Does Competitive Balance Drive Interest In Sports?
The beginning of each season brings hope for almost every sports fan because teams compete in sports leagues with structures in place to increase competitive balance.
In the NFL, which begins its regular season Sept. 10, teams with the worst records receive the highest draft choices to enhance their chances of obtaining the best new players entering the league from college. There is also a salary cap so no one team can outspend another and horde the best talent. Revenue sharing is also prevalent in the NFL, as well as the major European soccer leagues, which kicked off play this month. Teams split media rights revenues in most of these leagues with members typically receiving an equal share of money earned from these agreements (Spain’s La Liga is one exception).
These types of rules and competitive collaboration would violate most antitrust laws in virtually every other industry. Supporters of these practices claim this is the best way to ensure competitive balance among the teams in the league. In addition, they also argue that uncertainty of outcomes in competition is what drives fans, media, sponsors and dollars to the sports industry. If a single or a small collection of teams could sign all the best players then what excitement would these game provide?
The problem with this analysis is that competitive balance largely does not exist in sports today, and it may not actually drive audience interest in sports. In his book Playbooks and Checkbooks: An Introduction to the Economics of Modern Sports, Stefan Szymanski, the Stephen J. Galetti Collegiate Professor of Sport Management at the University of Michigan, found “limited evidence of support” for the uncertainty-of-outcome hypothesis as the fundamental driver of fan attendance. The research suggests that greater uncertainty can actually reduce attendance. Baylor University professor Kirk Wakefield found that stadium quality and star players were the best predictors of Major League Baseball (MLB) attendance. David Berri, a Southern Utah University professor and author of The Wages of Wins,has shown that college football and men’s college basketball have been dominated by a relatively small number of teams for decades.
Berri’s research suggests it may be the dominance of a few teams in any league competition that is actually one of the primary reasons sports leagues are now so successful. One only has to look at major professional sports leagues in the U.S. and Europe to find evidence to support this contention. One-quarter of the NFL’s 32 teams have won nearly 70% of the 49 Super Bowls. Seven NBA teams have won 33 of the past 36 NBA crowns, and the team with LeBron James on its roster made it to the NBA Finals the past five years. The San Francisco Giants and Boston Red Sox each won the World Series three times over the past 11 years. Only Chelsea, Manchester City, Manchester United or Arsenal won the EPL league title since 1992. In La Liga, it is extremely rare for a team not named Real Madrid or Barcelona to compete for a title. It is even more unusual for a team to challenge Bayern Munich for the Bundesliga championship in Germany.
Given this relative lack of competitive balance, it would seem that the sports industry should be crumbling. For most of these leagues, however, interest has arguably never been higher, even as in-game attendance has slightly declined. The 50 most watched sports events of 2014 each had more than 21 million viewers. The NFL, NBA and NHL all signed record setting media rights agreements for their leagues in recent years. The St. Louis Cardinals are the latest MLB team to sign a $1 billion local TV deal, and the Dodgers are the envy of every baseball club thanks to their $8.35 billion contract with Time Warner Cable TWC +0.30%.
The EPL, La Liga and Bundesliga have lucrative television rights deals throughout the world that are supplemented by the tens of millions of dollars earned through participating in the Champions League. In fact, each EPL team will receive over $154 million just in media rights deals alone. Sporting events also dominate social media as much as they do traditional media. Many of the most popular Facebook / Instagram posts, Tweets and tumblers are sent during global sporting events or by athletes.
The lack of parity does not mean that leagues should dismantle their current operating structures. In fact, it is this fair and unbalanced structure that has been great for the development of the sports industry. It also does not mean leagues should necessarily remove revenue sharing, salary caps or player drafts. While there have been dominant teams in all these leagues, they do not always come from the teams based in the largest cities or with the most potential resources. It would be unlikely for the Green Bay Packers, San Antonio Spurs or St. Louis Cardinals to achieve the success they have if not for these structures that limit the amounts teams based in larger markets can spend on players. The growth of these markets has enabled the NFL, NBA and MLB to create better products to market to fans.
However, the economics also do not suggest that it is competitive balance alone that is driving the leagues’ bottom lines. This could play a large role in many areas of the sports industry. If the NBA has a lockout in 2017, then its players could claim that they should be paid market rates rather than having any forms of salary limits or caps. What role competitive balance takes will be one of the central questions facing the sports industry going into the future.