The Business of SportsPublished: August 25, 2004 in Knowledge@Wharton
From the Preface:
“Within the framework of what you’ve been taught, this business makes no sense. — Wendy Lewis, Vice President, Strategic Planning, Recruitment and Diversity, Major League Baseball, at MBA Media and Entertainment Conference, Stem School of Business, New York University, February 21, 2003
The Ford Motor Company and General Motors Corporation operate under a general business model of selling as many vehicles as possible with the greatest profit margin possible. In the end, Ford and General Motors are competitors who want to sell product. There is no interest, and it is in fact illegal, to cooperate in a manner that allows both companies to be more profitable. Any traditional business could be used to illustrate the contrast that is important here. Yet, as the epigraph notes, the sports business has been different from the beginning.
In almost every sports venture, the competitors must cooperate for the venture to be profitable. In the nascent stages of team sports, the hat was passed among the spectators at local playing fields. A percentage of the take was distributed among the still sweat-drenched and muddy players from the two squads, and the man (it was almost always a man) who organized the outing took a higher percentage. It was in everyone’s interest to have a bigger pie to split, but even if they cooperated to make attendance as high as possible, they still competed vigorously to be the sole winner on the field. Following the competition, all went back to their jobs during the week. This competitive-cooperative model is now the standard in the National Football League (NFL), Major League Baseball (MLB), National Basketball Association (NBA), National Hockey League (NHL), and other sports leagues and professional sports ventures around the world.
Other visionaries saw ways to exploit athletes labeled amateurs by putting together athletic spectacles and reaping the profits. The cash was kept away from those amateurs. The value and need for amateurism was embellished by Greek mythology and class-centered Victorian logic. These amateurism concepts would eventually evolve into the National Collegiate Athletic Association (NCAA) and the Olympic Games. The modem Olympiad was founded by Baron Pierre de Coubertin in 1896 and, shortly thereafter, the NCAA was founded by a group of college presidents convened by then U.S. President Theodore Roosevelt. The application of the amateur ideal took hold, and student-run sports were taken over by universities, and so too were the revenues. From the labor standpoint, a large segment of the sports industry has found a way, unlike the automobile and other industries, to avoid paying for labor.
But winning at any cost is not allowed at any level, at least when the cost is something other than money. Every modern sports business has sets of defined rules and regulations that may even, in many instances, be grounded in law. For example, even if it could be argued that steroids and dietary supplements can make athletes better players, most sports business enterprises have banned their use.
Profit at any cost is similarly problematic. At various times studies have shown that, at the margin, an additional white player on a squad will bring in more fans than an additional black player. Most sports businesses will go for the win rather than the racial slight; or will they?
As these ventures grew, new players became part of the industry: radio, television, commercial endorsers, licensees, and sponsors. Lawyers and agents came into the picture to pull these deals together. The business went beyond just what happened during the competition. The business model was expanding. The primary revenue source was no longer limited to just the fans who could put money in the hat or, later, the fans who bought tickets.
By the time sport began to be referred to as a business, it was also clearly entertainment too; as such, different rules of business and law applied. Not all parties were able to move away from the concept of these businesses being little more than glorified games. There is a continuing conflict about whether the business of sports should be treated differently.
The stadiums and arenas where teams played or wanted to play became big parts of the business too. Interestingly, public money has been used to build many of these facilities. Ford and GM can only dream of that type of aid from the public coffers. There are seldom public battles between cities bidding to build a bigger plant to host an automaker.
Athletes too have realized that it is all more than a game, and they have unionized in the team sports, like much of the rest of working class America. That became an ironic position as average salaries surpassed $1 million and then $2 million per year in some leagues. Without a doubt, some of the highest paid union members in the world are those involved in professional sports leagues.
There are social issues uniquely impacting the sports industry too. These see the light of day in sports more than elsewhere, because the business is subject to constant scrutiny. Beat writers cover every aspect of the game, looking for that unique story, and those stories go far beyond whatever is happening on the field, court, or ice.
As in other industries, women are still not treated with parity in sports. Initially, it was not “appropriate” for women to participate in sports. Apart from their absence in any highly visible professional sport, the disparity was especially visible in the Olympics. It was not until 1984 at the Olympics in Los Angeles that women competed in a marathon event. Health reasons, decorum, and the need to be at home were cited. The passage of Title IX in 1972 has helped create new business
opportunities in women’s professional sports by allowing women to participate in sports in a meaningful way. Many women’s leagues have started and failed. A long dominant men’s league, the National Basketball Association started and financed the Women’s National Basketball Association (WNBA). The reasons for doing so were all based on business. Beyond professional sports, Title IX has also had a dramatic effect on the business of collegiate sports. It is now so long an ingrained part of the culture that at least one of the beneficiaries has never heard of it: When asked a question about Title IX at the 2002 U.S. Open tennis tournament, tennis star Jennifer Capriati replied, “I have no idea what Title IX is. Sorry.” She was a lifetime beneficiary at the age of 26. Today, women’s professional tennis is a sport in better shape than men’s professional tennis.
Many argue that sports led the way for American business on diversity with the racial integration of Major League Baseball in 1947 and that sports are still leading the way today. Approximately one-third of the players in the big leagues are of Latin American origin. There is, however, a dearth of diversity in management. Omar Minaya was the lone Latino general manager in baseball in 2003. Professional sport has become a global business in a manner similar, yet different from, other businesses. On the one hand the concepts of larger markets and cheaper labor can certainly be pointed to. In the NBA and Major League Baseball, the expanded talent pool is a genuine reality as well.
This is an industry where the issues that make headlines are the sharing of revenues, salary caps, luxury taxes, luxury boxes, and the search for the next corporate sponsor. The business model for the automobile may have evolved since the Model T, but not with the same level of public scrutiny and angst as has occurred in sports. Probably most uniquely, this business has an extraordinary level of dependence on the selling of a product to broadcasters, as opposed to getting customers to “purchase” the product by walking in the gate.
With that said, many of the rules are the same. The bottom line of the enterprise is ultimately important. As applied to team sports, there is just a different way of getting there. This is the case even though some individual owners (whether people or entities) can afford to lose seemingly endless amounts of money, citing reasons ranging from marketing the larger enterprise, to controlling content for the enterprise, to fattening up the enterprise for sale. The value of sport as strategic content was probably best exemplified in the structuring of YankeeNets. That venture went beyond the named enterprises to also include the New Jersey Devils and even internationally to include Manchester United. Though that specific entity ultimately failed, its structure will doubtlessly be repeated by future sports organizations …
The business of sports is interdisciplinary in nature. As such, the major business disciplines of management, marketing, finance, information technology, accounting, ethics, and law are all encompassed in the materials that follow. The readings provide this insight from the perspective of a variety of stakeholders in the industry … The book has been divided into three broad sections: professional, Olympic, and intercollegiate sports. The major issues that impact each of these broad categories of sports are subsequently addressed within each section. In addition, there are separate sections on both sociological considerations and the future challenges facing the sports industry. These two sections include all three of the aforementioned categories of the sports business – professional, Olympic, and intercollegiate sports. Though all sports are not discussed in each section, the message that is gleaned from a selected reading is typically instructive for understanding the issues as they impact other sports …
In researching this book, we found a dearth of existing works on the business aspects of the Olympic Games and intercollegiate athletics, even though much attention has been given to the sociological aspects of both of these topics. Similarly, a glaring lack of attention has been given to the ethical aspects of the business of sports, as well as the involvement of Latinos, women, and people with disabilities. These shortcomings are likely a product of the fact that the serious study of sports as a business is relatively new, with the first academic articles appearing in the 1950s and the advent of college sports management programs occurring little more than 30 years ago. Nonetheless, these neglected subjects warrant further study.
As we were completing the manuscript, Michael Lewis’s book Moneyball was released. As many sports fans know by now, that book is largely about achieving success in sports by thoroughly understanding the business, while also stepping back and taking a brand-new approach. Our hope is that both current and future business leaders will take both the facts and viewpoints expressed here and apply their own creativity to take their particular focus in sports to an even higher level.