CHAPTER THREE

Global Leagues

INTRODUCTION

This chapter takes a brief look at sports leagues based outside of the United States as well as further introducing the reader to concepts of interaction related to leagues based in different countries. Many of the issues related to ownership and leagues discussed in Chapters 1, 2 and 5 are relevant here. In fact, apart from variations in scale, the broad concepts relating to the importance of issues such as centralized governance, revenue sharing, integrity, and agents are very similar. It is the unique product and delivery distinctions that must be examined in order to understand the best business practices for leagues around the globe.

The first article, “Local Heroes,” provides an overview of sports labor markets around the globe. It takes an introductory look at how the various sports leagues are becoming more assertive in finding labor for their teams, no matter the country of origin of the athlete. In the United States, this is seen most clearly with the increased number of foreign-born players playing in MLB, the NHL and the NBA. There is certainly an increasing number, although still quite modest, in the NFL as well. Globally, in soccer the use of foreign players has long been present, with South American powerhouses Brazil and Argentina being a major provider for European-based clubs. Over the past decade or so, the African continent has been a provider of global soccer talent as well.

The next two articles look at the sport of cricket. “Cricket in India: Moving into a League of Its Own,” examines the origins of the Indian Premier League and the commercialization of the game in that country, which in some ways has mimicked the commercialization of sports taking place around the globe. The inaugural season was played in India to largely positive reviews as an entertaining version of the sport. The article examines the thinking and buildup behind that first season. A business decision was made to play the 2009 season in South Africa due to security concerns after the terrorist attack in Mumbai. That season, too, received positive reviews, and the entity has returned to India. This is an interesting example of a sports enterprise seeking success on multiple continents, albeit not necessarily by choice.

That second article on cricket, “Twenty20 Cricket: An Examination of the Critical Success Factors in the Development of Competition,” examines an even more dramatic development related to this classic sport. Twenty20 cricket is essentially a shorter, faster, and potentially more commercially viable version of the game. The article provides valuable insights in contemplating revisions to sports to seek a broader audience. It takes a close look at various marketing studies on the changes made to cricket and the success achieved.

The next excerpt is from Arsenal Football Club’s 2008 Annual Report. It provides a “micro” look at the global side of sports by looking at the finances of one of the top clubs in what is widely recognized as the best soccer league in the world, the English Premier League (EPL). According to Deloitte’s “Annual Review of Football Finance,” covering the 2007–2008 season, the EPL’s 20 clubs generated revenues of EUR 2.4 billion in 2007–2008, while its closest European competitors—Spain’s La Liga and the Germany’s Bundesliga—generated EUR 1.4 billion each, followed by Italy’s Serie A, with just under EUR 1.4 billion, and France’s Ligue 1, with EUR 1.1 billion. EPL revenues can be segregated into three categories: broadcasting of EPL and Champions League matches (accounting for 48% of the total revenues); match-day revenues, such as gate receipts and concessions (29%); and commercial revenues, including advertising and sponsorships (23%). Like their U.S. counterparts, the European leagues’ biggest expense is player salaries, accounting for 62% of EPL revenues in 2007–2008. The highlights of Arsenal’s Annual Report presented here provide the reader with a good overview of the finances of most of the leading global soccer clubs and delivers a good introduction to, and comparison of, a European team’s revenues with North American–based franchises. The 2009 Annual Report was published too late to be included in this book, but it does provide additional insight into the impact of the global recession on a high profile club. For a broader “macro” picture of soccer finances, the reader might examine additional highlights from Deloitte’s “Annual Review of Football Finance,” which is available at http://www.deloitte.com/assets/DcomUnitedKingdom/Local%20Assets/Documents/Industries/UK_SBG_ARFF2009_Highlights.pdf.

The final article in this chapter, “The Impact of the Flat World on Player Transfers in Major League Baseball,” looks more deeply at the global labor market, with a focus on the interactions of the player markets in the United States and Japan. It also looks at player transfer rules in other sports, as well as how the rules used in baseball might be improved. In reading this article, it is important to reflect on the rules of interaction that leagues around the globe must develop as the labor market flattens out for the players and they more readily view globally competing leagues as options.

OVERVIEW

LOCAL HEROES

Sporting Labour Markets Are Becoming Global. But What About Sports Themselves?

The Economist

The weather is perfect, with just enough breeze to freshen a warm June [2008] evening. Shea Stadium is bubbling this Friday night, with fans and food vendors, music and pregame presentations. On the big screen the New York Mets introduce themselves: Jose Reyes, shortstop, from the Dominican Republic… Carlos Beltran, centre fielder, Puerto Rico… Endy Chavez, right fielder, Venezuela… Oliver Perez, pitcher, Mexico. Mets fans have had a frustrating season, with rather fewer wins than losses. By Tuesday, the team’s manager will have been fired. But tonight they leave Shea unusually content. The Mets beat the Texas Rangers 7-1. Mr. Perez pitches solidly and bats in two runs. Mr. Beltran and Mr. Chavez both score one and bat one in. The speedy Mr. Reyes scores two and steals his 24th base of the year.

What is not unusual is the Mets’ cosmopolitan makeup: six of the nine starters were born outside the United States. The Mets are a prime example of the globalisation that has swept through sport’s labour markets in recent years. Now many sports are trying to pull off a more difficult trick: globalising their product markets too.

Start, though, with labour—and with baseball. In recent seasons, the proportion of players in the major leagues who were born outside America has been nearly 30%, up from 20% ten years ago. Dominicans are the biggest group, followed by Venezuelans. There are several Japanese players, and New York’s other team, the Yankees, has a star Taiwanese pitcher.

In the minor leagues the proportion is even higher: close to half. Among the legionnaires is Loek van Mil, a Dutch pitcher who stands 2.16 metres (7′ 1′) tall. If he fails on the mound, he might want to join Mr. Yao playing basketball: in recent years foreigners have accounted for around 80 of the 430-odd players on the NBA’s rosters. In ice hockey, North Americans no longer think Europeans too weak, with sticks or fists, for the NHL. Over 30% of NHL players come from outside America and Canada. This year’s [2008] Stanley Cup winners, the Detroit Red Wings, were captained by Nicklas Lidstrom, a Swede and one of 13 Europeans in a 28-man roster.

In other sports a global labour market may seem less of a novelty. English cricket has long relied on the old empire. In football, the Italian and Spanish leagues were graced by several fine foreign players in the 1950s and early 1960s. Both countries then banned foreigners in the hope of helping their national teams. Spain’s ban was lifted in 1974 and Italy’s in 1980.

Thirty years ago, when Tottenham Hotspur, a London football club, signed two members of Argentina’s World-Cup-winning squad, English fans marvelled at such boldness. Now imports are so common that FIFA and UEFA, the governing body in Europe, would like to cap them, but under European Union labour law players must be able to move freely between member states. The transformation in England, with the richest television contracts in the sport, has been remarkable. More than half the players in the Premier League are from outside Britain, up from one-quarter ten years ago. English clubs employed almost one-eighth of the players in the Euro 2008 tournament this June, even though the national team failed to qualify. Only German clubs were better represented.

The supply side of football’s labour market has shifted too. Brazil has long been a big exporter. Most of the clubs in this year’s Asian Champions League, for instance, have at least one Brazilian. Over the past decade or so there has been a scramble for Africans. French and Belgian clubs had been using Africa as a cheap source of talent for years, but lately the English have been keen buyers, often via Belgium or France, of such talents as Ghana’s Michael Essien and Togo’s Emmanuel Adebayor.

Ten years ago just under half the players at the African national championships played in their own leagues and two-fifths were with clubs in Europe. Of the 146 men involved, 41 worked in France and only three in England. At this January’s [2008] tournament, less than one-third were with domestic teams, mainly in North Africa. Well over half were working in Europe: 202 in all, 57 of them in France and 41 in England.

Virtuous Circle

It is not surprising that sport’s labour markets are globalising. The most talented people are gravitating towards the richest employers, whose ability to pay has been enhanced further by juicy television contracts. In turn, the best players make the sport more enjoyable to watch, bringing in more fans and more revenue.

The television money and fan base attract capital too. The globalisation of sport’s capital markets may not have gone as far as that of its labour markets, but it is under way. Several English football clubs are owned by foreigners, among them owners of American baseball and football franchises. In cricket, one franchise in the Indian Premier League has owners based in Australia and Britain.

Now several sports—and sports leagues in particular—are trying to expand their product markets beyond their borders as well, by staging games abroad. This is easier said than done. Sport, says Andrew Zimbalist, an economist at Smith College in Massachusetts, is different from other industries: “You can’t produce your product in one country and sell it in another. You can do it with laptop computers, but you can’t do it with a game.”

It is possible to export sport indirectly, by selling media rights. Most globalising leagues hope to make their money from fans in front of television sets rather than inside stadiums, and games abroad are one way of building a brand. But it may not work, because local loyalties matter. “It’s hard to get people interested in a baseball team on the other side of the world,” Mr Zimbalist says. “It’s an emotional thing.”

There are other potential obstacles. American football, for example, is not played much outside America and requires a lot of explaining. Soccer needs no introduction, but any league wanting to expand abroad faces another problem. Under FIFA rules it needs the permission of the national association of its host country. That association may well want to protect its own league from imports.

None of this is putting off prospective exporters. “US sports are rushing to get first into globalisation,” says David Stern, commissioner of the NBA. All of them, he explains, try to make money in roughly the same ways: by staging events, including games; by building television audiences; through digital media; through marketing partnerships; and by selling merchandise. European football and its top clubs are doing much the same thing, with the English to the fore.

Would-be globalisers have a success story to ponder: F1 motor racing, which has been stretching from its old haunts in western Europe, the Americas and Japan towards the fast-growing economies of the Middle East and Asia. This year the United States Grand Prix (GP) was dropped from the calendar. One race is scarcely enough to compete with NASCAR, and other countries have been eager to get their own GPs.

A Malaysian GP was added in 1999; races have been held in Bahrain and China since 2004 and in Turkey since 2005. In September the first Singapore GP—and the first F1 race at night—is due to take place. India, which already has an F1 team, is due to stage its first GP in 2010. According to Bernie Ecclestone, F1’s boss, races in Russia and South Korea may follow.

“We go where the markets for the manufacturers are,” Mr. Ecclestone noted last year, “where they are going to sell their cars in the future.” The sponsors whose logos festoon the cars and drivers’ firesuits are doubtless pleased to see the sport spreading around the world. And there are no protective local federations to worry about. On the contrary, more countries seem to want the glamour of their own GPs than can be fitted into the calendar.

On the face of it, American football has much in common with F1. It already has dedicated fans in its main target market (Europe, and chiefly Britain). It is seen as an upmarket sport. The NFL faces no protected competitors abroad, and its product is scarce. The NFL’s 32 teams play only 16 regular-season games each; those that reach the Super Bowl play a further three or four. Almost all games sell out. Ten teams have a 25-year waiting list for season tickets.

HOW TO GO GLOBAL

One big difference, though, is that F1 is already a global sport, whereas American football is not, and past efforts at exporting it have stuttered. Lots of exhibition matches have been played. In the 1990s the NFL set up a European league, which is now defunct. It has decided that there is no point in offering second-rate fare. “It’s got to be the NFL,” says Mark Waller, the Briton who oversees the NFL’s international operations. “It can’t be the European league.”

So last October [2007] the NFL went to Wembley Stadium in London, where the New York Giants (eventual winners of the Super Bowl) beat the Miami Dolphins 13-10. This year [2008] it will bring the New Orleans Saints and the San Diego Chargers to Wembley. Last year’s game was a sell-out. When tickets went on sale this May, 40,000 were snapped up within 90 minutes.

Though a great treat for Londoners, the NFL’s jaunts abroad are less fun for fans of the “home” team (the Dolphins last year, the Saints this time). Unless they can afford a foreign trip, they must forgo one of only eight regular-season home games. Mr. Waller admits this is a problem. “We’ve got to find a way to get more games,” he says. His preference would be to add an extra game for everyone, to be played on neutral ground. That would be fair on all the teams, and there would be 16 games to be spread around: perhaps in Toronto (where the Buffalo Bills are already due to play once a season), Mexico City (where a game was staged in 2005) or American cities without an NFL team, as well as London. New venues might see four games a year.

Meeting pent-up demand in America may prove easier than generating new interest abroad. Still, the test for the NFL is whether live games bring in more British enthusiasts who will stay with the sport. To fans, the game’s technicalities are part of the attraction. The problem is to get newcomers hooked. The NFL has always used television inventively, and Mr Waller thinks that high-definition television, in combination with its website, can help to explain the game to newcomers by getting them close to the stratagems and the sweat. “The only way you could do that before was to get on a field. You can do that all digitally,” he says.

MLB and the NHL may be luckier, in that they have more games to spare and are preaching to the converted. The NHL plans four regular-season games in Prague and Stockholm at the start of next season. MLB first went abroad in 1999, to Mexico. This season began with a series between the Boston Red Sox and the Oakland Athletics in Tokyo. Next year [2009] will see the second World Baseball Classic, a sort of baseball world cup, in which many MLB players take part.

Mr. Stern’s NBA played regular-season games in Japan 18 years ago. Now, all its foreign games are friendlies. Yet it may be best placed of all the ball-playing organisations to build a business abroad—notably in China. Basketball is already popular, roughly on a par with football, according to CSM Media Research in Beijing. It is also simple to play, and the Chinese government has a five-year plan to put a basketball court (and a table-tennis set) in every village. The Olympic baseball stadiums in Beijing are only temporary structures. The nearby basketball arena is anything but.

HOME-GROWN ATTRACTIONS

Better still, in Mr. Yao the NBA has a local hero who draws in viewers by the million. It also has another Chinese star in Yi Jianlian, now of the New Jersey Nets. Its games are shown on CCTV’s main free sports channel and it has another 50 television deals in the country. Not everything is predictable: during the three-day mourning period for the Sichuan earthquake, CCTV took the NBA playoffs, along with other forms of entertainment, off the air and resumed coverage only slowly afterwards—albeit in time for the finals. Earlier this year the NBA sold 11% of its Chinese subsidiary to a group of five investors, including ESPN, for $253m. Eventually, thinks Mr. Stern, there may be potential for the NBA to form a partnership with a Chinese enterprise to launch an NBA-affiliated league. Expansion to Europe is also on the horizon.

Of all the leagues with grand globalisation plans, the Premier League has probably caused the most fuss. Its Asia Trophy has been staged every other year since 2003. Now it is wondering how to expand its activities abroad. Earlier this year Richard Scudamore, the league’s chief executive, floated the idea of an “international round”, to be played in the middle of the season, in which all 20 teams would play an extra league match abroad with points at stake. This caused uproar.

One reason was that English fans cherish the symmetry of their football leagues: every team plays every other one twice, once at home and once away. The international round would upset that symmetry. (American sports leagues, by contrast, typically have unbalanced schedules.) Secondly, the Premier League has to deal with foreign football associations. Perhaps taking umbrage at the lack of warning, the Asian Football Confederation (AFC)—a potential host—said it did not like the idea of the English inviting themselves over. However, it has since softened its tone, saying that the Premier League would be welcome after all.

Mr. Scudamore explains that things are still up in the air. “All the clubs agreed to take a look at this over a long period,” he says. “The clubs are still keen to see us developing some kind of international strategic play. I sit here not knowing in what variant it will come back, but it will come back.” One selling point for some of them may be that foreign games will help financially to even up a lopsided league in which the top four are entrenched. Unlike domestic television revenues, foreign fees are shared evenly among the clubs.

In China, potentially the biggest market, the Premier League lacks the draw of a local star. Zheng Zhi, captain of the Chinese national team, does play in England—but his club, Charlton Athletic, was relegated from the league in 2007. The only Chinese player in the Premier League last season, Sun Jihai of Manchester City, started a mere seven games. He has just moved to Sheffield United, one level below.

Some have also questioned the wisdom of selling television rights for the three seasons to 2009–10 to WinTV, a pay-television company. Mr. Scudamore says that WinTV won a tender fair and square, and that it is “doing well from a low base”. WinTV says that since it started to show English football its subscriber base has increased “significantly”, to nearly 2.5m (some buying its channels singly, others as part of a package). It expects the number to double in 2008–09. People also mocked the sale of domestic rights to BSkyB when the league started, Mr. Scudamore says—and look how that turned out.

“If they are going to be interested in sport,” Mr. Scudamore says of potential fans in emerging economies, “we hope they’ll be interested in our sport. If they’re going to be interested in our sport, we hope they’ll be interested in us.” Most would-be exporters of sporting spectacles would no doubt say the same. They offer sport of the highest quality, whereas the standard of play in local leagues is often pretty ropy. But quite possibly, those fans, just like those in America and Europe, will eventually prefer to see their own local teams—the more so as standards improve.

Already, notes Seamus O’Brien, chief executive of World Sport Group, a sports-marketing firm based in Singapore, games involving national football teams draw far bigger audiences in Asia than do matches beamed from Europe “in the middle of the night”. Mr. O’Brien, who counts the AFC among his clients, thinks Asian football associations should treat the game at club level as an infant industry. They should shell out cash on bringing in foreign players—as Western sports have been doing for years, and as Major League Soccer did to bring Mr. Beckham to America. He proposes that South-East Asian countries pool resources to form their own regional super-league, which would be stronger than national competitions. There is money to pay for this: the second-placed bids for Premier League football rights in Asia, he says, amounted to $600m.

Eventually, believes Mr. O’Brien, “Chinese football will be bigger in England than English football is in China,” because the number of Chinese expatriates wanting to watch games from back home will outnumber their English counterparts. That may be some time off. But in the sports business developed countries no longer call all the shots. The strongest evidence for that comes not from baseball, basketball or football, but from another of the world’s great games: cricket.

CRICKET

CRICKET IN INDIA: MOVING INTO A LEAGUE OF ITS OWN

India Knowledge@Wharton

Corporate cricket in India has never been of a particularly high standard. At the bottom end of the leagues, companies form makeshift teams from their own ranks. Anyone who has ever wielded a bat is enlisted to play. You bat a bit, bowl a bit and then disband for beer. (The demon bowler who could mess up the proceedings by being too “professional” is given beer before the match, not after.) “Save for Mumbai teams … inter-corporate matches in India have never been very serious,” says Sandeep Bamzai, the author of Guts and Glory: The Bombay Cricket Story.

Come April 18 [2008], it will be a different ballgame. Eight companies are vying for top honors in the Indian Premier League (IPL). They include Mukesh Ambani’s Reliance Industries, Vijay Mallya’s UB Group, India Cements, GMR Holdings, filmstar Shah Rukh Khan’s Red Chillies Entertainment, and some makeshift alliances such as actor Preity Zinta and Ness Wadia, joint managing director of Bombay Dyeing, a leading textile manufacturer. These companies and combines have bid for and won franchises for eight major Indian cities. The tournament, to be played over 44 days in a 20-overs-a-side (Twenty20) format, will pit these eight teams against one another.

The marketers have already swung into action. The Bangalore team—owned by Mallya—has been named Royal Challengers, after one of the liquor baron’s popular whisky brands. Khan has called his Kolkata (formerly Calcutta) team the Knight Riders, “inspired by the phrase knight in shining armor.” The Chennai team, owned by India Cements, will be known as the Super Kings. (India Cements has brands such as Coromandel King.) Others, too, are rolling out elaborate plans.

They need to do that. By Indian standards, they have already paid large sums for these teams. The franchises for the eight cities were auctioned by the Board of Control for Cricket in India (BCCI). The auction took place in an extravaganza worthy of a Twenty20 match. Against a floor price of $50 million, Ambani won Mumbai with a bid of $111.9 million. Other winners included Mallya (Bangalore; $111.6 million), Hyderabad (Deccan Chronicle; $107.01 million), Chennai (India Cements; $91 million), Delhi (GMR; $84 million), Mohali (Preity Zinta and Ness Wadia; $76 million), Kolkata (Shah Rukh Khan; $75.09 million), and Jaipur (Emerging Media; $67 million). Incidentally, one of the losing bidders has offered to pay $130 million for a team if any of the franchisees is willing to sell. [The IPL added two teams in 2010, with expansion fees of $370 million for a team based in the city of Pune and $333 million for a team based in Kochi.]

GOING, GOING…

The payment for the teams was just the beginning. That auction was followed by bidding for the players. The best cricket players from all over the world were up for grabs. The top bid was for India’s Twenty20 and one-day cricket captain, Mahendra Singh Dhoni, who went to Chennai for $1.5 million. Andrew Symonds of Australia was bagged by Hyderabad for $1.35 million. Other rounds of bidding are still on.

With each team needing 16 men (11 players, a 12th man and four reserves), the price tag will keep climbing. Team Hyderabad, for instance, has already paid some $6 million for 11 players and will need to fork over more for the rest. The bids would have been higher, but for the fact that some iconic players—former India captains Sachin Tendulkar, Sourav Ganguly and Rahul Dravid—weren’t available. They are captains of the cities they are associated with (Mumbai, Kolkata and Bangalore, respectively) and will be paid 15% more than the highest-paid player in their teams.

These fees for players are hardly unusual by international standards. For example, Forbes magazine estimates golfer Tiger Woods’ annual income at $100 million. But for cricket—and not just in India—this is big money. Australian Ricky Ponting, the highest-paid cricketer in the highest-rated country team, takes home only $800,000 a year. Sponsorships bring this up to $4 million.

These large deals are already attracting criticism. Left-wing political parties have demanded an investigation into the “sources of hundreds of crores of black money spent on the auction” and why the government has condoned such “outrageous gambling.” Not to be outdone, the right-wing Shiv Sena party has described the auction as the “gambling of industrialists.”

The auctions, though, are a small part of the money machine. The BCCI had earlier sold the 10-year television rights to Sony Entertainment, the Indian subsidiary of Japan’s Sony, and World Sports Group (WSG), an Asia-focused sports marketing and management agency, for more than $1 billion. Together with the other takings, IPL is already a $2 billion business. As Lalit Modi, BCCI vice-president and chairman and match commissioner of the IPL, says: “IPL is the best thing that has happened to cricket. Corporate India is convinced about the product and the revenue model and has shown the appetite and passion for cricket.”

MONETIZING THE GAME

Modi, scion of a business family that owns tobacco-maker Godfrey Phillips, is the new face of the Indian cricket establishment. He studied marketing at Duke University in North Carolina, where he learned about the major U.S. sports leagues. “We have succeeded in monetizing the game,” he says.

“Yes, priorities have changed for a segment of the population,” says Sridhar Samu, professor of marketing at the Indian School of Business (ISB), Hyderabad. Adds Bamzai: “Cricket today is a metaphor for change.” According to Ashish Kaul, executive vice-president of the Indian Cricket League (ICL), a rival to IPL: “We as a country have reached a stage where entertainment is a basic necessity and not a leisure activity. Cricket is the lowest common denominator of this country and perhaps the largest entertainer.”

Corporate India—in the form of the new cricket leagues—will give the fans all the change they want. The game in its Twenty20 format has metamorphosed a great deal from its traditional five-day test match version. The first innovation—the 50-over-a-side, one-day variety—offended the purist; Twenty20, for them, is sheer slam-bam. But so what? “People anyway watch only the last 20 overs of a one-day match,” says Modi. “We are giving them concentrated cricket, concentrated entertainment.”

The franchisees are working overtime to ensure that the new format works. In Hyderabad, Deccan Chronicle is talking about hiring special trains to bring in fans from the hinterland. The train ride will be an experience in itself, with marketing men salivating at the thought of such a focused and captive audience, which also has time on its hands during the journey. In Kolkata, Shah Rukh Khan is planning a special women’s stand, while he makes the occasional guest appearance. Meanwhile, the Delhi team has hired an Indian Institute of Management (Ahmedabad) alumnus, a 45-year-old former colonel in the Indian Army, as assistant vice-president (operations). Corporatization and professionalization are clearly the watchwords of the day.

The key question is: Will the IPL benefit all stakeholders? The cricketers certainly stand to gain; they are seeing the sort of money they could only dream about earlier. This is particularly true of countries outside the Indian subcontinent where cricket has not been such a passion. Elsewhere, cricketers have to compete with stars in football, rugby and so on. In India, for all practical purposes, there is money only in cricket.

There could also be casualties, such as English county cricket. Which players would want to spend a season there when there is so much more money in the IPL? “County cricket is a page in the history books,” says Bamzai. And, though the BCCI says it will fix IPL schedules in consultation with the International Cricket Council (ICC), there have already been fears that money may have changed power equations. Indian cricket today earns as much as the rest of the cricketing world put together.

….

WHY EYEBALLS MATTER

BCCI’s Modi is confident that people are bored with soaps and that IPL will be a huge draw. Not everybody is so sure. “This will only work if you get the eyeballs,” says Bamzai. “I am not too sure if IPL will.”

Kaul of ICL is another skeptic. (ICL was started by the Zee Group, a television major, and IPL is actually the official response from BCCI.) “Perhaps BCCI and IPL may not lose anything as they are just selling a commodity,” he says. “But will the market be able to afford the rates? IPL is just an inter-corporate tournament—in a way, Mukesh Ambani vs. Vijay Mallya with 1,500 seconds (of advertising time) to be sold.” By his calculations, Sony and WSG could lose almost $10 million in the first year.

The bigger question around getting the necessary eyeballs—and thus being able to charge high ad rates—is whether Indian audiences will develop loyalty towards city-based teams. State-level cricket matches in India draw no audiences and are largely ignored by television. Will audiences be passionate in their support for Mumbai, except while local hero Tendulkar is batting? Or is the whole IPL extravaganza a marketing exercise that will fizzle out after a few matches?

Modi argues that city-level cricket can succeed in India for several reasons. “The league has been designed to provide opportunities to upcoming cricket stars to showcase their talents while sharing a platform with some of the world’s best cricketers,” he says. “It will be the first time we have a Twenty20 format for our fans and the first time the game will pit a city against another city. It also marks the first time international players of the stature of Shane Warne, Sanath Jayasuriya and Ricky Ponting will participate in a domestic Indian league. Indian corporations and Bollywood actors will be involved. The cricket matches will be covered globally.”

“Marketing muscle and money will play a role,” agrees Krishnamachar of WSG. “But eventually, the real maturity will come from the television viewers who turn around and say that they want to watch the best cricket and that it doesn’t matter if it is India vs. Australia or something else.”

“It is not just marketing hype,” says Samu of ISB. “There is significant substance with top players in the teams. It is a good product which is now getting marketing support. Indian cricket is certainly headed in the same direction as football in the UK and baseball in the U.S.” He agrees, however, that it will be a challenge to get audiences to watch city teams, since they have ignored state-level cricket.

Samu disagrees with the politicians who have been complaining about the large sums being spent on cricket. “One should not think in terms of too much money going to cricket being detrimental for other sports,” he says. “In fact, it may work to the advantage of other sports. Cricket is now moving to a different league and the other sports could learn from it and follow in its footsteps. They could look at adapting the same formats.”

Former test cricketer Syed Kirmani has a suggestion. “Other sports should be taken care of,” he says. “If one sport is overflowing with money, it should distribute some to other sports.” BCCI is, in fact, doing just that. It has just announced that it will set aside $25 million for the development of other sports.

As D-day approaches, the excitement is building up. It is not just among fans. “There are already enquiries from private equity players to team-owners asking them if they would be willing to sell a share of the pie,” says Krishnamachar of WSG. Srinivasan of India Cements is talking about an initial public offer (IPO) and listing his team. “It’s going to be a great carnival,” says Kirmani.

TWENTY20 CRICKET: AN EXAMINATION OF THE CRITICAL SUCCESS FACTORS IN THE DEVELOPMENT OF COMPETITION

Christopher Hyde and Adrian Pritchard

EXECUTIVE SUMMARY

The Twenty20 cricket competition is a shortened, faster version of traditional four-day and one-day cricket. It was launched in England and Wales in 2003 in an attempt to reverse dwindling interest in the sport. Games were to be completed in three hours and were augmented with off-field entertainment.

The study reviews literature concerning the launch of new sporting products and services, and investigates the critical success factors behind successful launches and also factors that led to failures. Most of the research conducted has been in American and Australian sport, with academic models developed in these countries, particularly America. The authors believe the models to be useful, but felt there were likely to be differences in England and Wales because of the sporting culture and calendar.

Attendance figures were gathered from a number of sources to quantify the success of the competition in terms of spectator numbers. These clearly show that crowds are a lot higher for this form of cricket. A short open-ended questionnaire was developed from the literature review in order to investigate the likely critical success factors. This was then sent to the marketing departments of the 18 counties who participate in the competition.

The secondary research and the comments received from respondents identify a number of factors that were attributed to being critical to the success of the competition. These include the use of market research and the application of marketing techniques, media coverage, a reputation for being fast and entertaining, and the length of the game. These factors lie within the three strategic factors affecting the diffusion rate model.

However, the model excludes two important factors that are contextual to cricket: competition timing and the weather. There are two elements that respondents felt were important in the competition’s timing: that the games are at a convenient time for spectators to attend, and that they avoid competition from other sports, particularly football. The implementation of this timing strategy might have helped gain increased audience interest. Other contextual factors that were identified as impacting on diffusion and requiring further investigation are saturation, in terms of length of the competition, and crowd involvement.

….

The research was qualitative, and only industry experts from counties’ marketing departments were interviewed. The primary research did not take account of spectators’ opinions, and further research is recommended to obtain their views on the competition and the factors that motivate them to attend matches.

INTRODUCTION

The authors investigated the issues involved in making a new sport successful. What factors determine whether people are likely to attend a new sporting event and become interested in it? Compared to other forms of cricket, the competition appears to have been successful at bringing in spectators, but what have been the critical factors in this success?

BACKGROUND TO TWENTY20

Cricket in England and Wales is governed by the England and Wales Cricket Board (ECB). The 18 domestic counties receive income from the ECB, which generates its revenue from international cricket via the sale of tickets, merchandise and television rights. ECB turnover in 2004 was £75.12 million, up from £73.5 million in 2003. Cricket is highly dependent on broadcasting revenue, which represents 80% of ECB income. The counties are subsidised by the ECB, with some earning up to 75% of their income from the source. The size of the cricket market is considerably smaller than football, where in 2005/6 six English football teams alone had a turnover greater than £85 million, Manchester United being the biggest at £167.8 million.

The English county cricket season begins in mid-April and concludes in September. Before 2003 it consisted of one-day championship games (lasting up to eight hours per day) and one-day games (lasting between six and eight hours) depending on the competition played….

A proposal to improve interest in the game through the new Twenty20 competition format was put to the first-class counties forum in 1998. The idea of a reduced version of the game was snubbed, but in 2001 problems in the domestic game were still apparent (The Economist 2003) and attendances were falling (English 2003). A £200,000 survey was undertaken by the ECB in 2001 in an attempt to collate information as to how to satisfy customers, gain interest from a younger market and help the game as a whole. This was undertaken in three key phases. First, there was a complete examination of statistics throughout cricket, which were analysed to identify trends and patterns. This was followed by interviews with a wide cross-section of demographic groups. A mixture of current and potential spectators was involved in the process to gain a greater depth and knowledge of the target audience. The final part of the strategy involved a large random quantitative survey. A programme of 4,000 15-minute face-to-face interviews revealed that about two-thirds of the population either disliked or had no interest in cricket. Prominent among the rejectors were children, young people aged 16–34, women, ethnic minorities and members of the lower social strata.

The first-class counties agreed to a shorter form of the game, with the aim of attracting these rejectors. ECB marketing manager Stuart Robertson was responsible for the creation of the competition and the research programme. He believed it should be launched with the primary aim being that the competition is market-driven. It was therefore necessary to apply basic marketing techniques to cricket. The rules were not intended to be radically different, because it was hoped that it would be a stepping stone for people to watch the longer versions of cricket (Twenty20 official site).

Twenty20 was launched on 13 June 2003, and played by the 18 first-class counties in England and Wales. The counties were split into regional groups, with the winners of each group progressing to a finals day in July. In 2004, an additional quarter-final stage was added to increase the number of games.

The games were designed to last for approximately 2 hours 45 minutes, thus creating a shortened, fast paced version of the traditional one-day game. It was deliberately staged in the middle of June, the hottest month of the year and also the period with the longest daylight hours. Most games started at 5.30pm, the aim being to become a major summer social attraction targeting a younger post-work crowd and offering a great family evening out. Additional entertainment was featured in the form of music and interactive crowd events; £250,000 was spent on marketing but no sponsor was found. However, pay-TV operator Sky screened the competition on satellite television, and terrestrial broadcaster Channel 4 covered cricket in general with a half-hour Saturday morning programme throughout June and a live game on 14 June.

LITERATURE REVIEW

New product development is generally agreed to be risky for a variety of different reasons, and the majority of new products/services fail. Also, the degree of novelty in new products and services tends to vary. Booz et al (1982) classify new developments into four categories: product replacements, additions to existing lines, new product lines, and products that are new to the world. Twenty20 would probably be classified by the model as an ‘addition to the existing lines’ of four-day and one-day cricket. Others might classify it as a ‘new to the world product’ if it is viewed as a new sports activity (Harness & Harness 2007).

Rogers (1983) examined the speed of adoption of products and services citing the five characteristics: differential advantage, compatibility with customer values, complexity in terms of ease of understanding, divisibility in terms of ease of trying the product/service and communicability of the benefits. Though the model is a generic one, it can, to some extent, be applied to Twenty20 cricket. Differential advantage is in the form of the speed of the game, with the shorter duration being compatible with consumer values and easier to trial. The limited changes to the rules means that it is not complex (Twenty20 official site 2003). Bridgewater (2007) claims that the complex rules of cricket make it difficult to expand its appeal, and one-day cricket is not suited to trial because of the length of the game. Higgins and Martin (1996) considered diffusion in a sports context and formulated a model to assess the diffusion rates of sporting innovations. They claim that there are three components that affect the rate of acceptance:

Twenty20 has been televised live by Sky on a subscription channel. The second day of the competition was also covered live on Channel 4 on free-to-air terrestrial television. The importance of television coverage in terms of finance, commercial rationale and organisational skills is generally accepted within the literature.

Garland et al (1999) investigated the marketing of cricket in New Zealand in the 1990s and the adoption of marketing techniques to meet customer requirements. New Zealand Cricket Inc conducted telephone interview research in 1991 to discuss the barriers to cricket. These were identified as ‘a boring game that takes too long to finish, with rules that are difficult to understand and in which New Zealand did not perform well’. Further problems identified were poor facilities, unruly behaviour at grounds, and a preference for television coverage. The research also made it clear that the barriers could be ‘circumvented’ by marketing strategies that made use of:

After three years, the New Zealand Cricket Council was able to see increases in attendance, television ratings, media coverage and revenue. The authors claim that research shows there is a clear distinction in the customer profile in New Zealand between test match and one-day international supporters, though they offered no empirical evidence.

The authors went on to look at the launch of Cricket Max, a version of the traditional game—mainly intended for pay-TV audiences—that was launched by Martin Crowe, a former New Zealand captain, in 1996. Crowe’s rationale (Cricinfo, 1996) was to provide a game that was short, very colourful, kept some old traditions and highlighted the best skills in the game in three hours of cricket. It was launched with live satellite coverage and sponsorship from Pepsi Max and BNZ [Bank of New Zealand]. McConnell (2004) noted that it did not compete against the country’s number one sport, Rugby Union. In comparing factors in different hemispheres, he stated that the longer twilight conditions in England offered advantages that could only be matched in the South Island of New Zealand.

Cricket Max has not been played since 2001, although there has never been an official announcement as to why not. Some of the ideas of Cricket Max were borrowed by Twenty20, the three-hour time slot being probably the most significant.

Haigh (2007) argues that the most successful variations of the traditional game have been those that looked more traditional and kept rule changes to a minimum. Cricket Max made changes in numbers of players and scoring; Twenty20 has not. He argues that the promotion of Twenty20 as ‘being for those who do not like cricket’ is for this reason misleading.

Paton and Cooke (2005) used attendance figures to investigate spectator numbers at domestic one-day and four-day games in England and Wales. The findings demonstrate that attendances were higher for games that didn’t clash with internationals, when games were played in the evening under floodlights, and when the games were played at festival grounds (those that are not the county headquarters, where most fixtures were played).

Funk et al (2001) devised the Sport Interest Inventory (SII) to measure the motivation for spectators to attend sporting events. It was originally applied to women’s professional soccer in the US (Funk et al, 2002). The model has also been applied in the context of Japanese and Australian sport (Neale, 2006). However, the authors have pointed out the need to survey consumers in a specific situation before using motives to develop marketing strategy.

The models of Higgins and Martin (2006) and Funk et al (2001) were both developed in the context of American sport. The SII was not used by the authors, as the research is of an exploratory nature and is not a quantitative study. An amended version could, however, be applied in the next stage of research when spectators are interviewed.

English sports have a different calendar, culture and spectator tastes from American sports, and the authors believe that the factors of timing and weather might impact upon a decision to attend an event. Further research was needed to find out if they are vital factors in the success of Twenty20. The aim of the research was to investigate these factors. The authors felt that timing was a factor in the success of the launch, as there were no other major sporting events in the summer of 2003, such as an Olympics or World Cup. A comparison can be drawn here with Rugby League. In 1996 the sport introduced an innovation with the creation of the Super League. The changed timing of the event, from a winter to a summer calendar, proved successful, as evidenced by a 19% rise in attendances when launched (Mintel, 2003).

The model for the research was developed by adapting the Higgins and Martin (1996) ‘three strategic factors affecting the diffusion rate’ model. The perceived newness component is re-titled ‘perceived newness of sport’ for reasons of clarification. A fourth component is added to include contextual factors. In the case of cricket it was thought that weather and timing would be important in determining the likely success of the innovation, though there may be additional factors that emerge from respondents’ comments. An example of the impact of contextual factors, and the benefits to marketers of exploiting them, can be seen in the positive impact of the World Cup in 2002 on attendances in the Japanese football J League (Funk et al, 2006).

Objectives

Methodology

A two-stage approach was adopted. Details of attendances were gathered from secondary information sources to compare attendances across competitions (Mintel, 2006; Wisden, 2004, 2005, 2006, 2007).

The authors also approached industry experts for their views on the competition. Because the research was of an introductory nature, an open-ended questionnaire was mailed to the marketing departments of the 18 first-class county cricket clubs in March 2005. Six questions were asked, the first two covering the areas of competition timing and the influence of weather, as discussed above. Respondents were also asked a further four questions regarding critical success factors to date, future critical success factors, the competition’s impact on finances, and whether the format had attracted a new audience. A final question allowed respondents to make further comments. Responses were received from seven of the counties. The respondent counties were all located in the middle and south of England. There was a noticeable absence from the northern counties.

….

QUESTIONNAIRE RESPONSES

Timing

All the respondents believed that the timing of the event was critical to the competition’s current success. Indeed timing was identified as crucial in different ways. The date range was selected because it would theoretically coincide with optimal weather conditions. The time of day was also a factor. A key objective was to make the event accessible to target markets, and the 5.30pm start enabled school children and the majority of workers to attend without encroaching on work time. Two respondents pointed out that the combination of these factors allowed families to attend. It was also felt that without other major sporting events occurring simultaneously, Twenty20 received more media coverage.

Weather

Respondents believed that the weather had an impact on initial success, although one pointed out that weather is crucial to all cricket competitions. However, the weather had not been as good in 2004 as in 2003. One respondent claimed that despite this, attendances increased in 2004 mainly through excitement. Another felt that good weather attracted a new audience in addition to established cricket fans.

Critical Success Factors

Respondents listed a number of factors here. Five mentioned the good entertainment provided by the competition. One respondent described the competition as having a reputation for fast and lively cricket. Satellite television and media coverage were mentioned four times, and the length of the game three times. Also mentioned were:

Future Critical Success Factors

Media interest was mentioned by five respondents in terms of maintaining satellite coverage and keeping the media interested. Five respondents also pointed out the problem of over-exposure of the format and the need to avoid saturation by having too many games. Two respondents mentioned the need to maintain the current format and keep it to a sensible calendar window slot.

Other factors highlighted were the competition from international Twenty20 cricket, which started in 2005 (Coward, 2007), weather, the need for counties to invest in marketing activities to sustain success, and the moving of games away from headquarters to other areas of the county.

Finances

All seven respondents agreed that the Twenty20 competition has made all the counties’ finances healthier, and some have come to rely on it to boost their income. For some counties, Twenty20 fixtures are the only games to sell out, and they bring in a big percentage of revenue. One respondent also pointed out that revenue was boosted not only by ticket sales and satellite coverage, but by secondary spending in catering outlets, beer sales, soft drinks etc. Another mentioned corporate hospitality as a good source of revenue.

New Audience

All respondents felt the competition has attracted a new audience: women and children (cited twice) families, non-county members, corporates, young people, people turned off by one-day cricket, 18-35 year olds, and sports fans in general.

Further Comments

One respondent attributed some of the success to crowd interaction, stating that it added to the atmosphere and general overall enjoyment. Another pointed out that Twenty20 led to more people attending other formats of the game, particularly floodlit matches.

CONCLUSIONS

The competition has proved to be a success in its first four years. The reasons for this can be seen in aspects of the three strategic factors affecting the diffusion rate model. In particular the characteristics of a shortened, three-hour version of the game were compatible with consumer needs, and sources of influence were gained through the media.

The timing and weather are not included as factors in the model. However, the findings from the primary and secondary data suggest strongly that these contextual issues need to be added to the model. There appear to be two aspects of timing that contributed to the success of the competition. First, that the competition is played at a time that is convenient for people to attend, and second, that it avoids competition with other sports, particularly football.

Further issues were mentioned and require more research, most notably the level of interaction of the sport. Some of the interaction is caused by events that are part of the match entertainment but not directly part of the game (Economist, 2003; Pryor 2004), but do these events contribute to the motive for attending?

FURTHER RESEARCH AND LIMITATIONS

The survey included only the county marketing teams. Research needs to be conducted among those who have attended games to investigate the issues discussed in the models, and in particular their motivation for going to matches. The SII model could be applied, but it needs to be adapted to take account of the contextual issues of timing in terms of convenience of attending, competing sports and the weather. The issue of crowd involvement in entertainment activities that are not part of the main game also requires investigation.

Further research is also needed to monitor the success of the competition following the introduction of international games in 2005. A World Cup was held in South Africa in 2007, but this did not coincide with English and Welsh domestic competition. Research is also required into the area of saturation. At what point is the game likely to reach saturation level, and what is the optimum number of games per season?

References

Booz, Allen & Hamilton (1982) New Product Management for the 1980s, New York: Booz, Allen and Hamilton, Inc.

Bridgewater, S. (2007) ‘International Marketing Mix’ in Beech, J. & Chadwick, S. (eds), The Marketing of Sport, FT-Prentice Hall.

Coward, M. (2007) ‘Traditionalists man the barricades’, The Australian, 7 November.

Cricinfo (1996) Cricket Max—The Game Invented By Martin Crowe, available from: http://content-eap.cricinfo.com/ci/content/story/67577.html [20 November 2007]

England and Wales Cricket Board (2005). About ECB and Twenty20, available from: http://www.ecb.co.uk/ecb/about/about-ecb.html [10 November 2004]

English, P. (2003) ‘Attention all non-cricket lovers’ Wisden Cricket Monthly, 17 June.

Funk, D.C., Mahony, D.F., Nakazawa, M. & Hirakawa, S. (2001) Development of the Sport Interest Inventory (SII): implications for measuring unique consumer motives at sporting events, International Journal of Sports Marketing and Sponsorship 3(3), 291–316.

Funk, D.C., Mahony, D.F. & Ridinger, L.L. (2002). ‘Characterizing consumer motivation as individual difference factors: augmenting the Sport Interest Inventory (SII) to explain specific sport interest’, Sport Marketing Quarterly 11, 1, 33–43.

Funk, D.C., Nakazawa, M., Mahony, D.F. & Thrasher, R. (2006) The impact of the national sports lottery and the FIFA World Cup on attendance, spectator motives and J. League marketing strategies, International Journal of Sports Marketing and Sponsorship 7(3) 267–285.

Garland, R., Inkson, K. & McDermott, P. (1999) ‘Sports Marketing’ in Sport Business Management in New Zealand in Trenberth, L. & Collins, C. Palmerson North: The Dunmore Press.

Haigh, G. (2007) ‘Shorter, simpler, sillier’. Available from: http://content-eap.cricinfo.com/ci/content/story/309625.xhtml?wrappertype=print [22 December 2007].

Harness, D. & Harness, T. (2007) ‘Managing sports products and services’ in Beech, J. & Chadwick, S. (eds) The Marketing of Sport. FT-Prentice Hall.

Higgins, S.H. & Martin, J.H. (1996) ‘Managing sport innovations: A diffusion theory perspective, Sport Marketing Quarterly 5(1), 43–48. Mahajan, V., Muller, E. & Bass, F.M. (1990) New product diffusion models in marketing: a review and directions for research, Journal of Marketing 54, 1–26.

Mahajan, V., Muller, E. & Srivastava, R.K. (1990) Determination of adopter categories by using innovation diffusion models, Journal of Marketing Research 27, 37–50.

McConnell, L. (2004) ‘Twenty20 in the land of Super Max’. Available from: http://content-eap.cricinfo.com/ci/content/story/135060html?wrappertype=print [22 December 2007].

Mintel (2003) UK Spectator Sport—April, available from http://academic.mintel.com, Mintel International Group Ltd, London.

Mintel (2006) Cricket and Rugby-UK—February. Available from: http://academic.mintel.com, Mintel International Group Ltd, London.

Neale, L. (2006) Investigating motivation, attitudinal loyalty and attendance behaviour with fans of Australian football, International Journal of Sports Marketing & Sponsorship 7(4), 307–17.

Papadimitriou, D., Apostolopoulou, A. & Loukas, I. (2004) The role of perceived fit in fans’ evaluation of sports brand extension, International Journal of Sports Marketing & Sponsorship 6(1), 31–48.

Paton, D. & Cooke, A. (2005) Attendance at county cricket: an economic analysis, Journal of Sports Economics, 6(1), 24–45.

Pryor, M. (2004) ‘Swift love affair that knows no boundaries’, The Times, 2 July, p.87.

Rogers, E.M. (1983) Diffusion of Innovations (3rd Edn). New York: Free Press.

The Economist (2003) ‘Adapt or die’, 21 June, p.33.

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Wisden Cricketers’ Almanack, (2004) 141st Edn, Edited by Engel, M. John Wisden, 833–42.

Wisden Cricketers’ Almanack, (2005) 142nd Edn, Edited by Engel, M. John Wisden, 887–98.

Wisden Cricketers’ Almanack, (2006) 143rd Edn, Edited by Engel, M. John Wisden, 890–96.

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Wisden Cricketer Monthly, (2003) July (71). Wisden Cricket Magazines.

SOCCER

ARSENAL FC ANNUAL REPORT, 2008

Chairman’s Report

P. D. Hill-Wood, Chairman, 18 September 2008

I am pleased to report another year of satisfactory progress against our key objectives of delivering long-term stability and success through the operation of the Club as a business which is self-sustaining. The annual accounts, which show a pre-tax profit of £36.7 million (2007—£5.6 million), clearly confirm the strength of the Group’s financial position following the move to Emirates Stadium. Your Board strongly believes this financial strength establishes the best possible foundation from which the Club can achieve footballing success long into the future.

During the 2007/08 season, the team played some highly entertaining and stylish football. The Club made a strong challenge for the Barclays Premier League title but eventually finished the season, just four points behind the winners, in a respectable third place. In addition, the Club reached the quarter-final stage of the UEFA Champions League and the semi-final stage of the Carling Cup.

… Our successful leverage of Emirates Stadium’s facilities is providing opportunities for the Group over and above those derived from the core business of staging the Club’s competitive fixtures. There is no doubt that Emirates Stadium has become a serious contender for the staging of major nonfootball events…. The stadium’s standing as a first class venue was further enhanced in March when it played host to a summit between Gordon Brown and French President Nicolas Sarkozy; the two political leaders held a joint press conference with the world’s media in attendance.

At the end of May music legend Bruce Springsteen played to two nights of sell-out audiences immediately establishing a reputation for Emirates Stadium as a nonfootball entertainment venue. Although the window between the end of the playing season and the start of work on renovating the pitch for the new season is relatively short, the staging of music events is certainly something we will consider again for the future. We have now successfully staged two Emirates Cups, in pre-season 2007 and 2008, and in March 2008 we played host to a third international friendly—Brazil v Sweden. We hope to continue with both the Emirates Cup and high quality non-Arsenal fixtures as regular features in the Emirates Stadium calendar.

We recognise that the Club’s operations have an impact on the local, national and global environment and during the year we have introduced a number of initiatives in order to try and operate as a more environmentally friendly organisation. We now have a dedicated recycling area in the stadium’s underground car park and on average we are recycling 10 tonnes per month of glass, cardboard and plastic which would previously have been sent to landfill. Other new initiatives in the year included progression of our supporter Contact Centre project. This brings together box office, home shopping, tours, travel and Junior Gunners operations for both telephone and e-mail handling and is designed to ensure an enhanced level of service is available to all of our supporters. The initial responses to the roll-out of this project have been encouraging.

….

I am delighted to confirm that E. Stanley Kroenke has accepted the Board’s invitation to become a non-executive director of Arsenal. Mr. Kroenke fully supports the approach the Board has taken in setting the direction of the Club and we believe his experience in sports team commercial management, sports marketing, media and new media rights as well as real estate development will be of great value. Mr. Kroenke is not a party to the “lock-down” arrangement entered into by the other members of the Board.

Mr. Kroenke is the shareholder in Kroenke Sports Enterprises (KSE), the leading live sports and entertainment group based in Denver, Colorado. In April this year KSE acquired from ITV plc a 50% share in Arsenal Broadband Limited and at the same time entered into a strategic partnership with the Club through Colorado Rapids, the KSE franchise.

….

ON THE FIELD

A look back at the first team’s 2007/08 season elicits mixed emotions. There is no doubt that the football played by Arsène Wenger’s side was often at a truly exceptional level, however, despite winning many plaudits, trophies were again to prove elusive.

The Premier League campaign yielded 83 points, some 15 points more than the previous season, and only three defeats yet only a third-placed finish. A fine ‘double’ over Tottenham Hotspur and an emphatic away win against Everton were particular highlights.

International call-ups and injuries—not least that which was suffered by our Croatian forward Eduardo at, perhaps, a pivotal point of his debut season—depleted the squad in the new year and this proved telling in the months of February and March when four consecutive draws considerably hampered the title challenge. Despite taking the lead in both games, the team then slipped to narrow defeats at Stamford Bridge and Old Trafford, which confirmed that the championship would not be heading to Emirates Stadium.

In the UEFA Champions League, a relatively straightforward Group Stage was followed by the glamour of a tie with reigning holders AC Milan. The excitement and pride felt by everybody connected with the Club following a famous 2-0 win at the San Siro, which secured progress to the quarter-finals, was considerable. However, domestic rivals Liverpool put an end to the European campaign on a dramatic night at Anfield in which a late Emmanuel Adebayor goal seemed to have earned us a place in the last four, only for two further strikes by the hosts to decide otherwise.

There were mixed fortunes in the domestic cups. Another fine Carling Cup run emphasized again the quality and depth of young talent which the Club is developing. The semi-finals were reached in some style although Tottenham Hotspur then prevailed through to the final. Early FA Cup successes against Burnley and Newcastle United were offset when a weakened side was beaten at Old Trafford in the fifth round of the competition.

Despite the disappointment felt at a season without winning a trophy, there can be no denying that progress was made in 2007/08. It is notable that Emirates Stadium is proving to be a significant factor in the team’s success—we remained unbeaten in all the 28 home matches played last season and, in fact, only one competitive game has been lost of the 58 played at our new home.

….

COMMERCIAL PARTNERS

Arsenal has continued to develop its commercial partner programme over the 2007/08 season. From a sponsorship perspective we are fortunate to be in a position where we are working closely with many high profile brands. During the year, Ebel joined our partner programme as official timing partner and we are also delighted to welcome Citroën, as the Club’s official car partner, for the start of the 2008/09 season.

We delivered our most successful merchandise figures ever during the 2007/08 season on the back of new second and third choice Nike kits and continuing excellence in own brand apparel, gifts and souvenirs delivered by S’porter, our retail partner. These results were assisted by a temporary store established in Enfield for the period ahead of Christmas 2007. A major overhaul of our Finsbury Park shop has been undertaken and a new store has recently been opened in St Albans. Further off-site stores are planned for the future.

Internationally, our merchandise business is also growing. Our Thai partner BEC Tero now has fourteen retail outlets for Arsenal merchandise, including a new flagship store in Phuket, Thailand. More distribution partnerships will be established for official club merchandise in other territories in the coming financial year.

Arsenal has been involved in other international activity which both improves the profile of the Club and drives revenues. Tiger Beer will continue to be Arsenal’s Official Beer in South East Asia for another three years. In Vietnam, the Club has secured sponsorship with Vinamilk, Gree Electrics and ICP, which will positively impact on the Club’s local profile. Financial service partnerships have been secured in Indonesia and Nigeria with Bank Danamon and UBA respectively. Local language official Arsenal websites in China, Korea, and Thailand continue to be used by over 300,000 local fans each month.

The international Arsenal Soccer Schools programme continues to advance. High quality facilities have opened in Bangkok, Thailand and Ho Chi Minh City, Vietnam and represent further grassroots investment. Arsenal now has sixteen affiliated Soccer Schools abroad. The Club has made its first major entry into India with a high profile Arsenal football roadshow supported by Tata Tea.

Closer to home, Emirates Stadium has hosted a wide range of organisations for a variety of conference, banqueting and meeting events. The stadium provides a flexible and unique venue and along with our catering partner Delaware North we have become expert in hosting high quality functions. In addition, Emirates Stadium welcomed over 80,000 visitors on a variety of stadium tours during the 2007/08 season.

Emirates Stadium also hosts the production facility and studio used to broadcast Arsenal TV, which was successfully launched in January. The channel is part of the Setanta Sports package of channels and is also available through Virgin Media reaching approximately 5 million homes in the UK and Eire. We are extremely pleased with the quality of the programming and presentation, with much credit going to our production partner Input Media. Feedback from fans has been positive and consequently broadcasting hours have been increased for the 2008/09 season.

Our joint venture partner in the Arsenal.com website business changed, following ITV’s sale of their 50% shareholding to KSE, and we now look forward to further developing this already successful website operation alongside KSE.

During the year we also ended our own commercial relationship with ITV. All commercial development, including the Arsenal licensing programme, is now undertaken in house. We would like to thank ITV for all the hard work expended on the Club’s commercial programme and their contribution to our commercial success over the last few years.

CHARITY OF THE SEASON

Treehouse, the national charity for autism education, became Arsenal’s nominated charity for season 2007/08 taking over from The Willow Foundation. Treehouse was established in 1997 by a group of parents of autistic children and it aims to transform the lives of all children with autism and the lives of their families, by increasing the quantity and quality of autism education. The Club’s partnership with Treehouse … was a great success raising a record breaking £519,000 for the charity.

PROSPECTS

The property side of the business will inevitably be of considerable significance to the Group over the next year, with a large number of apartment sales scheduled to complete at Highbury Square and progression of the redevelopment plans for Queensland Road. We will be closely monitoring all stages of the sales completion process. Over 2008/09 the proceeds of Highbury Square sales will largely be used for the repayment of the related bank loans, consequently reducing the Group’s net debt from its current peak level. The two sides of the Group’s business are financed independently of each other and both the property and football business segments start the year from very sound financial bases.

On the field the new season has got off to a promising start. We have successfully negotiated the qualification round of the 2008/09 UEFA Champions League to ensure participation in the Group Stage and this is important to the Club both in competitive and financial terms.

This Club is ambitious for success and as always, at the start of the season, our expectations are high. We look forward to supporting the team, as it challenges for trophies, throughout the course of the season.

In closing, I would like to pay tribute to my fellow directors, our management team and our entire staff for all of their hard work and dedication over the last year. I would also like to thank our Highbury Square project team and all of our other professional advisers for the support they have provided.

Finally thank you for the fantastic support given to the Club by all of our shareholders, supporters, sponsors and commercial partners. I look forward to welcoming you all again to Emirates Stadium over the course of the new season.

FINANCIAL REVIEW

K. J. Friar, Managing Director, 18 September 2008

The results for the year show a very satisfactory outcome and provide a further confirmation of the strong financial position which the Group occupies following its move to Emirates Stadium.

Overall the Group increased its turnover from £200.8 million to £223.0 million and recorded a profit before taxation for the year of £36.7 million compared with £5.6 million (stated after exceptional charges of £21.4 million) in the previous year (see Tables 1 and 4).

Continued growth in revenue and profit in our core football business, including the benefit of the new Premier League TV contracts for season 2007/08, was balanced by a year of lower sales activity and a break-even operating return in the Group’s property development business. The results of the football and property development segments will be considered in more detail later in this review.

In terms of the Group’s balance sheet, the most significant change reflects the progress made toward completion of the Highbury Square residential development and the investment in this project was the main reason that the carrying value of development property stocks increased during the year to £188.0 million (2007 – £100.1 million).

Source: Arsenal Football Club. Used with permission.

The Group’s overall net debt position rose to £318.1 million (2007 – £268.2 million). This increase in debt, which was anticipated both in last year’s annual report and this year’s interim statement, reflects the loans drawn down in funding the Highbury Square construction works. This level of net debt is expected to represent a peak for the Group with the level diminishing throughout 2008/09 as sale completions occur at Highbury Square.

The Highbury Square bank loan is included, on the basis of its projected repayment profile from receipts of sale completions, as part of creditors falling due within one year although the actual term date for the repayment of this loan facility extends to April 2010 (see Table 2).

Football Segment

The football business increased its turnover to £207.7 million (2007 – £177.0 million). This increase was mainly driven by the new Premier League domestic and overseas TV deals. The uplift in the value of these contracts, together with the levels of live coverage associated with our prominent challenge for the title and favourable exchange rates on £:_conversion of UEFA Champions League distributions to the quarter final stage, meant that total broadcasting revenues rose by some £24 million to in excess of £68 million. The main component of our turnover continues to be gate and match day revenue which at £94.6 million (2007 – £90.6 million) represents some 45% of total football revenues and 42% of the Group’s total revenues. There were 28 first team home fixtures in season 2007/08 which is one more than in the previous year and the average attendance was 59,720 (2007 – 59,850). We have been very successful in generating event income from our new home outside of the competitive first team fixture list; during the year Emirates Stadium hosted the inaugural Emirates Cup pre-season tournament which generated more than £4 million of ticket sales over two days, an international friendly fixture between Brazil and Sweden and two Bruce Springsteen concerts.

The continued growth in our retail turnover to £13.1 million (2007 – £12.1 million) and commercial revenues to £31.3 million (2007 – £29.5 million) has been referred to in the Commercial Partners section of the Chairman’s Report.

We remain firmly committed to sustained investment in the development of the playing squad in a market-place where the income from the new Premier League TV contracts has inevitably created a significant upward pressure on both transfer prices and players’ wage expectations. During the year we have improved and extended the contract terms of a large number of first team players and, of course, of Arsène Wenger himself. As a result, for the first time, the Group’s wage bill has exceeded nine figures at £101.3 million (2007 – £89.7 million). The wage/turnover ratio for the year, on a football segment basis, remained broadly stable at 48.8% (2007 – 50.6%) and continues to fall within our target range.

*Operating profit before depreciation and player trading costs.

Source: Arsenal Football Club. Used with permission.

Taking into account these changes in revenues and operating costs, the operating profit (before depreciation and player trading) from football increased to £59.6 million (2007 – £42.2 million).

Property Segment

Revenue in the property segment fell to £15.3 million (2007 – £23.8 million) as sales activity was limited to the granting of certain leasehold interests and contracting work within the social housing element of the Highbury Square development. The previous year contained the sale of a major development site at Drayton Park.

Profit from this Highbury Square sales activity was balanced by the carrying costs of our development site at Queensland Road such that the overall operating result from property was break-even (2007 – profit of £9.0 million).

We have now secured all of the land interests in the Queensland Road site, which lies to the south of Emirates Stadium, and we continue to progress the design of an appropriate redevelopment scheme and detailed permission for the site. This is proving to be a complex process—blending a mix of residential, commercial and regenerative elements—and we will not be able to finalise an on-sale of the site until it is complete.

Construction work at the Group’s main development site, Highbury Square, has continued at an intensive level throughout the year and remains very much on a schedule which will see the completion of the majority of the residential units over the next year. We are, of course, mindful and vigilant of the difficult conditions, which currently exist in the property and mortgage markets in general. That said, we remain confident that Highbury Square represents a genuinely unique residential scheme in an excellent location. This view is supported by the sales position to date, which continues to be positive. We have so far marketed 655 of the development’s 680 private residential apartments and 598 of these are the subject of exchanged sale contracts. The first wave of 65 finished apartments in the South Stand was released at the end of July and sales have so far completed on apartments having a revenue value of £18.7 million. Sales as achieved will be included in the Group’s 2008/09 financial results.

Player Trading

A profit of £26.5 million (2007 – £18.5 million) from the sale of player registrations means that overall player trading produced a surplus of £5.2 million for the year (2007 – £0.2 million).

The main contributions to the disposal profit came from the sales of Thierry Henry, Freddie Ljungberg, Jose Antonio Reyes, Jeremie Aliadiere and Lassana Diarra which I believe highlights the fact that selling players at a profit is a by-product of Arsène Wenger’s astute management of the long-term development of the playing squad rather than an objective in itself. The terms of certain past sales mean that we continue to gain additional fees as a number of former players, such as Fabrice Muamba and David Bentley, achieve success in their post-Arsenal careers.

The Board’s policy continues to be that the proceeds of any player sales are always made available for re-investment back into the development of the team.

Finance Charges

The net interest charge for the year was £17.0 million (2007 – £15.3 million of ordinary charges and £21.4 million of exceptional charges). The increase reflects a full year’s charge on the stadium financing bonds, whereas in the previous year interest costs on this debt were capitalised up to the date of Emirates Stadium’s opening.

Finance costs of £5.0 million attributable to bank loans drawn specifically to fund property development expenditure during the year were capitalised within property development stocks.

Profit After Tax

The tax charge for the period was £10.9 million (2007 – £2.8 million). The effective rate of tax at 29.8% is impacted by the change in the rate of corporation tax from 30% to 28% for the last two months of the financial year and the conversion of the Group’s deferred tax provisions to this new rate of tax.

The retained profit for the year of £25.7 million (2007 – £2.8 million) was the Group’s second best ever financial result, bettered only by 2000/01 which was the year in which the Group reported exceptional profits from the part sale of Arsenal.com.

Cash Flow and Treasury

In order to properly review the Group’s cash flow for the year it is necessary to separate out the investment in property development and the related bank funding (see Table 3).

The positive cash flow for the year means that the Group had total cash balances of £93.3 million at 31 May 2008 (2007 – £73.9 million). Whilst this is clearly a very healthy position it should be remembered that there is a strong element of seasonality to the Group’s operational cash flow with season ticket renewals during May having a positive impact. In addition, balances of £31.5 million (2007 – £32.9 million) within the total cash position are debt service bank deposits which form part of the security for the Group’s listed bonds and the use of these deposits is restricted.

As mentioned above the Group’s overall net debt position rose to an overall £318.1 million (2007 – £268.2 million) and this was an expected increase given the use of bank debt to fund the construction works at Highbury Square….

Source: Arsenal Football Club. Used with permission.

The largest part of the Group’s debt is £250.2 million of long-term bonds with fixed rates of interest which have been in place since the refinancing exercise completed in the summer of 2006. A repayment of £5.0 million was made during the year in accordance with the terms of the bonds. The annual debt service costs for these bonds, including repayment of capital, is approximately £20 million and this figure must always be considered in the context of the significantly increased levels of football operating profit which the Group is achieving following the move to Emirates Stadium.

The main element of property development financing is the Highbury Square loan balance which was £133.5 million at the balance sheet date (2007 – £62.9 million). This loan, which is repayable from the sale proceeds of the development, is ring-fenced from the Group’s football activities and the related financing arrangements. Some 73% of this loan balance is at fixed rate by virtue of interest rate swaps in place for that purpose.

The Group’s debt facilities are expected to be sufficient to fund the completion of its property development projects for the foreseeable future and its operations generally for the long-term. These facilities were put in place before the start of the 2007/08 financial year and, accordingly, the Group has not, to date, experienced any significant direct adverse impact on its financing arrangements as a result of the “credit crunch” and the related turbulence in the financial markets.

Risks and Uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group’s long term performance. These risks and uncertainties are monitored by the Board on a regular basis.

Football

The Group’s income is affected by the performance and popularity of the first team. Significant sources of revenue are derived from strong performances in the Premier League, FA Cup and UEFA Champions League (or UEFA Cup) and the level of income will vary dependent upon the team’s participation and performance in these competitions. A significant amount of the Group’s income is derived from ticket sales to individual and corporate supporters who attend matches involving the first team at Emirates Stadium and elsewhere. The level of attendance may be influenced by a number of factors including the level of success of the team, admission prices, broadcasting coverage and general economic conditions. Demand for tickets is currently very high and all season tickets, including approximately 7,000 premium Club Level seats and 150 executive boxes have been sold out for the 2008/09 season. The Club currently has in excess of 47,000 supporters on its waiting list for season tickets.

The first team’s success is significantly influenced by the performance of members of the playing staff and the performance of the football management team and, accordingly, the ability to attract and retain the highest quality coaching and playing staff is important to the Group’s business prospects. The Group insures the members of its first team squad but such insurances may not be sufficient to mitigate all financial loss, such as fees from a potential transfer, in the event of a serious injury. The Group enters into employment contracts with each of its key personnel with a view to securing their services for the term of the contract. However, the Group operates in a highly competitive market in both domestic and European competition and retention of personnel cannot be guaranteed. In addition, the activities of the Group’s main competitors can determine trends for market rates for transfers and wages that the Group may be required to follow in order to maintain the strength of its first team squad.

The Club is regulated by the rules of the FA, Premier League, UEFA and FIFA. Any change to FA, Premier League, UEFA and FIFA regulations in future could have an impact on the Group as the regulations cover areas such as: the format of competitions, the division of broadcasting income, the eligibility of players and the operation of the transfer market. The Group monitors its compliance with all applicable rules and regulations on a continuous basis and also monitors and considers the impact of any potential changes.

Commercial Relationship

The Group derives a significant amount of revenue from sponsorship and other commercial relationships. The Group aims to enter into long term arrangements with its key commercial partners thus securing certainty over the main components of its commercial income in the medium term. The Group’s most important commercial contracts are: naming rights and shirt sponsorship contracts with Emirates Airline which expire in 2021 and 2014 respectively, a kit sponsorship contract with Nike which expires in 2011 and a catering contract with Delaware North which expires in 2026.

Source: Arsenal Football Club. Used with permission.

Broadcasting and certain other revenues are derived from contracts which are currently centrally negotiated by the Premier League and, in respect of European competition, by UEFA; the Group does not have any direct influence, alone, on the outcome of the relevant contract negotiations. The Premier League currently sells its TV rights on a 3 year contract basis and 2007/08 was the first year of a new contract.

Foreign Exchange and Treasury

The Group enters into a number of transactions, relating mainly to its participation in European competition and player transfers, which create exposure to movements in foreign exchange. The Group monitors this foreign exchange exposure on a continuous basis and has facilities in place to hedge any significant exposure in its currency receivables and payables.

The Group’s policy is to eliminate, as far as possible, all of the interest rate risk which attaches to its outstanding debt finance balances. Where debt balances are subject to floating rates of interest the Group enters into interest rate swaps which serve to fix the rate of interest.

The financing arrangements for the Group’s football and property business segments operate independently of each other. As a consequence, the transfer of cash between the two business segments can, in general, only occur in circumstances governed by the terms of the applicable bank/debt finance arrangements. In addition, certain minimum bank deposits are required to be maintained as part of the security for the Group’s bank/debt finance balances. The Group monitors its compliance with the applicable terms of its bank/debt finance arrangements on a continuous basis and regularly reviews its forecast cash flow to ensure that both its business segments hold an appropriate level of bank funds at all times.

Where income from commercial contracts or other material transactions, such as player transfers, is receivable on an installment basis then the Group will usually seek to obtain an appropriate bank or similar guarantee.

Property

The Group expects to derive income from the sale of certain property development sites over the next two years—the main element of this being the sale of some 680 private residential apartments at Highbury Square. The achievement of these sales may be affected by the current downturn in the UK property market and the difficult conditions in the mortgage lending sector. The Group is monitoring the position closely.

The bank facilities which the Group has used to fund the Highbury Square development are ring-fenced from the financing of the football segment of the business. The final profits and cash to be released to the Club on completion of these property developments has not been budgeted by the Club and will be treated as a “bonus” when received—accordingly, there is no commitment to use any such profits and cash at any specific time for any specific purpose.

Outlook

The Group has made a sound start to the new financial year. We have made a modest ticket price increase for season 2008/09 (2.8% on a weighted average basis) following which general admission and Club Tier season ticket renewals have once again been at the maximum level.

The second staging of the Emirates Cup has again proved to be a great commercial success with near capacity attendances to both days of the competition.

The sales of Alexander Hleb, Justin Hoyte and a sell-on share receivable on David Bentley’s transfer from Blackburn will make a significant contribution to the profits to be reported on the sale of player registrations.

The most significant aspect of the 2008/09 results will be the sale completions to be reported on Highbury Square. Legal completions from the first phase of 65 apartments, released at the end of July, have so far generated sales proceeds of £18.7 million. We will continue to monitor sales closely over the coming months as the construction of more units is completed ready for release. The sales proceeds will be used to fund construction costs to complete and to repay the Highbury Square loan facility and this will result in a reduction in the Group’s overall net debt.

In conclusion, both the property and football business segments start the 2008/09 year in a strong financial position, providing the sound financial platform which underpins our long-term strategy for the Club.

PLAYER MARKETS

THE IMPACT OF THE FLAT WORLD ON PLAYER TRANSFERS IN MAJOR LEAGUE BASEBALL

Scott R. Rosner and William T. Conroy

I.   INTRODUCTION

Globalization has indeed made the world “flat,” and the sports industry is no exception. In particular, the exporting of the business of United States-based professional sports leagues is both desirable and irreversible. Throughout the last two decades, the leagues have attempted with varying degrees of success to create global product markets. The impact of this internationalization can be seen everywhere—from the success of the World Baseball Classic in 2006 and 2009 to the exploding popularity that has led the National Basketball Association (“NBA”) to announce the creation of NBA China, a Chinese subsidiary league in partnership with Disney and other local partners. Perhaps the most significant of these effects, however, is that the current player pool for most of the top professional sports leagues is no longer domestic in nature. This sea change is well underway, with international players comprising significant portions of current professional sports rosters across the sporting spectrum. There can be no doubt that the labor markets in professional sports are now global in nature. Partly as a result of domestic market saturation, and partly as a result of the sports leagues attempting to become export products, individual clubs are forced to look—and think—globally when seeking top-notch talent. The importation of playing talent into the United States-based professional sports leagues facilitates the exportation of these leagues, as fan affinity in a foreign market is likely to be greater when there is a player from that market in the league. The hope is that the establishment of global labor markets will help the leagues create global product markets.

Major League Baseball (“MLB”) has a unique approach to this global labor scene. This approach is evidenced by the system that was created to transfer players’ rights from Japanese professional baseball (known as Nippon Professional Baseball [“NPB”]) to MLB teams following the departures of several high profile players in the mid-1990’s. Over the last 13 years, a system has evolved whereby the transfer of players from the NPB to MLB is governed by a jointly developed process that allows owners of NPB teams to receive compensation for their less experienced players who are still under contract but desire to leave for MLB before they are eligible for free agency in NPB. When a player in the Japanese professional baseball leagues is under contract with a team in NPB and wishes to sign a contract with an MLB team, he must go through the “posting process.” High-profile players such as Ichiro Suzuki and Daisuke Matsuzaka have joined MLB through this system; as such, there has been an understandable amount of public attention directed towards the posting process. While significant media attention was focused on the staggering amount the Boston Red Sox paid for the right to negotiate with Matsuzaka—$51,111,111.11—there has been scant attention paid to the suboptimal nature of the posting process for at least two of the three stakeholders. The issue of player transfers is pressing in the National Hockey League (“NHL”) as well, which means that two of the three North American-based professional sports leagues that draw from a global player pool are having issues regarding their player transfer system; the National Football League has struggled to establish an international pipeline for player talent. Furthermore, there are several alternatives to the posting process that can address the suboptimality of the status quo. A more efficient posting process is important for historical reasons as well, with the Negro Leagues serving as an example of how an inadequate player transfer system can help lead to the demise of a league.

II.   THE POSTING PROCESS

A.   History

A brief examination of the history of the posting process, and the events that led to its development, is essential for understanding why the process exists in its current form. The movement of three players—Hideo Nomo, Hideki Irabu, and Alfonso Soriano—from NPB to MLB spurred the two leagues to complete a formal arrangement for the transfer of players. In short, the posting system was devised to try to keep Japanese players from leaving NPB in the first place and to provide compensation to the NPB teams in the event that they did.

The first Japanese player to appear in MLB was Masanori Murakami. His debut was the product of an exchange program between the Nankai Hawks and the San Francisco Giants, whereby Nankai sent three players to play in the Giants’ minor league system in 1964. Murakami performed so well in the minor leagues that the Giants promoted him to the major leagues later that season, where his continued strong performance led the Giants to seek his return for the 1965 season. While Nankai originally balked at the prospect of doing so, they ultimately capitulated on the condition that Murakami be permanently returned after the season. Despite a successful 1965 season, he was returned to the Japanese team. This led to a “Gentlemen’s Agreement” between MLB and NPB in 1967, whereby MLB teams agreed that they would not sign NPB players unless they were free agents. Though a number of American players pursued careers in NPB (typically after their MLB careers were over), no Japanese players moved to MLB until Hideo Nomo left the Kintetsu Buffaloes for the Los Angeles Dodgers in 1995.

Nomo was the first bona fide star to move to MLB from the Japanese professional leagues. In 1995, he used a legal technicality in his NPB contract in order to “retire” from his NPB team at the age of 26 so that he could avoid the free agency restrictions of his native baseball league. Nomo’s retirement allowed him to sign a three-year, $4.3 million contract with the Los Angeles Dodgers, a lucrative move that understandably had a profound impact on both the MLB and NPB franchise owners.

More significant than the Nomo retirement, at least in terms of providing the impetus for an agreement for the transfer of players from NPB to MLB, was the movement of star pitcher Hideki Irabu from the Chiba Lotte Marines to the New York Yankees. Prior to the existence of the formal posting process, the relationship between NPB teams and MLB teams was done on an ad hoc basis, with the parties sometimes developing “working agreements” between individual clubs. At the time, Irabu’s Japanese team, the Marines, had developed a working agreement with the San Diego Padres of MLB; the working agreement gave the Padres the right to buy the exclusive right to negotiate a contract with Irabu—which the Padres did. However, Irabu was unaware of his sale until it was completed without his permission; he then declared his intention to only play for the New York Yankees, ultimately maintaining this stance until a trade was worked out between the Padres and Yankees before the 1997 season. Again, the transfer of the Japanese player, and the way in which the process transpired, raised sufficient concern on both sides of the Pacific to move the two leagues closer to a formal arrangement.

Alfonso Soriano was the protagonist in the final player transfer to occur prior to the adoption of the posting system. In 1998, following the inability of Soriano to reach agreement on a contract with his NPB club, Hiroshima Toyo Carp, he attempted to retire, much in the same way Nomo had done three years earlier. But NPB had closed the loophole that Nomo had exploited previously, and the Japanese league believed that it had exclusive rights to Soriano. Over the protests, threats and objections of the NPB, Soriano signed a contract with the New York Yankees after a declaration by the MLB Commissioner’s Office that Soriano was, in fact, a free agent capable of signing with any team he desired. For the NPB, this was a clear-cut sign that a formal agreement between NPB and MLB was the only way to stem the tide of wholesale player defections to MLB.

B.   Description of the Posting System

There are three primary actors in the posting process who have a direct stake in the resulting outcome—the NPB team that “transfers” the player, the MLB team to whom the player is transferred, and the player himself. (There is potentially a fourth actor, the player’s agent, but because the agent’s interests are aligned with the player’s in the posting scenario, we consider just the player here.) Japanese players do not become international free agents until after they have played nine years in NPB; after their ninth year, they are free to sign a contract with any club, including those in MLB, without any transfer fee paid to the former NPB club. Conversely, any Japanese player who has not yet attained nine years of experience in NPB may not sign with an MLB team, because that player has not yet attained international free agent status under NPB rules. However, a player with less than nine years of experience who wishes to sign with a MLB team may ask his Japanese team to “post” him. If the NPB team agrees to post the player, it notifies the office of the NPB Commissioner, who then notifies the MLB Commissioner, at which point all 30 MLB teams are notified that the player is available.

Once individual MLB teams have been notified that the player has been posted, a four-day period begins during which MLB teams compete in a sealed-bid auction for the exclusive right to negotiate a contract with the posted player. After the expiration of the four-day period, all bids are collected by the MLB Commissioner’s office and opened. The NPB team is then notified of the amount of the highest bid (but not the identity of the MLB team) and has a four-day period to decide whether or not the winning bid will be accepted, though in each situation where a bid has been submitted by a MLB team, the highest bid has always been accepted by the NPB team. The amount of the bid is considered the “transfer fee” associated with the movement of the player. Following the acceptance of the highest bid by the NPB club, the MLB team that won the auction then has 30 days to negotiate a contract with the player. Should the contract negotiation yield a signed deal, the amount of the transfer fee is then paid to the NPB team by the MLB team, and the player becomes a member of the MLB team. If the player and the MLB team do not come to an agreement, however, the NPB team does not receive the transfer fee and the player returns to the NPB under the terms of his original contract with the club. It should be noted that the posting system is unilateral in nature, as it does not apply to MLB players seeking employment in Japan.

Table 5 is a complete representation of each player that has been successfully posted, along with the MLB team that “won” the auction and the price that team paid for the player.

An example of the posting process is illustrative. Matsuzaka, a star pitcher for the Seibu Lions, had established himself as the premier Japanese professional baseball pitcher. The Boston Red Sox outbid both the New York Mets (who bid a reported $39 million) and the New York Yankees (who bid $33 million) by determining that the right to negotiate with Matsuzaka was worth an unprecedented $51.1 million. Following the announcement of the Red Sox’ winning bid, the team then had 30 days during which it could negotiate a player contract with Matsuzaka, with the Seibu Lions receiving the $51.1M upon the signing of the contract between the pitcher and the Red Sox. Ultimately, the Red Sox and Matsuzaka agreed upon a 6-year, $52M contract, putting the total expenditures by the Red Sox to $103.1M for one player.

Table 5   Posting Fees Paid by MLB

Source: Modified from Baseball-Reference.com, Posting System, http://www.baseball-reference.com/bpv/index.php?title=Posting_system. Previously published in University of Pennsylvania Journal of Business Law. Used with permission.

III.   THE SUBOPTIMALITIES OF THE POSTING PROCESS

There are several reasons why the posting process is suboptimal, including: 1) it creates windfall profits for the NPB transfer team; 2) the first-price-sealed-bid auction inflates winning bids by MLB teams; 3) individual players are unable to realize their full market value in contract negotiations; 4) individual players have no ability to choose the MLB teams for which they play; 5) the system could adversely affect the competitive balance of MLB teams; and 6) the loss of marquee players negatively impacts NPB as a league. This section is divided into five sub-sections that each address the posting process and its impact on the actors involved. These sections also explore whether recent developments will alter the relationship between MLB and NPB.

[Ed. Note: Authors’ discussion of the windfall for NPB clubs and lost player value and freedom of choice are omitted.]

….

C.   The Impact on MLB Competitive Balance

If large-revenue MLB teams are the only teams with the financial means to successfully bid on Japanese players, especially when the posting fees for certain players reach into the $50 million territory, only certain teams will have access to this market for players. Of the 10 players who have been successfully posted and transferred to MLB teams, only five have been transferred to large-revenue teams. However, larger revenue clubs have paid the four largest fees, suggesting that they have increased access to the most desirable talent. While the empirical evidence seems to suggest that this issue has not yet reached the level of being a problem requiring immediate attention, the manner in which the Matsuzaka auction was won raises concern for some. If only the largest revenue teams have access to NPB stars in the posting process, then there is at least the possibility that an unbalanced distribution of talent in MLB could result. This is particularly concerning because the posting fee paid by the MLB team does not count against the team’s luxury tax number, and thus, is not subject to a luxury tax penalty. Had the Red Sox signed a free agent pitcher from another team within MLB for the $103.1 million they paid for Matsuzaka, all $103.1 million of that contract would have been subject to the 40% luxury tax aimed at leveling the playing field in MLB. However, because $51.1 million of the money paid for Matsuzaka was allocated as a transfer fee (and not subject to the luxury tax), the Red Sox luxury tax figure for the Matsuzaka signing was only $52 million. This legal loophole circumvents precisely the problem that the luxury tax was aimed at fixing, and furthers the problem of competitive balance in MLB. Given that signing a player from NPB has less of a luxury tax impact than signing a similar MLB free agent, there is credible risk that only large-market MLB teams will have access to the posting process.

D.   The Impact on Japanese Baseball

While the NPB team that successfully posts a player receives short-term windfall profits by doing so, the additive loss of marquee players has a deleterious effect on the overall NPB league product and on the medium and long-term business of the posting team itself. The migration of Nomo to the Los Angeles Dodgers had a strong influence on both Japanese baseball and MLB. Though Nomo was initially treated as a pariah when he left NPB for America, fans grew to accept his departure and tuned in en masse as the NHK public television network broadcast his games live throughout Japan. His success with the Dodgers increased Japanese interest in MLB and created opportunities for future Japanese players to play in the United States. Since Nomo’s 1995 debut, 36 Japanese players have played in MLB regular season games, including 16 who were on MLB Opening Day rosters in 2008.

Legendary Japanese baseball player Sadaharu Oh stated, “It’s been a great plus for baseball in Japan. Thanks to Nomo, kids in high school and junior high now have dreams of playing in M.L.B. Going to America and directly competing over there is a much better way to improve the level of play here than the good-will-type all-star exhibition series they used to hold when I was a player. Japan’s still inferior to America in baseball, but as more players aim to play over there, the gap will continue to close.” With respect to how Nomo created opportunities for Japanese players in the United States, Oh stated, “He showed that the level of Japanese baseball was not that different from the major leagues.”

Though Nomo’s successful MLB career positively impacted baseball in both Japan and the United States, Japanese baseball has suffered from the cumulative effect of the loss of a number of popular star players to MLB through both free agency and posting. Despite three NPB teams generating a combined $81.6 million by posting Matsuzaka, Igawa and Iwamura prior to the 2007 season, there was despair at the NPB offices over losing such popular players. There seems to be some recognition that the pursuit of the short-term revenues generated by posting could lead to a long-term decrease in revenues….

With NPB players leaving for the challenge of playing in MLB, as well as its increased salaries and better living and working conditions, NPB is likely to lose even more of its players to MLB in the future. The high fee paid for Matsuzaka and his potential for long-term MLB success is a portent for Japanese baseball, as the fact that the MVP of the Japanese national team left with great fanfare for a successful MLB team that paid him nearly what the top MLB free agent pitchers in the market secured is likely to lead to more NPB players pursuing careers in MLB, which will only further the uncertainty surrounding the future of NPB. This is heightened by the fact that there is no longer a stigma attached to players leaving NPB and fans are okay with it, as they can still watch their favorite Japanese players play on television or online rather than in person. In fact, most Japanese fans are proud of these transfers’ accomplishments and identify with them, rather than feeling resentment. It is simply not practical to expect that MLB teams will cease their pursuit of Japanese players, just as it was impractical to think that Japanese automakers would not pursue the U.S. market. To that end, MLB scouts have descended upon Japan’s high schools, colleges and leagues in search of talent. Japanese baseball officials are hopeful that a role model effect might be possible, with more of the best young Japanese athletes choosing to play baseball because of the success of the Japanese players in MLB.

The NPB team receives a windfall profit when it successfully posts one of its players. However, this short-term cash infusion may be offset by the subsequent impact of the loss of the player on the team’s on-field performance, attendance, public relations and television ratings—all of which could have a deleterious effect on the team’s revenues in the medium to long-term. It is reasonable to expect that an NPB team would be negatively impacted in both winning percentage and attendance when a player is lost through the posting system, as the team is losing what is typically a high-caliber player who helped the team win games and served as a gate attraction for the fan base. The economic benefits that NPB clubs receive from the transfer fees are not necessarily conducive to helping their future on-field success. Japanese teams tend to be more focused on the short-term than on the long-term because of their corporate ownership. As a result, the posting fees received by the teams are either filtered back to the parent corporation or are intended to provide the team with a needed infusion of capital to reduce what is usually a significant cash shortfall; typically, the posting fee is not intended to be used to sign another player in the hope of replacing the lost production of the defected player. Unlike in MLB, where a team may seek to replace a star lost through free agency with another high caliber player, the limited movement of impact free agents seen in NPB makes it very difficult to replace a lost player even if the team and its parent corporation were so inclined.

A closer look at the impact of losing a posted player on the on-field performance of their former NPB team yields mixed results. It is difficult to estimate the impact of the loss of these players on the teams’ win-loss record, as there are clearly a number of other factors that affected their performance. Nonetheless, of the 10 players who have been successfully posted, the former team had a worse record in the season immediately after the posting on six occasions and a better record on four occasions. The impact of losing players through the posting system on the attendance of their former NPB teams is also difficult to judge with accuracy because of the lack of reporting standards prior to the 2005 season. Before 2005, NPB teams simply estimated attendance, and these estimates were typically much higher than the actual number of fans who appeared to be in the stadium. It is also reasonable to expect that the team would suffer in its public relations as a result of transferring a star performer. Much as American sports fans protest the loss of a favorite player to another team via free agency by voicing their anger at the team, a Japanese team that posts a player risks incurring the wrath of its fan base. If this manifests itself in fans staying away from the ballpark and not tuning into television broadcasts, then the team’s revenues will suffer. While fans tend to be forgiving over the occasional loss of a player, a team that regularly posts players will not be as fortunate.

Finally, the television ratings for NPB games have fallen significantly as an increasing number of its better players have moved to Major League Baseball. Meanwhile, MLB games are broadcast daily in Japan and MLB games receive detailed coverage in Japanese newspapers, with many Japanese fans following MLB closely. More people in Japan watched Matsuzaka pitch his Red Sox games in 2007—all of which were broadcast on NHK-BS satellite that is available in 13 million Japanese homes—than watched his televised Seibu Lions games in 2006 (which was estimated to be 100,000 fans). MLB has successfully monetized this increased interest, resulting in nearly 70 percent of MLB’s international revenue coming from Japan. MLB currently receives close to $100 million annually from the Japanese marketplace—slightly less than $50 million from Dentsu (a Japanese advertising agency) and NHK in television rights fees, and approximately $50 million additionally from licensing, sponsorships and advertising.

There is an element of belief that a continual draining of the talent pool in NPB will ultimately lead to the demise of NPB. It is far more likely, however, that with the appropriate reforms to its currently flawed operating structure, NPB will endure; there remains a strong fan interest in and passion for the league, it has a long history, it still produces numerous high quality players, and it may be the only country in the world where baseball is still the national sport. To retain their viability, however, the NPB and its teams need to alter their priorities and organization, as currently their structures are suboptimal for both business and player development.

NPB teams are operated in a manner that is quite different than their MLB counterparts. Rather than being stand alone companies, as are the vast majority of professional sports teams in MLB, Japanese baseball teams are part of larger corporations that use the team to market and sell their products. For example, the Hokkaido Nippon Ham Fighters are owned by the Nippon Ham meat processing company and exist primarily for the purpose of selling its products. The underlying rationale for using the baseball teams in this fashion is that Japanese companies believe it is cheaper to purchase and run the team and get in the media every day through the coverage of the games than it is to advertise on Japanese prime-time television. This is reflected in the selection and deployment of their managerial talent. Unlike their American counterparts, Japanese baseball club executives typically are not baseball experts; instead, they rotate through the team from the parent company’s headquarters. The league’s fragmented structure is reflected in its flat growth over the past two decades, with attendance hovering around 20 million per year and total league revenues at approximately $1 billion. Historically, two NPB teams have done well on and off the field; the Yomiuri Giants and Hanshin Tigers both draw 3 million fans annually and are estimated to generate ¥20 billion annually, primarily through gate receipts and television rights fees. The teams hand their profits over to their parent companies. Most other teams suffer operating losses even when successful on the field. For example, the Nippon Ham Fighters won the title in 2006, drew 1,635,410 fans and still needed a multimillion dollar bailout from its parent corporation. The Chiba Lotte Marines were estimated to have lost over ¥2 billion in 2005 when it won the title and the Chunichi Dragons won the Central League pennant in both 2005 and 2006, but were estimated to have lost more than ¥10 billion during that period. The decentralized league structure—where there is little cooperation between the teams, no league-wide media, marketing or licensing contracts, and no revenue sharing—results in stark contrasts between revenues generated by individual teams. The revenue disparity is evidenced by television rights deals: Yomiuri sold its 2006 television rights fees for ¥100 million per game and Hanshin for ¥50 million, but Chunichi did the same for only ¥10 million, Nippon Ham for ¥3.8 million, Seibu Lions for ¥700,000 and Chiba Lotte a mere ¥150,000. Critics place the blame for this anachronistic league business model on the Yomiuri Corporation’s unwillingness to cede control as the most powerful team in NPB.

Another area in which there is a significant difference between MLB and NPB is in its playing facilities. Whereas most MLB teams either own their own playing facilities or have very favorable lease agreements that allow them to control most of the revenue generated by the facility, NPB teams generally do not own their stadiums (though Seibu does and it still loses money) or control ancillary revenue streams such as concessions and sponsorships and must pay hefty rents for their facilities. NPB teams are slowly beginning to become more focused on the business-side of the game. For example, following the lead of the Softbank Hawks, all of the NPB’s Pacific League teams are now streaming its home games live over the internet for free, the Chiba Lotte Marines are running pre- and post-game promotions and the league adopted interleague play in 2005 and postseason playoffs leading up to the Japan Series in 2007. In addition, mimicking the longstanding practice of the North American sports leagues that has allowed their media rights fees to grow exponentially over time, all of the Pacific League teams sold their broadcasting rights to a subsidiary of Softbank which in turn, negotiated with broadcasting stations to give licenses. Though the prices agreed in these deals are not made public, the Pacific League should see a long-term increase in its rights fees if the North American leagues are any indication. These efforts are all an attempt to generate more revenues from the on-field product.

There are also significant differences in player development between the Japanese and American professional leagues. Most MLB teams have six American minor league teams with a total of 125–150 players in the farm system at any one time, an arrangement that costs the average MLB team $20 million annually. American minor leaguers spend more time playing games than they do practicing. In contrast, there is comparatively little investment by the NPB teams’ parent companies in the minor league system, with each team having only 70 players in minor league system and just one farm team that plays close to 100 games each season. Japanese minor leaguers spend most of their time practicing rather than playing games. While it could be a reflection of different philosophies of player development, it is likely that the NPB parent companies do not want to spend the money on their minor league systems that their American counterparts do. This has a huge impact on player development in Japan and is manifested in a dearth of young stars available to replace players who leave Japan for MLB.

Overall, it appears that NPB is in need of a revamped structure where the clubs are treated as profit-oriented businesses in and of themselves and the league operations are more centralized. In addition, although it is highly likely that the top Japanese players will continue to leave for MLB, if Japan can improve its player development system and NPB its minor leagues so as to develop more highly skilled players, and perhaps complementing them with high quality players from other Asian countries like Taiwan and South Korea, then Japanese culture should maintain its passion for baseball and NPB will be well-positioned to monetize its fan base and remain a viable business. This is reminiscent of the many successful domestic soccer leagues globally; while they cannot compete with the top European leagues in England, Spain, Italy, Germany and France, they remain financially viable nonetheless.

[Ed. Note: Authors’ discussion of the possible Tazawa effect omitted.]

….

IV.   ALTERNATIVE METHODS OF INTERNATIONAL PLAYER TRANSFER

Various player transfer systems exist to facilitate the global movement of athletes across professional sports leagues. The following describes the various systems for the transfer of professional athletes in basketball, soccer and hockey, all of which are possible alternatives to the current MLB-NPB transfer system.

A.   Basketball

The ability for professional basketball players across the world to move to a team in another country is governed by the regulations set out by the world basketball governing body, the International Basketball Federation (“FIBA”). These standards are permissive and focus on facilitation of player transfer. In addition, international players may be drafted to American leagues through an acquisition of rights system.

The governing regulations state that “any basketball player shall have the right to play basketball in any country in the world, within the limits established by [FIBA]….”¹ The process by which this occurs is fairly straightforward. A player seeking transfer to a team in a foreign country must receive a “letter of clearance” from the basketball national governing body in his home country. This letter of clearance details the player’s playing history, but also includes an attestation by the player that he has fulfilled “all contractual obligations stipulated in any and all contracts between myself and any team….”² Once a player receives the letter of clearance, the only way that the letter can be rejected by the national governing body is if that individual player has not fulfilled his contractual obligations to his transferee team. In essence, the letter of clearance is the final step towards a successful transfer of the player to a team in another country.

As it pertains to the National Basketball Association (“NBA”), the rights to international players may be acquired through the annual NBA Draft, an option not available to MLB teams wishing to acquire players from NPB or much of the rest of the world. This draft is a global one, where individual NBA teams are free to draft any player who meets the requirements of Article X of the NBA Collective Bargaining Agreement. Once the NBA team has drafted the rights to the player, that team has exclusive negotiation rights with that player for a period of one year.

In both of the acquisition situations—where a player requests a letter of clearance to join a foreign team, or where that player is drafted by an NBA team (after acquiring the letter of clearance)—the individual player is the party negotiating with his own team for his release from the contract. Perhaps the highest profile international transfer to date is that of Yao Ming. The Chinese star was drafted with the No. 1 pick in 2002 by the Houston Rockets, at which time the Rockets began discussions with Yao’s Chinese team for his contractual release (discussions also included the Chinese government, because of Yao’s required playing service for the Chinese national team). Ultimately the Rockets paid Yao’s former team a $350,000 transfer fee for the ability to sign Yao to a NBA playing contract. Unlike the MLB–NPB transfer agreement, where the acquiring team is bidding for the rights to negotiate with the player (which operates as the buy-out provision of the player’s contract), the FIBA system allows for the two teams to directly negotiate with one another, a more efficient process than the first-price bidding. The player transferred to the NBA is then free to negotiate a playing contract within the confines of the NBA’s collective bargaining agreement with the team possessing his rights.

B.   Hockey

1.   Background

The National Hockey League (“NHL”) workforce was almost exclusively Canadian until the 1972–73 season when a group of Swedish players broke through and became regular contributors to their teams. The initial influx of European players was limited to Swedes and Finns for approximately 15 years until the fall of the Iron Curtain, when Russian, Czech and Slovakian players began to migrate to the NHL. In the 2007–2008 season, over 33% of the players who appeared on an NHL roster hailed from outside of North America. For international hockey, then, the global labor market makes it critical that a transfer agreement be in place to regulate and control the flow of players across international leagues. The NHL, NHLPA, International Ice Hockey Federation (“IIHF”), and the national hockey federations of Sweden, Finland, Russia, Slovakia, Switzerland, Germany, and the Czech Republic reached their first Player Transfer Agreement in 2001. Covering the 2001–2004 playing seasons, this system regulated the transfer of players from one national league to another, although this transfer happened primarily when players moved from non-North American teams to teams within the NHL. The agreement provided that an NHL team would compensate its European counterpart whenever a European player was signed. This agreement led to NHL teams paying European teams $28.8 million for the right to sign 185 players during its term. This deal was followed by a two-year agreement that began after the conclusion of the 2004–05 NHL lockout. Notably, however, the Russian Ice Hockey Federation opted not to participate in the agreement due to its dissatisfaction with the amount of financial compensation owed by the NHL team upon signing the player, as well as the limitations on the number of players that could be signed and the deadline for signing such players. This two year deal was followed by an agreement that again excluded the Russian Federation and was scheduled to be in effect from 2007–11. However, the European nations exercised a contractual right to opt out of the deal after the 2007–08 season. As of this writing, no new agreement has been reached and, while there have been no negotiations of late with the Russian Federation, the other European nations are still in talks with the NHL.

2.   Problems with the Previous Transfer Agreement

The IIHF Player Transfer Agreement (along with the NHL Collective Bargaining Agreement) governed the global movement of players, with the specific intention of compensating non-NHL teams when their star players left for the riches of the NHL. Players who were not currently under contract to an IIHF team were free to sign with any NHL team that they wished (or any other team for that matter). If, however, an NHL team drafted a player while that player was under contract to an IIHF team (or while an IIHF team held the player’s rights) from a federation that had signed the Player Transfer Agreement and the NHL team ultimately signed that player, the NHL paid that country’s governing body a flat fee of $200,000 in exchange for that player being free to leave his contract and come to the NHL. This was in addition to the value of the playing contract that the player ultimately signed with the NHL club.

For many European nations and for the Russian Federation in particular, the problem with the previous system was the perceived inadequacy of the payment for players. The flat fee of $200,000 was perceived as insufficient to compensate the former club for the loss of particularly talented star players like Evgeni Malkin and Alexander Ovechkin. Russian Ice Hockey Federation president Vladislav Tretiak stated, “Russian teams would rather lose players to the NHL for nothing than sign a contract that pays them what they consider a disrespectful amount of money.” Russia did not sign either the 2005–07 or 2007–11 IIHF–NHL Player Transfer Agreements; as a result, neither the NHL, nor the Russian Federation, nor the players, were bound by the terms of the Transfer Agreement when a Russian player was drafted by an NHL team. Neither Malkin’s (2nd overall pick in 2004 NHL Draft) nor Ovechkin’s (1st overall pick in 2004 NHL Draft) former teams received any compensation when their star players left for the NHL; instead, the players abruptly left their former employers and the NHL did not have to compensate their former teams for this loss because no agreement existed. The lack of Russian participation in the Player Transfer Agreement signaled a problem that is the complete opposite of that faced by the NPB and MLB: in hockey, the transferee team receives too little compensation.

Though the controversy centers primarily around compensation, the European federations have other issues surrounding the Player Transfer Agreement. First, the fact that many players signed away from the European leagues languish in the minors without ever making it to the NHL indicates that NHL clubs have been stockpiling young European players in the minor leagues (most European players signed by NHL teams do not ever play in the NHL). In 2007–08, there were 59 European players who signed with NHL teams; six played in the NHL that season, seven were returned to their European teams, and 46 played in North American minor leagues. The underlying reason for this stockpiling is likely a clause in the 2005 NHL–NHLPA collective bargaining agreement that requires European players to be signed within two years of being drafted lest the NHL team lose its rights. The European federations believe that this has a deleterious effect on player development, with young players leaving their home environments prematurely and never reaching their potential. In addition, the European teams lose the services of young talented players who could become attractions in their home countries instead of playing in North American minor leagues for a few seasons. While a player under the age of 20 who was under contract to an IIHF team had to be offered back to his European team under the 2007–11 agreement, the European federations would like to increase this age requirement to 22. The second issue for the European federations involves the transfer deadline for players to sign with NHL teams. The June 15 deadline that existed under the previous agreement made it somewhat difficult for European teams that lost players to NHL clubs to replace those players for the upcoming season; thus, they would like to see an earlier deadline that allows them ample time to find a replacement. The third issue for the European federations is related to compensation. Transfer fees under the previous agreements were paid in American dollars, but the decline of the dollar against the Euro and other European currencies means that the $200,000 fees that were being paid were worth substantially less in 2007 than they were in 2005. Given these concerns, the European federations are in search of corrective measures.

3.   Implications of the Absence of a Player Transfer Agreement

Fifty-one Russians played in the NHL in 2005–06 while the rights to 41 Russian players were transferred to NHL teams under the 2001–04 Player Transfer Agreement. In addition, 13 Russian players signed contracts with NHL teams during the 2005–07 agreement; however, the exclusion of the Russian federation from this agreement made these transfers ‘free’—that is, NHL teams paid no compensation to their Russian counterparts for signing their players instead of paying them a combined $2.6 million. The expiration of the most recent Player Transfer Agreement means all European hockey teams now face the potential loss of their players to NHL teams without compensation. If there was a duplication of the 59 players signed by NHL teams in 2007–08, this would save NHL teams $11.8 million (59 players at $200,000 per player). There also exists the very real possibility of the unregulated landscape leading to a lack of mutual respect of contracts—that is, teams signing (or “stealing”) players who have valid and binding contracts with other teams. This has already occurred with a handful of players signed by Russian teams despite the existence of valid contracts with NHL teams. Most notably, Alexander Radulov of the NHL’s Nashville Predators signed a deal with Salavat Yulyev Ufa of the Russian Kontinental Hockey League (KHL) in 2008 despite the fact that his contract with Nashville did not expire until 2009. An IIHF investigation found the existence of a valid contract with Nashville but also determined that the IIHF was powerless under its bylaws and in the absence of a valid player transfer agreement between the NHL and the Russian Federation to sanction the player from playing hockey in a domestic league. While the Russian Federation would prefer a FIFA-styled system requiring the NHL teams to negotiate directly with Russian teams over the terms of player transfers, the NHL has understandably balked at such a request. NHL teams are prevented from negotiating directly with European clubs by the terms of its Collective Bargaining Agreement, which prevents circumvention of the deal under threat of severe penalties, including significant fines and loss of draft picks. Any prolonged period without a player transfer agreement could impact the number of European players selected in the NHL entry draft, with NHL teams reluctant to waste valuable draft picks on players who they may be unable to sign. This scenario has already manifested itself with Russian players: only 15 were selected in the 2006 NHL entry draft and nine in both the 2007 and 2008 versions, compared with 44 in 2000.

The long-term impact of the absence of a player transfer agreement will be felt by the NHL and its teams, the KHL and other European leagues, the various European federations and the players themselves. Though NHL teams are realizing the savings of a free transfer system in the near term, the long-term costs could be troublesome. If the migration of talented European players to the NHL slows dramatically—as has already happened with Russians—the drop-off in talent may be reflected in lower quality of play. This in turn could have a negative impact on league revenues, as fans might find NHL hockey less entertaining. Nonetheless, if the most talented Europeans continue to pursue their dreams of playing in the top hockey league in the world and earning the larger contracts that come with it, then this is unlikely to occur. Conversely, while the KHL and other European leagues would certainly lose out on the compensation received when their top players are lost, they could see an increase in their overall quality of play as more players stay at home. The increased quality of play would make the sport more attractive to consumers and revenues could be expected to increase. This is likely to be of some benefit to the KHL as it attempts to grow. Ultimately, if it is successful in the long term in developing young Russian players, can keep them at home, and can attract talented European players, the KHL could compete with the NHL to be the top hockey league in the world. Not surprisingly, the dispute between the NHL, KHL and the Russian Federation over the Player Transfer Agreement is really most likely about each league’s desire to create an increasingly global product market and realize the attendant revenue increase.

… Though the NHL has long attempted to tap the European market, it has increased these efforts substantially in recent years. In addition to playing regular season games in select cities, the NHL has established the Victoria Cup preseason competition and participates in a marketing partnership with the European Champions Hockey League. These efforts could be a prelude to the NHL investing in the Champions Hockey League and eventually placing franchises in Europe. Though still in its infancy, the KHL is similarly eyeing a future European expansion. Despite all of this activity, the players themselves could be the biggest losers in the long-term if a player transfer agreement does not come to fruition. Though salaries could increase due to the presence of multiple bidders for their services, players may suffer in that it could be far more difficult for them to be able to play for the team and in the league that they desire in the absence of a player transfer agreement that establishes a smooth process for doing so. In addition, there is currently no agreement for the NHL to allow its players to participate in the 2014 Olympics in Sochi, Russia as they have done since the Nagano Games in 1998. The Russian Federation would obviously greatly prefer that the best players be available to participate in what will be one of the showcase events of the Games. However, given the tenuous relationship between the NHL, KHL and the Russian Federation, NHL player participation in the 2014 Olympic tournament is anything but certain. It is clear that a ‘Cold War’ in international hockey leads to multilateral losses in the long-term and must be remedied.

C.   Union of European Football Associations (UEFA)

There are few similarities and numerous differences between the European soccer transfer system and the baseball posting system. The transfer of European soccer players from one team to another closely resembles a free market system and is more efficient than any of the aforementioned systems. In the Union of European Football Associations (“UEFA”) the transferor team is permitted to negotiate directly with the transferee team, a direct business-to-business negotiation. Although there are restrictions governing which players may be transferred, the fact that more than one transferor team can solicit the services of the individual player allows for the possibility of an ascending price auction.

In similar fashion to the MLB–NPB posting process, following the conclusion of the playing season, individual teams produce a list of players who are available for transfer to other clubs. These players are currently under contract to the listing club and without being transferred would be forced to play out the duration of their contracts with their current club. Once the player is eligible to be transferred (i.e. his name has been listed by his current club), and there is another team interested in acquiring the player, then the two teams can begin negotiating the transfer price of the player. The transfer fee associated with the movement of a player is preliminarily set by the listing team, with the final transfer value the product of direct negotiation.

An interesting component of the UEFA system also addresses the apprehension felt by the Europeans under the former NHL-IIHF agreement: compensation for the training of younger players. A specific formula is in place to determine extra compensation paid to a transferee team when a player under the age of 23 is being transferred. This formulaic compensation only applies to the transfer of players under this age threshold, but this system is in place in order to compensate the typically lower revenue clubs for the development, and subsequent loss via transfer, of star players to typically higher revenue teams. The loss of promising young players who tend to be less expensive than older players of comparable skill, especially if they have not yet attained free agency, can promote competitive imbalance where the transferee teams are typically smaller, lower revenue clubs. Thus, the extra payment for players under 23 seeks to remedy the perceived imbalance that could result from these transfers of players.

In the absence of the additional payment for younger players, teams are free to negotiate whatever transfer fee they can for their players. There are currently two windows during the year that teams can transfer players—one during the summer and another during the middle of the playing season. Traditionally, teams attached a transfer value to each of the players who had been listed for transfer, and this transfer value was the baseline for negotiations. Unlike the baseball transfer system, where the bidding teams must bid in secrecy in a sealed bid auction, UEFA’s system allows for more full market participation, because each of the interested teams will know the transfer price attached to the player by the listing team. Football teams can negotiate with an unlimited number of other teams over the transfer fee and the result is typically a winning bid that is minimally above the next highest bid. The inefficiencies of the MLB system, where the Red Sox bid almost $12 million more than the next highest bidder for Matsuzaka, would never occur in the UEFA system because the winner would theoretically bid just $1 more than the next highest bidder.

Much like the NBA system, the transferee team and the individual player are the beneficiaries of this type of transfer system. Though the transferee team loses the services of a player who has marketable skills, it nonetheless receives financial compensation for this loss. Given the alternative—that the player leaves via free agency after the expiration of his contract without any compensation being paid to his former team—receipt of payment for the transfer of the player is a positive outcome, even if it is not optimal. For the individual player, the transfer system is an excellent lever to increase financial outcomes. In the absence of the transfer mechanism (and free agency), a player whose rights were initially acquired by a small market team would be subject to the budgetary restraints of that team his whole career. The transfer system almost surely guarantees that a player will be moving to the team that most highly values his services; often this will be a larger, more highly monetized team with deeper pockets with which to pay its players.

There is also an argument to be made that the transfer system is better for the transferor team (the team paying the transfer fee) as well. If the transferor team is a large revenue club that is not particularly adept at developing its talent from within, and instead focuses its efforts on placing the highest quality team on the field at any given moment, then the transferor team may view the payment of the transfer fee as simply a cost of acquiring talent. Although signing a player as a 12-year old with potential is less expensive than signing a 23-year old superstar, for a large revenue team without the skill to develop that 12-year old, payment of the transfer fee may be the best option for fielding the best team.

V.   ALTERNATIVES TO THE CURRENT POSTING PROCESS

A.   Worldwide Draft

One alternative to the current posting process between NPB and MLB is to have a worldwide draft, an option that MLB is likely to pursue in the next collective bargaining negotiations with the MLBPA as the 2011 expiration of the current agreement approaches. In both the NBA and NHL, an individual team is allowed to draft players from any country in the world, so long as those players meet the criteria of that league’s collective bargaining agreement (i.e. minimum age requirements in both leagues). For MLB teams, however, the pool of players from which the teams can draft is confined to those players who are American citizens (or from American territories), Canadian citizens, or anyone who has attended either high school or college in the United States. Because the MLB teams are not allowed to draft foreign players, the resulting framework is a collection of individual agreements with foreign federations regarding the way in which foreign players are transferred to MLB teams. In most instances, MLB teams are free to sign players from foreign countries in a way that very closely approximates a free transfer system. These transfers, though, are subject to the agreements that MLB has in place with the governing federations, as is the case with both Japan and Korea.

Because of the suboptimality of the current posting process for the transfer of players from NPB to MLB, there is room for improvement in this system. A worldwide draft would change the economics of global talent acquisition, though it is unclear as to exactly how this would occur. Proponents of a worldwide draft believe that it would decrease prices paid for high quality international players and reduce signing bonuses by providing MLB teams with leverage over them, since the clubs would have exclusive negotiating rights with the player rather than allowing the player to engage the clubs in a competitive bidding situation. Those opposed to a worldwide draft believe that it would increase player development costs by eliminating the possibility of signing a large number of players to low cost contracts and would disincentivize teams from scouting internationally, since the players they develop would be subject to selection by another team. The reality is that both parties are correct to some degree. Prices for high-end talent would likely fall due to the exclusive nature of the drafting rights, but the finite (and likely decreased) number of draft rounds would still allow teams to mine baseball rich countries for undrafted talent at a reasonable price. A worldwide draft would also eliminate a great deal of the malfeasance surrounding the signing bonuses paid to high-end international players. The FBI has been investigating whether scouts and team executives have skimmed money off the top of the bonuses paid to Latin American prospects.

A worldwide draft, or at least a United States and Japan draft, would partially alleviate the suboptimality issues of the current system by allowing MLB teams to assign a quasi-market value to Japanese players whose services were desired by MLB teams. By drafting the rights to NPB players in a draft that includes American players as well, MLB teams would be able to assign a value to the NPB players that approximated the player’s market value by drafting more valuable players in earlier rounds and less desirable players in later rounds.

The movement of players between NPB and MLB would increase as a result of a worldwide draft because more players would move to MLB, or the MLB minor leagues, than under the current system. By allowing more players to move from one league to another, the artificial premium currently paid for Japanese players under the posting process would be reduced as more and more NPB players move across the Pacific. MLB teams, instead of having to pay upwards of $50 million just for the chance to negotiate with a NPB player, would instead be able to draft that player, a much more efficient and lower cost method of acquiring the rights. A draft where all 30 MLB teams are participating against one another to acquire the rights to the best talent allows clubs to understand the markets for individual players more fully, because the system of drafting players is public and each team knows the relative values placed on players by the drafting teams.

There are, however, several significant hurdles to overcome before such a system could be implemented, as both the MLBPA and the NPB owners would have concerns that would need to be addressed. In exchange for subjecting a larger number of future union members to a draft system (where an MLB team acquires the rights to that player for at least six years), the MLBPA would likely want the number of rounds of the draft shortened from its current maximum length of 50 rounds to something significantly shorter. This would allow the MLBPA to get more prospective players inked to contracts with teams that had demonstrated needs for that player, instead of the player being forced to sign with the team who drafted his rights; or, in the alternative, not sign with the drafting team and be eligible for the draft in the following year.

Even more significant are the concerns of the NPB team owners. Under the current posting process system, they are the constituency for whom the posting fee pays the greatest dividend; thus, the NPB owners are the group least likely to desire change from the status quo. While the short-term interests of the NPB are arguably maximized when MLB teams pay posting fees for the rights to NPB players, an argument can be made that having NPB players eligible for the MLB Draft is in the long-term best interests of the NPB. That is, subjecting NPB players to a worldwide draft in which MLB teams could draft the rights to Japanese players would almost surely guarantee long-term survival for the NPB—even if only as an unofficial minor league for MLB. The focus of the NPB, and many other professional leagues whose players were subject to the MLB Draft, could become more focused upon player development as a pseudo-minor league system. While the NPB owners may be reluctant to move to this type of model, it could be their best long-term option.

Undoubtedly, the long-term dilemma facing the NPB is a difficult one: try to forestall the internationalization of the game and risk losing even more star players to MLB, or accept the globalization of the game as reality and preserve a meaningful role. Though unlikely to occur, the greatest risk for the NPB is the possibility that it could lose its relevance following the continued loss of major talent to MLB. Unlike the Negro Leagues (which folded soon after integration led to most of the best black players moving to MLB), extinction is not as grave a risk for the NPB because of the geographic boundaries separating the two leagues. After integration of American baseball, many times the Negro League and MLB teams were competing in the same cities for the same fans, at a moment when the talent of the MLB teams was far superior. In the hypothetical situation of the best Japanese players moving en masse to MLB, the NPB is protected by the Pacific Ocean. Although technological advancements allow Japanese fans to watch Japanese players who are playing in MLB, this does not mean that those same Japanese fans can see their favorite players in person. If for no other reason than ensuring the continuation of the culturally important performance of live professional baseball in Japan, the NPB will still have a niche.

B.   Flat Fee Paid by MLB to NPB

The presence of a strong Japanese professional baseball league is of great benefit to MLB. Beyond serving as a pool of playing talent for MLB clubs, the league keeps the sport of baseball culturally relevant and popular in Japan. That which is good for baseball is good for MLB, especially in the ever-flattening global sports marketplace. The fact that the sport is ingrained into Japanese culture clearly makes the selling of American baseball in Japan a much easier task than it is in countries where the game does not have a fervent fan base. Just as the minor leagues serve a grassroots function for MLB within the United States, NPB allows fans to develop a passion for the sport and experience it in a way that is otherwise unavailable through the mere watching of televised games. It is easier to sell MLB—the top professional baseball league in the world—to a country that already has a strong interest in the sport. An NPB that is so weakened by player defections to America that fan interest in NPB dissipates is self-defeating for MLB, and the league must remain sensitive to this issue. To this end, it would make sense for MLB to pay NPB an annual fee to allow its players to be selected in the MLB Rule 4 draft. NPB could allocate this money amongst its teams however it wanted, with the desired result being that the teams reinvest the money back into player development budgets so as to maintain a high quality of play in the league. The annual fee paid by MLB could take several forms. It could be a fixed amount, or based on the number and placement of the players selected in the MLB draft, or a combination of both. It is worth noting that it may be difficult to convince the Japanese teams of the merits of this system because the corporate operating structure makes the owners less likely to reinvest these funds into the teams themselves and much more likely to extract the proceeds from the teams.

C.   Per-Player Transfer Fee to be Negotiated by Individual Stakeholders

A third way to address the suboptimality of the NPB–MLB posting process is to have the transferor and transferee teams negotiate directly with one another for the appropriate transfer fee, in a similar fashion to the current system in place in the NBA and UEFA. This system would ideally be layered upon a worldwide draft, such that the transferor team in MLB would have already drafted the rights to the individual player (giving the MLB team exclusive negotiating rights vis-à-vis other MLB teams) and would then engage in a direct, face-to-face negotiation with the player’s former team.

Unlike the posting process, where there is no direct negotiation between the NPB and MLB teams involved in the player transfer, this system would allow the two teams to bargain over terms of the transfer fee. In strict financial terms, the benefactors of this proposed system would be the MLB teams, because rather than overbidding for players as a result of the first-price-sealed-bid auction, the MLB team would only have to spend the precise value that the NPB team attached to the individual player in order to acquire the player’s rights. In the example of Matsuzaka and the Red Sox, instead of offering a transfer fee that was $12M more than the next highest bidder, the Red Sox would only have had to spend $1 more than the value which the Seibu Lions had attached to Matsuzaka. There is no definitive evidence to prove that $51.1 million, the price paid by the Red Sox to negotiate with Matsuzaka, was the precise value assigned by Seibu to Matsuzaka. In fact, many commentators, prior to the revelation that the Red Sox had bid $51.1 million to win the rights, had said the transfer fee would probably be between $20–30 million. There was little to no indication by any of the same commentators that a bid in the $20–30 million range would have been unacceptable to the Seibu Lions; in fact, because Matsuzaka would have become a free agent after the 2008 season, the Lions wanted to ensure that they received some compensation for Matsuzaka and probably would have accepted a bid substantially lower than $51.1 million. Had the Red Sox been able to directly negotiate with the Lions, after having drafted Matsuzaka’s rights, the dollar value of the transfer fee would have more accurately represented what the two sides felt Matsuzaka’s value really was. Instead of the Lions capturing the entire inefficiency of the posting process, the Red Sox could have reduced the inefficiencies within the transfer fee by bargaining directly with Seibu.

A potential concern regarding the implementation of the individually negotiated transfer fees is that the NPB team could dictate to which team the player is transferred by refusing to negotiate with certain MLB teams or declaring his price prospectively. For example, a NPB team seeking to prevent its star pitcher from going anywhere but the Red Sox or Mets could effectively put information into the marketplace that teams other than the Red Sox or Mets should abstain from drafting the rights to the pitcher, because the only two teams with which the NPB team would negotiate are the Red Sox or Mets. From an economic standpoint, it is in the best interest of individual NPB teams, and the Japanese leagues as a whole, to have the NPB players drafted exclusively by MLB teams with high payrolls because on the whole, the transfer fees paid by large revenue teams like the Red Sox, Mets and Yankees can be higher than those paid by smaller revenue clubs like the Tampa Bay Rays, Florida Marlins, Pittsburgh Pirates or Kansas City Royals. This unilateral power of NPB teams to dictate the teams to which their players are transferred could seriously undermine the efficacy of the draft and individually negotiated transfer fees to promote an efficient marketplace for the exchange of player services.

Should the individual NPB team be able to effectively control to which teams the Japanese player can be transferred, problems arise not only with the NPB team being unnecessarily powerful, but also with the implication this has for competitive balance in the MLB. Smaller revenue MLB clubs, like the aforementioned Rays, Marlins, Pirates or Royals will not benefit from the talents of NPB players in the same way that the larger revenue clubs could. The existence of the worldwide draft would be far more equitable in the distribution of talent across MLB teams, but this equity could be eviscerated if NPB teams (who have a direct financial incentive) strong arm negotiations so that only the large revenue teams have a realistic chance to sign NPB players.

D.   Per Player Transfer Fee; Uniform

A fourth alternative to the current posting system is to have a transfer agreement that mandates a fixed per-player transfer fee that is paid each time a player under contract with the NPB team is signed by a MLB club. A variation of this model was used by the NHL in its most recent Player Transfer Agreement with the European hockey federations (minus Russia)—for each player under contract that was signed by an NHL club, the transferee team received $200,000.

Whether or not this system contributed to the prevalence of international players in the NHL is uncertain, but one thing the uniform transfer fee certainly did was reduce the transaction costs of player movement to the NHL. Because all three parties knew that $200,000 was the amount the transferee team would receive each time one of their players under contract signed a deal with an NHL club, there was no negotiating that needed to take place. This uniform transfer fee was not the most desirable option for the transferee team; however, it was preferable to the current system where there is the possibility of the transferee team receiving no compensation for the loss of its star players.

The NHL team and transferred player both directly benefitted in instances where the $200,000 fee represented less than market value for the transfer of the player. This was typically in instances where the player being transferred was an international star, or where the player demonstrated the potential to be an NHL star. It was also these instances where the transfer is suboptimal for the transferee team. The NHL team, however, captured the inefficiencies of this transaction because it did not have to pay the “true” transfer value of the player and could instead acquire the rights to the player for less than what they would have had to pay in an open marketplace. If this system were applied to the NPB–MLB relationship, MLB teams would prefer the uniform transfer fee arrangement to both the current posting process and the individually negotiated transfer fee systems, because the uniform transfer fee system, like that used in the NHL, best allows the transferor team to protect its financial interests.

The individual players being transferred also prefer the uniform transfer fee to both the posting process and the individually negotiated transfer fee because it allows the player to capture more of his market value once the player and the transferor team begin contract negotiations. The value a team places on a player will be measured by the total amount of money that the team is willing to spend on the acquisition of the player (both transfer fee and eventual player contract), and if a team spends less than market value on the transfer fee, it follows that the team then has more money to spend on the eventual player contract. Matsuzaka was valued by the Red Sox at $103.1 million, and if the Red Sox paid less than $51.1 million on the transfer fee, there would have been more than $52 million left to negotiate an actual contract with the player. While Matsuzaka probably would not have captured his full $103.1 million value under the uniform player transfer fee, it is reasonable to surmise that the contract the pitcher ultimately received would have represented more than the 50% of the pitcher’s overall value that he received under the existing system.

The clear loser under this framework is the transferee team. Teams will not sign players whose value is less than the uniform transfer fee, and will instead focus on players whose value is significantly greater than the predetermined transfer fee amount. While there would undoubtedly be an increase in the overall number of transfers from NPB teams to MLB teams, the overall value of the transfer fees would not approximate the value under the current system. Assuming that the NHL transfer fee of $200,000 per player is adopted, it would take 250 player transfers for the Seibu Lions to get the same amount as they did under the Matsuzaka transfer!

In order for a uniform player transfer fee to be effective, the system must be implemented by all of the countries from which the foreign players are drawn. This has been a major issue faced by the IIHF and the implementation of the International Player Transfer Agreement. Because the Russian Federation was not party to the Agreement, the signing of players under contract with a Russian club by a NHL team did not require the payment of a transfer fee. The major stumbling block preventing the signing of the agreement by the Russians was that the compensation for their star players like Alex Ovechkin and Evgeni Malkin fell woefully short of the players’ actual value.

E.   Per Player Transfer Fee; Uniform with Classes of Players

A fifth alternative to the posting process is to utilize the uniform per player transfer fee, but have several different levels of transfer fees based upon the varying degrees of a player’s performance and skill set. Teams transferring star players would receive significantly more in transfer fees than would the team losing an older marginal player. Likewise, the transferor team would have to pay a premium for star players, which is precisely what would happen in the open marketplace. Although this system is not optimal for the player being transferred, it does represent a middle point on the continuum between strictly uniform transfer fees and the current posting process.

Formation of this system would require input from both the NPB and MLB on the classification of a player, particularly if the amount of the transfer fee is dependent upon a classification of the individual player’s skill level. First, a classification scheme would have to be created, with varying compensation figures attaching to the different types of players. For example, a star right handed pitcher like Matsuzaka would have a higher transfer fee than an older utility infielder. Placement of a player amongst the various levels, however, is where the creation of this system becomes most difficult. Therefore, it will be necessary to have an independent third-party, selected using criteria agreed upon by both the NPB and MLB, as the final decision maker on disagreements of player classification. Particularly with regards to determining the differences between star and superstar players, these classifications could have significant financial impacts.

This proposed system addresses the concerns a NPB team would have regarding the uniform player transfer fee; namely, that the team is not being compensated fairly for loss of its best players. With regards to the IIHF–NHL Transfer Agreement, lack of fair compensation for star players was the precise reason given by the Russian Federation for not being party to the agreement. While these levels of player transfer fees will be both over-inclusive and under-inclusive, this system would yield a more efficient transfer fee than would a uniform transfer fee. At the same time, the individual player’s ability to capture his true market value would again suffer as a result of the transferor team being forced to pay a sizeable portion of the player’s value to someone other than the player himself.

F.   Percentage System

Another proposal for reform of the current NPB–MLB transfer system is to have the transfer fee amount determined as a percentage of the ultimate contract signed by the player with the MLB team. Under this system, the NPB team would again only receive compensation if the player signed a contract with the MLB team, and that compensation would be subject to the market forces of direct contract negotiation. Unlike the current system, where only one team may negotiate with the NPB player, this system would allow for direct solicitation of the player’s services by any and all teams that desired the player’s services. The percentage payment to the NPB team would be in addition to, and not subtracted from, the final contract amount received by the player. The cost of signing the player, then, is the value of the contract plus the percentage-based transfer fee.

This proposed system is the most optimal for the player, and represents a far superior outcome than is achieved in the current posting process. Rather than have situations where MLB teams are calculating player values using dollar amounts paid to the NPB team and not the player (Matsuzaka received a contract for far less than his market value because the Red Sox incorporated the $51.1 million posting fee into his value), the player in this system would receive very near his market value. This is especially true if more than one team is permitted to negotiate with the player. But there is still the possibility that the ultimate contract received does not represent the player’s true market value, if teams incorporate the percentage fee into the amount it is willing to pay the player. Despite this possibility, this system does not impact the total amount of the compensation received by the player nearly as much as the current posting system, especially if the new system is implemented with multiple suitors permitted for each player.

NPB owners may not prefer this proposed system to the one currently in place, but there are structural factors built into the proposal that ensure the NPB teams are fairly compensated for the caliber of player lost. Because the payment to the NPB team is a function of the total value of the contract given to the player by the MLB team, it follows that the NPB team will receive more money when it loses a star player compared with when it loses a role player. While a percentage-based payment would almost surely not yield the same possibilities of payments as does the current system, from the NPB’s perspective, the percentage system ensures that the loss of the best players yields the highest transfer payments.

Whether or not the MLB teams prefer a percentage-based payment model depends entirely on the percentage payment required of the MLB team. Should the percentage rise above 25%, it is conceivable that the MLB teams would prefer, or at least be impartial to, the current system. The preferred aspect of this proposed system, from the perspective of MLB teams, is that individual teams can negotiate with the player directly, without the sealed bidding of the current auction. This transparency will prevent the type of overbidding evidenced by the Red Sox $12 million overpayment for Matsuzaka’s services. This system, however, still has limitations. NPB teams could hijack the transfer of players, and skew the MLB competitive balance, by only negotiating with deep-pocketed teams. This system may lead to competitive balance issues if small market teams are entirely excluded from this labor pool.

VI.   Historical Precedent

This is not the first instance of a player transfer system being critical to determining the relationship between MLB and another league. As noted earlier, after Jackie Robinson integrated MLB in 1947, the relationship between MLB and the Negro Leagues was forever changed by the influx of African-American players into MLB. Had a more comprehensive and effective transfer system been in place, it is possible that the Negro Leagues would not have vanished as a viable economic entity. There is undoubtedly an irreversible trend of NPB players coming across the Pacific to the riches of MLB, and if the trend continues, the Japanese league risks becoming a league bereft of its star players.

A formal relationship never existed, pre-integration, between MLB and the Negro Leagues, and this lack of protocol was one of the main reasons the Negro Leagues diminished in popularity and ultimately folded in 1957, ten years after Jackie Robinson’s historic feat. There was no posting process and no system of payment for the transfer of players. Negotiations were typically between the Negro League player and the MLB team, and in many cases the Negro League club with whom the player was under contract was omitted from the conversation entirely. This was particularly true during the earliest player signings. As was typically the case in the Negro Leagues at the time, Jackie Robinson was reportedly operating under an oral agreement with his Negro League club, the Kansas City Monarchs. The contract that he signed to play for the Brooklyn Dodgers’ top minor league affiliate in Montreal in 1946 provided him with a salary of $600 per month and a $3,500 signing bonus, but more importantly it contained a clause stating that he was free of any obligation to any other club with no compensation owed from the Dodgers. While the white owners of the Kansas City Monarchs alleged that the club had a written contract with Robinson and threatened both to protest to MLB Commissioner Albert ‘Happy’ Chandler and to file a lawsuit against the Dodgers, they backed down from these threats amidst public pressure from the African-American community and media desiring integration and agreed to allow Robinson to play for the organization; nonetheless, they did publicly state that they felt the Dodgers owed them compensation.

Though no litigation was ever commenced, these complaints were subsequently echoed by other Negro League owners, who ultimately argued to Commissioner Chandler that MLB teams should negotiate with Negro League clubs directly rather than with the player, explaining “that while they were ‘glad to see our players get the opportunity to play in white baseball, [we] are simply protesting the way it was done.’”³ The Negro Leagues’ commissioners requested the leagues be formally recognized by MLB as either minor or major leagues, which would have allowed them to participate in the compensation scheme that had been established between MLB and its affiliated minor leagues. These complaints were met with derision by MLB Commissioner Chandler. Though no formal player transfer agreement or protocol was ever reached between the leagues, subsequent signings of Negro League players by other MLB teams began to be negotiated between the respective clubs rather than between the player and the MLB team. Negro League owners hoped to realize significant revenues by selling players to MLB, but this never came to fruition because the Negro Leagues were unable to respond adequately to the MLB teams raiding its rosters by doing so in kind, and they had no other outlet with which to align themselves. Thus, MLB teams rarely paid a fair market transfer fee, in large part because the Negro League clubs felt that they lacked the leverage to negotiate. After the owner of his Negro League team was rebuffed in an attempt to sell his rights to the New York Yankees for $100,000, Larry Doby became the first African-American to play in the American League in 1947 after MLB’s Cleveland Indians purchased his rights from his Negro League team for $10,000 plus an additional $5,000 bonus, payable if he was able to complete thirty days on Cleveland’s roster. The rights to Satchel Paige were sold by the Kansas City Monarchs to the Cleveland Indians in 1948 for a mere $5,000. Nonetheless, these laughably small transfer fees became a needed source of revenue for the Negro League clubs, and the exodus of players to MLB clubs accelerated in 1948. This caused the quality of play in the Negro Leagues to decrease and fans stopped coming to the ballparks and supporting their favorite Negro League teams as a result. Negro Leagues attendance dropped precipitously from 1946 (the last season pre-integration) to 1948; for example, the Newark Eagles’ home attendance declined 71 percent. By 1949, there were 36 former Negro Leaguers in MLB and their former league was well into its demise. When taken in combination with the desire of African-American baseball fans to support an interracial business that more closely reflected their goal of an integrated society, the poor organizational structure of the Negro Leagues and the typically bad team management, the Negro Leagues finally had too many obstacles to overcome. The Negro National League folded after the 1948 season, with two of its clubs disbanding and a third focusing on barnstorming. While the Negro American League reconstituted itself and continued to plod along, a lack of interest combined with the other obstacles to undermine the viability of the league as a whole and it struggled until the last Negro League game was played in 1957. Ultimately, while there is no doubt that society as a whole benefited from the integration of the major leagues, integration was not without its costs to the Negro League fans, owners and former players who did not make it to MLB.

The current MLB–NPB system presents many of the same issues, especially with regards to player movement and the impact that movement has on the health of the individual leagues. There is a compelling argument that it is in the best interests of MLB to preserve the long-term health of NPB, unlike what happened with the Negro Leagues, because NPB (and not MLB) is the best cultivator of Japanese talent. The owners of NPB teams have an interest in preserving the health of their league, while MLB owners have a similar interest in their own league. Any player transfer agreement would seemingly have to address both of these competing desires, although the place on the spectrum between where the self-preservation ends and the actual agreement falls will be the product of negotiation.

As previously noted, one critical difference between the circumstances surrounding the disappearance of the Negro Leagues and the current state of the NPB is the geographic proximity of the competitor league. During the late 1940s, after MLB had been integrated, many Negro League teams competed in the same cities as their MLB counterparts. In an era when gate receipts were the primary source of team revenue, the fact that many fans went to the higher quality MLB games had a direct effect on the lack of monetization for the Negro Leagues. In the current situation, however, it cannot be said that fans are choosing to attend MLB games instead of NPB games. A more accurate characterization may be that NPB fans are now following former NPB players who have signed with MLB teams (at the expense of following an NPB team) through digital media. But to what extent the following of MLB via digital media will destroy a revenue base (gate receipts) for NPB is uncertain. Another difference in the current situation is cultural. Baseball has long been a very important part of the fabric of Japanese culture and it remains the national pastime. There is simply too much pride in Japanese baseball to allow the long-standing, deep-pocketed professional league to fail. Despite the conceptual similarities, there are substantial differences between the Negro Leagues and Nippon Professional Baseball that are likely to lead to a different end result and allow NPB to survive notwithstanding the suboptimality of the player transfer agreement.

VII.   CONCLUSION

In the ever-flattening world, the challenge for MLB and NPB is to create a transfer system that is more efficient than the current model, while at the same time preserving NPB’s status as a viable economic entity. It is imperative for the sport of baseball that NPB remain intact; the demise of the second-strongest professional baseball league in the world would have a deleterious effect on the global growth of the sport and, ultimately, on MLB. The triumvirate of key stakeholders must all agree to effectuate any of the proposed alternatives, and there is an implicit tension between the desires of NPB, MLB and the MLBPA. Notwithstanding their input, there seem to be two alternatives that stand out from the others. The first is a global draft layered upon a NBA/UEFA-esque system of team-to-team negotiation. The second is a percentage based system, where the transfer fee amount paid to the NPB team is determined as a percentage of the ultimate contract signed by the player with the MLB team. It is left to the stakeholders to determine the system that best fits their needs.

Notes

1.  Regulation H—Rules Governing Players, Coaches, Support Officials, and Players’ Agents, Federation Internationale de Basketball, 6.

2.  USA Basketball Application for Letter of Clearance, http://www.hunbasket.hu/docs/USA_loc-application.pdf (last visited Dec. 30, 2007).

3.  Mark Ribowsky, A Complete History of the Negro Leagues, 1884 to 1955, 285 (1995).

Discussion Questions