The economics of sport

Sport as we know it today is a product of modern industrialised societies. It was in Great Britain, the cradle of the industrial revolution, where most sports began to be codified towards the close of the nineteenth century. The Duke of Wellington claimed that the Battle of Waterloo had been won on the playing-fields of Eton – in the days of Empire, sport was how the ruling classes trained their sons for their future roles in the army, industry and running the colonies. In the elite British schools the cult of sports, especially rugby and cricket, was given more emphasis than the academic curriculum. Actually, there is another theory which claims that sport was really invented to stop young boys masturbating, but I don’t think we’ll go there.

Initially the biggest conflict was between amateurism and professionalism, as sport, which had begun as the preserve of the upper classes, gradually became open to the working class participation. The sport/media complex has thrust sport into a dominant position in the twenty-first century.  We seem to back be to the Roman idea of bread and circuses. But with globalisation, television coverage, the internet, sports goods manufacturers, corporate sponsorship and government involvement, the reach and impact is far wider than the Romans could have ever have conceived.

Sporting salaries can always be relied upon to provoke outrage. It proves once again that what capitalism rewards is not merit but value added. So much depends on what sport you play and when you were born. Football has no more intrinsic merit than rowing but it does have so much more drawing power. Technology has transformed what sportsmen earn, enabling these modern gladiators to leverage their talent. The ultimate example of this has to be Tiger Woods, who has earned over a billion dollars in his career. Woods is also an example that wealth creation need not be a zero-sum game. He may have earned a lot of money, but that doesn’t mean there is less money for the other players. Quite the contrary; Woods has made the cake bigger for everyone. His recent hiatus was a disaster both for the game and his competitors.

When considering the economics of sport Europe and the United States offer a fascinating contrast. The American sporting model seems almost socialistic. I suppose this is because living under the cutthroat capitalism that is so prevalent in the USA is a bit tiring and they need a break from it. American sports leagues are basically cartels which exclude competition. Professional sports are the only private businesses in the United States that are largely exempt from anti-trust laws. They don’t compete with anyone else outside their borders. The leagues are closed; there is no promotion or relegation. This gives the owners a lot of economic stability. All of the teams have to participate in a revenue-sharing scheme designed to make sure the less wealthy teams get a share of the income earned by the richest teams. The other dominant aspect is the equality. There is a salary cap which limits the total amount a team can pay its players. The draft means that the worst teams, the teams that would have been relegated under the European system, can pick the best college players. How do Americans justify this flirtation with socialism? How can they reward failure? Ayn Rand must be turning in her grave. Well, the argument I have heard to justify this apparent betrayal of free market values is that sport is different to ordinary industries. There is an inherent value in a competitive balance that is necessary to produce the excitement and drama that make sporting contests so special. Sport, unlike trade, is a zero-sum game. Only one team can win and it would be boring if the same teams always won. However these economic policies mean that there is a dearth of truly great teams, what the Americans call dynasties. There is a joy in seeing a team reach maturity – they become part of sporting lore. This is one trade-off you face: greatness or competitiveness.

One other curiosity is the way American franchises sometimes move to other cities. This leads to some anachronistic names. There is no lake in Los Angeles but the Californian team’s name is a leftover of when the team was based in Minneapolis, which is on the coastline of the Great Lakes. And if you can’t imagine the Mormons playing bebop, or doing a bit of free improvisation, that is because the Utah Jazz get their name from New Orleans, the original home of the franchise.

The situation in Europe’s football leagues is much different and parity is not taken seriously by anyone. A few statistics should suffice. In England just four teams have won the Premiership since it was created in 1992 – Manchester United, Blackburn Rovers, Arsenal, and Chelsea. In Spain the situation is similar; Real Madrid and Barcelona have combined for 22 of the last 26 La Liga titles. To put this into perspective 13 different teams have won the Superbowl since 1990. It is true that 13 different teams have won the UEFA Champions league since its current format came into being in 1992. This seems to show that the big clubs have just grown too big for their national leagues. A European Super League has been broached a number of times but there would be huge outcry from the teams that were left out.

The most controversial area is ownership. While there are undoubtedly some colourful characters in US sport, they are nothing compared to what we see in England and Spain, especially the former. There may be a ‘Fit and Proper Person’ test, but as Tom Bower has pointed out, “No other country allows the crown jewels of their major sport to become the uncontrolled playthings of investors whose backgrounds remain untested.” There are a number of competing ownership models in Europe but I have to say I find none of them particularly convincing. England is big on plcs. The good aspect is the stock market demands much greater transparency but they are always vulnerable to takeovers. In Spain the big two are owned by their members. This has many positive features and many English fans envy this system. But I really don’t trust the Chairmen. They are spending other people’s money and they generally find it very difficult to resist the temptation to try to buy instant success and ignore the long-term economic consequences. I am a Real Madrid supporter but I have always felt a bit uneasy about Perez’s economic model. When Real began to be studied at the most prestigious business schools, I thought this can only end badly. Didn’t Enron use to be analysed in this way? And according to the new president Sandro Rosell, Joan Laporta has left FC Barcelona mired with a debt of $563 million. Of course these clubs are too important to fail and I don’t think either of them will be having a fire sale anytime soon.

And most recently we have had these leveraged buyouts. I do pride myself on all the things I have learned about economics over the last few years, but this is one area which has me utterly baffled. The idea that you buy a club by saddling it with debt has always struck me as rather perverse. I suppose the new owners may think the club is badly run and that they will be able to pay off the debt with the increased revenues they generate. I remain sceptical. The most famous example of an LBO is the takeover of Manchester United by the Glazers. The club has had to pay £400m in interest, bank fees and charges, yet the total debt now stands at more than £700m. I am not really sure what motivates the American owners. What makes many people put their (or other people’s money) into a football club? Maybe the Glazers think that in the long run the Manchester brand will be very valuable. Technology could play a key role here. Faster broadband speeds may enable them to own their rights and stream games to fans.

Football is a peculiar business. Many clubs are not run as businesses but for other motivations. Owning or presiding over a club is a massive ego trip and a way of promoting yourself or your political or business agenda. One needs to look no further than Florentino Perez and Joan Laporta.

These debates are not going to go away. I have the impression that if Genghis Khan were brought back to life and became chairman of a club, the fans would vote with their feet. What I mean is that as long as the man from the Mongolian steppes put his money on the pitch, the supporters would not be too worried where or how he had obtained it. Sport has become highly commercialised but I have no particular nostalgia for the golden days of the amateur sportsman. It may not always be ethical, but the competition to succeed among professional sports stars has given us a wonderful spectacle. All I can say is: Show me the money!

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One Response to The economics of sport

  1. Alberto says:

    A “merengue”, Martin? “Nobody is perfect…”

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