Wednesday, March 09, 2005

Why sports leagues are a productivity blackhole

Just as technology firms employing Moore's Law and Wal-Mart boosted US productivity and lowered prices for consumers throughout the 1990s and early 2000s, professional and certain college sports leagues hiked the price of being a fan far above the rate of inflation while not moving the needle on productivity (why this is so, I will get to later). As consumers improved their wages and saved a bit of money on their purchases, the Big Four (NFL, MLB, NBA, and NHL) professional leagues plus college football and basketball absorbed that surplus by demanding and getting from fans ever higher prices for their tickets, premium seating, licensed merchandise, and media rights fees.

Although the research firm, Team Marketing Report, documents in its Fan Cost Index that for a typical family experiencing a game is increasingly becoming a luxury outing, defenders of the price increases counter that the sports teams are just matching demand with supply. Even if true, the higher expense does not lead to greater output, the hallmark of productive resource allocation.

Sports teams, unlike normal business enterprises, can only deliver to their customers a chance at winning more games than they lose. However, because leagues are formed such that all the teams are intertwined in competition, the expected outcome across the league can only be a .500 record. Therefore, no matter how much money is poured into the league, the aggregate result will always have equal wins and loses. While modern athletes are bigger, stronger, and faster than ever before and coaching and conditioning techniques are state-of-the-art, the records of teams from the 1960s are just as valid as those of today, despite leagues being tens of billions of dollars richer. In essence leagues suck in more and more money but deliver the same product and equal results. Is there any greater example of unproductive work this side of the Atlantic?

If players' salaries were reduced by a factor of 10, do you think that kids who otherwise might have to work at McDonalds would still not compete as hard? Though players may be able to do things no mere mortal could do they are no entrepreneurs or other true risk-takers who earn their outsized pay. Others may pay these mavericks because they create and deliver a better idea, product or service or realize savings where no one else could. In short, productivity gets enhanced or else their customers look elsewhere and eventually everyone improves. This is not true of sports leagues; there is no pareto optimal condition that affect all fans which justifies ever climbing prices for the product delivered.