Thursday, September 12, 2013

Antitrust Law & Live Streaming of Games over the Internet

As documented in the last post, Major League Baseball Advanced Media (MLBAM) consolidates all team web sites and other Internet activities including the live streaming of games under the league’s umbrella. The NBA and NHL likewise control all clubs’ Internet services and streaming capabilities. The NFL is at least as restrictive in turning over live streaming exclusively to its broadcast partners. No heed is paid antitrust law’s conceivable application to collective league action of this sort. This was the case with American Football League, which sold broadcast rights collectively on start-up in 1960, jumping the gun by two years on the Sports Broadcasting Act, and likely helping the NFL convince Congress of the Act's necessity. There is of course nothing in the 1962 SBA that explicitly recognizes league control of live streaming games via the Internet. Moreover, the Act is very specific in limiting its application to television broadcasts of professional football, baseball, basketball, and hockey only. League control of Internet and website services has been challenged by individual clubs. However, last year the television and Internet blackout policies of MLB and the NHL each became the subject of class action antitrust lawsuits filed by customer groups. In December of 2012, a motion by the leagues to dismiss the now consolidated cases was rejected by US District Court Judge Shira Scheindlin; the case proceeds.

The plaintiffs allege that the leagues have violated the Sherman Antitrust Act by unfairly restricting fans' ability to watch local broadcasts through internet streaming or satellite television in two ways. First, consumers must purchase a package that includes all out-of-market broadcasts. For example a St. Louis Cardinals baseball fan living in New York City cannot simply purchase the feeds of Cardinals games, but a more (presumably) expensive package that includes all but the games of the Mets and Yankees. Second, the packages blackout any games broadcast locally via a CATV regional sports network (RSN). Customers cannot use Internet or mobile phone feeds to watch their local team play, but must instead purchase a cable subscription and watch televised games from an available RSN. This obstruction is particularly acute in areas with no well-defined local team, such as Las Vegas. Rather than making all games available, the area is instead designated by MLB as a local market for all six California and Arizona teams. Up to forty percent of the games played on a given night can be blacked out in Las Vegas…although that city is rumored to have other entertainment options. This is likewise the case in Iowa, parts of which is assigned by MLB as the home market for the several Midwest teams from the surrounding states (and which, after the state fair packs up, has slightly fewer entertainment choices than Vegas). The complaint charges that the exclusive broadcasting policies enable the RSNs to charge monopoly prices for their much sought after sports programming and to raise the subscription fees for cable consumers. The outcome of these lawsuits is critical to the access and costs of live sports programming for consumers. The failure by the plaintiffs to have the cases dismissed means the current situation will be checked to a degree. However, the lawsuits will likely be settled by negotiation before a court ruling is ever made. MLB and the NHL will most likely be forced to yield on the most extreme of their restrictions, like those described above; yet the rights to central control, and to  blackout in a more reasonably defined local market, are likely to remain.

As noted above, live Internet streaming is available to all but local market subscribers. Yes, that’s right, exactly the subscribers who should most desire live streaming! Like the fears from way back in radio days, that broadcasts would dampen live attendance, the substitution chance between Internet and the RSNs that deliver baseball and hockey to local markets, drives the leagues’ policy. The stakes are high and growing as RSN contracts for broadcast rights become increasingly more lucrative. With consumers switching to new delivery options for television shows and movies, live sports programming is the last stronghold of appointment television viewing, and this is driving rights values and contract commitments for live sports programming through the roof. However, these values are predicated on the considerable monopoly power of RSNs, often under joint ownership with their broadcast partner clubs (e.g The Yankees and the YES network). Statutory or court ordered weakening of the league-team-RSN monopolies likely bursts the broadcast rights bubble, and the leagues will dig in to protect their cash cow.

Notwithstanding, root of this problem is the allowance of league controlled streaming rights, which should be considered violation of antitrust law, and certainly are not protected by the SBA. This policy is unquestionably bad for consumers and there is no valid reason permit league controlled streaming and the accompanying restrictions on the product's delivery. Moreover, leagues have and will restrict broadcasts exactly to the level that they are allowed by law. Witness the NFL whose restrictions on Sunday free-to-air broadcasts often leave their customers with little choice and only unattractive games. Deadspin now rightly takes the league to task over this weekly. To evaluate what is taken from consumers, simply compare the availability of NFL games to NCAA football, which is not protected by the SBA on the basis of  the 1984 US Supreme Court decision (NCAA v. Board of Regents of the University of Oklahoma).  All the big NCAA games, and then some, are readily available to all markets. Consequently, without aggressive action by the courts, MLB and NHL fans and more will be able to watch their local team only with an RSN cable subscription, which will become increasingly expensive—good for the leagues, not the fans.

Sunday, September 8, 2013

Is Baseball the New Football?

Thirteen years ago Major League Baseball’s thirty teams collectively fronted a $75 million investment and launched a vehicle incorporating all individual team’s web sites and other Internet activities under the league’s umbrella. All content delivery, including developing live steaming capabilities, became part of Major League Baseball Advanced Media (MLBAM) assets, and their format has been essentially copied by all the rest. At the turn of the millennium the Internet could be described as roughly at the same early stage of development as television technology when the Colts-Giants 1958 NFL championship game triggered the transformation of football into America’s TV game. Since, and primarily simply due to the nature of the game, baseball has been regarded by many as a dinosaur because of its (relative to football) lack of adaptability to television broadcasts. Yet now the Internet, and the associated technology and devices, is rapidly changing viewing options, as did television offer an alternative to live event attendance. Perhaps, in much the same way that the NFL thrived because of its adaptability to television broadcasts, a baseball renaissance is mounting because of the sport’s suitability to the Internet.

The Internet through its access flexibility, available through an increasing array of mobile devices, provides an environment that allows consumers to partake in other activities, sport related and otherwise, while at once viewing/consuming a game. In this case, the nature of baseball may make it the sport most apt for multi-dimensional consumption. Besides standard broadcast delivery for viewing and listening though live streaming—available to all but local market subscribers (more on this to come) on since 2003—customers can access news, schedules, standings, and statistics from around the league and detailed information on each of MLB’s teams. Additionally, comes the opportunity to create and play in fantasy leagues. As consumption options have expanded beyond the simple and passive viewing of a game, baseball's deliberate pace, a liability for old fashioned broadcast TV, seems tailor-made for complimentary consumption options, and particularly for baseball because it is arguably the team sport whose fans are most consumed by supplemental statistics and information. 

MLBAM’s impact on MLB’s revenues was quick and clear. In 1999 MLB revenue totaled a little more than $3.6 billion, similar though about one-half billion more than the NBA at the time. By 2006 MLB revenues had nearly doubled to more than $6 billion, nearly keeping pace with the TV-rich NFL who returned $6.5 billion that year; meanwhile NBA revenues had grown only a bit, to just exceed $3.5 billion. Baseball business analyst Maury Brown wrote in late 2005 that MBLAM had become a money machine, and profitable in less than three years. USA Today reported revenues reached $380 million annually by 2006. Pete Toms revealed that by 2010 MBLAM annual revenues were excess of $500 million and the estimated value of the subsidiary enterprise was $2 - $3 billion. The MBLAM subscription price in 2013 topped out at $130 for all-year, full service accessThe NBA and NHL followed MLB’s lead and each offer similar full service websites that include live broadcasts to subscribers for out–of –market games. These products are likewise popular and similar to MBLAM, and are able to charge annual subscription prices of  $150 per year, though both attract fewer subscribers than MLBAM.

The dinosaur this time around may be the NFL, ever cautious and always effective at limiting consumer viewing access for profit. Like its peers, the league maintains control over team websites and content. However they've left live steaming options to their contracted broadcast networks. For example ESPN is able to live steam Monday Night Football, but will do so only for its cable subscribers. Because of the volume of cash turned over by the networks for rights, there is for the NFL a more delicate relationship than the other league’s have with their TV partners; the networks collectively pay the NFL substantive rights fees—over $20 billion in 201112, and that amount will nearly double to $40 billion per year beginning in 2014—far and away the highest in sports.  At present, the surge in traditional broadcast revenue has kept the NFL on at the top of the heap in terms of revenue generation- as they are now nearing $10 billion in annual revenues as number two MLB approaches $8 billion. But the NFL trails the pack in internet delivery. NBC offered the first ever live steaming of the Super Bowl in 2012, but the decision on steaming in the future will be determined by the network holding the broadcast rights. General access to live steaming is controlled by the NFL’s satellite television partner DIRECTV, and before 2011 access had been limited to those only homes where that service was not available and then only to those with specific mobile devices. Live streaming of NFL games became available universally to all devices for the first time in 2012, and at a hefty subscription price of $300 for the full service package.

Traditional broadcast markets are still thriving and keep the NFL at the top in terms of revenue and value. However assuming that Internet technology develops in the next twenty years at least as dramatically as did television technology from the 1960s onward, MLB is the league best prepared to capitalize. 


Thursday, September 5, 2013

Broadcast Revenue and Competitive Balance in the NFL

The NFL receives much credit for achieving the highest degree of competitive balance among American team-sport leagues. This is after all the league that shares all television broadcast revenue equally among its teams and strictly enforces a hard salary (actually payroll) cap. Any number of methods used to assess competitive balance confirm the competitive balance superiority of the NFL relative to the other major American team-sport leagues. Yet after further review, the two primary reasons just given for the league’s success at maintaining a relatively even distribution of talent across clubs do not hold water. This post will discuss the sharing of broadcast revenue, with the salary cap’s effect to be evaluated in a future post.

Much credit for the level of competitive balance, and the assumed corresponding financial success, in the NFL is given to the decision to sell collectively and share equally all television broadcast revenue. The financial advantage is certainly the case as the league controlled sales generate considerable market power and price is manipulated by regulating output; monopoly profits result. Commissioner Bert Bell realized the economic advantages of monopoly limits on the availability of televised games through league controlled rights the 1950s. However, he was thwarted by federal antitrust law. League sale of broadcast rights was ruled a violation of the Sherman Antitrust Act prior to the enactment of the Sports Broadcasting Act of 1961. Nonetheless the upstart challenger American Football League, formed in 1960, boldly sold their broadcast rights collectively, and without a successful legal challenge. Facing a competitive disadvantage the NFL, through recently appointed Commissioner Pete Rozelle, aggressively lobbied Congress to enact the SBA as a statutory exemption to federal antitrust laws. Under the Act antitrust laws do not apply to any agreement allotting broadcasting rights made by a professional league comprising only the sports of football, baseball, basketball, and hockey. Though not required by the law the NFL and the other three major American sports leagues have chosen to split league collected revenues equally among clubs. Only the NFL has assumed full ownership of television broadcast rights at the league level.

With NFL broadcast revenues equalized across teams beginning in 1962, the first year of league sales and equal revenue sharing, conventional wisdom suggests that the distribution of talent would also have leveled as the advantages of media market size were significantly curbed. However, the examination of two key dimensions of competitive balance does not support this position. The frequent claim is made is that the league’s broadcast revenue distribution allows the smallest markets to compete on an even playing field with the largest.  However from inception in 1922 to 1961, the Green Bay (WI) Packers, representing the NFL’s smallest media market through all except the very early part of this history, accumulated more league championships, at seven, than any other club. (The Packers were league champions in 1962 as well.) Green Bay and other smaller market clubs have accumulated titles since, but small market success hardly parallels the sharing of broadcast revenues. Championships in the before SBA period, as they have been since, were quite well distributed. From the largest markets the Chicago Bears earned six titles and the New York Giants four championships. Among the rest, the Detroit Lions won four championships, while the Philadelphia Eagles and the Cleveland Browns claimed three titles each. For those clubs with significant membership tenures in the league during this period, only the Pittsburgh Steelers and San Francisco 49ers were denied titles.

Economists prefer a more scientific approach for evaluating the distribution of talent, with the standard deviation of win percent each season commonly employed. (Standard deviation is adjusted to account for the number of scheduled games per season by creating an actual to ideal ratio of dispersion, the RSD. The closer to one the ratio, the better the competitive balance.) Again using the more specific metric, the claim that the SBA and collective rights sales improved balance is specious. Comparing the adjusted standard deviations averages of the before and after SBA periods in their entirety does reveal modestly better balance in the latter period. The RSD averages 1.74 for forty years before and improves to 1.57 for the fifty years after the Act’s passage. However a closer look, comparing the shorter periods directly before and after passage, reveals a different story. For the eleven preceding years, 1950 to 1961—the period beginning with the merger of the NFL and AAFC—RSD for the NFL was 1.53. RSD for the eleven years, 1962-1973 following the Act’s passage measures 1.74.  Competitive balance actually became worse in the immediate aftermath of the SBA!

Of course there are several factors that potentially influence the distribution of talent across teams in a sports league. Moreover, much besides the enactment of the SBA will likely differ between any arbitrarily compared eras. Included are shifting demographics, collective bargaining provisions, league expansions and mergers, changes in post season opportunities, etc. Notwithstanding, there is no evidence that the equal sharing of the proceeds from national television broadcast rights sales improved competitive balance in the NFL.

Thursday, August 29, 2013

Ranking FBS Coaches

The college football season kicks off this weekend; every squad has a clean slate and most fans have rosy expectations regarding the fate of their favorites. However as the season progresses many teams will disappoint and the head coach will be forced to face the music. In fact it’s likely that as many as twenty of the current group of one-hundred twenty-five FBS head coaches will be replaced before next season. The volatile labor market begs the question, what factors determine success and failure in this extremely well paid but highly competitive occupation?

Head football coaches must be proficient in two primary areas. First they recruit talent, the primary input to success. Just as important, the talent on hand must be utilized to produce wins. The head coach, much like a corporate CEO, assembles a staff responsible for both of these aspects. A fair evaluation of a head coach's performance accounts for execution in both of these areas. My paper, just published in the Journal of Sports Economics“Efficiency and Managerial Performance in FBS College Football to the Employment and Succession Decisions, Which Matters the Most, Coaching or Recruiting?”, examines coaches' performance in both realms and ranks the full set of FBS coaches each year from 2005-2011. The quantification of “talent” is derived from the annual recruiting class rankings. Efficiency is defined as how well each coach uses his resources relative to the average of his peers for each given year.

There are few surprises among the group that most efficiently utilizes talent (see the paper's table 3); Alabama’s Saban, TCU’s Patterson, Boise State’s Peterson, and Oregon’s Kelly are consistently represented in the top ten for the most recent years. More surprising are those comprising the bottom ten each year. This group is typically populated by coaches at premier programs, and thus able to recruit top talent, but whose teams were coning off mediocre or worse seasons, Texas’ Brown, Georgia’s Richt, Tennessee’s Dooley, and Neuheisel at UCLA, make multiple appearances among this group. Note that a frequent presence toward the bottom of the list typically leads to dismissal, e.g. Michigan’s Rodriguez, Dooley, and Neuheisel.

For the purposes of evaluating recruiting, the efficiency tests control for the football program’s reputation and resources. Even with the controls, coaches at high resource schools rank at the top of the yearly recruiting efficiency lists (table 5). However, that is not a surprise as there are some intangible factors that push blue chips toward these schools and effective coaches in recruiting as well as winning—those are highly correlated—move up to these highest paid positions at high resource programs. LSU’s Miles, Ohio State’s Tressel, and Oklahoma’s Stoops were regulars at the top of the recruiting efficiency list list during the sample period. Likewise some of those who fared poorly in talent utilization, like Richt and Neuheisel, are also frequently near the top in recruiting efficiency. The bottom groups in recruiting efficiency reflect an odd mix; some are coaches from high resource schools who had an unusually low-ranked recruiting class, Iowa's Ferentz  for example. However, coaches of successful lower resource programs, like Peterson and Patterson, are well represented here. Likely those who employ a nontraditional style of play are less interested in the blue chips, those players who are rated highly by the recruit ranking services. Instead they successfully recruit lesser ranked high school and junior college players who fit their particular style of play. Most revealing was the examination of individual coaches' performances over time. The key finding is the trend among all coaches for recruiting efficiency to wane over their tenure, and this decline leads to eventual dismissal. 

Both efficiency factors matter to firing and hiring, although talent utilization carries more direct weight in those decisions. Nonetheless, as recruiting efficiency falls of so does winning, which leads to dismissal. Interestingly, a consistent finding is that the new hires who best use the predecessor’s talent most likely go on to become the most successful coaches.

(The paper’s tables report the top and bottom ten coaches in each category for 2009 -2011 and the full set of rankings are available in the appendix.)

Thursday, August 22, 2013

What Drives Selig's Hard Line on PEDs?

Bud Selig is crazy…crazy like a fox. The bumbling car peddler managed his way to the head of the owners’ table and put together a coalition of merry men who engineered the biggest transfer of wealth since Lenin's crew. With the Steinbrenners and their ilk long since conquered, now it seems his sights are focused on the other group with whom he must share the proceeds of his profitable sport, the MLBPA, and he has a big stick. 

Major League baseball players face a Catch-22 on demands from their union. On the one hand they want the drug cheaters exposed and punished, if not ousted altogether. There are fewer than one thousand major league jobs and earning one and keeping it is brutally competitive and entirely performance driven. Players pumped up from PEDs literally threaten the jobs of those who choose to play by the rules. Conversely, players need the assurance of reasonable rights to privacy, and due process in any and all disciplinary actions. It is likely that right now the rank and file better understand, or at least are more responsive to, the former—it’s an emotional issue. But union leadership, distinctly in the tradition of Marvin Miller, understood that without the latter the owners via the Commissioner’s office could and would run roughshod over them—for a case in point witness Goodell’s NFL. The MLBPA has long maintained solidarity on nearly every issue, mostly falling in lock step with leadership’s propositions. That has served them well, especially when comparing their negotiated outcomes to the other sport unions. Nevertheless, PEDS policy may come to be the divisive issue. More importantly is the Commissioner’s push toward increasingly hard line policies motivated by a desire to split and bust the union? That’s what Miller thought—he viewed the drug testing frenzy as a “witch hunt” (H/T Edge of Sports).

Nonetheless, if the players want a “clean”  game they have the right to it and what constitutes banned substances should be at their collective discretion and really no one else’s. One should not feel pressured to imbibe to get or hold a job, especially when the substance is potentially dangerous and life threatening. Indeed, when it comes to banned substances, isn’t safety the only legitimate concern for what is and is not allowed? The problem is, with few exceptions, there is no clear and known line between the safe and unsafe. Substance policy at all levels instead follows a ridiculous pattern of taxonomy: if the substance is like medicine and heals one back to normal… no problem. However, if the junk is like a drug that makes a person better than normal, or to feel that way, it must be outlawed. No matter that a single substance, anabolic steroids or marijuana for example, can do both depending on the situation. But even if it could be known with certainty what substances should be, or need not be banned, the enforcement process becomes the worst sort of quandary. Nowhere are privacy rights and due process in more jeopardy than with drug testing. Yet, without testing the proscriptions have no teeth at all. On what side then does an athlete come down?  If  your career and livelihood are at stake it’s a dilemma, and one that can be exploited. Why is the hysteria over Biogenesis so baseball specific, when athletes from other sports were implicated too? As a union busting strategy, it fits all too well a familiar pattern of divide and conquer.  An unpopular antihero emerges to be the public face of the scandal, the other fingered desperados fit nicely along a vulnerable racial and ethnic divide—from Biogenesis all but two found culpable are Dominican. As Dave Zirin points out, it is white US-born players who are the most aggressively outspoken regarding their disapproval of PEDS. 

Perhaps Selig’s hardline is all about his legacy and reversing his image from being remembered as the  “steroid Commissioner” to the righteous savior of the game from drugs. But seriously, this is a man who seems to care nothing for his public image in any other context.  Every move he has made as Commissioner has been motivated by shifting the wealth of others his way, and that’s exactly what will result from a diminished union.

Thursday, August 15, 2013

It's Time for the Courts to Recognize that NCAA Amateur Rules Contradict Antitrust Law

If there is ever to be an about face on the legality, or lack thereof, of NCAA amateur rules and compensation of athletes, it will come from a belated recognition of barefaced antitrust by the courts. Imagine there exists a group of a thousand or so businesses of varying sizes and dispersed all across the country, and each firm offers a very similar set of product lines. Then suppose this group bands together and forges an agreement whereby, that rather than pay wages to a particular class of workers needed for producing one of the secondary product lines—valuable workers to the industry, but with limited job options elsewhere— instead compensate them with free access to one of the other product lines. The deal could also include the provision of housing and board, but absolutely nothing more. The actual value of the exchange may vary across firms, but the agreement,much to the benefit of each, would restrict all firms signing on to the pact to the modest in-kind payment.

As far-fetched and impractical as this scenario is for any other industrial application, it depicts the NCAA’s restrictions on compensation to athletes. In any other context collusion among firms to fix workers' compensation is a flagrant violation of the Sherman Antitrust Act. NCAA member institutions have agreed to eliminate the price competition in the market for students' athletic services by setting the allowed compensation to athletes as the “cost of attendance” to each college or university. In the jargon of antitrust law, these circumstances depict a price fix, a naked restraint of trade. It’s one thing to fool the public with the amateurism ruse, but judges? How has the NCAA steadfastly escaped the law?

The NCAA is not immune from antitrust scrutiny and, especially since the 1980s, its restrictions in other areas have been overturned by court decisions. For example, NCAA policies limiting competition in television broadcasts, NCAA v. Board of Regents of the University of Oklahoma (1984), and wage fixing in labor markets for assistant coaches, Law v. NCAA, (1998) were prohibited as a consequence of civil challenges invoking Sherman. Conversely, the courts have hardly been willing to entertain challenges to the rules designed preserve the amateur status of the athletes. Judges have bought the line put forth in the NCAA's Constitution that the competitive athletics programs of member institutions are designed to be a vital part of the educational system, and as such can only be preserved by a “clear demarcation between amateur and professional sports”.

Legal protection of their amateur rules from antitrust law relies on the NCAA’s deft portrayal of the sport participant’s dual role as both student and athlete. When subject to review, the NCAA has made a convincing effort to sufficiently entangle athletics and education so that the existence of a relevant market for athletic services cannot be effectively separated from educational mission of universities. The market for educational services is the one that is relevant, and though there is no US Supreme Court interpretation, federal district and appellate court decisions have, in almost every case, maintained that there is no relevant (labor) market for the athletic services of college students. In both of the the most prominent legal challenges to the NCAA's amateur standards, Jones v. NCAA (1975) and Banks v. NCAA (1992) the court denied the plaintiffs exactly on the basis of the failure to establish that a relevant market for their athletic skills existed. In subsequent challenges the NCAA has offered settlements before the appeals process has run a full course, for example White v NCAA(2006) where the Association was sued for price fixing under Sherman.

Holding that no relevant labor market exists implies that there is no market competition for athletic services. In that view potential college students, including those who possess exceptional athletic skills, are searching the higher education market for a suitable school. If they are good enough at their sport they may be offered a scholarship so as to offset their tuition, supplies, and room and board, but that is a secondary exchange.  While that may be the case for some students, for most athletes at the Division I level, especially those in the revenue generating sports, that interpretation is nonsense! University athletic programs compete, and do so vigorously, for the services of athletes. It’s called recruiting and the practice is as old as college sports. Yet, the roles remain bundled as athletes must also be (full time) students, but educational services are clearly the secondary market in this case. Notwithstanding, NCAA policies in about every respect but compensation treat the athletes like workers. Primarily, if they cannot perform at the necessary level the scholarship can be revoked—no work- no pay. There is no question what matters most when it comes to keeping their "jobs".

A mandate necessitated by court decision on a civil challenge is the surest way to change the system. A statutory proscription is unlikely, and the NCAA will never do what is right and fairly compensate the athletes; those collecting the returns have  far too good a deal. For the courts to engage, a Curt Flood type player has to emerge, and will probably face difficult choices in following the case all the way through in the face of settlement offers. Moreover unlike the Flood decision, the court cannot be swayed by arguments and sentiments that the right ruling will ruin college sports as we know them. It will take the right plaintiff with a compelling case, and the onus is on the courts to make it right.

Wednesday, August 14, 2013

Sports Lockouts Mirror Prevailing Labor Retreat

Lockouts with owners reaping the spoils are hardly unique to sports. For example the ongoing American Crystal Sugar lockout of its workers finally settled in May on essentially the owners’ original take-it-or-leave-it offer. Steven Greenhouse’s excellent piece, published last year in the New York Times, discloses that the increasing primacy of lockouts, reporting at least 17 owner initiated shutdowns in 2012. Clark University Professor Gary Chaison provides the elemental quote:

 “This is a sign of increased employer militancy. Lockouts were once so rare they were almost unheard of. Now, not only are employers increasingly on the offensive and trying to call the shots in bargaining, but they’re backing that up with action — in the form of lockouts.”

I don’t see where the lockout as management's primary negotiation strategy ends until unions are rendered completely ineffectualat least not without a change in the law and public policy. Ultimately that requires a political process, and can happen only if the public perception of unions changes. What does this mean for sports leagues? No worries short-term as none of the four CBAs expire until later this decade. And, MLB, up first in 2016, is the least susceptible to a lockout. However, as long as players are collecting economic rents (earnings above their next best option) there is ground to gain for owners.  The equilibrium might just be at about the reserve era split, with maybe 20% of revenues going to the players. Or before they hit that bottom, players give up on their unions and revert to antitrust relief.

Just or not depends on one’s perspective, but professional sports’ economic importance is more about visibility than value of the product.  If the losses continue and the plight of sports unions becomes recognized as too one-sided, that could benefit all union workers.

Tuesday, August 13, 2013

The MLB Anomaly: Part 2

In the previous post on lockouts I wrote that MLB is immunized from lockouts due to a combination of its progressive revenue sharing scheme and that they impose a tax system, rather than mandated spendinrestraints, for regulating payrolls. Both work to placate the small market owners who drive the labor unrest in the other leagues. I am following up on the discussion of revenue sharing in the last post with an examination of the effect of payroll regulation methods here.

MLB differs from each of the other major American professional leagues in that payrolls are not regulated so that all club’s wage bills fall within mandated upper and lower bounds, better known as the salary cap and salary floor. Under the payroll tax (officially competitive balance tax) system, MLB clubs are free to choose the level of payroll that suits them; although they are subject to financial penalties when exceeding the tax threshold. Yet most important to labor peace is that, besides meeting the required obligations to individual players, there is no minimum payroll criterion. All clubs, including the low revenue producers, have full discretion over their wage bill. Despite the freedom of clubs to spend as much or as little as they choose on player salaries, the portion of total MLB revenues going to players (52.6% last year per Forbes data) is very similar to the other leagues. In fact the revenue sharing-payroll tax system has been as effective in reducing payrolls in MLB as the rigid cap mandates of the other three, as each league has seen the players’ share fall from more than 60% to about 50% of total revenues since the 1990s.  (JohnSolow and Tony Krautmann provide an economic explanation of the effect of MLB's revenue sharing method on payrolls.) Nevertheless, in MLB club payrolls correspond quite well with club revenues, while in the other leagues low revenue producers spend a much higher portion of their revenues on player salaries than their large market peers.

A closer, club-by-club, look at the numbers shows why MLB’s small market owners are much more content than their capped-league counterparts. I've compiled a table, using the most recent year’s Forbes data (2012) from their club valuation reports (by way of Rod Fort’s sports data collection), which orders the clubs in each of the four leagues by the calculated percentage of total revenue paid to their players (player costs). Columns showing each club's total revenue and its revenue rank are also included for each league. In MLB eight of the ten highest player-share clubs are also in the top ten in revenue generation, while seven of the ten lowest in player share are from the bottom ten in revenue production. The other leagues show almost exactly the opposite pairings. In every case the clubs with the lowest revenue rankings have the highest player shares and vice versa.  In fact, the inverse correlation between revenue and payroll is tighter for the three capped leagues than the direct correlation is for MLB. The NHL data, which represents the pre-lockout splits, best illustrates the inherent volatility. Not only is the league’s total share to players the highest at 59%, but five clubs dished out more than 70%—one, the Islanders, more than 80%—of their earnings on player costs. Only one club (NFL’s Raiders) in the all of the other three leagues combined paid out as much as 70% of their revenue in salaries. Their newly settled CBA should make the NHL’s distribution similar to the NBA’s current numbers next year. Notwithstanding, the revenue-to-payroll imbalance implies that both of these leagues, and to a lesser degree the NFL, are far more prone to a lockout at expiration of their current CBAs than MLB.

One last and related thing: if you are convinced that the cap and floor system are the better way to regulate competitive balance (distribution of talent) then I’m afraid what you know just ain’t so.

Sunday, August 11, 2013

Lockouts: The MLB Anomaly

As stated in the previous post only Major League Baseball, of the four primary major American team-sport leagues, has not endured a lockout or any work stoppages in the past fifteen years. (I don’t mean to slight MLS for those who put them in the primary and major group; but the single entity model puts labor relations there in an entirely different sphere.) The question begging an answer is what separates MLB owners from their colleagues in the NBA, NFL, and NHL who each aggressively pursued lockout strategies over this time frame?  Foremost the MLB CBA, radically altered coming out of the 1994-95 strike, mitigates much of the tension driving the lockout decision in the other leagues.  This despite that there is no salary cap provision, normally the top item on ownership's’ wish list.  They key provisions of the 1997 Basic Agreement were a unique and progressive revenue sharing system (a tax and redistribution scheme) and a competitive balance (luxury) tax on club payrolls exceeding a threshold.  These conditions, except for some a reworking of the mechanics of the payroll tax in 2003, have remained in place through all subsequent CBA negotiations, and both matter to the keeping of the peace. I’ll get at the revenue sharing here and follow up with a post on the relevance of the payroll tax and lack of the salary cap.

Sports labor negotiations center around the division of revenues; that is, how to split their big money pie. There are essentially two phases of the revenue sharing debate that drive labor unrest.  One is the very evident owners -to- players distribution, and also fundamental is the allocation of revenues among the owners themselves. CBA negotiations tend to settle on resolution of the former, but it is the latter that triggers the lockout decision.  Major league professional sports are profitable, but the spoils are not evenly distributed across owners. Those running clubs in smaller and less lucrative markets often feel entitled to a greater share of the revenue they help generate by supplying the opposition. The NFL accommodated its small markets early on with a sixty-forty home-visitor gate split almost from the league’s inception, and most importantly in early 1960s with league control, sale, and equal-share distribution of all TV broadcast rights. All leagues distribute in equal club-shares the national broadcast and other league-earned revenues, but only in the NFL is that all TV broadcast income and represents the majority of league earnings. Before 1997 the only sharing of gate revenues in the other three leagues ranged from none to slim.  

From the 1970s onward the MLBPA effectively exploited the big versus small market divide and prevailed in most labor disputes. However, small market owner Bud Selig—inserted as Commissioner in 1992—built a coalition of like-minded owners and managed to implement a Robin Hood style system to settle the post-strike CBA negotiations in 1997. The MLB system was revolutionary in that it is based on significant sharing of not just the gate, but nearly all sources of locally produced revenue. The league collects a tax of about 30% on each club’s local income (gate, other stadium, local TV rights, etc.), pools this with the other centrally generated funds, and redistributes so that the lowest revenue producers get the largest shares.  So as much as the NFL, MLB’s system benefits small market owners.

So why does this sharing, or lack-there-of, matter? Think back to the pre-lockout talk. Every time it centers on the financial difficulties besetting some portion of league’s clubs.  Meaning some subset of clubs is not able to “keep up” financially with their cohorts in the better markets. The cry is always that the needy group cannot afford to compete in the talent market…competitive balance… blah, blah, blah.  The poor could be made richer though increased distributions from the rich…or forge an agreement with them to reduce everyone’s biggest expense—player salaries—by reducing the players’ share of revenue.  Lockout leverage means the latter is the preferred option and why the NBA and NHL, with very limited local revenue sharing, have been the most eager to engage this method. Despite their quite generous sharing, growing revenue disparity also explains the NFL’s 2011 lockout. The NFL redistributes only gate revenue; other stadium and locally produced revenues are kept in full by the home team.  The new stadium building boom beginning around 1990, with is emphasis on luxury seating and other sources of non-ticket revenue has increased the disparity in club revenues.  The low revenue producers could be brought up to speed with more sharing, or by a reduction of labor costs. Doubtless, recognizing the success of the lockout by his peers Commissioner Goodell chose the latter.

So MLB’s small market owners are relatively better subsidized than their peers in the other leagues, but couldn't a successful lockout work to all owners’ benefit there too? Maybe but the alternative, luxury tax for salary cap, means for curbing payrolls also influences the incentive to lockout. Stay tuned.

Friday, August 9, 2013

The Irony of Labor Law

In  the 1960s and 1970s, when sports unions ascended, effective use of labor law, especially by the Marvin Miller-led MLBPA, enabled them to make significant strides. For about twenty-five years, through the mid-1990s, nearly every work stoppage in American professional sports leagues was a strike. Since the settlement of the MLB players’ strike in 1995 each and every work stoppage has been a lockout …that is the cancellation of games was motivated by the owners and not the players.  In all cases, three lockouts in the NHL, two for the NBA, and one for the NFL, the owners have rolled back prior concessions and gained a CBA considerably more favorable to their interests.  Primary, the players’ share of revenue has fallen from more than 60% to less than 50% for each league that has locked out its players. The (non-statutory) law stipulates that the terms of a CBA stay in effect after expiration until a new agreement is reached. The satisfied party must be pressed to change the status quo, and the income eliminating work stoppage is the most effective force. Logically the side with the most leverage to shift the terms in their favor will initiate a stoppage…and that’s been entirely a one way street for now fifteen-plus years.  The spirit of the law authorizing lockouts is that it gives management a tool to balance a union’s right to strike. Except it is not balanced in professional sports.  Owners, were once hesitant to force a stoppage. That was until the NHL, under Commissioner Gary Bettman, exposed in 1996 that PR damage from a lockout was minimal and clearly offset by the more beneficial CBA.  The NBA, under the leadership of Bettman’s friend David Stern quickly followed suit, and locked out the players in 1998.  

Modern day ownership is much better suited to weather the storm of a stoppage than their predecessors; they are wealthier, more diversified and with long-term contracts for broadcast rights, luxury suites, sponsorships, less dependent on game specific revenue. The NHL and NBA have locked out the union at the expiration of every CBA since their fist try, and extracted more from the players each time. The NFL, which boasted nearly twenty years of labor peace, jumped on board in 2011, actually accelerating the termination of their CBA, to lockout their players. Only MLB, once the primary labor battleground, has not followed suit, but the different dynamics holding labor peace there may also be changing. 

So where does it go from here? What’s to stop owners from locking out until all the gains for players made by unions and antitrust relief (out of play under labor law) are extracted? In the reserve clause era players earned less than twenty percent of revenues had no mobility rights and were happy to take it.  Labor law allows lockouts and denies antitrust. Lockouts in particular provide owners the means to drive sports right back to those “good ole days”. The solution may be no union, and then no labor law, no lockouts... and antitrust relief back in play.

Wednesday, August 7, 2013

Missing the Point on Johnny Football

ESPN’s college football headliners Smug and Smugger, aka Herbie Herbstreit and Chris Fowler, parked their bus and set up studio in Athens, GA the first Monday in August. They were joined for the night's LIVE airing by understudy and local chap David Pollock. Athens is sleepy until rush week, so this visit was likely the highlight of the Bulldog nation's late summer. The conversation naturally centered on the news of the day, Johnny Manziel’s crime against the sport of college football. Heisman winner Manziel is alleged to have received payment for autograph signing sessions thus profiting from his reputation as a college football star. As usual the World Wide Leader crew inflated the already well established mainstream media's party line. Smug was indignant as he pointed out that it had been a mere eight months since young Johnny had ascended to the top Mount Virtue. Not only had Manziel been announced and greeted by Smugger as the winner of the football media’s favorite amateur football player trophy, he was humbled in the presence of the heroes who suffered through two and three more years of exploitation than had he, merely a freshman. Wondered Smug,  just removed from the aura of Tebow et al., the gravity of which having been transmitted through the sagacity of Smugger, how did Johnny go amiss? The righteous brothers then recounted the slew of off-season debauchery…guilty plea on a fake ID charge from the year before, kicked out of a frat party, hanging with a rapper, a disparaging tweet on life in College Station, TX, oversleeping on the Mannings, and now this, possibly breaking an NCAA rule! The sullen trio was as outraged as they were disappointed at the disregard for the rules shown by someone given the privilege of playing NCAA football—even worse to them was that he comes from wealth and does not even “need” the money!( At least no more than a well-paid sports talking head "needs" the money from endorsing bath soap...comfortable in his own skin, indeed!) A.J. Green was dead wrong to sell his property, and deserving of his punishment, but at least he was poor, it was pointed out.  

No mention of course that NCAA limits on economic freedom would be illegal in any other context—a blatant and severe restriction on basic liberty.  It’s one thing that athletic services cannot be directly sold to a college program but are permitted only as one side of an in-kind exchange, traded even-up for one of the university’s educational service offerings (but not always the one of the player's choice).  But even if that’s regarded as a fair and mutual exchange (not that an 18 year old football player has many other options), it doesn't begin to stop there. The athlete also sacrifices to his “employer” the property right to his name, image, and reputation, much of it ad infinitum.  It is a peculiar system; so much so that thus far even the wisest of judges cannot help themselves to apply the standard rules of antitrust law. So instead of substantive discussion of this system, most of the sports media “legal talk” will turn on evidence and burden proof in a kangaroo court.

Tuesday, July 30, 2013

My Journal of Sports Economics article "Efficiency and Managerial Performance in FBS College Football" is now available online.

This article develops a model of managerial efficiency for National Collegiate Athletic Association’s top division college football coaches. The derived efficiency measures are then linked to the hiring and firing process. The work concludes with an evaluation of the effect of head coach succession on team performance. This study evaluates coaching efficiency in terms of both use of talent and recruiting talent. The constructed efficiency rankings are used to evaluate hiring and firing decisions and determine the degree that each type of efficiency plays in these decisions. Last, the efficiency of the market is assessed by evaluating whether universities are making a good choice and are able on average to improve performance when replacing an under-performing coach. The empirical results indicate that both constructs of efficiency matter. Coaches who exhibit high level of both types of efficiencies regularly move up to the most lucrative jobs. Replacement of a poor performing coach is most often a wise decision.

Friday, July 12, 2013

Data Appendix: College Football Coaches Ranked- Journal of Sport Economics Paper

My article "Efficiency and Managerial Performance in FBS College Football: To the Employment and Succession Decisions, which Matters the Most, Coaching or Recruiting? will be published in 2013 in the Journal of Sports Economics.  I rank all NCAA FBS coaches in terms of their ability to coach (convert their available talent to wins) and to recruit talent. Tests are run to see how each measure influences hiring and firing decisions. The paper's tables lists the 10 best and 10 worst coaches in both categories for the most recent three years. I am posting the appendix here that includes the entire rankings of all FBS coaches from 2005-2011. There are two tables, the first rank coaches in order of efficiency of talent use and table 2 ranks them in order of recruiting efficiency for each year.