Sports Economics: The Impact of Sports on the Economics of a Community - Term Paper Example

Sports Economics It seemed like we are in a financial golden age for professional sports in these past fifteen years or so. Sports revenues and player fees have tremendously skyrocketed with the likes of David Beckham, Kobe Bryant, Ronaldhino and Roger Federer raking in more than 30 million dollars each in 2007 alone according to Forbes. (Badenhausen 2007) This is not surprising because the popularity of spectator sports has been steadily soaring particularly in the early 1990s. During this time, attendance is up 85 percent in baseball, 130 percent in basketball, and 40 percent in football and hockey with many clubs continually selling out as the value of broadcast rights have grown even faster than attendance: a fourteenfold increase in baseball, a sixteenfold increase in football, and a seventeenfold increase in basketball since the mid-1970s. (Scully 1995, p. 3) Looking at the list of the highest paid athletes, one will find that the top tier is occupied by players of team sports. This paper will examine the economics behind team sports and its impact on the economics of a community. The question as to what is the effect of a sports team migrating to a city will be addressed. I. Background Related Literature Academic interest in the economics of sports, particularly team sports, has been significant since the mid-1950s. Starting these times, a body of literature consisted of many books and journal articles have thoroughly examined the subject. Besides the commercial book publishers, several major university publishing outfits are bringing out scholarly works, often in special series on sports that include the economic side. Although no journal is focused exclusively on the sports business, many publications accommodate the subject. Among these are Industrial and Labor Relations Review, Industrial Relations, Labor Law, American Economic Review, and so on. Much of these academic literature originated in the USA. The period of time and the popularity of the subject produced increasingly sophisticated research on the economics of sports, both theoretically and in its use of econometric methodology, especially in recent times. We often read papers about the economics of sports in many economic journals and that these pieces would make anybody agree, particularly economists themselves, those professional sports, in the context of its social, cultural and economic importance, is a legitimate area of scholarly interest for both theoretical and empirical researchers. The Sports Business In order to determine the extent of the economic effect of the migration of a team or a club to a community, it is important to examine the business of professional sports first. The success of professional team sports ventures is based on the extent to which they can deliver games to a large number of people who are willing to pay for this entertainment. With more than a sizable market in large cities and reinforced by the media – television, radio and the internet – professional sports have become some manna from heaven for team owners and players. Cities take substantial pride in their teams as well. With the combination of sports, the media and advertising, consumers have become willing to shell money for sporting event as a modern day entertainment source. Sports business is characterized by team franchises owned by wealthy entrepreneurs or corporations, which are joined together in leagues. These leagues operate in cartel to limit competition. Providing major league entertainment is the exclusive province of these cartels, which limit their growth to maintain exclusivity and avoid overexposure. In particular, Paul D. Staudohar and J. A. Mangan (1991) talked about the business of team sports: Team derives their revenues mainly from ticket sales, the sale of television rights, parking fees, and sales concessions. Their major expense is salaries for players, scouts, and front-office staff, but most teams also incur significant expenses from stadium rentals and from marketing games locally. Although some teams may show operating losses (i.e., expenses exceed revenues), tax advantages help to make ownership of franchises a lucrative business in nearly all cases. (p. 6-7) All in all, the business aspect in professional sports and the profitability of owning a team franchise is largely dependent today in television broadcast. Although revenues are increases by raising ticket prices, building luxury boxes, and league expansion, it is television who has become the dominant driver of the sports success story. Indeed, the reach of the television as a media powerhouse allows for a most efficient way to deliver sports to consumers. This is the reason why multimillion dollar contracts are possible for players in basketball, soccer and baseball. Television networks are more than willing to shell money because sports is a big audience as evidenced by the popularity of Super bowl franchises and NBA in the US. We also find this true in the case of the hockey player salary. It is by far the lowest in professional team sports because the National Hockey League does not have any contracts with any US television networks. II. The Economics of Sports Benefits of Hosting a Franchise In general, hosting sports events have several perceived benefits. As a matter of fact, cities compete against each other for the privilege. Sometimes the competition gets out of hand, as it did when Salt Lake City was chosen to host the winter Games in 2002. Several Olympic officials were found guilty of accepting bribes in return for their vote for Salt Lake City in the competition leading to the awarding of the games. Nonetheless, sporting events boost tourism in a city justifying the need for sports expenditures. In terms of hosting a club or a sports team, the dynamics at play is even more complicated and more interesting. Here, we are not merely talking about the benefits of a one-time event but the benefits for a city that come with hosting one’s own team. The economic benefits come with the symbolism of pride that the city and its inhabitants identify with their own sports team or club. The team generates interest from nearly all aspects of community life – the local press report about it, the locals become die-hard fans and even the polity takes advantage of the benefits affecting public policy. A team’s or a club’s value as a symbol offers a way for city officials to lift themselves above the chaos and ungovernability of everyday affairs. At the same time, sports offers numerous rewards for politically connected interests. The psychological significance of a sport franchise to a city can be illustrated by the transfer of the New York Giants and Brooklyn Dodgers to California in 1957. It provoked a bitter and long-lasting reaction from the local followers to the point of affecting future major leagues. When the Dodgers moved west, one fan remembers, “if you were in Behan’s Bar and Grill, you’d have thought it was a wake. This was like seceding from the union.” (Euchner 1994, p. 17) Most importantly, according to Frank Jozsa and John Guthrie (1999), “a community that receives the franchise realizes psychic or economic spillover benefits from the business activities accruing from the team.” (p. 68) Melissa Jane Johnson Morgan and Jane Summers (2005), supports this, explaining that the benefits can be felt in two distinctly different categories: one is tangible and the other is tangible: The intangible benefit can be loosely grouped together and termed the “feel-good factor”, which refers to the sense of identity and pride and the positive impact of each of the club/team’s success on the home city and its people; The tangible benefits include the possibility that the franchise and their games including those hosted in the city can lead to economic benefits. (p. 66) Economically, a quantified illustration can be seen in the changes of ownership of national league teams. Media mogul Ted Turner purchased the Atlanta Braves for $11 million in 1976 and controlled the club until 1998. Around this time the estimated value of the Braves was pegged at $300 million, the fifth highest in organized ball, and Turner’s net worth was $5 billion. (Jozsa & Guthrie, p. 69) Sports teams are said to boost the local economy. Here, the club’s annual turnover should be multiplied by between 1.5 and 3.2 to calculate expenditure on city food, accommodation and sports ephemera. (Giulianotti 2005, p. 124) Obtaining a franchise has also been part of the strategy in urban renewal. Local politicians who retain or attract sports club for their city gain positive publicity. Symbolically, the major sports may be civic flagships, presenting their home as a major league player in the country’s and possibly the world’s business and culture. It is commonly believed that hosting a professional sport franchise enhances a community’s prestige, that “no place can really be considered to be a big town if it doesn’t have a professional baseball or football team.” (Harrington and Bielby, p. 42) On a more grassroots level, the case of the Liverpool Sports Club is an example to underscore our point: The Liverpool Football Club… started a pilot scheme with the aim of improving the connections between football clubs and local communities… Examples of community-based activities with relevance to crime prevention are numerous. They included football camps involving high-profile players who promoted quit-smoking and anti-drug themes. A program addressed truancy whereby children with a history of truancy who attended school for increasing periods of time received a Liverpool Football Club sticker and certificate. Those with improved attendance were invited to the club for a presentation. Another program with the Merseyside Fire Brigade aimed to reduce the 7000 hoax calls received by the brigade each year. (Morgan & Summers, p. 64) The case above highlights the fact that benefits for hosting a sports club are not mainly directly related to economic productivity but that of the entire well-being of the community. Disadvantage and Critiques Numerous sports economists argue that the financial costs of stadium building to serve as the home of a club or a team typically exceed their benefits. In Baltimore, for instance, sports fans and architects acclaimed the new Orioles’ stadium as money well spent, but economists calculated that $200 million public investment brought only $3 million annually in jobs and taxes. (Giulianotti , p. 124) the point of the critics is that instead of spending money of something that the taxpayers would have to pay in order to enter, why not use it to finance key social services such as health, education and transport. Furthermore, the cultural hegemony of professional sport franchise and the internal economics of the league structure, combined with the hegemony of growth politics, create a context in which cities are held hostage to the profit motives of sport franchise owners. For example, in the 1970s and 1980s nearly all professional sport franchise owners threatened to move if their demands for new stadiums and other benefits were not met. (Harrington and Bielby, p. 42) Finally, there is also the possibility that the rose is fading. The prospects for robust revenue and salary growth in the 1990s onwards have dimmed casting doubts, if not on the viability of sports franchise for a city, on its much ballyhooed perks and financial turnover. Gerald Scully writes: Attendance may rise somewhat, but with so many sellouts, its growth rate will decline… The prospects for rapid growth is broadcast revenue is not promising… club costs have been rising more rapidly in recent years. (p. 3-4) III. Conclusion The move of a team or a club to a new city highlights not only the changing shape of professional sports but also the transformation of the metropolis. The postwar years, the emergence of the US Rustbelt region, these were the times that brought suburbanization and the decay of many older urban areas, as many businesses sought to escape the real and perceived inadequacies and dangers of the old city. But sports franchises are helping the reemergence of the decaying polis by reinvigorating the populace that is increasingly getting dissatisfied and threatening to relocate, leaving stagnating community behind. As this paper has outlined, sports franchises are not only an economic boon but psychological, cultural and political boosts as well. On the other hand, a city is better off to develop thousands of small and large ways of building a community instead of banking solely on sports franchises for its economic welfare. His is also in preparation for a longer and more stable working coexistence. We have seen that cities can be vulnerable to relocation threats of sports franchises. It would be to the best interest of everyone if the city hosting a club or a team has previously improved on their economic and political conditions apart from sports so that it is stable and independent enough to allow a symbiotic relationship between the community – its government – and the franchise. In the end, good schools, health care, roads, utilities, and recreation facilities – all of these can make a city strong enough that it does not need to beseech a sports team or other firms to locate there. Of course, the addition of a professional sports franchise is more than a bonus with all the benefits it brings with it but it appears to be reasonable and practical if a city would prioritize the welfare of the citizens and the city itself so that a relocation of a sports franchise to the community can be economically viable. References Badenhausen, K. (2007). “The Worlds Top-Earning Athletes.” Forbes. Retrieved 28 Nov 2008 from http://www.forbes.com/sportsbusiness/2007/10/25/sports-tiger-woods-biz-sports-cz_kb_1026athletes.html Euchner, C. (1994). Playing the Field: Why Sports Teams Move and Cities Fight to Keep Them. JHU Press. Giulianotti, R. (2005). Sport: A Critical Sociology. Polity. Josza, F. and Guthrie, J. (1999). Relocating Teams and Expanding Leagues in Professional Sports: How the Major Leagues Respond to Market Conditions. Greenwood Publishing Group. Harrington, L. and Bielby, D. (2000). Popular Culture: Production and Consumption. Blackwell Publishing. Morgan, M. and Summers, J. (2005). Sports Marketing. Thomson Learning Nelson. Scully, G. (1995). The Market Structure of Sports. Chicago: University of Chicago Press. Staudohar, P. and Mangan, J.A. (1991). The Business of Professional Sports. University of Illinois Press. Read More