Stadiums, Broken Windows and more

by Russ Roberts on April 18, 2006

in Podcast, Sports

In this Econtalk podcast with Skip Sauer of Clemson University, we talk about stadiums, the economics of sports leagues and the economics of college sports. Again, comments much appreciated. This earlier post is based on our discussion. You can subscribe to EconTalk by going to iTunes, searching for "EconTalk" and subscribing there. Feel free to use the comments section of this post for any reaction to the ideas in the podcast.

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{ 4 comments }

TW April 18, 2006 at 6:14 pm

In the podcast, Russ defines sports as zero-sum because by definition, each league has to end every season at .500. He then re-defines it later in the podcast by contrasting the sports industry to "regular" businesses, such as a Kansas City shoe store, which is not in a zero-sum situation.

I'm not sure I agree with his definition because I take a different view of "zero-sum" in this case. Rather than look at the production on the field, I think we should look at the revenue (or the profitability) of each team.

In this instance, it's not a zero-sum game. A ticket sold at Royals Stadium in Kansas City does not mean one less ticket sold at Yankee Stadium in New York City. A dollar earned by Tom Hicks and the Texas Rangers does not come at the expense of the consortium that owns the St. Louis Cardinals. And so forth.

It depends on what you're measuring, on-the-field productivity versus off-the-field (or bottom-line) productivity. I realize I may get slammed here on the basis of irrational behavior, but there are owners who will gladly lose money to fund their sports pursuits…that also makes the sports industry unique.

I'll offer three general types of owners:

1) Spend anything to win, even to the point of losing money. Ever since the first official Grand Prix was run (1950 Great Britain, I believe), Enzo Ferrari wanted to win. He sunk everything into his F1 team to win every race….every title. He flat out said that the Ferrari car division existed solely to fund the F1 team. That was his passion. Even today, the Ferrari F1 team is rumored to spend well over $300 million per season; I dare say that if you take them as a separate entity, they're a money loser (a brief anecdote, there's an old joke that the easiest way to make a small fortune is to start with a large fortune, then go out and buy yourself a racing team).

2) Maximize profits at the expense of the on-the-field product. With apologies to Bengals fans, I think Mike Brown of the Cincinnati Bengals fit this definition from the 1990s up until a few years ago. His teams stayed at the minimum of the salary cap range for years. He was notorious even for providing players with cheap towels in the locker room. His team lost….but he raked in the profits as the minimal salaries he paid paled in comparison to his share of the TV revenue.

3) Set a budget such that the owner earns a reasonable annual rate of return, but the payroll is high enough for the team to remain competitive. With more apologies to Bengals fans, I'll throw out the way the Rooney family has run the Pittsburgh Steelers for over three decades. They've won…..they've remained competitive….and the Rooneys continue to rake in the profits.

The struggle for sports leagues is that while you have these three types of owners present in your leagues, each owner has an inherent intradependency on each other owner. After all, each team must have an opponent to play. Rather than branding the leagues as socialist, I'd instead argue the point that most leagues have done a poor job of drafting rules that recognize this intradependency.

John Dewey April 20, 2006 at 3:26 pm

TW,

What type owner is Mark Cuban? He seems to be a "Spend anything to win", but I don't think he's losing money. He bought the Mavericks for $280 million six years ago. Forbes says the team is now worth $403 million.

Truth is, the guy's just having more fun than any sports owner I've ever seen. That would probably be enough return for him.

Has any other billionaire ever sold soft serve ice cream at a Dairy Queen – after he became a billionaire? Dallas loves this guy!

TW April 21, 2006 at 11:20 am

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Now there's a fun question. I agree with both your points. He certainly came into the NBA as a "spend anything to win" type of owner, but I think his spending enthusiasm has been curtailed a bit.

Some say he's changed because he saw he couldn't buy a title (i.e. throwing money at the likes of Juwan Howard and Shawn Bradley), so he's deferring to his front office personnel to develop the young players they've drafted.

Others say he's actually still throwing money around, but only at the product on the court. They point to the warehouse that contains his marketing/ticket sales/customer service staff that resembles a sweatshop.

I think what he's up to is something more interesting than all that. I think he's trying to create a brand name for himself like Donald Trump has managed to do. Trump can put his name on a condo building, a golf course, an airline, a TV show, etc., and it has value.

My guess is that Cuban is trying to brand himself such that his basketball team, his HDTV network, and now his movies will one day be seen as having more value as "a Mark Cuban production" or "a Mark Cuban effort."

Hence his relentless promotion, from taking part in a WWF pay-per-view and being body slammed, to the circus atmosphere earlier this week in giving all fans in attendance a free American Airlines ticket.

As an aside, I wonder what was going through his mind at The Oscars this year. He showed up at the Mavericks game in a tuxedo and had cameras follow him from the arena to his private plane to the red carpet. His movie was nominated for multiple Oscars. He had to be on Cloud Nine.

But what turned out to be the story? His former coach, Don Nelson, was sitting in the 3rd row (couresy of one of the Wilson brothers), such that almost every time the cameras showed George Clooney or Steven Spielberg, there was Don Nelson in all his glory. I heard one anecdote that Spielberg, who is apparently short, kept having to ask Nelson, who also used to play for the Celtics, to slouch or move because Spielberg couldn't see. So all the attention was actually on Nelson, and Cuban had to field questions about why Nelson was there….and why Cuban was never on camera….instead of the type of attention he was hoping to garner.

TW May 1, 2006 at 1:58 pm

Following up to my first reply, thanks to a topical story by "The Economist." From the April 29, 2006, issue, page 64:

"The trouble with revenue sharing, however, is that it can encourage free-riders. daniel Rascher, the president of Sports Economics in Berkeley, California, points out that the Cincinnati [Bengals] franchise was the NFL's fifth-most-profitable during the 1990s, depsite winning the fewest games during the decade. The teams imply skimped on avoidable costs, such as talent scouts, and raked in revenues from the rest of the league."

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