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Home Biz of Baseball - Interviews The Economics of Sports: An Interview with Roger Noll

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The Economics of Sports: An Interview with Roger Noll PDF Print E-mail
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Written by Pete Toms   
Monday, 23 November 2009 00:00

Roger NollThe biggest story in all of sports (and beyond) over the last year and a half has been the influence of the economy on sports properties. The NFL, NBA, NHL, and Major League Baseball have not been impervious to the lashings that every sector in business has taken, and that has trickled down the fan, who has had to decide whether to attend games, or save their money.

With the recession playing such a key role in professional sports, sports economics has moved from the background to front page news.

Roger Noll, professor of economics emeritus at Stanford University and a Senior Fellow at the Stanford Institute for Economic Policy Research, has been one to have their pulse on economics, including sports.

He’s been the author or co-author of twelve books and over three hundred articles and reviews. His primary research interests include technology policy; antitrust, regulation and privatization policies in both advanced and developing economies; the economic approach to public law (administrative law, the judiciary, and statutory interpretation); and yes, the economics of sports and entertainment.

Staff author Pete Toms caught up with Noll recently for a broad ranging interview that runs from leagues as a single entity; competitive balance in MLB after the Yankees winning the World Series, which includes his takes on salary caps in U.S. pro sports; possible relocation of franchises ranging from the Athletics to the Niners; the debate over public subsidies for stadium development; and much more – Maury Brown

Select Read More for the interview with Roger Noll

Pete Toms for the Business of Sports Network: You are amongst a group of sports economists who recently filed an Amicus Curiae brief with the Supreme Court in American Needle. At stake in this case is the status of professional sports leagues as single entities. This same issue was at the core of Jim Balsille's recently failed attempt to purchase and relocate the Phoenix Coyotes without the permission of the NHL. Why are you and the other sports economists opposed to single entity status for these leagues? Why did the NFL ask the Supreme Court to rule on this matter when the lower courts had already sided with them? Why should sports fans be interested in this case? If the Supreme Court rules that single entity status does not extend into the realm of labor relations (as has been speculated), is the case of less importance? Would you care to handicap the outcome?

Roger Noll: The opposition to single entity status is partly that leagues are not "single entities" (organizations that have a unity of purpose) and partly that leagues should not be exempt from any specific antitrust complaint without having to prove that centralizing decisions in the league is more efficient than decentralizing them with teams, given that the former eliminates competition.

The NFL did not appeal the decision -- American Needle appealed. When they did, the NFL sought to broaden the case. Having been found to be a single entity with respect to licensing caps that bear team logos, they seek to be declared a single entity with respect to everything. Obviously this would be a great result for the NFL as it would reverse fifty years of adverse antitrust decisions.

Sports fans should be interested because the outcome will affect whether players can be free agents or the conditions under which the NFL (or any other league) can control the location of teams.

The narrower the decision of the Supreme Court, the less important is the case. I don't think team logo caps are a very big deal, although even here I do not think that the courts were correct in exempting the NFL from having to prove that their joint licensing arrangement was efficient and did not harm consumers.

I do not handicap the Supreme Court.

Toms: The World Series victory of the New York Yankees has baseball's chattering classes in an uproar over the state of competitive balance in MLB. Ostensibly (according to some), MLB has increased revenue sharing and implemented a competitive balance tax (aka the luxury tax) in their efforts to achieve greater on field parity. Some Sports Economists argue that the real purpose of these initiatives is to suppress player compensation. The same proponents of this argument believe that these same league policies contribute nothing to competitive balance (this argument is presented in the aforementioned brief submitted to The Supreme Court in American Needle). Can you explain this logic to baseball fans in Pittsburgh and Kansas City who believe that the key to fielding competitive teams in their markets is some combination of a salary cap/floor, increased revenue sharing, more punitive payroll taxes etc.?

Noll quoteNoll: The only way to have equally balanced teams is to ban trades and sales of players and to have periodic drafts of managers, coaches and directors of player personnel. The methods that leagues use to create balance have been shown to have little or no effect on the distribution of quality among teams. The logic behind it is that it is not in the interests of owners as well as players to have balanced competition. If all teams were of the same strength, total league revenues would go up if the best player in KC were traded for the worst player in NYC. In a regime of salary caps and no free agency, the KC owner will be richer if he sells his underpaid star to NY.

Check out last year's NHL standings. The NHL has the toughest salary cap in all sports. Was the league more balanced (e.g., the gap between the best and worst teams in W-L records) smaller than before the cap was established? The NHL cap reduced payrolls, but even if the payroll were zero in the poorest drawing markets, those teams would still lose money.

Toms: Is the era of the salary cap in US pro sports nearing its end? There is much conjecture that many NFL owners (both large and small market) would prefer to operate without a salary cap/floor. Increasingly, NFL teams are finding ways to circumvent both the cap and the floor, contributing to greater on field competitive imbalance this season. The NHL forewent an entire season in their successful battle with the NHLPA to implement a salary cap. Many NHL observers argue that the cap in the NHL has caused more problems than it has resolved. Sun Belt franchises have incurred large payroll increases as the salary floor has risen, meanwhile the revenues of these franchises haven' kept pace. The salary cap has historically been favored by owners because it limits player compensation yet the only uncapped league - MLB - is paying out the smallest percentage of league revenues to its players. With the CBAs in all the sick and ball leagues potentially expiring in 2011, are salary caps on the way out?

Noll: You misread the NFL. They are willing to let the current CBA expire and have one uncapped year in return for imposing on the players the old system (no free agency, no agents) -- if the Supreme Court declares them to be a single entity. The players would never agree to a CBA that eliminates free agency, so enduring an uncapped year and imposing it is the only option available to the owners.

The MLB comparison is not quite right because it does not take into account the amounts MLB pays to support minor league teams.

Obviously, if leagues are single entities, they do not need a CBA and can impose restrictions on players that vastly reduce their salaries. A cap is not important in this regime. But I doubt that this will happen.

Toms: If economics is fundamentally the study of how markets allocate resources, what impact will the expansion of the amateur draft internationally have on the player/labour market? Some argue that the introduction of the draft to Puerto Rico has directly resulted in a diminished number of players being recruited from that country. Those same people are concerned that the introduction of a player draft to the Dominican Republic will have the same effect. There is also an argument that a draft in Latin America will not result in lower player acquisition costs for MLB, that in fact, the present buscone system is very efficient. Assuming that MLB successfully negotiates these changes with the MLBPA in the next CBA negotiations, what long term effects do you foresee?

Noll: I do not think that this is terribly important. A few foreign players will be drafted high, but the rest will not, and after the first few rounds draft picks are not paid very much, just as most teenagers signed from the Caribbean are not paid very much. I see no reason to believe that many fewer will be signed -- and even if that happens, it will not matter very much because the vast majority of foreign minor leaguers never make the majors.

Toms: On the subject of revenue-sharing in MLB. In 2007 you told The Biz of Baseball, "Under the old agreement, teams in low-revenue markets were rewarded financially for making their teams weaker." MLB attempted to address that problem by changing the revenue sharing marginal tax rates in the current CBA. Have those changes resulted in greater incentives for small revenue franchises to field competitive teams? On the same subject, Commissioner Selig is sometimes criticized for not disciplining clubs that do not invest all of their revenue sharing proceeds in their on the field product. (I.E. Their revenue sharing receipts exceed their big league payroll). Is that a fair criticism?

Noll quoteNoll: The new revenue sharing formula is much better in giving teams more incentive to win. And as for the "criticism" by the Commissioner, it has no effect. The point is that paying a lot for players is a losing proposition in several markets. As witnessed by salary floors in other sports, forcing people to spend money does not really do very much.

Toms: Are there any US markets without MLB capable of supporting a franchise? Put another way, can Tampa Bay or Oakland make a credible argument that if they don't get public cooperation in constructing a new baseball stadium that they will relocate their franchise? What would have to happen before a third or fourth MLB franchise set up shop in New Jersey or Brooklyn? Does this bring us back to the significance of American Needle?

Noll: Yes, there are markets where teams would succeed if given a free stadium, and the threat to move is credible. Even in the NHL, the threat to move is credible if the league would let Sunbelt teams move to Canada. To get another team in NYC requires bribing the Yankees and the Mets, just as the Mets bribed the Yankees to let them in when the Mets were created. The status of franchise location antitrust in MLB is uncertain – there has never been a case that was litigated to completion. Thus, American Needle may not be important for MLB.

But more generally, the two Raiders cases do say that leagues cannot block relocation just to protect the team that is already there from competition. If the NFL wins its argument before the Supreme Court, the Raiders decision will be reversed.

Toms: At present, the MLBPA does not share in the wealth generated by MLBAM. Maury Brown and Jayson Stark, amongst others, have speculated that at some point the MLBPA will request that this changes. Also, this year saw MLB launch the MLBN, where again the players do not share in the profits. Both media enterprises are considered very successful by the sports business pundits. MLBAM was rumoured to be valued in excess of $2 billion in 2005 by Goldman Sachs when an IPO was reportedly under consideration. MLBN, at inception, launched into 50 million homes. (A record amount for a new cable channel.) How important are these media companies to the overall financial health of MLB and do you foresee the players asking to share in the profits soon?

Noll: The players do share -- if team revenues go up, so do salaries. I do not think that MLBPA should given this much priority. Anything that increases revenues will be good for the players.

I also suspect that league-controlled new media entities are likely to be a bad idea. Leagues do not generally do a good job running them. Remember the Baseball Network? They could make more money licensing it to someone else.

Toms: MLB attendance declined approximately 7% in 2009 from 2008. Twenty-two of 30 franchises reported a decline in attendance. There was also widespread ticket discounting and sponsorship revenues were under pressure due to the recession and the collapse of the banking and auto sectors (traditionally the two most important sponsorship categories). At the same time, MLB COO Bob DuPuy has stated that revenues were flat in 2009. Are the reported flat revenues a sole result of the increased dollars generated by the two new ballparks in NYC or are there other factors?

Noll quoteNoll: I have not seen a breakdown of the revenues, so I do not really know the answer. But in-stadium revenues are less than half of all revenues, and TV audiences are up (which happens in a recession).

I am not sure that "price discounts" are the full story. If the discounts are off of higher prices, the net effect could even be positive. Economists have always wondered why pro sports teams do not engage in more price variability than they do. It makes sense economically to have the sticker price be the price that is appropriate for the weekend, and to offer discounts for week days, especially if the opposition is weak.

Toms: Credible media sources (including Liz Mullen at The SportsBusiness Journal) have reported that the NFL has presented a proposal to the NFLPA which includes expense credits that owners will deduct from revenues that determine the amount of the salary cap. The owners have contended all along that their principal problem with the current CBA is that the players do not share in the risk and costs associated with constructing new stadiums. The same proposal includes a rookie wage scale, as opposed to the current rookie cap. Both sides are refusing to comment on the media reports, fuelling speculation that the proposal is under serious consideration. Do you see this proposal forming the foundation of a new agreement? Why is a rookie compensation a labor issue in both the NFL and MLB? Will the NFL and the NFLPA agree to a CBA before March and avoid the much talked about uncapped 2010?

Noll: I have no idea what is going on in the NFL-NFLPA bargaining. The "expense credit" idea is just another way to cut salaries. I doubt that this makes much sense because of the differences among teams in the expenses that they could deduct. Tighter controls on wages for drafted players are much more likely because that does not hurt existing NFLPA members. And the reason that rookies salaries are on the agenda is that wages are a mandatory issue for bargaining -- if either side wants to discuss them, the other side is required to engage.

Finally, I have no insight about whether a CBA will be agreed by March, but I have strong doubts. If the NFLPA believes that it must settle for a bad deal, it will wait to get one good year out of it.

Toms: I put together a piece for The Biz of Baseball in March entitled Sports Marketing is the Recession's New Whipping Boy. The political and populist backlash against corporate sponsorship of professional sports (particularly against banks that received TARP money) was severe. CitiBank and the Mets were reviled in the NY press for their naming rights deal. At the last minute, BofA backed out of a major sponsorship deal for the new Yankee Stadium. Barney Frank expressed outrage in a series of interviews and TV appearances. The PGA suffered. Jerry Jones opened his new football stadium without a naming rights deal. There are countless other examples. Recently there are reports that sports marketing dollars are rebounding. Do you see that trend in your research? Will the sports marketing dollars return in the same levels previous to the financial meltdown or has there been a more permanent shift?

Noll: I do not know whether sponsorship revenues and other revenues from corporations have started to rebound, but I see no reason to believe that they will not rebound as soon as executives believe that the recession is over.

Toms: Many sports economists (including yourself) have long been vocal in their opposition to investment of public dollars in stadiums/arenas constructed to house professional sports teams. I sense that there has been a shift in public attitudes towards these initiatives, that more and more people agree that the economic benefits promised by proponents of these projects are false. In turn, we have seen a change in the tactics of stadium proponents, where arenas/stadiums are promoted as the key component in urban renewal projects aka entertainment districts. Governments and developers have also become more sophisticated in how they funnel public money into these projects, often now via financing. (I.E. Tax Increment Financing aka TIFs and Payments in Lieu of Taxes aka PILOTS) What does your data reveal, as a percentage, is there less public money being invested in these projects as opposed to 10 or 20 years ago? Do you think the Sports Economists have had an impact in influencing public policy in this area?

Noll quoteNoll: Yes, public subsidies of sports teams are declining. Yes, sports economics research probably has had some effect. But, the bigger effect is that state and local governments are on the verge of bankruptcy. Look for some revival in subsidies in a couple of years.

Toms: A hot topic in the baseball media has been collusion. Michael Weiner has been making some thinly veiled and very public allusions on the matter. Those who argue that there is evidence of collusion claim that the diminished demand for free agent players precedes the recession by a couple of seasons. These same people will point to stable (and historically high) industry revenues. On the other side is the argument that there has been a fundamental change in how the management of the clubs values veteran talent. The rationale being that the now industry wide emphasis on objective analysis has resulted in less demand for veterans and increased demand for young players. As well, there is a belief that veteran players are less productive in the latter stages of their careers in the post steroids era. Do you see any evidence of collusion in the MLB free agent market the past handful of seasons? Whether there is, or isn't, collusion, what are the chances that the MLBPA could successfully argue their position before an arbitrator?

Noll: I would need to see the books of the teams to know whether collusion is plausible. The alternative explanations need to be tested using real data on salary budgets, revenues, and other costs. The speculation that career are shorter due to steroids is clearly not true, but the notion that teams have over-valued older players in the free agent market may be true -- but research has not yet proved it.

Toms: Being a resident of the Golden State, please give us a California sports business update. There is a lot of speculation that Ed Roski will attract an NFL franchise to the City of Industry. (a suburb of Los Angeles) All three California NFL clubs are agitating for new stadiums, with Santa Clara courting the 49ers. Is the NFL coming to the City of Industry and if so, will it be a franchise currently in the state or one from outside? Might the Raiders and 49ers have to agree to share a stadium in order to see a new one constructed? What is the future of the Chargers? Are the Oakland A's moving to San Jose? Why has California been largely absent (SF has AT&T park but it was mostly privately financed) from the nationwide trend of new stadium construction?

Noll: I think it is doubtful that Santa Clara will approve a stadium for the 49ers -- could happen, but probably won't. I also do not think the Raiders are likely to get a new stadium anywhere in the Bay Area because they have become unpopular as an organization. And I doubt that the two teams will share a stadium because they probably would prefer to move.

[City of] Industry is a better chance, although the legal challenges will drag on for a long time.

The A's are more likely to move to San Jose than the 49ers to Santa Clara. But they still must bribe the Giants for the territory. Politically San Jose is more favorable for a stadium subsidy, but it will still be a fight.

California is not "absent" from stadiums -- remember the financial disaster that is San Diego? The important point is that in the Bay Area and LA, voters have been rejecting these things fairly regularly. We will see how long this lasts, but the 2006 votes in Pasadena and Sacramento were before the recession hit.

Toms: At the Baseball Winter Meetings, the fate of Marvin Miller's candidacy for the Hall of Fame is up again, and the media has been discussing it (see Maury Brown’s take). There is agreement that Mr. Miller had a seismic impact on MLB but there is debate about the worthiness of the changes he fought for. From a fan perspective, was Marvin Miller a positive force in MLB?

Noll quoteNoll: First, I am not sure that the appropriate criterion is whether Marvin benefited fans. Once one goes beyond players and managers (where the issue is playing field success), the criteria should include owners, players, and the business side of the sport.

Beyond this, Marvin Miller is a giant in the history of baseball. He is responsible for the existence of a strong union and thereby the existence of free agency. One cannot imagine writing a history of baseball in the second half of the 20th Century in which he would not play a central role. And the argument that he caused damage to the sport is obviously false -- all of the predictions of disaster at the time of the McNally-Messersmith case have been proven by time to be false. Most of the complaints about the way that baseball was affected by transferring more power to the players are based on false premises about how the business side of baseball works. Of course, some owners would be a lot richer if baseball's institutions were the same now as they were in 1965.

Keeping him out of the Hall of Fame for this reason would be a travesty.


  • Interview conducted by Pete Toms
  • Editied by Maury Brown


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Poll

Should MLB Force Jeffery Loria to Sell the Marlins?