The Economics of Professional Sports Leagues: The Bottom Line in the Kintetsu Buffaloes Merger Issue is a Lack of Management

Senior Fellow, RIETI

In this column I am going to consider some questions concerning the professional baseball industry that have surfaced on the back of the Kintetsu/Orix merger issue. The focus in the mass media has been on issues like whether to introduce a one-league system or how many teams there should be, but such matters are not really the essential problem. We cannot hope for effective solutions if the questions set in the initial stages of dealing with the situation are mistaken or, to put it another way, as long as the debate is caught up in these issues the same problems are inevitably bound to crop up again in the near future.

The essential problem besetting the professional baseball industry is nothing other than a deficiency of management, including marketing. Many analysts and critics have been making this same point. However, do these people have an accurate understanding of what professional sports industries are in the first place? It seems rather doubtful to me. If critics do not understand the characteristic features of this industry, namely the extent to which it is the same as and the extent to which it differs from general types of business, then however fantastic advice may seem on first sight, it will still turn out like a house of cards in the end.

What is the product in a sports industry?

First, let us confirm some basic points concerning the market for sports. There are four components essential to any market: firstly, a supplier, then a product, followed by customers, and then competitiveness established among multiple suppliers. As far as this goes, sports markets are the same as markets for any other kind of business.

So, what is the product in a sports industry? Understanding of this most basic point is regrettably mistaken because of the appearance of things. The primary, basic product handled in such a market is, naturally enough, "sport." Sport presents itself basically in the form of "games," the price of which is paid in the form of gate receipts. As such, these games are equivalent to a "performance."

Such things as team members' image rights are secondary products derived from the business of the "game." The value of the Giants first developed because, in other words, there is a "baseball game value." Customers do not buy tickets simply because they want to see the Giants' team members. They are paying for the soft product, or service, that is a game played by the Giants. This is an obvious fact, but there is a none-too-infrequent tendency, not limited to professional baseball, for this point to drop out of sight.

Further, the most singular aspect of this industry comes from the way in which this product is manufactured. Completely unlike other industries, the product this one deals in cannot be manufactured independently. Because of that, a system and governance unlike those found in other industries are necessary. (Taking an example from another soft industry, film, it is not as if Toho or Shochiku would be unable to make a movie if they did not do so together.)

Since it is an industry, constant product development is a must. What kind of product development is it that raises the quality of a "game," which cannot be produced without co-operation? If the Giants win this year by an average of more than five runs, winning next year by an expanded average of ten runs is not product development. Product development in a sports industry is simply about producing confrontation in contests at a high level and that requires co-operative development. To put it another way, there are relationships of mutual dependence on the management side with all of the opponents the team plays against competitively in league games. Consequently, in all countries and in all types of leagues, there is no option but to have a cartel to co-ordinate the internal interests of all of the organization's members.

In reality, leagues everywhere are founded on the gathering and collusion of existing teams and become interest-regulating cartels that give priority to the rights and interests of these teams from the outset. (The J-League is probably the only example in the world of a league that did not start as a cartel made up of existing teams. I discuss this point in detail in my soon-to-be-published book.) Indeed, this is certainly a clear departure from the idea of the market, which would seek to avoid regulation as much as possible. However, given the product's essential characteristics, any system to produce it is going to be regulated and whether that is capitalism or socialism is an issue of a completely different dimension.

Sport is a unique product that is not made independently

In economic studies in Europe and America too it has been argued that in sports industries the market as a whole is made up of joint producers in a state of mutual competition during games. This apparently contradictory relationship is the most prominent point of difference from other industries. According to Walter C. Neale (1964, "The Peculiar Economics of Professional Sports"), the most valuable league result (referring to whether a game is won or lost) is a product that teams cannot produce independently. This product requires a multi-faceted production system made up by the opponent in a game, all of the opposition teams in the league, and the people and organizations that report on it (journalists, editors, publishing companies, newspaper distributors etc). Accordingly, a market monopoly would be unprofitable even to the monopolist and sport is a unique product that is not made independently. Consequently, the teams are individual businesses by law, but economically the league as a whole should be considered as a single entity. The profit takers are the individual businesses, namely the teams, based on the decisions of the league as a whole.

However, in practice, the profits of the individual teams and the league as a whole are not always the same. Structures in which the popular teams take the bulk of the profit and support the unpopular teams through certain kinds of redistribution can probably be found anywhere and are probably the same for all kinds of sports. So, it is usually the case that the popular teams accuse the unpopular teams of being freeloaders. This tendency can also be seen in the pronouncements of the owners of the popular Giants and Hanshin teams. However, if no fixed leveling took place there would be no competition in games, and it is clear that interest would decline. If invincibility is attained the interest of spectators will decline. The most valuable thing in sport is the possibility of an unpredictable one-off happening or event and if that is lost then the product value of the league as a whole will be lost too.

There are four types of customers paying money according to completely different logic in professional sports markets. First are the fans. When their numbers rise, the sport is taken up in the media. Then TV, the second customer, makes an entrance. The cost of this service is paid for by charges for TV rights. When the media takes up the sport, a "media value" is created. Thereupon the third customer, corporations, come in to take advantage of this value. They pay sponsorship and merchandising fees. The problem is the fourth customer, governments and localities. They demand and pay for results and benefits such as regional and cultural development, education, and health promotion. However, they do not necessarily incur a direct cash burden. The greatest burden is the provision of sporting facilities, the location of production. Worldwide, almost all sporting facilities are provided for by taxes. This would be out of the question if sports were not a public good. TV customers belong to the group of media stakeholders and have two heads, one as vehicles for reporting, and one as customers paying charges for TV rights.

There are two types of suppliers, the owners, shareholders and employers on the one hand and the coaches, players, and the like on the other. If they are included, there are six groups of stakeholders lined up here, the interested participants in professional sports industries. (The sports management school of the University of Tokyo Sports Association classifies its stakeholders into these six groups.)

What is the stakeholder-type management called for by sports?

The stakeholders in sport extend across many branches of society, encompassing many vested interests. The way in which those stakeholders are responded to determines the outcome for professional sports industries. Stakeholder-type management is a concept that was developed in opposition to "shareholder centric"-type management, and to put it simply, insists on management that keeps the interests of all stakeholders in mind. There are various ways to consider these interests and there is no categorically correct way of doing so. It is possible to break down stakeholders into types but they differ according to the industry or the corporations involved. In sports industries, and alternatively in the individual teams (organizations and businesses), accurate understanding of who the stakeholders are and the balancing of their interests is the foundation of management and its essence. Omitting this process will render the drawing up of strategy impossible. Strategy must be about the setting of priorities among the various stakeholder interests. Logic is necessary to set priorities. (This logic is solicitous and diverse.) Further, operations based on this logic are essential to management. In this light, activities based on emotional, passing ideas without this kind of logic, and hence without thorough investigation, are not worthy of being called "management."

As raised above, sport is recognized as a public good while its organizations tend to take on a public configuration and receive favorable treatment with regard to taxation. Accordingly, governance should of necessity be of the stakeholder type, instead of giving priority to shareholders.

The book Winners and Losers by Dr. Szymanski of the Imperial College Management School of London University devotes a chapter to a discussion of the issue of shareholders and stakeholders. In the end, he barely conceals his dismay, saying: "English football teams should surely be stakeholder-type organizations looking at their historical origins, but are falling into a pattern of management aligned with professional investors. Are fans and players satisfied with this? Is it the case that a club which considered the benefits to its fans and players as number one would be unable to satisfy its investors?"

July 27, 2004

July 27, 2004