portion of unshared revenues. If the NFL does not accede to these demands, it could face a player strike, thereby devastating the League’s popularity and success. Therefore, in order to maintain the incentives provided by unshared local revenue while at the same time preserving the basic revenue sharing structure that has so adequately proved the test of time, the NFL and its owners should consider an economic formula that redistributes some portion of the unshared local revenue from those teams on top to those at the bottom. Although the League has been largely unsuccessful in the few attempts that it has made to neutralize some of the harmful effects associated with the growth in unshared local revenue, it is important to carefully consider the limited action that the NFL has taken because it is helpful in providing guidelines for a more comprehensive reform of the revenue sharing system as a whole. First, it is important to identify the two major competing interests that must be balanced

recognizing that some lower-revenue teams are already forced to spend as much as seventy percent of their revenue on player salaries under the current salary cap.

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by any attempt at reform, namely: (1) the need for some unshared revenue to provide incentives for teams to market themselves; and (2) the need to preserve the basic revenue sharing structure that has fostered the success and popularity of the League by ensuring enough parity to establish the correct competitive balance among the individual NFL teams. Analyzing the G-3 Program adopted by the NFL to help finance the construction of new stadiums provides valuable insights that help to identify a number of different issues that must be addressed by any reform. First, it illustrates the importance that stadium ownership plays in the ability of an individual franchise to capitalize on sources of local revenue, and it indicates that stadium ownership will have to play a role in any future attempt at reforming the revenue sharing system. Second, the G-3 Program demonstrates both the inefficient effect that “Franchise Free Agency” can have on the League as a whole, and it indicates that those members of the League in a decision-making position clearly place significant value on maintaining franchises in all of the major television markets. Furthermore, the program’s favorable treatment of the largest-market teams also indicates that the League has not been overly concerned with addressing the widening revenue gap, and instead has focused more of its attention on maximizing total League revenue regardless of the potential effect on revenue disparities. Finally, by relying on financial incentives to keep teams in all of the major television markets, the G-3 Program highlights the League’s perception of its own inability to prevent individual franchises from relocating without an antitrust exemption from Congress. The lessons to be learned from the League’s “supplemental” revenue sharing pool are much more straightforward, and can be simply characterized as a lesson in the current inequalities that exist between those teams on the top and those at the bottom. The basic idea behind the NFL’s “supplemental” revenue sharing pool is to redistribute income so as to funnel the necessary funds to those teams that cannot keep pace with their wealthier counterparts. If it were not for the enormous revenue discrepancies between NFL teams, this basic approach would be very effective in eliminating the economic inequalities that currently exist in the NFL. However, because the growth in local revenue has far outpaced the amount of funds allocated to the “supplemental” pool each year, the effectiveness of this approach is seriously compromised. Therefore, in order to adequately address the large scale of the inequalities that have resulted from the growth of unshared local revenue, the League should redistribute some of the unshared revenue from those teams on top directly to

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those teams at the bottom. By taking a sufficient portion of local revenue from revenue-rich teams and directly redistributing that money to the teams with the greatest needs, the League can effectively shrink the revenue gap, and thereby help to ensure the relative competitiveness of less profitable teams. By adopting the basic redistributive approach of the “supplemental” revenue sharing pool, the League can efficiently shrink the current revenue gap while at the same time minimizing the impact that it will have on the incentives created by the existence of sources of unshared revenue. Furthermore, one minor addition to the basic approach of the “supplemental” revenue sharing pool will enable the League to minimize the revenue gap in a way that is even more consistent with the incentives provided by local revenue. This would be a benchmark limit on the total amount of local revenue that can be freely retained by an individual team in any given year. Instead of placing a firm limit on the total amount of local revenue that a team can utilize in that year, the benchmark will serve as a trigger in the redistributive formula. When a team’s annual local revenue exceeds the benchmark limit, it will trigger a percentage that will be applied against all of the local revenue in excess of the benchmark limit. For example, if a team exceeds the benchmark limit by ten million dollars, then a percentage of that ten million dollars will be allocated to the “supplemental” revenue sharing pool, which will then be redistributed to those teams with the greatest needs. Additionally, the “supplemental” pool can also be used to allocate funds to the players union, which will appease the concerns expressed by the NFLPA regarding their demands for an increased share of local revenue.224 Finally, this approach will allow the League to engage in the necessary amount of redistribution without significantly impairing the incentives that are created by unshared local revenue. V. THE POST-GAME SHOW: A CONCLUDING SUMMARY For over forty years, the NFL’s collective “League Think” philosophy has played a central role in establishing and maintaining the competitive balance that fostered the massive popularity and

224. Recent CBA negotiations have yielded a tentative agreement between the League and the NFLPA to share “total league revenue” with the players, which would include local revenue when calculating the percentage of League revenue guaranteed to players. If the next CBA does in fact share “total league revenue” with the players, it will render this issue moot. See discussion supra Part III.D.1 describing the recent developments in the on-going labor negotiations, and the implications that these developments will have on revenue sharing reform.

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success still enjoyed by the League today. In particular, the League’s two-pronged revenue sharing system has proven the test of time by adapting to the prevailing economic forces that have helped shape the course of the NFL’s financial model. While the emergence of too much unshared local revenue currently poses a variety of threats to the League’s continued financial and competitive stability, local revenue is not by nature a corrosive force. If properly harnessed, local revenue can help the League’s financial model evolve by incorporating the increased incentives that should enhance the League’s overall product as individual owners strive to improve the marketability of each individual franchise. However, when unchecked, the lure of unshared local revenue can entice an individual owner to maximize his own benefits at the expense of the League as a whole. Under these circumstances, the individual owners benefiting from local revenue are often blinded by their own success, and they fail to recognize that the success of their individual franchise necessarily depends on the success of the League as a whole. The League’s revenue sharing system was originally designed to ensure that the League’s success always came before that of an individual franchise. However, when the development of new economic forces threatened the sustainability of this collective principle, the League’s financial system was forced to evolve. For example, the salary cap was adopted in 1994 to help sustain the competitiveness of the League’s overall product by combating market inequalities that revenue sharing alone could no longer control. Similarly, the NFL’s current financial system, which includes both revenue sharing and the salary cap, is not adequately suited to address the threats posed by the excessive growth of local revenue. This enormous growth of local revenue has now combined with natural market inequalities like market size and stadium ownership to create a widening revenue gap between the richest and poorest teams. The expanding nature of this revenue gap now threatens the competitive balance that has previously ensured the sustained success of the League’s overall product, and must therefore be addressed before inflicting irreparable harm upon the popularity and success of the League. In order to adequately address these growing revenue disparities, the League’s financial system must once again evolve by incorporating a redistributive formula that maintains a proper level of unshared local revenue, and redistributes excessive local revenue to those teams most in need. Much like the creation of the salary cap, the adoption of this formula will help the NFL’s financial system improve by simultaneously capturing the positive incentives associated with a

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healthy level of local revenue, while also preventing the corrosive effects of excessive local revenue. Clay Moorhead*

* B.A. 2002, Middlebury College; J.D. candidate 2006, Vanderbilt University Law School. I would like to thank Coach McCabe for teaching me the game of football at its purest level and for instilling in me a true passion for the game. I would also like to thank all of the Vanderbilt Journal of Entertainment and Technology Law editors, especially Steve Lund. Finally, I would like to thank my family and friends, especially Laura, for their comfort and support.

M PRA Munich Personal RePEc Archive

Antitrust Analysis of Sports Leagues Pelnar, Gregory Lexecon

12 October 2007

Online at http://mpra.ub.uni-muenchen.de/5382/ MPRA Paper No. 5382, posted 07. November 2007 / 04:41

Antitrust Analysis of Sports Leagues

Gregory J. Pelnar Lexecon 332 S. Michigan Ave. Suite 1300 Chicago, IL 60604 (312) 322-0238 pelnar[email protected]

Draft: October 12, 2007

Table of Contents

Introduction

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Chapter 1: What Is a Sports League? 9 A Brief History of the Major Sports Leagues in the United States National Football League 10 Major League Baseball 12 National Basketball Association 13 National Hockey League 14 National Collegiate Athletic Association 16 Major League Soccer 18 Women’s National Basketball Association 19 Key Differences Between Sports Leagues 20 Sanctioning Bodies as a Form of Sports League 22 Economic Theories of Sports Leagues 23 Sports leagues as natural monopolies 23 Sports leagues as joint ventures 25 Sports leagues as cartels 27 Chapter 2: Basics of Antitrust Analysis 29 The Antitrust Laws 29 Exceptions to the Antitrust Laws 30 Judicial ‘interstate commerce’ exemption 30 Judicial ‘single-entity’ exemption 34 Statutory exemptions 37 Non-statutory exemptions 39 Proving Antitrust Violations 41 Proving violations of section 1 of the Sherman Act Proving violations of section 2 of the Sherman Act Proving violations of section 7 of the Clayton Act

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41 43 49

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Chapter 3: Sports Leagues vs. Their Own Member Teams 51 Basics of Cartels 51 Basics of Joint Ventures 53 Externalities 56 Organizational problems 56 Joint venture instability 57 Team Antitrust Challenges to Sports League Rules and Policies Public ownership restrictions 58 Sponsorship and licensing arrangements 61 Dallas Cowboys 61 New York Yankees 64 Television restrictions 67 NCAA 68 Chicago Bulls 72 Team relocation 75 San Francisco Seals 76 Oakland Raiders 77 San Diego Clippers 80 New England Patriots 81

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Chapter 4: Sports Leagues vs. Rival Leagues 86 Federal League vs. Major League Baseball 86 American Football League vs. National Football League 90 American Basketball Association vs. National Basketball Association 93 World Hockey Association vs. National Hockey League 94 United States Football League vs. National Football League 96 North American Soccer League vs. National Football League 99 Table 4.1: The Impact of Teams in Other Sports Leagues on Live Attendance 102 Table 4.2: The Impact of Teams in Other Sports Leagues on Television Viewership 104 Chapter 5: Sports Leagues vs. Prospective Teams and Owners 106 Prospective Teams Seeking Admittance Into a Closed League 107 Mid-South Grizzlies v. NFL 107 Seattle Totems v. NHL 109 Bowl Championship Series 110 Prospective Owners 113 Levin v. NBA 113 Fishman v. Estate of Arthur M. Wirtz 114 Piazza v. MLB 118 Murray v. NFL 120 Baseball at Trotwood v. Dayton Professional Baseball Club 122

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Chapter 6: Sports Leagues vs. Players 125 NCAA 125 Restrictions on player compensation and team sanctions for compensation restriction violations 126 Table 6.1: The Impact of NCAA Player Compensation Restrictions on Rents Earned by Universities on Their Athletes 129 Restrictions on player eligibility – the no-draft and no-agent rules 131 Restrictions on academic eligibility 134 Restrictions on transferring to another academic institution 134 Restrictions on the number of athletic scholarships 137 Restrictions on the dollar value of athletic scholarships 140 MLB 141 The Reserve Clause 142 Table 6.2: The Impact of MLB’s Reserve System on Player Salaries 144 Table 6.3: The Impact of MLB’s Reserve System on Competitive Balance 149 Amateur Draft 153 Table 6.4: The Impact of MLB’s Amateur Draft on Competitive Balance 154 Collusion 154 NFL 157 Blacklisting 158 Rozelle Rule, Revenue-Sharing, and Free Agency 159 Amateur Draft 166 Fixed Salaries 169 NBA 172 Four-year Rule 172 Player Opposition to the NBA-ABA Merger 173 Amateur Draft, Salary Cap, and Right-of-First-Refusal 174 NHL 177 Reserve Clause, Equalization Payments, Standard Player Contract, and Amateur Draft 177 Van Ryn Rule 180 Salary Cap and Luxury Tax 181 MLS 182 LPGA 182 Chapter 7: Sports Leagues vs. Coaches 186 NCAA Limits on the Number of Assistant Coaches 186 NCAA Limits on the Salaries of Certain Assistant Coaches

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Chapter 8: Sports Leagues vs. Stadium Owners 191 NFL’s Los Angeles Rams’ Relocation to St. Louis 191 NASCAR’s Winston (now Nextel) Cup and Busch Series Dates Chapter 9: Sports Leagues vs. Equipment Suppliers NCAA Baseball 211 Professional Tennis 214 Professional Golf 216 Professional Bowling 220 Auto Racing 224

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Chapter 10: Sports Leagues vs. Promoters/Sponsors, For-Profit Sports Camp Operators, Merchandisers, and the Media 230 Promoters/Sponsors 230 NCAA 231 Postseason Rules 231 Two-in-Four Rule 240 NBA 244 Professional Tennis 247 Boxing 251 For-Profit Sports Camp Operators 254 Merchandisers 257 NCAA Restrictions on Manufacturer Logos on Team Uniforms 257 NFL’s Exclusive Licensing Arrangement with Reebok 261 The Media 264 Television Stations 265 College Football Association television exclusivity agreements 265 NFL’s blackout policy 271 NBA’s limit on the number of games broadcast on superstations 272 Other Media 273 PGA’s Real-Time Scoring System 273 Websites with Domain Names Similar to that of NFL Teams 276

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Chapter 11: Sports Leagues vs. Fans, Taxpayers, and the Federal Government 278 U.S. Government Antitrust Lawsuits Against Sports Leagues 278 Professional Boxing 278 NFL Blackout Policy 283 Table 11.1: The Impact of NFL Local Area Television Blackouts on Live Attendance 292 Sports Fans’ Antitrust Lawsuits Against Sports Leagues 293 NFL’s Blackout Policy 293 Television Game Packages 296 NFL Sunday Ticket 296 NBA League Pass 299 Tying of Regular Season and Preseason Game Tickets 301 Price-fixing of Licensed Merchandise 305 League Suspensions of Teams 306 Unfair Labor Practices 307 Scheduling 308 Taxpayer Antitrust Lawsuits Against Sports Leagues 308 Chapter 12: Proposals to Curb Leagues’ Monopoly Power 311 Proposed Structural Remedies 311 Breaking Up Sports Leagues 311 Regulating Sports Leagues as Natural Monopolies 314 Mandating a Vertical Structure Where a Central Upstream Organization Provides Competition-organizing Services for Independent Downstream Teams 315 Mandating a System of Promotion and Relegation 316 Other Proposed Congressional Actions 318 Legislation Granting an Antitrust Exemption for Sports League Rules Regarding Franchise Relocation 318 Legislation Curbing the Use of Tax Subsidies to Lure or Retain Sports Teams 319 Rejection of the Competitive Balance Defense in Rule-of-Reason Analyses 320 Possible League Responses 321 Reorganization of the Major Sports Leagues Into Single-entity Structures 321 References Cited Cases

323 342

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Introduction

The antitrust analysis of sports leagues, at first glance, appears to be utterly confused. Why does Major League Baseball (MLB) have an antitrust exemption, but the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL) do not? Surely, there cannot be that much difference between MLB and these other leagues. And, why didn’t the antitrust authorities – the Antitrust Division of the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) – oppose and stop the merger of the two major professional football leagues (i.e., the National Football League and the American Football League) and the two major professional basketball leagues (i.e., the National Basketball Association and the American Basketball Association)? Surely, these were mergers to monopoly (or near monopoly). Their combined market share in the relevant market had to be close to 100%. What were the antitrust authorities thinking? And why do the antitrust authorities allow sports leagues to negotiate broadcast deals on behalf of their members? Surely, this increases the price that broadcasters must pay relative to what they could negotiate with each league member individually. On the other hand, sports leagues engage in a myriad of activities which have attracted antitrust scrutiny. Leagues typically set rules regarding who is eligible to play, how players will be assigned to teams, and the terms of those assignments. Leagues may also impose a cap on teams’ player payrolls, or impose a ‘luxury tax’ on the teams with the highest player payrolls. Aren’t these examples of the exercise of monopsony power by sports leagues over the players? Moreover, sports leagues typically set rules regarding the entry of new teams, the purchase, sale, and relocation of existing teams, and the sharing of revenue among teams. Leagues may attempt to limit the number of games a team can play, or the number of televised games it can play. Leagues set rules over allowable and banned equipment. Why do sports leagues adopt such rules and policies? Do they have an anticompetitive effect? Do they have a procompetitive rationale? The antitrust analysis of sports leagues is also interesting because it involves a multitude of controversial economic issues. Are sports leagues cartels or are they better understood as joint ventures? Are sports leagues natural monopolies? Do the rules and policies adopted by sports leagues restrict output or enhance demand for their product? And what is the ‘product’ produced by sports leagues? How does an incumbent sports league respond to the entry of a rival league? Is it ‘vertical foreclosure’ if a team in the incumbent league refuses to allow a team in the rival league to play at the same stadium? Is the stadium an ‘essential facility’? This book presents an overview of the antitrust analysis of sports leagues. Chapter 1 gives a brief history of the major sports leagues in the United States, discusses differences among leagues, and examines how economists answer the question: “What is a sports league?” Chapter 2 reviews the basics of antitrust analysis and their application to sports leagues, including antitrust exemptions, rule of reason analysis, evidence of monopoly and monopsony power (or, to use an analogous term, ‘market power’), and market definition issues. Chapter 3 discusses antitrust disputes between sports leagues and their own member teams over such issues as restrictions on the purchase, sale and relocation of existing teams and the sharing of revenues. Chapter 4 examines antitrust - -

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disputes between rival sports leagues. Chapter 5 addresses disputes with teams from rival leagues that want to join the league and prospective owners who want to purchase an existing league team. Attention then turns to the input market. Chapter 6 addresses antitrust disputes between sports leagues and players concerning issues like eligibility restrictions, free agency, salary caps, and luxury taxes. Chapters 7, 8, and 9 examine antitrust disputes between sports leagues and coaches, stadium owners, and equipment suppliers, respectively. Attention then shifts to the output market. Chapter 10 discusses antitrust disputes between sports leagues and promoters/sponsors, for-profit sports camp operators, merchandisers, and the media. Chapter 11 investigates antitrust lawsuits brought by fans, taxpayers, and the federal government against sports leagues over issues such as team sanctions, league television packages, taxpayer-financed stadiums, and league television blackout rules. Chapter 12 reviews proposals to curb the monopoly power of professional sports leagues.

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Chapter 1 What Is a Sports League?

Economists, antitrust lawyers, and the courts have wrestled with the question: “What is a sports league?” Is it a collection of competitors (i.e., teams) acting collusively? If so, the league would seem to be a cartel. Or is the league a single entity, with each team analogous to a subsidiary of a large corporation? If so, the league cannot be colluding, because an entity cannot collude with itself – it has to collude with another entity. Or is a league basically a joint venture undertaken by teams, similar to General Motors and Toyota launching a joint venture to produce automobiles? If so, when is such a joint venture anticompetitive and when is it procompetitive? Irrespective of the answers to these questions is another: is a sports league a natural monopoly? Moreover, is it even possible to answer such questions generally, or is there one set of answers specific to, say, the National Football League and another set of answers specific to the National Collegiate Athletic Association? Not surprisingly, those who allege that certain activities of sports leagues violate the antitrust laws view teams as engaged in an antitrust conspiracy, with the league functioning as a cartel whose anticompetitive activities enhance the profits of its members (the teams). Alternatively, those who allege a league is a single entity point out that an entity cannot be engaged in an antitrust conspiracy only with itself. In contrast, those who view sports leagues as joint ventures contend that league activities should be evaluated under the “rule of reason.” This chapter explores the question: “What is a sports league?” It begins with an overview of the major sports leagues in the United States. This overview leads to a discussion of some key differences, from an antitrust perspective, between the various sports leagues and a discussion of sanctioning bodies as a form of sports league. It concludes with an examination of competing economic answers to the question: “What is a sports league?” A Brief History of the Major Sports Leagues in the United States. The four major professional sports leagues in the United States are the National Football League (NFL), Major League Baseball (MLB), National Basketball Association (NBA), and National Hockey League (NHL). The major collegiate sports league is the National Collegiate Athletic Association (NCAA). Two of the newer professional sports leagues are Major League Soccer (MLS) and the Women’s National Basketball Association (WNBA). This section provides a brief history of these leagues, focusing primarily on their creation, the rules and sanctions imposed on their members, their competition (and, in some cases, merger) with rival leagues, and their attempt to limit player compensation. The leagues’ histories are interesting because, today, the NFL, NBA, NHL, MLB, and NCAA are entrenched incumbent leagues whose dominance appears unlikely to be eroded by a new entrant. Yet, that dominance was not always the case, nor was their future dominance ensured. Today, the major sports leagues are economic powerhouses and it may be difficult to imagine a time when they were not. Thus, it is useful to review

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their histories, as well as the (short) histories of some newer leagues, such as MLS and the WNBA. National Football League.1 In 1899, a neighborhood football team named the Morgan Athletic Club was formed on the south side of Chicago. Over the years, its name changed a number of times – Racine Cardinals, Chicago Cardinals, St. Louis Cardinals, Phoenix Cardinals. Today, the team is known as the Arizona Cardinals, the oldest professional football team still playing. The first attempt to form a professional football league occurred in 1902; it was named the National Football League. Another attempt to form a professional football league occurred in 1920; it was initially named the American Professional Football Conference, but shortly thereafter changed its name to the American Professional Football Association (APFA). The APFA drafted a league constitution and by-laws, assigned territorial rights to teams, placed restrictions on player movements, developed a membership criteria for franchises, and issued team standings. It also charged its teams a $100 membership fee (which no team ever paid) and scheduling was left up to the individual teams – the result being that teams did not all play the same number of games. The APFA changed its name to the National Football League in 1922; the member teams included the Green Bay Packers and the Chicago Bears. In 1925, the Pottsville Maroons, an independent pro team, were one of five new franchises admitted to the NFL. Pottsville scheduled a game against a team of former Notre Dame players to be played in Philadelphia. The NFL franchise in Frankford, a section of Philadelphia, protested that the game was to be played in its protected territory (Frankford was playing a home game the same day). The NFL forbid Pottsville from playing the game, but Pottsville played anyway. The NFL fined Pottsville, suspended it, and returned the franchise to the league. The NFL took a variety of actions against other teams as well. For example, in 1927, the NFL decided to eliminate the financially weaker teams and consolidate the quality players from 22 teams onto just 12 teams. At the depth of the Great Depression in 1932, the NFL had only 8 teams. The NFL also imposed penalties for violating league rules. In 1931, the Chicago Bears and Green Bay Packers were two of the teams fined $1,000 each for using players whose college classes had not yet graduated. The NFL instituted an annual draft of college players in 1936, with the teams selecting in inverse order to their finish. The first of several professional football leagues to form and call itself the American Football League occurred in 1926. The first folded after the end of its first season. Another American Football League formed in 1936. A third American Football League was formed in 1940 and folded in 1941. The AllAmerica Football Conference (AAFC), whose eight teams included the Cleveland Browns, was formed in 1946. Three years later, the NFL and AAFC entered into a merger agreement in which three AAFC franchises – Cleveland, San Francisco, and Baltimore – would join the NFL. A fourth American Football League (AFL) 1

This history is based on the NFL chronology posted on the NFL website. - -

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was formed in 1959 by Lamar Hunt. The AFL signed a five-year television contract with ABC. The NFL and AFL agreed to a verbal no-tampering pact relating to player contracts. In 1961, Willard Dewveall of the Chicago Bears became the first NFL player to play out his option and sign with an AFL team, the Houston Oilers. The AFL brought an antitrust suit against the NFL over the NFL’s alleged monopoly and its conspiracies involving expansion, television, and player signings. In 1962, the district court ruled against the AFL; the appeals court affirmed the district court’s decision. Secret talks between the NFL and AFL began in 1966 and the leagues agreed to merge. The leagues agreed to maintain separate schedules through 1969 and to play an annual AFL-NFL World Championship Game beginning in January 1967 – an event now known as Super Bowl I. The leagues agreed to hold a combined draft beginning in 1967 and to merge into a single league with two conferences in 1970. Congress passed legislation exempting the AFL-NFL merger from antitrust action on October 21, 1966. It was not the first time Congress passed a bill concerning sports leagues. On September 30, 1961, President Kennedy signed a bill legalizing singlenetwork contracts by professional sports leagues. In 1973, Congress passed legislation requiring any NFL game sold-out 72 hours prior to kickoff to be made available for local televising. (The legality of the NFL’s blackout policy was upheld by a district court judge in 1962.) Other leagues have formed and attempted to compete with the NFL. The World Football League started play in 1974 and folded the next year. The United States Football League (USFL) started play in 1983 and folded in 1985. The USFL filed a $1.7 billion antitrust suit against the NFL; the jury rejected all of the USFL’s television-related claims and awarded $1 in damages. In 1988, the appeals court upheld the jury’s verdict. Throughout its history, the NFL approved the relocation of numerous teams. However, when the Oakland Raiders sought to move to Los Angeles in 1980, the NFL blocked the move and the Los Angeles Coliseum Commission, joined by the Oakland Raiders, filed an antitrust suit against the NFL. In 1982, the jury ruled against the NFL, clearing the way for the move. A state court jury ruled for the NFL in 2001, rejecting the Oakland Raiders’ claims that the NFL destroyed its 1995 Hollywood Park stadium deal and that they own the Los Angeles market. The NFL modified its cross-ownership restrictions in 1997, permitting team owners to own teams in other sports in their home market and in markets without NFL teams. In 2001, NFL owners approved additional league-wide revenue sharing, agreeing to pool the visiting teams’ share of gate receipts for all preseason and regular-season games and dividing the pool equally beginning in 2002. The NFL Players Association, the union representing NFL players, was founded in 1956. In 1982, it called a strike that lasted 57 days, shortening the regular football season from 16 games to 9. Another strike occurred in 1987. A two-week lockout of game officials occurred in 2001. The NFL launched the World League of American Football (WLAF) in 1991. The WLAF did not play any games in 1993 and 1994. It resumed play in

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1995. In 1998, the league was renamed the NFL Europe League, and later, NFL Europa. The NFL folded the money-losing league after its 2007 season. Major League Baseball.2 The first professional baseball league was the National Association (NA) founded in 1871 and which folded in 1876 after six of its strongest teams withdrew to form a new league, the National League of Professional Baseball Clubs (NL). The NL began as an eight team league, but that number dropped to six the second year after two teams refused to make western road trips later in the first season and were expelled from the NL. The American Association (AA) began play in 1882 and offered lower ticket prices, served alcoholic beverages where legal, and scheduled games on Sundays. During seven of the ten years of their coexistence, the NL and AA participated in an early version of the World Series – a series of exhibition games arranged by the teams involved. The AA merged with the NL after the 1891 season. The NL was torn by internal conflict when some team owners sought to convert the league into a form of a ‘trust’ – there would be a single common ownership of all 12 teams. Today, such a structure is known as a ‘single entity league.’ Other team owners strongly opposed the plan and it was not implemented. The NL did impose a $2,400 limit on annual player wages in 1894. The Western League was founded in 1893 as a minor league based in the Great Lakes states. It renamed itself the American League (AL) in 1899. When the NL contracted to eight teams for the 1900 season, eliminating teams in Baltimore, Cleveland, Louisville, and Washington, the AL responded by placing teams in the abandoned Cleveland market and on the south side of Chicago. The AL declined to renew its National Agreement membership when it expired in October 1900 and, in January 1901, the AL declared itself a major league. The AL was able to hire disgruntled NL players and relocated two teams (Milwaukee and Baltimore) to cities with NL teams (St. Louis and New York, respectively). In 1903, a new version of the National Agreement was signed, with the AL and NL formally accepting each other as an equal partner in major league baseball. Major League Baseball (MLB) is the entity that effectively operates the NL and AL as a single league. MLB is governed by the Major League Baseball Constitution, an agreement whose origins can be traced back to the 1876 NL Constitution. MLB negotiates television, labor, and marketing contracts and hires umpiring crews. In 1922, the U.S. Supreme Court ruled in Federal Baseball Club v. National League that the business of baseball cannot be considered interstate commerce and thus is not subject to the federal antitrust laws. MLB’s antitrust exemption was supported in subsequent court decisions. Courts ruled that the antitrust exemption has been in effect for so long, and Congress has failed to pass legislation removing the exemption, that removal of MLB’s antitrust exemption, if it occurs, must be by an act of Congress, not by a court decision. Despite 2

This history is based on the following Wikipedia entries: History of Baseball in the United States, Major League Baseball, American League, and National League. - -

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complaints by some members of Congress, no legislation has ever passed stripping MLB of its antitrust exemption – although the exemption was limited to some extent by the Curt Flood Act of 1998. In 1947, the unwritten ‘gentleman’s agreement’ barring blacks from playing in MLB games was violated with the signing of Jackie Robinson. The next year other Negro League stars like Satchel Paige were signed by ‘white’ MLB teams and the Negro National League folded in 1948. (The Negro American League continued play until 1960, but lost its major league talent.) The Major League Baseball Players Association (MLBPA) was formed in 1966, the same year that two Cy Young winners – Sandy Koufax and Don Drysdale – refused to re-sign their contracts. The reserve clause, which had restricted the free movement of players between teams since the NL’s early days, was under challenge. In 1970, Curt Flood, a St. Louis Cardinal outfielder, went to court to negate his trade to another team, making his argument in part on antitrust grounds. Despite losing his case, he won public sympathy. Then, in 1975, two players played the season without contracts and, at season’s end, declared themselves free agents. The dispute was sent to an arbitrator, who ruled in favor of the players – and was promptly fired by MLB. MLB owners were forced to accept the collective bargaining package offered by the MLBPA which essentially replaced the reserve clause with the current system of free agency and arbitration. Team owners implemented spring training lockouts in 1976 and 1990; player strikes occurred in 1972, 1973, 1980, 1981, 1985, and 1994. The 1981 dispute concerned compensation for the loss of players to free agency. The 1985 dispute concerned the division of television revenue. The 1994 dispute, which led to the cancellation of the World Series, concerned television revenue sharing and a salary cap. National Basketball Association.3 In 1946, the owners of major sports arenas, including Madison Square Garden in New York City, founded the Basketball Association of America (BAA). It was not the first professional basketball league, having been preceded by the American Basketball League (ABL) and the National Basketball League (NBL), and did not have the best players. Four of the BAA’s 11 teams folded after the first season. The ABL’s Baltimore Bullets moved to the BAA and won the championship the same season. Prior to the 1948 season, four of the NBL’s best teams moved to the BAA, including the Minneapolis Lakers with their star player, George Mikan. Minneapolis won the 1948 season championship. In 1949, the six remaining NBL teams were absorbed into the BAA, which was renamed the National Basketball Association (NBA). The next year the NBA reduced the number of franchises from 17 to 11; by 1954, there were only 8 franchises. The introduction of the 24-second shot clock prior to the 1954 season led to higher scoring (and more exciting) games. Small-market teams continued to relocate to larger markets. After the Fort Wayne Pistons moved to Detroit and the 3

This history is based on information posted on the NBA website, the Wikipedia entry for the National Basketball Association, Koppett (1976), and Staudohar (1999). - -

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Rochester Royals moved to Cincinnati prior to the 1957 season, only one NBA team (Syracuse) was located in a metropolitan area of less than a million people. The American Basketball Association (ABA) was created in 1967, with 11 teams playing a 78-game schedule (the NBA’s 12 teams played an 82-game schedule). Some cities that had failed to attract an NBA franchise, such as Dallas, Denver, Houston, and Oakland, obtained ABA franchises. The ABA permitted its teams to sign college undergraduates and the ABA succeeded in signing a number of star players, including Julius Erving. Player salaries shot up as the ABA and NBA competed to sign players. The NBA also responded to competition from the ABA by rapidly expanding the number of franchises in an attempt to tie up the most viable cities. The NBA and ABA attempted to merge in 1970, but an antitrust suit filed by NBA players, who had benefited handsomely from the competition between the two leagues, halted the merger. The two leagues tried and failed to obtain Congressional permission to merge, as the NFL and AFL had done in 1966. The NBA reached an out-of-court settlement of the antitrust suit in 1976, agreeing to a much weaker reserve formula – a ‘matching offer’ arrangement in which a player who had played out his contract could reach a deal with any other team but the original team could retain the player by matching that offer. The settlement cleared the way for a deal between the NBA and ABA in which four ABA franchises (Denver Nuggets, Indiana Pacers, New York Nets, and San Antonio Spurs) would pay a $3.2 million entry fee and be absorbed into the NBA, raising the number of NBA franchises to 22. The deal was approved by Congress. The National Basketball Players Association was formed in 1954 and the first collective bargaining agreement with the NBA was reached in 1967. The league experienced financial problems and, in 1983, negotiated a collective bargaining agreement included capped player salaries, guaranteed that players would receive 53% of league revenue, and instituted a drug control program. The salary cap was a ‘soft’ cap – it did not apply to teams re-signing their own players. The league appeared to flourish and, unlike the NFL, MLB, and NHL, the NBA had no work stoppages. Then, in the 1998-99 season, there was a 202-day lockout when the NBA team owners reopened negotiations on the 1995 collective bargaining agreement and sought a ‘hard’ salary cap. During the 1997-98 season, player salaries had reached 57% of the $1.7 billion in league revenue, far above the 51.8% required to reopen negotiations. The NBA owners dropped their demand for a hard salary cap, but won a cap on individual player salaries; players won a guarantee for 55% of league revenue in years 4 through 6 of the agreement and 57% in year 7. The NBA created a women’s league, the Women’s National Basketball Association, in 1996 and an affiliated minor league, the National Basketball Development League, in 2002. National Hockey League.4 The first professional hockey league was formed in 1904 and named the International Pro Hockey League. It had six teams – five in 4

This history is based on information posted on the NHL and ESPN websites, as well as - -

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the United States and one in Ontario. The league folded in 1907. The National Hockey Association (NHA), which included the Montreal Canadians, played its first game in 1910. In 1911, the Pacific Coast Hockey Association (PCHA) was formed by teams in western Canada. In 1915, the two leagues agreed that the two league champions would face off, with the winner receiving the Stanley Cup – a silver bowl which the English Governor General of Canada, Lord Stanley of Preston, had purchased in 1892 and decreed be awarded to the best amateur team in Canada. The NHA suspended operations during World War I. The National Hockey League (NHL) was formed in 1917 by four NHA teams after a series of disputes with the owner of the NHA’s Toronto Blueshirts. The NHL added a new Toronto franchise – the Toronto Arenas – which became the Toronto Maple Leafs in 1927. By the end of the first season, only three of the five NHL franchises remained. The Quebec Bulldogs shut down temporarily; the Montreal Wanderers folded after a fire destroyed the Westmount Arena which they shared with the Montreal Canadians. The Western Canada Hockey League (WCHL) was formed in 1921as essentially a ‘sister’ league to the PCHA. The WCHL and PCHA played interleague games, with the champion of each league facing off to compete against the champion of the NHL for the Stanley Cup. The PCHA had only three teams so when the Vancouver Maroons folded in 1924 the two remaining teams moved to the WCHL, which was renamed the Western Hockey League (WHL). NHL teams won the Stanley Cup in seven of its first nine years. The last Stanley Cup won by a non-NHL team was in 1925 by the WHL’s Victoria Cougars. By 1926, other Canadian hockey leagues could not match the salaries offered by NHL teams. The WHL folded and the NHL purchased the contracts of every WHL player for $258,000. Separate deals were made to stock two NHL expansion teams. The Chicago Black Hawks purchased the players of the Portland Rosebuds for $15,000 and the Detroit Cougars (known today as the Detroit Red Wings) purchased the players of the Victoria Cougars for $25,000. Five of the WHL teams attempted to re-form and created a semi-pro league named the Prairie Hockey League, which lasted only two years, closing after the 1927-28 season. The NHL had expanded to 10 teams by the 1930-31 season, but with the onset of the Great Depression and then World War II the number dropped to six by 1942. Apparently spurred by the creation of the junior Western Hockey League in 1967, the NHL began to expand rapidly, doubling in size by adding six franchises in 1967 and then adding six more teams between 1970 and 1974. The World Hockey Association (WHA), a 12-team league, was formed in 1972 and outbid the NHL for several star players, including Bobby Hull, who left the Chicago Black Hawks and signed a 10-year, $2.75 million contract with the WHA’s Winnipeg Jets. The NHL responded by continuing to add expansion teams. The result was a dilution of the talent pool and decline in the overall quality of play. By 1976, many WHA teams were on the financial brink and the WHA and NHL began to discuss a merger. By the time an agreement was reached the following Wikipedia entries: Los Angeles Kings, National Hockey League, Pacific Coast Hockey Association, Western Canada Hockey League, Western Hockey League, and World Hockey Association. - -

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on March 22, 1979, only six WHA teams remained. Four of those six teams joined the NHL; the other two were paid to fold. In recent years a number of NHL teams have encountered financial and legal problems. The Pittsburgh Penguins declared bankruptcy in 1974 and 1998, the second leading to its star player Mario Lemieux taking over the team. The Los Angeles Kings declared bankruptcy in 1995; its owner, Bruce McNall, was convicted of bank fraud. The Ottawa Senators declared bankruptcy in January 2003 after being unable to pay its players. A few days later, the Buffalo Sabres, whose owner John Rigas was embroiled in the collapse of Adelphia Communications, also declared bankruptcy. The first NHL Players Association was formed in 1957 and was soon crushed. Ted Lindsay, the Association’s president, was traded by Detroit to the last place Chicago Black Hawks. The NHL’s first and only player strike occurred in April 1992, but lasted only 10 days and all affected games were rescheduled. The NHL’s first lockout occurred at the start of the 1994-95 season and lasted 103 days, resulting in a shortening of the regular season from 84 to 48 games. The NHL owners again locked out the players in 2004, eventually leading to the cancellation of the entire 2004-05 season. The NHL sought ‘cost certainty’ for its teams, which the NHL Players Association rejected as a euphemism for a salary cap. The lockout ended in July 2005 and the 2005-06 season began on schedule. The terms of the collective bargaining agreement included maximum and minimum salaries for individual players, a guarantee that players would receive between 54% and 57% of League revenues, an enhanced revenue sharing plan for teams, and terms for free agency; it did not contain a luxury tax. National Collegiate Athletic Association.5 The Intercollegiate Athletic Association of the United States (IAAUS) was formed in March 1906 in reaction to the violent nature of intercollegiate football – during the 1905 season alone there were 18 deaths and more than 150 injuries, leading President Theodore Roosevelt to host a White House meeting with the representatives of several schools. In 1910, the IAAUS changed its name to the National Collegiate Athletic Association (NCAA). Membership increased rapidly as the NCAA standardized the rules in numerous sports. Beginning in the early 1920s, the NCAA attempted to limit college athletics to amateurs, adopting guidelines regarding player eligibility, recruiting, and financial aid, but leaving enforcement to individual conferences and schools. In January 1948, the NCAA adopted the ‘Sanity Code’ granting the NCAA enforcement authority, but the only penalty was a schedule boycott whose imposition required a two-third vote of all NCAA members at the annual convention. Two years later, the NCAA failed to get the two-thirds majority needed on a motion to suspend seven institutions for violating the Sanity Code. 5

This history is based on information posted on the NCAA website, DeBrock and Hendricks (1997), Eckard (1998), and the following Wikipedia entries: Association for Intercollegiate Athletics for Women, National Association of Intercollegiate Athletics, and National Collegiate Athletic Association. - -

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The Sanity Code was repealed in January 1951; not a single sanction was imposed under the Code. A new code was adopted in January 1952. It contained a workable enforcement mechanism whose penalties included a schedule boycott, but also lesser penalties such as public reprimands, probation, reductions in the number of allowable scholarships, and bans on appearances on television and at bowl games. In 1949, the NCAA financed a study of the impact of television on football attendance and, in 1951, it declared a moratorium on the live broadcasting of college football games. A year later, the NCAA voted to allow limited live television. The NCAA contracted with the television networks to broadcast a limited number of games each season. Individual schools and conferences were prohibited from contracting with the networks to televise additional games. The price of broadcasting rights for NCAA football productions soared and the NCAA attempted to spread the rights fees across its membership. The school generating the bulk of these fees objected and the NCAA decided to restructure into three divisions, with Division I comprised of the largest revenue generating programs. The elite programs were not satisfied and threatened to withdraw from the NCAA, which responded by further restructuring Division I into I-A, I-AA, and I-AAA. Nevertheless, 66 schools formed the College Football Association (CFA) in 1977. The CFA filed an antitrust lawsuit against the NCAA over its restriction on the number of football games a team could have televised in a season. In 1984, the U.S. Supreme Court agreed with the CFA that the NCAA’s rule violated the antitrust laws. The NCAA has also adopted rules regarding minimum grade point averages, recruiting activities, number and amount of financial rewards, squad sizes, coaching staff sizes, and coaches’ earnings, among many others. Many of these rules have been challenged under the antitrust laws. On some rules, the courts have sided with the NCAA; on others, the courts have found that the NCAA was in violation of the antitrust laws. The NCAA is not the lone collegiate athletics association. The National Association of Intercollegiate Basketball (NAIB) was established in 1940 and, in 1948, became the first national organization to permit black student-athletes to compete in postseason competitions. The NAIB transformed into the National Association of Intercollegiate Athletics (NAIA) in 1952 when it began sponsorship of additional sports. The Association for Intercollegiate Athletics for Women (AIAW) was formed in 1971 to govern collegiate women’s athletics and administer national championships. At its peak, the AIAW had almost 1,000 member schools. The NAIA began sponsoring intercollegiate championships for women in 1980 and the NCAA did likewise shortly thereafter. Former AIAW powerhouses like Tennessee and Old Dominion decided to participate in the first Division I NCAA Women’s Basketball Tournament in 1982. The AIAW tournament lost its appeal and NBC canceled its television contract with the AIAW. The AIAW filed an antitrust lawsuit. In 1983, the court ruled in favor of the NCAA.

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Major League Soccer.6 The 1994 World Cup was awarded to the United States on the condition that a 1st division (or ‘Division One’) professional soccer league be established. Major League Soccer (MLS) was formed in December 1993 and the 10-team league began play in 1996. Unlike the NFL, MLB, NBA, and NHL, MLS does not have individual team owners. The league owns the teams; some investors in MLS operate one or more teams, but they do not own those teams. They are ‘investor-operators’, not ‘team owners.’ Thus, MLS is a ‘single entity’ organization. The league enters into contracts with the players, not the team. MLS initially was viewed in Europe as a ‘retirement league’ in which stars past their prime could collect an easy paycheck; today, the league is more youthoriented. A number of young American players have chosen to play for MLS rather than languish on the bench of European teams. European soccer leagues have a ‘vertical’ structure – the worst teams in a higher division can be demoted to a lower division, while the best teams in a lower division can be promoted a higher division. This is known as an ‘open’ league – the specific teams competing in a particular division changes over time. MLS, like the NFL, MLB, NBA, and NHL is a ‘closed’ league. An MLS team that performs poorly does not fear being relegated to a less prestigious league, whereas a non-MLS team cannot be promoted into the same division as the MLS teams regardless of how well it plays. While most MLS teams began play in football stadiums, the league intended to build its own stadiums, enabling it to earn additional revenue from parking and concessions. The first such stadium was Columbus Crew Stadium, personally financed by Lamar Hunt, the investor-operator of the Columbus Crew, in 1999. The second was the Home Depot Center, completed in 2003 and home to the Los Angeles Galaxy. It was the work of Anschutz Entertainment Group (AEG) and the Galaxy became the first MLS team to make a profit. In 2005, a new expansion team, Chivas USA, joined the Galaxy in playing its home games at the Home Depot Center. Until recently, AEG was the investor-operator of six MLS teams, including DC United, Houston, and the MetroStars. Two MLS teams are operated by owners of NFL teams and play their games in the same stadium as the football team. The New England Revolution is operated by Kraft Sports Group, owner of the New England Patriots, and play at Gillette Stadium; the Kansas City Wizards were operated by Lamar Hunt and play at Arrowhead Stadium. The Major League Soccer Players Association (MLSPA) was formed at the end of the 1996 season and in February 1997 it filed an antitrust lawsuit against MLS. The MLSPA was organized as a trade association instead of a union because unions are prohibited by federal law from suing. In April 2000, the district court ruled that MLS’s single-entity structure did not violate the antitrust laws. In April 2000, an appeals court also sided with MLS. Three years later, in April 2003, the players formed a union, the Major League Soccer Players Union. The union and the league reached a collective bargaining agreement in November

6

This history is based on information posted on the MLS website, the Wikipedia entry for Major League Soccer, as well as various other soccer-related websites. - -

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2004. The agreement’s terms included minimum player salaries, but did not directly address the league’s salary cap of $1.73 million per team. MLS was not the first professional soccer league in the United States. The most notable was the North American Soccer League (NASL), formed in 1968 by the merger of the United Soccer Association and the National Professional Soccer League. The league started with 17 teams, of which 12 folded after the first season. The signing of soccer superstar Pele in 1975 transformed the NASL, which had been a ‘minor’ league – at least relative to the ‘major’ European leagues. It expanded to 24 teams in 1978, but soaring costs resulted in most teams having financial problems. Within a few years, 17 teams folded. The NASL shut down in March 1985. Women’s National Basketball Association.7 The first professional basketball league for women was the Women’s Professional Basketball League (WBL), which started play in 1978 with eight teams, expanded to 14 teams its second season, but folded after its third season. In 1996, two professional women’s basketball leagues were formed. The American Basketball League (ABL) began play in 1996 with eight teams; the Women’s National Basketball Association (WNBA) started play in 1997, also with eight teams. The ABL placed teams in cities with strong collegiate women’s basketball programs; the WNBA placed teams in cities with NBA teams. The ABL was unable to compete successfully against the WNBA and folded in the middle of its third season. The WNBA was created by the NBA and, initially, had a single-entity structure. The WNBA league and teams were owned collectively by the NBA; the investor-operator of a specific WNBA team was the NBA owner in that city. After the 2002 season, the WNBA was reorganized so that teams would have owners, not investor-operators, and teams could locate in cities without NBA teams. The WNBA teams were sold to their NBA counterparts or to third-parties. Two teams folded prior to the 2003 season and two others moved. The Orlando Miracle moved to Connecticut after being purchased by the Mohegan Sun casino, which is run by the Mohegan Indian tribe. The WNBA allowed the team’s purchase by the casino so long as there is no sports betting at the facility. After the 2003 season, another team folded. The WNBA and players signed a collective bargaining agreement prior to the start of the 1999 season. The players threatened to strike prior to the start of the 2003 season. The start of the 2003 pre-season was delayed as the players won a limited form of free agency while the league won caps on individual player salaries. Many WNBA players reportedly supplement their salaries by playing in European women’s basketball leagues during the WNBA’s off-season.

7

This history is based on various newspaper articles and the following Wikipedia entries: American Basketball League, Women’s National Basketball Association, and Women’s Professional Basketball League. - -

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Key Differences Between Sports Leagues. The preceding overview of the major sports leagues reveals a number of differences across leagues. Some of these differences are critical to an antitrust analysis of sports leagues. Four key differences are the extent of judicial and/or legislative protection from the antitrust laws, single entity vs. individual team ownership, interleague competition, and closed vs. open leagues. Major League Baseball is the only sports league in the United States that has immunity from the antitrust laws. That immunity originates in the 1922 decision by the U.S. Supreme Court that the business of baseball is not interstate commerce and since the federal antitrust laws apply only to interstate commerce, they do not apply to the business of baseball. Members of Congress have often threatened to pass legislation stripping MLB of its antitrust exemption, but have failed to do so – although the Curt Flood Act of 1998 did place some restrictions on the exemption. Other leagues have avoided antitrust scrutiny for certain actions by obtaining Congressional approval. Both the NFL-AFL and NBA-ABA mergers received such approval. Exemptions to the federal antitrust laws are examined in more detail in Chapter 2. Exemption from the antitrust laws can also occur by structuring the league as a single entity. Many of the recently-formed sports leagues have adopted the single-entity organization: MLS, WNBA, and the XFL (the ill-fated Extreme Football League formed by the World Wrestling Federation and NBC which folded after one season). Since an organization cannot engage in an antitrust conspiracy only with itself, the single-entity structure enables the league to hold down player salaries. Players have to contract with the league and thus individual teams cannot drive up salaries bidding for players’ services. Interestingly, the WNBA has abandoned the single entity structure, suggesting that there are costs as well as benefits to that form of organization. Investors may be more willing to invest in a league’s success if they can own a specific team (and profit by running it well) than if they have to invest in the league itself and operate, but not own, a specific team. A third difference across sports leagues is the extent of interleague competition. Professional baseball is played not only in North America, but in Japan, Mexico, and other countries. Professional football is not only played in the United States, but in Canada. There are numerous professional basketball leagues around the world other than the NBA. Professional hockey is not only played in North America, but in Europe as well. However, in their respective sports, MLB, the NFL, NBA, and NHL are the premier leagues in the entire world. The elite players from around the world gravitate towards these leagues. The elite players from these leagues do not tend to move to these other leagues. Some MLB players do sign with Japanese teams, but they tend to do so after failing to sign with a MLB team; such players are generally past their prime. Some NBA players sign with European teams, but those players are either past their prime or need to gain experience and improve their skills in the hope of one day playing in the NBA. Professional football players rarely choose to play in the Canadian Football League if they can earn a spot on an NFL team. Professional hockey players rarely choose to play in Europe if they can play in the NHL. A major exception to the dominant position of North American sports leagues is soccer. It is not true that the top soccer players in the world gravitate to MLS. According to Noll (2003b), most of the best players on the U.S. national team play for European professional teams and MLS does not have the talent of the best English league – the Premier League. Rather, the MLS is more comparable in quality to the bottom Division 1

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or top Division 2 English leagues. This competition for talent curbs MLS’s monopsony power over players. A fourth difference across sports leagues relates to their ‘openness.’ The major sports leagues in the United States are closed – a non-league team can only gain admittance to the league through the consent of the league members, who typically require payment of a substantial entry fee. This is in contrast to the typical sports league in Europe, which has an open, hierarchical structure. Consider the case of English Soccer. The top league is the English Premier League. The second-tier league is Division 1. There are lower-tier leagues as well. The three worst performing teams in the Premier League are relegated to Division 1 the next season, while the top two teams in Division 1 are promoted to the Premier League, as is the winner of a playoff among those finishing in positions 3 through 7 in Division 1. Open sports leagues are believed to give teams a greater incentive to win since playing against higher quality opponents presumably attracts greater fan interest and thus yields higher revenues for the team. As a result, teams will bid more aggressively for players.8 This implies that player salaries will be higher in an open sports league than in a closed one, all else equal. Consistent with this prediction, Noll (2002) examines English soccer and finds that ‘promotion and relegation’ has a net positive impact on attendance and results in higher player salaries. However, Noll finds the impact of promotion and relegation on competitive balance among teams to be ambiguous because some teams may be promoted to a division in which they do not have a realistic chance of fielding a competitive team and, as a result, these teams spend less on players once they are in the higher league (albeit briefly) than they did when they were attempting to be promoted into the higher league. Sports leagues in the United States seek to maintain ‘competitive balance’ among teams by a number of means, including the sharing of gate and broadcast revenues and restrictions on player movement and salaries. Such revenue-sharing does not occur in Europe. Nor do European leagues have a reserve clause, draft, salary cap, luxury tax, or collective merchandising agreement – although some European leagues collectively sell broadcast rights. Individual teams in open sports leagues not only have less market power over players, they have less market power over municipalities seeking to attract or retain a team. As Ross and Szymanski (2002) explain, “a club’s threat to relocate without tax subsidies is diluted by the possibility that the team itself may be relegated and, more importantly, by the creation of alternative entry routes for cities that do not possess a major league team.” (p. 629) Of the sports leagues in the United States, only the NHL has seen some of its teams declare bankruptcy. In contrast, Szymanski and Valletti (2003) observe that 16 English soccer teams have fallen into the U.K. equivalent of Chapter 11 in the last three years. They conclude that the system of promotion and relegation may enhance social welfare by dissipating rents earned by teams (which take the form of stadium subsidies, the gap between players’ marginal revenue product and their salaries, and so on), but may

8

See Ross and Szymanski (2002); the economic literature on ‘European Football’ is surveyed by Matheson (2003). - -

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reduce social welfare by making games less competitive (i.e., the quality of the product is reduced).9 A number of economists have advocated that the ‘closed’ sports leagues in the United States be required to establish a system of promotion and relegation. They believe that introduction of such a system will curb the market power of leagues and individual teams.10 This proposal, as well as other proposals for the reform of sports leagues in the United States, is discussed in Chapter 12. Sanctioning Bodies as a Form of Sports League. Some professional sports have ‘sanctioning bodies’ – auto racing, boxing, golf, tennis, among others. A sanctioning body sets the rules for a competition (including rules regarding who may participate), enforces those rules, guarantees the purse, provides rankings of players or teams, and declares the champion. For example, courts have found that the United States Tennis Association “legitimately functions as a private, nonprofit regulating body to ensure that competitive tennis is conducted in an orderly fashion and to preserve the essential character of the game as played in organized competition.”11 The PGA Tour “sponsors and cosponsors professional golf tournaments conducted on three annual tours” (i.e., the PGA Tour, the NIKE Tour, and the Senior PGA Tour), has rules on how a player can gain entry into a particular tour, and sets rules for each tournament.12 Boxing has a multitude of sanctioning bodies, each declaring its own champion. The failure of boxing to produce a single undisputed champion at each weight category reduces its appeal to fans. The National Association for Stock Car Auto Racing (NASCAR) was formed in 1948 by Bill France “to unite all stock car racing under one set of rules; to set up a benevolent fund and a national point standings whereby only one stock car driver would be crowned National Champion.”13 NASCAR also guaranteed the purse for each race it sanctioned – an act that earned NASCAR the respect of the drivers, who in the past sometimes went unpaid. NASCAR developed penalties for those found in violation of its rules. NASCAR is 100% owned by the France family, which also controls about 60% of International Speedway Corporation, which owns numerous tracks that host NASCAR races. NASCAR decides which racetracks get which race dates. The teams that compete in NASCAR races are neither direct, nor indirect, owners of NASCAR. Teams are independent businesses – they enter into their own deals with sponsors. Prior to 1999, the broadcast rights for each race belonged to the racetrack, with NASCAR receiving 10% of whatever the track negotiated with a network. The Fox Sports network told NASCAR it 9

Szymanski and Smith (1997) and Dobson and Goddard (1998) examine the financial performance of the English soccer industry; Medcalfe (2003) finds an improvement in competitive balance after the introduction of promotion and relegation in English soccer and cricket. 10 Noll (2003b) argues that both the American closed league system and the European open league system produce less than the optimal number of major-league teams, because both have monopoly power. 11 Gunter Harz Sports v. United States Tennis Association, 665 F.2d 222 (8th Cir. 1981). 12 PGA Tour v. Martin, 532 U.S. 661 (2001). 13 The discussion in this paragraph is based primarily on Hagstrom (1998). - -

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would bid to broadcast NASCAR races if it could negotiate directly with NASCAR instead of having to negotiate separately with each racetrack.14 NASCAR now negotiates broadcast rights with the television networks. For example, in 2005, NASCAR negotiated a $4.4 billion, 8-year contract with four networks, of which 65% will go to the racetracks, 25% will be split among the racing teams, and 10% will go to NASCAR.15 Some economists believe the market power of professional sports leagues such as the NFL, NBA, NHL, and MLB could be curbed by forcing the leagues to function more like sanctioning bodies such as NASCAR. Teams no longer would be direct or indirect owners of the league. Rival sanctioning bodies would compete for the participation of teams. One problem is how to design a system that benefits fans by producing an undisputed champion – the problem that plagues boxing. This proposal, and others, will be discussed in more detail in Chapter 12. Economic Theories of Sports Leagues. Many, but not all, economists agree that sports leagues are natural monopolies – there are a number of economic factors pushing teams in a particular sport to consolidate into a single league. Economists also generally agree that sports leagues are a type of joint venture. Economists disagree, however, as to whether particular joint ventures/natural monopolies such as the NCAA, NFL, NBA, NHL, and MLB operate as cartels. Sports leagues as natural monopolies: If total production costs are lower when one firm produces all an industry’s output compared to when it is produced by more than one firm, the market is said to be a ‘natural monopoly’ and the single firm in the market a ‘natural monopolist.’16 In a 1964 article titled “The Peculiar Economics of Professional Sports,” Walter Neale argued that sports leagues are natural monopolies.17 Their products include not only the games themselves, but also the excitement of the pennant race, the league standings, and the championship. A single team alone cannot produce these products – it needs an opponent. Neale argues: “The several joint products which are products joint of legally separate business firms are really the complex joint products of one firm, and this firm is necessarily an all-embracing firm or natural monopoly.” (p. 4) The “most useful of all products” is the World Championship, which can only be produced by a single league. As a result, there is a strong tendency toward a single league in each professional sport. At the time Neale wrote, the National Football League and American Football League had not yet merged. Neale did not find the coexistence of the two professional football leagues to be an anomaly. Rather, he predicted that “this is inherently a temporary state of affairs.” (p. 6) He was right. A few years later, the NFL and AFL merged. Ross (1989) disagrees that sports leagues are natural monopolies. He argues that there are two theoretical reasons why sports leagues may be natural 14

See Schlosser (2001). See Hiestand (2005). 16 See Carlton and Perloff (2005), pp. 104-05. 17 Other studies arguing that sports leagues are natural monopolies include Roberts (1995) and Heintel (1996). 15

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monopolies, neither of which are supported by facts. One possible reason is that the minimum size of a sports league is too large to support more than one league. Suppose a league needs a least eight teams to function, but only 12 franchise locations are viable (each of which can support only one team). A second league could place franchises in the four viable locations without teams but would need to add at least four more teams, either by convincing four teams from the initial league to switch to the new league or by adding second teams to locations already with a team in the initial league. In either case, either some of the teams in the initial league fold, and thus the initial league fails to be of minimum viable size and itself folds, or the second league fails to add enough franchises to achieve the minimum viable size of eight teams and thus the second league folds. In either case, only one league survives. Ross dismisses this argument, arguing that, in practice, sports leagues now contain so many teams that they could be split into a number of smaller, but still economically viable, leagues. Heintel (1996) counters that Ross’s argument “has no bearing on whether the NFL is a natural monopoly, however; it merely shows that the NFL has more teams than absolutely necessary to operate.” A second theoretical reason why sports leagues may be natural monopolies is that it may be less costly to expand an existing league than to form and operate a new league. Ross dismisses this argument, asserting that the only cost savings to having only one league would be the incidental administrative savings from the elimination of duplicate league offices. He contends that there is no evidence that a second league would have to pay higher stadium rental charges, player salaries, or administrative costs than would a monopoly league. It is true that player salaries soar when leagues have to compete for talent, as evidenced by the impact of NBA-ABA competition for professional basketball players and NHL-WHA competition of professional hockey players. The key point, Ross explains, is that a distinction must be drawn between actual dollar expenses and costs (i.e., the value to society of the resource). A monopoly league can depress player salaries and will have actual dollar expenses which are lower than if it had to compete with another league. The higher player salaries which it would have to pay if a second league existed are a higher dollar expense, but they are not a cost – the value to society of the players’ services has not changed. Society does not benefit from the monopsonistic exploitation of players. In other words, a single league may be able to add new teams at lower cost than a second league can be formed, but this lower cost is attributable to its monopsony power. Heintel counters that Ross’s assertion that costs for a second league would be no higher than for a monopoly league is incorrect and irrelevant. It is incorrect because a new league would have to invest in intangible capital (e.g., rivalries, fan loyalty) which the NFL has already generated, resulting in higher costs for a new league. It is irrelevant because simply showing a second league could operate at the same cost as the NFL does not prove that the NFL is not a natural monopoly. The question is what happens to the NFL’s average cost per unit of output (e.g., games played) as output increases. Heintel asserts that it decreases, and thus the NFL is a natural monopoly. Ross also addresses the question as to why rival leagues generally do not co-exist for long. In the case of Major League Baseball, Ross answers that MLB “acquired monopoly power by engaging in mergers and anticompetitive acts that - -

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clearly would constitute illegal monopolization in violation of section two of the Sherman Act” and “maintained its monopoly position by creating new franchises to deprive new leagues of the base necessary to begin competition,” conduct which “also probably would constitute illegal monopolization absent the exemption.” In the case of the NFL, Ross argues that the NFL-AFL merger created a giant incumbent which is entrenched in most of the largest markets in the United States. The World Football League and United States Football League were unable to compete with the NFL, in part due to disastrous managerial decisions by the new leagues. The failed entry of these leagues does not imply the professional football industry is a natural monopoly any more than the failure of new entrants to compete against Alcoa implied that the aluminum industry was a natural monopoly. Ross agrees that fans value championship games, but believes that rival leagues can agree jointly to produce a champion. Heintel counters that the rival leagues would have to coordinate to produce a championship, reaching agreement on a schedule and common rules – and thus the rival leagues would cease to be distinct. However, as discussed earlier in this chapter, during the early 1900s, rival professional hockey leagues did agree to hold a championship, with the winner receiving the Stanley Cup. The NHL supplied one of the teams in the championship; its opponent for the Stanley Cup came from a rival league. Finally, Ross disputes that competition between leagues for players will result in “ruinous competition.” He points out that franchise values are a better indication of a league’s financial health than are teams’ balance sheets. During the alleged “ruinous competition” between the NBA and ABA, the value of professional basketball franchises rose, not fell. Sports leagues as joint ventures: A single team can only produce scrimmage (or ‘exhibition’) games, which are unlikely to generate much fan interest.18 To produce a ‘real’ game, it needs an opponent, and it needs to agree with the opponent on the rules and scheduling of the game. Unlike a typical business which benefits if its competitors fold, a single team does not benefit if its opponents fold. The team wants to beat its opponents on the field, and possibly also outperform them financially, but it does not want its opponents to fold. Therefore, the characterization of individual teams as individual firms does not quite fit. Nor does the characterization of a sports league as an individual firm. The interests of the league do not always coincide with that of each of its member teams (see Chapter 3). The league acts on behalf, and with the consent, of its 18

The Green Bay Packers hold a scrimmage game during the NFL preseason and tens of thousands of fans attend. However, this does not mean that the same number of fans would attend if the Packers were the sole NFL team. The huge attendance is due to a number of reasons. Fans want a sneak preview of the team for the upcoming regular season; if not for the upcoming season, fans would have little incentive to size up this year’s team. Moreover, Packers’ home games are always sold-out so securing tickets to games can be difficult and expensive; therefore, the scrimmage game is a poor quality (but also low cost) substitute for attending a regular season game. - -

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members. Sometimes a league may take actions that some of its members do not support. Consider the issue of how many teams to have in the league. Ross and Szymanski (2002) show that, in a simple model of a league seeking to maximize league profits, the number of teams in the league expands to the point where marginal revenue is zero. In contrast, the individual teams comprising the league will want to expand the number of teams only to the point which maximizes average revenue per team. In general, the size of the league desired by the individual teams will be smaller than the size of the league desired by the league itself. 19 Economists generally prefer to think about sports leagues as joint ventures.20 As Flynn and Gilbert (2001) explain, the term “joint venture” does not have an exact meaning in economics. Nor does it have an exact meaning in antitrust law. The basic idea, however, is that two or more independent entities collaborate to achieve a commercial objective. Pharmaceutical companies form joint ventures with biotechnology companies to conduct drug-related research. General Motors and Toyota entered into a joint venture to produce automobiles. Flynn and Gilbert write: “The central economic issue for antitrust analysis is whether the coordination of professional sports teams harms competition, and if so, whether the lessening of competition is more than offset by benefits to consumers from that coordination.” (p. F28) Viewing sports leagues as joint ventures does not immediately determine whether their activities are anticompetitive or pro-competitive.21 A joint venture may engage in either, or some of both. Moreover, an action of a joint venture may be pro-competitive in some respects and anti-competitive in others – it depends on whether the existence of the league and its success are taken as a given (ex post) or whether the creation of the league and its future success are taken as uncertain (ex ante). An action which appears to be anti-competitive from an ex post perspective may be procompetitive from an ex ante perspective. (Chapter 2 examines the basics of antitrust analysis in more detail.) From the joint venture perspective, a sports league, in the words of Tollison (2000), “competes as a single entity in the relevant product market in both live attendance and television markets” and “has incentives to mute intrabrand competition (among teams) in the interest of promoting interbrand competition so that league revenues (which are partially shared) are maximized in competition with other sports and possibly also with a myriad of alternative ways that consumers can spend their entertainment dollars.” (p. 22)

19

See Ross and Szymanski (2002), pp. 630-31. The characterization of sports leagues as joint ventures is advocated by Rascher and Schwarz (2000), Tollison (2000), and Flynn and Gilbert (2001), among others. 21 In contrast, viewing a sports league as a cartel immediately suggests its activities are anti-competitive; viewing a sports league as a single-entity suggests that its activities do not constitute an antitrust conspiracy since a single-entity cannot conspire only with itself. 20

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Sports leagues as cartels: A cartel is defined as “an association of firms that explicitly agree to coordinate their activities, typically to maximize joint profits.”22 Some economists believe sports leagues are a form of cartel. For example, Fort and Quirk (1995) write: “Professional team sports leagues are classic, even textbook, examples of business cartels… However, sports leagues differ from other cartels in one important and paradoxical respect. Sports leagues are in the business of selling competition on the playing field… The special problem for sports leagues is the need to establish a degree of competitive balance on the field that is acceptable to fans.” (p. 1265) Adams and Brock (1997) characterize the relationship between a sports league and its players union as a bilateral monopoly. Sports leagues often cite the need to maintain ‘competitive balance’ as the pro-competitive rationale for imposing a wide range of restrictions, including salary caps, revenue sharing, luxury taxes, and restriction on free agency. ‘Competitive balance’ seems like a fairly straightforward concept (fans want to watch ‘competitive’ games), until one attempts to actually define and measure it (fans want to watch competitive ‘good’ games, not games between evenly matched, but poor or mediocre quality, teams).23 Whether restrictions like salary caps and revenue sharing are cartel-imposed anticompetitive practices or in fact maintain competitive balance, and thus have a pro-competitive rationale, will be discussed in Chapter 3 (restrictions on teams) and Chapters 6 and 7 (restrictions on players and coaches). A joint venture may or may not function as a cartel. The NCAA is frequently cited as an example of a joint venture which functions as a cartel.24 As the discussion earlier in this chapter reveals, the NCAA historically has attempted to restrict output by limiting the number of televised football games and restrict competition for inputs by limiting the eligibility, recruiting, and financial aid of student-athletes and by limiting the compensation of ‘restricted earnings assistant coaches.’ These restrictions result in wealth transfers from players and assistant coaches to the schools. (Chapters 6 and 7 examine the market power of sports leagues over players and coaches in more detail.) According to Tollison (2000), the closest analogy to a professional sports league in college athletics is not the NCAA, but rather the college athletic conferences, such as the Big Ten. The NCAA, in contrast, “is an association of otherwise independent colleges and universities that have come together for the purpose of regulating intercollegiate athletics.” (p. 22) Whereas these colleges and universities compete against one another in a number of open markets (e.g., for students, for faculty, for research grants), the NCAA “provides a vehicle through

22

Carlton and Perloff (2005), p. 780. See, for example, Sanderson (2002), Utt and Fort (2002), Zimbalist (2002, 2003a), Eckard (2003), Humphreys (2003a, 2003b), Fort and Maxcy (2003), Fort ( 2003), Kahane (2003), Sanderson and Siegfried (2003), and Szymanski (2005). 24 See, for example, Becker (1985), Fleisher, Goff, and Tollison (1994), Siegfried (1994), Blair and Romano (1997), Eckard (1998), Rascher and Schwarz (2000), and Tollison (2000). 23

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which competition in intercollegiate athletics can be stifled in both relevant input and output markets.” (p. 23) Not all economists believe the NCAA is a cartel. For example, McKenzie and Sullivan (1987) argue that “the NCAA acts not as a cartel but as a demandenhancing joint venture.” (p. 387) They point out that “the NCAA members are not a single unified firm, but are a collection of many independent firms with different cost structures and different market demands” and thus they “have the same incentive to improve their profits by cheating on the cartel – even forming alternative collegiate or semiprofessional sports associations that permit explicit wage payments to athletes – as they do to form the cartel in the first place.” (p. 385) McKenzie and Sullivan question “how any effective, exploitive sports cartel can be maintained in the long run in the absence of forced membership or barriers to exit from the NCAA by member colleges and barriers to entry into the sports market by alternative sports associations.” (p. 385) They believe that “NCAA rules are an efficient contract among participants in a joint venture” and “are prudent measures by colleges to increase the demand for intercollegiate athletics and college education.” (p. 376) In summary, sports leagues are a form of joint venture by which individual teams cooperatively produce a product, namely games (both live and televised) which culminate in the declaration of a league champion. They typically devise schedules and rules by which their member teams are expected to comply. Some of those rules, such as those imposing restrictions on player salaries and mobility, allegedly are pro-competitive because they maintain ‘competitive balance’ among teams. Whether this is in fact the case is hotly disputed by economists. Also hotly disputed is whether the existence of only one major sports league in each sport (except for relatively brief periods) is evidence that sports leagues are natural monopolies, or alternatively, evidence that the major sports leagues have engaged in anticompetitive conduct against their rival leagues.

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Chapter 2 Basics of Antitrust Analysis

Monopolies and cartels restrict output, thereby raising the price of their product relative to the price that would prevail under competition – the so-called ‘competitive price.’ A monopsony is the sole buyer of an input and thus can restrict its usage, thereby enabling the monopsonist to pay less than the competitive price for the input. Sports leagues have monopoly power with respect to their output – games – and monopsony power over some of their inputs – the players. Thus, fans are forced to pay a higher-thancompetitive price to attend games and players are paid less-than-competitive salaries. The antitrust laws seek to protect consumers by preserving competition. They do not, however, seek to protect competitors – a critical distinction. Introduction of a superior product, for example, benefits consumers but may have disastrous consequences for competitors. It is not an antitrust violation to simply sell a product which consumers find so superior to its alternatives that it becomes the sole product in the market; in effect, the superior product becomes the market. However, it may be an antitrust violation if the product’s producer engages in certain actions to prevent competition to the product. How does one determine whether a producer’s actions are antitrust violations? This chapter provides the answer. It begins with a discussion of the antitrust laws, then examines the several exemptions to the antitrust laws, and concludes with an overview of how to prove antitrust violations. The Antitrust Laws:25 The Sherman Act of 1890 was the first federal antitrust legislation and contains two main provisions. Section 1 outlaws “every contract, combination …, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Notice that Section 1 outlaws ‘every’ such contract, combination, or conspiracy. Thus, a literal application of Section 1 would invalidate virtually every commercial arrangement. As early as 1911, the U.S. Supreme Court ruled that, despite its broad language, Section 1 applies only to contracts, combinations, and conspiracies that are ‘unreasonable’ restraints of trade or commerce. Courts decide what is ‘unreasonable.’ Some activities are per se illegal; others have to be evaluated under the so-called ‘rule of reason’ – the anticompetitive effect of the activity in dispute is weighed against its business justification and purported pro-competitive effect. Section 2 of the Sherman Act states that “every person who shall monopolize or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.” In other words, Section 2 makes it illegal for 25

This discussion is based on Carlton and Perloff (2005), the Federal Trade Commission publication “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” and “Executive Summary of the Antitrust Laws” by Richard M. Steuer of Kaye, Scholer, Fierman, Hays & Handler, LLP, which is posted on the Findlaw website at http://profs.lp.findlaw.com/antitrust/. - -

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a company to “monopolize or attempt to monopolize” trade or commerce. Notice that Section 2 does not make it illegal simply to be a monopoly. As courts have interpreted Section 2, it is not even necessarily illegal for a company to try to achieve a monopoly; it is illegal to “monopolize, or attempt to monopolize” through ‘unreasonable’ methods. A key factor in the court’s determination of what is ‘unreasonable’ is whether the practice in dispute has a legitimate business justification. Note that both Section 1 and Section 2 apply to “trade or commerce among the several States.” In other words, the Sherman Act applies to ‘interstate commerce,’ and not to ‘intrastate commerce’ or interstate activity which is not ‘commerce.’ This distinction is the source of Major League Baseball’s antitrust exemption; in 1922, the U.S. Supreme Court ruled that the business of baseball is not interstate commerce and thus the federal antitrust laws do not apply. Interestingly, courts have found other sports leagues to be engaged in ‘interstate commerce’ and thus only Major League Baseball has a judicial exemption from the federal antitrust laws. The Clayton Act of 1914 covers several specific types of restraints. Section 2, which was amended by the Robinson-Patman Act of 1936, prohibits price discrimination that lessens competition. Section 3 prohibits competition-lessening tie-ins and exclusive dealing. Section 7, which was amended by the Cellar-Kefauver Act of 1950, prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to create a monopoly.” Section 7A, known as the Hart-Scott-Rodino Act, mandates the prior notification of large mergers to both the Federal Trade Commission and the U.S. Department of Justice, the two federal government agencies responsible for enforcing the antitrust laws. Section 8 deals with interlocking directorates among firms. The Federal Trade Commission (FTC) Act of 1914 created the FTC. Section 5 outlaws “unfair methods of competition” – but does not define ‘unfair.’ Violations of the Sherman Act have been found by the U.S. Supreme Court to also be violations of Section 5, but Section 5 covers some practices not covered by the Sherman Act. In this sense, the Act may be considered a ‘catch-all enactment’ which fills loopholes in other statutes. Individual states also have their own antitrust laws. Antitrust challenges to sports leagues almost always allege violation of federal, not state, antitrust laws. Exceptions to the Antitrust Laws. There are four general categories of exemptions from the federal antitrust laws applicable to sports leagues: a judicial ‘interstate commerce’ exemption which applies specifically to Major League Baseball; a judicial ‘single-entity’ exemption which applies to sports leagues structured as single-entities, such as Major League Soccer; statutory exemptions in which Congress mandates that certain transactions be exempt from antitrust scrutiny, such as the NFL-AFL and NBA-ABA mergers; and non-statutory exemptions which facilitate the collective bargaining process between professional sports leagues and their respective players’ unions. Judicial ‘interstate commerce’ exemption: In 1922, the U.S. Supreme Court decided the case of Federal Club v. National League. The plaintiffs were members of a baseball league that attempted to compete with MLB. Plaintiffs alleged that the defendants, MLB’s National League and American League, “destroyed the Federal League by buying up some of the constituent clubs and in

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one way or another inducing all those clubs except the plaintiff to leave their League,” in violation of the Sherman Act. The Court decided: The business is giving exhibitions of base ball, which are purely state affairs. It is true that in order to attain for these exhibitions the great popularity that they have achieved, competitions must be arranged between clubs from different cities and States. But the fact that in order to give the exhibitions the Leagues must induce free persons to cross state lines and must arrange and pay for their doing so is not enough to change the character of the business. According to the distinction insisted upon in Hooper v. California, 155 U.S. 648, 655, 15 S. Sup. Ct. 207, the transport is a mere incident, not the essential thing. That to which it is incident, the exhibition, although made for money would not be called trade of commerce in the commonly accepted use of those words. As it is put by defendant, personal effort, not related to production, is not a subject of commerce. That which in its consummation is not commerce does not become commerce among the States because the transportation that we have mentioned takes place. To repeat the illustrations given by the Court below, a firm of lawyers sending out a member to argue a case, or the Chautauqua lecture bureau sending out lecturers, does not engage in such commerce because the lawyer or lecturer goes to another State. If we are right the plaintiff’s business is to be described in the same way and the restrictions by contract that prevented the plaintiff from getting players to break their bargains and the other conduct charged against the defendants were not an interference with commerce among the States. In other words, the business of baseball is not interstate commerce, and thus is not covered by the Sherman Act. Two subsequent Supreme Court decisions reaffirmed the decision in Federal Club v. National League. In 1953, the Court decided the case of Toolson v. New York Yankees concerning an antitrust challenge to MLB’s reserve clause, which gave the first team to sign a player a continuing and exclusive right to his services. The Court ruled: In Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922), this Court held that the business of providing public baseball games for profit between clubs of professional baseball players was not within the scope of the federal antitrust laws. Congress has had the ruling under consideration but has not seen fit to bring such business under these laws by legislation having prospective effect. The business has thus been left for thirty years to develop, on the understanding that it was not subject to existing antitrust legislation. The present cases ask us to overrule the prior decision and, with retrospective effect, hold the legislation applicable. We think that if there are evils in this field which now warrant application to it of the antitrust laws it should be by legislation. - -

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In other words, if MLB’s antitrust exemption is to be removed, it will have to be by Congressional action. Another antitrust challenge to MLB’s reserve clause was brought by Curtis Flood, who had signed with the Cincinnati Reds in 1956, was traded to the St. Louis Cardinals before the 1958 season, and then traded to the Philadelphia Phillies in 1969. Flood filed a lawsuit in 1970 charging violations of the federal antitrust laws, as well as civil rights and other statutes. The Supreme Court’s ruling contained an eight-point summary of its view: 1. Professional baseball is a business and it is engaged in interstate commerce. 2. With its reserve system enjoying exemption from the antitrust laws, baseball is, in a very distinct sense, an exception and an anomaly. Federal Baseball and Toolson have become an aberration confined to baseball. 3. Even though others might regard this as “unrealistic, inconsistent, or illogical,” see Radovich, 352 U.S., at 452, the aberration is an established one, and one that has been recognized not only in Federal Baseball and Toolson, but in Shubert, International Boxing, and Radovich, as well, a total of five cases in this Court. It is an aberration that has been with us now for half a century, one heretofore deemed fully entitled to the benefit of stare decisis, and one that has survived the Court’s expanding concept of interstate commerce. It rests on a recognition and an acceptance of baseball’s unique characteristics and needs. 4. Other professional sports operating interstate – football, boxing, basketball, and presumably, hockey and golf – are not so exempt. 5. The advent of radio and television, with their consequent increased coverage and additional revenues, has not occasioned an overruling of Federal Baseball and Toolson. 6. The Court has emphasized that since 1922 baseball, with full and continuing congressional awareness, has been allowed to develop and to expand unhindered by federal legislative action. Remedial legislation has been introduced repeatedly in Congress but none has ever been enacted. The Court, accordingly, has concluded that Congress as yet has had no intention to subject baseball’s reserve system to the reach of the antitrust statutes. This, obviously, has been deemed to be something other than mere congressional silence and passivity… 7. The Court has expressed concern about the confusion and the retroactivity problems that inevitably would result with a judicial overturning of Federal Baseball. It has voiced a preference that if any change is to be made, it come by legislative action that, by its nature, is only prospective in operation.

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8. The Court noted in Radovich, 352 U.S., at 452, that the slate with respect to baseball is not clean. Indeed, it has not been clean for half a century. This emphasis and this concern are still with us. We continue to be loath, 50 years after Federal Baseball and almost two decades after Toolson, to overturn those cases judicially when Congress, by its positive inaction has allowed those decisions to stand for so long and, far beyond mere inference and implication, has clearly evinced a desire not to disapprove them legislatively. In other words, MLB’s antitrust exemption, if it is to be stripped at all, must be stripped by Congress, not by the courts. Congress did step in to limit MLB’s antitrust exemption in one area. The Curt Flood Act of 1998 states that “major league baseball players are covered under the antitrust laws (i.e., that major league baseball players will have the same rights under the antitrust laws as do other professional athletes, e.g., football and basketball players).” For example, if baseball owners declared negotiations with the players’ union at an impasse and sought to impose their own terms, major league baseball players could decertify their union, and then challenge the owners’ actions under the antitrust laws – just as professional football and basketball players can. Note that the Act applies only to “major league” baseball players, not players in the minor leagues. While the Curt Flood Act limited MLB’s antitrust exemption in one area, it reaffirmed it in all other areas: the business of baseball at the minor league level; the relationship between major and minor league baseball; decisions about franchise expansion, location, and relocation; decisions about franchise ownership transfers; dealings with umpires; television contracts with the broadcast networks; and so on. The limits of MLB’s antitrust exemption were addressed by the 2003 decision by the Appeals Court for the Eleventh Circuit in the case of MLB v. Charlie Crist, which concerned MLB’s attempt to stop the Florida Attorney General from investigating MLB’s contraction plans (Florida’s two teams, the Florida Marlins and the Tampa Bay Devil Rays, were the only teams to oppose contraction and were leading candidates to be eliminated.) The appeals court ruled that MLB’s antitrust exemption is not limited to the reserve clause, as the Florida Attorney General argued, by rather extends to the “business of baseball.” The contraction issue relates to the number of teams participating in league play and thus is “obviously” part of the business of baseball. Moreover, baseball teams cannot be prosecuted under state antitrust laws for activity which falls under the “business-of-baseball” exemption. However, MLB’s antitrust exemption does not apply to dealings between teams and third-parties. Given MLB’s antitrust exemption, the question naturally arises: what can MLB do that the NFL, NBA, and NHL cannot? In terms of restrictions on player salaries and mobility, possibly very little. The reason is that each league has to negotiate a collective bargaining agreement with its players’ union. While MLB, in theory, has an antitrust exemption that permits implementation of a reserve clause and other restrictions on player mobility, it ultimately has to reach an

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agreement with its (very strong) players’ union, which invariably will demand some form of quid pro quo. When MLB owners purportedly colluded in refusing to sign free agents during the period 1986-88, they did not violate the federal antitrust laws, but they did violate their collective bargaining agreement’s anticollusion provision – Article XX(F).26 (The impact on players is examined in more detail in Chapter 6.) On the other hand, MLB may be able to impose restrictions on teams that other leagues cannot. For example, team relocation is far less common in MLB than in other sports leagues. The only recent relocation of a MLB team is the Montreal Expo’s move to Washington D.C. The NFL and NHL, in contrast, have experienced numerous team relocations. Sometimes these leagues have succeeded in preventing a relocation (e.g., the St. Louis Blues’ move to Saskatoon); sometimes they have not (e.g., the Oakland Raiders’ move to Los Angeles). (The impact of relocation restrictions on teams is discussed in more detail in Chapter 3). What would be the impact if MLB lost its antitrust exemption? Opinions vary.27 The largest impact may be on baseball’s minor league system. As Hylton (1999) explains, baseball’s antitrust exemption applies not only to MLB, but to an entity called “Organized Baseball” of which MLB is just one part. There are a number of minor leagues (Class A, AA, and AAA) and they are bound together contractually with MLB by the National Agreement, which dates back to 1883. Hylton observes: “From the time of the first National Agreement in 1883, member teams and leagues have agreed to respect the territorial rights of other teams and to refrain from competing for the services of players except by those rules specifically set out in the agreement… Key to the operation of this system have been the concepts of league classification, salary caps, and reserved rights to players.” (p. 393) Without Organized Baseball’s antitrust exemption, this system could not continue in its present form. It should be noted that the NFL and NBA, in contrast, have a much less developed minor league system, with college football and basketball programs basically serving as their minor league systems. Another possible impact could be a wave of team relocations, as small market clubs move to more profitable locations. Such relocations, in turn, could affect MLB owner support for a luxury tax on teams with the highest player payrolls. Judicial ‘single-entity’ exemption: In 1984, the U.S. Supreme Court decided the case of Copperweld v. Independence Tube, which dealt with the question of whether Copperweld and its wholly-owned subsidiary, Regal Tube, were capable of conspiring with each other in violation of Section 1 of the Sherman Act. The Court ruled they were not:

26

See Ferguson, Jones, and Stewart (2000) and Silverman v. MLB Players Relations Committee. 27 See, for example, Ross (1989), Scully (1989), Roberts (1994, 2003) and Zimbalist (1994). - -

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The coordinated activity of a parent and its wholly owned subsidiary must be viewed as that of a single enterprise for purposes of §1 of the Sherman Act. A parent and its wholly owned subsidiary have a complete unity of interest. Their objectives are common, not disparate, and their general corporate objectives are guided or determined not by two separate corporate consciousnesses, but one. With or without a formal “agreement,” the subsidiary acts for the parent’s benefit. If the parent and subsidiary “agree” to a course of action, there is no sudden joining of economic resources that had previously served different interests, and there is no justification for §1 scrutiny. In reality, the parent and subsidiary always have a “unity of purpose or a common design.” The “intraenterprise conspiracy” doctrine relies on artificial distinctions, looking to the form of an enterprise’s structure and ignoring the reality. Antitrust liability should not depend on whether a corporate subunit is organized as an unincorporated division or a wholly owned subsidiary. In other words, a parent company cannot engage in an antitrust conspiracy with only its wholly-owned subsidiaries. Suppose that instead of forming a sports league whose members are independent teams, a newly-formed sports league itself owned the teams and permitted investors in the league to operate, but not own, specific teams. Would such a league be analogous to a parent company and its wholly-owned subsidiaries? If so, the Supreme Court’s Copperweld decision would seem to suggest that the league and its teams would be incapable of conspiring to violate the antitrust laws. The league would seemingly be free to adopt, for example, restrictions on player salaries and mobility without fear of being found guilty of an antitrust violation. Major League Soccer adopted such an organizational structure when it formed in 1995. MLS began play the next year. In February 1997, eight MLS players sued the league, the league’s operator/investors, and the United States Soccer Federation (USSF) under a number of antitrust theories: Count I alleged that the league and the operator/investors violated Section 1 of the Sherman Act by agreeing not to compete for player services; Count III alleged that the league violated Section 2 of the Sherman Act by monopolizing, attempting to monopolize, or combining or conspiring with the USSF to monopolize the market for the services of Division I professional soccer players in the United States by preventing the sanctioning of any other entity as a Division I professional soccer league in the United States; and Count IV alleged that the operator/investors violated Section 7 of the Clayton Act by combining assets in such a way as to substantially lessen competition and tend to create monopoly. In its 2002 decision, the Appeals Court for the First Circuit rejected the players’ arguments, but declined to express total support for the league’s view that it is a single-entity and falls inside the Copperweld safe harbor. The appeals court observed: “In many ways, MLS does resemble an ordinary company: it owns substantial assets (teams, player contracts, stadium rights, intellectual property) critical to the performance of the league; a substantial portion of generated revenues belongs to it and is to be shared conventionally with both

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operator/investors and passive investors.” The court then added a number of reservations: Nevertheless, it is hard to treat the corporate integration as conclusive. The challenge here is primarily to the operator/investors’ role as team managers, not as ordinary stockholders, and to restrictions imposed on them in that role preventing competition for player services. That a stockholder may be insulated by Copperweld when making ordinary governance decisions does not mean automatic protection when the stockholder is also an entrepreneur separately contracting with the company. Above all, there are functional differences between this case and Copperweld that are significant for antitrust policy. First, there is a diversity of entrepreneurial interests that goes well beyond the ordinary company. MLS and its operator/investors have separate contractual relationships giving the operator/investors rights that take them part way along the path to ordinary sports team owners: they do some independent hiring and make out-of-pocket investments in their own teams; they retain a large portion of the revenues from the activities of their teams; and each has limited sale rights in its own team that relate to specific assets and not just shares in the common enterprise. One might well ask why the formal difference in corporate structure should warrant treating MLS differently than the National Football League or other traditionally structured sports leagues. This contrasts with Copperweld’s observation that the parent and its wholly owned subsidiary in that case shared a “complete unity of interests.”… Second, in this case the analogy to a single entity is weakened, and the resemblance to a collaborative venture strengthened, by the fact that the operator/investors are not mere servants of MLS; effectively, they control it, having the majority of votes on the managing board. The problem is especially serious where, as here, the stockholders are themselves potential competitors with MLS and with each other. Here, it is the MLS that has two roles: one as an entrepreneur with its own assets and revenues; the other (arguably) as a nominally vertical device for producing horizontal coordination, i.e., limiting competition among operator/investors. From the standpoint of antitrust policy, this prospect of horizontal coordination among the operator/investors through a common entity is a distinct concern. The appeals court ultimately concluded that it did not have to reach a definite decision on whether MLS is a ‘single-entity’ for antitrust purposes:

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To sum up, the present case is not Copperweld but presents a more doubtful situation; MLS and its operator/investors comprise a hybrid arrangement, somewhere between a single company (with or without wholly owned subsidiaries) and a cooperative arrangement between existing competitors. And, of course, there is not one kind of hybrid but a range of possibilities (imagine the operator/investors with their separate entrepreneurial interests but without their control of MLS). The question is what legal approach to take… In all events, we conclude that the single entity problem need not be answered definitely in this case. Stuck (2004) explores whether MLS’s push to build soccer-specific stadiums jeopardizes and erodes the league’s single-entity defense in future antitrust litigation. In February 2000, the league had twelve teams and nine operator-investors. The number of teams has since dropped to ten, while the number of operator-investors plunged to three: Anschutz Entertainment Group (operating six teams – the Chicago Fire, Colorado Rapids, D.C. United, Los Angeles Galaxy, San Jose Earthquakes, and New York/New Jersey MetroStars), the Hunt family (operating two teams – the Columbus Crew and Kansas City Wizards), and the Kraft family (operating one team – the New England Revolution). Lamar Hunt privately financed the Columbia Crew stadium himself, but he insists he needs a dual-purpose football/soccer, not a soccer-specific, stadium for Kansas City. Kraft built a dual-purpose stadium for the New England football and soccer teams, a plan embraced by MLS. The interests of the operatorowners and MLS may diverge as public funding is sought for more soccerspecific stadiums. Stuck argues: “MLS’s current inability to coordinate facility issues among its three primary investors further erodes the appearance of a true ‘unity of interest,’ and thus, further erodes the league’s single-entity defense.” (p. 569) MLS’s single-entity structure has also been attacked as a ‘sham’ corporation and therefore not entitled to antitrust immunity.28 Statutory exemptions:29 On a number of occasions, the U.S. Congress passed, and the president signed, bills granting limited antitrust immunity to sports leagues. In 1953, the U.S. Department of Justice (DOJ) filed an antitrust lawsuit against the NFL seeking an injunction against continued enforcement of Article X of the NFL’s Bylaws which prohibited the telecasting of any NFL games into the ‘home territory’ (generally defined as a 75-mile zone) of a team playing a home game the same day. The league was concerned about the impact of televising games on live attendance. At the time, television rights fees were insignificant relative to ticket and other stadium revenue. Article X, however, also prohibited 28 29

See Brill (1999), Sullivan (2000), and Waxman (2001). The discussion in this section is based primarily on the Voluntary Trade Council (2005), and to a much lesser extent on Cohen (1994). - -

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teams from broadcasting their games in another team’s home territory, even if that team was playing an away game (unless permission was received from both teams playing that game). The DOJ contended that Article X was an unreasonable restraint of trade and thus a violation of Section 1 of the Sherman Act. The district court ruled that the restriction on telecasts in the home territories of teams playing a home game was pro-competitive, but the restriction on telecasts in the home territories of teams playing away games was ‘unreasonable’ and a violation of the antitrust laws. Prior to 1961, NFL teams negotiated individual television contracts. In 1961, the NFL authorized its commissioner, Alvin ‘Pete’ Rozelle to negotiate a single national television contract with CBS. Once the contract was signed, the NFL filed a petition asking the district court to find that the deal did not violate the antitrust laws. The district court decided, however, that the contract violated its previous order. (Interestingly, at this time, the AFL, NBA, and NHL also had single network contracts.) The Sports Broadcasting Act of 1961 was passed in response to the district court’s decision. The Act stated: The antitrust laws … shall not apply to any joint agreement by or among persons engaging in or conducting the organized professional team sports of football, baseball, basketball, or hockey, by which any league of clubs participating in professional football, baseball, basketball, or hockey contests sells or otherwise transfers all or any part of the rights of such league’s member clubs in the sponsored telecasting of the games of football, baseball, basketball, or hockey, as the case may be, engaged in or conducted by such clubs. In other words, the four major professional sports leagues in the U.S. could negotiate contracts with the broadcast networks to televise their games and those contracts would be immune from challenge under the antitrust laws. Note that the Act applies only to “professional” sports. The NCAA, for example, was not given an antitrust exemption to negotiate television deals. Moreover, the Act applies only to the mentioned four sports – football, baseball, basketball, and hockey – and thus a professional soccer league, for instance, would not be covered by the antitrust exemption. Note also that the Act does not apply to all telecasting, but rather only to “sponsored” telecasting, which has been interpreted as mean ‘free’ television – broadcast networks such as ABC, CBS, and NBC. As a result, the appeals court ruled in Shaw v. Dallas Cowboys that the NFL’s deal with the satellite broadcaster DIRECTV to offer ‘NFL Sunday Ticket,’ an all-or-nothing package, was not covered by the Act’s antitrust exemption. The Sports Broadcasting Act was amended by the Football Merger Act of 1966 to provide an antitrust exemption for the merger of the NFL and AFL. The amendment read: In addition, such laws shall not apply to a joint agreement by which the member clubs of two or more professional football leagues … combine

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their operations in expanded single league … if such agreement increases rather than decreases the number of professional football clubs so operating, and the provisions of which are directly relevant thereto. Note that the amendment applies only to professional football league mergers, and even more, only to those that do not result in a decrease in the combined number of teams.30 Thus, when the NBA and ABA sought to merge in the early 1970s, the proposed merger was not covered by the Sports Broadcasting Act and the leagues had to obtain separate congressional approval. The Football Merger Act was attached to a minor tax bill by Senator Russell Long of Louisiana. Press rumors suggested that the NFL would express its appreciation by awarding the next NFL franchise to New Orleans. Soon thereafter, New Orleans was in fact awarded an NFL franchise. Non-statutory exemptions: Labor unions have a ‘statutory’ exemption from the antitrust laws. As the Appeals Court for the Eighth Circuit explained in Mackey v. NFL, the Clayton Act and other statutes “declare that labor unions are not combinations or conspiracies in restraint of trade, and specifically exempt certain union activities such as secondary picketing and group boycotts from the coverage of the antitrust laws.” The purpose of this statutory exemption was “to insulate legitimate collective activity by employees, which is inherently anticompetitive but is favored by federal labor policy, from the proscriptions of the antitrust laws.” This statutory exemption “extends to legitimate labor activities unilaterally undertaken by a union in furtherance of its own interests,” but “does not extend to concerted action or agreements between unions and non-labor groups.” However, the U.S. Supreme Court had earlier ruled, in the words of the appeals court, “that in order to properly accommodate the congressional policy favoring free competition in business markets with the congressional policy favoring collective bargaining under the Federal Labor Relations Act … certain union-employer agreements must be accorded a limited nonstatutory exemption from the antitrust sanctions.” Mackey v. NFL was a lawsuit brought by professional football players alleging that the NFL’s “Rozelle Rule” violated section 1 of the Sherman Act. The Rozelle Rule, named after the NFL commissioner, required a team signing a player whose contract had expired with another team to pay compensation to the player’s former team. One of the questions the appeals court had to decide in 1976 was whether the Rozelle Rule fell under the non-statutory labor exemption, and it enumerated three necessary conditions: (1) “the restraint on trade primarily affects only the parties to the collective bargaining relationship”; (2) “the agreement sought to be exempted concerns a mandatory subject of collective bargaining”; and (3) “the agreement sought to be exempted is the product of bona fide arm’s-length bargaining.” The appeals court concluded that the Rozelle Rule failed to satisfy the third condition because the Rule pre-dated the advent of the 30

The Act specifies a few other restrictions as well. For example, the separate and combined leagues must be not-for-profit tax-exempt associations. - -

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collective bargaining relationship (the Rule was imposed in 1963, well before the collective bargaining agreements of 1968 and 1970) and, furthermore, there was insufficient evidence of a quid pro quo (the NFL claimed that there was a quid pro quo and players received increased pension benefits and the right to individually negotiate their salaries). Thus, the Rozelle Rule was not covered by the non-statutory labor exemption and the appeals court found that “the Rule, as implemented, contravenes the Rule of Reason and thus constitutes an unreasonable restraint of trade in violation of §1 of the Sherman Act.” While the business practice in dispute in Mackey v. NFL was not covered by the non-statutory labor exemption, numerous league activities have been found to be so covered. In 1987, the Appeals Court for the Second Circuit ruled in Wood v. NBA that the provisions of the collective bargaining agreement governing a salary cap and the college draft are covered and, in January 1995, ruled in NBA v. Williams that “the antitrust laws do not prohibit employers from bargaining jointly with a union, from implementing their joint proposals in the absence of a CBA [collective bargaining agreement], or from using economic force to obtain agreement to those proposals. What limits on such conduct that exist are found in the labor laws.” In September 1995, the same appeals court ruled in the case of Caldwell v. ABA. Caldwell alleged that he was blacklisted for his ABA union activities and rested his antitrust claim on two interrelated propositions: (1) he should have the right to seek the best terms for his services as a professional basketball player and (2) he should have the right not to have teams collusively agree upon the terms upon which he will or will not be hired. The appeals court disagreed: “Once the ABA became obligated to recognize the ABA Players Association as the exclusive bargaining representative of the ABA players, therefore, Caldwell lost the right to seek the best bargain from individual ABA teams” and, moreover, “those teams became exempt from any antitrust rule that might have compelled them to compete individually for players represented by the Union.” In 1996, the U.S. Supreme Court decided the case of Brown v. Pro Football. When negotiations with the players’ union reached an impasse in 1989, the NFL had unilaterally implemented a plan to permit each team to establish a ‘developmental squad’ of substitute players, each of whom would be paid the same fixed salary of $1,000 per week. In 1990, 235 developmental squad players sued the NFL alleging the fixed $1,000 weekly salary violated section 1 of the Sherman Act. The Court noted that the question at issue is: “Does it [the nonstatutory labor exemption] apply to an agreement among several employers bargaining together to implement after impasse the terms of their last best goodfaith wage offer?” The Court concluded it does. In 2004, the Appeals Court for the Second Circuit decided the case of Clarett v. NFL, which challenged the NFL’s eligibility rules for the NFL draft. Those rules required a player to be more than three football seasons removed from high school before being eligible to be drafted by an NFL team. The appeals court observed that, although the eligibility rules do not appear in the collective bargaining agreement (CBA), they do appear in the NFL Constitution and Bylaws, which are mentioned in the CBA. The appeals court ruled:

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Clarett argues that the NFL clubs are horizontal competitors for the labor of professional football players and thus may not agree that a player will be hired only after three full football seasons have elapsed following that player’s high school graduation. That characterization, however, neglects that the labor market for NFL players is organized around a collective bargaining relationship that is provided for and promoted by federal labor law, and that the NFL clubs, as a multi-employer bargaining unit, can act jointly in setting the terms and conditions of players’ employment and the rules of the sport without risking antitrust liability. For those reasons, the NFL argues that federal labor law favoring and governing the collective bargaining process precludes the application of the antitrust laws to its eligibility rules. We agree. It should be noted that the boundaries of the non-statutory labor exemption remain imprecise.31 The U.S. Supreme Court held in Brown v. Pro Football that the exemption applied, but did not define its precise contours. The Appeals Court for the Second Circuit does not regard the three conditions set forth by the Appeals Court for the Eighth District in Mackey v. NFL as defining the appropriate limits. Proving Antitrust Violations: Proving an antitrust conspiracy is somewhat different than proving an attempt to monopolize, and both are somewhat different than proving an anticompetitive merger. 32 Proving violations of section 1 of the Sherman Act: When is a restraint of trade ‘unreasonable’? For some types of conduct, the answer is clear. Courts have developed the doctrine of ‘per se’ illegality to deal with blatantly anticompetitive conduct. In NCAA v. Board of Regents, the U.S. Supreme Court wrote: “Per se rules are invoked when surrounding circumstances make the likelihood of anticompetitive conduct so great as to render unjustified further examination of the challenged conduct.” For conduct which is a per se offense, it is sufficient to demonstrate that the defendant engaged in the conduct. If so, the defendant is guilty; it is no defense to argue that the conduct had little anticompetitive effect – the size of the effect is irrelevant to the question of guilt. Per se violations include horizontal price fixing (i.e., price fixing by producers of competing products), vertical price fixing (i.e., the seller and buyer agree on the specific price at which the buyer will resell the product – as opposed to the seller ‘suggesting’ a resale price), and allocation of markets or customers. Concerted refusal to deal (i.e., horizontal boycotts such as sellers of competing products agreeing not to deal with a competitor known to have cut prices or 31 32

See Clarett v. NFL. This discussion is based, in part, on “Executive Summary of the Antitrust Laws” by Richard M. Steuer of Kaye, Scholer, Fierman, Hays & Handler, LLP, which is posted on the Findlaw website at http://profs.lp.findlaw.com/antitrust/. - -

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buyers of a product agreeing not to deal with a particular seller) formerly was considered a ‘classic’ per se offense, but courts now are somewhat more selective in applying the per se rule in such cases. Conduct which is not a per se offense is judged under the ‘Rule of Reason.’ The U.S. Supreme Court in NCAA v. Board of Regents acknowledged that there is no “bright line” separating the two: Indeed, there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct. For example, while the Court has spoken of a “per se” rule against tying arrangements, it has also recognized that tying may have procompetitive justifications that make it inappropriate to condemn without considerable market analysis. The basics of a Rule of Reason analysis were described by the Court of Appeals for the Tenth Circuit in Law v. NCAA: Courts have imposed a consistent structure on rule of reason analysis by casting it in terms of shifting burdens of proof… Under this approach, the plaintiff bears the initial burden of showing that an agreement had a substantially adverse effect on competition… If the plaintiff meets this burden, the burden shifts to the defendant to come forward with evidence of the procompetitive virtues of the alleged wrongful conduct… If the defendant is able to demonstrate procompetitive effects, the plaintiff then must prove that the challenged conduct is not reasonably necessary to achieve the legitimate objectives or that those objectives can be achieved in a substantially less restrictive manner… Ultimately, if these steps are met, the harms and benefits must be weighed against each other in order to judge whether the challenged behavior is, on balance, reasonable. Thus, a rule of reason analysis generally involves three categories of economic evidence: (1) evidence that the conduct had a “substantially adverse effect on competition”; (2) evidence that the conduct has “procompetitive virtues”; and (3) evidence that the conduct “is not reasonably necessary to achieve the legitimate objectives or that those objectives can be achieved in a substantially less restrictive manner.” A “substantially adverse effect on competition” may be demonstrated, for example, by a showing that players and/or coaches are being paid less – or sports fans and television networks are paying more – than they would be in a competitive market. A “procompetitive virtue” of a league rule or practice may be demonstrated by showing its effectiveness in maintaining competitive balance among teams. Whether the rule or practice “is not reasonably necessary” to maintain competitive balance or whether competitive balance “can be achieved in a substantially less restrictive manner” may be demonstrated by showing the ineffectiveness of the challenged rule or practice in maintaining competitive

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balance or showing the effectiveness of less restrictive rules and practices in maintaining competitive balance. Economists have developed a number of measures of competitive balance. One measure is the season-to-season correlation in team winning percentage. If the correlation is relatively low, a ‘bad’ team one season has a reasonable probability of becoming a ‘mediocre’ or ‘good’ team the next season, whereas a ‘good’ team faces a reasonably probability of being less-good the next season. A second measure of competitive balance is the within-season variance of team winning percentages. The lower the variance, the more ‘parity’ among teams. Proving violations of section 2 of the Sherman Act: Section 2 of the Sherman Act prohibits the act of monopolization and the attempt to monopolize; it does not prohibit simply being a monopoly. Proof of the act of monopolization requires a showing that the defendant (1) possesses ‘monopoly power’ in the ‘relevant market’ and (2) willfully acquired or maintained that power. ‘Monopoly power,’ as defined by the U.S. Supreme Court, is the power to control prices or exclude competition.33 The ‘relevant market’ is determined by identifying the ‘product market’ (i.e., the products that buyers would substitute in response to a small but significant and nontransitory price increase) and ‘geographic market’ (i.e., the area that buyers would patronize given a small but significant and nontransitory price increase). The question of whether monopoly power has been ‘willfully acquired or maintained’ is, in the words of one attorney, “ephemeral and difficult to determine.” 34 Monopoly power has been ‘willfully acquired or maintained’ if it is ‘abused’ or used to intentionally drive out the competition; monopoly power has also been ‘willfully acquired or maintained’ if the defendant engaged in conscious acts to further or maintain its market position by such acts as acquisitions of competitors, exclusive dealing, and predatory pricing; however, monopoly power has not been ‘willfully acquired or maintained’ if the defendant’s market position is achieved by offering a superior product, possessing superior business acumen, or being the beneficiary of a historical accident (or just dumb luck). Proof of the attempt to monopolize requires a showing that (1) the defendant had a ‘specific intent’ to monopolize, (2) the defendant engaged in anticompetitive acts designed to injure actual or potential competition, and (3) a ‘dangerous probability of success’ existed that the defendant would in fact achieve monopoly power. Economists have identified several indicators that a defendant possesses monopoly power, including high price-cost margins, high barriers to entry, and 33

Landes and Posner (1981) define ‘market power’ as “the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded”; they define ‘monopoly power’ as “a high degree of market power.” (p. 937) 34 See “Executive Summary of the Antitrust Laws” by Richard M. Steuer of Kaye, Scholer, Fierman, Hays & Handler, LLP, which is posted on the Findlaw website at http://profs.lp.findlaw.com/antitrust/. - -

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high risk-adjusted rates of return.35 To be evidence of monopoly power, however, these indicators must persist for a significant period of time – long enough for new competitors to enter the market if they choose to do so and long enough for the current firms in the industry to adjust their production. Price-cost margins are generally used to approximate the amount by which the current price exceeds the price that would prevail under competition. Since price equals marginal cost in a ‘purely competitive’ industry, the price-cost margin is typically calculated as the difference between the market price and marginal cost, expressed as a percentage of the market price. Calculated in this way, the price-cost margin is known as the ‘Lerner Index.’ The Lerner Index does not reflect risk. Thus, an industry may have an average price-cost margin far above that of other industries not because the firms in that industry have monopoly power, but because the industry is very risky – as would be the case if the cost of developing new innovative products is high and product life is short due to rapid technological change in the industry. The Lerner Index also may be positive simply because there are fixed costs of operating in the industry. One drawback of the Lerner Index is the need to measure marginal cost – the cost of producing the last unit of output. One way to finesse this problem is to develop an economic model and derive an alternative expression for the price-cost margin whose variables are more easily measured. It can be shown using a simple single-period model that a monopolist maximizes profits at the output level where the price-cost margin equals the inverse of the industry (and, in the case of a monopoly, the firm’s) price elasticity of demand, (p-c)/p = -1/ε, where p is the market price, c is marginal cost, and ε is the industry price elasticity of demand.36 Thus, there is a direct relationship between the Lerner Index and the industry elasticity of demand. If the industry elasticity of demand is -2, for example, then the market price is two times marginal cost.37 In industries where marginal cost increases as output expands, the Lerner Index gives an upper bound on the deviation of the monopoly price from the price that would prevail under competition because, c, the marginal cost at the monopolist’s profit-maximizing output level will be less than the marginal cost at the higher output level under competition. If instead of a single firm (a monopolist), the industry consists of a ‘dominant firm’ and a ‘competitive fringe,’ the Lerner Index for dominant firm i, Li, is Li = (pi – ci)/pi = Si/(εdm + εsj (1-Si)), where pi is the price charged by firm i, ci is the marginal cost of firm i, Si is the market share of firm i, εdm is the industry price elasticity of demand, and εsj is the 35

See Landes and Posner (1981), Brennan (1982), Kaplow (1982), Ordover, Sykes, and Willig (1982), and Schmalensee (1982). 36 The elasticity of demand, ε, is the percentage change in quantity purchased in response to a 1% change in the market price. See Landes and Posner (1981) for the derivation of this equation. 37 A profit-maximizing monopolist maximizes output in the elastic area of the industry demand curve and thus ε is at least 1 in absolute value. The closer ε is to 1, the higher the Lerner Index. - -

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elasticity of supply of the fringe firms.38 Thus, the Lerner Index is higher (1) the larger the market share of the dominant firm, (2) the more inelastic the industry demand, and (3) the more inelastic the supply of fringe firms. Note that the dominant firm’s market share, in isolation, may provide a misleading indication of the amount by which the market price exceeds that which would prevail in a competitive market. A dominant firm may have little ability to price above the competitive level if industry demand is very elastic (for example, if there are a lot of good substitutes for the firm’s product) and if the supply elasticity of fringe firms is very elastic (i.e., fringe firms significantly increase their output in response to even a small increase in the market price). If there is no single dominant firm (i.e., if the market is an ‘oligopoly’), then the Lerner Index for firm i is Li = (pi – ci)/pi = Si(1+ki)/(εdm + εsj (1-Si)), where ki is the ‘conjectural variation’ of firm i (i.e., firm i’s estimate of the aggregate amount that its rivals will change their output if it changes its output by one unit).39 If ki is positive, firm i expects its rivals to parallel its actions – if firm i expands output, its rivals expand their output; if firm i cuts back its output, its rivals cut back their output. If ki is negative, firm i expects its rivals to counteract its actions – if firm i expands output, its rivals cut back their output; if firm i cuts back its output, its rivals expand their output. Note that the derivation of the Lerner Index for a dominant firm implicitly assumed ki = 0 – firm i does not believe its rivals will change their output in response to a change in its output. Note also that firm i has greater monopoly power when it expects its rivals to parallel its actions (ki > 0) than when it expects its rivals to counter its actions (ki < 0). Another indicator of monopoly power is barriers to entry. If an industry is highly profitable, existing firms in the industry may seek to expand and firms not in the industry may seek to enter. In either case, the profitability of the industry should fall so that, on a risk-adjusted basis, it is no more or less profitable than other industries. Moreover, even if the existing firms refrain from expanding so as to preserve their above-average risk-adjusted returns, potential entrants will nevertheless have an incentive to enter to capture some of those returns. One reason why there may be no entry even if an industry is experiencing a prolonged period of above-average risk-adjusted returns that that there are ‘barriers to entry.’ According to Ross (2003), sports leagues engage in practices that create barriers to entry, such as assigning exclusive territories to teams and limiting the number of teams in the league. Rascher (1996) argues that a number of barriers to entry exist in the case of sports leagues. One barrier to entry is the fixed supply of stadiums – exclusive territories prevent teams in the same league from competing with one another and creation of a rival league would require securing sufficient unused stadium capacity to operate a league with the minimum number of teams. A second barrier to entry is the limited number of television outlets (although Rascher observes that this barrier has fallen as the number of television networks has proliferated in recent years). A third barrier to entry is the ‘winner-take-all’ 38 39

See Landes and Posner (1981) for the derivation of this equation. See Ordover, Sykes, and Willig (1982) for the derivation of this equation. - -

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nature of the market – high fixed costs and low marginal costs mean that consumers will purchase only the highest quality product since it will not cost significantly more than lower-quality products. Thus, “there is no room for second-tier talent in winner-take-all markets.” (p. 6) Persistently high profitability is another indicator of monopoly power. Risk-adjusted rates of return should equalize across industries over time; in the words of Schmalensee (1982), “persistent excess profits provide a good indication of long-run power; they show clearly that there is some impediment to effective imitation of the firm in question.” (p. 1806) One problem, however, is how to measure risk-adjusted profitability. In theory, it should be possible to calculate the rate of return earned by the original owners of teams in a sports league. It should also be possible to calculate the rate of return earned by buyers of established teams. The rate of return earned by the latter, in theory, should be far lower than that of the former – established teams are far less risky investments than investing in a team that is part of a startup league, as the sports league histories of Chapter 1 would suggest. There have been numerous sports leagues formed since 1900. Only a handful did not fold. While these surviving leagues – the NFL, NBA, NHL, and MLB – appear today to be formidable competitors for any startup league, they were not always so. One attempt to estimate the profitability of sports franchise ownership was conducted by Scully (1995). He finds that, in the early 1990s, sports franchises earned an average return of 27%; it was larger for franchises located in large metropolitan areas (33.3%) than in smaller ones (20.5%). In comparison, stock market investors tend to earn about 10% annually and the median profit rate of the 500 largest industrial companies is between 3.9% and 5.5% of sales. Scully believes that “it would be fair to conclude that a number of clubs do evidence a monopoly return.” (p. 135) He adds: “If a 30-percent or greater return to franchise ownership is taken as evidence of monopoly, then about half of the clubs in professional team sports earn a monopoly return.” (p. 135) Monopoly power may also be inferred from the conduct of firms in an industry.40 For example, industries with histories of price fixing or dividing markets likely are composed of firms with monopoly power. Similarly, a firm which price discriminates or engages in predatory pricing likely has monopoly power. Thus, there are a number of indicators of monopoly power. None by itself is infallible, but together they provide strong evidence of whether a firm possesses monopoly power. Similarly, economists have developed measures of monopsony power. In the sports league context, monopsony power over players is typically inferred by estimating players’ marginal revenue product (MRP) net of training costs. Studies generally find that, prior to the introduction of free agency, players were paid far below their net MRP, which has been interpreted as evidence that sports leagues had monopsony power over players. Of course, an alternative explanation is that the estimated net MRPs are measured with considerable error resulting (i.e., a considerable upward bias). Each study has to make some assumptions about how 40

See Schmalensee (1982). - -

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a player impacts team revenue. An econometric model is needed to link player performance to live attendance or broadcast viewership ratings. There are many possible proxies for player performance. For example, in the baseball context, a pitcher’s performance could be proxied by his walks-to-strikeouts ratio, whereas a hitter’s performance could be proxied by his slugging percentage. Alternatively, a player’s performance could be measured by examining the impact on the team’s winning percentage when the player does not play (e.g., the player goes on the disabled list). The player’s marginal impact on team winning percentage is multiplied by the marginal impact of team winning percentage on live attendance or broadcast ratings. The player’s marginal impact on live attendance or broadcast ratings is then converted into monetary terms. For example, the player’s marginal impact on live attendance may be multiplied by average fan expenditures at games to get an estimate of the player’s marginal impact on team revenue from live attendance at its games.41 Economists have also addressed the question of how to define the ‘relevant market’ in which the monopoly power, if any, occurs. Unfortunately, little has been written specifically about the relevant market in antitrust litigation involving sports leagues. Seal (1993), however, does tackle this issue. He makes two key points: (1) “the general principles of market definition – with their focus on interchangeability of products and services from the point of view of those utilizing them – are equally applicable to antitrust claims arising in the sports and entertainment industries as they are in other contexts” and (2) courts and litigants “must always focus on the nature of the claim being asserted to make certain that they correctly determine whose view of interchangeability is relevant in resolving product market definition issues.” (p. 764) For example, in NCAA v. Board of Regents of the University of Oklahoma, a number of universities challenged the NCAA’s rules limiting the number of televised games any one team could play and restricting the total amount of televised intercollegiate football. The rules were not being challenged by, for example, television broadcasters or advertisers. Thus, Seal explains, “the issue was whether there were athletic organizations other than the NCAA to which the plaintiff universities could have turned if they were unhappy with the restrictions placed by the NCAA on their ability to televise their football games.” (pp. 75455) If the lawsuit had been brought by television broadcasters or advertisers, in contrast, the issue would have been “whether college football telecasts compete with other sports and entertainment programming.” (p. 754) Seal writes: “This restraint caused ‘antitrust injury’ to the colleges because of the market power the NCAA held over suppliers of the product, the universities with college football programs, not because of the market power which the NCAA had with respect to the demand for the product, broadcasts of college football games.” (p. 756) (The U.S. Supreme Court decision in NCAA v. Board of Regents will be discussed in more detail in Chapter 3.) Similarly, restrictions on player mobility may be challenged by the players for depressing salaries below the competitive level (i.e., the exercise of leagues’ monopsony power) or by rival leagues for foreclosing access to the market for 41

See, for example, Baade and Tuttle (1991). - -

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player services. In the case of antitrust lawsuit brought by players, the relevant market depends on players’ alternative employment possibilities, whereas in the case of an antitrust lawsuit brought by a rival league, the relevant market depends on alternative potential sources of players for the league. For example, from the perspective of NFL players, is playing in the Canadian Football League a substitute for playing in the NFL? Is the Canadian Football League a source for professional football players that can be tapped by a newly-created rival to the NFL? In International Boxing Club of New York v. U.S., the United States brought an antitrust suit against promoters of professional boxing matches who allegedly were able to control both championship boxing matches and boxers by means of their control over arenas suitable for professional boxing matches. The question was whether the relevant market was all professional boxing events (as the promoters argued) or just championship boxing contests, as the U.S. argued. Based of the large difference in average revenues, televisions ratings, movie rights, and ticket prices between championship and non-championship bouts, the U.S. Supreme Court ruled that ‘a separate, identifiable market’ exists for championship boxing contests. Seal agrees: The foregoing market definition seems correct whether the antitrust concerns generated by the promoters’ market dominance are viewed from the point of view of suppliers in the market (the fighters) or the customers (broadcasters or fight fans). A fighter wishing to be a championship contender does not consider being relegated to participation in nontitle bouts as a substitute for his ability to fight in championship boxing events. The customers, too, apparently felt championship bouts were uniquely different from nontitle bouts as evidenced by their willingness to pay higher admission prices or broadcast fees for the privilege of viewing or broadcasting championship as opposed to nontitle fights. Championship boxing thus represented a distinct product market, whether the restraints being challenged were viewed from the point of view of the customer (broadcasters and boxing fans) or suppliers (boxers). (p. 760) Likewise, in Philadelphia World Hockey Club v. Philadelphia Hockey Club, a rival hockey league brought an antitrust lawsuit against the NHL alleging that the NHL’s reserve clause and expansion violated Section 2 of the Sherman Act because it enabled the NHL to tie up virtually every professional-caliber hockey player. The question was whether the relevant market should include not only major league professional hockey leagues, but also minor league professional hockey leagues, semi-professional hockey leagues, and amateur hockey leagues. Given the higher ticket prices, higher television revenues, and higher player salaries of major league professional hockey relative to the other leagues, the district court found “the relevant product market to be major league professional hockey as it is currently played in the NHL.” Once again, Seal agrees:

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This provision thus precluded the new league from competing for the supply of workers it needed by foreclosing the league from negotiating with NHL players. Of course, the new league was free to negotiate with players outside the NHL, but the court concluded that availability of such hockey players in minor league, semiprofessional, or amateur leagues did not provide the new league with suitable substitutes for professional hockey players bound by the reserve clauses in their contracts with NHL teams. Hockey fans did not view these minor league players’ skills as interchangeable with NHL players’ skills and thus these minor league players were not properly viewed as part of the market when the NHL’s market power over the supply of available players was measured. The court thus correctly focused on the availability of suitable product substitutes (hockey players) to the party challenging the restraint which limited availability of certain players needed by the plaintiff to compete. (p. 761) Proving violations of section 7 of the Clayton Act: Section 7 of the Clayton Act prohibits corporate acquisitions, whether of whole companies or only specific assets, if the likely result is a ‘substantial lessening of competition’ or a ‘tendency toward monopoly’ in any ‘relevant market.’ According to the Federal Trade Commission, there are at least two necessary conditions for a merger to likely have an anticompetitive effect: (1) the market must be “substantially concentrated” after the merger and (2) “it must be difficult for new firms to enter the market in the near term and provide effective competition.”42 To summarize, the antitrust laws protect competition, not competitors. The antitrust laws do not outlaw simply being a monopoly (or monopsony) – the antitrust question, instead, is what did the monopoly (or monopsony) do to achieve and/or preserve its market position? In general, the actions of sports leagues are evaluated under a ‘rule of reason’ analysis. It is not sufficient for the plaintiff to show that the actions had a ‘substantially adverse effect on competition.’ Nor is it necessarily sufficient, given the plaintiff proves a substantially adverse effect on competition, for the defendant to show that the actions have a pro-competitive (or ‘efficiency’) rationale – the plaintiff may be able to counter that the pro-competitive benefits could be achieved in a less restrictive manner. One critical step in a rule of reason analysis is the delineation of the relevant product market. As Seal (1993) explains, the relevant product market would have been different if television broadcasters or advertisers, rather than universities, had been the plaintiffs in NCAA v. Board of Regents. As a result, antitrust analysis of a sports league’s actions depends on the identity of the party challenging those actions. Consequently, the 42

See the Federal Trade Commission publication titled “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws.” - -

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following chapters will be organized according to the identity of the challenging party: the league’s own team members (Chapter 3), rival leagues (Chapter 4), prospective teams and owners (Chapter 5), players (Chapter 6), coaches (Chapter 7), stadium owners (Chapter 8), equipment suppliers (Chapter 9), promoters/sponsors, for-profit sports camp operators, merchandisers, and the media (Chapter 10), and fans, taxpayers, and the federal government (Chapter 11).

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Chapter 3 Sports Leagues vs. Their Own Member Teams

The interests of a sports league are not necessarily identical to the self-interests of its individual member teams. Sometimes an individual team wants to move to a more profitable location, while the league wants it to stay put. Sometimes a team wants to control its own merchandising, while the league wants to negotiate deals covering all teams. Sometimes a team wants to televise additional games beyond those covered by the league’s television deal. One common method by which the team seeks to pursue its own self-interest is to file a lawsuit alleging the onerous league rule violates the antitrust laws. Noll (2003b) observes that teams seeking to form a league have five sets of decisions they have to make regarding league structure: (1) format – how will games be scheduled to determine a champion?; (2) hierarchy – how will the league relate to other leagues with higher or lower quality players?; (3) multiplicity – how many leagues will be at the same level in the hierarchy?; (4) membership – under what conditions can a team enter or exit the league?; and (5) governance – how will league rules and policies be decided and enforced? It is unlikely that teams will be unanimous in how they would like the league to be structured. Moreover, even if they agree on how the league’s rules and policies should be decided and enforced, they are unlikely to be unanimous in what those rules and policies should be. Thus, there is ample opportunity for the interests of a particular team to conflict with that of the league, which is determined by majority vote of the team owners. This chapter begins with a discussion of the basics of cartels and joint ventures, each of which commonly has conflict with its members. Cartels use detection and punishment to hold its members in line. Joint ventures, somewhat similarly, may adopt certain rules to prevent individual member self-interest from destroying cooperation. Sports leagues attempt to prevent the self-interest of their individual teams from destroying the league by imposing a wide variety of rules. This chapter reviews a number of such rules, the antitrust challenges to those rules, and their alleged pro-competitive rationale. Basics of Cartels. The goal of a cartel is to maximize the aggregate profits of its individual members. Typically, it does so by restricting the output of its members relative to what they would produce if they competed with one another. If the non-cartel members do not expand their output sufficiently in response to the cartel’s output restriction, price will rise and the cartel members will earn higher aggregate profits than they could under competition. Conflict may arise because each cartel member seeks to maximize its own profits, not the aggregate profits of the cartel. Thus, each cartel member would like to expand its output (i.e., sell more than its ‘quota’ at the higher price) and thus earn even higher profits than it would by obeying the cartel’s quota. However, if each cartel member ‘cheats’ on the quota, aggregate output will not restrict as much as it otherwise would and, consequently, price will not rise as high. The cartel will therefore adopt a system to detect and punish cheating.

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Consider NCAA football. Fleisher, Shughart, Tollison, and Goff (1988) analyze data for the period 1953-83 and estimate an econometric model of whether a school’s football program has been put on probation. Schools with more variable winning percentages are found to be more likely to be put on probation, whereas schools with consistently high winning percentages are not more likely to be placed on probation. NCAA enforcement apparently protects the top-tier teams from up-and-coming teams. In short, the authors present “theoretical and empirical evidence on the methods that the National Collegiate Athletic Association (NCAA) and its member schools use to detect violations of its cartel agreement” and conclude that “the enforcement of the NCAA rules has a redistributive effect that benefits consistent winners at the expense of up-andcoming schools.” (p. 433) Similarly, Eckard (1998) examines ‘competitive balance’ before and after the NCAA enforcement system began in 1952. Although the NCAA apparently believes that such enforcement promotes competitive balance, Eckard documents that competitive balance has decreased since 1952, a result consistent with cartel theory: “Economic theory predicts that cartel enforcement should reduce playing-field balance over time; i.e., produce more stability (less ‘churning’) in conference standings and national rankings.” (p. 368) Thus, there are likely to be conflicts between cartel members and these conflicts may make the cartel unstable. Ferguson, Jones, and Stewart (2000) observe that teams, “through the medium of the league, jointly promulgate rules that determine, in general, interteam behavior and, more specifically, the amount of output to be produced (number of games), all entry conditions, the negotiation and disposition of all national media contracts, interteam revenue sharing, and the basic conditions of player employment,” whereas each team simultaneously “is explicitly recognized as a spatial monopolist, setting its own output prices, negotiating local stadium and media contracts, and dealing with players within the general limits set by league-wide rules.” (p. 422) They argue that Major League Baseball acts as a cartel in setting rules that restrict teams’ willingness to pay for players and impose costs on the transfer of players between teams, but within the cartel, each MLB team acts like a price-taker in the market for player services. Under such a system, it is hardly surprising that the interest of an individual team may sometimes conflict with the interest of the league. The ‘stability’ or ‘longevity’ of cartels has been examined in a number of economic studies. Levenstein and Suslow (2002) review the results of a number of studies and observe that the average duration of a cartel is between 3.7 years and 7.5 years. However, the range of cartel durations is very large. One study reports the shortest duration of a cartel to be one year and the longest to be 18 years; another study gives the range as 1 to 29 years; a third study reports a range of 1 to 13 years. Similarly, one study reports that about 60% of cartels last less than 5 years and less than 20% last 10 or more years; another study reports that 43% of cartels last less than five years and 32% last 10 years or more; a third study reports that 40% of cartels last less than five years and 37% last 10 or more years; a fourth study finds that 39% of cartels last less than five years and 24% last 10 or more years. Levenstein and Suslow conclude that “cartels are neither short-lived nor long-lived; they are both” and, consistent with economic theory, “cheating is a common cause” of cartel breakdown. As Levenstein and Suslow report, there is conflicting evidence whether the number of firms in a cartel increases, decreases, or has no effect on cartel duration. On the one hand, having more cartel members may make it more difficult to agree on a quota - -

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and detect cheating. On the other hand, the more industry output produced by cartel members, the less ‘fringe’ production and thus the greater the rewards to the cartel from restricting output. Studies reported by Levenstein and Suslow find that between 60% and 79% of cartels have 10 or fewer members. The major sports leagues have many more members. The NFL has 32 teams; the NBA, NHL, and MLB have 30 teams. Each league has existed for decades. Many other leagues have failed after only a few years. The long life of the NFL, NBA, NHL, MLB, and NCAA may suggest that their league rules successfully prevent cheating on the cartel. Alternatively, their long life may suggest that their league rules facilitate operation of their demand-enhancing joint venture. Basics of Joint Ventures. Sports leagues are a form of joint venture. One rationale for joint venture formation is to produce a product that requires the skills of a number of independent business firms. In the case of a sports league, the joint venture’s product is games leading to the declaration of a league champion. Although a single team can produce ‘intrasquad’ exhibition games by itself, those games attract fan interest largely because they offer a preview of the team that will later compete against other teams. Unlike most industries where a firm typically profits if its rivals falter, a sports team may be hurt if its rivals falter since their resulting joint product – their games – may become less appealing to fans. While joint ventures have advantages over other forms of organization, they have disadvantages as well. Chang, Evans, and Schmalensee (1998) identify three categories of disadvantages: divergent objectives, externalities, and organizational problems. Divergent objectives. Joint venture members may have divergent objectives regarding the venture’s purpose and strategy, the division of financial contributions, and the division of the resulting benefits. As an example of conflict over a venture’s strategy, consider open-wheel auto racing.43 In 1978, a rebel group of team owners complained to the United States Automobile Club (USAC) about poor promotion and small purses. After their proposals were rejected by the USAC’s board, they left the organization and, in 1979, formed Championship Auto Racing Teams (CART), which quickly dominated open-wheel racing. In the 1990s, the owner of the Indianapolis Motor Speedway, Tony George, vigorously disagreed with CART’s strategy and sought to control the high cost of putting a car on the racetrack. When CART failed to adopt George’s proposed strategy, he left CART and, in 1994, formed his own racing organization, the Indy Racing League, as a lower-cost open-wheel alternative. CART declared bankruptcy in 2003. Divergent objectives across sports league members can arise for numerous reasons. For example, some teams have greater revenue potential than others. Major market teams like the New York Yankees can attract more fans to their games and negotiate local television deals many times larger than small market teams like the Pittsburgh Pirates. Krautmann (1999), Zimbalist (1992), and 43

This discussion is largely based on the Wikipedia entries for Champ Car and Indy Racing League. - -

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Bruggink and Rose (1990) estimate that each additional one million people in a MLB team’s market increases team revenue by $2.12 million, $2.40 million, and $1.47 million, respectively; moreover, MacDonald and Reynolds (1994) find that each $1 billion increase in metropolitan income increases MLB team revenue by $750,000. Not surprisingly, the major market teams want to keep their revenue; small market teams want team revenues to be shared. The league has an interest in producing games that fans want to watch. Yankees fans may love watching their team outbid opposing teams for the most talented players and then beating those teams on the field; on the other hand, fans of small market teams may become disgusted as they watch their team’s emerging stars depart to the major market teams. Some leagues have implemented revenue-sharing schemes to preserve ‘competitive balance’ in the league. Economic studies have shown that revenue-sharing decreases player salaries, but does not necessarily improve competitive balance.44 If the goal of each team owner is to maximize profits, then revenue-sharing shifts the demand curve for players downward, resulting in lower equilibrium salaries. If the downward demand shift is the same for all teams, the distribution of playing talent across teams will be unaffected, and thus revenue-sharing does not affect competitive balance. If, on the other hand, the downward shift is larger for the large-market teams, those teams will reduce their demand for player talent more than will the small market teams, resulting in a shift in player talent toward the small-market teams and thus greater competitive balance within the league. Whether the downward shift is the same for all teams is an empirical issue and depends, in part, on what attracts fans to games (e.g., playing a bad team so the home team has a good chance to win, playing a good team so even if the home team loses the quality of play should be high) and on how revenue is shared (i.e., symmetrically as is generally done in U.S. sports leagues or performance-based as is generally done in European sports leagues).45 For example, Brown (1994b) examines revenue sharing in college football conferences and finds that the conferences which tend to have the weakest teams also tend to engage in the most sharing of revenue. However, Surdam (2002) argues that, in the American League during the 1950s, the stronger a baseball team, the greater its ability to draw fans while on the road, and thus the sharing of gate revenue would actually have had the effect of shifting revenue from the weaker teams to the stronger teams. Therefore, depending on the demand for a sport and precisely how revenue is shared, a revenue-sharing plan may or may not promote competitive balance; such a plan could even exacerbate inequalities among the teams. Members of sports leagues may also have divergent objectives with respect to profits and winning (or ‘sportsmanship’). While Yankees owner George Steinbrenner has his share of critics, no one criticizes him for not trying to field a winning team. The Yankees are the prime example of a ‘deep pocketed’ team that is willing to reach deeply into that pocket to field a winner. Other teams, 44

See Marburger (1997), Késenne (2000), Sanderson & Siegfried (2003), Késenne (2004), and Szymanski & Késenne (2004). 45 For a discussion of revenue-sharing in U.S. and European sports leagues, see Palomino and Rigotti (2000) and Palomino and Sákovics (2004). - -

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including the Chicago Cubs, the Chicago Bears, and the Los Angeles Clippers, have a reputation for being tightfisted, more concerned with earning a profit than winning the championship. Sometimes, as with the Cubs, the team is owned by a ‘deep pocketed’ corporation; sometimes, as with the Bears, the team is owned by a family without ‘deep pockets.’ Still other teams, such as the former Montreal Expos, excelled at developing young talent which they could not afford to pay once their players became established stars. Some leagues have established a ‘luxury tax’ system in an attempt to penalize teams with the largest player payrolls. Economists have explored the operation of leagues under the assumption that team owners seek to maximize profits and under the assumption that team owners seek to maximize their winning percentage. Fort and Quirk (2004) find that, relative to a league of profit-maximizing owners, a league of winningpercentage-maximizing owners will have a greater demand for player talent and will spend more to acquire that talent. However, which of the two leagues will have greater competitive balance is indeterminant. Vrooman (1997a) assumes a ‘sportsman’ owner jointly maximizes franchise value and the satisfaction from winning and shows that a sportsman owner expands the team’s talent beyond the point that maximizes franchise value. Consistent with this effect, he finds that owners looking to sell their franchise often reduce their player costs (and thus increase franchise value) prior to the sale.46 In fact, if all owners are sportsmen, all franchises will be ‘undervalued’ relative to what they would be worth if all owners were profit-maximizers. Vrooman also shows that a syndicated sportsman owner expands the team’s talent even more than does the sole syndicated sportsman, which Vrooman terms the ‘Steinbrenner’ effect of syndication. Thus, franchise ‘undervaluation’ is even greater in a league of syndicated sportsman owners. Vrooman argues that Major League Baseball has moved toward a league composed of highly leveraged team ownership syndicates in the 1980s. MLB adopted a rule that had the effect of limiting the leverage of its larger franchises (e.g., the New York Yankees). Some studies have attempted to identify the ‘true’ objective function of team owners. Zimbalist (2003b) argues that these studies have yielded inconclusive results. He contends that team owner objectives vary by team, league, and country and depend strongly on how the team relates to the owner’s other assets. DeBrock and Hendricks (1996) examine roll call voting in the NCAA and report that they “cannot attribute NCAA actions entirely to the economic motive or the educational motive.” (p. 498) Still other studies investigate whether teams play in such a way as to maximize their chances of winning. Romer (2006) analyzes play-by-play data on NFL games and, specifically, the choice on fourth down of whether to kick or try for a first down. He documents “systematic, clear-cut, and overwhelmingly statistically significant departures from the decisions that would maximize teams’ chances of winning.” (p. 340)

46

Interestingly, the Chicago Tribune – the owner of the Chicago Cubs – dramatically increased the team’s payroll prior to putting the team up for sale. - -

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The impact of some league rules will depend on whether team owners are solely profit maximizers, solely winning-percentage-maximizers, or derive utility from both the monetary and non-monetary benefits associated with team ownership. For example, Késenne (2005) finds that revenue-sharing worsens competitive balance in leagues of profit-maximizing owners but improves competitive balance in leagues of winning-percentage-maximizing owners. In contrast, Atkinson, Stanley, and Tschirhart (1988) show that the effectiveness of revenue-sharing in improving competitive balance is mitigated when owners are not exclusively profit-maximizers but enjoy private (i.e., non-shared) nonmonetary benefits of team ownership as well. In short, there are numerous areas in which the interests of an individual team owner can diverge from the interests of the majority of team owners, who determine the league’s rules and policies. Externalities. A joint venture member can take actions that impose costs on the joint venture’s other members. For example, a member may attempt to ‘free-ride’ on the joint venture’s investments by using them for its individual gain; alternatively, it may ‘free-ride’ by supporting the joint venture only to the extent that it benefits individually, rather than to the extent that the joint venture as a whole benefits. Chang, Evans, and Schmalensee (1998) argue that joint ventures generally seek to maximize the total value that all members receive and thus will want to provide incentives for members to increase the joint venture’s value, adopt rules to prevent free-riding, and penalize members that engage in actions that impose negative externalities on the other members. The product of sports leagues is games leading to the crowning of a league champion and sports leagues attempt to maximize the value of those games. Sometimes the actions of an individual team may be optimal for that team but detrimental to the league itself. For example, a team may find it optimal to relocate to another city, but doing so may make it a less attractive opponent for the other teams. Although the team’s gate receipts may be higher in the other city, the gate receipts of the other teams may fall because it attracts less fan interest. Such a negative externality may occur if the team relocates to a remote city in a different time zone – fans may feel less rivalry towards a remote team and the different time zone may reduce television viewership of the game. As a result, sports leagues have an interest in teams’ relocation decisions. A deep-pocketed, winning-obsessed team owner could impose a negative externality on other team owners by ‘overpaying’ for star players to win the championship. Such an owner may be willing to incur losses in order to win the championship and thus be willing for the franchise to be ‘undervalued.’ Such an owner may also be willing to go heavily into debt in a quest to win the championship. The ‘win at any cost’ mentality of one owner, however, may depress the value of the franchises of the other owners. Consequently, sports leagues have an interest in the ownership and financing of teams. Organizational problems. The operation of a joint venture requires that its members cooperate to some extent, even though they may be aggressive competitors in other regards. Such cooperation may be difficult to elicit and sustain, as each member needs to cede some control over its assets to the joint - -

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venture, and thus partly to its competitors. Unless the members trust one another, they may refuse to cooperate. The joint venture also must establish a decisionmaking mechanism. If a subset of members effectively makes decisions on behalf of the joint venture, the other members may become frustrated and uncooperative. Therefore, joint ventures adopt rules and policies to promote member cooperation. Chang, Evans, and Schmalensee (1998) caution that “it is important for people who engage in antitrust analysis to understand the general nature of these problems and to recognize that joint ventures may require some latitude to implement rules and practices that are designed to deal with them.” (p. 247) They add: “This is not to say that antitrust policy should defer to all claims by a joint venture that its practices are necessary for viability. Rather, the courts and regulators should be careful about substituting their judgments for those made by the people who are intimately involved in running the joint venture in question, especially when the challenged practice is not likely to be an effective exercise of market power.” (p. 247) Joint venture instability. Divergent objectives across members, externalities, and organizational problems all may contribute to the instability of joint ventures. Economists have documented that joint ventures tend to be relatively short-lived and many are terminated earlier than planned. Kogut (1989) examined 92 U.S.based joint ventures and found that about half terminated within six years. Studies by McKinsey & Co. and Coopers & Lybrand reportedly have found that roughly 70% of joint ventures fall short of expectations or are disbanded.47 Another study suggests that, on average, joint ventures do not survive even one-half as long as the term of their joint venture agreement.48 The major sports leagues currently in existence – the NFL, NHL, NBA, and MLB – have survived for decades; other sports leagues like the World Hockey Association, United States Football League, and North American Soccer League survived for only a few years. One possible reason is that the rules and policies of the major sports leagues reduce conflict between members and thus enable the league to operate more smoothly and efficiently. Even if true, this does not mean that an individual member will not bitterly oppose a particular rule or policy and seek to remove it by filing an antitrust lawsuit against the league. Team antitrust challenges to sports league rules and policies. When a team opposes a particular sports league rule or policy, it has a number of options. It could lobby fellow team owners to oppose it and thereby get the league to change it. If that fails, the team may file a lawsuit alleging that the rule or policy violates the antitrust laws. This has happened on numerous occasions. The remainder of this chapter focuses on four types of league rules or policies that have been challenged by teams on antitrust grounds: public ownership restrictions, sponsorship and licensing arrangements, television restrictions, and team relocation.

47 48

Business Week (July 21, 1986). Berg, Duncan, and Friedman (1982). - -

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Public ownership restrictions.49 The NBA’s Boston Celtics, NHL’s Florida Panthers, and MLB’s Cleveland Indians have publicly traded stock. If one wants to own part of these teams, their shares can be purchased, just like one can buy shares in IBM, Google, and Wal-Mart. The Celtics went public in 1986, selling a 40% ownership stake of dividend-paying stock.50 The Panthers went public in 1996 and, at least initially, the team did not intend to pay a dividend. In 1997, Major League Baseball passed a rule allowing teams to sell shares to the public, but required an individual or group of no more than 20 persons to maintain at least a 10% economic stake and 90% voting interest in the team. The Indians went public in 1998, issuing two classes of stock with Indians owner and Chairman Richard E. Jacobs retaining 99.98% of the team’s voting control. Some teams are owned by publicly-traded corporations. For example, the Tribune Company owns MLB’s Chicago Cubs, the Walt Disney Company owns the NHL’s Anaheim Mighty Ducks and has partial control of MLB’s Anaheim Angels, and Rupert Murdoch’s News Corp. owns MLB’s Los Angeles Dodgers. Thus, it is easy to be a part-owner of the owner of such professional sports teams. No NFL team is publicly-traded. The Green Bay Packers are publiclyowned, but the stock is not publicly traded. The Packers sold 1,000 shares for $5 per share in 1923; each buyer was expected to simultaneously purchase at least six season tickets. The Packers went into receivership in 1935 and were reorganized as a nonprofit corporation, with a $15,000 capital infusion from the sale of 300 shares. A third stock sale occurred in 1950 and raised $118,000 in new capital at $25 per share. There were about 4,627 shares of Packers stock outstanding in 1997 when the team proposed to sell 400,000 shares at $200 per share to raise funds to make improvements to Lambeau Field and, in the future, finance construction of a new stadium. Some teams, including the Jacksonville Jaguars and Tennessee Oilers, expressed concerned about the Packers’ proposal, fearing the Packers would use part of the new capital to buy free agents. Other owners, including Jerry Jones of the Dallas Cowboys, believed the Packers did not need league approval for the stock sale. Although the Packers also believed they did not need the NFL’s approval, the team did not intend to proceed without that approval, which it eventually received. Prospective purchasers of the Packers stock were required to represent that they had not been accused of fraud in any litigation, been convicted of a felony, or participated in sports gambling. The shares would not – and according to the Corporation’s Restated Articles of Incorporation could not – pay a dividend. Stockholders would have the right to vote at the team’s annual meeting, but their shares could not earn a financial return. Other terms of the Articles of Incorporation made it virtually impossible for the buyer of Packers stock to make a profit on the purchase. For example, the shares could not be resold. The Packers reclassified the 4,627 ‘original’ shares on a 1,000-for-1 basis, resulting in 49

The discussion in this section is based on Aukofer (1997), Nawrocki and O’Brien (1997), and Lascari (1999). 50 For an analysis of the stock price behavior of the Celtics shares, see Brown and Hartzell (2001). - -

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4,627,000 shares for the original shareholders, and succeeded in selling an additional 120,000 shares at $200 per share, raising $24 million in new capital. The Packers are not the only NFL team to desire to raise new capital by selling stock. William H. Sullivan, owner of the New England Patriots since the team’s inception in 1959, had sold non-voting shares to the public beginning in 1960 when the team was in the old American Football League (AFL), which did not have a policy against selling shares to the public. The AFL merged with the NFL into a single league in 1966 and the terms of the merger specified that the post-merger league would adopt the NFL’s policy against public ownership. The Patriots received a special exception. Article 3.5 of the NFL’s constitution and bylaws requires that three-fourths of NFL owners approve all transfers of ownership interests in a team, except for transfers within a family. The NFL also has an ‘uncodified’ policy against the sale of shares to the public, although members have the authority to approve a given transfer by a three-quarters vote. In 1976, Sullivan acquired the publicly-traded Patriots shares and the team thus became fully privately-owned. In the mid-1980s, William Sullivan and his son, Charles, who owned the stadium where the Patriots played, began experiencing financial problems and, after observing the Celtics’ initial public offering in 1986, decided to similarly raise capital. The plan was for them to receive a loan for $80 million, half of which would go to the Patriots, the other half to the stadium. The Patriots were to repay their half of the debt by selling a 49% stake in the team to the public. William Sullivan raised his planned stock sale at the NFL owners meeting on October 27, 1987. Although Sullivan believed that 17 of the 21 owners would vote to approval the sale, NFL Commissioner Pete Rozelle reportedly told him that he opposed the sale and that league approval was “very dubious.” Sullivan did not ask for a vote, believing it to be futile. Sullivan sold the Patriots for $83.7 million in October 1988. On May 16, 1991, Sullivan filed an antitrust lawsuit against the NFL, claiming that the league had prevented him from selling a 49% equity stake to the public and, as a result, he was forced to pay off his debts by selling the team at a fire-sale price to a private buyer. The district court dismissed Sullivan’s claims under Section 2 of the Sherman Act, but allowed a trial on his Section 1 claims. Sullivan claimed that ‘but for’ the NFL’s public ownership policy, he would have been able to sell a 49% equity stake to the public for $70 million, pay off his debts, and retain ownership of a more valuable and profitable team. He argued that the NFL’s policy against public ownership restricts competition between teams for the sale of their ownership interests and thereby depresses the prices of such ownership interests. For example, the team’s fans may be willing to pay a premium in order to own a piece of the team and thus the inability to sell shares to fans may lower the price at which an ownership interest in the team can be sold. The NFL’s policy therefore harms (1) consumers who want to purchase the team’s stock and (2) team owners seeking to purchase investment capital. The NFL offered evidence to the contrary and argued that its public ownership policy is ancillary to legitimate joint venture activity. The jury determined that the relevant market is the “nationwide market for the sale and purchase of ownership interests in the National Football League

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member clubs, in general, and in the New England Patriots, in particular” and that the NFL’s policy had an “actual harmful effect” on competition in this market. The jury awarded damages of $38 million, which the judge reduced to $17 million. The trebling of antitrust damages led the district court to award Sullivan a total of $51 million in damages. The NFL appealed the judgment, but did not challenge the jury’s finding of the relevant market. 51 Rather, the NFL argued “(1) that NFL clubs do not compete with each other for the sale of ownership interests in their teams so there exists no competition to be injured in the first place; and (2) Sullivan did not present sufficient evidence of injury to competition from which a reasonable jury could conclude that the NFL’s policy restrains trade.” The Appeals Court for the First Circuit countered: “Although we agree with the NFL that conceptualizing the harm to competition in this case is rather difficult, precedent and deference to the jury verdict ultimately require us to reject the NFL’s challenge to the finding of injury to competition.” The appeals court also rejected the NFL’s argument that it is a ‘single entity.’ Moreover, the appeals court wrote: We take no issue with the proposition that certain joint ventures enable separate business entities to combine their skills and resources in pursuit of a common goal that cannot be effectively pursued by the venturers acting alone… We also do not dispute that a “restraint” that is ancillary to the functioning of such a joint activity – i.e. one that is required to make the joint activity more efficient – does not necessarily violate the antitrust laws… We further accept, for purposes of this appeal, that rules controlling who may join a joint venture can be ancillary to a legitimate joint activity and that the NFL’s own policy against public ownership constitutes one example of such an ancillary rule. Finally, we accept the NFL’s claim that its public ownership policy contributes to the ability of the NFL to function as an effective sports league, and that the NFL’s functioning would be impaired if publicly owned teams were permitted, because the short-term dividend interests of a club’s shareholder would often conflict with the long-term interests of the league as a whole. That is, the policy avoids a detrimental conflict of interests between team shareholders and the league. We disagree, however, that these factors are sufficient to establish as a matter of law that the NFL’s ownership policy does not unreasonably restrain trade in violation of §1 of the Sherman Act. There is evidence in the record, according to the appeals court, “of a clearly less restrictive alternative to the NFL’s ownership policy that would yield the same benefits as the current policy” – namely, “allowing for the sale of minority, nonvoting shares of team stock to the public with restrictions on the size of the holdings by any one individual.” It would be up to a jury to decide whether such a sale would indeed be a less restrictive but equally beneficial policy. 51

See Sullivan v. NFL, 34 F.3d 1091 (1st Cir. 1994). - -

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Ultimately, however, the appeals court found that several prejudicial errors were committed during the trial. The judgment was vacated and a new trial ordered. In August 1996, Sullivan and the NFL reached an out-of-court settlement in which Sullivan would receive $11.5 million.52 It is unclear why public ownership would interfere with the functioning of the NFL joint venture, and yet apparently not interfere with the functioning of the NBA, NHL, and MLB joint ventures. Perhaps it is because the latter have permitted public ownership, but with certain restrictions. The NFL arguably could adopt a public ownership policy with similar restrictions. If so, the NFL’s current public ownership policy may fail the “less restrictive alternative” test of a rule of reason analysis.53 Sponsorship and licensing arrangements. Sports leagues often enter into sponsorship and licensing arrangements involving large sums of money and then distribute the revenue to member teams according to set formula, such as equal shares. Suppose a team accounts for a disproportionate share of sponsorship and licensing money, or suppose a team believes it can enter into more lucrative sponsorship and licensing arrangements by itself and should not have to share that revenue with other teams. Conflict between the team and the league is likely. Such conflict has indeed occurred, with two notable cases involving the NFL’s Dallas Cowboys and MLB’s New York Yankees. In both cases, the team accused the league’s marketing arm of being a cartel; in both cases, the antitrust lawsuits were settled out-of-court and on terms generally believed to favor the Cowboys and Yankees. Dallas Cowboys.54 In September 1995, Dallas Cowboys owner Jerry Jones signed a deal making Nike an official sponsor of Texas Stadium, the Cowboys’ home field. Nike was a competitor of the apparel licensee with which NFL Properties, the NFL’s marketing arm, had reached an exclusive apparel licensing deal. Jones also signed stadium advertising contracts with PepsiCo, the competitor of Coca-Cola Co. which had a league-wide sponsorship deal with NFL Properties. In addition, Jones had a sponsorship deal with Dr. Pepper. Jones was in the process of negotiating a deal for American Express to become the official charge card of “Texas Stadium, the home of the Dallas Cowboys” even though VISA was the official charge card of the NFL, having negotiated a license with NFL Properties earlier in the year. 52

New York Times (Aug. 12 1996). For further discussion of sports league restrictions on public ownership, see Lopatka and Herndon (1997) and Cheffins (1999). 54 The discussion in this section is based primarily on Abilene Reporter-News (2001), Kass (1996), New York Times (October 24, 1995; February 21, 1996; December 14, 1996), and the complaint in NFL Properties v. Dallas Cowboys Football Club (September 18, 1995). 53

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NFL Properties quickly filed a $300 million lawsuit alleging that the Cowboys’ sponsorship deals violated the NFL’s revenue-sharing agreements, which specified that such revenue would be distributed evenly among teams. NFL Properties alleged that the Cowboys “have engaged in an unlawful plan and scheme, in violation of contractual and fiduciary obligations, to misappropriate for themselves valuable business opportunities and revenues that rightfully belong to plaintiff NFL Properties.” NFL Properties stressed the importance of revenue-sharing to the league: 10. The cornerstone of the NFL system, however, is revenue sharing. To produce competitive games, it is essential that teams be wellmatched. The NFL and its Member Clubs thus have a strong interest in having strong, viable teams. Revenue sharing is critical to achieve this end: it ensures that all NFL Member Clubs, not just those in larger or better situated markets, will have the financial resources to field a competitive team. 11. The Dallas Cowboys franchise itself is a case in point: revenue sharing has contributed to its present success… The system allowed Jones to rebuild the Cowboys into a commanding NFL team – one that has now made three straight trips to the National Football Conference Championship Game and has won two of the last three Super Bowls. 12. One important source of revenue shared by NFL Member Clubs is that which derives from the various identifying marks of the NFL’s teams… 13. The Member Clubs recognized long ago that the Club Marks and NFL Marks would be more competitive in the market place and that their value would be maximized and thus more effective in promoting the NFL, if they were licensed as a package. Accordingly, in 1963, the Member Clubs created plaintiff NFL Properties to market the Club Marks and NFL Marks jointly; from its existence, NFL Properties has conducted advertising campaigns and promotional ventures on behalf of the NFL and all of its Member Clubs. In 1982, NFL Properties’ ability to market the Club Marks was greatly enhanced by a series of agreements entered into and approved by the Member Clubs, including the Dallas Cowboys, to facilitate a long-term unified program of promotional activities involving the Club Marks and NFL Marks. Under these agreements (the “Licensing Agreements”), each Member Club transferred exclusive rights to its Club Marks to a trust pursuant to a plan whereby the trust would then exclusively license all such Club Marks to NFL Properties; NFL Properties became solely responsible for licensing the Club Marks for commercial use… The proceeds of NFL Properties’ licensing activities would be shared equally among all Member Clubs, with some portion to be used for charitable and educational purposes. - -

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The Licensing Agreements have served as a critical component of the joint-venture goals of the NFL. NFL Properties alleged: “While continuing to enjoy all of the other benefits of the NFL joint venture, he [Dallas Cowboys owner Jerry Jones] determined to embark upon a wrongful plan and scheme to destroy the structure and operations of NFL Properties in order to gain for the Cowboys more than an equal share of licensing revenue and to deny that revenue to the other Member Clubs.” It also alleged: “Jones understands that, if defendants are permitted to ‘cherry-pick’ among the benefits and obligations of the NFL and NFL Properties and to enter into separate deals with competitors of sponsors or licensees that have contracted with NFL Properties, the entire collective marketing and revenue-sharing system of NFL Properties will unravel.” In particular, if Jones’s plans are permitted to continue, there will be two main effects: (1) sponsors and licensees will reduce their willingness to pay for ‘exclusive’ league sponsorships and licenses and (2) other teams will follow the Cowboys’ lead and sign their own side-deals. Both effects will reduce the value of NFL Properties’ collective rights and ultimately lead to the abandonment of the system of joint promotion. The Cowboys tried unsuccessfully to get the court to dismiss the lawsuit, contending that NFL Properties is a “marketing cartel” whose goal in filing the lawsuit “is to punish a critic of the cartel.” In November 1995, Jones filed a $750 million antitrust lawsuit against NFL Properties, alleging that it restricted competition between NFL teams. Jones sought to break up NFL Properties and give the Cowboys control over the team’s trademarks and logos. In December 1996, the Dallas Cowboys and the NFL reached an out-of-court settlement. Jones was allowed to not only keep his sponsors, but to sign new ones as well. Other owners were permitted to enter into similar sponsorship deals. Because the revenue from such deals would not be shared with other teams, the settlement was expected to reduce the funds available for the NFL’s revenue-sharing pool, thereby harming small-market teams like the Green Bay Packers. In May 2001, the NFL approved a 10-year, $250 million deal making Reebok the league’s exclusive apparel licensee beginning in 2002. The deal contained a clause giving each team the option to be the private wholesaler, retailer, and distributor of its own apparel. The Dallas Cowboys were the only team to exercise that option. The Cowboys had led the league in merchandise sales in four of the last five years and Jones believed he could do a better job of marketing the Cowboys than could NFL Properties. The Cowboys were required to guarantee the league 16% of sales (the team’s share of sales over the previous five years). In other words, if the Cowboys accounted for less than 16% of NFL merchandise sales, the Cowboys would have to make up the shortfall and pay the NFL an amount equal to 16% of league merchandise sales, but if the Cowboys

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accounted for more than 16%, the Cowboys would pocket all sales beyond that threshold. New York Yankees.55 After winning the 1996 World Series, the New York Yankees on March 2, 1997 signed a 10-year, $95 million sponsorship deal with Adidas – far more revenue than the team could receive from the league-wide sponsorship deal that divided revenues evenly among all teams. MLB responded by suspending Yankees owner George Steinbrenner from its Executive Council. On May 6, 1997, the Yankees countered by filing an antitrust lawsuit against MLB and its member teams. The Yankees accused the defendants of engaging in a concerted action “to combine and conspire together to restrain competition in the businesses of the licensing of Club trademarks and of retail and wholesale baseball merchandise sales, and to misappropriate rights and revenues belonging to the Yankees and adidas.” In particular, the Yankees alleged that the defendants (1) “have recently undertaken a concerted effort to interfere with a Florida contract between adidas and the Yankees pursuant to which adidas and the Yankees have agreed that adidas will be a Yankees sponsor, that the Yankees will license Yankee trademarks to adidas, and that the two organizations will cooperate in creating and marketing more competitive merchandise using the Yankees and adidas trademarks”; (2) “imposed a requirement that Major League Clubs exchange confidential pricing and other competitive data for the purpose and effect of restraining competition in trademark licensing, corporate sponsorships, and retail and wholesale baseball merchandise sales”; and (3) “have combined to prevent individual Clubs from marketing merchandise under the individual Club’s own trademarks, and to impose sanctions on any Club or licensee that seeks to do so.” Furthermore, the Yankees alleged: 9. Defendants have combined and agreed not to license their trademarks to adidas or to do business with adidas except on monopolistic terms and conditions. By combining and agreeing to prevent Major League Clubs from competing against one another in licensing of trademarks, defendants have created a horizontal restraint – an agreement among competitors on the way in which they will compete with one another. For example, through the 1995 Agency Agreement, defendants have illegally conspired to establish a horizontal division of markets, the sole purpose of which is to stifle competition among Major League Clubs who might wish to do business with adidas. Defendants’ conduct in this respect also has included a group boycott, in concert with 55

The discussion in this section is based on Bambauer (2005) and the complaint in New York Yankees Partnership and Adidas America v. Major League Baseball Enterprises (May 6, 1997). - -

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Nike and Reebok, and other restraints of trade without legitimate justification. 10. Defendants have also acted to penalize adidas for entering a sponsorship agreement with the Yankees, including threats of litigation against adidas for entering an agreement with the Yankees, and to restrain competition by adidas which they find against their narrow self interest. 11. Defendants’ actions to restrict and prevent competition in trademark licensing, corporate sponsorships, and retail and wholesale baseball merchandise sales are unrelated to, and outside the reasonable scope of, any exception the business of baseball may have from the antitrust laws… 12. The defendants’ actions adversely affect consumers and consumer welfare by limiting consumer choice, increasing the prices consumers pay, and adversely affecting the quality of goods available. The Yankees contended that they have attempted to resolve their differences short of litigation, but to no avail: “Rather than reconsider their decision to implement a cartel for the licensing of club trademarks and for retail and wholesale baseball merchandise sales, defendants have reaffirmed their intent to continue and even expand their cartel.” The ‘cartel’ is MLB Properties, which was established with the January 1, 1984 Agency Agreement, renewed and amended with the January 1, 1991 Agency Agreement, and then established with the Amended and Restated Agency Agreement dated December 1, 1995. Although the Yankees refused to sign any of these agreements, they obtained the support of more than three-fourths of the MLB teams and thus the defendants took the position that the Yankees were nevertheless bound by the agreements. The 1995 Agreement designates MLB Properties, according to the Yankees’ complaint, “as the exclusive agent for the promotional and retail licensing of the marks of the Major League Clubs both in the United States and in international markets” and, under the Agreement, “the individual Clubs retain only certain rights to license and otherwise exploit their marks within their limited Home Licensing Territory (rights which MLB Properties has repeatedly sought to curtail.)” The income of MLB Properties is split evenly among the MLB teams. Small market teams like the Montreal Expos and Milwaukee Brewers were thus strong supporters of MLB Properties – they were able to free-ride on the efforts of the more successful teams like the Yankees that account for the great bulk of MLB Properties’ income. The Yankees alleged: “Clubs opposed to the cartel, such as the Yankees, have been routinely harassed, received threats from MLB Properties, and have had contracts clearly outside MLB Properties’ agency obstructed by the Office of the Commissioner, the Executive Council, and MLB Properties itself.” The MLB Properties cartel “hinders efficiency by creating the incentive for free-riding,” while the equal distribution of MLB Properties’

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revenues “diminishes the incentives for individual Clubs to promote and invest in their marks and in the success of their own Clubs.” The Yankees contended: “In the absence of the cartel established and enforced by Major League Baseball through the Agency Agreement and MLB Properties, the Major League Clubs would compete with one another in the markets for professional baseball trademark licensing, sponsorships, and retail and wholesale merchandise – which would in turn lead to more competitive pricing, increased output, improved quality, and greater market efficiency.” The Yankees identified two relevant product markets: (1) “professional baseball retail licensing markets” and (2) “professional baseball sponsorship markets.” The former “involve the sale of rights to use the marks of professional baseball clubs on apparel or other goods” and, at competitive prices, “rights of this type have no close substitutes and are not reasonably interchangeable with any other products or rights, and the prices of rights of this type are not highly elastic with respect to prices of other products or rights.” The latter “involve the sale of rights to affiliate a company or a product with a major league professional baseball club or clubs to promote the company or product” and, at competitive prices, “rights of this type have no close substitutes and are not reasonably interchangeable in use with any other products or rights, and the prices of rights of this type are not highly elastic with respect to prices of other products or rights.” The relevant geographic markets for evaluating both sets of relevant product markets are the North American market, the nonNorth American market, and the worldwide market. The Yankees alleged: “As a result of their joint and concerted action, defendants have and exercise market power and monopoly power in the professional baseball sponsorship markets and in the professional baseball retail licensing markets.” The Yankees argued that there is no efficiency rationale for MLB’s challenged practices: 118. Major League Baseball frequently advances the protection of on-field competitive balance as a justification for organized anticompetitive behavior. However, to the extent such balance is deemed desirable or necessary, the restriction of competition in corporate promotion and retail licensing activities has no reasonable relationship to achieving on-field competitive balance of the Major League Clubs. In fact, such sharing often creates incentives for inactivity by poor-performing Clubs, who will derive revenue from other Clubs more concerned with the success of their teams and their marks. Further, other mechanisms are far more likely to achieve results and far less likely to impede competition between the Clubs. 119. There is also no efficiency created by the bundling of Club marks for licensing as a unit to promotional sponsors or retail products manufacturers. Rather, corporate sponsors and

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licensees often prefer to associate themselves with the marks of one or a few teams beyond the local areas of such teams. The cartel, instead of generating a superior product, forces the 30 Clubs to sell together a product that sponsors and licensees often find unnecessary to pay for and generally unwieldy. Importantly, the Yankees explained why the defendants’ actions fall outside of MLB’s antitrust exemption: “Although the Executive Council Defendants and the Major League Club Defendants are involved in the exhibition of major league professional baseball games, their participation in the markets discussed above is not a reasonably necessary facet or unique characteristic of baseball exhibitions” and, furthermore, “the activities of these defendants in the markets described are not a function of, dependent on, or related to the Major League Baseball reserve system or to the ownership and organizational structure of the game of baseball as operated by these defendants.” Interestingly, the Yankees admitted: “Major league baseball has supply and demand characteristics sufficiently distinct from the supply and demand characteristics of other baseball exhibitions and other sporting events so that at reasonably competitive prices major league baseball has no reasonably close substitutes and constitutes a separate market.” In the spring of 1998, MLB and the Yankees reached an out-ofcourt settlement – Steinbrenner was restored to MLB’s Executive Council and MLB signed a sponsorship agreement with Adidas. The Cowboys and Yankees cases are interesting. Both teams explicitly use the term ‘cartel’ to describe the marketing arms of their respective leagues. A cartel is typically assumed to restrict output and maximize profits. Both teams believe that given their league’s revenue-sharing scheme, they can earn greater profits by ‘going it alone.’ Neither team believes there is an efficiency rationale for assigning exclusive sponsorship and licensing rights to their respective league’s marketing arm: Jerry Jones thinks he can market the Cowboys more effectively than can NFL Properties, while the Yankees do not believe that the sharing of sponsorship and licensing revenue promotes competitive balance and that bundling those rights is necessarily efficient. Since neither case went to trial, it is remains to be seen whether league marketing arms can survive a rule of reason analysis.56 Television restrictions. The invention of the television slowly changed the economics of sports leagues. Prior to television, teams earned the bulk of their revenue from selling tickets to games. The televising of games thus posed a threat to game attendance. Watching the game on television was a substitute for attending the game in person. Depending on the particular fan and other factors 56

For further discussion of sports leagues’ collective licensing and merchandising arrangements, see Grusd (1999) and Roberts (2001). - -

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such as the weather, watching the game on television may be either a good or bad substitute for watching it in person. Whether it is a good or bad substitute may also depend on the particular sport; the excitement of a hockey game is generally believed to be lost when watched on television – you have to be there. On the other hand, many fans may prefer to watch a December Chicago Bears home football game from the comfort of their living room rather than braving the cold in the stadium. And there was another concern. Fans may not attend one game because they can watch a different game on television. Suppose a fan’s team is poor and unexciting, while top-notch teams are playing a game broadcast on television. A fan may decide to sit home and watch the game between high-quality teams on television rather than attend a game between poor-quality teams, even if the person is a fan of one of those low-quality teams. In a sense, television allows a team to ‘encroach’ on the ‘home territory’ of other teams. Initially, television broadcast rights were tiny relative to the revenue from game attendance. Sports leagues were concerned about the impact of televising games on attendance and sought to assert greater control over the broadcasting of games. Sometimes the rules and policies adopted by a sports league were strongly opposed by one or more league teams, and in some cases these teams filed antitrust lawsuits against the league over its television restrictions. The NCAA was involved in one important case regarding the number of football games a school could have televised each season; the NBA’s Chicago Bulls, who had superstar Michael Jordan, were involved in two others regarding the number of Bulls games that could be televised nationally. NCAA.57 The first live college football game was televised in 1938; it had only six viewers. Initially, schools individually negotiated the broadcast rights to their team’s football games. There were no limitations on such things as the number of games to be televised. After receiving complaints from members that televising games was reducing game attendance, the NCAA in 1950 commissioned the National Opinion Research Center (NORC) to analyze the impact. The NORC study determined that the impact depended on the percentage of homes that had a television in the area – in areas where 30% or more of homes had a television, televising a game reduced game attendance by 10%; in areas where fewer than 5% of homes had a television, televising a game increased game attendance by 10%. The NCAA’s television committee decided that televising college football games into an area where another college football game is being played negatively impacts live attendance and gate receipts and therefore recommended a moratorium on live broadcasts of college football games. The NCAA’s policy permitting schools to individually negotiate the broadcast rights to their team’s athletic events without limitation was revoked at the NCAA convention in 1951. The revocation was opposed by 57

The discussion at the beginning of this section is based primarily on Greenspan (1988) and Siegfried and Burba (2004). - -

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the University of Pennsylvania. The NCAA responded by declaring the University of Pennsylvania to be a “member in bad standing” and arranged a group boycott of the school’s football games. Four of the school’s football opponents cancelled their games for the 1951 season, leading the University of Pennsylvania to give up its opposition to the NCAA’s actions. The NCAA negotiated a 1-year, $1.14 million deal with NBC to broadcast 12 national college football games. A team was limited to two appearances (thereby expanding the number of teams that would appear on national television and securing broader support for the NCAA’s centralized sale of broadcast rights) and the revenue was split between the teams playing the game and the NCAA. NBC could select a game to be broadcast on Saturday afternoons, knowing that no other NCAA college football game would be broadcast on a competing network. Despite the limitation on the number of appearances, only games involving top collegiate football teams tended to be selected. Thus, the top teams complained about the limitation on the maximum number of appearances, while lower-quality teams supported such limitations. In 1977, members of several major collegiate football conferences (i.e., Atlantic Coast, the Big Eight, Southeastern, Southwestern, and Western Athletic) and some major independent schools (e.g., Penn State, Notre Dame) formed the College Football Association (CFA). All of the CFA’s members also belonged to the NCAA. The Big 10 and Pacific 10 were the only two major conferences not to join the CFA. The CFA sought to secure a larger share of broadcast revenues for the teams that generated most of that revenue – the top-ranked and most popular teams. Although it obtained a modest relaxation of the limitation on the number of appearances, the CFA lacked the votes in the NCAA for more substantial changes. In 1981, the CFA and NBC negotiated a 4-year, $180 million contract. Splitting that revenue among the CFA’s 62 members would have been much more lucrative than what the schools would receive under the NCAA’s broadcast deal. The NCAA responded by informing CFA members that the CFA-NBC contract would violate the NCAA rule prohibiting members from independently negotiating broadcast rights to individual games. Violators of the rule would be excluded from NCAA meets and tournaments, including the lucrative NCAA men’s basketball tournament. The CFA members did not have enough top men’s basketball teams to form their own tournament and they decided not to sign the deal with NBC. On September 8, 1981, two members of the CFA, the University of Oklahoma and the University of Georgia (both of whose legal expenses were paid by all CFA members) filed an antitrust lawsuit against the NCAA alleging that the NCAA’s control of college football telecasts violates Section 1 of the Sherman Act.58 The U.S. District Court for the 58

NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984). For a - -

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Western District of Oklahoma defined the relevant market to be “live college football television” and found that competition in this market had been restrained because, for example, the NCAA fixed the price of some telecasts and the NCAA’s restriction artificially limited the production of televised college football. The NCAA defended its restriction by arguing that it protected live attendance at college football games and promoted competitive balance among the football programs. The district court found neither argument persuasive. The U.S. Court of Appeals for the Tenth Circuit sided with the district court in finding that the NCAA’s television plan constituted price fixing. The case went to the U.S. Supreme Court and was decided on June 27, 1984. The Court found that: (1) “The NCAA television plan on its face constitutes a restraint upon the operation of a free market, and the district court’s findings establish that the plan has operated to raise price and reduce output, both of which are unresponsive to consumer preference” and “these hallmarks of anticompetitive behavior place upon the NCAA a heavy burden of establishing an affirmative defense that competitively justifies that apparent deviation from the operations of a free market”; (2) “The record does not support the NCAA’s proffered justification for its television plan that it constitutes a cooperative ‘joint venture’ which assists in the marketing of broadcast rights and hence is procompetitive”; (3) “Nor, contrary to the NCAA’s assertion, does the television plan protect live attendance, since, under the plan, games are televised during all hours that college football games are played” and, moreover, “by seeking to insulate live ticket sales from the full spectrum of competition because of its assumption that the product itself is insufficiently attractive to draw live attendance when faced with competition from televised games, the NCAA forwards a justification that is inconsistent with the Sherman Act’s basic policy”; and (4) “The interest in maintaining a competitive balance among amateur athletic teams that the NCAA asserts as a further justification for its television plan is not related to any neutral standard or to any readily identifiable group of competitors. The television plan is not even arguably tailored to serve such an interest.” As a result, the U.S. Supreme Court ruled that the NCAA’s television plan violated the Sherman Act. On the issue of market definition, the Court observed that “the NCAA seeks to market a particular brand of football – college football” and “[t]he identification of this ‘product’ with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable, such as, for example, minor league baseball.” The Court noted that the district court “employed the correct test for determining whether college football broadcasts constitute a separate market – whether there are other products discussion of earlier challenges to the NCAA’s control of college football telecasts, see footnote 47 of Greenspan (1988). For a discussion of the eventual demise of the CFA, see Siegfried and Burba (2004). - -

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that are reasonably substitutable for televised NCAA football games” and “found that intercollegiate football telecasts generate an audience uniquely attractive to advertisers and that competitors are unable to offer programming that can attract a similar audience.” Thus, “there can be no doubt that college football constitutes a separate market for which there is no reasonable substitute” and “we agree with the district court that it makes no difference whether the market is defined from the standpoint of broadcasters, advertisers, or viewers.” The Supreme Court’s findings have been put to the test in a number of economic studies. If the courts were correct that the NCAA’s television plan restricted output and raised price, fees for televising college football games should have fallen following the Supreme Court’s decision. Greenspan (1988) shows that this is what happened. In 1983, 95 games were televised and fees paid totaled $74.2 million. The number of games televised in 1984, 1985, and 1986 were 63, 97, and 99, respectively (excluding regional telecasts packaged by individual conferences), and the corresponding fees paid were $42.0 million, $50.1 million, and $52.7 million. If the NCAA’s pro-competitive arguments were valid, the U.S. Supreme Court’s decision in 1984 should have had a negative impact on (1) attendance at college football games and (2) competitive balance among football programs. The empirical evidence is, at best, weakly consistent with the first prediction and inconsistent with the second. Fizel and Bennett (1989) test the impact of college football telecasts on college football attendance during the period 1980-85. Although they conclude that the general increase in the number of telecasts reduces attendance, the relevant regression coefficients are statistically significant only at the 0.10 level. At the 0.05 significance level, the surge in college football telecasts had no impact on college football attendance. Bennett and Fizel (1995) test the impact of the U.S. Supreme Court’s decision on competitive balance in college football, using such measures as the dispersion of winning percentages in conferences and the average team winning percentages of strong and weak football programs. Contrary to the NCAA’s claim, they conclude that playing strength among Division I football teams has become more equal following the Supreme Court’s 1984 decision. The same conclusion is reached by Eckard (1998), who observes that the number of schools appearing in the Top 10 rose from 27 during the period 1973-81 to 37 in the period 1987-95, and the Herfindahl Index fell from 560 to 449. A similar result is obtained by focusing on the Top 20. Were the courts correct that there are no good substitutes for college football telecasts? Pacey and Wickham (1985) analyzed the Nielsen ratings of nationally televised college football games during the period 1976-81. They found the number of hours of professional football and baseball televised during the week had no statistically significant impact on the Nielsen rating of the college football game. However, simultaneous broadcast of a World Series game reduced the Nielsen rating of the college football game by 1.9 points. Thus, although professional - -

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football and baseball telecasts are not a good substitute for college football telecasts generally, telecasts of professional sports’ “championship” games may be. Did consumers benefit from the Supreme Court’s decision? Pacey and Wickham (1985) observe that since the decision, many more college football games are being broadcast and television viewership has increased. They conclude: “Clearly, the short run impact has been beneficial to the consumer while the long run economic consequences cannot yet be determined.” (p. 94) However, Greenspan (1988) contends that, although fans who watch college football on television have benefited from the increase in the number of televised games, fans who attend college football games are harmed because, for example, game starting times are set to accommodate television coverage. Overall, the economic evidence suggests that the U.S. Supreme Court got it right – the NCAA’s television restrictions reduced output, raised prices, and lacked a pro-competitive rationale. Chicago Bulls. In the early 1990s, the NBA’s Chicago Bulls were wildly popular, with superstars Michael Jordan and Scottie Pippen. The Bulls had a strong incentive to broadcast their games to as large an audience as possible. A regional cable channel has a smaller potential audience than does a station whose signal is carried nationwide by cable systems, a so-called ‘superstation.’ As a superstation, WGN had a larger potential audience than did SportsChannel, the regional cable television station that broadcast many Bulls’ games, and thus the Bulls had an incentive to broadcast as many games as possible on WGN. The nationwide broadcast of Bulls games, however, meant that on some occasions the Bulls would be playing on WGN while two other NBA teams would be playing on another channel. Quite possibly, a significant number of basketball fans – even fans of the teams playing the other game – would choose to watch the Bulls game. Given the star-power of the Bulls, it is unsurprising that other NBA teams did not want to have their televised games competing against a televised Bulls game. In fact, Hausman and Leonard (1997) document that, during the 1989-90 season, Nielsen ratings for games on Turner Network Television (TNT) were significantly reduced if WGN was airing a Bulls game at the same time.59 In 1990, the NBA adopted a 20-game cap on the number of games a team could broadcast nationally, over the objections of the Chicago Bulls and New Jersey Nets. Teams were allowed to broadcast 41 games over-the-air in their home markets and another 41 games could be shown on local cable. The games could not be televised in 59

Hausman and Leonard served as antitrust litigation consultants to the Chicago Bulls and WGN. - -

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competition with a game being shown on NBC. Moreover, no more than 20 games could be televised on a superstation, and no game on a superstation could be televised in competition with a game airing on TNT. The Bulls and WGN filed an antitrust lawsuit which characterized the NBA as a cartel whose television restriction limited the output of broadcast games in violation of Section 1 of the Sherman Act. The U.S. District Court for the Northern District of Illinois, Eastern Division, enjoined the NBA from enforcing its restriction. The NBA appealed.60 The appeals court held that the NBA’s television restriction does not fall under the antitrust exemption in the Sport Broadcasting Act because the NBA has not “transferred” a right to sponsored telecasting. Nor does it fall under the ‘single entity’ antitrust exemption because the district court “concluded that the best characterization of the NBA is the third we have mentioned: a joint venture in the production of games but more like a cartel in the sale of its output.” The appeals court added: “Whether this is the best characterization of professional sports is a subject that has divided courts and scholars for some years, making it hard to characterize the district judge’s choice as clear error.” Since the NBA’s television restriction is not covered by any antitrust exemption, it must be analyzed under the Rule of Reason. The NBA complained that the district court had condemned the 20game limit without a finding that the NBA had a significant market share in a particular market. The appeals court interpreted the district court’s analysis as a ‘quick look’ version of the Rule of Reason: “any agreement to reduce output measured by the number of televised games requires some justification – some explanation connecting the practice to consumers’ benefits – before the court attempts an analysis of market power.” The appeals court acknowledged that the NBA’s contention that its television restrictions control free-riding deserves “serious analysis.” The NBA identified three forms of free-riding: (1) “the contracts with NBC and TNT require these networks to advertise NBA basketball on other shows” and “the Bulls and WGN receive the benefit of this promotion without paying the cost”; (2) “the NBA has revenue-sharing devices and a draft to prop up the weaker teams” and the Bulls “took advantage of these while they were weak (and through the draft obtained their current stars) but, according to the league, are siphoning viewers (and thus revenues) to their own telecasts, thus diminishing the pot available for distribution to today’s weaker teams”; and (3) “the Bulls and WGN are taking a free ride on the benefits of the cooperative efforts during the 1980s to build up 60

Chicago Professional Sports Limited Partnership and WGN Continental Broadcasting Company v. NBA, 961 F.2d 667 (7th Cir. 1992). - -

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professional basketball as a rival to baseball and football – efforts that bore fruit just as the Bulls produced a championship team, and which the Bulls would undermine.” The appeals court rejected the NBA’s free-rider defense: When payment is possible, free-riding is not a problem because the “ride” is not free. Here lies the flaw in the NBA’s story. It may (and does) charge members for value delivered. As the NBA itself emphasizes, there are substantial revenue transfers, propping up the weaker clubs in order to promote vigorous competition on the court. Without skipping a beat the NBA may change these payments to charge for the Bulls’ ride. If the $40 million of advertising time that NBC will provide during the four years of its current contract also promotes WGN’s games, then the league may levy a charge for each game shown on a superstation, or require the club to surrender a portion of its revenues. Major league baseball does exactly this and otherwise allows its teams access to superstations… Avoidance of free-riding therefore does not justify the NBA’s 20-game limit. The appeals court ruled that it would not overturn the district court’s decision to enjoin the NBA from enforcing its 20-game cap. A few years later, the Bulls sought to increase the number of games televised on WGN from the 25 or 30 games authorized by injunction since 1991, to 41 games, while the NBA sought to impose a “tax” on games broadcast to a national audience. The Bulls and WGN went to court; the district court made a 30-game allowance permanent, to the chagrin of the Bulls and WGN, but also ruled the NBA’s fees to be excessive, leading both sides to appeal the decision.61 The appeals court vacated the district court’s judgment, arguing the district judge erroneously required the NBA to have a complete unity of interest in order to be treated as a single entity. The appeals court ruled that, “when acting in the broadcast market the NBA is closer to a single firm than to a group of independent firms” and therefore “plaintiffs cannot prevail without establishing that the NBA possesses power in a relevant market, and that its exercise of this power has injured consumers.” The appeals court distinguished its current decision from its 1992 ruling in favor of the Bulls and WGN: “We affirmed the district court’s original injunction after applying the ‘quick look’ version because the district court had characterized the NBA as something close to a cartel, and the league had not then made a Copperweld argument.” As for the fee sought by the NBA on games broadcast to a national audience, the appeals court criticized the district court’s 61

Chicago Professional Sports Limited Partnership and WGN Continental Broadcasting Company v. NBA, 95 F.3d 593 (7th Cir. 1996). - -

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ruling that the per game fee should be reduced from $138,000 to $39,400: The district court’s opinion concerning the fee reads like the ruling of an agency exercising a power to regulate prices. Yet the antitrust laws do not deputize district judges as one-man regulatory agencies. The core question in antitrust is output. Unless a contract reduces output in some market, to the detriment of consumers, there is no antitrust problem. A high price is not itself a violation of the Sherman Act… WGN and the Bulls argue that the league’s fee is excessive, unfair, and the like. But they do not say that it will reduce output… Lack of an effect on output means that the fee does not have antitrust significance. Once antitrust issues are put aside, how much the NBA charges for national telecasts is for the league to resolve under its internal governance procedures. It is no different in principle from the question how much (if any) of the live gate goes to the visiting team, who profits from the sale of cotton candy at the stadium, and how the clubs divide revenues from merchandise bearing their logos and trademarks. Courts must respect a league’s disposition of these issues, just as they respect contracts and decisions by a corporation’s board of directors. Thus, the U.S. Court of Appeals required the Bulls and WGN, pending further proceedings in the district court or an agreement among the parties, to abide by the NBA’s limitations on the maximum number of superstation broadcasts. Team relocation. A team may believe it would be more profitable if it moved to another location. Such a move, depending on league rules and policies, may require approval of the other league members. The league has an understandable interest in the relocation activities of its members. For example, the team may be seeking to move to a city where the league planned to add an expansion team, and thus the team is attempting to seize a new franchise opportunity that ‘belongs’ to the league. The relocation to a smaller city may reduce the league’s broadcast revenue, even if the relocating team’s revenue increases due to public subsidies and a more lucrative stadium deal. The relocation of a team from an aboveaverage sized city to an even larger city may decrease competitive balance among the teams in the league. Furthermore, the relocation may disrupt rivalries, hurting fan interest when the team is on the road. When teams wishing to relocate fail to obtain the support of the league for the move, they sometimes file an antitrust lawsuit challenging the league’s relocation rules and policies. Teams which have done so include the NHL’s San Francisco Seals, the NFL’s Oakland Raiders, the NBA’s San Diego Clippers, and the NFL’s New England Patriots. - -

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San Francisco Seals.62 In 1969, the NHL’s San Francisco Seals formally applied to the league to exchange its current franchise for a new one located in Vancouver. Thus, instead of ‘relocating’ to Vancouver, the Seals were actually applying for a new franchise in a new location (Vancouver). The NHL’s Board of Governors denied the request and the Seals filed an antitrust lawsuit alleging that the defendants combined to prevent it from playing its games in Vancouver, where it believed its gate receipts would be higher. The Seals did not challenge the league’s allocation to individual teams of ‘home territories’ with exclusive rights within those territories. Rather, it wanted to obtain such a home territory in Vancouver. The district court found that “the relevant product market with which we are here concerned is the production of professional hockey games before live audiences, and that the relevant geographical market is the United States and Canada.” Within this market, the Seals and the other members of the NHL are not competitors “in the economic sense” but rather “are, in fact, all members of a single unit competing as such with other similar professional leagues.” Consequently, “the organizational scheme of the National Hockey League, by which all its members are bound, imposes no restraint upon trade or commerce in this relevant market, but rather makes possible a segment of commercial activity which could hardly exist without it.” Thus, the district court concluded that “the actions of the Board of Governors pursuant to the constitution and bylaws of the National Hockey League do not violate section 1 of the Sherman Act, as they do not restrain trade or commerce within the relevant market.” The Seals also alleged that the defendants violated Section 2 of the Sherman Act by attempting to monopolize the business of major league hockey. In particular, the Seals alleged that the NHL wanted to keep the team in San Francisco to discourage a rival league from expanding into San Francisco. Since the Seals did not belong to a rival league, even if the Seals’ accusation was true, they would not have been the target of the NHL’s alleged anticompetitive acts and would not have been injured by those acts. Therefore, the district court ruled that the Seals did not have standing to sue on Section 2 claims. The district court thus granted the NHL’s motion for summary judgment in July 1974. By that date, the Seals had already declared bankruptcy and changed ownership. In 1976, the franchise was transferred to Cleveland and became the Cleveland Barons. In June 1978, the financially-troubled Barons were merged with the Minnesota North Stars.

62

The discussion in this section comes from various hockey-related websites and the district court decision in San Francisco Seals v. NHL, 379 F. Supp. 966 (C.D. Ca. 1974). - -

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Oakland Raiders. After the Los Angeles Rams moved to Anaheim in 1978, the Los Angeles Coliseum, where the Rams had played, was left without an NFL tenant. The Coliseum asked the NFL to place an expansion franchise in Los Angeles, but was told it was not possible at the time. The Coliseum attempted to lure an existing NFL team, but such a relocation would have required unanimous approval of all 28 teams under the NFL Constitution’s Rule 4.3 of Article IV. In September 1978, the Coliseum filed an antitrust lawsuit against the NFL alleging that Rule 4.3 violated Section 1 of the Sherman Act. The lawsuit failed because the Coliseum did not have a NFL team committed to relocating to Los Angeles. Nevertheless, the NFL responded by amending Rule 4.3 so that a relocation had to be approved by only three-quarters of the 28 teams. The Oakland Raiders’ lease with the Oakland Coliseum expired in 1978 and Al Davis, the Raiders’ general managing partner, began negotiations with the Los Angeles Coliseum. A deal was imminent in January 1980 so the L.A. Coliseum reactivated its lawsuit against the NFL in an attempt to thwart the NFL from preventing the Raiders’ relocation. Although the district court granted the injunction, the appeals court reversed. The Raiders and the L.A. Coliseum reached a ‘memorandum of agreement’ on March 1, 1980 and two days later at an NFL meeting Davis announced his intention to move the Raiders to Los Angeles. The league obtained an injunction preventing the move. On March 10, 1980, the league voted on the move – 22 teams voted against the move and 5 abstained. The L.A. Coliseum renewed its antitrust lawsuit against the NFL and its member teams, with the Oakland Raiders aligned as a party plaintiff. On June 14, 1982, the court permanently enjoined the NFL and its member clubs from interfering with the Raiders’ move to Los Angeles. In May 1983, a jury awarded the Raiders $11.55 million in damages and the L.A. Coliseum $4.86 million; the district court then trebled the antitrust damages. The NFL and its member teams appealed the decision.63 The NFL argued that (1) it is a single entity and thus incapable of restraining trade in violation of Section 1 of the Sherman Act and (2) Rule 4.3 is not an unreasonable restraint of trade under Section 1. The appeals court sided with the district court in rejecting the single entity argument, noting, for example, that profits vary widely across teams and this “disparity in profits can be attributed to independent management policies regarding coaches, players, management personnel, ticket prices, concessions, luxury box seats, as well as franchise location, all of which contribute to fan support and other income sources.” To determine whether Rule 4.3 is an unreasonable restraint of trade, the appeals courts noted that it “must examine Rule 4.3 to determine whether it reasonably serves the legitimate collective concerns of the owners or instead permits them to reap excess profits at the expense of the

63

Los Angeles Memorial Coliseum Commission v. NFL, 726 F.2d 1381 (9th Cir. 1984). - -

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consuming public.” The appeals court agreed with the NFL that the Rule served legitimate collective concerns: We agree that the nature of NFL football requires some territorial restrictions in order both to encourage participation in the venture and to secure each venturer the legitimate fruits of that participation. Rule 4.3 aids the League, the NFL claims, in determining its overall geographic scope, regional balance and coverage of major and minor markets. Exclusive territories aid new franchises in achieving financial stability, which protects the large initial investment an owner must make to start up a football team. Stability arguably helps ensure no one team has an undue advantage on the field. Territories foster fan loyalty which in turn promotes traditional rivalries between teams, each contributing to attendance at games and television viewing. Joint marketing decisions are surely legitimate because of the importance of television… Last, there is some legitimacy to the NFL’s argument that it has an interest in preventing transfers from areas before local governments, which have made a substantial investment in stadia and other facilities, can recover their expenditures. In such a situation, local confidence in the NFL is eroded, possibly resulting in a decline in interest. However, the appeals court added: All of these factors considered, we nevertheless are not persuaded the jury should have concluded that Rule 4.3 is a reasonable restraint of trade. The same goals can be achieved in a variety of ways which are less harmful to competition. The appeals court advised: To withstand antitrust scrutiny, restrictions on team movement should be more closely tailored to serve the needs inherent in producing the NFL “product” and competing with other forms of entertainment. An express recognition and consideration of those objective factors espoused by the NFL as important, such as population, economic projections, facilities, regional balance, etc., would be well advised… Fan loyalty and location continuity could also be considered.

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Thus, the Raiders were free to move to Los Angeles. On June 16, 1986, the appeals court issued its opinion regarding the jury’s damage awards and the trebling of damages by the district court.64 The appeals court ruled that “the jury could properly have found that the amount of the Raiders’ lost profits from the delay of two years in moving to Los Angeles amounted to $11,554,382” but “the district court erred in limiting the NFL’s damage offset defense, when it excluded from the jury’s consideration in calculating damages the benefits the Raiders realized by taking from the NFL the opportunity to establish an expansion franchise in Los Angeles.” Al Davis testified that the Raiders’ franchise value increased by $25 million when it moved to Los Angeles. Since the appeals court ruled that “Rule 4.3 was illegal only as it was applied in 1980,” the NFL “legitimately possessed the value of that expansion opportunity that had accrued until 1980.” Therefore, “the excess portion of the injunctive relief can be measured as the value of the NFL’s Los Angeles expansion opportunity in 1980, prior to the NFL’s illegal conduct, less the value of the Oakland opportunity returned to the league.” In other words, by moving to Los Angeles, the Raiders seized for themselves a valuable expansion opportunity and returned to the NFL a less valuable expansion opportunity in Oakland. The net value of the Raiders’ seizure had to be subtracted from the Raiders’ damage award. A few years later, the NFL began imposing relocation fees.65 In 1988, the St. Louis Cardinals’ move to Arizona involved payment of a $7.5 million relocation fee. Relocation fees were also paid for the Los Angeles Rams’ move to St. Louis in 1995 and the Cleveland Browns’ move to Baltimore in 1996. On the other hand, there was no relocation fee for the Los Angeles Raiders’ move back to Oakland in 1995; nor was there a relocation fee for the Houston Oilers’ move to Nashville in 1996. The 1984 court decision in the Raiders case is controversial. Among those who believe it was wrongly decided are Lehn and Sykuta (1997), who have two primary criticisms: (1) “in its rejection of the single entity argument, the court failed to properly distinguish between the cooperation that is necessary to promote the value of the league as a whole and the ability of teams to compete in input markets” and the court “also adopted internally inconsistent arguments with respect to the value of teams independent of the league” and (2) “it failed to recognize that territorial restrictions promote incentives for individual franchisees, or clubs, to invest in product quality and the reputation of the franchisor, the NFL.” (pp. 562-63) In support of the latter criticism, Lehn and Sykuta examine the impact of the Raiders’ move to Los Angeles on the Los Angeles Rams and the San Francisco 49ers. They document that the product quality of the Rams, as measured by the Rams’ won-loss record, plunged after the Raiders’ move to Los Angeles, consistent with the hypothesis that the 64 65

Los Angeles Memorial Coliseum Commission v. NFL, 791 F.2d 1356 (9th Cir. 1986). Vrooman (1997b). - -

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Rams’ incentive to invest in their team’s quality diminished. On the other hand, the product quality of the 49ers soared, suggesting that after the Raiders’ move from Oakland, the 49ers had greater incentive to invest in their team’s quality. Interestingly, the product quality of the Raiders also fell after moving to Los Angeles. Lehn and Sykuta conclude: “A cursory examination of the evidence suggests that the league has in fact been injured and that the arguments underlying the court’s decision were incorrect.” (p. 563) San Diego Clippers. In the early 1980s, prior to the appeals court decision in the lawsuit over the NFL’s Oakland Raiders’ move to Los Angeles, the NBA’s San Diego Clippers sought to move to Los Angeles, but abandoned their quest after the NBA filed suit. After the appeals court decided the Oakland Raiders’ case, the Clippers believed they were now free to relocate. On May 14, 1984, the Clippers announced that they would move to Los Angeles the next day and any attempt by the NBA to stop them would be a violation of the antitrust laws. The Clippers complied with Article 9 of the NBA’s constitution, which prevents teams from moving into the territory operated by another team, by getting the Los Angeles Lakers to agree in writing to waive their rights under Article 9. The NBA sought to avoid antitrust liability by scheduling the Clippers’ games in Los Angeles. However, the NBA also went to court seeking a declaratory judgment that it could restrain the movement of its member teams and that it could impose a fee for the unilateral usurpation of the NBA’s franchise opportunity. The district court granted summary judgment in favor of the Clippers. The NBA appealed and the appeals court reversed the district court’s grant of summary judgment because there were numerous issues of fact to be resolved and the case was remanded to the district court for trial.66 The appeals court stressed: “Neither the jury’s verdict in Raiders, nor the court’s affirmation of that verdict, held that a franchise movement rule, in and of itself, was invalid under the antitrust laws.” It repeated that “a careful analysis of Raiders I makes clear that franchise movement restrictions are not invalid as a matter of law.” Whether the application of the NBA’s franchise movement restrictions to stop the Clippers’ move would be a violation of the antitrust laws would have to be decided at trial. The NBA sought either the return of the Clippers to San Diego or termination of the franchise.67 In September 1987, less than a week before the trial was to commence, the NBA and the Clippers reached an out-of-court settlement. The Clippers’ owner, Donald T. Sterling, agreed to pay the league approximately $6 million in fines, signed documents stating that the NBA’s rules regarding 66

NBA v. SDC Basketball Club and Los Angeles Memorial Coliseum, 815 F.2d 562 (9th Cir. 1987). 67 New York Times (March 9, 1985; October 1, 1987). - -

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franchise moves are valid and binding, and dropped all claims against the NBA including his $100 million lawsuit filed against the NBA in March 1985 alleging “various fraudulent acts.” In return, the NBA allowed the Clippers to remain in Los Angeles. New England Patriots. Victor K. Kiam II acquired majority-control of the NFL’s New England Patriots in 1988 and, as a condition for the NFL’s approval of his purchase, Kiam signed a contract agreeing to comply with the NFL’s Constitution and Bylaws and to obtain advance approval from the NFL before any transfer of ownership of the team. Kiam also agreed to “continue to operate the Patriots’ franchise within its existing home territory, unless a transfer of the franchise … to a different city is approved by the member clubs of the League.” In 1989, NFL Commissioner Paul Tagliabue issued a statement that sale of a team would require the approval of at least three-quarters of the NFL’s members. At the time, the Patriots played their home games in Foxboro, Massachusetts, and experienced financial difficulties due in part to the inadequate Foxboro facility and the restrictive lease the team had with the facility. The team was not profitable the first two seasons under Kiam’s ownership and he had to personally guarantee loans and use personal funds to cover cash flow shortfalls. He attempted unsuccessfully to negotiate with Boston city officials for a new stadium. In 1990, Kiam began to consider moving the Patriots to another region of the country; there appeared no chance of getting a new stadium in New England and, according to Kiam, then-Commissioner Pete Rozelle had told him prior to purchasing the team that if he was unable to secure a new stadium in New England that he would be permitted to move the team. Kiam negotiated with a group named Touchdown Jacksonville, Inc. (TJI) to move the team to Jacksonville. After TJI officials informed the NFL that they were close to a deal, the NFL told TJI that it “did not favor the move” and that if TJI wanted the NFL’s support (without which it could not secure a franchise), it should cease negotiations with the Patriots. TJI did so and, several months later in the fall of 1991, Touchdown Jacksonville, LTD (TJL) was formed, with TJI president David Seldin as the president of TJL’s corporate general partner. Some of TJI’s assets were transferred to TJL. In 1991, Kiam informed Commissioner Tagliabue that the Patriots would have to move for financial reasons. Tagliabue opposed any move. The NFL increased the team’s debt limit by $10 million after requiring Kiam to agree not move the team before the end of the 1993 season. In 1992, Kiam negotiated to sell the team to James Orthwein, who the NFL required to sign an “iron clad commitment” not to move the team to St. Louis, his hometown. A few weeks prior to the close of the sale of the Patriots to Orthwein, the NFL announced that the sale would not be approved unless Kiam signed a release of all claims against the NFL, including potential antitrust claims. On May 8, 1992, Kiam signed the release and three days later the transaction closed. - -

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The NFL awarded an expansion franchise to TJL in November 1993. It was around this time that Kiam alleges he first learned of the NFL’s role in the collapse of negotiations between himself and TJI. On November 16, 1994, Kiam filed an antitrust complaint against the NFL alleging that its monopolistic and conspiratorial conduct illegally lowered the value of the Patriots franchise and had anticompetitive effects in several markets. Kiam argued that he had signed the claims release under economic duress, and that the release itself was an instrument of the anticompetitive conduct. The jury returned a verdict in favor of the NFL on the issue of economic duress and the district court granted the NFL’s motion for summary judgment on the remaining claims. Kiam appealed.68 The appeals court found that the antitrust claims involved issues of fact that could not be resolved by means of summary judgment on the current record. However, the appeals court also found that the claims release signed by Kiam was valid. Thus, Kiam could not pursue the antitrust claims against the NFL and its members, but Kiam could pursue them against TJI and TJL because they were not covered by the claims release. The impact of relocation on professional sports franchise values has been investigated by Alexander and Kern (2004), who estimate a cross-sectional regression model of franchise values using data on the U.S.-based franchises (Canadian-based franchises are excluded from the sample) of the four major North American sports leagues over the period 1991-97. Interestingly, they find that relocation does not have a statistically significant impact on franchise value, but playing in a new facility does. In other words, holding whether the team plays in a new facility constant, whether the team is playing in a new city does not significantly affect franchise value. This finding suggests that teams may first try to obtain a new facility in their current city and, if that fails, attempt to relocate to a new facility in another city. Of course, the threat to relocate to a new facility in another city may add leverage to the team’s negotiations for a new facility in its current city – and this may explain why playing in a new facility, regardless of whether the location is old or new, raises franchise value. Note, once again, that Alexander and Kern excluded Canadian-based franchises from their analysis. This omission may be particularly important in the case of the NHL, which in its 1979 expansion added three Canadian-based franchises (Edmonton, Quebec City, and Winnipeg) and one U.S.-based franchise (Hartford).69 In 1980, the Atlanta franchise relocated to Calgary. Thus, there was a trend toward more Canadian-based franchises, although most NHL franchises continued to be based in the U.S. More recently, however, the trend has been for Canadian-based teams to relocate in the United States, despite the continuing huge popularity of hockey in Canada. The Quebec team, which had been 68 69

VKK Corporation v. NFL, 244 F.3d 114 (2nd Cir. 2001). Jones and Ferguson (1988). - -

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purchased for $15 million in 1988, was sold for $75 million and a side-payment and relocated to Denver; the Winnipeg team was sold in 1996 for roughly the same amount and relocated to Phoenix.70 Jones and Ferguson (1988) and Cocco and Jones (1997) examine franchise profitability, viability, and relocation of NHL teams, particularly the Canadianbased teams. Jones and Ferguson analyzed data from the 1977-78 season and concluded that several Canadian cities were more attractive expansion opportunities for the NHL than any potential U.S. cities – and more attractive than at least eight cities with current NHL teams. This finding is consistent with the trend toward more Canadian-based franchises. However, Cocco and Jones, using data from the 1989-90 season, reach a very different conclusion, finding evidence that “the viability of Canadian Small Market Franchises (SMF) is in doubt because of a combination of inadequate revenue (due to the quality of their locations) and escalating salary cost.” (p. 1537) They consider a number of possible solutions, including revenue sharing, salary caps, and public subsidies, but conclude that “none are as attractive or as realistic as relocating south to US cities.” (p. 1537) In 1983, the NHL rejected the proposed relocation of the St. Louis team to Saskatoon. Saskatoon was one of the three Canadian cities without an NHL franchise which Jones and Ferguson (1988) had estimated was preferable to all potential, and at least eight existing, U.S. locations. Why then did the NHL reject the relocation? One possible answer is externalities. In the NHL (as in the NBA), gate receipts were not shared between the home and visiting teams. The home team kept it all, unlike the NFL where 60% of the gate receipts are kept by the home team and 40% are given to the visiting team and unlike MLB which splits gate receipts 85%-15% between the home and visiting team.71 By moving from St. Louis to Saskatoon, the team may become a less attractive opponent (for example, the rivalry that the St. Louis team has with the Chicago Blackhawks would be disrupted). Since gate receipts are not shared, the negative impact on gate receipts at Blackhawks home games would be borne entirely by the Blackhawks. Thus, it is possible that the negative externality that the move to Saskatoon would have on other NHL franchises would far outweigh the private benefits of the relocation to the St. Louis franchise. This hypothesis was tested by Carlton, Frankel, and Landes (2004), who examine the impact of the relocation of four NHL franchises on attendance at games where they were the visiting team. 72 The change in ‘away’ attendance is calculated as the difference between actual attendance and the attendance predicted by their econometric model if the move had not occurred. When California moved to Cleveland, attendance at games where it was the visiting team fell 0.22% the first year and 0.90% the second. When Kansas City moved to Colorado, ‘away’ attendance rose 2.63% the first year, but then fell 1.59% and 70

Cocco and Jones (1997). Alexander and Kern (2004). 72 The NHL hired Lexecon, an economic consulting firm, to conduct an economic analysis of the proposed move and Carlton served as the NHL’s economic expert. 71

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8.79% in the second and third years, respectively. The corresponding declines in away attendance when Atlanta moved to Calgary were 9.22%, 9.70%, and 5.61%. When Colorado moved to New Jersey, away attendance declined 5.59% the first year and 1.04% the second. Since the NHL approved these relocations, one would expect the negative impact on ‘away’ attendance to be relatively minor. The model is used to predict the impact of the proposed move of the St. Louis Blues to Saskatoon under the assumption that the effect on away attendance will be the same in each of the first three years after the move and then have no effect. The predicted decline in away attendance in each of the first three years is 9.21%, and, not surprisingly, the NHL blocked the move. Sports leagues may also oppose the relocation of one of their members because of the negative impact on competitive balance. Quirk (1973) uses population as a crude measure of revenue potential and assumes that a move increases competitive balance if the population of the city to which the franchise moves is closer to the average population of franchise cities than the population of the city from which the team moved. Only three of the ten major league baseball franchise relocations which Quirk examines meet his criteria for increasing competitive balance. Moreover, when the effect of the move on the drawing potential of nearby teams is taken into account, Quirk concludes that only one move – the St. Louis Browns to Baltimore – increased competitive balance. Thus, sports leagues – or at least Major League Baseball – have approved relocations even if they negatively impacted competitive balance. Legislators have been conflicted when it comes to franchise relocation. On the one hand, they often rail against MLB’s antitrust exemption; yet, legislation has been introduced to give other professional sports leagues antitrust immunity on issues of franchise relocation. For example, the Fan Freedom and Community Protection Act of 1995 (which did not pass) contained the following provision: “It is not unlawful by reason of the antitrust laws for a professional sports league to enforce rules or agreements authorizing the membership of such league to decide whether a professional sports team that is a member of the league may relocate from one community to another.” The Act would have required leagues to make specific findings on ten issues: (1) “the extent to which fan loyalty to and support for the team has been demonstrated during the team’s tenure in the community”; (2) “the degree to which the team has engaged in good faith negotiations with appropriate persons concerning terms and conditions under which the team would continue to play its games in the community”; (3) “the degree to which the owners or managers of the team have contributed to any circumstances which might demonstrate the need for the relocation”; (4) “the extent to which the team, directly or indirectly, received public financial support by means of any publicly financed playing facility, special tax treatment, or any other form of public financial support”; (5) “the adequacy of the stadium in which the team played its home games in the previous season, and the willingness of the stadium, arena authority, or the local government to remedy any deficiencies in such facility”; (6) “whether the team has incurred net operating losses, exclusive of depreciation and amortization, sufficient to threaten the continued financial viability of the team”; (7) “whether any other team in the league is located in the community in which the team is currently located”; (8) “whether the team proposes to relocate to a community in - -

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which no other team in the league is located”; (9) “whether the stadium authority, if public, is not opposed to such relocation”; and (10) “whether there is a bona fide investor offering fair market value for the professional sports team and will retain the team in the current community.” Gattuso (1985) makes the case that Congress should not get involved in the NFL’s franchise relocation decisions in the aftermath of the court’s ruling in the case involving the Oakland Raiders’ move to Los Angeles. Ross and Dimitroff (1997) argue that, although the majority of court decisions hold that MLB’s antitrust exemption covers the “business of baseball” (and thus covers franchise relocation issues), some courts have held that the exemption applies only to the reserve clause in players’ contract (and thus relocation issues would not be covered by the exemption). They contend that if relocation issues are not within MLB’s antitrust exemption, “a solid case can be made that the present restrictions on the sale or relocation of major league baseball teams violate section 1 of the Sherman Act.” (p. 539) In summary, sports leagues require the cooperation of their members in order to produce their output. Despite the fact that the four major North American sports leagues have survived (although not necessarily flourished) for decades, many other sports leagues lasted only a few years before they disappeared. One possible reason for the longevity of the major sports leagues is their rules and policies, which reduce conflict between members and between members and the league. Nevertheless, some rules and policies have been attacked on antitrust grounds by disgruntled league members. Four examples are public ownership restrictions, sponsorship and licensing restrictions, television restrictions, and restrictions on franchise relocation.

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Chapter 4 Sports Leagues vs. Rival Leagues

The four major North American sports leagues have each been challenged by rival leagues, which either folded without a trace (Federal League of Professional Base Ball Clubs, United States Football League), folded after merging some of their teams with the major league (American Basketball Association, World Hockey Association), or merged completely with the major league (American Football League). Competition between rival leagues occurs in both input (players and coaches) and output (games) markets. One clear effect of such interleague competition is soaring player salaries – player salaries are much closer to their marginal revenue product when leagues have to compete for players than when they do not. Not surprisingly, the incumbent league may attempt to deter or frustrate the entry of a rival league by attempting to restrict the ability of its players to sign with a team in the rival league. Similarly, the incumbent league may attempt to prevent teams in the rival league from playing games in the stadiums used by the incumbent’s teams. The incumbent, in addition, could expand by putting new teams into cities which could support a team but lack one. Such tactics have been tried. It should come as no surprise that the newly-created league often brings an antitrust lawsuit against its incumbent competitor alleging, for example, that the incumbent is acting illegally to maintain its monopoly. Interleague competition occurs in the output market as well. Typically, competition leads to lower prices and/or higher quality. This is not necessarily true in the case of competition between sports leagues, however, because the expanded demand for players results in a dilution of talent, and consequently may reduce the quality of the resulting games. Suppose the new entrant has the same number of teams and the same number of players per team as the incumbent. Unless the incumbent contracts by merging or folding some teams, the demand for players will double. Many players who were not good enough to be on a team in the incumbent league prior to the entry of the new league will now be able to find a spot on a team in one of the leagues. Thus, a reduction in the incumbent league’s ticket prices or broadcast fees following the entry of a new league may reflect, at least in part, the poorer quality of the league’s product, its games. This chapter focuses on five instances of antitrust litigation involving a newlycreated league and an incumbent league for the same sport: Federal League vs. Major League Baseball, American Football League vs. National Football League, American Basketball Association vs. National Basketball Association, World Hockey Association vs. National Hockey League, and United States Football League vs. National Football League. The chapter concludes with a discussion of an antitrust lawsuit involving leagues in different sports: North American Soccer League vs. National Football League. Federal League vs. Major League Baseball. The National League introduced the ‘reserve clause’ in 1879, thereby binding players to the team that originally acquired the right to contract with them and giving National League teams monopsony power over their players. As one would expect, player salaries fell. This fall was rapidly reversed after the formation of a new league, the American - -

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Association, in 1882. Between 1882 and 1891, the average nominal salary of National League players jumped from $1,375 to $3,500 – or about $63,000 in 1998 dollars. After four American Association teams were absorbed into the National League and five other American Association teams were bought out by the surviving teams, average National League players salaries plunged from $3,500 in 1891 to $2,400 in 1892, a drop of 31%, and to $1,800 in 1893, a further drop of 25%. In 1893, the National League capped player salaries at $2,400, and some teams imposed even lower caps. The decline in player salaries coincided with rising, not falling attendance.73 In 1901, a new rival league appeared – the American League. By successfully luring players from the National League, the American League in 1902 actually had higher attendance (2.2 million) than the National League (1.7 million). The National League attempted to have state courts enforce its reserve clause but the effort failed because those courts did not have jurisdiction for player movements across state lines. Player salaries soared and, during the 1903 season, the two leagues merged and at the end of the season played the first World Series. That season, player salaries dropped roughly 15%. In 1913, the Federal League began play as a minor league.74 The next year the league sought to attract major league players by doing without a reserve clause, thereby giving Federal League players the freedom to move between teams. The Federal League lured a number of star players, although most of the players it lured were past their prime. On the other hand, Federal League teams played in new, state-of-the-art stadiums. The Major League teams responded to the competition from the Federal League by offering higher player salaries and three-year contracts. Between 1913 and 1915, when the Federal League was in existence, player salaries rose 67%, from $3,000 to $5,000. The Federal League filed an antitrust lawsuit against the National League and American League in January 1915 in an attempt to break their reserve clause and thereby aid the Federal League in attracting players from those leagues. After the 1915 season, a deal was reached whereby the American and National leagues would help the Federal League owners who were in debt in exchange for the disbanding of the Federal League and the dropping of the antitrust lawsuit. Teams in all three leagues were struggling financially. In some cases, a Federal League team played in the same city as an American or National league team, and all teams with such direct competition were having financial problems. The owner of the Federal League’s Chicago Whales was allowed to purchase the National League’s Cubs and move them to the Whales’ new ballpark – known today as Wrigley Field. The owner of the Federal League’s St. Louis Terriers was allowed to takeover the American League’s Browns. Harry Sinclair, owner of a Federal League team, sold his players’ contracts and reportedly made a fortune. By 1917, after the buy-out of most Federal League team owners, player salaries had fallen from $5,000 in 1915 to $4,000 in nominal terms (and even smaller in real terms given the inflation of the World War I period). 73 74

The information in this paragraph and the next comes from Kahn (2000). The information in this paragraph and the next comes from Tarantino (2005), except for the player salary figures, which come from Kahn (2000). - -

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The Federal League’s Baltimore Terrapins were denied a Major League team, declined a $50,000 settlement, and filed an antitrust lawsuit not only against the National and American leagues but, among others, three executives of the Federal League. The Terrapins alleged, in the words of the U.S. Supreme Court, that “the defendants destroyed the Federal League by buying up some of the constituent clubs and in one way or another inducing all those clubs except the plaintiff to leave their League, and that the three persons connected with the Federal League and named as defendants, one of them being the President of the League, took part in the conspiracy.”75 The U.S. Supreme Court concluded that “the restrictions by contract that prevented the plaintiff from getting players to break their bargains and the other conduct charged against the defendants were not an interference with commerce among the States.” In other words, the business of baseball is not interstate commerce and thus not subject to federal antitrust laws. Another economic threat to Major League Baseball came from the African American league, which prospered from the 1920s to the early 1940s. After the racial integration of MLB in 1947, the exodus of talent from the African American league led to its demise a few years later.76 As will be discussed further in Chapter 6, numerous economic studies have documented that MLB’s reserve clause had a negative impact on player salaries. For example, Scully (1974) estimates players’ marginal revenue products (MRPs) net of training and capital costs for the 1968 and 1969 seasons and finds that ‘star’ and ‘average’ players received salaries equal to 15% and 20% of their net MRPs, respectively. Medoff (1976) estimates that, during the 1972-74 seasons, ‘star’, ‘average’, and ‘mediocre’ hitters were paid 41%, 36%, and 30% of their MRP, respectively, while the corresponding figures for star, average, and mediocre pitchers were 49%, 51%, and 55%. Sommers and Quinton (1982) examine the 14 most sought-after players who became free agents after the 1976 season and find that the five pitchers were paid, on average, 99% of their MRPs during the 1977 season and the nine hitters were paid 84%, which suggests that non-free agents (i.e., players still bound by the reserve clause) were underpaid. Lehn (1982) compares average real salaries before (1971-76) and after (1977-80) the introduction of free agency and finds that, in the first year of free agency (1977), average real salaries rose 39%, from $51,501 to $76,066, and rose an additional 22%, to $99,876, the next year. The increases then dropped to 2.2% in 1979 and 1.2% in 1980. In addition, Lehn documents that the number of guaranteed years on players’ contracts rose sharply after the introduction of free agency. Raimondo (1983), Hill and Spellman (1983), and Hill (1985) also compare player salaries to their MRPs before and after the introduction of free agency in 1977 and conclude that free agent salaries are much closer to players’ MRPs than are non-free agent salaries. Thus, there is little dispute that, prior to the introduction of free agency, MLB’s reserve clause enabled teams to pay players less than the value of their marginal revenue product, even after adjusting for the training costs which teams invest in their players. 75 76

Federal Base Ball Club of Baltimore v. National League, 259 U.S. 200 (1922). See Fort and Maxcy (2001). - -

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Did the reserve clause have any procompetitive rationale? One possibility is that it maintained competitive balance. Cash-rich teams like the Yankees could not simply outbid other teams for the best players. Since teams were able to trade players, however, a team such as the Yankees could simply acquire the best players by offering the best trades. Therefore, at least in theory, the reserve clause should have no effect on competitive balance in the league – a result known as the “Coase Theorem”, named as Ronald Coase, winner of the 1991 Nobel Prize in Economics. Many economic studies investigate the impact of MLB’s reserve clause on ‘competitive balance’, as proxied by the standard deviation of teams’ winning percentages, changes in the relationship between market size and team winning percentage, and the season-to-season correlation in team winning percentage. Evidence of an increase in competitive balance would include a decrease in the standard deviation of team winning percentages, a smaller (albeit positive) correlation between market size and team winning percentage, and a smaller season-to-season correlation in team winning percentage. If the reserve clause maintained competitive balance, then competitive balance should fall after the introduction of free agency. If the Coase Theorem is correct, the introduction of free agency should have no effect on competitive balance. As will be discussed further in Chapter 6, the studies yield conflicting results. Some studies find little or no impact. For example, Besanko and Simon (1985) compare player movements over the period 1969-81, competitive equality over the period 1970-83, and the relationship between market size and team winning percentage over the period 1970-83; they find no statistically significant change in any of these measures before and after the introduction of free agency. Dolan and Schmidt (1985) examine the period 1969-83 and find no statistically significant change in the standard deviation of team standings and the Gini coefficient for total wins before and after the introduction of free agency; they find that the concentration of team revenue rose significantly in the American League, but not in the National League. Fort and Quirk (1995) compare the standard deviation of winning percentage in the period before (1966-75) and after (1976-85) the introduction of free agency and find no statistically significant change for either the American or National League. Hylan, Lage, and Treglia (1996) examine the movement of free agent and non-free agent pitchers across teams over the period 1961-92 and find that attaining free agent status does not significantly affect the probability of a pitcher changing teams, although pitchers with seven or more years of service are less likely to move to a new team during the free agency era. Cymrot, Dunlevy, and Even (2001) compare the movement of free agent and non-free agent hitters across teams using data on players who played both the 1979 and 1980 season; they document that the impact of the gain from moving on the probability of changing teams is the same for free agents (who pocket the gain) as non-free agents (whose gain is pocketed by the team). On the other hand, some studies do find that competitive balance has been altered by the introduction of free agency – and not necessarily for the worst. For example, Drahozal (1986) examines the movement of players signing guaranteed contracts of five or more years during the period 1977-81 and found no evidence that free agents moved from teams in small cities to ones in large cities. However, over the period 1972-82, excluding expansion teams, the standard deviation of - -

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winning percentage fell in the National League, but rose in the American League, after the introduction of free agency. Likewise, the Spearman correlation coefficient for population and winning percentage fell for the National League and rose in the American League. If the Coase Theorem held, no change should have been detected. Balfour and Porter (1991) examine the period 1961-1989 and find some evidence that the variance of winning percentage fell after the introduction of free agency; they also find that the correlation of winning percentage across seasons fell dramatically after the introduction of free agency, which together suggest that the reserve clause may have hindered, rather than maintained, competitive balance. Butler (1995) examines the period 1946-92 and finds no statistically significant impact of free agency on the standard deviation of team winning percentage within a season, but shows that free agency significantly lowered the season-to-season correlation of team winning percentage. Horowitz (1997) constructs an ‘relative entropy’ measure of competitive balance for the period before (1903-75) and after (1976-95) the introduction of free agency and finds that competitive balance declined in the National League, consistent with the hypothesis that the reserve clause maintained competitive balance, but not in the American League. Depken (1999) calculates a Herfindahl Index based on each team’s percentage of total wins before (1920-76) and after (1977-96) the introduction of free agency and finds that the concentration of wins increased in the American League, as one would expect if the reserve clause maintained competitive balance, but not in the National League. Eckard (2001b) finds that, excluding expansion teams, the variance of team winning percentage falls in the American League between the periods 1961-76 and 1977-92, but rises in the National League; in both leagues, the Herfindahl Index of teams with the highest winning percentage falls, suggesting the reserve clause hindered competitive balance. Thus, the economic evidence suggests that MLB’s reserve clause clearly depressed player salaries. Whether the reserve clause maintained, hindered, or had no effect on, competitive balance is unclear. If the reserve clause had a procompetitive rationale, it is not obvious. American Football League vs. National Football League.77 In 1958, and again in 1959, the son and heir of Texas oilman H.L. Hunt, Lamar Hunt, tried unsuccessfully to obtain an NFL franchise to be located in Dallas. He was also offered a 20% stake in the NFL’s Chicago Cardinals, but declined. Hunt began formulating plans for a new professional football league which he naively believed – by his own later admission – would not be a rival to the NFL. In fact, he sought the NFL’s blessing for the new league. He did not receive it. The American Football League was formed in August 1959 with six teams (Dallas, 77

The discussion in this section is based primarily on the Wikipedia entries for “American Football League” and “AFL-NFL Merger”, the two-part series titled “The AFL: A Football Legacy” posted on the Sports Illustrated website and dated January 22, 2001, and the appeals court decision in American Football League v. National Football League. - -

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Denver, Houston, Los Angeles, Minneapolis, and New York), with two more teams (Buffalo and Boston) added later the same year. Team owners were required to post a $100,000 performance bond and contribute $25,000 of earnest money. The Minneapolis team was owned by Max Winter, who in November 1959 announced that he was leaving the AFL to accept an NFL franchise offer – the Minnesota Vikings. The NFL offered Hunt an NFL expansion franchise in Dallas, which he rejected because he did not think it right to abandon his fellow AFL owners. The NFL awarded an expansion franchise to Dallas in January 1960 which would compete directly with Hunt’s AFL team in Dallas. The Minneapolis franchise formally withdrew from the AFL on January 27, 1960 and three days later the AFL awarded a franchise to Oakland. The AFL filed an antitrust lawsuit against the NFL on June 17, 1960 over the NFL’s awarding of an expansion franchise to Dallas and alleging the NFL interfered with the AFL’s attempt to obtain a television contract. Its first contract with ABC averaged only $2,125,000 a year for the entire league. The AFL began play in September 1960, drawing about 10,000-20,000 fans per game, whereas NFL games regularly had attendance in excess of 50,000 fans. Among the innovations introduced by the AFL were the two-point conversion, putting the official time on the scoreboard clock, putting players’ names on their jerseys, network television broadcasting of league games, and the sharing of gate and television revenues by home and visiting teams. In 1962, after a two-month trial, a federal court ruled against the AFL. The AFL appealed. In September 1963, the Appeals Court for the Fourth Circuit upheld the lower court’s decision.78 The district court had found that the two leagues competed in a national market for outstanding players and coaches, a national market for television coverage, and 31 metropolitan areas (cities with a population of at least 700,000 persons according to the 1960 census) for spectators. The AFL had argued that the relevant market for spectators should consist only of the 17 cities where the NFL either had a franchise or was seriously considering adding one in 1959. The appeals court rejected the AFL’s proposed relevant market: It is not unlike the choice a chain store company makes when it selects a particular corner lot as the location of a new store. It preempts that lot when it acquires it for that purpose, but, as long as there are other desirable locations for similar stores in a much broader area, it cannot be said to have monopolized the area, or, in a legal sense, the lot or its immediate vicinity. The National League was first upon the scene… It now has franchises in fourteen cities, some of which the district court found capable of supporting more than one professional football team. Obviously, the American League was of that opinion, for it placed teams in New York, Los Angeles, and the San Francisco-Oakland area, where National, at the 78

American Football League v. National Football League, 323 F.2d 124 (4th Cir. 1963). - -

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time, had well established teams. Most of the other cities in which each league operates, however, are incapable of supporting more than one professional football team. In such a city, a professional football team, once located there, enjoys a natural monopoly, whether it be affiliated with the National or American League, but the fact that National had teams located in such cities before American’s advent does not mean that National had the power to prevent or impede the formation of a new league, or that National’s closed cities should be included in the relevant market if American’s closed cities are to be excluded… Though there may be in the nation no more than some thirty desirable sites for the location of professional football teams, those sites, scattered throughout the United States, do not constitute the relevant market. The relevant market is nationwide, though the fact that there are a limited number of desirable sites for team locations bears upon the question of National’s power to monopolize the national market. The district court had observed that the NFL had franchises in only 11 of the 31 apparently desirable sites, leaving 20 entirely open to the AFL – and several sites were believed to be sufficiently large to support a team from each league. The appeals court rejected the AFL’s argument that the NFL had grabbed the most desirable sites: There is no basis in antitrust laws for a contention that American, whose Boston, Buffalo, Houston, Denver and San Diego teams enjoy natural monopolies, has a right to complain that National does not surrender to it other natural monopoly locations so that they too may be enjoyed by American rather than by National. When one has acquired a natural monopoly by means which are neither exclusionary, unfair, nor predatory, he is not disempowered to defend his position fairly. The AFL also argued that the NFL’s expansion into Minneapolis and Dallas constituted an attempt to monopolize. The court rejected the argument, noting that the NFL had discussed expansion prior to the creation of the AFL. For example, in early 1956, the owner of the NFL’s Chicago Bears, George Halas, predicted that the NFL would expand from 12 to 16 teams during the period 196065. The appeals court concluded “that the District Court properly held that the plaintiffs have shown no monopolization by the National League, or its owners, of the relevant market, and no attempt or conspiracy by them, or any of them, to monopolize it or any part of it.” In May 1963, having concluded that his Dallas team could not compete successfully with the NFL’s Dallas Cowboys, Hunt moved his AFL franchise to Kansas City and renamed it the Kansas City Chiefs. On January 29, 1964, the AFL signed a five-year, $36 million deal to have its games broadcast on NBC beginning with the 1965 season. As a result, the AFL could better compete with the NFL for talent. Sometimes teams from the two leagues drafted the same collegiate player; sometimes the player chose to sign with the AFL team (e.g., Joe - -

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Namath), sometimes the player signed with the NFL team (e.g., Gale Sayers). The competition for player talent increased further when Oakland Raiders general manager Al Davis became AFL commissioner in April 1966. Davis sought to actively recruit players already on NFL rosters. Meanwhile in April 1966, Hunt and Dallas Cowboy owner Tex Schramm were meeting secretly in Dallas to discuss concerns over soaring player salaries and the practice of player poaching. By the end of May, they had completed the groundwork for a merger of the two leagues. The merger was announced on June 8, 1966, the terms of which included the full merger of the two leagues by 1970 and an agreement by the AFL to pay indemnities of $18 million to the NFL over 20 years due to the potential harm to the NFL’s San Francisco Forty-Niners and New York Giants from having to compete with the AFL’s Oakland Raiders and New York Jets, respectively. Davis was so furious he resigned as AFL commissioner on July 25 rather than serve until completion of the merger. Davis opposed the merger because he believed that in a competition between the AFL and NFL, the AFL would prevail. As discussed in Chapter 3, despite now being an NFL owner himself, Davis has not been reluctant to oppose NFL rules and policies which he believes harm his Oakland Raiders. The NFL obtained an antitrust exemption from Congress to allow the merger to occur. An NFL expansion franchise was awarded to New Orleans, the Saints, allegedly because of the support given by several Louisiana politicians to the legislation. Testifying before a Congressional hearing in support of the legislation, NFL Commissioner Pete Rozelle promised that, if the merger was allowed, none of the existing franchises in either league would relocate from their current city. Since then, many of these franchises have, in fact, relocated, including the Oakland Raiders (which moved to Los Angeles in 1982 and back to Oakland in 1995), the Baltimore Colts (which moved to Indianapolis in 1984), the St. Louis Cardinals (which moved to Arizona in 1988), the Los Angeles Rams (which moved to St. Louis in 1995), the Cleveland Browns (which moved to Baltimore in 1996), and the Houston Oilers (which moved temporarily to Memphis in 1997 and then permanently to Nashville in 1998). American Basketball Association vs. National Basketball Association.79 The American Basketball Association was formed in 1967 by a group of investors unwilling to pay the NBA’s high price for a new franchise. The ABA placed teams in cities believed to have the potential fan base to support an NBA franchise but which had not received one. The backup plan of the ABA team owners was to merge with the NBA. The ABA played without a television contract until the 1969-70 season when its All Star Game and several playoff games aired on CBS.

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The discussion in this section is based primarily on an article by Pete Madzelan titled “The ABA Changed the Game: Will It Change It Again” which appeared on the MLN Sports Zone website and the description of the ABA v. NBA lawsuit appearing on the website of Zelle Hofmann Voelbel Mason & Gette. - -

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The ABA sought to make professional basketball more exciting, promoting superstars and introducing innovations such as the 3-point shot and a red, white, and blue basketball. It also did not follow the NBA’s lead in adopting a ‘four-year rule’ whereby players had to be four years removed from high school before they could be drafted by an NBA team; the ABA recruited college underclassmen. The ABA also signed a number of NBA players. A U.S. district court found the NBA’s four-year rule to be a restraint of trade in violation of the Sherman Act and the NBA amended its rule to allow the drafting of underclassmen showing financial hardship. In 1974, the ABA allowed the signing of high school players, once again forcing the NBA to amend its own draft rules. The two leagues competed for talent, to the benefit of the players but to the detriment of some of the financially shaky ABA teams. In 1969, the ABA brought an antitrust lawsuit against the NBA alleging that it attempted to eliminate competition and restrain trade via the control or monopolization of players, facilities, and television coverage. The two leagues reached a tentative merger agreement in April 1970, which was unanimously approved by the ABA team owners, but an antitrust lawsuit brought by the NBA Players Association sought to block the merger. A federal court issued a restraining order preventing the merger. In 1971, the two leagues agreed to petition Congress for an antitrust exemption so that they could merge. The ABA brought another lawsuit against the NBA in 1974, believing that the NBA was not honoring the agreement and continuing to restrain trade. A few weeks prior to their scheduled trial in 1976, the two leagues reached a settlement in which four ABA teams (i.e., the Denver Nuggets, Indiana Pacers, San Antonio Spurs, and New York Nets) would join the NBA. Each of the four franchises paid $3.2 million to join the NBA, agreed not to receive any television revenue for the first three years, and agreed not to participate in the 1976 college draft. Between 1967 and 1977, the average player salary in the NBA rose 615%, rising from $20,000 to $143,000; in comparison, player salaries rose 402% in the NHL (rising from $19,133 to $96,000 in the face of competition from the World Hockey Association), 302% in Major League Baseball (rising from $19,000 to $76,349 in the face of an adverse arbitration ruling resulting in the introduction of free agency), and 121% in the NFL (rising from $25,000 to $55,288).80 World Hockey Association vs. National Hockey League. The World Hockey Association was formed in 1971 and played its first games in the 1972-73 season. Prior to its formation, the NHL was the only major professional hockey league in North America. The three other professional hockey leagues in existence in North America at that time were the American Hockey League (AHL), the Western Hockey League (WHL), and the Central Hockey League (CHL), with the latter tending to have less talented players than the other two leagues. Among the amateur or semi-professional hockey leagues in existence were the International Hockey League and the Eastern Hockey League. The NHL required its member teams to have an affiliation with at least one ‘player development team’ and, in 80

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fact, 16 of the 24 professional minor league teams had some form of affiliation with an NHL team – and all teams in the Central Hockey League were owned by NHL teams. Unlike the NFL and NBA which benefit from the talent developed by college football and basketball programs, the NHL had to invest millions of dollars in the amateur and minor leagues to develop potential major league-caliber players. The NHL has had a reserve clause in its player contracts since at least 1952. In order for NHL teams to invest in young players, they allegedly needed assurance that they would have the right to sign the players they developed. However, player contracts in the AHL, WHL, and CHL also contained reserve clauses. On August 18, 1972, the WHA filed an antitrust lawsuit against the NHL alleging that the NHL’s reserve clause violated both Sections 1 and 2 of the Sherman Act. The district court issued its ruling on November 8, 1972. 81 Given that the WHA was seeking a preliminary injunction against the NHL’s enforcement of its reserve clause, the district court refrained from ruling whether the reserve clause violated Section 1; however, the district court agreed with the plaintiffs on the Section 2 charge and therefore granted a preliminary injunction against the NHL. The district court rejected the NHL’s argument that it needed the reserve clause to protect competitive balance, noting that in the past 20 years, Montreal had won the Stanley Cup 12 times, Toronto four times, Detroit three times, and Chicago once. Thus, there did not appear to be much competitive balance even with the reserve clause. The district court also rejected the NHL’s argument that the reserve clause is protected by the labor antitrust exemption, noting that (1) NHL players have sought to eliminate the reserve clause but the NHL has not granted any type of concession on the issue and (2) even if the reserve clause was the product of a collective bargaining agreement, a third-party such as a rival league would nevertheless have the right to challenge the reserve clause on antitrust grounds. The relevant market was found to be major league professional hockey and the relevant geographic market was the United States and Canada. In particular, using the criteria set forth in International Boxing Club of New York v. United States, the court observed that major league hockey is quite different from minor league hockey in terms of “higher ticket prices, increased television revenues, and greater players’ skill and salaries.” Of the 158 players signed by the WHA as of July 21, 1972 to play the 1972-73 season, 111 (70%) were subject to the reserve clause in their contracts with the NHL, AHL, WHL, and CHL for the 1971-72 season. As of November 1972, more than 200 (58%) of the 345 players signed by the WHA for the 1972-73 season were subject to the reserve clause in their contract with the NHL, AHL, WHL, and CHL for the 1971-72 season. The district court found:

81

Philadelphia World Hockey Club v. Philadelphia Hockey Club, 351 F. Supp. 462 (E.D. Pa. 1972). - -

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The similarities of phraseology and basic incorporation of Clause 17 in the Standard Player’s Contract of the AHL, CHL, WHL, and NHL is the result of a common agreement, mutual understanding, and conspiracy by the NHL and its affiliated minor leagues to maintain a monopolistic position so strong that the NHL precludes effective competition by the entry of another major professional hockey league. Through the totality of many interlocking arrangements, including the Joint Affiliation Agreement, the Pro-Amateur Agreement, and Clause 17 in the Standard Player’s Contract, the NHL perpetuates a conspiracy and combination with the intent to monopolize and which monopolizes major league professional hockey. These concerted efforts were done not solely to maintain a high level of professional competition among the NHL teams, but rather the major reason was the desire to preclude others from ever having immediate access to the reservoir of players who could become part of another major professional hockey league which could be a material and viable competitor to the NHL. The WHA folded after the 1978 season and four of its teams (Edmonton, Hartford, Quebec City, and Winnipeg) were absorbed into the NHL. Between 1970 and 1977, the average NHL salary jumped 284% (from $25,000 to $96,000); in comparison, NBA salaries rose 257.5% (from $40,000 to $143,000), MLB salaries rose 163% (from $29,000 to $76,349), and NFL salaries rose 60% (from $34,600 to $55,288).82 Jones and Walsh (1987) estimate NHL player salaries for the 1977-78 season and find evidence that some free agents were “overpaid” – their salary exceeded their gross marginal revenue product (GMRP). In particular, of the 14 players appearing in one of their tables, eight were paid more than $5,000 in excess of their GMRP, four were paid within $5,000 of their GMRP, and only two were ‘underpaid’ by more than $5,000. Moreover, separate analyses of player salaries and marginal revenue products for forwards and defensemen shows that, on average, no category of player was being paid less than his net marginal revenue product. Jones and Walsh argue that “the activities of the WHA were primarily responsible for the increased NHL salaries in the 1970s and brought an end to any presumption of persistent player exploitation.” (p. 96) They also observe that, “if press reports are to be believed, … the NHL has not been able to use its reestablished monopolistic position to force salaries to their former levels.” (p. 96) Thus, they conclude: “Obviously, institutional changes, partially prompted by WHA entry – antitrust rulings, the strength of the Players Association, and so on – have dulled the NHL’s monopsony power.” (p. 96) United States Football League vs. National Football League. The United States Football League was founded in May 1982 as a 12-team league to play professional football in the spring, whereas the NFL plays its games in the fall and winter. The USFL began play in March 1983. It had network and cable 82

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television contracts with ABC and ESPN. The USFL made the fateful decision to switch to a fall season in direct competition with the NFL beginning with the 1986 season. The broadcast and cable television networks, which were interested in showing spring football, were not interested in broadcasting non-NFL professional football games during the NFL season, especially given the fact that they were already under contract to broadcast the NFL games. Without a television contract for the 1986 season, the USFL found itself in a hopeless situation. In three seasons, the USFL lost approximately $200 million. It played its last game in July 1985. In October 1984, the USFL filed an antitrust lawsuit against the NFL seeking damages totaling $1.701 billion and appropriate injunctive relief. The USFL alleged, for example, that the NFL had (1) prevented it from obtaining a television contract for the fall 1986 season, (2) attempted to co-opt some USFL team owners by offering NFL franchises to Donald Trump, owner of the USFL’s New Jersey Generals, and Alfred Taubman, owner of the USFL’s Michigan Panthers (Taubman denied being offered an NFL franchise), (3) holding a supplemental draft for players still under contract with an USFL team, and (4) expanding NFL team rosters from 45 to 49 players. The case went to a jury trial in 1986. The jury found that the relevant market was major league professional football in the United States and that the NFL had willfully acquired or maintained monopoly power in that market. Furthermore, the jury found that the USFL had been injured by the NFL’s unlawful monopolization. Nevertheless, the jury awarded the USFL only $1 in damages, which were to be trebled – or a total damage award of $3. Following the jury’s verdict, the USFL abandoned plans to play the 1986 season and folded. The jury did not find that the defendants had violated Section 2 of the Sherman Act by attempting or conspiring to monopolize a relevant market. Although the jury found that the defendants had participated in a contract, combination, or conspiracy to restrain trade, the jury did not find it an unreasonable restraint of trade in violation of Section 1 of the Sherman Act. Nor did the jury find the NFL’s contracts with the three television networks for the right to broadcast NFL games to be an unreasonable restraint of trade in violation of Section 1. The jury also rejected the USFL’s ‘essential facilities’ claim, finding that the NFL did not have the ability to deny the USFL access to a national television contract. The USFL moved for a judgment notwithstanding the verdict on each of the antitrust counts rejected by the jury and sought a new trial that would be limited to the issue of damages. The NFL filed a motion regarding the jury’s determination that the NFL had unlawfully monopolized professional football in the United States. The district court rejected both motions.83 The USFL appealed. On March 10, 1988, the appeals court affirmed the jury’s verdict and held that “the anti-competitive activities on which the jury based its verdict did not justify a large damages verdict or sweeping injunctive relief.”84 The USFL was awarded treble damages totaling $3. 83 84

USFL v. NFL, 644 F. Supp. 1040 (S.D. NY 1986). USFL v. NFL, 842 F.2d 1335 (2nd Cir. 1988). - -

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The appeals court observed that “the USFL candidly admits that ‘at the heart of this case’ are its claims that the NFL, by contracting with the three major networks and by acting coercively toward them, prevented the USFL from acquiring a network television contract indispensable to its survival”; these claims had been expressly rejected by the jury. The appeals court ruled that the jury “was clearly entitled by the evidence to find that the NFL’s fall contracts with the three networks were not an anticompetitive barrier to the USFL’s bidding against the NFL to acquire a network contract.” It also noted that “there was ample evidence that the USFL failed because it did not make the painstaking investment and patient efforts that bring credibility, stability and public recognition to a sports league.” The appeals court added: In particular, there was evidence that the USFL abandoned its original strategy of patiently building up fan loyalty and public recognition by playing in the spring. The original plan to contain costs by adherence to team salary guidelines was discarded from the start. Faced with rising costs and some new team owners impatient for immediate parity with the NFL, the idea of spring play itself was abandoned even though network and cable contracts were available. Plans for a fall season were therefore announced, thereby making 1985 spring play a ‘lame-duck’ season. These actions were taken in the hope of forcing a merger with the NFL through the threat of competition and this litigation. The merger strategy, however, required that USFL franchises move out of large television markets and into likely NFL expansion cities. Because these moves further eroded fan loyalty and reduced the value of USFL games to television, the USFL thereby ended by its own hand any chance of a network contract. In other words, it was the USFL’s own actions that led to its demise, not the actions – lawful or unlawful – of the NFL. The appeals court rejected the USFL’s appeal: Notwithstanding the jury’s evident conclusions that the USFL’s product was not appealing largely for reasons of the USFL’s own doing and that the networks chose freely not to purchase it, the USFL asks us to grant sweeping injunctive relief that will reward its impatience and selfdestructive conduct with a fall network contract. It thus seeks through court decree the success it failed to achieve among football fans. Absent a showing of some unlawful harm to competition, we cannot prevent a network from showing NFL games, in the hope that the network and fans will turn to the USFL. The Sherman Act does not outlaw an industry structure simply because it prevents competitors from achieving immediate parity. This is particularly so in the case of major-league professional football because Congress authorized a merger of the two leagues existing in 1966 and thus created the industry structure in question.

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Yet, despite the laughably small damages award, the competition between the USFL and NFL produced a clear winner – the players. Between the years 1977 and 1982, the real (inflation-adjusted) NFL salary grew an average of 4% annually. The average annual increase surged to 20% during the period 1982-85 when the NFL had to compete with the USFL for players. After the demise of the USFL, the increase between the years 1985 and 1989 plunged to 5%.85 As Kahn (2000) explains, changes in NFL attendance and television revenues cannot account for these changes in player salaries. North American Soccer League vs. National Football League. The North American Soccer League (NASL) was formed by the merger of two pre-existing soccer leagues in 1968. The NASL’s organizer was Lamar Hunt, the founder of the American Football League and owner of the Kansas City Chiefs. Hunt owned the NASL’s Dallas franchise, and later the Tampa Bay franchise. In 1975, the wife of the NFL’s Miami Dolphins owner Joseph Robbie became majority owner of the NASL’s Fort Lauderdale franchise and Joseph Robbie operated the soccer team. The seasons of the NFL and NASL somewhat overlapped and teams from the two leagues often used the same stadiums. Some fans allegedly switched their interest from the NFL to the NASL. The two leagues competed in the sale of national broadcast rights and for national advertising revenue. NFL and NASL teams located in the same city competed for live attendance, local television audiences, and local advertising revenue. The NFL had a policy against team owners holding a controlling stake in a team of a competing league since the 1950s, but did not put the policy into writing until January 1967 – when 12 owners of (pre-merger) NFL and AFL teams were involved in the formation of the predecessors to the NASL. In 1972, NFL owners passed a resolution stating that NFL owners were not to acquire operating control of a team in a competing league and any owner who possessed such an interest should make a ‘best effort’ to dispose of it. The NFL’s Philadelphia Eagles were unprofitable in each year from 1969 to 1974 and again in both 1976 and 1977. Around the same time, the NASL’s Philadelphia Atoms were leading the league in attendance. The Eagles’ owner Leonard Tose denounced Hunt for saying that soccer was the sport of the future. Tose suggested that fans have only so many dollars to spend on sports entertainment so any dollar they spend on a sport other than football may be one less dollar spent on football. In other words, the NASL’s Philadelphia Atoms were taking revenue from the NFL’s Philadelphia Eagles. Max Winter, owner of the NFL’s Minnesota Vikings, had a similar concern about the NASL’s Minnesota Kicks. In 1978, NFL owners proposed an amendment that would have prevented all majority owners, certain minority owners, officers, and directors of NFL teams (and certain relatives of such persons) from owning any interest in a ‘major team sport’ franchise. In effect, the amendment would have required both Hunt and 85

The information in this paragraph comes from Kahn (2000). - -

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Robbie to divest their soccer interests if they wished to continue to own an NFL team. On September 28, 1978, the NASL went to court to prevent the adoption of the proposed amendment. The court issued a preliminary injunction on February 21, 1979, concluding that the NASL would be irreparably injured by the amendment; the NFL did not appeal the injunction. After a lengthy trial, the court ruled that the purpose and impact of the NFL’s cross-ownership ban was to suppress competition from the NASL but, because the NFL and its member teams had to be regarded as a ‘single economic entity’ in competition with the NASL, Section 1 of the Sherman Act did not apply. The NASL appealed the decision. On January 27, 1982, the appeals court rejected the NFL’s ‘single entity’ defense, noting that courts have repeatedly rejected the theory that, by acting as a ‘joint venture’, a combination of firms can gain exemption from Section 1 of the Sherman Act:86 The characterization of NFL as a single economic entity does not exempt from the Sherman Act an agreement between its members to restrain competition. To tolerate such a loophole would permit league members to escape antitrust responsibility for any restraint entered into by them that would benefit their league or enhance their ability to compete even though the benefit would be outweighed by its anticompetitive effects. Moreover, the restraint might be one adopted more for the protection of individual league members from competition than to help the league. For instance, the cross-ownership ban in the present case is not aimed merely at protecting the NFL as a league or “single economic entity” from competition from the NASL as a league. Its objective also is to shield certain individual NFL member teams as discrete economic entities from competition in their respective home territories on the part of individual NASL teams that are gaining economic strength in those localities, threatening the revenues of such individual teams as the NFL Philadelphia Eagles, owned by Leonard Tose, because of competition by the NASL’s Philadelphia team, and the revenues of the NFL Minnesota Vikings because of competition by the successful NASL Minnesota Kicks. The NFL members have combined to protect and restrain not only leagues but individual teams. The sound and more just procedure is to judge the legality of such restraints according to well-recognized standards of our antitrust laws rather than permit their exemption on the ground that since they in some measure strengthen the league competitively as a “single economic entity,” the combination’s anticompetitive effects must be disregarded. The appeals court rejected the NASL’s claim that the NFL’s crossownership ban should be condemned as a per se violation of Section 1 of the Sherman Act, deciding instead to analyze the ban under the rule of reason. The NFL defended the ban as being pro-competitive because it was necessary for NFL owners to compete efficiently in the professional sports league market, but the 86

NASL v. NFL, 670 F.2d 1249 (2nd Cir. 1982). - -

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appeals court noted that “the voluminous trial record discloses that the NFL’s cross-ownership ban would foreclose NASL’s teams from continued enjoyment of and access to a significant segment of the market supply of sports capital and skill, thereby restraining at least some NASL teams from competing effectively against NFL teams for fan support and TV revenues” and any resulting restraint “would benefit not merely the NFL as a league but those NFL teams that would be otherwise weakened individually and disproportionately (as compared with other NFL teams) by competing NASL teams.” The NFL argued that there is no market (or ‘submarket’) for sports capital and skill – any difficulty the NASL or its teams had in obtaining such capital and skill would be due to the poor financial outlook of the franchises and not because of any inability to attract capital and skill due to the ban. The NASL argued that a market for sports capital and skill exists and is limited to existing or prospective major sports team owners. The district court had decided that a sports capital and skill market exists, but it is neither as narrow as the NASL, nor as broad as the NFL, asserts. The appeals court found that a sports capital and skill market exists and is not limited to existing or prospective sports team owners, but such owners constitute a significant portion of the market. The appeals court noted that the NFL does not believe its own argument that all sources of capital are fungible substitutes because, if that were true, the NFL would not have gone through the trouble of adopting the cross-ownership ban. Thus, given that the ban clearly restrains competition in this market, the question is whether its anticompetitive effect is outweighed by its pro-competitive effect. The NFL argued that the ban was pro-competitive because it (1) assured the undivided loyalty of NFL owners in competing with the NASL in the sale of tickets and broadcasting rights, (2) prevented disclosure of confidential information to NASL competitors, (3) protected the personnel and resources of NFL owners from conflicting or excessive demands, (4) prevented the dilution of goodwill developed by the NFL, (5) avoided disputes between NFL cross-owners and other NFL owners, and (6) prevented interleague collusion in violation of the antitrust laws. The appeals court ruled that the first two pro-competitive rationales can be achieved by less-restrictive means, the third is unsupported since many NFL owners have other business interests, and the other pro-competitive effects are outweighed by the ban’s anticompetitive effect. Thus, the Appeal Court ruled in favor of a permanent injunction prohibiting the NFL’s cross-ownership ban. The Philadelphia Eagles and Minnesota Vikings were concerned that they were being hurt by competition from NASL teams. There do not appear to any economic studies which test whether this in fact was the case. In general, the evidence from North American sports leagues provides little support for such a concern for the NFL and NBA, although there may be some effect on MLB and NHL live attendance. Table 4.1 summarizes the economic literature. Zuber and Gandar (1988) and Noll (1974) report no statistically significant effect on live attendance at NFL games from the presence of other professional sports teams in the same city. Burdekin and Idson (1991), Kahn and Sherer (1988), and Noll (1974) all report no statistically significant effect on live attendance at NBA games from the presence of other professional sports teams in the same city. On the other hand, Noll (1974) estimates that average NHL per game live attendance is 2,800 lower in the ‘average’ city with 3 other professional sports teams and that - -

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inter-sport competition reduces MLB season live attendance by 250,000 (21%) in the ‘average’ baseball city (3.5 million metropolitan population and 3 other professional sports teams). Demmert (1973) finds that the presence of a team with a winning record in another sport raises the season attendance of the MLB in the same city by 40,000, but reduces per capita attendance by 1.3 attendees. Mixed results are also reported in England. Baimbridge, Cameron, and Dawson (1995) find no statistically significant effect on First Division rugby match attendance from other major sporting activities in the same area, but Baimbridge, Cameron, and Dawson (1996) find that the presence of an alternative sporting activity reduces English Premier soccer league match attendance by 28%. Table 4.1 The Impact of Teams in Other Sports Leagues on Live Attendance Attendance Measure

Measure of Teams in Other Sports Leagues

Major League team season data for the 1970 and 1971 seasons.

Official paid admissions.

Number of other professional sports teams (baseball, basketball, football, hockey) located in the city.

Baseball attendance in the average baseball city (3.5 million metropolitan population and 3 other professional sports teams) is reduced by 250,000 (21%) due to intersport competition.

Demmert (1973)

Major League team season data for 16 teams over the period 1951-69.

Team season attendance.

Sum of one plus winning percentage of all non-baseball professional sports teams within the same locality (if any).

Presence of one team with .500 record raises season attendance by 40,000 attendees, but lowers season attendance per capita by 1.3 attendees.

Burdekin & Idson (1991)

NBA team season data from the 1980-81 to the 1985-86 season.

Team season attendance.

Total number of other professional sports franchises (including other NBA teams) in home SMSA.

Not statistically significant.

Kahn & Sherer (1988)

NBA team season data from the 1980-81 to the 1985-86 season.

Team season attendance.

Number of other major league sports franchises in the locality.

Not statistically significant.

Noll (1974)

NBA and ABA team season data for the

Average attendance per game.

Number of other professional sports teams (baseball,

Not statistically significant.

Sport

Study

Data

MLB

Noll (1974)

NBA

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Estimate

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Table 4.1 The Impact of Teams in Other Sports Leagues on Live Attendance Attendance Measure

Measure of Teams in Other Sports Leagues basketball, football, hockey) located in the city.

NFL games in the 1983 and 1984 seasons.

Game-day no-shows as a percentage of stadium capacity.

Dummy variable denotes another professional sports event (baseball, basketball, football, hockey) on the same day in the same city.

Not statistically significant.

Noll (1974)

NFL team season data for the 1970 season.

Official paid admissions.

Number of other professional sports teams (baseball, basketball, football, hockey) located in the city.

Not statistically significant.

NHL & WHA

Noll (1974)

NHL and WHA team season data for the 1972-73 season for games played up to Feb. 15, 1973.

Average attendance per game.

Number of other professional sports teams (baseball, basketball, football, hockey) located in the city.

2,800 fewer attendees per hockey game in average city with 3 other professional sports teams.

Rugby (England)

Baimbridge, Cameron & Dawson (1995)

First Division matches in the 1993-94 season.

Match attendance.

Number of other major sporting activities in the area.

Not statistically significant.

Soccer (England)

Baimbridge, Cameron & Dawson (1996)

English Premier League matches in the 1993-94 season.

Match attendance.

Number of other major winter sporting activities (rugby league, rugby union, speedway, Endsleigh Football League teams) within the team’s catchment area.

Presence of an alternative sporting activity reduces attendance by 28%.

Sport

Study

Data 1969-70 and 1970-71 seasons.

NFL

Zuber & Gandar (1988)

Estimate

There is also some evidence that television viewership of NBA and NCAA football games is reduced by the presence of teams in other sports leagues, particularly if those other teams are competing in playoff (as opposed to regular season) games. Table 4.2 summarizes these studies. Kanazawa and Funk (2001) analyze Nielsen television viewership ratings for local non-cable NBA games in the second half of the 1996-97 season and find that each additional professional - -

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franchise (MLB, NBA, NFL, NHL) in the viewing market reduces the Nielsen rating by between 0.50 and 0.68 points in their Generalized Least Squares model (the effect is not statistically significant in the Random Effects model). Hausman and Leonard (1997) analyze Nielsen ratings for NBA games broadcast on NBC from the 1990-91 through the 1992-93 season and find that the simultaneous broadcast of a NCAA basketball tournament game significantly reduces the Nielsen rating of the NBA game, but the simultaneous broadcast of a NCAA basketball regular season game does not. Pacey and Wickham (1985) examine nationally televised NCAA football games during the period 1976-81 and find that the simultaneous broadcast of a MLB World Series game lowers the Nielsen rating of the NCAA football game by 1.9 points, but the total number of hours of NFL and MLB games televised during the week does not. Table 4.2 The Impact of Teams in Other Sports Leagues on Television Viewership

Sport

Study

Data

Television Viewership Measure

NBA

Kanazawa & Funk (2001)

NBA games in the second half of the 1996-97 season.

Nielsen ratings for local noncable games.

Number of major professional sports franchises (i.e., baseball, basketball, football, hockey) in the viewing market.

Each additional professional franchise reduces the Nielsen rating by 0.50-0.68 points (Generalized Least Squares model); not statistically significant in Random Effects model.

Hausman & Leonard (1997)

NBA games broadcast on NBC from the 1990-91 through the 1992-93 season.

Nielsen ratings.

Dummy variable denotes games played while an NCAA basketball tournament game is being televised.

Simultaneous broadcast of NCAA basketball tournament game significantly reduces Nielsen rating of the NBA game.

Dummy variable denotes games played while an NCAA regular season basketball game is being televised.

Not statistically significant.

Number of hours of professional football and baseball televised during the week.

Not statistically significant.

Dummy variable denotes games played while a World Series baseball game is being televised.

Simultaneous broadcast of a World Series game lowers the Nielsen rating of the college football game by 1.9 points.

NCAA Football

Pacey & Wickham (1985)

Nationally televised games during the period 1976-81.

Nielsen ratings.

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Measure of Teams in Other Sports Leagues

Estimate

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In summary, the formation of a rival sports league tends to be good news for players – their salaries invariably rise. Sports leagues have attempted to ‘tie-up’ their players with a reserve clause, thereby hindering a rival league’s access to established players. Sports leagues contend that the reserve clause has a procompetitive rationale – it promotes competitive balance. Economic studies, however, have – at best – produced conflicting evidence on the impact of the reserve clause on competitive balance. Although rival leagues have successfully challenged some restraints on antitrust grounds, eventually the rival league has generally either folded and its teams disappeared, or it has merged in whole – or in part – with the incumbent league. In either case, player salaries suffer when the competition between leagues for players disappears. Competition between leagues in different sports would not be expected to significantly raise player salaries, except for the relatively rare individual who excels at more than one professional sport, such as Bo Jackson who played in both NFL and MLB games. Cross-ownership bans have pro-competitive effects, such as aligning the incentives of owners, but those pro-competitive benefits have been found by courts to be either outweighed by their anticompetitive effect or achievable by less restrictive means.

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Chapter 5 Sports Leagues vs. Prospective Teams and Owners

Sports leagues decide which teams will be members and who can own them. Given the instability of joint ventures discussed in Chapter 3, this should come as no surprise. Sports league members have to cooperate, at least to some extent, in order to produce their product. Just because a team from a rival league, say, is of a quality comparable to that of teams in the incumbent league does not mean that the incumbent will necessarily admit the team into the league – just as an automotive joint venture between General Motors and Toyota would not necessarily admit Ford into the joint venture if it made such a request. The costs of admitting a particular new member may simply not be worth the cost. On the other hand, by restricting membership, a sports league arguably raises the market price of its product. If more teams were admitted into the league, the supply of tickets to league games would rise, which would tend to have a negative effect on ticket prices. Sports leagues also have an interest in who owns the member teams. Once again, the league needs cooperation among its members. A prospective owner who is not expected to be a good joint venture partner will not be approved. For example, sports leagues have an interest in ensuring that their games are viewed as honest and fair. Therefore, a league may not approve the sale of a member team, for example, to someone with connections to gambling or organized crime. (Interestingly, the Women’s National Basketball Association approved the ownership of one of its teams by a casino.) This chapter focuses on attempts by prospective teams to gain admittance into a major sports league and by prospective (or current minority) owners to acquire control of a professional sports franchise.87 One tactic has been to file an antitrust lawsuit against the league if admittance is denied. These lawsuits have generally not succeeded.

87

For an interesting case involving a prospective team owner who allegedly failed to obtain an AFL expansion franchise (this was prior to the AFL-NFL merger) because of a restrictive covenant between the NFL’s Washington Redskins and RFK Stadium, where the Redskins played, see Hecht v. Pro-Football. The restrictive covenant prevented any team other than the Redskins from playing professional football at RFK and thus Hecht was unable to obtain a stadium lease for the expansion team he hoped to receive. Hecht sued the Redskins and RFK Stadium, arguing that RFK was an ‘essential facility’ for the hosting of professional football games in Washington, D.C., and the restrictive covenant was a restraint of trade. Plaintiffs and Defendants agreed that the relevant product market was the business of professional football, but disagreed on the geographic market. Plaintiffs contended it was limited to Washington, D.C.; Defendants contended it was national in scope. The district court essentially sided with the Defendants’ definition and the jury found in favor of the Defendants. The appeals court, however, ruled that the geographic market was only Washington, D.C. and therefore ordered a new trial. - -

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Prospective Teams Seeking Admittance Into a Closed League. There are numerous reasons why a sports league will want to control who can become a member, as the discussion in Chapter 3 on the instability of joint ventures shows. The refusal to add a new member may harm the prospective member seeking to be admitted, but it does not harm consumers. There is no reduction in competition when a prospective member is refused admission – the prospective member was seeking to share in the league’s profits, not compete with the league. This distinction is crucial for understanding why sports leagues’ refusals to admit new members were not found to be a violation of the antitrust laws in Mid-South Grizzlies v. NFL and Seattle Totems v. NHL. Mid-South Grizzlies v. NFL.88 The World Football League (WFL) played its first season in 1974 but folded halfway through the 1975 season. The WFL’s rules differed from those of the NFL in a number of respects. For example, a touchdown was worth 7 points and an ‘action’ point (as opposed to an ‘extra’ point) could only be scored by running or passing – not a kick). One of the WFL’s teams was the Memphis Southmen, which had made a splash by signing three players from the NFL’s Miami Dolphins – running backs Larry Csonka and Jim Kiick and wide receiver Paul Warfield. The Southmen finished the 1974 season in first place in its division with a record of 17-3, but lost in the playoff semi-finals. After the league folded, the team changed its name to the Memphis Grizzlies and applied for admission to the NFL. The NFL’s Constitution and Bylaws stated that a new league member could only be added to the ‘home territory’ of a current member by the unanimous consent of league members. A prospective league member who would not encroach on the home territory of a current member would need the approval of at least 20 NFL members or three-fourths of the NFL members, whichever was greater. The NFL did not have a franchise in Memphis and a Memphis-based team would not encroach on the home territory of any NFL member. The NFL rejected the Grizzlies’ application. On December 3, 1979, the Grizzlies filed an antitrust lawsuit against the NFL alleging that the rejection amounted to an unreasonable restraint of trade – a group boycott. The Grizzlies, it should be noted, did not challenge the NFL’s franchise exclusivity for designated home territories, the NFL’s revenue-sharing arrangement requiring a 60-40 revenue split between the home and visiting team, and the NFL’s joint sale of television rights. Rather, the Grizzlies wanted to become a participant in these arrangements and the NFL had refused. The Grizzlies suggested that the NFL’s refusal was an attempt to punish, intimidate, and restrain it for participating in the WFL and thereby competing against the NFL. The Grizzlies alleged that the NFL’s refusal to admit it as a member violated Section 1 of the Sherman Act and, in addition, the NFL was attempting to monopolize interstate trade and commerce in professional football in violation of Section 2 of the Sherman Act. 88

The discussion in this section is based primarily on the Wikipedia entry for the World Football League and the appeals court decision in Mid-South Grizzlies v. NFL. - -

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The district court granted summary judgment to the NFL. The Grizzlies appealed. On November 4, 1983, the appeals court affirmed the district court’s decision.89 The Grizzlies had argued that the relevant product market is major league professional football and the relevant geographic market is the United States. The district court agreed and observed that “there is no doubt that the NFL currently has a monopoly in the United States in major league football.” The question posed by the Grizzlies on appeal was thus “whether it can be said as a matter of law that defendant neither acquired nor maintained monopoly power over any relevant market in an unlawful manner.” The appeals court answered that the NFL’s market power is based, at least in part, on the Sports Broadcasting Act of 1961 and its 1966 amendment approving the NFL-AFL merger: As to the acquisition of dominant position and monopoly power, the facts are undisputed. Long before the Grizzlies and the World Football League came into existence, Congress authorized the merger of the two major football leagues extant in 1966, and granted to the merged league the power to pool television revenues. That congressional decision conferred on the NFL the market power which it holds in the market for professional football. Congress could not have been unaware that the necessary effect of the television revenue sharing scheme which it approved for the NFL would be that all members of that league would be strengthened in their ability to bid for the best available playing and coaching personnel, to the potential disadvantage of new entrants. … It would take a court bolder than this to claim that the congressionally authorized acquisition of market power, even market power amounting to monopoly power, was unlawful under Section 1 of the Sherman Act. … Since the 1966 statute is not directed at preservation of competition in the market for professional football, and cannot be construed as conferring any economic benefit on the class to which the Grizzlies belong, we conclude that it does not oblige the NFL to permit entry by any particular applicant to the NFL shared market power. The appeals court then considered whether any NFL obligation to permit entry to its shared market power arises from the Sherman Act. According to the Grizzlies, the NFL’s antitrust violation was the refusal of its application for membership. The appeals court found that “the exclusion was patently procompetitive since it left the Memphis area, with a large stadium and a significant metropolitan area population, available as a site for another league’s franchise, and it left the Grizzlies’ organization as a potential competitor in such a league.” Thus, the refusal to admit the Grizzlies into the NFL did not harm interleague competition and the question becomes whether it harmed intraleague competition. The NFL argued that there is no intraleague competition – the NFL is a single entity and a joint venture. The Grizzles, according to the appeals court, failed to 89

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show that their franchise would compete for the same ticket and team paraphernalia purchasers and local broadcast outlets as the NFL team based in St. Louis, the nearest NFL franchise (which was over 280 miles away). Moreover, the Grizzlies competed for players and coaches when they were in the WFL, so interleague competition for players and coaches was not harmed by the refusal to admit the Grizzlies into the NFL. Finally, the Grizzlies argued that the NFL is an ‘essential facility’ and thus has an obligation to admit members on fair, reasonable, and equal terms unless there is some pro-competitive rationale for denying admission. The appeals court rejected the essential facilities argument, noting that there is no evidence that competition (in the economic, not athletic, sense) would be improved if the Grizzlies joined the NFL. As for the Section 2 claims, the appeals court noted that the same analysis applies. The congressional legislation of 1961 and 1966 authorized the NFL’s acquisition of market power and the Grizzlies only challenged their exclusion from that shared monopoly. The Grizzlies did not show how their admittance into the NFL would promote competition in the economic sense. Seattle Totems v. NHL.90 The Seattle Totems played in the Western Hockey League. Despite winning the WHL championship in both the 1966-67 and 196768 seasons, the team’s on-the-ice performance plunged in the early 1970s and, after the financially disastrous 1971-72 season, the Totems owners, Vince Abbey and Eldred Barnes, sold a majority interest in the team to the owner of the NHL’s Vancouver Canucks, Northwest Sports. The Totems became a farm team for the Canucks. However, the agreement included a provision that said that if an NHL franchise were offered to Seattle, Abbey and Barnes had the right to repurchase the Totems from Northwest Sports. In April 1974, the NHL announced that Seattle and Denver would receive franchises and begin play with the 1976-77 season. The WHL folded after the 1973-74 season and the Totems moved to the Central Hockey League in anticipation of becoming an NHL franchise. The Totems finished in last place in the 1974-75 season and, even worse, Abbey had difficulty finding money to pay the NHL’s franchise fee. Abbey also explored moving either the NHL’s San Francisco or Pittsburgh franchise to Seattle to begin play in the 1974-75 season. The Totems had lost $2 million since Northwest Sports had acquired a majority interest in the team. The NHL’s plan to add franchises to Seattle and Denver failed, with neither city obtaining an NHL franchise (the newly-formed World Hockey Association did locate a team in Denver, however). Abbey sued the NHL for antitrust violations, while Northwest Sports sued Abbey for his share of the Totems’ losses (eventually winning $1.3 million). In particular, Abbey alleged that the NFL and its member teams had monopolized professional hockey in North America, in violation of the Sherman Act. Abbey also alleged that the 90

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NFL’s anticompetitive activities prevented the Totems from securing a WHA franchise and from forming a new league with other WHA teams. Abbey’s lawsuit against the NHL did not succeed, as an appeals court finally threw out the case in 1986.91 The appeals court found that there was no reduction of competition because the Totems were seeking to join the NHL and share in its profits, not compete against the NHL: The Totems were not competing with the NFL; they were seeking to join it. They were granted a conditional NHL franchise but failed to fulfill the conditions precedent to obtaining a final franchise. The WHA was competing as a major professional hockey league at that time. Without an NHL franchise Seattle constituted a potential WHA site, and the denial, if any, of an NHL franchise under these circumstances did not injure competition… There is no contention or showing that the denial was to protect any other major league team in the Seattle market; there was none… The Totems argue that there is more here than the mere denial of a sports franchise. They argue that there was a grand scheme on the part of the NHL to destroy the WHA by promising franchises to WHL teams so that those teams would not join the WHA. “Once peace had been made between the NHL and WHA, however, the NHL moved to avoid its responsibilities” under its White Paper agreement with the WHL. One of those alleged “moves” was apparently to deny Seattle a franchise. This argument misses the point. The Totems’ allegations of wrongful conduct by the NFL do not establish that competition in the relevant market was injured by those acts. Consequently, the Totems have failed to meet their burden of proof on this issue. Bowl Championship Series.92 Prior to the 1998 season, Division I-A college football was unique in that it did not have a formal system for deciding a national champion. Unlike, for example, college basketball with its ‘March Madness’ postseason tournament, the top college football teams played in a single post-season bowl game and only by chance would the top two teams play each other. (Of course, fans disagreed vehemently over who the top two teams were.) For example, the champions of the Big Ten and Pac-10 conferences would meet each year in the Rose Bowl. Thus, if the Big Ten or Pac-10 champion was ranked #1 or #2, the only way a #1 versus #2 matchup could occur is if its Rose Bowl opponent was ranked #1 or #2 as well. In other words, prior to the 1998 season, a ‘true’ national championship game, if it was to occur at all, would occur by accident. 91 92

Seattle Totems Hockey Club v. NHL, 783 F.2d 1347 (9th Cir. 1986). The discussion in this section is based primarily on the Wikipedia entry “Bowl Championship Series”, an article on the ESPN website titled “Utah’s Attorney General Considers Move” dated November 15, 2003, Carroll (2004), and Moreland (2005). - -

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The conferences participating in a bowl game did not share their bowl revenue with non-participating conferences. The six most prominent Division I-A football conferences – the Atlantic Coast Conference (ACC), Big East, Big Ten, Big Twelve, Pacific Ten (Pac-10), and Southeastern Conference (SEC) – along with independent Notre Dame, created the Bowl Championship Series (BCS) for the 1998 season. As it was initially formulated, the champions of each of those six conferences would play in the four most prestigious bowl games (i.e., the Rose Bowl, Sugar Bowl, Fiesta Bowl, and Orange Bowl). Thus, at least six of the eight spots in the ‘BCS Bowls’ would be filled by ‘BCS teams.’ If Notre Dame finished the season ranked sufficiently highly, it would automatically receive one of the two ‘at-large’ spots. If a team from a non-BCS conference finished sufficiently highly, it would also automatically receive one of the ‘at-large’ spots. The four BCS Bowls alternated hosting the championship game between the #1- and #2-ranked teams based on the BCS formula, which depended on polls, computer rankings, strength of schedule, number of losses, and victories over top10 ranked teams. The BCS has generated revenues of approximately $100 million annually, with roughly 95% distributed to the six BCS conferences and the remainder distributed to non-BCS conferences. The non-BCS conferences complained that the BCS made it almost impossible for one of their teams to ever play in the national championship. Moreover, the disparity in revenue received by the conferences made it virtually impossible for a non-BCS conference to improve to the point where its champion would one day play in the national championship. Congress held hearings on the antitrust implications of the BCS in 2003. Utah’s Attorney General, whose state was host to three non-BCS teams (i.e., Brigham Young University, Utah, and Utah State) called for an antitrust investigation. The BCS allegedly represented a ‘group boycott’ of non-BCS conferences. In response to these complaints, the BCS added a fifth bowl – the national championship game – for the 2004 season. By adding a fifth bowl, there are now four at-large slots (with Notre Dame automatically getting one of those slots if it is ranked sufficiently highly). Carroll (2004) and Moreland (2005) analyze the antitrust implications of the BCS prior to its addition of a fifth bowl game. Both agree that the BCS’s alleged group boycott should not be treated as a per se violation of the antitrust laws. Rather, the BCS must be examined under the rule of reason. Both conclude that the BCS does not violate the Sherman Act. Moreland points out that the addition of a fifth BCS bowl game and the consequent increase in the number of ‘at-large’ slots makes the BCS as it is configured today even less likely to violate the antitrust laws. The BCS had the pro-competitive effect of creating a new product – a Division I-A national football champion. Not surprisingly, some fans continued to complain that their team was denied a chance to play for the national championship because their team ‘deserved’ to be ranked either #1 or #2. In other words, if there is no consensus as to which two teams are the best at the end of the regular season, there will be no consensus as to which two teams should play in the national championship game. Nonetheless, compared to the situation

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prevailing prior to the creation of the BCS, today there is greater consensus as to which team is the ‘true’ national champion. Is there a ‘less restrictive’ alternative to the BCS? BCS critics argue that the national champion should be determined via a playoff system. As Carroll (2004) explains, a playoff would destroy two of the BCS’s primary objectives – to remain faithful to college football’s long bowl game tradition and to place a premium on success over the course of an entire season. The BCS as it is currently structured makes every game during the season meaningful – one loss makes a team’s chances of a national championship precarious and two losses are likely fatal. In a playoff format, in contrast, a few losses may be ‘good enough’ in that the team may still be sufficiently highly rated to qualify for the playoff, and thus still have a chance for the national championship. Fan interest in regular season games would likely be lower under a playoff system than under the current BCS format. The ‘closed’ nature of North American sports leagues enhances the market power of the individual league members. Teams frequently use the threat of relocation to extract public subsidies for new stadiums.93 The “closed” nature of North American sports leagues is quite different from the relatively “open” nature of European sports leagues. As Ross and Szymanski (2002) explain, European sports leagues for such sports as soccer, rugby, basketball, and cricket are comprised of multiple tiers, or divisions, and each year the worst-performing teams in a division are demoted to the next lower division while the top performers are promoted to the next higher division. Due to the possibility of promotion to a higher quality division, teams in lower divisions have an incentive to invest in higher quality players and fan interest in the lower leagues is enhanced. Moreover, the entry and exit of teams in a division each year hinders the ability of the incumbent franchises to exercise market power, particularly with respect to obtaining tax subsidies for new stadiums. As will be discussed in more detail in Chapter 12, Szymanski and Ross believe that the decision by current North American teams to maintain a closedleague structure constitutes an unreasonable restraint of trade and they advocate a system of promotion and relegation so as to promote entry and curb market power. Market power may also be curbed by simply adding more teams. As the discussion in Chapter 4 shows, leagues sometimes allegedly expand into new cities in order to make it harder for a rival league to compete. In such cases, expansion may enhance market power. However, not all expansion decisions are driven by a desire to make it more difficult for a rival to enter. Jones and Ferguson (1988) examine the NHL’s expansion and find that, according to their model, the most profitable cities to add a NHL franchise were Winnipeg, Quebec City, Edmonton, and Calgary. The NHL did, in fact, expand to the first three cities by absorbing the WHA franchises located in those cities and allowed the NHL’s Atlanta franchise to relocate to Calgary. Not only would adding more teams to a league potentially reduce market power, it may actually improve the league’s competitive balance. Schmidt (2001) finds that competitive balance increased markedly when the American League and National League began expanding in 1962 and 1963, respectively. One possible reason is the expansion 93

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draft, in which strong teams lose talented young players, key situational players, and established quality players (albeit ones who are overpaid, suffering from declining skills, or difficult to manage). A few years ago, the talk in Major League Baseball was not about expansion, but contraction. Noll (2003a) argues that MLB teams create enormous social benefits because the alternative employment of MLB players pays so much less than they earn as MLB players. Nevertheless, Noll estimates that the elimination of the two weakest teams – Montreal and Florida – would benefit the remaining teams by approximately $1 billion. Litigation pushed back the contraction date to no earlier than 2003 and the new collective bargaining agreement pushed it back further to at least 2007. The Montreal franchise has since been relocated to Washington, D.C. and is now known as the Washington Nationals. Prospective owners. Sports leagues generally require that franchise ownership changes be approved by the league. A prospective owner who fails to receive league approval may challenge the rejection on antitrust grounds, typically alleging an illegal group boycott. This section reviews several such lawsuits. In no case was the league rejection of a purchase by a prospective owner found to be an antitrust violation. It should be noted, however, that the league is not always named as a defendant. In some instances, the named defendant was found to be guilty of an antitrust violation, such as a refusal to deal, but the league’s rejection of the purchase was not found to be anticompetitive. Levin v. NBA. In 1972, Irving Levin and Harold Lipton had an agreement to purchase the Boston Celtics. The purchase had to be approved by at least threequarters of the NBA Board of Governors, which consists of one governor designated by each league member. At its June 1972 meeting, only two votes were cast in favor of the purchase, thirteen votes were cast against the purchase, and one governor was not present. Thus, the NBA Board of Governors rejected the proposed purchase. Levin and Lipton filed an antitrust lawsuit against the league alleging that its rejection was the result of an illegal group boycott motivated by the Governors’ antipathy for Sam Schulman, owner of the Seattle Supersonics. Levin and Lipton were shareholders and officers of First Northwest Industries, the company that operated the Supersonics. Schulman was the president and principal shareholder of First Northwest. The NBA argued that this business relationship violated the ‘conflict of interest’ provision of the NBA constitution, which states: “A member shall not exercise control, directly or indirectly, over any other member of the Association.” The provision was intended to maintain public confidence that NBA teams compete intensely within the league framework. Levin and Lipton, in contrast, argued that the NBA president and other league members regarded Schulman as a renegade, rebel, and troublemaker – and were concerned that the Celtics would vote the same way as the Supersonics in the future if the proposed purchase was approved. The district court granted summary judgment in favor of the NBA, noting that “plaintiffs wanted to join with those unwilling to accept them, not to compete with them, but to be partners in the operation of a sports league for plaintiff’s - -

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profit” and “no matter which reason one credits for the rejection, it was not an anti-competitive reason.”94 Thus, the court concluded that, “regardless of the financial impact of this rejection upon the plaintiffs, if any, the exclusion of the plaintiffs from membership in the league did not have an anticompetitive effect nor an effect upon the public interest.” Fishman v. Estate of Arthur M. Wirtz. In January 1972, Marvin Fishman and his investors’ group had an agreement in principle to purchase the NBA’s Chicago Bulls for $3.3 million. The Bulls had been playing at Chicago Stadium, which was controlled by Arthur Wirtz and his son William, under a series of short-term leases. Prior to seeking the NBA’s approval for the purchase, Fishman sought a 3year lease at a lower rate than the Bulls were currently paying; Wirtz refused. When Fishman tried to get the Bulls to lower their selling price, the Bulls refused. Some of the investors in Fishman’s group split off and joined with Arthur Wirtz to form Chicago Professional Sports Corporation (CSPC) to attempt to acquire the Bulls. Fishman formed a new group, Illinois Basketball, Inc., (IBI) to pursue the purchase of the Bulls. Peter Graham, a Vancouver investor, also was attempting to acquire the team; when his offer was rejected by the Bulls, he dropped out of the competition. On June 2, 1972, IBI submitted a signed offer to buy the Bulls for $3.3 million and, the same day, the Bulls’ Executive Committee recommended that IBI’s offer be accepted. CPSC attempted to renew negotiations with the Bulls, pointing out that IBI did not have anywhere for the Bulls to play and IBI would need the NBA’s approval for the purchase. On June 9, CPSC submitted an executed stock purchase agreement to the Bulls along with a cashier’s check for $3.3 million. Three days later, CPSC increased its offer by $50,000 in order to top IBI’s offer. Nevertheless, on June 14, the Bulls formally accepted IBI’s offer. The NBA Board of Governors is comprised of one representative from each team and the NBA Constitution mandates that the transfer or sale of 10% or more of a franchise must be approved by at least three-quarters of the Board. Thus, IBI’s purchase required the approval of at least 13 of the 17 Governors. By the time of the NBA Board of Governors meeting on June 15-16, 1972, the NBA Commissioner and the NBA Finance Committee had approved IBI’s financial and ‘moral’ fitness to be an NBA owner. Prior to the meeting, the NBA was informed by CPSC that its cash offer for the Bulls was higher than IBI’s and that it had reached a 10-year deal with Arthur Wirtz to lease Chicago Stadium. On the evening prior to the meeting, the CPSC’s president met with several NBA members and later admitted that “his purpose was to secure nonapproval of the transfer to IBI as this would be the only possible way his group could possibly acquire the Bulls.” On June 15, only 10 of the 17 Governors voted to approve the sale to IBI – three less than needed for the NBA’s approval. One of the reasons why the transaction did not receive NBA approval was that IBI did not have a stadium lease and it was suggested that, if IBI could secure 94

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a lease, the proposed transfer could be voted on at the NBA’s upcoming July 11 meeting. IBI attempted to discuss a lease with Wirtz, but Wirtz refused to meet with IBI or return its phone calls. Wirtz did discuss a lease with the Bulls’ current owner, who was told that no lease would be entered into directly with IBI and that the Bulls should agree to be purchased by CPSC instead. On July 5, having failed to secure a lease with Wirtz, IBI executed a lease for the Bulls to play at the International Amphitheatre. Prior to the meeting, CPSC lobbied against IBI’s purchase and made it clear to NBA members, in the words of the district court, that, “although the Chicago Stadium was not available to the Bulls (and the NBA) if the Bulls were sold to IBI, the Chicago Stadium would be available to the Bulls (and the NBA) if the IBI sale was aborted, and the Bulls sold to the Crown-Wirtz group.” Once again, the IBI purchase received only 10 votes in favor, and thus failed to obtain the NBA’s approval. Six of the seven no votes based their decision, at least in part, on their belief that the International Amphitheatre was entirely inadequate and unacceptable. (The seventh, Phoenix, could not recall why it voted no.) Some NBA members admitted that they were persuaded by CPSC to aid its attempt to acquire the Bulls. On July 19, 1972, pursuant to having failed to gain NBA approval, the contract between IBI and the Bulls was terminated. On July 28, the Bulls reached an agreement to be purchased by CPSC. The NBA approved the purchase on August 10. Fishman and IBI filed an antitrust lawsuit alleging that (1) Wirtz had violated Section 2 of the Sherman Act by his ‘refusal to deal’ with the plaintiffs regarding a lease for Chicago Stadium, and thus prevented plaintiffs from entering the market for the presentation of live basketball in Chicago, (2) the other participants in CPSC violated Sections 1 and 2 of the Sherman Act by conspiring with Wirtz to withhold a lease for Chicago Stadium from IBI and instead to make such a lease only available to CPSC, and (3) defendants had violated Sections 1 and 2 of the Sherman Act by conspiring with the NBA and certain NBA members in a group boycott to prevent IBI from acquiring the Bulls. On October 28, 1981, the district court ruled in favor of the plaintiffs on all counts. The defendants appealed, questioning the district court’s delineation of the relevant market and its conclusion that the antitrust laws apply to competition for the acquisition of a natural monopoly. The appeals court issued its decision on November 21, 1986.95 The district court had found that the relevant market was competition for the presentation of live professional basketball in Chicago, that this was a natural monopoly market, and the bidding competition to acquire a natural monopoly falls within the purview of the antitrust laws. In particular, the district court found that Chicago Stadium was an ‘essential facility’ for the presentation of live professional basketball in Chicago and the Wirtzes had exercised their ‘strategic dominance’ of the market for suitable arenas to exclude IBI from the relevant market. Defendants argued that the relevant market was the nationwide market for the purchase of professional sports franchises. The appeals court sided with the district court, observing: “It is not clearly erroneous to define the relevant market 95

Fishman v. Estate of Arthur M. Wirtz, 807 F.2d 520 (7th Cir. 1986). - -

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in these circumstances as the market to which access is sought.” Although the case could be viewed from the perspective of a national sports franchise market, doing so would change the ‘theory’ of the case, with the issue being whether CPSC had acquired a monopsony on basketball franchises in Chicago. The district court found that the market for the presentation of live professional basketball in Chicago is a natural monopoly because, as a practical matter, the city could not support two such franchises. Moreover, the NBA grants exclusive territories to its teams so if one wanted to present live professional basketball in Chicago, one would have to buy the Bulls. Thus, defendants argued that IBI and CPSC competed for a natural monopoly and it is irrelevant to Bulls fans whether IBI or CPSC acquired the team since they would face a monopolist in any event. Defendants alleged that the antitrust laws do not apply, since they are designed to protect competition, not competitors. The appeals court sided with the district court in concluding that the Sherman Act protects competition to acquire a natural monopoly. The district court found that Chicago Stadium was an ‘essential facility’ – it could not be reasonably duplicated and access to it was necessary if one wished to compete – and, therefore, its owner was obligated to make the facility available to competitors on nondiscriminatory terms. By refusing to lease to IBI for no sound reason, defendants had violated Section 2 of the Sherman Act. Defendants argued that Chicago Stadium was not an essential facility and there was no refusal to deal. The appeals court disagreed on both counts. Chicago Stadium “was not duplicable without an expenditure that would have been unreasonable in light of the size of the transaction such duplication would have facilitated” – building a new stadium would cost $19 million, several times the cost of purchasing the Bulls’ franchise. Furthermore, Wirtz had no legitimate business reason not to negotiate with IBI regarding a lease. The appeals court disagreed with the district court’s finding that the NBA’s refusal to approve the transfer of the Bulls to IBI constituted a ‘concerted refusal to deal’ or ‘group boycott.’ The appeals court countered: “We cannot approve the district court’s treatment of this alleged violation, however, because the evidence supporting this common scheme shows only that CPSC shareholders successfully lobbied certain NBA members so as to ultimately win league approval for themselves.” Citing Levin v. NBA, the appeals court argued that the act of voting to reject a proposed transfer of ownership, by itself, is not an antitrust violation. Thus, the appeals court asserted: “In the case before us, the NBA decision, on its own, was not an anticompetitive act.” In his dissent, Judge Easterbrook attacked the court’s finding as to the relevant market, arguing that the relevant market is the national market for sports franchises, and in this market, Chicago Stadium has no market power – and thus there is no injury to consumers: The market definition in this case shows why you can’t pick a market without knowing the purpose of the choice. The court has defined a market of professional basketball in Chicago. This is a plausible market, if the question is whether anything injured consumers. It looks at demand elasticity (can fans travel to Milwaukee? Switch allegiance from

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basketball to hockey or opera?) and at a supply elasticity (can new teams sell their product if the Bulls cut back output? can TV pipe other NBA games into Chicago?). Defining the market in this way shows that if the Stadium had contrived to prevent the start-up of a second basketball team – as the stadium in Hecht v. Pro-Football, Inc., 187 U.S. App. D.C. 73, 570 F.2d 982 (D.C. Cir. 1977), cert. denied, 436 U.S. 956, 57 L. Ed. 2d 1121, 98 S. Ct. 3069 (1978), contrived to stop the advent of a second pro football team in Washington, D.C. – there would be a serious antitrust problem. This definition also shows that the sale of the Bulls to CPSC rather than IBI could not injure consumers; it did nothing to conditions of either demand or supply. If, instead, we seek to learn whether CPSC harmed competition for a sports franchise, we must define a market that looks at the demand and supply possibilities facing Rich [the Bulls’ owner] and IBI. Rich could have been injured if IBI and CPSC, in cahoots, rigged their bids, or if CPSC had prevented IBI from bidding. But Rich has not complained. To tell whether IBI’s opportunities as a would-be operator of professional sports teams were hampered, we must look at its options, not those of fans in Chicago. There is a national market in sports franchises, as the makeup of IBI and CPSC shows. Each syndicate includes owners of sports teams in other cities (and in other sports) around the country; Fishman himself had an interest in the Milwaukee Bucks basketball team. The Second Circuit has held that there is a national market in “sports capital”. North American Soccer League v. NFL, 670 F.2d 1249 (2d Cir.), cert. denied, 459 U.S. 1074, 74 L. Ed. 2d 639, 103 S. Ct. 499 (1982). There is also a national market in which arenas compete for teams. See Los Angeles Memorial Coliseum Commission v. NFL, 726 F.2d 1381 (9th Cir.), cert. denied, 469 U.S. 990, 105 S. Ct. 397, 83 L. Ed. 2d 331 (1984), and consider the saga of the Indianapolis … Colts, Indianapolis Colts v. Mayor and City Council of Baltimore, 775 F.2d 177 (7th Cir. 1985). We need not discuss the Brooklyn Dodgers … or the Washington Senators. Which market matters depends on the theory of competition involved… The court today chooses a market (pro basketball in Chicago) the buyers in which were unaffected by the conduct in issue; a market looking at the opportunities of Fishman and IBI, such as a market in sports franchises, would reveal that the Stadium lacked market power; either way, the lack of injury to consumers reveals that there is no violation. Judge Easterbrook also disputed the contention that Chicago Stadium is an ‘essential facility.’ The Bulls, in fact, formerly played their games at the International Amphitheatre, until the burning of McCormick Place forced them to move. Moreover, Fishman could have built the Rosemont Center, which was built after 1972, and become its prime tenant: The majority’s observation (slip op. at 30-31) that $19 million is a lot of money, more than the initial cost of the Bulls (though certainly not more - -

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than the ongoing cost of running the Bulls) is irrelevant; a new arena would have had more tenants than the Bulls. The observation is like saying that if DeLorean wants to build only 1,000 cars a year, it is “uneconomic” to build a new plant, and therefore General Motors must build DeLorean’s cars for him. Antitrust law requires nothing of the sort. A stadium is the place in which sporting contests are “manufactured.” A would-be manufacturer cannot hire a crew of employees (the team) and demand that someone else supply the plant. While Judge Easterbrook seriously disagreed with the court’s decision on a number of points, he concurred in the court’s decision that the NBA’s rejection of the transfer of the Chicago Bulls to IBI, and the lobbying which produced the rejection, did not violate the antitrust laws. Piazza v. MLB. Vincent Piazza and Vincent Tirendi, both of Pennsylvania, organized a group of investors with the goal of purchasing MLB’s San Francisco Giants and moving the team to the Tampa Bay area. On August 6, 1992, Piazza’s group executed a Letter of Intent with the Giants’ owner, Robert Lurie, to purchase the team for $115 million. Lurie agreed not to negotiate with other prospective buyers and to help the group obtain MLB’s approval for the purchase and relocation of the team to the Suncoast Dome in St. Petersburg, Florida. A few weeks later, Piazza’s group entered into an agreement with the City of St. Petersburg to use the Suncoast Dome. On September 4, Piazza’s group submitted an application to MLB for the purchase and relocation of the Giants. MLB conducted personal background checks on the investors, which raised, in the words of the Chairman of the Ownership Committee, a “serious question in terms of some of the people who were part of that group.” The Chairman announced that “a couple of investors will not be in the group.” Another member of the Committee, Jerry Reinsdorf, stated that the Committee was concerned about “out-of-state” money and that the “Pennsylvania People” had “dropped out.” Since both Piazza and Tirendi are Italian, they interpreted the comments as suggesting that the background checks raised the possibility that they were connected to organized crime, which they denied. They also denied that they had “dropped out” of the investor group. On September 12, the Chairman admitted to reporters that “there was no problem with the security check.” Meanwhile, MLB was working to obtain other bids. In fact, on the same day as Piazza’s group submitted their application, the Chairman of the Ownership Committee asked Lurie to consider other offers for the Giants, despite knowing of Lurie’s exclusive agreement with Piazza’s group. Five days later, on September 9, the President of the National League invited George Shinn of North Carolina to make an offer to purchase the Giants and keep them in San Francisco. Eventually, another investor group emerged and offered $15 million less than the $115 million offer of Piazza’s group, but offered to keep the team in San Francisco. On November 10, 1992, MLB formally rejected the Piazza group’s offer.

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Piazza sued, alleging both antitrust and constitutional violations.96 With respect to the antitrust claims, Piazza alleged that the defendants had monopolized the market for MLB teams and placed direct and indirect restraints on the purchase, sale, transfer, and relocation of MLB teams, as well as on the competition for MLB teams. Piazza alleged that these actions unlawfully restrained and impeded his opportunities to engage in the business of major league baseball. The alleged constitutional violations included being deprived of one’s liberty and property interests and privileges without due process of law, being denied equal protection of the laws, and being denied freedom of contract and association. Piazza argued that the relevant market is the market for American League and National League baseball teams and that the Defendants directly and substantially interfered with competition in that market. The district court agreed with Piazza’s relevant market delineation. The Defendants sought to have the case dismissed because MLB is exempt from the antitrust laws, as evidenced by the court decisions in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs (1922), Toolson v. New York Yankees (1953), and Flood v. Kuhn (1972). (These cases were discussed in Chapter 2.) The district court reviewed these court decisions and concluded: “Although the Supreme Court has not couched its explanation of the exemption in these terms, I believe that the only arguably surviving rule to be gleaned from the Court’s baseball trilogy is that if the relevant product market involved is the market defined as the ‘business of baseball,’ injury to competition in that market may not be redressed under the Sherman Act.” Courts have defined the ‘business of baseball’ as that which is central to the ‘unique characteristics and needs’ of baseball and, therefore, the exempted market includes (1) the reserve system and (2) matters of league structure. In other words, the market to which MLB’s antitrust exemption applies has the following characteristics: “(1) the product is the exhibition of baseball games; (2) the sellers, as with the market defined by plaintiffs, are team owners; and (3) the buyers are fans and, perhaps, the broadcast industry.” However, in this case, the market has the following characteristics: “(1) the product being sold is an ownership interest in professional sports teams; (2) the sellers are team owners; and (3) the buyers are those who would like to become team owners.” Thus, the market to which MLB’s antitrust exemption applies is not the market at issue in this case. As a result, although the district court dismissed Piazza’s constitutional claims, it denied MLB’s motion to dismiss the antitrust claims. In November 1994, with their trial about to begin, Piazza and MLB reached an out-of-court settlement for an undisclosed amount, reported to be $16 million.97

96 97

Piazza v. MLB, 831 F. Supp. 420 (E.D. Pa 1993). The $16 million figure appears in a blog posted on the Athletics Nation website on February 2, 2005. The settlement became the subject of a lawsuit between MLB and its insurance carrier, Marsh & McLennan. - -

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Murray v. NFL. Francis Murray acquired an option to purchase the NFL’s New England Patriots, which were having financial problems in part due to an unfavorable lease for Foxboro Stadium, for $63 million in April 1986; the NFL approved the option. The Patriots were owned by William Sullivan, to whom Murray extended a $21 million line of credit. According to Murray, as of April 1987, he had performed all of the obligations under the option agreement and should have been able to acquire the Patriots from Sullivan, who with the aid of the NFL sought alternative buyers. Although Murray obtained a court order preventing the sale of the Patriots, Sullivan negotiated a sale to Victor Kiam. Murray then joined with Kiam to acquire the Patriots, with Murray as the 49% general partner and Kiam owning the remaining 51%. The partnership deal between Murray and Kiam included a ‘put’ option for Murray to sell his 49% stake to Kiam in exchange for a $38 million payment. Murray also held a 40% interest in a venture seeking to bring a NFL franchise to St. Louis and he intended to use the money from exercising the put option for that purpose. According to Murray, if Kiam failed to pay the $38 million, Murray would become the Patriots’ sole general partner, in which case he intended to relocate the Patriots to St. Louis or Hartford, Connecticut. In his pursuit to get an NFL expansion franchise for St. Louis, Murray had partnered with James Orthwein, who in July 1990 extended a line of credit to Murray and obtained a secured interest in Murray’s 49% stake in the Patriots. Murray also had obtained a loan from National Westminster Bank. Murray notified Kiam on July 8, 1991 that he would exercise the put option on October 10, 1991. Murray learned on September 30 that Kiam had given a secured interest in his 51% Patriots stake to IBJ Schoeder Bank in exchange for a loan. The NFL had rules regarding the amount of debt a franchise could take on, and the IBJ loan allegedly violated the NFL’s limit. Murray notified the NFL of the debt limit violation on October 9. Kiam refused to pay Murray the $38 million and instead requested an extension because he disputed whether the partnership agreement called for Murray to become sole general partner in the event of nonpayment. Pursuant to the NFL’s policy, Murray submitted the matter to the league for compulsory arbitration. On October 14, Orthwein informed the NFL that he would foreclose on Murray if Kiam failed to make the payment. On November 4, Murray requested immediate action by the NFL. A week later, National Westminster Bank sued Murray to collect on its loan. According to Murray, the NFL ignored his pleas for expedited arbitration so that Orthwein could gain ownership of the Patriots and thereby oust Murray from the league so he could not challenge its policies regarding financing, team relocation, and compulsory arbitration. On November 22, 1991, the NFL allegedly offered to purchase the Patriots from Murray; he refused. At Orthwein’s urging, Murray attended an NFL owners meeting to convince Kiam to sell the Patriots to Orthwein. According to Murray, Orthwein told him that if he succeeded in getting Kiam to sell, Murray could keep his stake in both the Patriots and the St. Louis venture. Murray agreed to pay Kiam $1 million over three years to get a deal. On March 16, 1992, Orthwein purchased National Westminster Bank’s loan to Murray and assumed control of the bank’s litigation against him. Orthwein allegedly demanded Murray’s stakes in the Patriots and St. Louis - -

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venture to settle the bank’s loan. On May 11, 1992, Murray and Orthwein reached a settlement in which Orthwein would take possession of Murray’s 49% stake in the Patriots and Orthwein agreed that if St. Louis failed to obtain an expansion franchise, he would relocate the Patriots to St. Louis, with Murray allegedly preserving his stake in a St. Louis franchise. Orthwein allegedly undermined Murray’s attempt to bring an expansion franchise to St. Louis by cooperating with a competing group. Moreover, he did not relocate the Patriots to St. Louis. Orthwein eventually sold the Patriots to Robert Kraft for $160 million – money to which Murray believed he was entitled. Murray sued, alleging that the NFL and other Defendants conspired to restrain trade in the market for the purchase and sale of professional football franchises in violation of Sections 1 and 2 of the Sherman Act. In particular, Murray alleged that NFL rules unlawfully restrained and affected his rights to sell the Patriots, causing him to sell his interest in the team at a loss in an anticompetitive market. The allegedly anticompetitive NFL practices were its restriction on the use of public financing to buy out an existing franchise partner or to purchase another NFL franchise, its compulsory arbitration requirement, and its team relocation policy. Murray alleged that the NFL conspired to divest him of his ownership interest in the Patriots and an expansion franchise so as to prevent him from challenging these league practices. The NFL sought to have the lawsuit dismissed because the joint activities of its members cannot form the basis of an antitrust violation. The district court ruled on a motion to dismiss on June 26, 1996.98 For the purpose of a motion to dismiss, the district court accepted Murray’s assertion that the relevant product market is the “market for the sale and purchase of ownership and control interests in NFL professional football franchises” and that the relevant geographic market is nationwide generally and, specifically, the “market for NFL professional football franchises in the metropolitan areas of Boston, Massachusetts; Hartford, Connecticut and St. Louis, Missouri.” The district court refused to grant the NFL’s request for summary judgment (1) on the public financing allegation, concluding that Murray had presented sufficient facts for a Section 1 challenge; (2) on the compulsory arbitration allegation, ruling that whether the policy “restrains competition unreasonably by eliminating competitors from the field of prospective purchasers is a question of fact to be determined by the jury under the ‘rule of reason doctrine’”; and (3) on the Section 2 monopolization or attempted monopolization claim that Murray was denied the ‘essential facility’ of compulsory arbitration. The district court did grant the NFL’s request for summary judgment on the relocation allegation because Murray never actually applied to relocate the Patriots and what action the NFL would have taken in that event is speculative. Furthermore, the district court concluded that Murray’s failure to obtain an NFL expansion franchise for either St. Louis or Hartford is not an antitrust injury because existing NFL franchises, expansion franchises, and franchises of rival leagues can continue to compete to locate in these two cities.

98

Murray v. NFL, 1996 U.S. Dist. LEXIS 9108 (E.D. Pa 1996). - -

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On April 28, 1998, the district court granted Defendants’ motion for summary judgment in its entirety.99 The district court noted that Murray was not denied arbitration by the NFL because he did not comply with the agreed-upon prerequisites for such a hearing. Thus, Murray failed to present evidence in support of an essential facilities claim. Moreover, Murray did not present evidence that the NFL used its arbitration policy to exclude prospective purchasers of the Patriots who wanted to relocate the team. As for the public financing allegation, the district court observed that Murray did not present evidence that a public offering would have been viable and that he ever implemented a plan to conduct such an offering. Baseball at Trotwood v. Dayton Professional Baseball Club. In 1997, several groups were competing to bring a minor league baseball team to Dayton, Ohio. In order to do so, a group would have to negotiate the purchase of an existing Midwest League franchise, get approval from the Midwest League for the purchase, and then get the approval of the National Association of Professional Baseball Leagues (NAPBL) and MLB for the purchase – and then the group would have to go back to those organizations to get approval to move the franchise to Dayton. Moreover, since Dayton lies within the ‘home territory’ of MLB’s Cincinnati Reds, the group would have to obtain a territorial waiver from the Reds. Thus, there were many obstacles to bringing a minor league baseball franchise to Dayton. In January 1997, Sports Spectrum, Inc. (SSI) executed an option agreement giving it the right to acquire the Midwest League’s Michigan Battle Cats for $3 million. Afterward, SSI allegedly received assurances from the Reds that if the Reds were to waive their territorial rights, they would only do so for SSI. With that assurance, SSI entered into an agreement for a stadium project. On March 21, 1997, SSI executed a contract to purchase the Battle Cats. A few weeks later, SSI agreed to sell a 55% interest in the team to Rock Newman, Inc. (RNI) for $2 million if permission to relocate the team to the Dayton area was obtained. Meanwhile, on March 28, a married couple, Sherrie Myers and Tom Dickson, reached an agreement with Downtown Dayton Partnership (DDP) to locate a minor league franchise in the Dayton area and, later, Dayton’s City Commission approved the agreement, which stated that Myers and/or Dickson would own or manage the minor league baseball franchise that located in the Dayton area. Dickson was the principal owner of the Midwest League’s Lansing Lugnuts and a member of the league’s Board of Directors. On May 30, the Reds issued a conditional territorial exclusivity waiver to DDP. Myers succeeded in getting the approval of the Midwest League and the NAPBL for the purchase of the Rockford Cubbies from the Chicago Tribune, but MLB refused to give its approval. The Reds then terminated their conditional waiver and, in November 1997, Myers announced she was terminating her efforts to acquire the Rockford Cubbies and relocate them to Dayton – and that she intended to sue MLB for reverse discrimination. 99

Murray v. NFL, 1998 U.S. Dist. LEXIS 5894 (E.D. Pa 1998). - -

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The same month, the Reds granted a conditional territorial exclusivity waiver to SSI that would expire on January 26, 1998. When SSI met with Dayton and DDP, it discovered that SSI would be expected to make a much larger financial contribution than had been expected from Myers and that neither wanted Rock Newman involved in minor league baseball in Dayton. SSI concluded that it would not get a stadium in downtown Dayton and finalized an agreement to locate a stadium in Trotwood, Ohio. However, when SSI filed documents to get the Midwest League’s and NAPBL’s approval for the purchase of the Battle Cats on January 14, both refused to even consider the application because Myers had not withdrawn her application. Myers refused to withdraw her application and the expiration date on the Reds’ waiver passed. Myers had been negotiating to sell her interest in the Rockford Cubbies to the “Mandalay Defendants”, who included Hank Stickney, a trustee of the NAPBL. DDP and Dayton had been negotiating with the Mandalay Defendants to locate a minor league baseball team in downtown Dayton. The Mandalay Defendants ultimately received the necessary league approvals and the waiver from the Reds. Baseball at Trotwood (which was owned by RNI and four individuals from SSI) sued, alleging that the Defendants, which included the ‘Mandalay Defendants’, the NAPBL, and the Midwest League, had conspired and acted in concert to restrain trade and to create a monopoly in violation of Sections 1 and 2 of the Sherman Act. In particular, Plaintiffs alleged that the Defendants had imposed direct and indirect restraints on the purchase, sale, transfer, and relocation of minor league baseball teams, as well as on the competition for the purchase, sale, transfer, and relocation of such teams. The Mandalay Defendants asked the district court to dismiss the claims because Plaintiffs failed to allege an antitrust injury. The district court agreed and dismissed the case against the Mandalay Defendants, but noted that “the Court cannot conceive that those claims, as they are presently drafted and as they relate to the other Defendants, retain viability, in light of the Decision herein.”100 Thus, the district court directed the other Defendants named in the antitrust claims to move for dismissal as well. The district court’s reasoning was based on Judge Easterbrook’s dissent in Fishman v. Estate of Arthur M. Wirtz in which he argued that, for an antitrust injury to occur, consumers had to be harmed, and in the case of a natural monopoly, consumers are in the same position regardless of who wins the contest to be the natural monopolist serving those consumers – in other words, regardless of who wins, the consumer is at the mercy of a monopolist. The district court observed that “given that the Plaintiffs have not alleged that the Defendants’ actions limited the number of franchises that would be allowed to be located in the Dayton area, there is no allegation that the actions of the Defendants altered the market structure for minor league baseball in the Dayton area, increased prices or reduced the quality of minor league baseball supplied in that area”; in short, “there are no allegations that the Defendants’ actions curtailed competition in the minor league baseball market in the Dayton area, only that those actions curtailed 100

Baseball at Trotwood v. Dayton Professional Baseball Club, 113 F. Supp. 2d 1164 (S.D. Oh W.D. 1999). - -

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the Plaintiffs’ ability to be the entity servicing the market.” In other words, “there was bound to be one winner and one loser of that competition, and one and only one monopolist would emerge to provide minor league baseball in this area.” The district court also argued that by seeking to join, rather than compete, with the Midwest League, there was no reduction in competition because the Mandalay Defendants rather than the Plaintiffs became the provider of minor league baseball to the Dayton area. The district court noted that the courts in Levin, Seattle Totems, and Mid-South Grizzlies had reached a similar conclusion. The district court summed up its decision as follows: In sum, the Court concludes that, where two groups compete for one right, the losing group does not have a valid antitrust claim, merely because the winning side conspired with those who would make the award and acted tortiously. An example demonstrates the Court’s point. A and B compete with each other to enter into a contract with C. The fact that A obtains the contract by bribing C does not give B a valid antitrust claim against A, even though its ability to compete for the contract with C has been compromised by the fact that A acted in concert with C, by bribing the latter, in the absence of proof that the concerted activity harmed consumers by reducing output or raising prices. Based on the foregoing, the Court concludes that the Plaintiffs have not alleged that they suffered an antitrust injury. Rather, they have asserted nothing more than business torts that allegedly harmed a competitor. Accordingly, the Court sustains the Mandalay Defendants’ Motion to Dismiss… In summary, courts have interpreted the antitrust laws in such a way as to give sports leagues broad discretion in selecting which franchises will be allowed as members and who will be allowed to own those franchises. The courts repeatedly stress the distinction between seeking to compete with the league and seeking to join the league. Preventing a franchise or owner from joining the league does not harm competition, but preventing a franchise or owner from competing with the league may. Courts have not agreed on whether competition to become a natural monopolist can result in an antitrust injury. One view, advocated by Judge Easterbrook, is that consumers are not impacted by which firm prevails in the competition to be the natural monopolist and thus no antitrust injury (which by necessity must be an injury suffered by consumers) can occur – and if there is no antitrust injury, there is no violation of the antitrust laws. However, Judge Easterbrook’s opinion was a minority view even in the Fishman case where it was issued.

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Chapter 6 Sports Leagues vs. Players

Sports leagues have implemented a variety of restrictions that players have generally opposed. These restrictions fall into three broad categories: eligibility, sanctions, and compensation. Eligibility standards include the NCAA’s requirement that players be ‘amateurs’, the NFL’s requirement that players be out of high school for a number of years before they can be drafted, and the NBA’s (now discarded) policy against drafting high school players. Leagues also impose sanctions on players who violate league rules. The compensation-related restrictions of sports leagues include reserve clauses, rookie drafts, salary caps, luxury taxes, and player transfer fees. Players have challenged all of these restrictions on antitrust grounds, with fairly little success. As discussed in Chapter 2, in some instances, these restrictions were topics of the collective bargaining agreements between the sports leagues and their respective players unions and thus were exempt from the antitrust laws. One may expect the impact of such restrictions to be more onerous in some leagues than in others. NFL players do have other employment options, including the Canadian Football League (CFL), but the best CFL players are more likely to move to the NFL than the best NFL players are to move to the CFL. Likewise, MLB players could play in Japan, but they generally choose not to unless they have difficulty signing with an MLB team. There are numerous professional basketball and hockey leagues throughout the world, but they do not generally attract established NBA and NHL players, but rather attract marginal players hoping to eventually sign with an NBA or NHL team. On the other hand, it is not unusual for a top U.S. soccer player to sign with an European team instead of playing Major League Soccer. Thus, sports leagues vary in the extent of their monopsony power over players. For the NCAA and the four major North American professional sports leagues, economists have documented that league restrictions on players have succeeded in maintaining player compensation below the value of the players’ marginal revenue product. One strong piece of evidence is the behavior of players’ salaries when a rival sports league forms. As discussed in Chapter 4, the formation of a rival sports league leads to a surge in player salaries as the leagues compete for players. When the rival league either folds or merges with the incumbent league, the growth in player salaries slows dramatically. Economists have documented similar surges in player salaries when players become eligible for salary arbitration or free agency. This chapter will analyze the restrictions on players imposed by the NCAA, MLB, NFL, NBA, and NHL. It then discusses players’ antitrust challenge to Major League Soccer (a ‘single-entity’ league). The chapter concludes with a discussion of an interesting case involving the Ladies Professional Golf Association (LPGA) and its attempt to sanction a player for allegedly cheating. NCAA. The NCAA produces and markets ‘amateur’ athletics and thus imposes numerous restrictions on collegiate players so as to preserve their ‘amateur’ status. Some of these restrictions relate directly to player eligibility – for example, a player cannot have signed with an agent or entered a professional sports league - -

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draft. Other restrictions are placed on player compensation – schools can offer players a limited number of scholarships, but cannot pay the players for their athletic services. The NCAA also has the authority to sanction teams for violating NCAA rules – for example, if a school’s coach is found to be secretly paying his or her players, the entire team may be suspended from competition. The NCAA also imposes numerous other restrictions, including academic eligibility requirements and transfer restrictions. Collegiate players have challenged these restrictions on antitrust grounds, largely without success. Collegiate players are currently challenging on antitrust grounds limits on the number of scholarships an athletic program can award and limits on the dollar value of those scholarships. Restrictions on player compensation and team sanctions for compensation restriction violations. In 1983, several student-athletes challenged the NCAA’s sanctions on the University of Arizona football team making the team ineligible to participate in post-season competition in the 1983 and 1984 seasons and prohibiting the team from making television appearances in the 1984 and 1985 seasons. On May 17, 1983, the NCAA’s Committee on Infractions had issued a confidential report which documented that, during the period 1975-79, representatives of the University’s football program had provided current players and players under recruitment with compensation or extra benefits such as free airline transportation, free lodging, as well as cash and bank loans for the athletes’ car payments, rental payments, and personal use. The athletes did not dispute that the violations occurred, but alleged that the vote of the Infractions Committee imposing the sanctions represented an agreement among member institutions to exclude the University of Arizona from the market for televised and post-season competition, and thus constituted a group boycott in violation of Section 1 of the Sherman Act. The district court granted the NCAA’s request for summary judgment on the antitrust claim, ruling that “the attributes of a per se illegal boycott simply do not exist.”101 The district court explained: There has been no showing by the plaintiffs that the NCAA, its member institutions, or the Infractions Committee had any purpose to insulate themselves from competition by imposing sanctions on the University of Arizona or any of the other universities currently on probation. To the contrary, the purpose of the sanction is not only to preserve amateurism but to enhance fair competition among the association’s member institutions. Similarly, Southern Methodist University’s (SMU’s) football program was suspended by the NCAA for the entire 1987 season and other restrictions were imposed for the 1988 season. The NCAA found that SMU had exceeded limits on compensation for student-athletes. An antitrust lawsuit was brought by David McCormack, an attorney and SMU alumnus. The plaintiffs included several members of the football team. Plaintiffs alleged that (1) the limitations on compensation to football players constitute illegal price fixing in violation of 101

Justice v. NCAA, 577 F. Supp. 356 (D. Az 1983). - -

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Section 1 of the Sherman Act and (2) the suspension of SMU constitutes a group boycott by other NCAA members, also in violation of Section 1 of the Sherman Act. The plaintiff football players argued that they had suffered an injury to their business (i.e., playing football), that they effectively sold their labor to SMU, and that the NCAA rules restrict the amount that they can be paid, preventing them from selling their labor to the highest bidder. The appeals court decided that the NCAA rules had to be analyzed under the rule of reason and that, on this basis, the rules are reasonable:102 The NCAA markets college football as a product distinct from professional football. The eligibility rules create the product and allow its survival in the face of commercializing pressures. The goal of the NCAA is to integrate athletics with academics. Its requirements reasonably further this goal. After amending their complaint once and withdrawing another amendment, the plaintiffs still produce only two allegations to support their claim that the NCAA’s rules are designed to stifle competition: that the NCAA permits some compensation through scholarships and allows a student to be a professional in one sport and an amateur in another. Accepting these facts as true, however, they do not undermine the rationality of the eligibility requirements. That the NCAA has not distilled amateurism to its purest form does not mean its attempts to maintain a mixture containing some amateur elements are unreasonable. We therefore conclude that the plaintiffs cannot prove any set of facts that would carry their antitrust claim and that the motion to dismiss was properly granted. Because the eligibility rules do not violate the antitrust laws, enforcement of them through suspension and other restrictions does not constitute an illegal group boycott. Thus, courts have found that the NCAA’s restrictions on player compensation do not violate the antitrust laws – the compensation restrictions are reasonable given that the NCAA produces and markets ‘amateur’ athletics. Moreover, suspension of teams found in violation of the restrictions on player compensation is also ‘reasonable.’ Some commentators disagree. A 1992 Harvard Law Review article titled “Sherman Act Invalidation of the NCAA Amateurism Rules” argues that “the defining characteristic of intercollegiate athletics is merely the college attendance of all of its athletes” and that the NCAA’s ‘amateurism’ requirements “are based on the outdated ideal of amateurism that is in no way necessary to the product of college sports.” (p. 1301) Therefore, the article concludes: “Courts should thus invalidate these rules as clear restraints of trade in the market for the skills of student-athletes.” (p. 1301)

102

McCormack v. NCAA, 845 F.2d 1338 (5th Cir. 1988). - -

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As discussed in Chapter 1, some economists view the NCAA as a cartel with monopsony power over student-athletes, while others view the NCAA as a demand-enhancing joint venture. The NCAA’s monopsony power is typically demonstrated by comparing the compensation of student-athletes to their marginal revenue product (MRP). Most such studies conclude that student-athletes receive far less than their MRP in the two major revenue-generating NCAA sports – football and basketball. Table 6.1 summarizes the economic literature. Star players are particularly valuable to their teams – not only athletically, but financially as well. Brown and Jewell (2004) estimate that, during the 1995-96 men’s college basketball season, having an additional player who is subsequently selected in the NBA draft on a basketball team raises the team’s revenue by $1,194,469. Tollison (2000) presents a back-of-envelop-type calculation of the MRP of a typical player in the NCAA men’s basketball tournament and finds that the MRP for a tournament victory in the early rounds is $30,000, but soars to $220,000 if the team advances to the Final Four – whereas the implicit annual compensation of tuition, room, and board at most schools is in the $5,000-$10,000 range. Brown (1994b) examines the revenue of 46 Division I basketball teams for the 1988-89 season and finds that team revenue increases by between $871,310 and $1 million for each additional player subsequently drafted by the NBA, even though the NCAA limits the value of a scholarship to a maximum $20,000 annually – which suggests that a future NBA draftee generates rents for his collegiate basketball team of approximately $1 million annually. Similar results are found for men’s football. Brown and Jewell (2004) estimate that, during the 1995 college football season, having an additional player who is subsequently selected in the NFL draft on a football team raises the team’s revenue by $406,914. Brown (1993) examines the revenue of 39 Division 1-A football teams for the 1988 season and finds that team revenue increases by between $538,760 and $646,150 for each additional player subsequently drafted by the NFL – whereas even adding in recruiting costs, scholarship players cost less than $30,000 per year. Leonard and Prinzinger (1984) analyze data on 40 Division I college football teams for the 1981 season and estimate that MRP ranges from $37,825 to $129,435 depending on ticket price, whereas scholarships for college football players are valued at only $4,150 – which suggests that college football players receive only between 3% and 11% of their MRP. Likewise, similar results are found for women’s basketball. Brown and Jewell (2006) estimate that an additional ‘premium’ women’s basketball player generates almost $250,000 annually for her team. However, the impact is considerably larger (in excess of $400,000) for the ‘elite’ women’s basketball programs than for the less-successful ones. Brown and Jewell (2006) conclude: “Since a college player’s effective pay is limited to a maximum $36,000 value of an athletic scholarship, schools appear to extract sizable rents from the best college players.” (p. 96)

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Table 6.1 The Impact of NCAA Player Compensation Restrictions on Rents Earned by Universities on Their Athletes

Sport

Study

Test

Result

Basketball (Men’s)

Brown & Jewell (2004)

Estimates MRP of a premium (subsequently drafted into the NBA) player using data for the 1995-96 season.

Adding a premium player raises team revenue by $1,194,469 annually.

Tollison (2000)

Estimates MRP of typical player in the NCAA tournament via a backof-envelop-type calculation.

MRP for a tournament victory in the early rounds is $30,000. If the team advances to the Final Four, MRP rises to $220,000. However, the implicit annual compensation of tuition, room, and board at most schools is in the $5,000-$10,000 range.

Brown (1994b)

Estimates rents (the difference between MRP and the maximum compensation allowed by the NCAA) for premium (subsequently drafted into the NBA) players using data on 46 Division I teams for the 1988-89 season.

NCAA limits the value of a scholarship to a maximum of $20,000 annually. Adding an additional premium player raises team revenue by between $871,310 and $1,283,000 annually. Thus, future NBA draftees generate rents for their teams of approximately $1 million annually.

Basketball (Women’s)

Brown & Jewell (2006)

Estimates MRP of a premium (subsequently drafted into the WNBA) player using data for the top 10 women’s basketball conferences during the 2000-2001 season.

Adding a premium player raises team revenue by $241,337 annually, on average. However, for elite programs, adding an elite player raises team revenue by an average of $403,303 annually. The maximum value of an athletic scholarship is $36,000.

Football

Brown & Jewell (2004)

Estimates MRP of a premium (subsequently drafted into the NFL) player using data for the 1995 season.

Adding a premium player raises team revenue by $406,914 annually.

Brown (1993)

Estimates rents (the difference between MRP and the maximum compensation allowed by the NCAA) for premium (subsequently drafted into the NFL) players using data on 39 Division I-A teams for the 1988-89 season.

NCAA limits the value of a scholarship to a maximum of $20,000 annually. Even if other costs, such as recruiting costs, are added, scholarship players cost less than $30,000 annually. Adding an additional premium player raises team revenue by between $538,760 and $646,150 annually.

Leonard and Prinzinger (1984)

Compares MRPs and scholarship values using data on 40 Division I teams for the 1981 season.

Depending on ticket price, the MRP ranges from $37,825 to $129,435. Since scholarships were valued at $4,150, collegiate football players received only between 3% and 11% of their MRP.

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Similarly, Brown and Jewell (2004) conclude: Our updated MRP estimates from these 1995-96 data underscore Brown’s earlier estimates: Athletic departments extract sizable monopsony rents from college football and basketball players. Given that the NCAA limits effective compensation for student athletes, our estimates suggest that a college program can extract nearly $400,000 from a premium college football player and over $1 million from a premium college basketball player per year. These rents, in turn, often amount to transfers to coaches and administrators in the form of higher salaries as well as to support nonrevenue producing sports or even academic programs. (pp. 160-61) Tollison (2000) makes a similar point: The revenue is there to have a pay system; it is simply not presently flowing to the players in proportion to their contribution to revenue. It is flowing to (head) coaches, athletic departments to prop up non-revenue sports, and, yes, to the English Department. This redistribution of wealth is real, large, and ongoing in any major athletic program in the country. (p. 24) Some commentators have rejected analyses comparing the value of scholarships received by student-athletes to their marginal revenue product. One problem is how to incorporate the training costs incurred by collegiate athletic programs. Moreover, McKenzie and Sullivan (1987) argue that the NCAA compensation rules enhance the demand for student-athletes and that the relevant question is not whether MRP is less than the actual compensation received by student-athletes, but whether MRP is less than the expected compensation of student-athletes (which would include not only the value of the athletic scholarship but also the present value of the expected future income stream from professional employment). NCAA sanctions can have a large impact on the disciplined member. Brown (1993) estimates that a one-year 10% reduction in the number of allowed football scholarships would reduce the sanctioned team’s revenues by roughly $600,000 annually, or more than $2 million over a four-year collegiate career, and a one-year prohibition on television appearances would reduce the sanctioned team’s revenues by $543,925 – ignoring the effect of revenue-sharing within the sanctioned team’s athletic conference. From an economic standpoint, NCAA sanctions can be viewed as (1) a means by which a cartel polices its members so as to prevent cheating on the cartel, (2) a system via which a joint venture maximizes the venture’s joint revenue, or (3) a method by which a franchisor sets and enforces rules on its franchisees so as to prevent free-riding. The latter interpretation is suggested by McKenzie and Sullivan (1987), who liken the NCAA’s rules to the rules that McDonald’s imposes on its fast-food franchises, which benefit the franchisees collectively even though each individual franchisee has an incentive to cheat on

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those rules. Somewhat similarly, DeBrock and Hendricks (1997) argue on the basis of a median voter model of NCAA roll-call voting on important policy matters that the median NCAA member may find it optimal to force poor quality teams to improve and to restrict the quality of the strongest teams, thereby leading to greater competitive balance, which in turn may lead to higher joint revenue. Depken and Wilson (2006) analyze data for 11 major Division I-A football conferences over the period 1953-2003 and find that a greater level of NCAA enforcement actions (i.e., investigations and probations) in a conference is associated with an improvement in competitive balance, whereas a greater severity of punishment is associated with a reduction in competitive balance; they conclude that, “on average, the net effect of NCAA enforcement is an improvement in competitive balance.” (p. 826) Likewise, Depken and Wilson (2004b) analyze data for 10 major Division I-A football conferences over the period 1888-2001, but they reach a more ambiguous conclusion: “Our pooled results do support the claim that NCAA enforcement may have the unintended consequence of reducing competitive balance, although we do find evidence that might support the NCAA’s stated goal of enforcement, namely to improve competitive balance.” (p. 241) Eckard (1998), however, argues that cartel theory predicts that the NCAA will attempt to inhibit poor teams from improving and work to protect the strong teams from competition. Consistent with this prediction, Eckard finds that yearto-year changes in national rankings and conference standings declined in 1952 when the NCAA introduced a workable mechanism for enforcing player eligibility, recruiting, and financial aid restrictions. Also consistent with Eckard’s prediction is the finding of Fleisher, Shughart, Tollison, and Goff (1988) that enforcement of the NCAA’s rules benefit teams which have been consistent winners at the expense of lower quality (but rapidly improving) teams. Restrictions on player eligibility – the no-draft and no-agent rules. Compensation restrictions are not the only restrictions that the NCAA imposes on players who wish to compete in NCAA events. The NCAA also places restrictions on players’ signing with agents and taking part in the entry drafts of the professional sports leagues. Moreover, the NCAA has a rule preventing a player from competing in intercollegiate athletics while in a graduate program other than one at the student’s undergraduate institution. Student-athletes have been unsuccessful in challenging these restrictions on antitrust grounds. The NCAA’s no-draft and no-agent rules were challenged as illegal restraints on trade in violation of Section 1 of the Sherman Act by Braxston Banks, a Notre Dame football player who entered the 1990 NFL draft after sitting out his senior year (1989) due to a knee injury. Banks was not selected in the draft and failed to join a team as a free agent. Therefore, Banks wanted to return to Notre Dame to play one more year, but by entering the NFL draft and signing with an agent he had violated two NCAA eligibility rules and thus lost his final year of intercollegiate eligibility. Banks filed an antitrust lawsuit alleging that the NCAA rules restricted the labor market opportunities for collegiate football players and constituted a group boycott by NCAA and NFL teams. The district court dismissed Banks’ claims, finding that Banks failed to tie his allegations to any competitive impact on any identifiable market. The appeals court agreed, and - -

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noted that the no-draft rule and other similar NCAA regulations preserve the bright line of demarcation between college and “play for pay” football.103 The appeals court also rejected Banks’ contention that NCAA member schools are ‘purchasers of labor’ via grant-in-aid athletic scholarships because the value of those scholarships depends on a school’s tuition and room and board, and not on the supply and demand for players. Moreover, the appeals court argued that the NCAA is not, and should not become, a minor league farm system for the NFL: The involvement of professional sports agents in NCAA football would turn amateur intercollegiate athletics into a sham because the focus of college football would shift from educating the student-athlete to creating a “minor-league” farm system out of college football that would operate solely to improve players’ skills for professional football in the NFL. We should not permit the entry of professional athletes and their agents into NCAA sports because the cold commercial nature of professional sports would not only destroy the amateur status of college athletics but more importantly would interfere with the athletes’ proper focus on their educational pursuits and direct their attention to the quick buck in pro sports. The no-agent and no-draft rules are vital and must work in conjunction with other eligibility requirements to preserve the amateur status of college athletics, and prevent the sports agents from further intruding into the collegiate educational system. In his dissenting opinion, Justice Flaum argued that Banks had identified a relevant market – the college football labor market – and explained how the NCAA no-draft and no-agent rules harmed competition in that market. Schools compete for football players by not only offering scholarships covering tuition and room and board, but also by offering non-monetary benefits such as the football coach’s or program’s reputation and the quality of the school’s academic program. Thus, schools pay a ‘price’, not limited to monetary terms, to obtain the services of football players. The no-agent and no-draft regulations eliminate some forms of competition in the college football labor market and, therefore, are anticompetitive – and, consequently, Banks’ claims should not have been dismissed. However, the fact that the no-agent and no-draft rules are anticompetitive does not mean that they necessarily would not survive a rule of reason analysis. In other words, the no-agent and no-draft regulations may be shown to have a pro-competitive rationale. As Justice Flaum observed, “It may very well be that the no-draft and no-agent rules are essential to the survival of college football as a distinct and viable product, in which case Banks would lose.” Bradford Gaines, a Vanderbilt University student, was ineligible to compete in the 1990-91 college football season because he ‘irrevocably’ renounced ‘any and all’ remaining football eligibility so he could enter the 1990 NFL draft. Gaines was not selected by any NFL team and failed to sign a free 103

Banks v. NCAA, 977 F.2d 1081 (7th Cir. 1992). - -

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agent contract with either an NFL or Canadian Football League (CFL) team. Gaines sought to return to Vanderbilt to play another year of college football, in violation of the NCAA’s no-draft and no-agent rules. Gaines filed an antitrust lawsuit alleging that the NCAA’s refusal to allow collegiate players who unsuccessfully enter the NFL draft to return to play NCAA football is an unlawful exercise of monopoly power in violation of Section 2 of the Sherman Act. The district court noted that Gaines would have to show that the NCAA (1) possesses monopoly power in the relevant market and (2) willfully acquired or maintained that monopoly power – as opposed to possessing that monopoly power due to growth or development as a consequence of a superior product, business acumen, or historic accident.104 Gaines argued that the relevant product market is ‘major college football services’ and consisted of players in Division 1-A football programs; the NCAA controls 100% of the market. The NCAA argued that there were other ‘buyers’ for major college football player services, including the NFL, CFL, the World League of American Football, and the Arena Football League; the NCAA does not have monopoly power over this broader market. The district court noted that it “is hard-pressed to see any validity to the parties’ interpretation of college football players like Brad Gaines as ‘sellers’ and NCAA schools and professional football leagues or teams as ‘buyers’ in an economic market.” However, the district court found it unnecessary to decide the proper market definition since Gaines had failed to demonstrate that the NCAA willfully acquired or maintained its monopoly power: This Court is convinced that the NCAA Rules benefit both players and the public by regulating college football so as to preserve its amateur appeal. Moreover, this regulation by the NCAA in fact makes a better ‘product’ available by maintaining the educational underpinnings of college football and preserving the stability and integrity of college football programs. Therefore, Gaines cannot succeed on the merits of his §2 claim because the NCAA has shown legitimate business justifications for the Rules at issue. It seems obvious to this Court that rules which are justified by legitimate business reasons necessarily cannot be deemed ‘unreasonably exclusionary’ or ‘anticompetitive.’ Thus, the legitimate business reasons of the NCAA justifying enforcement of the eligibility Rules negate any attempt by Gaines to show the second element of a §2 claim – willful maintenance of monopoly power. Consequently, regardless of whether the NCAA justifications are viewed as a defense to a §2 challenge or rather as proof contradicting an assertion of willful monopolization, they necessitate a ruling by this Court in favor of the Defendants at this preliminary injunction stage of the proceeding.

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Gaines v. NCAA, 746 F. Supp. 738 (M.D. Tn 1990). - -

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Thus, like restrictions on player compensation, the NCAA’s no-draft and no-agent rules are ‘reasonable’ means employed by the NCAA to offer its unique product – ‘amateur’ athletics. Restrictions on academic eligibility. The NCAA imposes academic requirements on student-athletes. In 1965, the NCAA required incoming studentathletes to have a minimum high school grade point average of 1.6 out of a possible 4.0. Such a requirement acts as an entry barrier, which may be welcomed by some schools and opposed by others. For example, schools with high academic standards may favor a high minimum high school grade point average for incoming student athletes because it improves their ability to compete against schools with lower academic standards. On the other hand, schools with major revenue-generating athletic programs may oppose a minimum high school grade point average because such a rule may impair their ability to field an elite team, thereby reducing the revenue generated by their athletic programs. Interestingly, Depken and Wilson (2004a) estimate a model of the competitive balance among Division I-A football teams over the period 1888-2001 and find some evidence that competitive balance declined after the adoption of the minimum high school grade point average in 1965. In 1986, the NCAA voted on Proposition 48, a Scholastic Aptitude Test (SAT) requirement for freshmen eligibility which included a provision that a student-athlete’s high school grade point average could offset a low SAT score. An earlier proposition would have made freshmen eligibility exclusively dependent on the student-athlete’s SAT (or ACT) score. As in the case of the minimum high school grade point average requirement, the ‘exclusive’ SAT requirement may be supported by schools with high academic standards and opposed by those with low academic standards, whereas the more flexible Proposition 48 may be favored by institutions with low academic standards and opposed by those with high academic standards. Fleisher, Goff, and Tollison (1991) examine voting on Proposition 48 by the 82 institutions with Division I-A football programs and, consistent with the hypothesis that schools vote in their competitive self-interest, find that athletic conferences with higher average SAT scores were less likely to vote in favor of Proposition 48. Fleisher, Goff, and Tollison comment: “Proposition 48 works like an entry barrier whether it was conceived as such or not.” (p. 178) Restrictions on transferring to another academic institution. The NCAA requires that a student-athlete who transfers to another academic institution ‘sit out’ a year before participating in intercollegiate athletics. Some athletic conferences, such as the Pacific-10, have their own set of transfer restrictions. The NCAA also has a Postbaccalaureate Bylaw, which prohibits a student-athlete from participating in intercollegiate athletics after enrolling in a graduate program at an institution other than the student-athlete’s undergraduate institution. Both sets of ‘anti-transfer’ rules have been challenged on antitrust grounds, albeit unsuccessfully. Rhiannon Tanaka, a star high school soccer player, enrolled at the University of Southern California (USC), a member of the Pacific-10 (Pac-10) athletic conference, for the 1994-95 academic year. In the spring of 1995, - -

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dissatisfied with the quality of USC’s education, Tanaka sought to transfer to the University of California, Los Angeles, another Pac-10 member. Pac-10 Rule C 83-b governed intra-conference transfers and held that, before a transferring player could compete for his or her new team, the student-athlete first had to fulfill a residence requirement of two full academic years, would be charged two years of eligibility in all Pac-10 sports, and, for the two years of athletic ineligibility, could not receive any athletically-related financial aid. USC was satisfied with a less severe sanction, insisting that Tanaka ‘sit out’ a single academic year and lose one year of eligibility. Tanaka also did not receive any athletically-related financial aid during her first semester at UCLA. Tanaka filed an antitrust lawsuit against USC, the Pac-10, and the NCAA, alleging the Pac-10 transfer rule violated Section 1 of the Sherman Act. The district court dismissed her complaint because the Pac-10 transfer rule was “noncommercial” in nature (recall that establishing a claim under Section 1 requires a showing that the agreement unreasonably restrains “trade”) and, even if it was “commercial” in nature, it would still not violate the antitrust laws because the rule would not be found to be unreasonable under a rule of reason analysis. Tanaka appealed. The appeals court declined to decide whether the Pac-10 transfer rule was “commercial” in nature and instead assumed it was and proceeded to analyze the rule under a rule of reason analysis.105 The appeals court rejected both the relevant product market (i.e., UCLA women’s soccer program) and relevant geographic market (i.e., Los Angeles) identified by Tanaka, arguing that just because Tanaka’s personal preference was to play in Los Angeles did not imply that Los Angeles was an “area of effective competition” for student-athletes competing for positions in women’s intercollegiate soccer programs. Rather, the geographic market was national in scope, as evidenced by the fact that Tanaka was recruited by schools throughout the United States. Moreover, those schools were from a number of athletic conferences, not just the Pac-10, and thus these athletic conferences had to be included in the relevant product market. The appeals court also argued that Tanaka failed to allege that the Pac-10 transfer rule has an anticompetitive effect in a relevant market, however defined, because the rule governs only intra-conference transfers and thus would likely have no anticompetitive effect on a national market and, furthermore, Tanaka alleges that the application of the transfer rule was an isolated act of retaliation against her – an injury to herself as opposed to an injury to a definable market. The appeals court noted that an analogy could be drawn between the Pac-10 transfer rule and the “Rozelle Rule” which was found to fail a rule of reason analysis in Mackey v. NFL. The Rozelle Rule gave the NFL Commissioner the authority to award one or more players from a team that signed a free agent to the team losing the free agent as compensation, thereby discouraging the signing of free agents by other teams; however, unlike the Pac-10 transfer rule, the Rozelle Rule applied to every NFL player. (The Rozelle Rule and Mackey decision are discussed in more detail later in this chapter.)

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Tanaka v. USC, 252 F.3d 1059 (9th Cir. 2001). - -

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Tanaka included the NCAA as a defendant even though the NCAA transfer rule was not applied to her. She alleged that the NCAA “contracted, combined or conspired” with the other plaintiffs. The appeals court rejected her argument. Thus, the appeals court affirmed the district court’s decision dismissing Tanaka’s complaint. Although Tanaka’s antitrust challenge to the Pac-10 transfer rule was unsuccessful, Konsky (2003) argues that the NCAA’s transfer rules do not survive a rule of reason analysis and therefore they violate Section 1 of the Sherman Act.106 Konsky contends that the NCAA transfer rules are subject to the antitrust laws because they are “sufficiently commercial” – the rules are motivated by commercial rationales (e.g., the rules facilitate the maintenance of high-quality athletic programs at low cost by enabling coaches to “lock in” student-athletes); the rules are not motivated by academic goals (e.g., the rules do not take into account transfers done for academic reasons other than the discontinuation of the student-athlete’s academic program at the school); and the rules are not motivated by the NCAA’s amateurism goals (e.g., the amateur nature of college athletics would not be threatened by the mobility of student-athletes). Following a rule of reason analysis, Konsky then explains that the transfer rules affect a significant market, namely, the market for student-athlete services, and constitute a horizontal restraint on trade within that market. In particular, the transfer rules restrict the movement of players between schools and remove some players from the market altogether (e.g., players who have one year of eligibility remaining after four years of school due to being ‘redshirted’ one year and thus who cannot transfer without losing their remaining eligibility). Moreover, Konsky argues that the NCAA transfer rules have few, if any, pro-competitive effects – the rules are not needed to preserve the ‘unique’ product of college athletics, do not necessarily enhance public interest in (i.e., demand for) college sports, and do not necessarily enhance competitive balance because the bench players from the elite programs may transfer to lower-ranked programs to get more playing time, thereby increasing the quality of the lower-ranked teams and reducing the depth of talent at the elite programs. Furthermore, any pro-competitive effects of the transfer rules could be achieved via less restrictive means, such as allowing more exceptions for academically-related transfers and transfers of players recruited by a coach who has left the team. The NCAA’s Postbaccalaureate Bylaw has also been unsuccessfully challenged on antitrust grounds. Renee Smith graduated from St. Bonaventure in two and a half years, having played two seasons of intercollegiate volleyball (she chose not to play a third season). She then enrolled in a postbaccalaureate program at Hofstra and enrolled in a second postbaccalaureate program at the University of Pittsburgh. Neither postbaccalaureate program was offered at St. Bonaventure. The NCAA would not allow Smith to play volleyball for either Hofstra or the University of Pittsburgh. Smith filed an antitrust lawsuit alleging that the Postbaccalaureate Bylaw is an unreasonable restraint of trade in violation of Section 1 of the Sherman Act. The district court dismissed Smith’s claim 106

For an argument that the NCAA transfer rules can be successfully challenged under the laws regarding covenants not to compete, see Yasser and Fees (2005). - -

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because “the actions of the NCAA in refusing to waive the Postbaccalaureate Bylaw and allow the Plaintiff to participate in intercollegiate athletics is not the type of action to which the Sherman Act was meant to be applied.” Smith appealed, but the appeals court agreed with the district court:107 We agree with these courts that the eligibility rules are not related to the NCAA’s commercial or business activities. Rather than intending to provide the NCAA with a commercial advantage, the eligibility rules primarily seek to ensure fair competition in intercollegiate athletics. Based upon the Supreme Court’s recognition that the Sherman Act primarily was intended to prevent unreasonable restraints in ‘business and commercial transactions,’ … and therefore has only limited applicability to organizations which have principally noncommercial objectives …, we find that the Sherman Act does not apply to the NCAA’s promulgation of eligibility requirements. Moreover, the appeals court ruled that the NCAA’s Postbaccaluareate Bylaw would survive a rule of reason analysis: We agree with these courts that, in general, the NCAA’s eligibility rules allow for the survival of the product, amateur sports, and allow for an even playing field… Likewise, the bylaw at issue here is a reasonable restraint which furthers the NCAA’s goal of fair competition and the survival of intercollegiate athletics and is thus procompetitive. Clearly, the rule discourages institutions with graduate or professional schools from inducing undergraduates at other institutions to forgo participating in the athletic programs at their undergraduate institutions in order to preserve eligibility to participate in intercollegiate athletics on a postbaccalaureate basis. Likewise, the rule discourages undergraduates from forgoing participation in athletic programs on their own initiative to preserve eligibility on a postbaccalaureate basis at another institution. Indeed, we think that the bylaw so clearly survives a rule of reason analysis that we do not hesitate upholding it by affirming an order granting a motion to dismiss Smith’s antitrust count for failure to state a claim on which relief can be granted. In summary, collegiate transfer rules have thus far been found by the courts to not violate the antitrust laws. However, some commentators believe that the transfer rules could be successfully attacked on antitrust grounds. Restrictions on the number of athletic scholarships.108 In August 2004, a group of non-scholarship (‘walk-on’) student-athletes in Division I-A football 107

Smith v. NCAA, 139 F.3d 180 (3rd Cir. 1998). 108 The discussion in this section is based primarily on the Consolidated Class Action Complaint, Defendant’s Motion for Judgment on the Pleadings, and Order in In re: NCAA I-A Walk-on Football Players Litigation. - -

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programs filed a consolidated class action lawsuit alleging that the NCAA’s limit on the number of athletic scholarships such programs could award violated Sections 1 and 2 of the Sherman Act. At the time, the average Division I-A football roster had roughly 117 players, but the NCAA only allowed programs to award 85 scholarships. Thus, the average team had 32 ‘walk-on’ players. Plaintiffs alleged that, but for the NCAA’s scholarship limit, all walk-on players in Division I-A programs would have received full scholarships because schools attempting to make their teams more competitive on the field would offer more scholarships, which would force other schools to offer more scholarships as well. In particular, Plaintiffs alleged: The NCAA’s artificial limit on the number of football scholarships is classic cartel behavior. The NCAA and its member institutions control big-time college football. The NCAA uses that control to maximize revenues and minimize costs. According to the NCAA’s own figures, Division I-A schools earned on the average $25.1 million in athletic revenue in 2003, up from $13.6 million in 1993. The agreed restrictions on football scholarships have allowed Division I-A schools to generate that revenue at a lower cost, but at the expense of the class of “walk-on” players who are excluded from the scholarship system by this horizontal and unlawful restraint of trade. The NCAA did not always limit the number of scholarships. In 1956, the NCAA allowed the awarding of scholarships solely on the basis of athletic ability and, prior to 1977, there was no limit on the number of scholarships a Division IA football program could award. In 1977, the NCAA capped the total number of scholarships at 95 and the number of new scholarships that could be awarded each year to 25. The cap on the total number of scholarships was lowered to 92 in 1992, 88 in 1993, and 85 in 1994. Plaintiffs argued that the relevant product market is NCAA Division I-A football and the relevant geographic market is the United States. They allege that “the NCAA’s members have created a horizontal restraint of trade – an agreement among competitors on the way in which they will compete with one another, whereby they have agreed to restrict competition for one of the major inputs to the product.” Plaintiffs contend that the scholarship limit was implemented to reduce the cost of one of the inputs, not to improve competitive balance among Division I-A football programs or achieve any other procompetitive effect. As evidence that the NCAA’s scholarship limit has a ‘commercial” purpose, Plaintiffs observe that the scholarships are not awarded based on financial need or academic merit. Rather, the scholarships are used to obtain players, one of the inputs needed to produce NCAA Division I-A football. And schools tend to profit enormously from the sale of that product – in 2001, the average Division I-A school obtained almost $11 million from its football program, while total football-related expenses averaged only $6.2 million.

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The NCAA asked the district court to dismiss the case, setting forth four main arguments, each of which the district court found unconvincing.109 First, the NCAA argued that NCAA rules preserving amateurism and fair competition have been found by the courts not to violate the Sherman Act and that athletic scholarships are not “compensation” for athletic participation – student-athletes are not employees of the school who are “paid to play.” According to the NCAA, there is no “trade” in student-athlete services – there is no commercial market for college football players – which implies that the NCAA scholarship limit cannot restrain “trade” or “commerce.” Competition between schools for student-athletes is not “trade” or “commerce” simply because football scholarships have a monetary value. The district court countered that, while courts have upheld NCAA bylaws protecting amateurism in college athletics, the NCAA is not exempt from the antitrust laws and some courts have found that NCAA rules and regulations implicate “trade” or “commerce.” Moreover, the district court found that the NCAA scholarship limit “is not on all fours with those cases which hold that NCAA eligibility rules are not subject to the Sherman Act.” Plaintiffs are not challenging amateurism in Division I-A football. Second, the NCAA argued that Plaintiffs have not alleged a legally cognizable relevant market. According to the NCAA, Plaintiffs’ relevant market was not defined with reference to reasonable interchangeability and the crosselasticity of demand. Other potential substitutes for Division I-A college football include Division I-AA football, Division II football, Division III football, professional football, college football at non-NCAA institutions, junior college football, other fall sports (e.g., baseball, basketball, hockey, soccer, lacrosse), and other forms of entertainment (e.g., movies, concerts). Thus, a high school football player who wants to play collegiate football has numerous options other than attending a Division I-A school. The district court countered that, at this stage of the litigation, “Plaintiffs have alleged a sufficient ‘input’ market in which NCAA member schools compete for skilled amateur football players.” Third, the NCAA argued that Plaintiffs did not allege an injury to competition. According to the NCAA, Plaintiffs failed to explain how consumers are harmed in any relevant market by the scholarship limit. The district court countered that Plaintiffs have described an injury to the input market – walk-ons are left with enormous student loans while the NCAA and its members save hundreds of millions in scholarship money. Fourth, the NCAA argued that the Plaintiffs provided insufficient factual allegations showing that the NCAA possessed monopoly power in any relevant market. According to the NCAA, Plaintiffs failed to show that (1) the NCAA has monopoly power in any relevant market and (2) the NCAA has willfully acquired or maintained its purported monopoly. The district court countered that the traditional definition of ‘monopoly power’ is “the power to control market prices or exclude competition” and Plaintiffs have alleged that the NCAA is a “classic cartel” which “exercises an almost absolute control over intercollegiate athletics.”

109

In re: NCAA I-A Walk-on Football Players Litigation, Case No. C04-1254C, W.D. Washington at Seattle (September 14, 2005). - -

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Thus, the district court declined the NCAA’s motion to dismiss the case. Of course, that by no means implies that the district court believed that Plaintiffs had actually proved their allegation that the NCAA scholarship limit violates the Sherman Act. Whether Plaintiffs will succeed in doing so remains to be seen. The Plaintiffs’ case suffered a blow on May 3, 2006 when the district court denied class certification because it was not convinced that all walk-on players would have received scholarships but for the NCAA scholarship limit.110 Sutter and Winkler (2003) cite two pieces of evidence which cast doubt on any pro-competitive rationale for the scholarship limit. First, they compare competitive balance before and after the adoption of the scholarship limit and find that competitive balance in Division I-A football has not increased since 1977. Second, they show that NCAA members with stronger Division I-A football teams were more likely to vote in favor of a reduction in the number of football scholarships, which suggests that the scholarship limit functioned to protect the elite football programs from competition from programs seeking to field a top quality team. Sutter and Winkler conclude: “If traditional powers attract more and better walk-ons, this would suggest that marginally lower scholarship limits will not increase parity and may even entrench incumbents.” (p. 16) Restrictions on the dollar value of athletic scholarships.111 On February 17, 2006, a group of student-athletes on athletic scholarships filed an antitrust lawsuit against the NCAA over its cap on the dollar value of such scholarships. The student-athletes competed in the NCAA’s two “revenue sports” – Division IA football and basketball. The NCAA permits “full ride” athletic scholarships to cover only tuition, mandatory fees, room and board, and required books. Expenses such as school supplies, recommended textbooks, laundry expenses, health and disability insurance, travel costs, and other incidental expenses are not covered. As a result, the NCAA caps the value of athletic scholarships at a level below the “full cost of attendance.” Plaintiffs allege that, but for the NCAA cap, competition among Division I-A schools would drive the value of athletic scholarships up to at least the full cost of attendance. According to the Plaintiffs, the NCAA’s own estimate is that a student-athlete on a full athletic scholarship must cover an average of $2,500 in out-of-pocket expenses. Plaintiffs allege that there is no cognizable justification for the NCAA’s cap on the value of athletic scholarships – it is not reasonably necessary to preserve ‘amateurism’ in NCAA athletics; it is simply a cost-containment measure. Effective August 1, 2004, the NCAA relaxed the cap in the sense that student-athletes can now receive need-based grants and loans in addition to the athletic scholarship. However, student-athletes still cannot receive, in excess of the athletic scholarship, financial aid based in whole or in part on their athletic talents and accomplishments. Thus, Plaintiffs allege that the NCAA continues to cap the value of scholarships based on athletic talent and accomplishment that student-athletes can receive. 110

In re: NCAA I-A Walk-on Football Players Litigation, 2006 WL 1207915 (W.D. Wash. May 3, 2006). 111 The discussion in this section is based on the complaint in White v. NCAA (2006). - -

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According to the Plaintiffs, the relevant product markets are the markets for major (Division I-A) college football and basketball. The relevant markets do not include the Army, Navy, and Air Force Academies because they do not offer athletics-based financial aid. The colleges and universities in the relevant markets compete with one another in the recruitment of student-athletes by offering prospective student-athletes grants of athletics-based financial aid. The relevant geographic market is the United States. The cap on the value of athletic scholarships is binding, as evidenced by the fact that all (or nearly all) of such scholarships are for the maximum amount permitted by the NCAA. Thus, Plaintiffs argue, in the absence of the cap, the value of the athletic scholarships they received would have been (at least) the full cost of attendance. As evidence that the NCAA cap affects interstate commerce, Plaintiffs report that during the academic year 2004-2005, revenues for Division I-A football and basketball programs exceeded $2.2 billion and their profits exceeded $900 million. During academic year 2002-2003, 68% of Division I-A football programs were profitable, with an average profit of $9.2 million, and 70% of Division I-A basketball programs were profitable, with an average profit of $3 million. The average profit at Division I-A schools from football and basketball was $8 million. Plaintiffs allege that athletic scholarships awarded to studentathletes are “commercial transactions that affect interstate commerce.” Plaintiffs also allege: “There is no practical alternative to NCAA membership for any academic institution that wishes to sponsor a major college sports program.” There is not a single academic institution with a major college sports program that is not a member of the NCAA, and thus must abide by NCAA rules. Academic institutions that violate the NCAA cap may be subject to an array of sanctions and the individual student-athlete who receives athletics-based financial aid in excess of the cap may be declared ineligible to compete in NCAA sports. As a result, Plaintiffs allege that, in violation of Section 1 of the Sherman Act, the NCAA and its members, via the cap on the value of athletic scholarships, have “contracted, combined and conspired to fix, depress or stabilize the amount, terms and conditions of athletics-based financial assistance to student athletes.” It will be interesting to see how this case is decided. One question is whether the cap is a reasonable means to preserve the unique character of collegiate athletics – amateurism. If there are no limits to what schools can ‘bid’ for the services of student-athletes, would NCAA athletics become a different product? MLB. As discussed in Chapter 2, Major League Baseball has been found by the U.S. Supreme Court to be exempt from the federal antitrust laws, at least with respect to MLB’s actions pertaining to the “business of baseball.” Two of the cases upholding MLB’s antitrust exemption involved players challenging MLB’s reserve clause. One of those cases, Flood v. Kuhn, was decided on a 5-3 vote, leading MLB to offer some concessions to the players, one of which – arbitration – would quickly lead to the introduction of free agency. Somewhat ironically, despite their antitrust exemption, MLB owners were found to have engaged in - -

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collusion in the mid-1980s, not in violation of the federal antitrust laws, however, but rather in violation of the “anti-collusion” clause in their collective bargaining agreement with MLB players. In 1998, Congress passed the Curt Flood Act, the purpose of which was “to state that major league baseball players are covered under the antitrust laws (i.e., that major league baseball players will have the same rights under the antitrust laws as do other professional athletes, e.g., football and basketball players), along with a provision that makes it clear that the passage of this Act does not change the application of the antitrust laws in any other context or with respect to any other person or entity.” Thus today, MLB’s antitrust exemption is limited in labor matters. The Reserve Clause. When the National League was organized in 1876, the teams competed to sign players and the best players earned as much as $4,500 per season (a large sum given that a skilled laborer working 60 hours per week might earn between $1,200 and $1,500 annually). 112 Raiding of each other’s rosters occurred, with some players jumping to a different team in mid-season. Thus, competition for players was not only costly to the team owners, the “integrity of the game” was brought into question as the quality of a team could swing dramatically in the course of a single season as top players jumped to (or from) a team. Team owners met to discuss roster jumping during the winter of 1878-79 and secretly agreed not to raid each other’s rosters during the season and to “restrain” themselves during the off-season. Specifically, each team would draw up a list of five players it wanted to keep on its roster the next season and teams agreed not to offer a contract to any of these “reserved” players. In 1883, the agreement was expanded from five “reserved” players on each team to all players. In 1887, it became a formal clause in players’ contracts. Minor league teams also implemented a reserve clause, which the National League refused to honor since it sought to be the league with the top players. Eventually the minor league teams reached a deal with the National League in which the latter could select players from the former in exchange for a fixed payment. In Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, the U.S. Supreme Court in 1922 ruled that the business of providing baseball games for profit between teams of professional players was not interstate commerce, and thus was not covered by the federal antitrust laws. The Court upheld MLB’s antitrust exemption in 1953, in the case of Toolson v. New York Yankees, where the Plaintiff professional baseball player challenged MLB’s reserve clause on antitrust grounds, and again in the 1972 case of Flood v. Kuhn where the Plaintiff challenged MLB’s reserve clause on antitrust grounds after being traded without his consent to another team. The Court did not affirm the Federal Baseball decision because it necessarily believed that the 1922 decision that the exhibition of baseball games was not interstate commerce was correct, but

112

The discussion in this paragraph and the next is based on Haupert (2003). For another discussion of the origins of the reserve clause, see Eckard (2001a), who concludes that the likely motive for the reserve rule was “monopolistic collusion.” - -

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rather because MLB had operated under the antitrust exemption for so long that the exemption should be removed by an act of Congress, not by the Court. However, the Court decision in Flood v. Kuhn was close, 5-3. 113 With three dissenting justices and one abstaining justice, MLB reportedly decided it was time to cut a deal with the players and, in 1973, MLB owners agreed that (1) players with 10 years of MLB experience and five years with the same MLB team could veto trades and (2) contract disputes involving players with at least two years of MLB experience would be handled via binding arbitration. In 1975, two players – Andy Messersmith of the Los Angeles Dodgers and Dave McNally of the Montreal Expos – on the advice of their agents, played the entire season without a contract and, when the season ended, claimed that the reserve clause no longer applied to them. In other words, the reserve clause only bound the player to his original team for one year after the player’s contract expired. The dispute went to professional arbitrator Peter Seitz, who ruled in favor of Messersmith and McNally – and was promptly fired by MLB. MLB owners responded by shutting down training camps and threatened to cancel the season unless the MLB Players Association (MLBPA) agreed to limits on the movement of players between teams. Nevertheless, the 1976 season began on schedule and, in the summer of that year, MLB and MLBPA signed an agreement that players would become free agents after six years in the major leagues and teams who lost players would receive compensation in the form of an additional pick in the amateur draft. Between 1976 and 1979, the average MLB salary more than doubled, from $45,000 to $100,000. The primary curb on what the MLB owners could do became not the federal antitrust laws, but rather the MLBPA. When, in 1979, MLB owners sought to change the form of compensation for the loss of a player to free agency from an additional pick in the amateur draft to a player from the free agent’s new team, the MLBPA objected, leading eventually to a 50-day strike during the 1981 season. Similarly, the players went on strike during the 1994 season to oppose MLB’s attempt to implement a salary cap. Numerous economic studies have documented how MLB’s reserve clause depressed player salaries and how player salaries soar as they first become eligible for binding arbitration and finally become free agents. The economic literature is summarized in Table 6.2.

113

The discussion in this paragraph and the next comes primarily from the Encyclopedia of American Industries website entry for “Professional Sports Clubs and Promoters” and an article from the ESPN website titled “Free Agency: How It Happened” and dated November 20, 2000. - -

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Table 6.2 The Impact of MLB’s Reserve System on Player Salaries

Study

Test

Result

Krautmann, Gustafson & Hadley (2000)

Compares salaries and MRPs of players ineligible for both arbitration and free agency (“apprentices”) and those eligible for arbitration but not free agency (“journeymen”) during the period 1988-94.

The average apprentice is paid $475,000 less than his MRP, while the average journeyman is paid slightly more than his MRP. The typical team extracts $3 million from its players bound by the reserve clause, but average team player development expenses are roughly $6 million per season.

Miller (2000)

Estimates separate salary regression models for free agents and arbitration-eligible players using data on players who became free agents or filed for arbitration during the 1991-94 seasons.

For hitters, the salary obtained via arbitration is approximately 10% less than the salary the player would have obtained in free agency; the corresponding figure for pitchers is 22%.

Krautmann (1999)

Imputes the market value of hitters under the reserve clause by estimating a model explaining free agent wages (which are assumed to equal free agent MRPs) using data on 215 hitters eligible for free agency in the period 1990-93.

“Apprentice” hitters are paid, on average, 25% of their MRP. Surplus extracted from the apprentices roughly equals the team’s training expenses.

Bodvarsson & Banaian (1998)

Estimates salary regression equation model using data for the 1986-88 season. Also estimates model of whether a player files for final offer arbitration. Focuses on 237 players eligible for final offer arbitration during the 1986 and 1987 seasons but not eligible for free agency at the end of the 1987 season.

For hitters, a one percent increase in the probability of filing for final offer arbitration increases salaries by 1.10% and those who do file increase their salaries by 29.3%; the corresponding figures for pitchers are 0.81% and 21.6%.

Blecherman & Camerer (1996)

Compares salaries and MRPs of hitters signing contracts after the end of the 1989 season and before the start of the 1990 season.

The non-free agents signed contracts for an average of $712,023 and had an average MRP of $704,317. In contrast, the free agents obtained an average salary of $934,115 but had an average MRP of only $604,678.

Krautmann & Oppenheimer (1996)

Uses MRP estimates of Zimbalist (1992), but nets out training costs.

The present value of the excess of MRP over salary for players bound by the reserve clause approximately equals the cost of training.

Gustafson & Hadley (1995)

Compares the salaries of players eligible and ineligible for arbitration for the 1990 season.

For both hitters and pitchers, arbitration-eligible players earn higher salaries than arbitration-ineligible players; 25.1% ($174,079) of the gap between the salaries of hitters eligible and ineligible for arbitration cannot be explained by other factors and thus is attributed to monopsony power; 40.5% ($242,965) of the corresponding gap for pitchers is attributed to monopsony power.

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Table 6.2 The Impact of MLB’s Reserve System on Player Salaries

Study

Test

Result

Telser (1995)

Re-examines net MRP estimates of Scully (1974).

The ratio of salary to net MRP is lower for star players than for average or mediocre players because of the ‘ultimatum game.’

MacDonald & Reynolds (1994)

Compares salaries of pitchers and hitters with 1-2, 3-6, and 7+ years of experience during the 1986 and 1987 seasons.

At the margin, hitters with 1-2 years of experience earn 5% of an additional increment in their career MRP, those with 3-6 years earn 58%, and those with 7+ years earn 106%. The corresponding figures for pitchers are 8%, 86%, and 122%.

Marburger (1994)

Compares salaries of pitchers and hitters (1) ineligible for both final-offer arbitration and free agency, (2) eligible for final-offer arbitration, and (3) eligible for free agency during the 1991 and 1992 seasons.

For hitters, becoming eligible for final-offer arbitration raises average salary from $438,000 to $675,000, a 54% increase. For pitchers, the increase is 32%. As players eligible for final-offer arbitration near eligibility for free agency, their average salaries rise to roughly equal that of free agents.

Kahn (1993)

Compares salaries of 4 classes of players: (1) players under the reserve clause and more than one year away from free agency, (2) players eligible for arbitration but more than a year away from free agency, (3) players in their last year before free agency, and (4) players who are free agents. The sample period is 1987-90.

Players eligible for arbitration but more than a year from free agency have higher salaries than players under the reserve clause. Players in their last year prior to free agency have salaries similar to free agents, and both have higher salaries than those eligible for arbitration. Free agents and players in their last year prior to free agency use their bargaining power to secure longer, guaranteed contracts.

Fort (1992)

Calculates Gini coefficients for salaries before (1965-74) and after (1986-90) free agency.

Gini coefficient rose from 0.354 to 0.505, implying that salary inequality has increased after free agency.

Johnson (1992)

Compares salaries of black and white players who were and were not eligible for free agency during the 1987 season.

No statistically significant impact of free agency eligibility on salaries of white players; black players eligible for free agency have significantly lower salaries than black non-free agents.

Zimbalist (1992)

Estimates MRPs for “apprentice” hitters under the reserve clause without salary arbitration rights, “journeymen” hitters with arbitration rights and the imminent prospect of free agency, and “master” hitters. The sample period is 1986-89.

Apprentice hitters are paid 17-25% of their MRP; journeymen hitters are paid 50-64% of their MRP; master hitters are paid more than their MRP.

Hadley & Gustafson (1991)

Compares salaries of pitchers and hitters (1) ineligible for both final-offer arbitration and free agency, (2) eligible for final-offer arbitration, and (3) eligible for free agency during the 1989 season.

The average hitter and pitcher, respectively, experiences a 60.7% and 70.7% salary increase when eligible for arbitration. The average salary increase for free agents versus players ineligible for both free agency and arbitration is 43.3% for hitters and 35.2% for pitchers.

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Table 6.2 The Impact of MLB’s Reserve System on Player Salaries

Study

Test

Result

Hill (1985)

Estimates MRPs for hitters and pitchers before (1976) and after (1977) free agency, with the 1977 sample restricted to players who were not free agents in the 1977 season.

In 1976, below-average hitters received salaries in excess of their net MRP, while average and star hitters received 1334% of their net MRP. Average and below-average pitchers and some star pitchers received salaries in excess of their net MRPs. The most “exploited” star pitchers receive 30% of their net MRP. In 1977, “exploitation rates” generally declined.

Hill & Spellman (1983)

Compares salaries in the season before (1976) and after (1977) free agency.

Holding ability and experience constant, free agents in 1977 received higher salaries than non-free agents; for both pitchers and hitters, compensation in 1977 was based more on past performance and less on seniority.

Raimondo (1983)

Estimates MRPs for the 1977 (post-free agency) season using the methodologies of Scully (1974) and Medoff (1976); compares results to those of Scully (1974) and Medoff (1976) for the pre-free agency period.

Holding player type (hitter, pitcher), quality (star, average, mediocre), and methodology (Scully, Medoff) constant, salary as a percentage of MRP is much higher for the free agents relative to both (1) players in the pre-free agency period and (2) non-free agents in the post-free agency year of 1977.

Lehn (1982)

Compares average real salaries before (197176) and after (1977-80) free agency.

In 1977, the first year of free agency, the average real salary rose from $51,501 to $76,066, a 39% increase. In 1978, it rose to $99,876, an additional 22% increase. Increases in 1979 and 1980 were only 2.2% and 1.2%, respectively. The number of guaranteed years on players’ contracts rose sharply after free agency.

Sommers & Quinton (1982)

Estimates MRPs for the 14 most sought-after players who became free agents after the 1976 season using data for the 1977 season.

Although the five pitchers generated gross MRPs roughly equal to their annual contract costs and 7 of the 9 hitters also had gross MRPs in excess of their annual contract costs, only one free agent’s signing had a net benefit exceeding net cost (under the assumption the free agent would have been replaced on the roster with a non-free agent). Suggests non-free agents are underpaid.

Medoff (1976)

Estimates MRPs and compares them to players’ salaries for the 1972-74 seasons.

Star, average, and mediocre hitters are paid 41%, 36%, and 30% of their MRP, respectively; star, average, and mediocre pitchers are paid 49%, 51%, and 55% of their MRP, respectively.

Scully (1974)

Estimates net MRPs and compares them to players’ salaries for the 1968 and 1969 seasons. Net MRP equals MRP net of training and capital costs.

Star and average players receive salaries equal to 15% and 20% of their net MRPs, respectively. Mediocre players have salaries above their net MRPs, which are negative.

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Several studies focus on the period prior to the introduction of free agency. Scully (1974) examines data for the 1968 and 1969 seasons, prior to the introduction of free agency, and finds that ‘star’ and ‘average’ players received salaries equal to 15% and 20%, respectively, of their marginal revenue product net of training and capital costs, whereas ‘mediocre’ players had salaries in excess of their net MRP, which is negative. Medoff (1976) examines data for the 197274 seasons and finds that ‘star’, ‘average’, and ‘mediocre’ hitters are paid 41%, 36%, and 30% of their MRP, respectively, while the corresponding figures for star, average, and mediocre pitchers are 49%, 51%, and 55%. Telser (1995) shows that the ratio of salary to net marginal revenue product (NMRP) was a decreasing function of NMRP – the larger a player’s NMRP, the greater the team’s bargaining power with the player in salary negotiations. The reason was that the team could issue an “ultimatum” by offering a relatively small fraction of the player’s (large) NMRP and the player would find it extremely costly to decline the offer. In contrast, a player with a small NMRP would find it less costly a refuse a salary set at a small fraction of the player’s (small) NMRP. Thus, prior to the introduction of free agency, MLB players were paid far less than their MRP, with the possible exception of the worst players, who may have been overpaid. A number of studies focus on the period just before and after the introduction of free agency. Sommers and Quinton (1982), Lehn (1982), Raimondo (1983), Hill and Spellman (1983), and Hill (1985) all present evidence consistent with the hypothesis that MLB possessed monopsony power over baseball players prior to 1976 and that MLB’s monopsony power has diminished since that time. Economic studies also document that MLB’s monopsony power has been diminished by the introduction of binding arbitration. Using data for the 1989 season, Hadley and Gustafson (1991) compare the salaries of three groups of pitchers and hitters: (1) those ineligible for both final-offer arbitration and freeagency, (2) those eligible for final-offer arbitration, and (3) those eligible for free agency. They find that the average hitter who becomes eligible for arbitration experiences a 60.7% salary increase, while the corresponding figure for the average pitcher is 70.7%. Likewise, the average hitter and pitcher who become free agents (relative to players who are ineligible for both arbitration and free agency) experience an average salary increase of 43.3% and 35.2%, respectively. Similarly, Zimbalist (1992) examines data for the period 1986-89 and finds that ‘apprentice’ hitters under the reserve clause and without salary arbitration rights are paid 17-25% of their MRP, ‘journeyman’ hitters with arbitration rights and the imminent prospect of free agency are paid 50-64% of their MRP, and ‘master’ hitters are paid more than their MRP. Kahn (1993) examines data for the period 1987-90 and finds that players eligible for arbitration but who are more than one year from free agency have higher salaries than players under the reserve clause. Moreover, players in their last year prior to free agency have salaries similar to that of free agents; both have salaries higher than players eligible for arbitration and both use their bargaining power to secure longer, guaranteed contracts. Using data for the 1991 and 1992 seasons, Marburger (1994) finds that becoming eligible for final-offer arbitration raises the average salaries of hitters and pitchers by 54% and 32%, respectively. Furthermore, as players eligible for final-offer arbitration near eligibility for free-agency, their average salaries rise to roughly - -

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equal that of free agents. MacDonald and Reynolds (1994) find that, during the 1986 and 1987 seasons, hitters with 1-2 years of experience earned 5% of an additional increment in their career MRP, hitters with 3-6 years of experience earned 58%, and hitters with 7 or more years of experience earned 106%; the corresponding figures for pitchers were 8%, 86%, and 122%. Gustafson and Hadley (1995) find that, for the 1990 season, 25.1% ($174,079) of the gap between the salaries of hitters eligible and ineligible for arbitration cannot be explained by other factors and thus is attributed to MLB’s monopsony power; the corresponding figure for pitchers is 40.5% ($242,965). Blecherman and Camerer (1996) find that the average non-free agent signing a contract between the end of the 1989 season and prior to the start of the 1990 season was paid roughly his MRP, whereas the average free agent signing a contract during this period was paid roughly 50% more than his MRP. Bodvarsson and Banaian (1998) examine a sample of 237 players eligible for final offer arbitration during the 1986 and 1987 seasons but who were not eligible for free agency after the 1987 season. They document that players benefit from both the mere possession of final offer arbitration rights and from actually filing for arbitration. Moreover, they argue that these benefits are not due to player-sorting (i.e., teams are more likely to offer arbitration to higher-quality players). Miller (2000) examines players who became free agents or filed for arbitration during the 1991-94 seasons and shows that, although arbitration is associated with a lower salary than free agency, higher free agent salaries tend to lead to higher salaries awarded in arbitration. Some studies find that the ‘surplus’ extracted from the players bound by the reserve clause approximates (or may even be less than) the training costs incurred by the player’s team. Using the MRP estimates of Zimbalist (1992), Krautmann and Oppenheimer (1996) conclude that the present value of the excess of MRP over salary for players bound by the reserve clause approximately equals the cost of training. Likewise, Krautmann (1999) analyzes data for the period 1990-93 and concludes that, while ‘apprentice’ hitters are paid an average of 25% of their MRP, the surplus extracted from those players roughly equals the team’s training expenses. Krautmann, Gustafson, and Hadley (2000) examine data for the period 1988-94 and conclude that the typical team extracts $3 million from its players bound by the reserve clause, but the team’s player development expenses average $6 million per season. Several pro-competitive rationales for MLB’s reserve clause have been proposed. Miceli (2004) presents a model in which the reserve clause benefits players because it gives teams an incentive to invest in a player’s development, thereby increasing the likelihood that the player will be able to play at the major league level. The problem is that once a player is sufficiently developed, the team that invested in the player’s development may find itself outbid for the player’s services by other teams – and if teams cannot obtain a “return” on their investment in a player’s development, teams have little incentive to make such an investment. In other words, players face a trade-off between the salary they receive assuming they make the major leagues and the probability of making the major leagues. By accepting a lower salary initially at the major league level, a player provides his team with an incentive to invest in his development and thereby increases the probability that he will develop into a major league player. Thus, both players and teams benefit from the reserve clause. - -

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Another possible pro-competitive rationale for MLB’s reserve clause was to improve competitive balance. By preventing wealthy teams from bidding for the players of other teams, wealthy teams could not simply offer the largest salaries to the league’s best players and thereby “buy” a championship. The dynamics of the reserve clause are not that simple, however, because teams are allowed to trade players and thus the wealthy teams can attract the league’s best players by offering the most lucrative trade. In other words, the distribution of players across teams should be independent of whether players are bound by a reserve clause or whether free agency exists. This is known as the “Coase Theorem.” The difference is that, under free agency, the team who loses a player may not receive anything in return (it depends on what free agent compensation rules have been agreed to by the league and the players’ association), whereas, under the reserve clause, the player may still go to a new team but the player’s original team will demand and receive something in return. Many studies test whether the Coase Theorem holds in major league baseball, with conflicting results. The economic literature is summarized in Table 6.3. Table 6.3 The Impact of MLB’s Reserve System on Competitive Balance Study

Test

Result

Fishman (2003)

Estimates a regression model of the standard deviation of team winning percentage using data for the 1950-2001 seasons.

The regression coefficient on the number of players who declared free agency the prior year is positive and statistically significant.

Depken (2002)

Compares Herfindahl Indices based on each team’s share of total home runs and total opponent strikeouts before (1920-76) and after (1977-96) free agency.

Concentration of home runs fell in the American League, but not in the National League. Concentration of opponent strikeouts fell (at the 90% confidence level) in the American League, but not in the National League.

Cymrot, Dunlevy & Even (2001)

Compares the movement of free agent and nonfree agent hitters across teams using data on players who played in both the 1979 and 1980 seasons.

The impact of the predicted gain from moving on the probability of changing teams is the same for free agents (who pocket the gain) and non-free agents (whose gain is pocketed by the club).

Eckard (2001b)

Compares variance of team winning percentage and the relative concentration of league championships (team with highest winning percentage at the end of the regular season) before (1961-76) and after (1977-92) free agency, excluding expansion teams. Also calculates average annual number of players traded or sold before (1973-75) free agency.

The variance of team winning percentage falls in the American League, but rises in the National League. In both leagues, the Herfindahl Index of teams with the highest winning percentage at the end of the regular season falls. Only 3.6% of “regular” and 2.3% of “impact” players were sold or traded during the 1973-75 period.

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Table 6.3 The Impact of MLB’s Reserve System on Competitive Balance Study

Test

Result

Depken (1999)

Compares Herfindahl Index calculated based on each team’s percentage of total wins before (19201976) and after (1977-96) free agency.

Concentration of wins increased in the American League, but not in the National League.

Horowitz (1997)

Compares entropy measure of competitive balance before (1903-75) and after (1976-95) free agency.

Competitive balance declined in the National League; no statistically significant change in the American League.

Ross & Lucke (1997)

Examines several measures of competitive balance using data from the period 1961-92: regresses a team’s winning percentage in the current season on its winning percentages for the prior three seasons; examines incidence of teams finishing the season within five games of first place in their division; examines incidence of teams going from ‘good-to-bad’ or ‘bad-to-good’; examines movement of pitchers on teams going from ‘good-to-bad’ or ‘bad-to-good.’

The coefficient on the one season lagged winning percentage is 0.444 in the period before free agency (1961-76) and 0.327 thereafter (1977-92); the incidence of teams finishing within five games of first place in their division is 1.94 during the period 1961-76 and 4.58 during the period 1977-92; incidence of teams going from ‘good-to-bad’ or ‘bad-to-good’ is higher after the introduction of free agency; after the introduction of free agency, there is a greater migration of pitching talent away from ‘good-to-bad’ teams and towards ‘bad-togood’ teams.

Hylan, Lage & Treglia (1996)

Compares the movement of free agent and nonfree agent pitchers across teams during the period 1961-92.

Probit analysis shows that attaining free agent status does not affect the probability of the pitcher changing teams; however, pitchers with seven or more years of service are less likely to move in the free agency era.

Vrooman (1996)

Compares season-to-season correlation of team winning percentage over the period 1970-93.

Regression coefficient on lagged winning percentage declines from 0.715 in 1970-76 to 0.717 during 197880, 0.450 during 1983-85, 0.311 during 1986-89, and 0.036 during 1990-93.

Butler (1995)

Compares the standard deviation of team winning percentage within a season and the season-toseason correlation of team winning percentage over the period 1946-92.

No statistically significant impact of free agency on the standard deviation of team winning percentage within a season; free agency significantly lowers season-toseason correlation of team winning percentage.

Fort & Quirk (1995)

Compares the standard deviation of winning percentage in the period before (1966-75) and after (1976-85) free agency.

No statistically significant change for either the American or National League.

Balfour & Porter (1991)

Compares variance of winning percentage and correlation of winning percentage across seasons before (1961-76) and after (1977-89) free agency.

Variance of winning percentage falls from 56.6 to 48.3, which is significant at the 90% confidence level; correlations of winning percentage across seasons using lags of one, two, and three years are sharply lower in the free agency era.

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Table 6.3 The Impact of MLB’s Reserve System on Competitive Balance Study

Test

Result

Drahozal (1986)

Examines movement of players signing guaranteed contracts of five or more years during the period 1977-81; compares standard deviation of winning percentage (excluding expansion teams) before (1972-76) and after (1977-82) free agency; compares rankings by population and winning percentage before (1972-76) and after (1977-82) free agency.

No evidence that free agents move from small cities to large cities. Standard deviation of winning percentage fell from 0.0607 to 0.0497 for National League teams, but rose from 0.0475 to 0.0561 for American League teams. Spearman correlation coefficient for population and winning percentage ranking fell from 0.329 to 0.231 for National League teams, but rose from 0.140 to 0.230 for American League teams.

Besanko & Simon (1985)

Compares player movements (1969-81), competitive equality (1970-83), and relationship between market size and team winning percentage (1970-83) before and after free agency.

No statistically significant change in any of the measures.

Dolan & Schmidt (1985)

Compares the concentration of team revenue, the standard deviation of team standings, and the Gini coefficient for total wins before (1969-76) and after (1977-83) free agency.

Concentration of team revenue (Gini coefficient, Herfindahl Index) rose significantly in the American League, but not in the National League; no statistically significant change in the standard deviation of team standings and Gini coefficient for total wins for either league.

Consistent with the Coase Theorem, Cymrot, Dunlevy, and Even (2001) find that, for players who played both the 1979 and 1980 season, the impact of the predicted gain from moving to a new team on the probability of changing teams is the same for free agents (who pocket the gain) and non-free agents (whose original team pockets the gain). They conclude that “the invariance property of the Coase Theorem is empirically supported by the analysis of the 1980 baseball labour market, and ‘Who’s on first’ and team competitive balance are indicated to not be dependent on the institution of player free agency.” (p. 602) Fort and Quirk (1995) compare the standard deviation of winning percentage in the period before (1966-75) and after (1976-85) free agency and find no statistically significant change in either the American or National League. Drahozal (1986) finds that, following the introduction of free agency, there was no significant movement of players from small market to large market teams, which suggests that “the reserve system did not significantly affect the distribution of playing talent.” (p. 117) Besanko and Simon (1985) find no statistically significant change in player movements, competitive equality, or the relationship between market size and team winning percentage before and after the introduction of free agency. In fact, Besanko and Simon document that “free agents (especially good ones) tend to end up signing with worse teams than the ones they leave”, which suggests that “diminishing returns to quality place a limit on the economic incentives for a large city team to dominate a league.” (p. 83) Dolan and Schmidt (1985) find no statistically significant change in the standard deviation of team standings and the

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concentration of total wins before (1969-76) and after (1977-83) the introduction of free agency. On the other hand, in violation of the prediction of the Coase Theorem, there is some evidence that the introduction of free agency has impacted the movement of players across teams. Depken (2002) finds that free agency reduced the concentration of home runs across teams, but did not affect the concentration of strikeouts or runs scored. He concludes that his results are consistent with an increase in player mobility after the introduction of free agency, but are not consistent with a monopolization of player talent by a minority of teams. Using data for the period 1961-92, Hylan, Lage, and Treglia (1996) document that “after the introduction of free agency, the pitchers with greater longevity in the major leagues are less likely to move relative to their mobility in the pre-free agency period” and, “in general, better pitchers are less likely to move and that pitchers playing on teams with higher winning percentages or in large market cities were less likely to move.” (p. 1030) Some studies report evidence suggesting that the demise of the reserve clause has led to a decline in competitive balance. For example, Fishman (2003) estimates a model of the standard deviation of team winning percentage using data for the period 1950-2001 and reports that the greater the number of players declaring free agency in the prior year, the greater the standard deviation of team winning percentage the following year. Fishman concludes that “free agency does have an effect on competitive balance (harmful) and that (due to transaction costs or economic distortions) the Invariance Proposition does not perfectly hold for Major League Baseball.” (p. 90) Depken (1999) finds that, after the introduction of free agency, the concentration of wins increased in the American League (but not in the National League), leading him to conclude that “free-agency has statistically reduced parity in the AL while it has had no statistically significant influence on parity in the NL.” (p. 216) Horowitz (1997) shows that competitive balance in MLB has been on an upward trend in the 20th century, but there have been a number of events that have reduced that upward trend. One of those events was the introduction of free agency – at least in the National League (but not in the American League). In contrast, a number of other studies find that the demise of the reserve clause may have improved competitive balance. For example, Eckard (2001b) documents a diminishing return to pennant contention after the introduction of free agency, in the sense that there is a greater decline in attendance for teams in the mist of several consecutive years of pennant contention. Thus, following the introduction of free agency, player talent is more likely to be reallocated to potential new contenders rather than the same contenders year-after-year. Eckard documents that “year-to-year fluctuations in league standings increased after free agency; cumulative win percent variance decreased; and the concentration of pennant winners declined in both the AL and the NL” and, therefore, “the 1976 introduction of free agency in MLB caused an increase in competitive balance.” (p. 442) Ross and Lucke (1997) state that “studies of Major League Baseball, where the labor market was transformed within a 1-year period in 1976 from a regime of almost complete monopsony – the famous reserve clause tying a player to a team for life – to virtually unlimited free agency for players with more than 6 years of major league service, now point to the conclusion that player restraints do - -

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indeed affect the allocation of players and the competitive balance among teams.” (p. 655) Ross and Lucke – as well as Vrooman (1996), Butler (1995), and Balfour and Porter (1991) – find that the correlation between a team’s current and lagged winning percentage since the introduction of free agency has declined. This suggests that the introduction of free agency has made it easier for bad teams to improve and more difficult for top teams to stay on top. Amateur Draft. MLB introduced a ‘reverse order’ amateur draft in 1965. The team with the worst winning percentage gets the first pick in the draft; the team with the second-worst winning percentage gets the second pick, and so on. Assuming teams have roughly similar abilities in scouting and developing talent, the worst teams should be able to draft higher quality players than the better teams, thereby improving the quality of the bad teams relative to the good teams. In other words, the reverse order amateur draft should improve competitive balance. The economic evidence, summarized in Table 6.4, is mixed. Fishman (2003) estimates a regression model of the standard deviation of team winning percentage over the 1950-2001 seasons. Although he finds that the dummy variable denoting the presence of the reverse order draft is negative, which is consistent with the hypothesis that the draft improves competitive balance, the coefficient is not statistically significant at the 5 percent level. On the other hand, Fort and Quirk (1995) and Daly and Moore (1981) report results generally consistent with the reverse order draft improving competitive balance.

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Table 6.4 The Impact of MLB’s Amateur Draft on Competitive Balance

Study

Test

Result

Fishman (2003)

Estimates regression model of the standard deviation of team winning percentage using data from the 19502001 seasons.

Coefficient on the dummy variable denoting the presence of the reverse order amateur draft is negative, but not statistically significant at the 5 percent level.

Fort & Quirk (1995)

Compares the standard deviation of winning percentage in the period before (1952-63) and after (1964-75) the rookie draft.

No statistically significant change for the National League; significant decrease for the American League, possibly due to the 1964 purchase of the Yankees by CBS and a large drop in the team’s winning percentage.

Compares the Gini coefficient for the concentration of championships in the period before (1952-63) and after (196475) the rookie draft.

Gini coefficient fell significantly for both American League (0.892 vs. 0.699) and National League (0.710 vs. 0.571).

Compares coefficient of variation of winning