Tuesday, May 31, 2005

Has Title IX Inhibited the Growth of Lacrosse? 

The May 30th edition of the NYTimes (free registration required) has a major story about the growth of lacrosse in North America.

When Johns Hopkins plays Duke in the final of the N.C.A.A. men's Division I tournament at Lincoln Financial Field here Monday, about 40,000 fans are expected to attend. The crowd will be the second largest to attend an N.C.A.A. championship game this year; 47,262 attended the men's Division I college basketball title game at the Edward Jones Dome in St. Louis.

... According to the sport's governing body, US Lacrosse, 354,361 people played the game in 2004, compared to 253,931 in 2001.

... Since 1995, the number of varsity high school lacrosse programs increased to 2,332 from 808.
The article mentions Major League Lacrosse, and its expansion plans. It continues,

There is also a 10-team indoor league, the National Lacrosse League, with teams in cities from Anaheim to Toronto, and it plans to expand to Portland, Ore., and Edmonton, Alberta, in 2006.
Industry insiders tell me that this past year, NBC was pleasantly surprised by the ratings spike they received when they broadcast championship lacrosse. An several years ago, in head-to-head competition in Toronto, lacrosse outdrew arena football, despite major ownership of the Toronto arena football Phantoms by Rogers, a dominant media firm in Canada, especially in the sports area. The arena football team no longer exists.

What is inhibiting the growth of Lacrosse?

The NYTimes article mentions two factors:

"The biggest obstacle to growth is the lack of coaches," Alexis Longinotti, the Northern California chapter president of US Lacrosse, wrote in an e-mail interview. "There have been several teams that wanted to start, but weren't able to find a coach, so they didn't happen."
But others blame Title IX [sex equality in funding at the college level].

... Division I men's lacrosse is one of the few places where the sport's growth has been inhibited. According to N.C.A.A. participation studies, there were 54 Division I teams in 2004, only three more than in 1994.

Some coaches and administrators say gender-equity initiatives of Title IX have handcuffed universities from adding men's lacrosse, especially at institutions where Division I football is played because football, with its 85 scholarship athletes, creates an imbalance.

"I don't think there is any other solution that is within our ability to influence," said Steve Stenersen, the executive director of US Lacrosse. "The issues that are limiting Division I men's lacrosse growth are far bigger than lacrosse and far bigger than any sport."

Some college coaches are concerned, saying the sport is hindered at its most prominent level and cannot expand.

"There's going to be a crisis of opportunity, and I have no idea what the answer is," Virginia Coach Dom Starsia said. "I really don't see a resolution of this issue."
This position is surely correct, so far as it goes. If lacrosse were the only game in town, so to speak, then serious restrictions on the ability to pay the athletes (or even offer them substantial scholarships) might not have so large an impact on the supply of talent. But if very good athletes have better opportunities to receive scholarships in other sports that earn more revenue for their schools, then lacrosse might have more difficulty attracting them, given the limitation on the total number of scholarships that can be offered to male athletes.

At the same time, the expected earnings from playing professional lacrosse are considerably less than the expected earnings from playing major league football or basketball or baseball, and that differential likely also has an sizable impact on the supply of skill to the sport.

Monday, May 30, 2005

Hand-Wringing At the Knight Commission 

This from the Knight Commission. From 2001 to 2003, athletics spending grew at a rate four times faster than overall institutional spending, even without a full account of facilities and salaries.

“It’s clear that all those interested in the future of intercollegiate athletics must find a way to bridle escalating expenses,” said Thomas K. Hearn Jr., president of Wake Forest University, in his first meeting as chair of the Knight Commission. “As the Knight Commission indicated recently in opposing the addition of a 12th Division I-A football game, we cannot resolve our fiscal challenges by burdening athletes with an additional game to generate revenue... ”

The tone makes it sound like there is some sort of fiscal crisis in college sports. But the NCAA's own Revenues and Expenses Reports 02-03 show that (including institutional support) athletic departments typically break even. And it is well-known that athletic departments are allowed to spend all of their revenues. So, expenditures equal revenues, plus direct instituitonal support of athletics out of the general university budget.

So let's see what the above mentioned survey shows for revenues (Table on p. 30). First, at the average report, real revenues (by my calculation) grew 21.7% from 1999-2003, and 12.9% from 2001-2003. At the top end, the increases are 9.0% and 6.2%, respectively. Since spending equals revenue typically, then it must be the case that institutional spending grew at pretty small amounts! [Really, this is more of an indictment of low spending on higher ed than on freewheeling college sports spending.]

This makes me wonder about the fretting and hand wringing. Revenues are increasing at a healthy rate for college athletics. Since ADs are allowed to spend what they make, so spending goes up. Butthere is no current "crisis." And even if revenues fall off, so what? Coaches and ADs will take pay cuts, but it's clear they already are earning far more than it takes to just keep them involved in college sports as opposed to their next best non-sport option. And spending on facilities would fall. ADs and members of the press often put the "arms race" stamp on the growth in spending but "arms reduction" will happen just as fast if revenues take a downturn.

Finally, we have yet to witness dramatic changes, either increases or decreases, in institutional support for college athletics (by the same NCAA commissioned survey) and we won't. Universities will never pay more than the value that college athletics generates for the university, not in terms of direct revenue, but in terms of indirect budget increments from legislatures tied to the service universities provide through college sports. It is no accident that governors and politically powerful boosters always attend the intra-state college rivalry games. And apparently the value of that hasn't changed much for universities.

Thursday, May 26, 2005

The cost of balls 

The cost of baseballs to MLB is about the same as a starting first baseman. MLB runs through about 900,000 balls in a season, for $5.5 million. The average first baseman is making $5.7m in 2005, based on the top 30 salaries for the position at USAToday.

Of all the sports, baseball seems unique in treating its spheroid as almost instantly depreciated by contact, and disposable. Mike Maloney and I were discussing this issue on the way back from a fishing trip this week. Then on my return I find that Frank Stephenson had unearthed a column titled "The true life story of baseballs." By this story's accounting, the practice of players tossing balls into the stands - the observation motivating the conversation with Mike - accounts for less than 10% of balls retired from an MLB game. A foul ball into the stands is the modal cause of retirement, with foul tips (they must scuff the ball somehow) second.

Unlike a basketball or football, a foul baseball seems more easily captured and hidden by fans. The differential cost of policing the team's "right to the ball" may be a factor causing baseball to "let them go," while basketball and soccer manage to get their balls returned.

Two questions spring to mind when thinking about crowds and the cost of balls. First, does any baseball historian know when MLB quit trying to get balls back from the crowd? My hunch is that the "rule of capture" in baseball was established in the post-war period, and was not common practice during the depression.

Second, colleges rely on the goodwill of fans to return footballs to the field. Why then does the NFL resort to nets behind the goalpost to force the ball's return? Whatever the reason, viewed alongside practice in baseball, the NFL's nets seem miserly. Footballs are more costly than baseballs, but not as many leave the field. At $200 per ball and 10 balls per game, the NFL's cost per game of souvenir footballs would be roughly the same that baseball incurs at present. Relative to the cash collected from fans in the seats, it's even less.

Empirical assessments of NCAA competition 

On Spending:
In 2003, NCAA/EADA data suggest that operating athletic spending represented roughly 3.8% of total higher education spending for D1-A schools. By comparison, the share was roughly 3.3% in 2001.

These spending shares exclude capital spending. Including capital spending for both athletics and the overall university budget modestly raises the share of total spending attributed to athletics, but does not alter the fundamental conclusion that athletic spending represents a small share of total institutional spending.
On inequality:
A common measure of inequality is the Gini coefficient, which would equal one if one school accounted for all spending and zero if spending were the same across schools. Increases in the Gini coefficient represent increased levels of inequality and vice versa.

Between 1993 and 2003, the Gini coefficient for D1-A football spending rose from 0.23 to 0.30. The Gini coefficient for D1-A basketball spending also rose sharply, from 0.24 to 0.30.
On fluctuations in spending across schools:
More than 30% of the schools that were in the top quintile of D1-A football spending in 1993 were no longer in the top quintile by 2003. More than three-fifths of the schools in the middle quintile in 1993 were no longer there in 2003; less than two-fifths had moved up and one-fourth had moved down.

[B]etween 1993 and 2003, an increase in operating expenditures of $1 on football or men'’s basketball in D1-A was associated with approximately $1 in additional operating revenue, on average.

[There is] no robust statistical relationship between changes in operating expenditures on football and changes in football winning percentages between 1993 and 2003.

[There is] no relationship - either positive or negative - between changes in operating expenditures on football or basketball among D1-A schools and incoming SAT scores or the percentage of applicants accepted.
These are the carefully stated conclusions of an ongoing study by Jonathan Orszag of Competition Policy Associates and Peter Orszag of Brookings. Although commissioned by the NCAA, the study is written in the spirit of factual assessment. On controversial issues the Orszags frequently conclude that hypotheses favorable to the NCAA are "not proven."

Kudos to Chris Clapp, a former Clemson student (and a fine one), who contributed to the report, and thanks to CollegeAthleticsClips for the link.

Wednesday, May 25, 2005

Soccer Incentives 

Recent travels kept me away from the SportsEconomist for the past couple of weeks. Fortunately, I was lucky of enough to have access to Fox Soccer Channel over the weekend of May 15 for the final day of the English Premier League. Whether one cares about soccer or not, the incentives embedded in the EPL (and other soccer leagues around the world) provide an interesting contrast to those offered in American sport.

One of the biggest differences is at the bottom of the league. In American sports, teams play out the season in front of empty stadiums in games that mean very little to fans. The relegation system in soccer creates an entirely different atmosphere. During the course of the May 15 games (all started at the same time), all four EPL teams vying for the last spot above the relegation zone held the upper hand at one time. Norwich came into the day holding the spot. Southhampton grabbed it for a time in the first half. During the second half of the games, Crystal Palace and West Brom traded the spot back and forth as their scores changed. These games contained interest, tension, and drama equivalent to any "game 7" playoff in American sport. The celebration scene at West Brom looked like world championship. The weekly EPL Review Show spent the first thirty minutes summarizing this battle at the bottom! Beyond the relegation battle, competition for European Cup football places as well as 500,000 pounds for each finishing spot made most of the games meaningful and exciting. There are many more marginal incentives than in American sports.

The relegation system likely creates some internal redistribution issues. I suspect that the system enhances the "size of the pie" to the point of swamping the division of the pie problems it may create. Teams are always playing for something, which translates into high fan interest and revenues for the league. In From the Ballfield to the Boardroom, I discuss the recurring problem in American sport of owners and pundits observing them fixating too much on the division of the pie while ignoring the effects of building a bigger pie. As noted in an earlier post, for all of the attention devoted to the NFL's revenue sharing and salary cap, their real success has been through the boom in the interest in their product over the last thirty years.

Tuesday, May 24, 2005

College Coaches' Salaries and Free(?) Markets 

A common response from D-IA ADs about escalating coaches salaries is that they are simply "meeting the market." John Genzale of the Sports Business Journal offers this gem full of uninformed claims and confused economics that takes this "meeting the market" argument to its illogical conclusion (I'm not picking just on the author because this type of stuff has appeared many times).

"College presidents are smart guys; they can do the math. They don’t pay players, so labor costs are relatively modest. They know that ratings, gate and bowl appearances can produce far more revenue than they pay in coaches’ salaries. And they know that athletic success is their best form of marketing... Coaches make big bucks because they’re worth it. They are the most recognizable figures on campus. The best of them improve the competitive fortunes of their programs while enriching the lives of their players. They promote the educational mission of their universities while enhancing its business prospects. So let’s quit whining and pay them what the market dictates."

The author admits that "free-market" salaries can be unjust but are "an unavoidable byproduct of a free marketplace" and implores critics to "develop faith in the marketplace."

The uninformed claims, easily found in other opinion columns, are many:

*College presidents, while typicall smart in my experience, aren't always guys (and nobody has ever reviewed their math abilities).
*By the NCAA's own Revenues and Expenses Reports, gate and bowl appearances may produce more revenue than coaches are paid, but it all stays in the athletic department (typically, D-IA departments barely break even without direct institutional support).
*Nowhere is there a shred of evidence that athletic success is the best form of marketing available to college presidents; success has spillover value from TV appearances but no university I know of would divert a single dollar of other marketing expenditure to the success of the athletic department expecting some sort of marketing return.
*Coaches come in all styles, just like the rest of us; some enrich the lives of their players and others don't.
*I for one would just love to hear how it is that coaches enhance the educational missions of their universities.

But, turning to economics, let's look at just what type of "free marketplace" we're talking about here, and whether coaches really are worth it. Few college players receive in-kind payment close to their contribution to revenues because of NCAA amateur requirements and immobility rules. And here's the kicker: players' contributions to revenues, over and above the value of the in-kind payment they receive (their personal value of education and their valuation of training for a shot at the pros), goes into salaries and facilities (universities don't expect a direct monetary payment from the athletic department). And the value of this contribution increases immensely over time. Coaches' salaries would rise anyway, but they would be nowhere near their current levels without this kicker from players.

It's a funny kind of "free market" where the rules only allow coaches to move at competitive wages, but not players.We've known since Ricardo that rents accrue to scarce factors. Markets are great at accomplishing this. But coaches are only artificially scarce; star players are paid less than their contribution to revenues and the balance goes to coaches, ADs, and athletic facilities, not the university.

There are good things about college sports; admirable things even. But let's not misplace our faith by singing the praises of a completely contrived market where coaches simply enjoy the transfer of value from players that is created by NCAA rules.

Friday, May 20, 2005

Technology, rules, and the nature of the game 

Technological advances in equipment have rendered grand old golf courses obsolete for professional tournaments. Many have adapted by lengthening and narrowing fairways, "Tigerproofing" themselves in an attempt to keep scores from plummeting. There is serious discussion of more restrictive regulation of the golf ball as well.

In softball, technological advance has done much the same, rendering local ballfields obsolete, as described in today's WSJ:
By the beginning of this decade... softball bats had become too powerful -- often resulting in longer games with inning after inning of home runs. Last year, the ASA [Amateur Softball Association of America] responded by telling makers to limit how fast a regulation softball could fly off their bats in a lab test -- its "98 mph rule." After years of better performance, bats were effectively dampened.
Until, that is, the bat doctors went to work:
"It's amazing the lengths teams will go to win an $18 trophy," says Joe Morice, a player and manager of Cassie's Italian, a men's softball team in Fairfax, Va.

Bat doctors have devised various procedures to give players that age-old satisfaction of launching a ball over the outfield fence. One method, called "end loading," involves removing the cap on the end of the barrel and adding weight, shifting the bat's balance to give it more momentum when swung. Bat doctors may also use a lathe to shave the inside of a bat's barrel to make it springier, in effect giving the ball an extra boost on contact. Then there's the painting routine -- taking a high-performance bat that isn't allowed for league play and disguising it as a regulation model.
Old sports and new technologies can often be in conflict. One way of addressing the conflict is to go the route of the PGA, by making the courses excruciatingly long and tough. Lengthening amateur ballparks or municipal golf courses is not likely an economic response. So golfers get to enjoy the prospect of more birdies, which at the municipal level is not much of a problem. Longer softball games, with balls routinely flying over the fence, may be more threatening to the nature of the game. Hence the new bat regulations.

But turning back the clock by regulating technology is not the simplest policy to implement or enforce. As the WSJ story implies, development of technology and responses to it may lead to unrecognizably different forms of softball, as different associations adopt different rules. Much in the way that different rules generated forms of auto racing that have little in common, apart from the vehicle having 4 wheels and an engine. Football's struggle with the rulebook led to a similar outcome, with the American form (developed in isolation) evolving into something completely different from either Rugby or Soccer.

Thursday, May 19, 2005

Looking back, and ahead, in English football 

Today's Telegraph has a fascinating conversation between Arsenal old boy Alan Smith, hero of Fever Pitch, and Nick Hornby, the book's author. Here's one bit, in which Hornby touches on the cultural transformation in football over the past few decades:
As a young boy, [Hornby] fondly remembers paying 30p on the train to get across from his Maidenhead home, then another 15p to stand on 'the Schoolboys', the old terrace at Highbury earmarked for youngsters.

"I know it was a long time ago but it was the time when, I don't know, a newspaper cost 5p. So that's three times the price of a paper to watch Arsenal.

"It's more of a treat now to go two or three times a year. If you haven't had that basis of being completely committed in your teens and twenties, I don't know how those kids are going to have the same relationship with the club when they're adults."

The answer, in all likelihood, is that they won't. If things stay the same at the big clubs at least, supporters such as Hornby are in danger of gradually dying away altogether to be replaced by a more casual version that floats in and out; they'll go when they can, otherwise watch it on the box.
Hornby also rues the decline in competition manifested in England's top division:
[I]n your day if you got a draw at Aston Villa it was regarded as a decent result, but now it's the end of the world. I don't think it should be like that. Arsenal didn't lose a league game last season and Chelsea have only lost one this time. You can see that it's going to be the same next year. Then you're in a situation where clubs will be looking abroad for the real competition.
No doubt that's what's going on, and is the likely play that Glazer has in mind with Man United. UEFA will try and block the formation of a European super-league, as indicated by the recent rule designed to increase the number of "home grown" players on teams, and rulings enforcing the "domestic-only" nature of European leagues. But the economics behind the transformation that Hornby describes - call it globalization - make the super-league inevitable. A super-league would reduce the opportunity for mid-level teams to compete with the cream of the crop in England's top league. That loss is real and regrettable, but as Hornby's description implies, it's virtually gone already.

Welcome to Rodney Fort 

Rodney Fort, Professor of Economics at Washington State, has joined The Sports Economist. Professor Fort is a major contributor to the field. His books Pay Dirt and Hardball (both with James Quirk) are classics, and belong on the bookshelf of anyone interested in sports and economics, and he more recently produced a fine textbook, Sports Economics. Rod ran across the blog a few months ago and liked it enough to agree to make an occasional contribution. While his first post is below, hence this official welcome, Rod has been leaving thoughtful and fact-filled comments for a while now. We are delighted to have Professor Fort on board. Welcome!

"Money" and "Ball" and the Cost per Win Fallacy 

In his article, "Based on Payrolls, Brewers Faring Quite Well This Season," Tom Haudricourt offers us the following:

"The bottom line of victories and losses is the absolute best way to judge how a major-league team is managing its money. With nearly six weeks of the 2005 season complete, the Milwaukee Brewers have to feel pretty good about how they've fared. With a $41 million payroll, which ranks 27th among the 30 big-league clubs, the Brewers have forged a 17-16 record. Breaking that down further the Brewers have spent $2.41 million per victory, a figure that obviously will decrease dramatically as the season progresses."

This comparative "cost per win" approach is popular with the media. He then goes on to criticize, who else, the Yankees:

"No team has underachieved more, per dollar spent, than the New York Yankees, who have a league-high $208 million payroll - $84 million more than the team with the second-highest payroll, Boston. Despite winning five consecutive games, the Yankees are 16-19, which works out to $13 million per victory."

To his credit, Haudricourt notes the limits of this "snapshot;" things can change during the rest of the season, and the Yankees 1) obviously intended to do better and 2) probably will do much better than their slow start. [Indeed, they have just beat up on my own Mariners to fatten their winning percent.] So let's not get hung up on the particular snapshot. Instead, let's think about the limits of the cost per win concept.

Basic sports economics shows the fallacy of measuring any kind of success across different markets by costs per win. First, fans in New York like winning and apparently are willing to pay more than any other fans in order to see it happen. So, Yankee GMs do their level best to give their fans what they want and collect this truly large amount of money. But there is nothing linear about the spending required to do so! The average cost of a win is far from constant; costs of winning should increase at the margin.

Further, fans in NY may be quite happy to pay even more to watch the very best players (on average) win, regardless of how much winning actually takes place (within limits of course, as witness the Yankees' declining economic fortunes under CBS ownership in the late 1960s). Other consumers in NY appear of similar inclination (I think of opera, for example-- it's just music and singing, eh? But it's doubtful that opera patrons in NY would pay the same amount for the lesser opera offered in, say, Seattle). This suggests that a win in NY is not the same consumption item as a win in Oakland and it's possible that an efficient GM would spend more to achieve a 0.600 winning percent than an efficient GM in Oakland would spend to the same end.

So, cost per win would be useful in comparing two different GMs in the same market; the lower cost per win would be the more efficient GM in that market. But the same measure is invalid when comparing GMs across markets. Cost per win will always show the Yankees to be "under-achievers" as long as the average cost of winning is non-linear and as long as Yankee fans are willing to pay more to watch the game's best win at any reasonable level of winning.

This has relevance for the "money" part of Moneyball. Author Lewis points out that Billy Beane typically shows a lower cost per win than other MLB GMs. And then Lewis goes on to suggest that the rest of the GMs in MLB have something to learn. But this is an invalid comparison. It is valid to compare Beane's success to previous A's GMs, but not to GMs in other cities. Nobody would ever spend like the Yankees if they operate in the Oakland market and care about profits.

Or, the other way around, given that Beane has done as well as any other GM in Oakland has ever done, and given Oakland's revenue potential, we would never expect the same success in Oakland as in NY. The relative level of winning in Oakland and New York bears this out. During Beane's tenure (since 1996 and up to last season, 2004), Oakland's winning percent has only twice been greater than that of the Yankees (2000 and 2001). And Oakland has won its division three times in Beane's 9-year tenure while the Yankees won their division in 8 of those 9 years (1997 being the only exception). The Yankees have also won a few World Series in that time. This is not a knock against Beane, a truly great GM in Oakland. It's just the obvious expected result given the variation in revenue potential in MLB.

Teams are structured to capture the revenue potential in their respective markets. And cost per win is a silly way to judge success at doing so across teams in different markets with different revenue potential.

Wednesday, May 18, 2005

Glazer's business plan? 

There has been much speculation in the press that Malcolm Glazer intends to negotiate TV deals independently from the Premier League. The problem is that the issue has already been settled both internally among the League, and externally with the European Commission on Competition. But that doesn't stop the spin-meisters. For example, this story in The Guardian quotes a Commission spokesman as if what he is saying is news to Glazer:
Malcolm Glazer has been dealt a serious blow to his hopes of Manchester United securing their own TV deals after the European Commission today said they would not support a legal challenge by the club's new owner.
If Glazer has spent over a billion bucks without knowing that this issue has been raised and dealt with by the Commission on more than one occasion, he has not done due diligence. Hence I doubt that his strategy is based on independent television deals.

The way Premier League TV money is distributed is explained in the "Frequently Asked Questions" section of the league's website - it's not exactly a corporate secret:
195 countries show FA Premier League matches on television. ...

50% of total [TV; ed.] money goes on an equal share basis to the 20 FA Premier League clubs, while relegated clubs also receive some of this money in the form of a parachute payment. 25% of the money is paid as facility fees, which are determined by the number of appearances on television. 25% is paid in merit payments, determined by the position that a club finished in the league.
Several years ago, Manchester United attempted to change the rules governing distribution of TV revenue. As described in the Guardian story, the other clubs were not persuaded - United's proposal was voted down, 19-1.

Glazer may have some innovations in mind for Man U, but he's not telling the press, so they are just making stuff up. That's my take at least.

Youth and professional sport 

Michael McCann on a new Hawaii law which places an age floor on contestants in the sport of ultimate fighting: "It's strange that there doesn't appear to be the same outrage for 18-year olds repeatedly punching each other in the head as there is 18-year olds taking 18-foot jumpers or catching passes out of the backfield." Strange indeed, but predictable.

Monday, May 16, 2005

College football & season ticket rights 

Virginia Tech is reallocating seats to season ticket holders. The new policy is a textbook example of increasing revenue by separating fans on the basis of willingness to pay, with a nod to loyal followers:
Season-ticket holders had previously been able to keep their same seats when they renewed, but this year, many of them must move to make room for bigger donors to the Hokie Club, the athletic department's fund-raising unit.

Virginia Tech -- which sold 37,411 season tickets last year -- notified those ticket holders in October of how they will allocate the seats.

Hokie Club members at the Golden Hokie level -- those who give $2,000 to $4,999 per year -- have been picking their seats since May 2.

But some people had priority over the 2,400 Golden Hokies in the Hokie Club. Fans who have bought season tickets every year since 1966 got to keep their seats. Then came annual Hokie Club donors of $5,000 or more; they each got to buy six tickets. Next up were people who were season-ticket buyers for at least 35 straight years; they got to buy four tickets apiece. It was then time for the Golden Hokies; they also get to buy four tickets apiece.
Two grand per year gets you the right to be fourth in line to buy seats. How 'bout them Hokies!

See the story at SI.com for more details. I wonder how many fans have purchased tickets continuously since 1966?

A revolution in ownership structure? 

Sensible commentary on Glazer's takeover of Manchester United - now assured of success in a technical sense - has been in relatively short supply. One of the better pieces is Richard Williams' column in Saturday's Guardian. After a skeptical treatment of "Chicken Little" responses to the transaction, Williams offers his view of the larger issue:
No doubt a Glazer or an Abramovich would respond to the supporters' demand to play a part in the affairs of their club by pointing out that the purchase of tickets to see Sylvie Guillem at Covent Garden does not give the buyer the right to a say in the Royal Ballet's artistic policy. The only way to exert influence in a free market is to stay away, a decision some United fans are threatening to take. No doubt there will be plenty of others waiting to take their places.

But, being neither simply business nor an art form, sport is not susceptible to their rules of organisation. It is about a different sort of identification, a sense of emotional belonging that is both easily agitated and fundamentally unbreakable. And in the end the best way to run a football club, by far, is through the ownership of its members.

This is the structure used by Real Madrid, Barcelona, Bayern Munich and AFC Wimbledon, the club formed by fans alienated by the old Wimbledon. The two Spanish giants, with memberships of 85,000 and 102,000 respectively, are non- profit-making and fully democratic organisations, holding quadrennial elections at which a president is mandated to run the club's affairs. AFC Wimbledon are run by a trust that aims to control at least 75% of the club's shares, and it will be interesting to see how long that principle survives in the club's rapid climb up the pyramid of English football.
The Wimbledon case in interesting: a club purchased by foreign owners, and in what is extremely rare in English football, packing up and moving to new digs in Milton Keynes. The fans in Wimbledon created their own team and are attempting to play their way back up the ladder to the Football League. In the U.S., a similar result has been obtained by dissimilar means. When teams in Cleveland and Houston left for better prospects in Baltimore and Nashville, the towns got their teams back after paying ransom of about $1 billion (yes, with a b) to the NFL. I definitely prefer the English approach to the problem.

Williams is a fan of the trust/democratic concept of club ownership. It certainly has some appeal, but I have reservations. It is easy to see how the top clubs in Williams' list - Bayern, Barcelona, and Real Madrid - generate the interest from their fan base to take an ownership stake. But ownership structure might not work nearly as well at Bolton, Dundee, or Wigan. Wigan, for example, have just won promotion to the Premier League for the first time thanks to an owner who financed the transformation of the club. This would have been virtually impossible under the democratic form of organization.

The championship seasons of Chelsea and Blackburn Rovers stem from a similar pattern of investment and vision. And therein lies the problem, as I see it, with democratic ownership of football clubs. It limits the potential source of competition, and thereby enhances the dominance of clubs currently on top. Forcing it upon an entire league could be costly.

Nevertheless, the concept has momentum, as suggested by Kevin Mitchell's column in Sunday's Observer. Mitchell has both feet in the Chicken Little camp, but provides some interesting information from David Boyle, Deputy Manager of an organization called Supporters Direct:
'If Glazer had tried this on five years from now,' says Boyle, 'the United fans would have had a very good chance of stopping him.'

It is some claim. But, he says, Supporters Direct is one of the best-kept secrets in football and is growing. He predicts that its guiding principle - turning fans into shareholders and encouraging the bond between the community and the boardroom - is the only way forward. 'Every model has been tried: butcher, baker, candlestick maker, millionaires, sugar daddies, plcs. They have all run up debts and gambled with tomorrow's money today. This is the only game left in town because, as long as there are football fans, there will be football clubs. In truth, the game has never been as properly run and community-based as it can be.'

There are 10 Football League clubs where trusts have a majority holding, with Stockport County and Rushden & Diamonds coming on board next month. 'In five years,' says Boyle, '25 per cent of clubs in the Nationwide will be run by supporters trusts. That should be up to 50 per cent in 10 years. And 20 years from now we expect the vast majority of clubs to be run by their supporters.'
Interesting. Having a mix of alternative ownership structures is probably a good thing for the game. But I am curious as to why none of the top English clubs are run by one of Boyle's trusts.

Sunday, May 15, 2005

More on Manchester United:
Hedge Funds Back Glazer 

According to the Sunday Times [h/t to Brian Ferguson for the link], three major hedge funds are backing Malcom Glazer's acquisition of Manchester United.

THREE secretive US hedge funds last night emerged as the key backers of American sports tycoon Malcolm Glazer’s controversial £800m takeover of Manchester United.

The New York-based funds of Citadel, Och-Ziff Capital Management and Perry Capital have poured £275m into the bid.

... The three hedge funds have combined to acquire special-preference shares issued as part of the Glazer takeover. Glazer will pay the funds interest and retain the option of buying back the shares at a later date.

A further £265m loan facility has been provided by JP Morgan and is being syndicated to a consortium of banks, with the remaining £272m provided through the Glazer family’s existing equity stake.
This type of investment seems to be a bit of a departure from leveraged investments and hedges that one might expect from hedge funds. But these funds are not typical hedge funds.

Kenneth Griffin, the youthful founder of Citadel, is one of the most respected money managers in America... The fund now manages more than $12 billion and accounts for more than 1% of daily trading in New York, London and Tokyo.

Perry, founded and run by Richard Perry, manages about $11 billion in assets. The fund is known for its bruising approach in takeover battles, and has built stakes in firms including Blockbuster, the video-rental chain.

Och-Ziff is one of the world’s 20 largest hedge funds with an estimated $12 billion of assets under management.... Founder Dan Och, who spent 12 years at Goldman Sachs, started the fund in 1994 with $100m of capital from the Ziff brothers of the legendary American publishing family.
In light of the information provided in the comments section to Skip's inital posting about this takeover, the investments by these funds could well turn out to be quite lucrative. There could be potentially large capital gains from this investment. But the major upside will go to Glazer, who has a buy-out option if the acquisition turns out to be profitable, and the hedge funds will share in the down-side risk if it doesn't.

I presume they are being well-compensated for taking this risk.

Saturday, May 14, 2005

Pricing Under Uncertain Demand 

The pricing of gate tickets to a team's games is a case of pricing under uncertain demand. Ticket prices depend on the demand for a team's games and the demand depends, in large part, on the quality of the team. But when the ticket prices posted on the season schedules are set, nobody knows how well the team will perform. So ticket prices are set with an eye to the future.

One of the factors that fans use to gauge the quality of next year's team is the quality of last year's team. If last year's team performed well, fans generally expect the team to perform well in the current year (as long as "enough" of last year's talent remains on the team) and the demand for the team's games - especially early in the season and for season ticket sales - will be higher than otherwise.

The Los Angeles Clippers have already announced that they are raising the prices of most of the tickets to their games. They didn't make the playoffs and they didn't have a winning season, but they were 13 games above 0.500 at home and they finished the season 3 games above the Lakers in the Pacific Division!
The Clippers, confident they're poised to make a serious run for the playoffs next season, have raised ticket prices in eight of 10 seating areas in Staples Center, an increase of as much as 20% in the prime locations. ...

A spokesman for the Clippers, whose 27-14 home record last season was their best in 12 years, said the team has received few complaints about the price increases. The club has taken 400 new orders for season tickets since the 2004-05 season ended last month, spokesman Joe Safety said.

The Clippers were 37-45 and 10th in the Western Conference, eight games out of the final playoff spot and ahead of the Lakers for the first time in 12 years and only the third time in the Clippers' 21 seasons in Los Angeles.
Teams have latitude in the actual price for which they sell their tickets, so if the Clippers end up underperforming and the demand for Clippers games is less than expected, some tickets will be sold at less than the stated ticket price (see the comments to this post by co-blogger John Palmer, specifically this one by Rod Fort).

Here are the prices for next year's tickets to Clippers games. Note at the time of this writing, individual game prices to Clippers games have not been finalized.

Why Tiger Missed the Cut 

Paul Kedrosky, of Infectious Greed, and well-known writer for Wired and many other sources, including the WSJ, says that Tiger hits the ball too hard, trading off distance for accuracy. Paul has a really nifty flash chart showing that over time, Tiger's distance has increased by a small amount while his driving accuracy is slipping considerably.

As you can see, despite the supposed improvement in his game, Tiger's driving accuracy has fallen off much more than his driving distance has increased. At the same time, the gap between Woods and the mass of his professional competitors is much smaller than it was five years ago -- the animation shows this nicely, with a great splotch of competitors all closing in on Woods over the period.
Go see the flash chart. It shows the trade-off results nicely; it's worth a look.

What are the shadow prices and elasticities of accuracy vs. distance on the PGA tour?

Friday, May 13, 2005

Glazer gets United 

Tampa Bay Bucs owner Malcolm Glazer has now acquired over 70 per cent of the shares in Manchester United. The dam broke yesterday when McManus and Magnier (dubbed the Coolmore mafia in reference to their worldwide horse breeding operation) sold their stake. Shareholders United, a group formed in a vain attempt to thwart the takeover, described the transaction as "a treacherous act of betrayal by the Irish. They've sold Man U for 30 pieces of silver and they won't be forgiven." It seems the Christian analogy is limited. Man U supporters are threatening boycotts, blocking traffic in front of Gold Trafford, and generally making a nuisance of themselves.

Henry Winter, The Telegraph's head football writer, is apparently drinking from the same cup. In a rant that could have been scripted by Shareholders United itself, Winter makes the claim that shifting control from one tycoon to another "will damage our national game." His descent into xenophobia in the concluding sentence - the "famous club certainly do not deserve an American predator like Glazer" - reveals more about Winter himself than what is in store under a Glazer regime.

Apart from wrangling over TV money, there is not much that Glazer can do to reform the EPL or the FA. He will control Manchester United, not the decision-making of the governing bodies. That is the beauty of the English system. Glazer might ruin the club for a decade if he seeks to profit by restraining the wage bill for players, but on balance that might be a positive contribution! You won't find Arsenal or Liverpool supporters shedding tears over that prospect.

The potential downside for English Football is that the deal may be an incremental step towards American-style organization of the league. That might be good for owners of the top clubs, but it would cost everyone else dearly, most notably fans and players.** But Glazer can't change the system by himself, so the danger is remote, though worth guarding against.

The timing of the transaction is intriguing. The Irish are selling at a profit as the decline in United's dominance of the EPL is becoming increasingly obvious - an excellent move on their part (the takeover premium is significant). On the buying side, Glazer is taking control with one game left in the EPL season, and the FA Cup Final with Arsenal next Saturday. Man U "supporters" will have their pop in the streets over the next ten days. But then what? Things might cool off if Glazer, as planned, brings a superstar or two to the squad over the summer. The alternative scenario is that the off-season will give rabble-rousers time to organize a full-scale assault for the start of next season. Unfortunately, the history of pathological lunacy among English football supporters makes that a real prospect.


**The EPL is arguably the most successful league on the planet, based on the value it creates for consumers. But the open system of competition between England's divisions (the three bottom teams will be relegated to a lower division this weekend) and among leagues (for players and viewers) in the rest of the world makes the wage bill much higher than it would be under an American system. This seriously limits the potential for profit - most English clubs eat capital, rather than generate a return on it. There's nothing wrong with that in my view - its primary effect being that it limits the pool of ownership to sportsmen.

Thursday, May 12, 2005

Will the NFL Saints Move?
and if so, where? 

We have been very fortunate to have Phil Miller provide us with the details behind the saga of the NFL Vikings' search for a new stadium here and here. I can readily imagine there are similar motives at work with this story out of San Antonio:
A local attorney representing New Orleans Saints owner Tom Benson said Tuesday that Benson is interested in relocating the franchise, possibly to San Antonio.
Translation: He is shopping the team around, one way or another, seeking the best deal he can get from the municipality (and state!) willing to pony up the biggest subsidy.

In fact, there is good reason to believe he is looking very carefully at Los Angeles [the quotation below is from Red Stick Observer , which provides considerably more information than I have quoted].
As for Albuquerque - yes, the Saints are flirting with New Mexico too, according to the Express-News - that just won't happen. The NFL doesn't have room for a duplicate of the Arizona Cardinals.

So the obvious direction of the team is....drumroll, please....Los Angeles. Benson can draw around a $1 billion offer for the Saints (which is a great payoff for him, considering he paid around $70 million for the team in the 1980s). And all signs point to the team's departure west after the 2005 season.

The team's exit clause from its deal with Louisiana calls for a one-time $81 million payout within 90 days of the Saints' 2005 season finale. If Benson does that, he is free and clear to do what he wants. By not renegotiating the overly charitable deal with the state, Benson showed his hand. He will have his cake and eat it too, by still receiving the $15 million in payment from Louisiana, while maintaining the ability to cut and run after 2005.

The obligation to keep the [team] in Louisiana would apparently still be intact even if Benson sold the team to another suitor. That would restrict offers he would receive for the team. So, if he forks over the $81 mil for the exit clause, the team could be sold to the highest bidder and moved - where else - to Los Angeles, the nation's second largest media market. That $81 million pales in comparison to a $1 billion payday.
Eventually, someone in the NFL may actually have to move to Los Angeles, and the Saints seem like a good choice; otherwise, Los Angeles might lose its cachet as a credible threat for all the other owners in their negotiations with local gubmnts for more subsidies.

And, of course, once/if the Saints move to Los Angeles, then New Orleans becomes a viable option for the other owners to use as a credible threat in their own negotiations with their own municipalities.

Wednesday, May 11, 2005

When There's a Will... 

there's a way. From the Minneapolis Star Tribune:

Vikings running back Onterrio Smith was detained last month at Minneapolis-St. Paul Airport after police found paraphernalia later identified as a kit used to circumvent drug tests.

Smith was neither arrested nor charged, but as of Tuesday it was unclear whether the incident will affect his status in the NFL's confidential substance-abuse program.

Smith acknowledged to airport police that he was carrying dried urine, along with a device called "The Original Whizzinator" and a bottle of pills labeled "Cleansing Formula." He told police the kit was "for making a clean urine test," according to the police report, and said he was taking the materials to his cousin.

Smith was suspended four games last season after testing positive for marijuana, his second "strike" in the league's program. A third "strike" would result in a yearlong suspension. An attempt to substitute a urine specimen qualifies as a positive test, but NFL spokesman Greg Aiello did not immediately know Tuesday whether possession of a masking device fits that criteria.

Oy! He was taking the materials to his cousin???? If true, it shows a serious lack of sagacity, given that he already has two strikes against him.

Monday, May 09, 2005

What is it About Roofs? 

The proposed stadium deal for the Minnesota Twins does not include a roof. The Twins say that they aren't willing to pay for a roof. If a roof is to be included, they say that the state of Minnesota will have to foot the $100 million bill.
Stadium proponents urged the state's largest county to move rapidly for legislative approval to levy the additional 0.15 percent sales tax, which would run for as long as 30 years and amount to 3 cents for every $20 purchase in the county. The 42,000-seat stadium, which would include a $125 million contribution from the Twins and would not feature a retractable roof unless the state contributed the extra $100 million cost, would be completed by 2009 in the downtown Warehouse District.
A similar thing is going on in the push for a new stadium for the Vikings.

Two years ago, after evaluating three potential locales in Anoka County, county officials landed on the Blaine site, which has more than 400 acres ready for development. It stands just west of Interstate Hwy. 35W, bordered by 109th Avenue NE. to the north and Lexington Avenue to the east.

Soon after, the county proposed a fixed-roofed stadium, with a 300,000-square-foot medical clinic, a 250-room hotel, 1.3 million feet of corporate office space, 200 townhouses and 650,000 square feet of retail and entertainment facilities.

The total cost was estimated at $1.6 billion.

The county and city presented the plan to Gov. Tim Pawlenty's Stadium Screening Committee last year and, with the concept, the Anoka County Board approved a three-quarter-cent sales tax increase to help pay for it.

But in a meeting with city and county officials on April 14, Wilf was apparently indifferent to a roof, questioned the need for the clinic and told political leaders that he would examine the Lino Lakes land, 8 miles to the east of the Blaine site, near Interstate Hwy. 35E. ...

"Without a roof, you have nothing," Ryan said. "For this to work, you've got to get into the entertainment business."

With a roof, the stadium's year-round capabilities would allow it to play host to events such as the NCAA men's basketball Final Four and even a Super Bowl, said Novak.

Without a roof, the stadium's use would be limited to a handful of events besides Vikings games.

Why would the Vikes not want a roof? It'll keep the state bird out of the stadium and it does get a wee bit chilly up here in late fall and in the winter. Even so, putting on a roof is not economically justifiable.

I ate With Jay Weiner of the Minneapolis Star-Tribune over lunch two weekends ago. He told me that in his conversations with Twins officials, it would be cheaper for the Twins to buy coats/hotel rooms for every person who chose not attend a game because of the threat of inclement weather than it would be to put on a retractable roof. So in other words, the lost revenue associated with inclement weather isn't that great.

Blame it on da wabbit 

Andrew Beyer called it "a dismal derby," "among the worst in recent decades." And he's right, if you go by the numbers. Adjusted for the speed of the track, the running time was sub-par, the slowest since Prairie Bayou's win in 1993.

The result was certainly dismal for the pocketbooks of horseplayers like Beyer, as the exacta of 50-1 Giacomo and 71-1 Closing Argument left only hunch players, lawyers, and fans of Sting (Giacomo is named after the singer's son) in possession of winning tickets. And friends of Mike Smith, the winning jockey, who was telling anyone who would listen that his colt was sitting on a big race and to get their money down.

How'd it happen? First, as I said in my Derby Day post, a case could be made for all but three of the contenders. Second, "blame it on da wabbit." The final time may have been slow, but the inner fractions of the race (22.28, 21.8 and 22.3, respectively, for the first three quarters) were the 2nd fastest in the Derby's 131 year history. The reason was da wabbit, Spanish Chesnut, who was entered to set a fast pace to set things up for the closing kick of his stablemate, Bandini.

Spanish Chesnut forced the issue, and those in close attendance to the pace wilted under pressure. Exactly as planned, except that Bandini failed to fire. As they say on the backstretch, the "race fell apart." Of the more fancied runners, only Afleet Alex showed up for the stretch drive, and despite a game effort, he weakened in the last yards. Giacomo and Closing Argument had good trips, stayed well back from the hot pace early, and had enough left to "pick up the pieces." I just wish my crystal ball was working this well when I made my selections.

It was indeed a stunning outcome, but unlike Beyer I'm not willing to label it dismal. Joe Drape in the New York Times, who picked Giacomo to finish last, is much more charitable in his look back at the race, and gives the connections their due.

But can they pull another rabbit out of the hat in the Preakness? With a more reasonable pace scenario, the two horses on the lead at the 1/4 pole - Bellamy Road and High Fly - will be much tougher to catch at Pimlico. I'm guessing that Giacomo will be no better than 3rd or 4th choice in the betting on Preakness Day.

Saturday, May 07, 2005

Derby day 

This year's Derby is a mouth-watering edition of America' great horse race. The field is as deep in talent as any I can recall. Only one horse has no chance. Spanish Chesnut will run as rabbit for Bandini, his objective being to insure an "honest" pace, and to take away the possibility that one of the front-runners coasts to an easy lead. A case can be made for almost any other runner, although I think Baffert and Lucas - two trainers with the appetite for the race and the skills to win it - are taking flyers with Sort It Out and Going Wild. Those three horses should go off at odds of 75-1 or more; every other horse is worth some consideration (you can get free past performances from the Daily Racing Form here).

Steve Haskin, who has watched Derby preparations from the backstretch at Churchill Downs for many years, is as confused as I am. That's not surprising, since three year olds mature into polished racehorses quickly in the spring, and the best of them gather at Churchill Downs to take a shot at this race. The Derby field is always the cream of the crop, and it's not easy to separate the exceptional from the very good. Haskin admits he can't do that this year, in this analysis of the race and his strategy for betting it. He's "going for value," playing horses that are training well and that look to go off at high odds.

Bellamy Road is the potential superstar in the field, but he will not have the race his own way - Spanish Chesnut will force the issue with him early. If Bellamy Road is the second coming of Seattle Slew, he will brush off the challenge and let his long, easy stride carry him to victory. But he is a lightly raced colt. He has not faced anything like what will be thrown at him today, and lacks the experience that forges a seasoned competitor. Afleet Alex has the seasoning, and has impressed me (and Haskin too) with his preparation for the Derby. And he runs fast. He's my pick to win a very competitive horse race. If Bellamy Road's Derby is more like Holy Bull's than the Slew's, a trifecta including High Fly and Nobel Causeway would yield a handsome payoff. Happy Derby Day!

Friday, May 06, 2005

Coase, Moneyball, and Transaction Costs 

Adam Yu has written a wonderfully titled essay, "The Coase Theorem Meets Moneyball." It won the Milton Friedman prize at the Chicago Graduate School of Business, and it is available on-line here [free registration required to see the entire essay]. The essay has a very clear statement, applying the strong version of Coase to the change from the reserve clause to free agency:

Prior to the inception of free agency in 1976, the property rights of players were solely assigned to the team. This policy, known as the reserve clause, meant that barring a trade or sale of player rights, individuals could only play for their drafted team. With the advent of free agency, players who had acquired a requisite amount of service time were free to the highest bidder. Free agency thereby signified the transfer of property rights from teams (owners) to players. Owners vehemently resisted free agency, fearing the disproportionate flow of premium talent towards the larger baseball markets. According to Coase however, free agency's transfer of property rights would leave the allocation of players unaffected. Even under the reserve clause then, it was argued that the better players from smaller market clubs were peddled to the larger market clubs anyway.
This opening provides an excellent introduction. But then the essay argues that high transaction costs, in the form of high salaries, keep small market teams from being competitive with the large market teams:

However, the best underpaid talent will not be underpaid for long, nor will they be with their original team. In the end, Coase was right again in theory; but free agency created a transaction cost in the form of rising salaries that altered the distribution of major league baseball talent.
Oops. Rising salaries are a result of the realignment of property rights; they aren't transaction costs.

To the extent that results are different under free agency than they would have been under the reserve clause, one possible explanation is that transaction costs are higher now than they were then [which seems plausible given stories we read about the negotiations between owners and agents]; but that would mean we should see more competitive balance now than we did before free agency, which the author seems to deny.

An alternative explanation that seems plausible is that many of the current property rights owners (the players) have utility functions with different arguments and weights than the previous property rights owners (the team owners). We still get an efficient allocation of scarce resources, but it is different, and this is the weak version of the Coase Theorem.

Wednesday, May 04, 2005

More Stadium Games in Minnesota 

With all the attention being given the Twins and their receipt of approval from Hennepin County officials to go ahead with their plans, don't forget that the Vikings want to abandon the Metrodome too. One potential site that has received a lot of attention is located in a suburb in the north part of the Twin Cities metro area - Blaine. This article from the Minneapolis Star Tribune shows some of the negotiating tactics that are going on:
Two years ago, after evaluating three potential locales in Anoka County, county officials landed on the Blaine site, which has more than 400 acres ready for development. It stands just west of Interstate Hwy. 35W, bordered by 109th Avenue NE. to the north and Lexington Avenue to the east.
Here is a link to a Google map of the proposed site. Here is a satellite picture of the site from Google maps (which, by the way, is a very neat website!). From an earlier passage in the article:

Zygmunt Wilf, a New Jersey real estate developer who is scheduled to visit Blaine today, has told officials that if he and his partners buy the Vikings, a domed stadium is not a priority. He also said that elements of the retail-commercial-housing development in the Blaine proposal don't appeal to him, and that he is examining land in nearby Lino Lakes as an alternative stadium site.

Why might Mr. Wilf want to look at different sites?

Langfeld speculated that Wilf's interest in acreage other than in Blaine could merely be "a negotiating tool" as he begins to meet Blaine landowners, who for 18 months have been smacking their lips at the prospect of being critical to a stadium plan.

For instance, Rick Wilder, who owns 140 acres on the site and operates the Metro Gun Club there, said he believes his land could be worth more than $20 million, a staggering figure he has based on square footage for potential development,

"One of these guys might make me an offer I can't refuse," Wilder said. "But, I tell you, I'm not going to be forced out. I don't want to be relocated."

On the other hand, Joe Preiner, who bought 75 acres in 1968 for $300 an acre and who is now asking more than $200,000 per acre, said, "This Vikings thing has screwed up a lot of deals."

It sounds like Wilf doesn't want to tip his hand. What you get out of any agreement is determined, in part, by what you get if you disagree. If you make your opponent believe that you have options that you find suitable, you move negotiations in your direction. The county officials, on the other hand, probably shouldn't have announced their favorite spot. Perhaps this has something to do with it being easier to spend other people's money.

Why Don't Teams Lower Ticket Prices When the Team Isn't Doing Well? 

In an earlier posting, the discussion in the comments raised the econ-speak concepts of marginal revenue and marginal costs. Here is another intriguing application, using that backward-L shaped marginal cost curve.

A student asked the question in the subject line, "Why don't teams cut their ticket prices when the team isn't doing well and attendance has dropped?"
I trotted out the usual answers.

  1. Maybe the transaction costs are too high. It is easy to program a computer to change prices, but how would the team give refunds to people who had already purchased their tickets, if at all?
  2. Perhaps lowering the prices would have the effect of reducing demand in the future if people waited for lower prices before purchasing their tickets.
  3. They do. Sometimes teams effectively reduce ticket prices by staging promotions and give-aways that were not part of the pre-season marketing plan.

Here is another fun answer, though, which hinges on a set of heroic assumptions.

  • Suppose the demand for tickets is linear [and hence so is the marginal revenue "curve"] .
  • Suppose the marginal costs are backward-L shaped, with a horizontal portion in the relevant region, which is well-below capacity.
  • Suppose the drop in demand just reduces the percentage of people willing to pay each possible price for tickets. E.g., whereas before the team went on the skids, perhaps 1000 fans would have been willing to pay $100 for a ticket, but now only 500 are willing to pay that much. In other words, suppose the drop in demand doesn't shift the demand curve in parallel fashion but instead rotates it clockwise around the vertical intercept.
  • Suppose the team is a profit maximizer.

In this case, it can be shown that the profit-maximizing price is invariant with the slope of the demand curve, so long as the marginal revenue curve intersects the horizontal portion of the MC curve. The demand can drop way off (i.e. rotate inward one heck of a lot), and the profit-maximizing price is the same as it would be if demand were high (but not so high that the MR crosses the vertical portion of the MC curve).

I realize the assumptions are heroic, but they're not too extreme are they? This explanation probably helps us understand a bit more why prices for tickets to sporting events are fairly stable regardless of the team's performance.

Tuesday, May 03, 2005

A College Lesson for the NBA? 

Refreshingly, the NBA playoffs so far have escaped the 75-point clutch-and-grab purgatory of the past decade. Still, according the Nielsen data reported on Zapt2it, 3.3 million households watched the NBA playoffs on Sunday afternoon. That's about 2 million fewer than watched the NASCAR race Sunday and slightly less than viewership for WWE Smackdown!. To be fair, these events aired in primetime, but the NBA lost out in direct competition with the the Shell Houston Open. Now that's a smackdown! In a broader perspective, CBS's 11-year deal pays the NCAA about $550 million per year just for the tournament while the NBA receives only $750 million per year for the regular season and playoffs combined.

The interest in the NCAA tournament presents an interesting comparison with the NBA. Although I'm not a big fan of college basketball -- the hyper-physical play reflects the 90s trend in the pro game, many coaches are obnoxious, officiating is inconsistent at best and atrocious at worst, and then there is Billy Packer (don't get me started) -- I find the tournament compelling, especially the first two rounds. The "lose and you're out" format makes every game meaningful. Very few teams show up poorly motivated, and if they do, they often pay. Aside from some of the 1-16 and 2-15 seed matchups, the single-game format makes the outcome somewhat uncertain and enhances the chances for upsets. I find myself engrossed in games in which I had no direct rooting interest and emotionally involved with teams like Vermont and Wisconsin-Milwaukee.

The longer a series is, the more that the average performance level of the two teams influences the outcome while variation in performance in any one game influences the outcome less. In this respect, the NBA's "best of 7" format places a premium on the "best team" winning much more heavily than on the drama. Interest in the NCAA tournament seems to support the idea that fans prefer a heavier weighting on drama. Nobody I know participates in NBA playoff picking pools, while March is filled with them for the NCAA. Rather than moving in the direction of promoting more drama, the NBA has lengthened even the first round series to the "best of 7" format in recent years.

Given that the NBA is not currently setting the TV market on fire, why not experiment for three or for seasons with a shorter playoff format that makes each game more meaningful and increases the drama. If a "lose and you're out" system is too extreme for the league, then a "best of 3" format until the finals with a "best of 5" finals would go a long way. The "best of 3" series could be run in a week's time. Coupling shorter series with a slightly shorter season would also permit the league to start the playoffs right on the heels of the NCAA tournament (when basketball interest is high) and run the finals in early May. By June, I'm much more interested in baseball, BBQ, and my golf swing than I am basketball.

Monday, May 02, 2005

Hurrah! It's Derby Week 

We kick off Derby Week - a week of anticipation - with a look back in time.
This horse continues to fascinate people who love racing as well as people who follow the sport two minutes a year.

"People ask for anything," said Erika Justus, a farm receptionist and tour guide who hosted a group of nearly 100 teachers from across America at Three Chimneys Tuesday. "Hats. T-shirts. Pictures. Hair. Manure."

Manure?

"Manure," she shrugged.
The horse? Smarty Jones of course, last year's Triple Crown phenom. How popular is he? Well, if you want to pay him a visit on a weekend, get your tickets early: all slots are taken through mid-July. Smarty Fever lives on.

For a trip down memory lane, here is our archive page from last May, which has a slew of Smarty posts.

Subsidize commencement! 

Members of the Association of Independent Colleges and Universities in Massachusetts confer 56,000 undergraduate and graduate degrees annually. Over two-thirds of those graduates are from out of state and usually have at least two guests at their commencement.

"We have more than 30 universities and colleges around the Greater Boston area, which generate in visitors and economic activity the equivalent of back-to-back Super Bowls," said Richard Doherty, president of Boston-based AICUM.
Nearly 60 commencements will take place in the Boston area over the next six weeks. The five largest will generate more than $7.5 million in hotel revenue alone. The story which reports these facts discusses how the area might capitalize on "America's College Town."

The real story however, is not income for hotels and restaurants, but social returns to private investment in human capital. The local economy surely benefits from educating these students. Even if "half of all new college graduates leave the state," the ones that stay are highly educated. The Massachusetts economy thus enjoys the benefit of private capital inflows when well-heeled parents send their kids there for an education. The analogy to the U.S. as a whole, and captial inflows from the rest of the world, is worth considering.

Sunday, May 01, 2005

Ticket scalping 

Chip Case devotes a class each year to the reselling of sports tickets.

He has a section in his economics textbook on the same subject.

But for Case, an economics professor at Wellesley College, the sale and scalping of sports tickets is more than an interesting theoretical pursuit. Like Margaret Mead, he has done plenty of firsthand research in the jungle, and he has the stories to prove it.

In 1984, Case waited in line for two nights on Causeway Street to get $11 tickets to one of the classic Celtics-Lakers championship series. The night before the climactic seventh game, he was in the shower when his daughter called out to him: ''Dad, there's a guy on the phone who wants to buy your Celtics tickets." Case said he wasn't selling. ''But Dad," his daughter added, ''he's willing to pay at least $1,000 apiece for them."

Case was selling. An hour later, a limo arrived at the house to pick up two tickets -- one that belonged to Case and one to a friend of his. The driver left behind $3,000.
That's from a story by Charles Stein in today's Boston Globe. I recommend the entire piece, but can't resist including this:
Like any good market, the one for tickets is remarkably sensitive to information. Case has a story about that, too. He was in Kenmore Square just before game four of last year's playoff series between the Yankees and Red Sox. The Red Sox had dropped the first three games and there was no joy in Mudville. Scalpers were unloading tickets for the fourth game for only slightly more than face value. Tickets for a possible fifth game were going for even less.

But the Red Sox rallied to win game four in extra innings. By 2 that morning, said Case, top tickets for game five were already selling for more than $1,000 online. A bear market had become a bull market instantaneously.
Even $1,000 seems modest - those prices suggest that Sox fans had little hope, and weren't willing to pay much to see an impending Yankee triumph. But now there's this: "[I]f you went online last week, you could find front-row Green Monster seats for the July 15 game against the Yankees selling for more than $2,000." That's a bit rich. Makes you wonder about the guy who lost his season tickets for mixing it up with Gary Sheffield. What a maroon!

Barriers to Entry and Franchising 

Co-blogger Phil Miller has recently written on his own blog,

Increasing the size of a league imposes [negative] externalities on existing team owners. The new team draws some fans away from the existing teams and it draws some national media revenue from incumbents as well. It also increases the demand for playing talent. To limit entry into the league, the league sets up barriers to entry (expansion fees, and league-wide approval votes, for instance) that effectively keep other teams out.

But the barriers to entry serve another purpose: Las Vegas does not have a team in part because it provides leverage to the few teams left (namely Minnesota and Florida) who are still seeking public money for a new stadium in their existing regions.

In addition, James Quirk and Rodney Fort have also written here about the barriers to entry and local monopolies created by the league system in North American professional sports. And Rod Fort has also written about the topic in his Sports Economics text. And it appears that Stefan Szymanski and Andrew Zimbalist are recommending in their new book that world soccer leagues could become more profitable by increasing the barriers to entry into their leagues.

I expect I will be eaten alive by these powerhouses for asking this, but in what ways and to what extent are professional sports leagues different from McDonald's or any other fast-food chain?

Opening another McDonald's outlet might have the same negative externalities Phil describes for existing franchisees; as a result, franchisees are not willing to pay much for franchises unless they have some contractual guarantees, similar to the territorial restrictions in major league sports, that new franchises will not be located near their existing franchises. It is in McDonald's interest as a franchisor and in the interest of existing franchisees to create these barriers to entry, restricting the entry of new franchisees into the franchisor's overall organization (or firm?).

But in what sense can or should these contractual agreements about territories be called barriers to entry? What is the relevant industry from which new franchisees are being restricted? In fast foods there are plenty of close substitutes; similarly in professional sports there are plenty of entertainment alternatives.

Also, and as I recall, this was a major issue in the Raiders-NFL anti-trust suit, what is the firm? If we think of McDonald's as the firm, the firm is merely restricting the number of outlets for its output. Similarly, if MLB limits the number of franchises, all they are doing is limiting the number of outlets for their product.

Finally, fast food franchises also play one city off against another. Readers who live in large cities may not believe franchisors do this, but I live in a small town where such behaviour is readily apparent. The competition between small towns to get a McDonald's or Tim Horton's [coffee and donuts] franchise is very intense, and the franchisors do indeed play the towns off against each other, just the way Phil describes what happens in MLB.

In the end, you may want to call these territorial restrictions "barriers to entry" but I am not convinced (yet) that doing so yields useful analysis. And I see nothing wrong with the local "monopolies" that are created when franchisors include territorial rights in their franchise agreements.