Preface

THE BUSINESS OF SPORTS: THE FOUNDATIONS OF A UNIQUE INDUSTRY

Honda and Toyota operate under a general business model of selling as many vehicles as possible with the greatest profit margin possible. In the end, Honda and Toyota are competitors that want to sell product. There is no interest, and it is in fact illegal, to cooperate in a manner that allows both companies to be more profitable. Any traditional business could be used to illustrate the contrast that is important here. Yet, as the epigraph notes, the sports business has been different from the beginning.

In almost every sports venture, the competitors must cooperate for the venture to be profitable. In the nascent stages of team sports, the hat was passed among the spectators at local playing fields. A percentage of the take was distributed among the still sweat-drenched and muddy players from the two squads, and the man (it was almost always a man) who organized the outing took a higher percentage. It was in everyone’s interest to have a bigger pie to split, but, even if they cooperated to make attendance as high as possible, they still competed vigorously to be the sole winner on the field. Following the competition, all went back to their jobs during the week. This competitive–cooperative model is now the standard in the National Football League (NFL), Major League Baseball (MLB), the National Basketball Association (NBA), the National Hockey League (NHL), and other sports leagues and professional sports ventures around the world.

Other visionaries saw ways to exploit athletes labeled amateurs by putting together athletic spectacles and reaping the profits. The cash was kept away from those amateurs. The value and need for amateurism was embellished by Greek mythology and class-centered Victorian logic. These amateurism concepts would eventually evolve into the National Collegiate Athletic Association (NCAA) and the Olympic Games. The modern Olympiad was founded by Baron Pierre de Coubertin in 1896, and almost a decade later the NCAA was founded by a group of college presidents convened by then-U.S. President Theodore Roosevelt. The application of the amateur ideal took hold, and student-run sports were taken over by universities, and so, too, were the revenues. From the labor standpoint, a large segment of the sports industry has found a way, unlike the automobile and other industries, to avoid paying for labor.

But winning at any cost is not allowed at any level, at least when the cost is something other than money. Every modern sports business has a set of defined rules and regulations that may even, in many instances, be grounded in law. For example, even if it could be argued that steroids and dietary supplements can make athletes better players, most sports business enterprises have banned their use.

Profit at any cost is similarly problematic. At various times studies have shown that, at the margin, an additional white player on a squad will bring in more fans than an additional black player. Most sports businesses will go for the win rather than the racial slight.

As these ventures grew, new players became part of the industry: radio, television, commercial endorsers, licensees, and sponsors. Lawyers and agents came into the picture to pull these deals together. The business went beyond just what happened during the competition. The business model was expanding. The primary revenue source was no longer limited to just the fans who could put money in the hat or, later, the fans who bought tickets.

By the time sport began to be referred to as a business, it was also clearly entertainment; as such, different rules of business and law applied. Not all parties were able to move away from the concept of these businesses being little more than glorified games. The conflict about whether the business of sports should be treated differently continues today.

The stadiums and arenas where teams played or wanted to play became big parts of the business, too. Interestingly, public money has been used to build many of these facilities. Most companies can only dream of the type of aid that sports franchises receive from the public coffers.

Athletes, too, have realized that it is more than a game, and they have unionized in the team sports, like much of the rest of working class America. That became an ironic position as average salaries surpassed $1 million per year in all of the major North American professional leagues (and much more in some). Without a doubt, the highest paid unions in the world are those involved in professional sports leagues. Unlike most other industries, where employers endeavor to prevent their employees from unionizing, employers in professional sports leagues can derive significant financial and legal benefits from unionization of their workforces. Namely, they can blatantly include anticompetitive measures that help ensure the financial success of the business, such as salary caps and entry drafts, into their collective bargaining agreements. These measures hold up to legal scrutiny, despite the fact that the leagues can all be described as having a monopolistic hold over their respective sports. This is due to the existence of a judicially created exception to the United States antitrust laws known as the nonstatutory labor exemption.

A variety of social issues are unique to the sports industry as well. These see the light of day in sports more than elsewhere, because the business is subject to constant scrutiny. Beat writers and bloggers cover every aspect of the game, looking for unique stories, and those stories go far beyond whatever is happening on the field, court, or ice.

As in other industries, women are still not treated with parity in sports. Initially, it was not “appropriate” for women to participate in sports. Apart from their absence in any highly visible professional sport, the disparity was especially visible in the Olympics. It was not until 1984 at the Olympics in Los Angeles that women competed in a marathon event. Health, decorum, and the need for women to be at home with their families were cited as reasons for this. The passage of Title IX in 1972 helped create new business opportunities in women’s professional sports by allowing women to participate in sports in a meaningful way. Many women’s leagues have started and failed. A long dominant men’s league, the National Basketball Association, started and financed the Women’s National Basketball Association (WNBA). The reasons for doing so were all based on business. Beyond professional sports, Title IX has also had a dramatic effect on the business of collegiate sports. It is now an ingrained part of the sports culture, with a full generation of women who have benefited from it and now expect their daughters to be able to do the same.

Many argue that sports led the way for American business on diversity with the racial integration of Major League Baseball (MLB) in 1947 and that sports are still leading the way today. In 2008, 27% of the players in the big leagues were Latino, 10% were African American, and 2% were Asian. However, diversity is still lacking in the upper levels of management. Although there was an all-time high of 2 Latino and 3 African American general managers and 10 field managers of color on opening day in 2009, there were no African Americans or Latinos and only 2 women (one of whom was the owner’s wife) serving as a team president or CEO of an MLB team.

Professional sport has become a global business in a manner similar to, yet different from, other businesses. Sports leagues have definitely benefited from larger markets and cheaper labor. In the NBA, NHL and MLB, the expanded talent pool is a genuine reality as well.

Issues that make headlines in this industry include the sharing of revenues, salary caps, luxury taxes, luxury boxes, and the search for the next corporate sponsor. The business model for the automobile may have evolved since the Model T, but not with the same level of public scrutiny and angst as has occurred in sports. Unique to this business is the extraordinary level of dependence on the selling of a product to broadcasters, as opposed to getting customers to “purchase” the product by walking in the gate.

With that said, many of the rules are the same. The bottom line of the enterprise is ultimately important. As applied to team sports, there is just a different way of getting there. This is the case even though some individual owners (whether people or entities) can afford to lose seemingly endless amounts of money, citing reasons ranging from marketing the larger enterprise, to controlling content for the enterprise, to fattening up the enterprise for sale.

The Business of Sports, Second Edition, is designed for current and future sports business leaders as well as those interested in the inner workings of the industry. Through original introductions, carefully selected readings with the editors’ notes updating relevant text, and incisive questions, this book gives the reader insight into this unique business. The business of sports is interdisciplinary in nature. As such, the major business disciplines of management, marketing, finance, information technology, accounting, ethics, and law are all encompassed in the materials that follow. The readings provide this insight from the perspective of a variety of stakeholders in the industry. We have attempted to edit the selections in the book in a manner such that the reader will not be overburdened with the jargon of any specific discipline. Where possible, cumbersome citations have been deleted to provide for a smoother read. Where we deemed it necessary for reference purposes, the citations were retained. The original note numbering is retained in the selections, though the numbering of tables, charts, and figures has been changed from the originals in the name of organization and uniformity.

This book is not meant to cover all aspects of every topic involved in the sports industry. Nonetheless, it does provide the reader with a fairly comprehensive overview of many of the major sports business issues. In order to do so most effectively, the book has been divided into three broad sections: professional, Olympic, and intercollegiate sports. The major issues that impact each of these broad categories of sports are subsequently addressed within each section. In addition, there are separate chapters on gender equity, race, and ethics. These three sections include all three of the aforementioned categories of the sports business—professional, Olympic, and intercollegiate sports. Though all sports are not discussed in each section, the message that is gleaned from a selected reading is typically instructive for understanding the issues as they impact other sports.

As the Second Edition of the first comprehensive collection of readings to focus on the business of sports, it is our hope that this book will continue to provide a framework for understanding the business of sports and the dilemmas faced by today’s sports business leaders. Although this is a Second Edition, in many ways it is an entirely new work. Approximately three-quarters of the articles excerpted are new, most of which were published since the First Edition was released in 2004. The articles that remain from the First Edition are more seminal in nature; they generally remain as timely in 2010 as they were when first published—and any relevant facts have been updated to reflect the current situation. New chapters on global sports leagues and teams have been added to this edition, while the chapters on accounting and taxation, licensed products, and the future that appeared in the First Edition have been removed. Those latter topics have been addressed in the context of other chapters. In addition, the chapter on individual sports has been removed from the hard copy of the book and can now be found exclusively in the online materials found at www.jblearning.com. We have also slightly tweaked the order of the chapters to present the information in a more logical manner, a lesson learned from using the First Edition of the book in numerous courses at the Wharton School and elsewhere.

However, we recognize that no work is perfect. This book is no different. The information found in this book is current as of January 2010, and, in some cases, was updated to reflect changes that occurred as the book was moving through production. Doubtless some of the information will have changed by the time the book is printed. In researching this Second Edition of the book, we continued to find a dearth of existing works on the business aspects of the Olympic Games and intercollegiate athletics, even though much attention has been given to the sociological aspects of both of these topics. Similarly, a glaring lack of attention has been given to the ethical aspects of the business of sports, as well as the involvement of Latinos, women, and people with disabilities. These shortcomings are likely a product of the fact that the serious study of sports as a business is relatively new, with the first academic articles appearing in the 1950s and the advent of college sports management programs occurring little more than a generation ago. Nonetheless, these neglected subjects warrant further study.

Our hope is that both current and future business leaders will take both the facts and viewpoints expressed here and apply their own creativity to take their particular focus in sports to an even higher level.