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Economics of Sport sample essay

1. Introduction:

This report will overview and discuss how stakeholders in professional sports can get as much as they want out of the sport, without too much involvement from the government. It will also cover some of the purposes of government-intervention and what they should do to keep the competitive balance intact for the leagues. There will be examples and discussions drawn from clubs and leagues in the European Soccer and also differences between how sports leagues on either sides of the Atlantic ocean works in this matter. The importance of keeping stakeholders happy is the key to on-pitch success. Stakeholders in sport are everybody involved with sport; participants (players/athletes), fans, governing bodies, financial investors and communities at large.

1.1 Background:

Since the early stages of the discussion and the involvement of the economics side of the field of sports, Naele (1964) identified professional sports leagues as a different animal than any other competitive industry in the world we know today. The main focus for professional sport leagues is to provide and compromise teams to a highly competitive level where they can produce and sell sporting events to the public (Fort & Quirk, 1992). Similar individual teams make up a professional sports league, that all relies to gain the maximum of economic benefits as possible while relying on the opportunity to compete against other teams to produce their outputs; the outcome will be games for the fans to enjoy. Without an organised structure of games and tables, the competitive output would not exist for sports leagues or its fans.

Naele (1964) also claims that there is one main difference between a typical competitive business industry and the sports industry. He says that a normal industry gains the most economic and capital benefits while it faces the least amount of competition as possible. Simply put, the businesses are seeking to be the only supplier to the market to become the market leader and in that way earn money. This is not a preferred position for any professional sports league or team, while they rely on other teams and leagues to produce a product of outcome to make a sustainable business out of it.

1.2 Why do clubs either focus on winning or maximising profits?

Models often used to discuss how sports leagues tend to behave are primarily the trend if club owners either aims for maximise profits (El-Hodiri & Quirk, 1971) or wins (Késenne, 2000). It is seen that the North American major sports leagues and the European leagues supports the assumptions that clubs uses a trade-off point of profit and wins (Atkinson, Stanley, & Tschirhart, 1988). The most optimal for leagues and clubs should be to aim towards finding a model that balances the weighted sum of profit and wins (Dietl, Grossmann, & Lang, 2011). Therefor we sometimes see teams and leagues that work after gaining profit and economic benefits for survival, and on the other side we see the teams and leagues that works towards winning as their main goal and business objective. Some owners of team are even willing to lose or invest money to build a winning team in the long run (Fort & Quirk 2005).

1.3 Where does the government fit in to the market of sports?

There are two main reasons why governments intervene in sports: efficiency and equity (Andreff, 2001). Efficiency reports to the allocation of production resources. That involves sharing and allocation of who does what, how will it be done and where it will be produced. In other words, government and state supplies the right people and funding so that sport production from all levels are made as efficient as possible. Equity on the other hand are concerned how the distribution of the market will benefit and gain throughout society (McWha, Smith, & Clarke, 2000). Meaning that the government and state joins up to gain the participation and enrolment of sport from youth and grassroots levels so that as many as possible can get the chance of getting involved with sports programs. Government tends to use sports funding to gain a bigger and broader social wellbeing and strengthen national identities while gaining and providing the country with more talent and more competitive power on an international scale (McWha, Smith, & Clarke, 2000). Government bodies also ensure that rules are followed and that the regulatory framework for how the organisations operate are followed correctly.

2. Key Issues

The sports culture between Europe and America varies a lot. All from regulating, formatting and design and managing are way different from each side of the Atlantic. The way that the American sports leagues are formed is that they are built as independent organisations which has an entry barrier through franchise sales. This means that a new entry to the league is only possible if a current team is for sale of if the league are in a need of open up for expansion (Cain, Louis & Haddock, 2005). In Europe they use an open model, which is seen as a hierarchical structure where entry relies fully on a promotion/relegation system (Andreff, 1989).

2.1 European Football

Football is by far the world’s most popular sport with over 3.5 billion fans worldwide (Dunning, 1999) The English Barclays Premier League had in the season of 2009-2010 revenues worth of £2.1 billion, which by then was a record for the league (Conn, 2011). Now a few years later, a new broadcast deal has been signed and together with the worlds most expensive regular tickets prices, the revenues will be worth nearly £5 million (Pantanella, 2012). With an promising and an substantial uplift of the already massive broadcast deals of the 2013/2014 season, the English Premier League will account for more then the half of the top 20 clubs with the highest revenue of Europe (Bosshardt, Bridge, Hanson, Shaffer, Stenson & Thorpe, 2013).

From the roots, the clubs throughout Europe is voluntary organisations. But with the new age of media, commercialisation and globalisation; the bigger and the dominant clubs are more seen as business entities with capital, a vision of profit and the responsibility of results for the fans (Boyle & Haynes, 2004). According to the Deloitte annually edition of the Football Money League, the Spanish giant Real Madrid became the first European club team to surpass the €500 million (AUD 658 million) revenue threshold in one year during the season of 2011/2012. Second on that list is Barcelona FC with AUD 619 million and third is the English sided Manchester United FC on AUD 508 million (Bosshardt, Bridge, Hanson, Shaffer, Stenson & Thorpe, 2013)

With this amount of money being shoved in and out of the football organisation in Europe it is hard to see why there would be a need of government intervention other than how the regulations of the sharing of the deals will be spent. The bigger, the better and the more popular the club are, the more fans they will attract and the more TV viewers they will get (Fort & Quirk, 2005). In Spain there are no regulations or laws of the distribution of the broadcast revenue at all. They are letting every club negotiate individually with the broadcasters available on the market. Since the season of the Spanish La Liga 2004/2005, there has only been one year when a team (Villareal 07/08) other then Real Madrid and Barcelona clinched the first two spots of the table (List of Champions – Sport Soccer Statistic Foundation, 2013). Thanks to this system, the league has almost lost its competitive balance for the rest of the teams of the league while the two dominant teams clinch the best commercial-deals for the league for themselves and the spots of continental competition.

The English Premier League has also been dominated by the classic “top 4” teams, Chelsea FC, Manchester United FC, Arsenal FC and Liverpool FC. Since the English Football League First Division rebranded itself to the Barclays Premier League in 1992, there has only been one season where a team outside of the former mentioned to become Champions (Blackburn Rovers 94/95), and since then there has only been Leeds United that has been able to steal a top three place in the table from the “top 4” teams (Past Winners – The Football League, 2013).

The sharing of the broadcast rights revenue in England is shared in three parts: 50% are shared equally throughout all 20 clubs, 25% in facility fees and 25% depending how they end up in the league (Premier League Season Review, 2011). With this numbers in mind, the money attracted to certain clubs seen as being more economically viable than others, comes from individual contracts, endorsements and overseas business opportunities and sponsorships, not exclusive from broadcast rights. This is where the problem is. A trend of overseas rich oligopolies taking over ownerships of European clubs has formed an international debate whether the ethics and moral of the competitive balance of the sport. With almost immeasurable amounts of money, a civil person can by the majority of shares of a team and transform it to a name-reputational team with gaining high-value player transfers and offers high wages (Vrooman, 1995).

The government and the state bodies around Europe have since 2009 together with UEFA agreed on putting a motion of a so-called Financial Fair Play. It was introduced due to the concern of the heavy spending of a number of professional clubs across Europe, it was hoped that the regulations would eventually lead to a more ‘level playing field’ by preventing clubs with very wealthy owners who make substantial cash gifts to their club from gaining an unfair advantage over other clubs who are run on a more sustainable business model, and in so doing encourage lower levels of spending (UEFA, 2012).

2.2 Other leagues

Over the Atlantic Ocean there is a whole other perspective of sports. America has uniquely formed a fundamental culture, where schools and colleges are to be the main resource of forming the professional leagues (Bottenburg, 2010). Leagues in America have the world’s most profitable league; the National Football League (NFL) that alone draws in an annual profit of over one billion Australian dollars (Seepersaud 2010) The American Leagues are seen as the most competitive-balanced leagues in the world, with leagues as the NFL, NHL, MLB and the NBA. In America they use a variety of implements of their formatting of the leagues to make it as fair and as competitive as possible. But the how the competitive balance work in practise varies from eye to eye. As mentioned before, America uses a closed league system.

Thanks to that it is possible for them to use a so called draft system, where the lowest ranking team from previous season has the opportunity to choose first in the upcoming draft of young talents from all over the world. NFL, NBA and NHL also implemented salary caps, which give the teams over the league a total amount of money to spend on wages each season so that not one single team is the only one to afford the biggest names. They also have a season concluded with a knockout play-off. This kind of formatting makes the outcome each year impossible to range. Since the commercialisation of the sports imploded America there has only been few back-to-back wins in the professional leagues. There has been some dominance by teams as the Los Angeles Lakers (NBA), New York Yankees (MLB), but other than that the outcome is considerably uncertain from year to year. Not least in the NHL and the NFL.

3. Summary

Since most of the European clubs are win-maximised focused teams with the main aim to survive and stay as high up in the league system as possible, the intervention of government and state should be as low as possible. For the participants of the game they really do not need any actions to be taken from the government other than regulating the safety on the pitch with guards and police forces protecting them to unknown elements of danger. They will all get paid, and if they are good enough to seek themselves elsewhere for more lucrative deals, the already government-applied silly-season and the transfer-windows will secure them and the clubs.

In America the draft system and college involvement should be enough for the government’s involvement. Since the American sports leagues are working after a cartel linked system to survive and make profits, the salary cap helps younger and inexperienced players to secure wage-deals that suits them in their careers. The fans will always be together and involved with their club unless something drastic will happen. The way that government should intervene to keep fans from all levels satisfy are to maybe try to manage and put pressure on leagues and clubs to keep their gate-tickets as fair and lucrative as possible.

With the draft system and the Financial Fair Play, the fans from teams and clubs that have not gained the trophies or cups recently, will be to their advantage in a near future. This will make a higher competitive market for talents and that the spread of players will be wider overall. Community will get help of government involvement of them interact and supply state and government supported facilities by bringing either existing clubs or future franchises to their community. This is a form of politic question that involves tax-money and an overall public demand.

As long as the leagues and the teams manage to keep a sustainable competitive balance and a high quality outcome, I do not see why governments should interact and interfere with how the sports leagues are managed today. The Financial Fair Play is too soon to reflect on how it will work out as an outcome for the European football, but we can already see that it has marked its point in countries as Turkey and Spain when UEFA banned Besiktas and Malaga from continental competition due to overspending of their own capacity. The government should work from the community’s perspective; keep a full-on investigation and reporting about drugs and safety of players and athletes. In short, let the leagues and sports manage themselves, because in the end it is all about keeping the most important stakeholders happy and satisfied, the fans.

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