A Case For Relegation In American Sports - A Paper

The original title of this paper, "An Analysis of Cartel Practices of American Professional Sports Leagues and a Viable Alternative Solution" would not make for a useable blog post title. Written for a class at St. Joseph's University in the Spring of 2009, the paper makes a case for introducing the European model for professional sports leagues in the United States. I attempt to do this by debunking some of the most widely-used arguments that are used to keep the anti-trust exemptions in place that allow American professional sports leagues to operate as cartels - such as the ridiculous competitive balance argument. 

It was my hope that Major League Soccer would choose a different path than its fellow American professional league cartels.  I, and many others, have been disappointed to see MLS follow the anti-trust exemption route.   I look forward to reading what you think about my stance. 

"An Analysis of Cartel Practices of American Professional Sports Leagues and a Viable Alternative Solution" by Vincent Blando - April 2009

Entrepreneurs who wish to enter franchises into major American professional sports leagues face obstacles that do not exist in any other industry.  Regardless of how wealthy a potential ownership group may be, how foolproof the business plan, how powerful the groundswell of support from a given locality for a new team, professional sports leagues are unaffected unless they are cultivating buyers for a team that is for sale or for an expansion franchise designated for a predetermined locale.

Professional sports leagues in the United States operate in closed systems, or cartels, which allow the leagues to function outside antitrust guidelines that all other industries in the country must follow.  Thanks to an antitrust exemption granted to Major League Baseball in 1922, professional sports leagues in the United States have been permitted to operate as monopolies which incorporate practices not found anywhere else in the country.  Leagues are able to determine the number of franchises competing within their frameworks and tacitly control the expansion of the total number of league teams. They are able to implement earning limitations on their players and in most cases dictate where entry level players must begin their careers.  Almost all of the leagues in the United States grant their teams monopolistic geographical territories that can not be encroached upon by other franchises in the league.  Professional franchises have been able to leverage the emotional support of their fans to negotiate sweetheart deals for publicly-financed arenas by using the threat of moving to a different city.  Often, fans in geographical areas inhabited by long-moribund franchises have no recourse but to support poorly-run operations because they are the only game in town.

 

The current cartel system benefits franchise owners at the expense of players, fans and municipalities: “In [American] professional sports, clubs are organized into leagues that function as cartels to protect the monopoly franchises and the territorial rights of the owners” (Adams, 1997).  That is not to say that players do not often make a lot of money or that most fans do not enjoy the games.  However, professional sports in the United States is big business, and thus should be treated as such: “The myth of sport as primarily entertainment has been laid to rest along with such delusions as the loyalty of players to the team and the athlete as a sexually faithful, drug-free role model for American youth. Sport is a business whose product is entertainment” (Rosenberg, 1986).  A study conducted by the European Sponsorship Association in 2006 concluded: “over thirty billion dollars was spent on sponsorship worldwide in 2005, with eighty-five percent of those expenditures involving sports properties” (Fortunato, 2007).  Why then are professional sports leagues given so much leeway to operate as they do?  One reason has been unwavering support from American courts.  There have been numerous challenges to the status quo, all of which have been unsuccessful: “Between 1922 and 1980 more than seventy bills were introduced to remove professional sport’s antitrust exemption; none succeeded” (Rosenberg, 1986).  The major professional sports leagues in the United States have achieved a state that is optimal for the success of a cartel: “A cartel must design an organizational structure that is not only immune to entry by outsiders, but also subversion by insiders. Obtaining explicit government legitimization for its activities is an ultimate desideratum; obtaining assurance of benign neglect by the antitrust agencies is a workable ‘secondbest’ option” (Adams, 1997).  A record of seventy-plus victories against zero defeats in antitrust litigations would suggest that the leagues have achieved cartel success as defined by Adams.

The closed system of operation implemented by sports leagues is strictly an American phenomenon.  The major sports leagues have only one tier, populated by a set number of teams.  Once granted entry to the league, a team is secure of its place.  To gain entry, teams must either pay an exorbitant expansion fee to the established league owners or purchase an existing franchise (Grow, 2006).  The limited number of teams for each league is set by the design of league aficionados, who leave viable markets purposely uninhabited.  This serves to drive up the value of individual franchises, and to give owners leverage over the political leaders of their teams’ current municipality.  This practice negatively affects a large portion of the American population: “Millions of sports fans in medium-sized cities and occasional major metropolitan areas are precluded from watching a local sports team at the major league level, although an unrestrained market might well support such teams” (Ross, 2001).

The establishment of geographical monopolies also harms fans as well as taxpayers who have no interest in sports: “Fans have no choice but to endure inferior quality teams caused by local mismanagement…Many taxpayers who are not sports fans must pay, or forego city services that would otherwise be funded, because state and local governments provide massive subsidies to retain or attract artificially-scarce franchises” (Ross, 2001).

The antitrust exemption was granted to Major League Baseball in 1922 in order to give league owners the power to openly work together to protect their product: “Although each team is a separate business, the product requires the activities of two teams, preferably ones that are equally matched so the outcome is uncertain. Hence there must be explicit coordination…baseball was granted an exemption…in recognition of the need for collusion among teams” (Leifer, 1990).  The exemption was granted so teams could work together to establish centralized schedules, establish a shared rule set and to screen potential players.  However, the exemption has been used by leagues to implement a host of other control measures using arguments based on a supposed need for competitive balance which include “limiting the size of rosters, revenue sharing, the reverse draft, and the reserve system” (Leifer, 1990).  Major League Baseball and National Hockey League franchises enter into agreements with minor league teams to develop their players, while the National Football League and the National Basketball Association draft their players primarily from American college programs.  All four leagues force all prospective players to make themselves available to an amateur entry draft, which allow franchises to take turns selecting players for their teams (Leifer, 1990).

The competitive balance argument is the backbone for American professional sports leagues defenses during antitrust litigation: “The ‘competitive balance argument’ maintains that, because predictable outcomes will reduce fan interest and therefore profitability, professional sports leagues require special treatment under the antitrust laws that recognizes their ‘strong and unique interest in maintaining competitive balance” (Mehra, 2006).  While there is some truth to the competitive balance argument, it is not without flaws.  The first flaw in the argument is that it is virtually impossible to create a perfectly level playing field.  One league-implemented control actually serves as an example for why competitive balance measures are inconsistent: “League restrictions on entry protect the territorial monopolies of existing teams. These…monopolies vary in population size…and thus vary in the potential support they can give a team” (Leifer, 1990).  For instance, a team in New York City has a financial competitive advantage over a team based in Cleveland based solely on the populations of the respective geographic regions.  Even with controls in place that direct the best talent to struggling teams and which cap what a player can earn in salary, large-market teams are able to lure players due to the additional income that can be earned through endorsements in a more populous metropolitan area.

Another flaw inherent to the competitive balance argument for professional sports leagues is that of limited resources, particularly players talented enough to play sports at a high enough level to satisfy the fans.  This problem becomes more acute when necessary physical characteristics are taken into account: “Perhaps unsurprisingly…the key factor limiting competitive balance in the NBA is that there is a short supply of very tall people, and an even shorter supply of those with NBA-caliber skills. The NBA cannot simply make more Shaquille O’Neals” (Mehra, 2006).  The competitive balance argument, as to how it relates with maintaining fan interest, was tested greatly during the Michael Jordan era in the NBA.  Jordan’s Chicago Bulls teams won six league championships in eight years, usually while well established as the clear betting favorite to win the titles.  Even with the Bulls playing at such a dominant level, television ratings were never higher nor have those numbers been approached since.  There was little doubt as to who would win the championship during this era, yet people tuned in anyway to see the game played at its highest level.

On the other end of the competitive balance argument spectrum are American franchises which serve as perennial doormats to the rest of their respective leagues.  There are numerous examples of teams in all four of the major American sports leagues that languish in last place season after season despite the best efforts of competitive balance controls.  Fans living within the geographical regions monopolized by these teams are victimized by a lack of alternatives.  Anyone in these areas that wishes to see a league game must pay for tickets, thus rewarding franchises that are poorly run: “Freedom from competition also means that individual club owners can behave in notoriously inefficient ways, guaranteed a permanent place in a monopoly league and enjoying league policies dictated by a board on which they have an equal vote” (Ross, 2001).  Owners of poorly-run franchises, especially in cases where they are guaranteed large payouts from league-negotiated television contracts and revenue sharing, have little incentive to improve their product: “fans have no choice but to endure inferior quality teams caused by local mismanagement” (Ross, 2001).

Adoption of the European model of professional sports leagues would solve many, if not all of these problems.  Most professional sports leagues around the world operate in an open format, allowing teams to earn their way to the top tier of their respective leagues by virtue of the automatic promotion and relegation system.  This is especially true in Europe.  European leagues do not recognize territorial rights.  Many teams operate within mere kilometers of one another and still enjoy vast followings.  An entrepreneur who wishes to enter their team into a European professional league must simply register the team, have players to play the team’s matches and to provide a home field for the team to host its games.  The team is automatically entered into the league’s lowest tier, and can earn its way to the top flight with a few years of sustained success.  The English football (known in the United States as soccer) league is made up of five tiers, with the highest tier known as the English Premier League (Cain, 2005).  Teams earn their place both positively and negatively through their performance in a given season.  The top three teams in each of the lower four tiers automatically moves up to the next-highest tier, taking the places of the three bottom teams which are relegated down to the next-lowest tier (Ross, 2001).

The English Premier League serves as an acceptable model for comparison to American major sports leagues: “For one it [the EPL] is among only a few leagues outside of North America that are truly on similar  financial footing, in terms of club valuations and revenue” (Mehra, 2006).  As with the four major sports leagues in the United States, The EPL is widely recognized as the top league for its sport in the world today and attracts a world-wide following.  How does a very successful league outside of the United States cope with competitive balance?  It has been widely accepted in recent years that there is an elite group of three or four clubs that have a realistic chance to win the League championship.  Some years, there is a favorite so prohibitive, that the odds for the team to win the championship are staggering by American standards: “In August 2006…the Indianapolis Colts, the team deemed most likely to win…the Super Bowl, were offered at 5:1. These odds imply…a 17% chance of winning…Meanwhile, the Premier League favorite was Chelsea, offered at 4:9…roughly a 70% chance” (Mehra, 2006).  The Premier League has been a huge success despite it appearing to be significantly imbalanced.  This would seem to refute the competitive balance argument: “predictable results have not thwarted the Premier League in rivaling North American sports leagues when it comes to money”.  The English model demonstrates that there is an alternative methodology for success outside of the cartel and monopolies mold.  It is puzzling that with such a high-profile example of alternate practices, that there has yet to be a successful legal challenge to the antitrust exemptions enjoyed by the American professional sports leagues.

The implementation of the European open system would benefit American sports fans in a number of ways: “The ability to enter would…benefit millions of fans in markets now not served by major league clubs, or under-served by limits on the number of teams in the league” (Ross, 2001).   Relegation in an open system serves a purpose outside of providing accountability and added motivation to poorly-performing franchises.  It also adds to the entertainment value of the product: “It [relegation] would increase the incentive for current major league teams to invest in quality player talent, in order to avoid relegation. Second, it would provide a new aspect of each competitive season, as fans not only follow close races among the league leaders but races among the lesser teams in the league to avoid relegation” (Ross, 2001).

The United States is a nation that loves professional sports.  The four major sports leagues enjoy great support from fans and firm backing from the American political and judicial systems. Competitive balance should no longer be accepted by the courts as a valid argument in defense of closed cartel systems in American professional sports leagues.  The revenues generated by the major sports leagues is so high that the argument that sports serves primarily as entertainment also no longer passes muster.  The antitrust exemption that allows professional league franchise owners to operate their cartels should be revoked, and professional sports treated as any other business.  A lot has changed since 1922, and the only parties that truly benefit from the current system are team owners and league executives.  An open system would greatly lower the incidents of municipalities being held hostage and forced to shower teams with huge tax subsidies to finance new playing venues in order to keep their teams in place.  The artificial scarcity created by American sports leagues is not permitted in any other industry.  Professional sports leagues in this country wield power over its employees, most notably the players, which other industry leaders could only dream of.  Regardless of the astronomical salaries many athletes earn, the current system is not fair to them, it is not fair to the fans and it is not fair to taxpayers.  Implementation of the European open league system would fix much that ails the American professional sports establishment.

REFERENCES

Adams, Walter (1997).Monopoly, Monopsony, and Vertical Collusion: Antitrust Policy and Professional Sports. Antitrust Bulletin. Fall 1997. Vol 42, 721-748.
 

Cain, Louis P (2005).Similar Economic Histories, Different Industrial Structures: Transatlantic Contrasts in the Evolution  of Professional Sports Leagues. The Journal of Economic History. Vol 65, No 4, 1116-1147.
 

Fortunato, John A (2007).Reconciling Sports Sponsorship Exclusivity With Antitrust Law. Texas Review of     Entertainment & Sports Law. Vol 8:33, 33-48.
 

Grow, Nathaniel (2006).There's No "I" In "League": Professional Sports Leagues and the Single Entity Defense. Michigan Law Review. Vol 105, Iss 1, 183-209.
 

Leifer, Eric M (1990).Inequality Among Equals: Embedding Market and Authority in League Sports. American Journal of Sociology. Volume 96 Number 3, 655-683.
 

Lopatka, John E (1997).Antitrust and Sports Franchise Ownership Restraints: A Sad Tale of Two Cases. Antitrust Bulletin. Vol 42, Iss 3, 749-792.
 

Mathias, Edward (1999).Big League Perestroika? The Implications of Fraser V. Major League Soccer. University of Pennsylvania Law Review. Vol 148 Issue 1, 203-238.
 

Mehra, Salil K (2006).Striking Out "Competitive Balance" In Sports, Antitrust, and Intellectual Property. Berkeley Technology Law Journal. Vol 21:4, 1500-1545.
 

Rosenberg, Edwin (1986).Simple Problems, Simple Solutions. Society. May/June 1986, 24-27.
 

Ross, Stephen F (2001).Antitrust Options to Redress Anticompetitive Restraints and Monopolistic Practices By Professional Sports Leagues. Case Western Reserve Law Review. Vol 52:133, 133-171.
 

Vrooman, John (1997).Franchise Free Agency in Professional Sports Leagues. Southern Economic Journal. Vol 64, Iss 1, 191-220.