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The Economics of the Sports Business

The Economics of the Sports Business

Professor Wray Vamplew
University of Edinburgh

The Economics of the Sports Business

Does the Business of Sport Differ from ‘Real’ Business?  

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Much of the economics associated with sport are conventional. Funds have to be raised, wages have to be paid, and resources have to be allocated to the production process. Yet in some respects spectator sport has peculiar economics.

A major different is that many sports clubs are less concerned with maximising profits and prefer to focus on winning cups and championships what sports economists label utility-maximising. Now you might ask ‘doesn’t winning lead to larger crowds, greater revenue and profit?’ The answer is ‘not always’. The two objectives can require different economic behaviours. Profit maximisers are well aware that profit is determined not by revenue but by revenue minus costs. However, utility seekers will be willing to spend all (or most of) their income to improve the team.

Another significant difference is that while most manufacturers in the non-sport world sell the certainty of their output as being reliable, the uncertainty of the result is a bedrock of sport. Sport is a product whose result or quality cannot be guaranteed. There is no script, no template and no identical replication. Indeed ‘uncertainty’ is the selling point of the sport product and a maxim of most sports economists is that the more unpredictable a contest the greater the attendance. Hence promoters often take action to promote competitive balance by trying to equalise the playing abilities of teams through restrictions on player mobility or revenue redistribution.

A further difference is that becoming a monopoly is not an objective for clubs or individuals in sport whereas in the business world a firm can prosper if it can eliminate all competition and become a monopoly supplier as this will allow it to raise prices and increase profits. Such a position in the sporting world would be self-defeating as firms and individuals need a competitor before a sellable product is available. No other form of commerce requires rivals to work together to produce a saleable product.

That said, there can be a form of monopsonic behaviour at the level of leagues which often operate as cartels, something generally illegal today for conventional business. Yet this is precisely what has happened in most professional team sports. The sports industry has a history of regulations, determined by leagues, which have impacted on the free movement of labour and not allowed employees to choose where they want to work or for whom. Equality of competition has been promoted by weakening the stronger teams and strengthening the weaker ones by such methods as salary caps, reverse order drafts and various forms of revenue redistribution.  Moreover leagues can impose restrictions on new entrants to the industry. In other businesses if you can raise sufficient start-up funds you can become a new bank, an oil company, or whatever, but in sport your application to join a league can just be refused or you may have to join at the lowest level of the pyramid in a promotion/relegation system.

The Americans are Different

As a basic generalisation American professional sports teams have making money as their primary objective, whereas in Europe owners seek utility from their spending. Operators in America rarely receive less than a market return on their investment, generally make capital gains when they sell a franchise, and even poorly-performing teams can make profits.  In contrast few professional teams in Europe make consistent profits and rely on benefactors (wealthy individuals or supporters groups) to keep them afloat so that they can focus on winning championships, gaining promotions, and avoiding relegations.

Given their commercial proclivity, it is no surprise that to protect their investments American team owners opted for their leagues to be closed institutions of competing franchises in which the sole quality control mechanism was gate-money. In contrast meritocracy has been the key feature of European leagues which were generally open ones in which teams were promoted or relegated between divisions.

Another major difference between European sport and that of North America has been the development of pan-national team sport competitions. Entry to these comes from performing better than other clubs in their domestic leagues and cups of which there is a plurality at elite level across Europe. These European-wide competitions are additional (and significant) revenue generators for the clubs, giving them an added incentive to strive to win.

Among other differences are that:

Americans punish success (via the reverse order draft) whilst Europeans punish failure (via relegation)

Americans pursue the drafting and trading of players rather than a monetary transfer system

American leagues operate on a franchise system with territorial exclusivity granted so as to protect the investment of the owners whereas Europe has larger leagues with some cities having more than one team.

American clubs own teams in minor leagues so that in effect promotion and relegation applies to players not the clubs.

Revenue sharing is more common in North America whereas certainly in European football the only centralised sharing comes from television revenues but with no implication of equal shares.

There is significantly more intervention in the labour market in North America.

The Future?

Has globalisation and hyper-commercialisation on both sides of the Atlantic led to a convergence of the two models? Certainly European clubs have sought to learn merchandising lessons from their American counterparts; the growing size of television contracts have encouraged equity capital companies to move into franchise sports like Formula 1; and some see the move of some American owners into European sport – or, more precisely, British football – as the thin end of the wedge. Things are changing but have they changed enough to render these models invalid? Closed competitions in team sports have been rejected in Europe (so far) and the franchise principle has not caught on (yet).


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