Diagramas de bloques de control

Every four years, the World Cup reminds us that most of the world pays little attention to baseball or American football and that hockey and basketball are dis-tinctly secondary diversions. Soccer dominates the world stage. As Table 3.6 shows, professional teams, such as Manchester United and Real Madrid, have operating incomes and market values that rival those of the Los Angeles Dodgers and Dallas Cowboys. In Europe alone, merchandise sales for the top five European leagues (Spain’s La Liga, England’s Premier League, Germany’s Bundesliga, Italy’s Serie A, and France’s Ligue 1) topped $800 million in 2009–2010.⁵⁵

55Yahoo! Sport, “Ligue 1—France Fourth in Merchandise Sales,” EuroSport.com, February 22, 2011, at http://uk.eurosport.yahoo.com/23022011/58/ligue-1-france-fourth-merchandise-sales.html.

table 3.6 Soccer Club Values and Revenues, 2011 ($ Millions)

Team Country Market Value Revenue

Manchester United England 1,864 428

Real Madrid Spain 1,451 537

Arsenal England 1,192 336

Bayern Munich Germany 1,048 396

Barcelona Spain 975 488

AC Milan Italy 838 289

Chelsea England 658 313

Juventus Italy 628 251

Liverpool England 552 276

Inter Milan Italy 441 275

Source: Dan Bigman, “The World’s Most Valuable Soccer Teams,” Forbes, at http://www.forbes.

com/2011/04/20/worlds-most-valuable-soccer-teams_slide.html, viewed April 5, 2012.

4 ESPN analyst John Clayton, quoted in Doug Farrar, “The NFL Loses American Needle: What It Means,” Shutdown Corner/Yahoo! Sports, May 24, 2010, at http://sports.yahoo.com/nfl/blog/

shutdown_corner/post/The-NFL-loses-American-Needle-What-it-means?urn=nfl,243282.

Sources: Doug Farrar, “The NFL Loses American Needle: What It Means,” Shutdown Corner/

Yahoo! Sports, May 24, 2010, at http://sports.yahoo.com/nfl/blog/shutdown_corner/post/

The-NFL-loses-American-Needle-What-it-means?urn=nfl,243282; Jennifer S. Forsyth, “American Needle Throws Downfield in NFL Licensing Dispute” Law Blog: The Wall Street Journal, September 18, 2009, at http://blogs.wsj.com/law/2009/09/18/american-needle-throws-downfield- in-nfl-licensing-dispute/; Craig Corbitt, Jan Yi, “American Needle, Inc. v. National Football League, et al.: Amicus Curiae Brief of Economists in Support of Petitioner,” at http://www.scribd.com/

bigtkirk/d/20345483-Sports-Economists-Amicus-Brief-in-American-Needle-Case, viewed May 1, 2012; Tom Van Riper, “The NFL Vs. American Needle,” Forbes, January 7, 2010, at http://www.

forbes.com/2010/01/06/american-needle-supreme-court-business-sports-nfl.html.

(Continued)

Once one goes beyond the top few teams, however, the figures drop off dra-matically. According to 2011 figures from Forbes, the 10th most valuable soccer team in the world, Inter Milan, was worth less than every NFL team. The 20th most valuable team, Borussia Dortmund, was worth less than every MLB and NBA team and was roughly equal to the Calgary Flames, the NHL’s 13th most valuable franchise.⁵⁶ Despite Latin America’s passion for the sport and the out-standing performance of several national teams, no Latin American country has a club in Forbes’ top 20. European clubs employ almost all the top Latin American (and African and Asian) players.

The divide between rich and poor is not merely geographic. Even in the

“major” soccer countries, teams outside the top division have difficulty making a profit. In Spain, 80 percent of all merchandise sold comes from either Real Madrid or FC Barcelona.⁵⁷ Twenty-two of the seventy-two Football League clubs that rank below England’s Premier League effectively declared bankruptcy at some point between 2000 and 2006.⁵⁸ In contrast, teams in England’s Premier League share in a four-year $2.85 billion contract with British Sky Broadcasting Group PLC that expires in 2013.⁵⁹ Until recently, teams in Italy’s Serie A did not even share reve-nue with each other. As a result, Juventus and AC Milan had television revereve-nues 20 times greater than smaller Serie A clubs. A new revenue sharing agreement does little to correct this imbalance. The five dominant teams (Juventus, AC Milan, Inter Milan, Roma, and Napoli) succeeded in basing much of the sharing formula on the number of fans a team has. Because these five teams have so many fans, they will continue to receive the lion’s share of revenue.⁶⁰

Profit-Maximization in soccer

As we saw earlier in this chapter, profit-maximization is one of several possi-ble motivations for a team owner in North America. The same can be said for European soccer teams. The Russian oligarch Roman Abramovich probably did not have profits on his mind when he bought a controlling interest in Chelsea of England’s Premier League. His motivation was probably more in line with Mark Cuban’s reasons for owning the Dallas Mavericks, as seen by Chelsea’s Champion’s League victory in 2012.

Broad social forces have also limited profit seeking by soccer team owners.

In England, the limits were remnants of the social hierarchy that surrounded the origins of the sport. As recently as 1982, the Football League, which then oversaw the four top divisions of soccer in England, prohibited teams from paying salaries

56Dan Bigman, “The World’s Most Valuable Soccer Teams,” Forbes, at http://www.forbes.com/

2011/04/20/worlds-most-valuable-soccer-teams_slide.html, viewed April 5, 2012.

57Yahoo! Sport, “Ligue 1—France Fourth in Merchandise Sales,” (2011).

58Umberto Lago, Rob Simmons, and Stefan Szymanski, “The Financial Crisis in European Football,”

Journal of Sports Economics, vol. 7, no. 1 (February 2006), pp. 3–12.

59Aaron O. Patrick and Dana Cimilluca, “English Soccer’s Morning After,” Wall Street Journal June 5, 2009, at http://online.wsj.com/article/SB124346762522860417.html.

60SoccerEx, “Peace at Last as Serie A Clubs Agree Revenue Sharing Deal,” SoccerEx Business Daily, copyright 2009–2012, at http://www.soccerex.com/industry-news/peace-at-last-as-serie-a-clubs-agree-revenue-sharing-deal/, viewed April 5, 2012

to club directors.⁶¹ Thus, the business practices of English soccer teams have only recently begun to resemble those of North American teams. One example of the odd decisions that resulted from the lack of professional management came in 1967, when what is now the Premier League “rejected a BBC proposal of a million pounds for live broadcast of championship matches.”⁶² This is tantamount to the NFL’s refusing to allow the networks to broadcast the Super Bowl.

In some countries, outside authorities limit the activities of teams. In France, the national soccer association strictly limits the teams’ ability to borrow and spend. In Germany, the fact that loans must be personally guaranteed by team officials constrains the amount that teams borrow.⁶³ Both sets of limitations have restricted the ability of teams to obtain top-flight players, but they have also kept teams from overextending themselves financially.

The greater role of government in European economies further restricted team profits by limiting broadcast revenue. Unlike the United States, European countries have only recently opened the airwaves to private broadcasters. With leagues facing a monopsonistic buyer of broadcast rights, soccer broadcasts and broadcast revenues lagged badly behind those of the North American sports. For example, in the 1970s, when television had already become a dominant economic force for North American teams, teams in the top division of French soccer still derived over 80 percent of their revenue from ticket sales.⁶⁴

With the growth of private TV stations, particularly via cable, television revenue has played an increasingly important role in the finances of European soccer teams. Today, French teams in Ligue 1 derive over 50 percent of their rev-enues from television. The same can be said for leagues in England, Italy, Germany, and Spain.⁶⁵ Aware of the value of integrating the game with the broad-cast of the game, large cable companies have come to hold increasing stakes in teams themselves. Silvio Berlusconi’s purchase of AC Milan through his broad-cast company, Fininvest, is only one of many prominent cable broadbroad-casters to invest in soccer teams.

the Impact of Promotion and relegation

Unlike MLB, the NBA, the NFL, or the NHL, membership in a typical soccer league is not fixed. Each year, the three worst teams in most soccer leagues are relegated to a lower division, while the three best teams in the next division are promoted to a higher one. Imagine baseball’s Colorado Rockies’ being sent down to the International League and replaced in the National League by the Columbus Clippers, and you have an idea of what promotion and relegation can do.

61Stefan Szymanski and Andrew Zimbalist, National Pastime (2005), p. 132.

62Wladimir Andreff and Paul D. Staudohar, “European and US Sports Business Models,” in Transatlantic Sport, edited by Carlos Pestana Barros, Muradali Ibrahimo, and Stefan Szymanski (Cheltenham, U.K.:

Edward Elgar, 2002), p. 25.

63Umberto Lago et al. “The Financial Crisis in European Football,” (2006), p. 8.

64Wladimir Andreff and Paul Staudoher, “European and US Sports Business Models,” (2002), p. 25.

65Stefan Szymanski and Andrew Zimbalist, National Pastime (2005), p. 160.

The fact that a team could move from one league to another and back again greatly complicates the structure of and relationship between leagues. At min-imum, one needs an overall authority to oversee the relationships between the various leagues. Table 3.6 shows the various affiliations that exist in English soccer (other nations have similar structures).

The best European teams have the chance to play in yet another league. Each year, the Union of European Football Associations (UEFA) invites the top teams in each country to play in the Champions League, an elite group of 32 teams to deter-mine the European Champion.⁶⁶ The teams earn substantial rewards if they advance far in the Champions League playoffs. According to UEFA, the 32 clubs in the Champions League in 2010–2011 will share almost $1 billion, with FC Barcelona, the winning club, receiving almost $67 million.⁶⁷

Finally, continental organizations such as UEFA answer to the Federation International de Football Association (FIFA). FIFA is best known for the World Cup championship it stages every four years. In the World Cup competition, play-ers return from their club teams to their home countries to compete as a nation.

One last source of revenue for soccer teams stems from the open system of relegation and promotion, and explains how top Czech or Argentinean players wind up playing for Italian or Spanish teams. Many soccer teams keep them-selves financially afloat by developing talented young players and then selling their rights to wealthier teams. A wealthy team such as Manchester United might purchase the rights to players from small “provincial” English teams, from teams from relatively poor countries such as Ukraine or Brazil, and from financially con-servative teams such as Olympique Lyonnais in France’s Ligue 1. This practice is more acceptable in an open system of promotion and relegation than in a fixed, closed system because teams face a natural limit to the sales they are willing to make. If a relatively small team, such as Stoke City, sells too many of its play-ers, it will find itself relegated to a lesser league with a subsequent reduction in

66This happens on each continent. For example, in South America the Confederacion Sudamericana de Futbol (CONMEBOL) stages the Copa Toyota Libertadores.

67UEFA, “Champions League Financial Distribution,” Management, August 16, 2011, at http://www.

uefa.com/uefa/management/finance/news/newsid=1661038.html.

table 3.7 Organizational Structure of English Soccer Organization Jurisdiction

Premier League 20 Best teams

Football League 72 Teams in next 3 leagues Football Association 500 + Teams in all leagues

UEFA Football clubs throughout Europe

Champions League 32 best football clubs in UEFA

FIFA Football clubs worldwide

revenues. A team in a closed system faces no such disciplinary force. Thus MLB teams from the 1915 Philadelphia Athletics to the 1996 Florida Marlins have held periodic “fire sales” in which they auctioned off all their best players.

the financial dangers of an open system

Promotion brings a huge reward to teams that advance to England’s Premier League while relegation brings a huge penalty. This winner-take-all (or at least winner-take-most) structure provides a strong incentive for teams on the verge of promotion or relegation to invest heavily in players who will ensure promotion or stave off relegation. If this effort fails, a team can find itself with a bloated payroll and diminished revenues.

Elite teams also face pressure to invest heavily in players to ensure inclusion in the Champions League. The dangers of spending heavily can be seen in the sad case of Leeds United (a team particularly close to one coauthor’s heart). In the late 1990s the team’s management spent heavily in an effort to win the European Championship. However, Leeds lost in the 2001 semifinals, costing it about $18 million in lost revenue. Worse yet, Leeds failed to qualify for the Champions League the next season. With revenues far below expectations, the team had no choice but to sell off many of its high-price players. By 2005, the team had been relegated from the Premier League.⁶⁸ As of 2012, Leeds remains in the Championship League, just below the Premier League but with no immediate prospect of returning to its former glory.

the single-entity ownership Model

All of the leagues we have discussed so far have one thing in common: They oper-ate based on what is known as a franchise model. Each team is owned by a differ-ent individual, group, or corporation and is free to pursue its own goals, within limits imposed by the league. The teams also make all of their own player per-sonnel decisions, such as whom to draft, whom to retain, and whom to dismiss.

Although this model of ownership is popular, especially among long-established sports, some of the newer leagues in sports that do not have large followings have adopted a different ownership model: the single-entity league.

In a single-entity league, investors purchase a share of the league itself rather than an individual team or share of a team. All operations of the league, including the allocation of players to teams, are made by the central league offices.⁶⁹ This includes negotiation of player contracts, marketing and advertising decisions, and other expenditures. The advantage of this structure is the ability to manage costs across all teams—eliminating disparities between large markets and small markets.⁷⁰

68See Stefan Szymanski and Andrew Zimbalist, National Pastime (2005), p. 139.

69Roger G. Noll, “The Organization of Sports Leagues,” Oxford Review of Economic Policy, vol. 19, no. 4 (Winter 2003), p. 530.

70Tripp Mickle and Terry Lefton, “Several Leagues Later, Debate on Single Entity Model Still Lively,”

Street and Smith’s Sports Business Journal, August 4, 2008, at http://www.sportsbusinessjournal.com/

index.cfm?fuseaction=article.printArticle&articleId=59720, viewed June 8, 2009.

The challenge for single-entity leagues is to cater to demand differences across local markets. The advantage of the franchise system is that individual team owners can make decisions that they believe are best for their own team rather than have to bow to a single decision that may be good for some teams, but not for others.

Some leagues are transitioning from the single-entity model to a franchise model, such as MLS and the WNBA. Thus, while it seems clear that established leagues in well-known sports prefer the franchise model, it appears that there is no single answer as to which league structure is best for emerging sports.

BIOGRAPHICAL SkETCH Bill Veeck

People need people (who else is there to take advantage of?)

—Bill Veeck¹

Many owners have won more games than Bill Veeck did with the Cleveland Indians (1946–1949), St. Louis Browns (1951–1953), and Chicago White Sox (which he owned twice, 1959–1961 and 1975–1980). It is safe to say, however, that no owner in the history of the game had nearly as much fun.

Veeck was literally born into baseball—his father was presi-dent of the Chicago Cubs—and he never left. In the 1920s, young Bill helped plant the ivy that now covers the wall at Wrigley Field.

A self-described hustler, Veeck was a showman nonpareil who gave baseball such attractions as bat day and the exploding scoreboard, and such disasters as “disco demolition night,” at which a sellout Chicago crowd ran amok after thousands of disco records were blown up. Veeck also proposed many innovations that baseball adopted only after he had passed from the scene. In his 1969 memoir, The Hustler’s Handbook, for example, Veeck proposed using the scoreboard to do a variety of things—to review disputed plays or to inform the fans about the type and speed of pitch that had just been thrown—that teams took decades to implement.

Bill Veeck had an innate sense of how the market and social justice come together.

Between 1947 and 1964, only two American League teams other than the New York Yankees—the Cleveland Indians and the Chicago White Sox—won pennants, and only one won a World Series. Veeck was the owner of the Cleveland Indians when they won the 1948 World Series, and he built the team that appeared in the 1954 World Series. He was later the owner of the Chicago White Sox when they made it to the 1959 World Series, their first appearance since the Black Sox scandal of 1919. It was no coin-cidence that these teams were among the leaders in integrating the American League.

Veeck brought Larry Doby to the Indians in 1947, a few weeks after Jackie Robinson broke the color line with the Brooklyn Dodgers. Four years earlier, Veeck had tried (Continued)

Summary

Unlike most firms, sports teams do not necessarily maximize profit. Pursuing a different goal, such as maximizing wins, can lead to very different behavior by a team, but even if teams do not maximize their profits, they cannot afford to ignore them entirely. Teams derive their revenue from ticket sales, the sale of broadcast rights, licensing income, other venue-related income, and the transfer of funds from other teams. The degree to which revenues are shared among teams varies from league to league, with the greatest sharing occurring in the NFL.

to integrate baseball when he sought to buy the sad sack Phillies, one of the worst and least popular teams in baseball, and stock the team with players from the Negro Leagues. Veeck had long opposed baseball’s color line on moral grounds, but he also felt that integrating the game made good business sense. He thought that bringing in star players from the Negro Leagues would build a talented, exciting team that fans would want to see. According to Veeck, MLB Commissioner Kenesaw Mountain Landis stepped in at the last minute and found another buyer for the Phillies, prevent-ing his purchase of the team.

Veeck also showed a sense of fairness as an outspoken critic of baseball’s reserve clause, which effectively bound a player to a team for life. He was the only owner to testify against the reserve clause in Curt Flood’s lawsuit against baseball in the 1970s.²

Veeck’s unorthodox beliefs and promotions did little to endear him to the other owners. They went so far as to block his attempt to move the Browns, a poor relation of the more popular Cardinals, from St. Louis to Baltimore, allowing the move only after Veeck had sold the team. In an attempt to boost interest in his team, Veeck tried such stunts as sending 3⁼7⁼⁼ Eddie Gaedel to the plate as a pinch hitter (he walked) and hold-ing “You Be the Manager Day,” in which fans were given the opportunity to make sub-stitutions and determine strategy. Predictably, some owners attempted to block Veeck’s

Veeck’s unorthodox beliefs and promotions did little to endear him to the other owners. They went so far as to block his attempt to move the Browns, a poor relation of the more popular Cardinals, from St. Louis to Baltimore, allowing the move only after Veeck had sold the team. In an attempt to boost interest in his team, Veeck tried such stunts as sending 3⁼7⁼⁼ Eddie Gaedel to the plate as a pinch hitter (he walked) and hold-ing “You Be the Manager Day,” in which fans were given the opportunity to make sub-stitutions and determine strategy. Predictably, some owners attempted to block Veeck’s