THE SPORTS BUSINESS. Buffalo Braves to San Diego. New Orleans Jazz to Utah

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1 12 THE WALL STREET JOURNAL CLASSROOM EDITION 18 Dow Jones & Company, Inc. All Rights Reserved. MARCH 19 THE SPORTS BUSINESS PLAYING FOR KEEPS Professional-sports leagues have become big business AT ONE TIME, professional athletes were viewed as fierce competitors mostly interested in the thrill of winning in front of their cheering, adoring fans. But today, the competition has extended well beyond the playing field, and fans have a different impression of professional-sports stars: as overpaid prima donnas more focused on their current negotiations than winning ball games. The business of major-league sports has changed greatly since the late 1s, when most players made relatively little money and most team owners were more concerned about making the playoffs than making huge profits. Television money, revenue-hungry owners and financially savvy players have turned sports into a high-stakes enterprise. In 1, the National Football League didn t have a national. Today, its TV rights sell for $1 billion a year. Also in 1 basketball player Wilt Chamberlain was team sports highest-paid performer, at $1, a year, and Clint Murchison bought the expansion Dallas Cowboys for $6,. During this season, basketball star Patrick Ewing will make $9.8. The Cowboys currently the most valuable franchise in sports are worth $238, according to Financial World magazine. How times have changed. 3 Podoloff Kennedy O Brien Stern Ft. Wayne Pistons to Detroit Rochester Royals to Cincinnati Minneapolis Lakers to L.A. Philadelphia Warriors to San Francisco Chicago Zephyrs to Baltimore Syracuse Nationals to Philadelphia 2 Boston Celtic dynasty begins 1 Chamberlain $1, Chamberlain's 1-point game W. Chamberlain $25, Boston Celtic dynasty ends ABA formed P. Maravich St. Louis Hawks to Atlanta Cincinnati Royals to Kansas City K. Abdul-Jabbar signs with Bucks $3, K. Abdul-Jabbar $4, L.A. Lakers win games NBA signs $5.25 with CBS Buffalo Braves to San Diego San Diego Rockets to Houston for $9.2 Reinsdorf buys Bulls for $17.5 Larry Bird, Magic Johnson enter NBA ABA folds; four teams join NBA M. Malone J. Erving $2,2, $1,, salary $143, New Orleans Jazz to Utah NBA / CBS $22 San Diego Clippers to L.A. Kansas City Kings to Sacramento NBA / CBS $42.5 NBA / cable TV $25 K. Abdul-Jabbar retires P. Ewing $9,8, BASKETBALL Houston Rockets sold for $9 Bulls worth $2 NBA / NBC worth $2 M. Jordan rookie salary: $, P. Ewing Bird, Johnson retire M. Jordan salary and endorsements worth $44 a year M. Jordan $3,5, Salary cap $3,25, salary $1.9 Magic Johnson comes back B. Cannon $46,6 Rozelle Chicago Cardinals to St. Louis L.A. Chargers to San Diego Dallas Texans to Kansas City Murchison buys Cowboys for $6, Modell buys Browns for $3.9 NFL and AFL merge AFL forms; signs with ABC NFL / CBS $4.7 NFL / CBS $14.1 AFL / NBC $7 J. Namath $112,5 J. Namath $15, Tose buys Eagles for $16 Oakland Raiders to L.A. Culverhouse buys Tampa Bay for $16 NFL worth $18.8 $135, a minute for Super Bowl ad time World Football League begins play World Football League folds salary $55,2 W. Payton $4, J. Elway $1,, Baltimore Colts to Indianapolis Tagliabue Bright buys Cowboys for $6 Braman buys Eagles for $6 worth $4 St. Louis Cardinals to Phoenix Jones buys Cowboys for $14 milion T. Aikman $6,25, Lurie buys Eagles for $1 USFL begins play USFL folds salary $4, FOOTBALL L.A. Rams to St. Louis L.A. Raiders to Oakland Cowboys valued at $238 Browns valued at $1 worth $1 billion Cleveland Browns to Baltimore M. Richard $25, Campbell Ziegler Bettman NHL six-team-league era B. Hull $1, New teams pay $2 each to join NHL Bobby Orr enters NHL B. Orr $133, B. Hull $2, Canada Cup series with Russians World Hockey Assoc. formed salary $, K.C. to Colo. WHA folds; three teams join NHL NHL / ESPN California Seals to Cleveland Cleveland merges w/ Minnesota $2 Atlanta to Calgary NHL loses network TV M. Dionne $3, Colorado to N.J. St. Louis Blues sold for $12 $2,, $, NHL / SportsChannel $5 $8,5, St. Louis Blues valued at $ salary $3, Disney acquires Anaheim franchise ICE HOCKEY Minnesota to Dallas Quebec to Colorado Owners lock out players with two networks worth $

2 MARCH Dow Jones & Company, Inc. All Rights Reserved. THE WALL STREET JOURNAL CLASSROOM EDITION 13 THE SPORTS BUSINESS About the Sports Timelines These timelines show economic developments in professional baseball, football, basketball and ice hockey since 18. Each professional sport has its own timeline. Estimated annual attendance figures for each sport (in s) are shown as a line graph: basketball (orange); football (green); ice hockey (blue); and baseball (red). On the bottom of each timeline are average annual player salaries and the salaries of the sport s highest-paid players, in s of dollars. At the top of the timelines are the commissioners for the National Basketball Association, National Football League, National Hockey League and Major League Baseball. You ll notice similar events in all timelines: franchise moves; new teams; rival leagues; growing values of franchises and player salaries; and the impact of player strikes on attendance. Some major economic trends are apparent. Notice the falloff in baseball attendance during 19 and 19, because of the player strike. (Baseball-attendance figures are higher than other sports because baseball teams play many more games than teams in other sports.) Also note how many NBA teams moved during the late 1s and early 1s, and the relocation of existing NFL franchises to Los Angeles, Indianapolis and Phoenix during the 1s. So, the recent move by the Cleveland Browns to Baltimore is hardly unique Commissioner Attendance Top player salaries salaries 8 Frick Eckert Kuhn Ueberroth Vincent none Giamatti Jan.-Aug. 19 CBS buys Yankees for $14 Steinbrenner buys Yankees for $1 Milwaukee Braves sold for $6.2 ; move to Atlanta Turner buys Braves for $1 BASEBALL Kansas City Athletics to Oakland N.Y. Giants to San Francisco Seattle Pilots to Milwaukee Seattle Mariners pay $5.25 for expansion team Brooklyn Dodgers to L.A. Baltimore Orioles worth $12 7 Washington Senators (original team) to Minneapolis Washington Senators (expansion team) to Texas Colorado, Florida join league Braves worth $12 Yankees worth $1 6 World Series cancelled Network worth $11 a year $52 $1 5 $3 Houston Astrodome opens Seattle, Toronto join league $2 Koufax, Drysdale hold out 4 Jacobs buys Orioles for $7 Smulyan buys Mariners for $ League adds four teams League adds four new teams Nintendo buys Mariners for $1 Angelos buys Orioles for $1 3 Baseball merchandise royalties $12 Baseball merchandise royalties $12 2 Marvin Miller hired by players union Attendance accounts for 7% Attendance % Attendance 37.5% Curt Flood sues league over reserve clause Supreme Court upholds reserve clause Players awarded $2 in collusion damages Free agency begins 1 T. Williams $, W. Mays $15, H. Aaron $2, C. Hunter $7, salary $, N. Ryan $1,, G. Foster $2,, M. Schmidt $2,13, R. Sandberg $7,1, R. Clemens $5,4, K. Puckett $3,, K. Griffey $8,5, Average player salary $ Karl Hartig Sources: Major League Baseball; National Football League; National Basketball Assoc.; National Hockey League; other sources.

3 6 THE WALL STREET JOURNAL CLASSROOM EDITION MARCH 19 CHARTS Interpreting Sports Business Data. QUICK QUIZ: 1 Test your knowledge by taking the The Business of Professional Sports quiz on p. 4 of this month s Classroom Edition. Discuss your answers. Would you agree the sports business has grown in the past 37 years? Why? INTERPRETATION: 2 This month s Centerspread uses timelines to show economic developments in professional basketball, football, hockey and baseball since 18. A How is annual attendance for each sport indicated? B Why is attendance for baseball so much higher than for other sports? C Which sport had the highest attendance in 1: basketball, football or hockey? D What accounts for the drop in baseball attendance levels in 12, 11 and 19? 3 Average annual player salaries and salaries for the highest-paid players are shown along the bottom of each sport s timeline. The data are in s, to correspond with the vertical scales on the charts. A Who made more in 17: the average hockey player or football player? What was the difference? B Who made more in 19: the average hockey or football player? What was the difference? Has it narrowed or widened since 17? C How much money did NBA player Michael Jordan make from his salary and endorsements in 19? D Compare the average annual salaries with the salaries of the highest-paid players. What general observations can you make? 4 Who bought baseball s Yankees in 14? How much did they pay? How much were the Yankees worth in 19? 5 How does baseball s revenue from merchandise royalties in 17 compare with royalties in 11? 6 How much was the National Football League s with CBS worth in 12? How much was the NFL s worth in 19? 7 Use Sports Business Data Timelines on p. 7 of this guide to define these terms and answer the questions: A Define salary cap (Basketball 13) and explain how it influenced the growth of NBA players salaries. B What is a reserve clause (Baseball 1)? Who challenged the reserve clause in court in 1 and why did this player lose his case? C Explain what free agency is (Baseball 15). How has free agency caused players salaries to grow? D What issue caused the hold out by baseball players Koufax and Drysdale in 19? 8 Select and research a major-league team of your choice and prepare a timeline that highlights its owners, key players, moves to new cities, successes and failures since 1. See the bibliography below. What comparisons can you make between your team s timeline and the timeline for your team s sport? BIBLIOGRAPHY The League: The Rise and Fall of the NFL, by David Harris (New York: Bantam Books, Inc., 16). Lords of the Realm, by John Helyar (New York: Villard Books, 19). Baseball and Billions, by Andrew Zimbalist (New York: Basic- Books, 19). Answers 1 Answers are at bottom of quiz. 2A Attendance is shown with line graphs: basketball, orange; football, green; ice hockey, blue; baseball, red. 2B Baseball teams play many more games than other sports teams. 2C Basketball, about 19 2D s 3A Hockey: $, compared with football s $55,2; difference was $4,2 3B Hockey: $3, compared with football s $4,; difference had narrowed to $19, 3C $44 3D There s a substantial difference between average and top-paid players; salaries have generally risen steadily. 4 CBS: $14 ; $1 in : $12, compared with $12 in : $4.7 ; 19: $1 billion 7A A limit on how much a team can pay all its players each year; allowed players to share in growing owner revenue 7B Clause binding a player permanently to a club. Curt Flood. Supreme Court upheld trade because of baseball s antitrust exemption. 7C Right to negotiate with any team; players can go to highest bidder 7D Demand for multi-year s 18 Dow Jones & Company, Inc. All Rights Reserved.

4 MARCH 19 THE WALL STREET JOURNAL CLASSROOM EDITION 7 THE SPORTS timelines depict economic events in the evolution of professional basketball, football, ice hockey and baseball since 18. Here are explanations of key events in the timelines: BASKETBALL 18-14: Franchise movements Six National Basketball Association teams move to new locations. 1: Wilt Chamberlain makes $1, The former University of Kansas and Harlem Globetrotter star signs with NBA s Philadelphia Warriors; becomes league s highest-scoring and highest-paid player. 19: American Basketball Association formed Competition between NBA and rival league, fueled by bidding war for U.C.L.A. star Lew Alcindor (Kareem Abdul- Jabbar), drives up player salaries. Nineteam NBA expands to 18 teams by : ABA and NBA unify ABA folds; four teams are accepted into NBA, along with ABA stars Julius Erving, David Thompson, Moses Malone and George Gervin. 19: Larry Bird, Magic Johnson enter NBA The two collegiate stars join the Boston Celtics and Los Angeles Lakers, respectively, beginning a rivalry that showcases the league on network television through the 1s. 13: Salary cap As part of the NBA labor agreement, players are awarded 53% of owners revenue. In exchange, players agree to a salary cap: a limit on how much a team can pay all its players each year. The cap allows owners to have fixed costs, and players to share in growing revenues. 19: M. Jordan salary and endorsements worth $44 / P. Ewing makes $9.8 Most of Jordan s earnings come from product endorsements ($4 ). Ewing has highest annual salary paid by a team; experts say eight players will make more than $1 a year in 19. FOOTBALL 1: Pete Rozelle named commissioner L.A. Rams general manager Pete Rozelle is named league commissioner. His marketing expertise helps the NFL gain lucrative television and merchandising s. 1: AFL formed The rival American Football League begins play, helped greatly by a with ABC. Sports Business Data Timelines 15: Joe Namath signs with Jets The Alabama star quarterback signs with the AFL s New York Jets, setting off a playerbidding war between the AFL and NFL. 19: NFL and AFL merge The leagues merge, and their champions play in a game later known as the Super Bowl : WFL forms and then folds Another rival league, the World Football League, starts play in 14, signing NFL stars Larry Czonka and Paul Warfield. 12: Oakland Raiders move to Los Angeles Raiders owner Al Davis moves his club over objections of league. A bitter court case ensues, which Mr. Davis wins. 13: USFL begins play The United States Football League plays during the NFL s off-season. The USFL signs several star collegiate players, including Herschel Walker, Reggie White and Steve Young, before collapsing in : worth $1 billion a year The NFL signs record-breaking with five TV networks; Fox replaces CBS. ICE HOCKEY 19: League expands to 12 teams National Hockey League doubles in size with addition of teams in Philadelphia, St. Louis, Pittsburgh, Los Angeles, Oakland and Minnesota. 12: Canada Cup series NHL Canadian all-star team plays a Russian all-star team. 12: World Hockey Association formed A rival league forms but doesn t attract star players from the NHL, except for Chicago forward Bobby Hull. WHA folds in 19, and three of its teams join the NHL. 16: NHL loses network Declining in popularity, NHL loses its with NBC. The league goes 18 years without regular exposure on network TV. 18: NHL/SportsChannel NHL signs with the East Coast-based SportsChannel cable network. Although deal is more lucrative than a previous deal with ESPN, the lack of national exposure severely hurts the league and leads to the departure of commissioner John Ziegler. 19: Owner lockout Players locked out of work by owners during labor dispute. Play resumes in time for Stanley Cup play-offs. 18 Dow Jones & Company, Inc. All Rights Reserved. BASEBALL 18: Dodgers, Giants move to West Coast Brooklyn Dodgers and N.Y. Giants move to lucrative Los Angeles and San Francisco markets, leaving New York with only one team, the Yankees. In 12, the expansion New York Mets join the National League. 19: Marvin Miller hired by players union The former Steelworkers chief economist is hired by union. Mr. Miller galvanizes the union, which wins major concessions from the owners in the next 25 years. 19: Koufax, Drysdale hold out Dodger pitchers skip spring training, demanding multi-year s. Both players get significant raises but one-year s. 1: Curt Flood sues league The St. Louis Cardinals trade the centerfielder, who sues to overturn the reserve clause, which binds a player to a club. Supreme Court later upholds the trade because of baseball s exemption from anti-trust prosecution. (Supreme Court granted exemption in 12 after a gambling scandal.) 12: Players win right to salary arbitration during brief early-season strike. 15: Free agency begins Arbitrator rules in favor of pitchers Andy Messersmith and Dave McNally, who sought to be free agents with the right to negotiate a with any team. Ruling effectively kills reserve clause; player salaries soon escalate as richer teams bid for star players. 11: Players walk out on June 12 in dispute over free agency. Season resumes after 5-day strike, but ratings and attendance are down for rest of year. 14: Ueberroth becomes commissioner L.A. Olympic Organizing Committee Chairman Peter Ueberroth takes over from Bowie Kuhn. He gets better television and merchandising deals for the league. 11: Owners pay collusion damages Star free-agent players, who weren t offered pay raises in mid-1s, win lawsuit against team owners, whom they accused of banding together to keep wages artificially low; owners ordered to pay $ : Players walk out in August; owners refuse to negotiate until the 19 season, forcing cancellation of World Series. continues into early 19 season, when players return to work without a bargaining agreement.

5 8 THE WALL STREET JOURNAL CLASSROOM EDITION MARCH 19 FOCUS Economic Rent and Athletes Salaries THIS MONTH S Cover Story illustrates how the new economics of the National Football League created problems for Cleveland Browns owner Art Modell. Some economists would point out that Mr. Modell s financial woes were due in part to economic rent, a concept developed by British economist David Ricardo in the early 18s. Economic rent is a payment made to a factor of production in excess of the amount needed to keep that factor on the market. In professional football, a player is a factor of production labor. The amount needed to keep a player on the market is the the minimum salary needed to convince him to play ball instead of staying at home. The difference between the minimum salary he is willing to play for and what he is actually getting paid is economic rent. Economic rent is associated with any factor of production whose supply is fixed. Most people would agree that the number of professional athletes capable of playing at the skill level of a Patrick Ewing or Ken Griffey, Jr. is limited. They are factors of production that can t be reproduced. You can use the graph below to visualize the concept of economic rent. Yearly Salary (s of dollars) P $8.5 $1.6 Price A Market for Ken Griffey S 1 R B D Quantity The vertical supply curve (S) for Ken Griffey is perfectly inelastic, which means the quantity supplied is fixed and can t be influenced by price: There is only one Ken Griffey. The demand curve (D) for Ken Griffey intersects the vertical supply curve at $8.5, his current salary (R). Raising or lowering his salary (price) Subject Areas: Business, Careers, Economics Lesson Objective: Analyze the concept of economic rent with respect to the salaries of professional athletes and entertainers. APPLICATIONS: 1 This month s Centerspread, on pp. 12 and 13, shows how average annual salaries of professional athletes have grown since the 1s. Assume that the highest-paid players in basketball, football and ice hockey in 19 would have been willing to work for the average player s salary. Use the data on the Centerspread charts to calculate the amount of economic rent Patrick Ewing, Troy Aikman and Wayne Gretsky collected last year. 2 Pick one of these players and estimate how much you think he would have made last year if he hadn t Answers 1 Ewing $7,9,; Aikman $5,536,; Gretsky $7,7,. 2 Answers will vary. 3 Because Mr. Griffey is so skilled, the demand for his services is greater. If he is a free agent, he can sell his services to another team. These players generate more revenue because fans will pay higher ticket prices to see them. isn t going to change how many of him are available to play baseball. If he would be willing to play baseball for the average player s salary of $1.6 (line AB) instead of staying at home, then he is collecting economic rent of $7.44 ($8.5 minus $1.6, represented by area APRB). played his sport, but worked as, say, a stock broker or car-dealership owner. Now calculate the amount of economic rent he collected. (See related article on p. 6 of the Classroom Edition.) 3 Discuss why a team owner would be willing to pay Ken Griffey $8.5 when he could purchase labor at an average price of $1.6 instead? What is the owner buying in addition to labor? How is it possible that this athlete can earn so much economic rent? How does fan loyalty to certain players influence salaries? 4 What impact do you think player strikes have on the amount of economic rent athletes are able to collect? What impact do strikes have on the amount of economic rent owners are willing to pay? 5 Use the concept of economic rent to explain why Jim Carrey and John Travolta are each paid $2 to make a movie. (See related article on p. 21 of the Classroom Edition.) 4 In the short term, a strike might make it possible for athletes to collect more of the existing economic rent. But in the long term, if strikes dampen fan interest in the sport, the total amount of economic rent owners are willing to pay will go down. 5 The quantity of both is fixed so producers are willing to pay a high price because they want the ticket sales they believe these actors will attract. 18 Dow Jones & Company, Inc. All Rights Reserved.