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.

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.

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 ineffectual—at 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.

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 spending restraints, 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.

Table: Clubs’ Player Costs to Revenue Shares by League- MLB,NFL,NBA,NHL

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.