The Role of Economics in Sports

The Role of Economics in Sports

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"Money makes the world go 'round." Sports could not exist without the presence of money. You have high paid athletes asking for multi-million dollar contacts, while at the same time you have doctors not even making close to that amount. There are corporations buying out sports teams, buying stadiums, and buying everything that has to do with sports. Someone may ask why they do this. Sports are one of the most profitable industries in the world. Everyone wants to get their hand on a piece of the action. Those individuals and industries that spend hundreds of millions of dollars on these sports teams are hoping to make a profit, but it may be an indirect profit. It could be a profit for the sports club, or it could be a promotion for another organization (i.e. Rupert Murdoch, FOX). The economics involved with sports has drastically changed over the last ten years. In the United States, we spend about 13% of all money on sports and entertainment. Sports has obviously done its job; entertained and drained money out of our pockets.

A young boy goes up to his mother and says, "Mommy! I want to be a baseball player!" If this was said in 1930, the boy's mother probably would have told the boy, "That's not future for you! You need to get a real job and make good money." If this was said in 1999, the boy's mother probably would have said, "Let's go to the store and buy you a baseball glove so you can start to practice." It is visible to every sports fan that in the past few decades, sports has undergone a whole new renovation. It isn't just an activity that is played for fun. It is a business in which owner and players attempt to coincide. It is a business where TV controls fan interest. It is also a business that affects many people's lives, both monetary and living aspects. There are many aspects that are involved with the economics of sport. Each one having unique qualities that adds to the greatest source of entertainment.

Economics is the study of how best to allocate scarce resources throughout an entire market. Economics affect our lives on a daily basis, whether it is on a business level or a personal level.

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The ability to work within the economy may vary from each individual entity. Economics are present everywhere, from a shopping mall to a successful business. Sports have become more of a business entity rather than an entertainment industry due to the strong economic impression of the overall industry. It is true that the entertainment aspects of sports are what drive the economic desire of business to be involved with sports but, without the understanding of the influence of the economy, sports are merely entertainment and not a business. There are several instances in which economics may contribute to the effect on the sports industry such as; the success of a team, the price of a ticket, the amount of money an athlete will make and the amount of profit a team will make. The success of any single entity solely relies on the current economic market situations. The desire for one to be involved with a specific sport agency is what stimulates the demand for such a business.

Sport is a business, which relies heavily on the involvement from society, and business within to be successful. There are several areas and economic factors that must be taken in to consideration when looking at the outstanding success of sports such as; basic economics, areas of sport that are experiencing economic problems or profitability, effects of economics of sport through television and media, and management labor issues. All of the previously mentioned aspects effect the success or failure of sport as an industry within the economic market of entertainment. We will take a closer look at these items and prove that sport is a business that relies on the economy and also discuss how the economics in sports effect the industry as a whole as well as individually as profit driven entities.

Economics is the study of how best to allocate scarce resources among competing uses (The Micro Economy Today…Bradley R. Schiller). Economics is concerned with the production and use of goods and services. There are economic aspects to nearly all the problems of society. To satisfy its members, an economic system is expected to provide goods and services and to provide employment, security, equality of opportunity, equity, and progressiveness (Basic Economics…Richard S. Eckaus). Eckaus went on to say that it must operate within three types of constraints:
1. The limits of technical knowledge
2. The limits of the productive resources available
3. The patterns of organization, behavior, and law impose by social custom and more.
All these constraints can and do change overtime, but at any one time they set limits on the operation of the economy (Professor Kristjanson).

The ability of an economy to satisfy the gals of its members within the limitations set by these constraints depends on its efficiency. Efficiency implies not only the absence of waste but also organizing and using the available resources effectively (Basic Economics…Richard S, Eckaus).

Before I mentioned efficiency, I should have first talk about scarcity, since the existence of constraints on the economy, is in one hand, and unlimited human wants is in the other, and efficiency is a solution mixture of both. Scarcity, in turn, creates the necessity of making choices among alternatives. The study of the manner in which choices are made is one of the central themes of economics (Basic Economics…Richard S. Eckaus). Three fundamental kinds of questions must be resolved by an economy:
1. What goods will be produced and in what amounts?
2. How will goods be produced and in what amounts?
3. Who gets how much of the goods produced?

From an economist's perspective between play by children and play by adults rest on the magnitude of incentives and cost (The Economics of Professional Team Sports…Henry G Demmert). Indeed, most all behavioral situation involves play. For example, in business metaphors involving play are used extensively. Workers compete for higher paying position; groups of individuals form teams (firms) and compete against other teams for consumers' dollars. In politics individuals and semi-cooperative groups (parties) struggle against each other for votes and at the same times trade votes: they engage in "political games" (Sportometrics…Texas A&M University Press). Even within the household setting, spouse, sibling, and parent-children relationships structured around the incentive constraint domain of play (Sportometrics…Texas A&M University Press).

Certainly, sporting events qualify as play. In fact, custom so closely associates these things that the previous sentence might read: play qualifies as play. If anyone did research on business or anything related with economics might find it frivolous, but the importance of play as fundamental economic behavior changes this perspective. The fact that athletic events present very pure forms of play strengthens the case for economic research into sports rather than rendering such work less interesting. Sports become an arena of pure economic activity. Incentives and constraints are spelled out clearly; players act as rational economic agents; sporting events and seasons can be seen as the operation of miniature economies (Sportometrics…Texas A&M University Press).

The PGA has a unique pay structure when it comes to athletes. Most professional teams pay their athletes win or lose, but the PGA chose the economics structure to only pays those athletes who comes out on top at every individual tournament. Many critics in the past said that this kind of structure was going to fold. The athletes would create some kind of union and overrule the pay system. Today nearly thirty years after sport economist Randy Albelda raised the comment that the PGA was going to go out of business within five years. We find that the PGA simply watches its game grow richer purses, more television exposure and more people playing golf. The Tours purses quadrupled in the past 15 years, going from $13 million in 1980 to about $60 million this year. Every PGA Tournament and 30 senior events are televised domestically and American professional golf is now beamed to 112 countries. (Life is good for PGA Tour commissioner Finchem…web).

Though Finchem (Tour commissioner who was President Carter economic adviser in 1978-79.) game has grown increasingly large, he admits that competing for the sports dollar long-term is much more challenging now than it was five years ago. He said that companies are more demanding, they have a lot more options on how to spend their money."

Since only the top players in each individual tournament receive pay and there happened to be different players almost every time. Last years only six of the 326 players on the PGA Tour money list-made more than $1 million. In baseball, about 220 of the 831 players on this year's opening day rosters-27 percent-made $1 million or more.

There are a few economic problems within the sports industry. One major problem is called competitive imbalance. Competitive imbalance has to do with the fact that only a small amount of professional teams have the money and the talent to compete with other teams in their league (Markiewicz 1). The other big problem is that attendance at professional sports events is declining.

Competitive imbalance is an economic problem because if a team only makes a small amount then that team can not afford to pay the big dollars that is required to sign star players and with out these players it is hard for teams to remain or become competitive. As a result of this, the team will begin to loose money. In an attempt to fix this many teams will lower their payroll even more, hoping that if they spend less, they might be able to make a profit. This usually doesn't work and what ends up happening is that the team becomes that much worse. This is a serious problem facing all sports, but it is most evident in baseball. Last year only two teams spent less than $48 million and had a winning record and of the 13 teams that spent over $48 million only one of them had a losing record (Ringolsby 3). Another study was done at the end of last years baseball season and it showed that the top 20 percent of major league teams ranked by payroll won an average of 93.7 games, while the bottom 20 percent only averaged 68.1 wins (Suttell T).

Another major economic problem facing the sports industry is the attendance at games. Attendance in all four major sports has gone down over the past few years (Ringolsby 3). There are many reasons for this. One reason is that there is more sports programming available on free or cable television than ever before. If someone can sit in their own house and watch a game for free, then why should they go through the hassle of getting to the stadium and paying big dollars for tickets? This brings up the next problem; ticket prices are too high. Ticket prices seem to go up every year for all of the major sports. A study of the four major sports showed that the cost of a family of four to attend a game are MLB $114.82, NBA $214.28, NHL $238.97, and NFL $243.34. Another report by the Sports Marketing Group showed that nine out of ten Americans say ticket prices are so high that it is difficult for them to attend a professional sporting event (Burton 37).

An example of how these problems effect certain teams is the Minnesota Twins. The Twins payroll for this year is only around $18 million (La Velle 6), so it is almost impossible for them to compete with teams like the New York Yankees who's payroll for this year is around $75 million (La Velle 6). As a result of this, the Twins attendance will go way down and they will loose money and be forced to lower their payroll even more, making their team even worse.

There are ways to solve these problems though. To solve competitive imbalances there must be a higher amount of revenue sharing and luxury taxes for teams with payrolls over a certain amount. If this is done then small market teams like the Twins will be able to sign high priced players and maybe become competitive once again. To solve the problem of falling attendance, the obvious answer is to lower ticket prices, but it doesn't look like that will ever happen, so events, like kids days and other types of promotions have to be used to bring fans back to the park.

Despite these problems, sports overall is a profitable industry. Profits can be made several different ways. One way is through sponsorship. Often big companies will sponsor individual players or even whole teams and hope that people will go out and buy the product being sponsored by their favorite player or team. This is profitable for both the sponsors, because they make money from the product being sold and it is also profitable for the team or player, because the sponsor pays them.

Another way to make a profit in sports is through merchandising. Merchandise includes everything from clothing and apparel to books and video games. Merchandising is profitable for both the company selling the goods and the team or player being marketed, because the team or player will receive a certain amount of the profits.

A third way to make a profit in sports is through broadcasting rights. Television and radio networks pay to have the rights to broadcast certain teams. This benefits both the team and the broadcaster. The team receives the money from the broadcaster and the broadcaster makes money by selling commercial time, and it also gives them an opportunity to advertise other shows on their network.

A perfect example of how a team and the companies connected to it make a profit in sports is the New York Yankees organization. Two years ago the Yankees singed a ten year 93 million dollar contract with Adidas. Adidas supplies the team with things like cleats and T-shirts, so not only do the Yankees make a lot of money, Adidas will too because people will see the Yankees players wearing Adidas and they will want to go out and buy their products (Noteworthy 8). The Yankees also make a large amount of money from merchandise. Last year alone they made over $20 million from sales of Yankee merchandise (Burton 37), but one of the biggest ways the Yankees make money is through television deals. In 1988, the Yankees signed a 12 year $486 million dollar television deal with Cable System Corporation. That's equal to $40.5 million in television revenue each year. This deal expires in the year 2000, and many people feel that then next Yankees television deal will bring in over $50 million a year (Burton 37).

As these numbers show, sport can be a very profitable industry. It is profitable for sponsors, merchandisers, and television broadcasters and for professional teams. Even though there are a few unlucky teams like the Twins, who don't make much of a profit or in some cases any profit at all, most professional sports teams enjoy economic success. Many teams may not be as successful as the Yankees organization, but most teams make enough to cover their expenses plus some extra to keep everyone happy.
For many years, television (TV) has been the primary way that sports fans can gather information about their favorite sports. From football to bowling, every sport is on television. These television stations that put these games and matches on TV strive off ratings. These Neilsen ratings tell how popular the program is and how many people are watching it. In the past few years, there has been a downward trend in these TV ratings. Could professional sport be in trouble due to this downward trend? There are many reasons that attribute to this decline.

This decrease in popularity of watching sports on TV began in 1994. Baseball was in the midst of one of the greatest seasons it had in a long time. There were players such as Matt Williams who was on pace to break the record for home runs in a season. The Expos, a small payroll team, were dominating baseball with an amazing record. While this entire display of talent was occurring, the owners and the players were caught up in a fierce labor dispute. In August of 1994, the players decided to strike over this labor dispute.

The strike lasted into the March of 1995, canceling the World Series for the first time since 1903. When the players and owners finally gave up their disputes, the players were ready to play baseball. Unfortunately, the fans were not as forgiving as the teams expected. There was a large trend for many stations not to put on baseball games due to the fact of the increasing unpopularity of baseball. Such cities as New York and Chicago would still show their hometown teams on TV, but would be reluctant to show out-of-state games ( The 1995 baseball season began a trend that would lead to a decrease in rating for the next five years.

Baseball itself seemed to have resurgence in popularity in 1998. By the time the All-Star Game came around, there were two players who had the opportunities to break the single season home run record. The ratings for the Home Run Derby were higher from those of previous years ( Due to the fact that this coveted record may be broken, more and more stations wanted to put these games on TV. It was a blessing in disguise for TV that Mark McGwire and Sammy Sosa had their spectacular years. Ironically, when the World Series came around, it turned out to be the lowest rated World Series in years ( It seemed obvious to many people that the Yankees would win it all.

What makes sport unique is that it is unpredictable; or is it? When you look at a Padres/Yankees World Series, you know who is going to win. When you look at a Broncos/Falcons Super Bowl, you know who is going to win. The Super Bowl this past year received a 40.2 rating, the lowest in 7 years ( Each rating point represents 980,000 viewers. Despite the fact that this is a very large audience, it was not as big as past games. Although it should not be, the fans can usually "see the future" for the outcome of most big games. This will hurt TV ratings if the fans become tuned out. A direct result of this could be a loss of sponsorships. Why would a company and corporation spend money on an event which people may not want to watch? Also, in years to come, the companies may not want to commit due to the fact that it may be the same situation; a lopsided game. With a decrease in advertising, what will be the fate of the Super Bowl, NBA Finals, and World Series?

The NBA was one of the leagues that strove off this decrease in Major League Baseball popularity. The NBA's biggest star at the time, Michael Jordan, had much to do with its success. A good name for this could be the "Jordan Effect." Since Michael Jordan has entered basketball, the NBA has turned into a billion-dollar business. With his presence, TV ratings skyrocketed. When a viewer tuned into a basketball game on Sundays, most definitely there would there be a Bulls game. A normal Jordan game would bring in a 6.5 rating ( During his 1 1/2 years of retirement, a normal game would bring in a 3.8 rating ( Due to the lockout and Michael Jordan's retirement, a decrease in ratings is eminent. Playoff ratings during the Jordan years were well over 10, sometimes going to 13 ( That meant that about 9-12 million people were watching these games. With the absence of this superstar, ratings will plummet. Also, products that were endorsed by Michael Jordan such as Hanes, Nike, and Gatorade may not want to show their commercials during the playoffs due to lack of audience attention.

When dealing with college sports TV ratings, people can easily get confused. Despite the fact that local stations will continue to show local college coverage, large stations such as NBC and CBS will cover big name teams. Teams such as Michigan and Notre Dame will always get priority over small name schools. The networks choose games that will be attractive to the viewers and more profitable for them ( Also, from the fan's perspective, they would rather see a Duke/UConn basketball game than see an Illinois/Hawaii basketball game.

When it comes to the NCAA Tournament or the big bowl games, the stations can't help it if an underdog team makes it, but for the most part it will usually be the same dominating team year after year. If there were a decrease in TV ratings, it probably would not affect the fans and their perspective of college sports. Many fans have an attraction to a team because they grew up with them or they graduated from that specific college.

The trend of a decrease in ratings in the long run can hurt the sports industry not so much on the college level, but in the professional level sports. A lot of the reason for this downward trend cannot be helped. The "unpredictability" of sports and the retirement of players cannot be stopped because it happens naturally. Currently, sports are experiencing many changes in the amount that is brought in and with the whole setup of the games. It will be interesting to see sports TV in the future.

In every aspect of life there is an authoritative figure with the power to dictate the rules or regulations for a certain group or area where people work or live. In sports, this authoritative group is called, "management". The management group will set the guidelines for a certain organization and as a result be ultimately responsible for its success or failure. In the sports industry, management is responsible for the success of individual organizations as well as overall success of leagues or associations. Management of organizations disseminates many rules and regulations to individuals to insure the smooth transition from loss to profit. The main task for the management of an organization is to make a profit while entertaining fans by placing the most competitive team on the field. Although most organizations are strictly profit driven, there are still organizations that are more concerned with the actual on-field success of a team. While managers try to accomplish these goals, there are guidelines and obstacles that keep them from doing so. There are labor issues that act as constraints for managers to carryout their functional duties.

In sport, there are several types of labor costs, which discourage a manager from making an easy logical decision to making an economic business decision. Being that an organization is acting as a profit driven business, the manager must act as a representative of the organizations' moneys. So, in order to remain a profitable organization, the revenues must exceed the costs. There are several costs that are incorporated with a sports organization. These costs may include, players salaries, travel expenses, game day expenses, player development, administrative costs and the final costs being, player fringe benefits, such as pensions.

Player's salaries are the largest expense which organizations have to deal with. The costs of player's salaries have increased greatly over the course of the last 18 years. "From 1981 to 1994, the mean salary in MLB increased from $303,400 to $1,182,000; the mean in the NBA from $295,200 to $1,380,000; in the NFL from $147,600 to $737,000; and in the NHL from $177,100 to $525,00." (Sheehan, 1996) There have been a few reasons for this average increase of 9.5%. The first being the increase in profit that organizations are making and the second being the structure of the negotiations processes for each league. These costs are increasing and profits are as well. Although some organizations are willing to pay these costs to field a successful team, there are some that are strictly profit driven and want to do just that. A team that wins usually has a lower profit due to higher costs in the sense of player salaries. "Gene Autry, former owner of the California Angels paid high salary free agents to win championships in the 80's. After only winning two divisional championships, he cut payroll and in 1994, was the lowest in the American League. He was no longer concerned about a World Series as he was about making a profit, even if it meant losing. (Sheehan, 1997) Another cost that organization faces are increasing player pensions. Currently each team pays $2 million plus 10% of player salaries.

Travel costs are another large cost for teams to incur, When a team travels, the organization must cover the cost of transportation, hotel and accommodations, and also per diem expenses. The cost will vary for each sport due to the amount of players a team carries. The NBA will cost less to travel than the NHL. In addition to players, there are also coaches, equipment, trainers and sometimes family. Travel expenses can typically run up to $3 million dollars per year. The cost per game may be in excess of $75,000 per season per player or $450 per game for up to 40 people.

In addition to travel costs, a team must also factor in game day expenses. If a team doesn't have to pay for travel due to a home game, the organization must prepare all facets of game day operations. These operations may include, field maintenance, security, ushers, facility management as well as facility rental fees. These types of costs may be approximately $60,000 per home game. If an organization owns its own stadium, the costs may be even greater.

Player development is a key tool in professional sports. In order to field a successful team, their must be recruiting and scouting of younger talent to take the place of already existing talent. Within many professional sports there are minor leagues set up to insure this player development. The NHL, MLB and MLS all have minor league systems, which they fund. The cost for these developmental leagues may cost up to $7 million per year.

The last, yet most minimal cost organizations deal with are the administrative salaries. The average administrative cost per team is approximately $3 million. When taken in to consideration, the average player is making an extremely higher paycheck than those who actually run the organization are. Yes, it is true that without the players, there would be no need for an administrative team but, without the administrative team, there would be no team for the players to play on.

Although organizations are faced with many costs, it is the job of the management to offset these costs and turn them in to profits. However, depending on the skill level of the management, profits may or may not be achieved. The way most organizations will insure a profit is to cut or manage these costs. Management will often find new ways to generate new revenues through new marketing ideas or promotions. Corporate sponsorships, partnerships, mergers with other businesses and media have all been huge providers of revenues for professional sports. Revenues and costs are often derived from each other. If costs are high, such as player costs, revenue tends to be higher due to success of a team. Although revenue may be high, profit may not. In the opposite cases, if costs are low, revenues may also be lower but, because costs aren't as high, there is more of a profit. This year the New York Yankees payroll is at approximately $85 million. This is a prime example of paying your players to win. The lack of concern for profit was probably not the first item on George Steinbrenner's mind. (Associated Press. 1999) All businesses have problems, and the sports business is no exception. Problems of supply and demand, problems linked to profits and losses, problems related to salaries, sales, taxes and so on. (Weiss.1993)

Revenues are generated in many ways. Ticket sales, luxury boxes, media and television broadcasting rights, stadium revenues and licensed merchandise sales are all ways an organization can generate revenues to offset all of the costs incurred. The different amounts of revenue dollars have been previously stated. The average media revenue is anywhere from $7 million in TV contracts and $8.5 to $13.4 million per team for national media. However, even though most leagues show substantial revenues, there may certain organizations earning a majority of that which prompts the idea of revenue sharing. In regards to licensing, the Dallas Cowboys logo sells far more than the Cincinnati Bengal's' however, both teams receive the same ration of 1/30th of the league revenues.

Ticket sales generate almost 25.9% of revenues in baseball, 18.3% in the NBA, 16% in the NFL, and 22.3% of average revenues in the NHL. Thus the total average revenue that ticket sales generate for professional sports is approximately 21%. Although some teams exceed these percentages, some teams are drastically below that number. Media generates 20.7% in the MLB, 14.4% in the NBA, 42.4% in the NFL and 11% in the NHL. Media generates nearly 22% of all revenues in sports. Stadium revenues which are greatly dependent on the size of the stadiums are minimal but, do contribute to the overall percentage of the revenues. This is where the popularity or success of a team will see one of the biggest affects. In MLB, 12.4% is the average revenue generated through stadiums. However, the Chicago Whitesox have an overwhelming average of 25.5%. The NBA average is approximately 4.2% but, the New York Knicks, rely on 14% of its revenue to be generated from the stadium.
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