Explaining the Bowl System

Tuesday, December 20, 2011
Authors: 
Tyler Cowen

Why do the bowls persist? Crony capitalism rules once again.

This bowl season, 70 teams will compete in 35 bowls and more than $180 million will be paid to the conferences and schools represented. Ten will play in BCS bowls, which pay the lion’s share of the money.

Everyone from President Barack Obama to University of Chicago economist Richard Thaler prefers a playoff format (like every other NCAA sport has) to the bowls, which seems both more fair and more fun. Yet the bowl system is in place contractually until 2014 and it has proven to be resilient.

Why has such an unpopular system had so much staying power? Before we get caught up in the excitement of bowl season, let’s figure out how the dollars and cents hold the system together.

Bowls often take money over merit when making match-ups

Which two teams should compete in a bowl game? It should be exciting but money matters, too. Sure, the BCS “title” game pits no. 1 vs. no. 2 in the rankings, but historically, the size and travelling capacity of a team’s fan base often trumps rank and talent when bowl selections are made. Popular teams such as Notre Dame and Penn State regularly receive better bowl invitations than their performance would seem to merit.

The bowl games have always been commercial enterprises. They were created for warm-weather cities to boost tourism during the winter, by bringing fans from colder states – and their dollars — into local economies.

In 2007, Mark Schlabach chronicled the Chick-fil-a Bowl’s selection process. He explained that Boston College was not invited to the game in Atlanta because organizers worried that BC’s fan base wouldn’t buy enough tickets and spend enough money.

“The BC thing ate me up for a week,” Stokan (the Bowl President) said. “The factors on the field were very favorable to Boston College. But when you look at this thing, you have to take into account the players, the administrators, the relationships with the leagues and the financial commitments. The city really depends on us because we’re one of the top 10 conventions. We have an obligation to hotels, restaurants and retailers.”

Are you surprised that this bowl is run by the local Chamber of Commerce?

The schools are expected to spend small fortunes on the games. Those expenses typically include more than just sending a players, coaches, families, cheer squads, and bands to the game. Schools are also often financially responsible for selling a large number of tickets, and there are frequently requirements that schools buy a certain amount of hotel nights in the host city.

Did you know that there is a “Sugar Bowl CEO”? Circa 2009, he was paid more than $600,000 a year. Is it surprising that the Sugar Bowl and Fiesta Bowl each have more than $30 million in net assets? Did you know that many of these bowls also receive government subsidies?

The system in action

This year, the Sugar Bowl passed on no. 7 Boise State and no. 8 Kansas State to take no. 11 Virginia Tech and no. 13 Michigan, in part because the latter offered stronger fan support and publicity. Not all schools make the grade; this year West Virginia is having serious trouble (as of mid-December) selling its $2 million worth of Orange Bowl tickets; only 5,700 out of 17,500 have been sold (the school has also given away about 4,000 tickets so far). However, it’s unclear what worries the West Virginia athletic department more: That the school stands to lose a large sum of money or that low sales will send a negative signal about the school’s bowl-worthiness to its future partners in the Big 12.

Big bowl schools make their money on the back end

There are plenty of statistics about how many schools lose money in bowl games, but they are based on comparing travel costs with the payout received from the game. That’s a flawed analysis. It’s all about advertising. What schools may lose up front they usually make up in the long run, and that is why competition to play in bowls is so fierce.

Larger schools pull in most of their revenue from tuition and donations, and successful collegiate sports teams boost both areas. That’s why a good football coach can make several times more than the college or university president, with top coaching salaries reaching well into the millions.

In years following a championship football performance, admissions interest in a school rises significantly, including relative to its peer institutions. That means more students and a better selection of students, and over time it also means more and better donors for the school.

The prospect of alumni donations drives the structure of big-time collegiate sports. Here is a typical story, as reported by the Chronicle of Higher Education

“He made that contribution because initially our basketball team made him proud to be an alumnus of this college, which, in turn, reminded him of how much he had learned from the faculty in his major. He wanted to contribute to his academic program as a way of expressing his thanks for helping him become so successful in life.”

Furthermore, premium tickets to a bowl game are a way to reward top givers, make them feel exclusive, and bring them together to form a community of peers.

The bowl game itself builds loyalty among students who attend — the future donors. As Bear Bryant once put it: “It’s kind of hard to rally around a math class.”

Usually, bowl games are a way for colleges to enhance their reputations. This year, TicketCity Bowl can help the Penn State Nittany Lions rehabilitate theirs. Rather than keeping the fees from their participation, Penn State is donating the money to charitable groups. The $1.5 million they will give away is chump change relative to the school’s overall operating budget and the long-term value of the school’s name.

It’s hard to put a dollar value on the financial benefits schools reap from bowl appearances. But, given the intensity with which they compete to get there, the salaries of coaches who get them there, and the amount of money they allow the bowl organizers to hold onto, the long-term value of these appearances must be very large.

It’s possible that a playoff system could produce similar or even greater gains for the traditional football powers, but it would be riskier for them (more competition) and the bowl organizations would lose millions. Those two groups are natural allies in a quest to preserve the status quo.

Who wins and who loses?

The top teams in the six BCS conferences win. The bowl organizations and the business community in the bowl cities win. Schools outside the BCS cartel and fans who want to see a “true champion” lose.

In the strange world of college football, the bowls are also a win for the players. Since they ordinarily get no direct compensation for their work, the bowl trip amounts to a paid vacation with excursions, photo-ops, gift bags, and the like.

Traditional football schools and the BCS bowls act as an informal cartel that divvies up the surplus created by fans of the big schools. Whenever the system is threatened, they react by tossing a bit more money to the have-nots.

Is it better that we have a bowl system?

There are some problems with making a playoff system work for college football. If you imagine a rotating playoff at neutral sites, fans would have to travel to three or four different cities all over the country, and with no more than a week’s notice to make plans. Even a diehard fan will likely make such a trip only once, and that means a bowl game, with lots of advance notice. An NCAA basketball game has a stadium seating maybe 20,000, but for college football the goal is to fill a stadium that seats closer to 80,000. The basketball teams also can play more often, and that makes it easier to support an intense playoff season with more frequent match-ups and more teams in the initial tournament field.
Still, maybe it could work, just as the NFL playoffs mobilize big enough audiences to be profitable. But that doesn’t mean it will happen. The real value in the college football games is brought by the schools with big fan bases, and they don’t want to share those gains with the NCAA or the smaller schools. As it stands now, the big schools are in charge and they will probably decide to stay in charge.

What’s the bottom line?

In sum, we have a system where the games are not designed to produce the best on-field matchups, the competitors often lose money but fight fiercely to participate, outsiders and observers complain vehemently, and the organizers amass and waste a great deal of money with little oversight.

Welcome to capitalism, American style. Get back to us when you’ve found a better system.

The Economics of Moneyball: Do the Principles Really Work Anymore?

Friday, December 9, 2011
Authors: 
Tyler Cowen

“Moneyball” succeeded as an Oakland A’s strategy, gave Michael Lewis a best-selling book, and is now a hit movie starring Brad Pitt. But is the method actually a path to winning?

The Moneyball thesis is simple: Using statistical analysis, small-market teams can compete by buying assets that are undervalued by other teams and selling ones that are overvalued by other teams.

Paul DePodesta, a co-architect of the strategy (“Peter Brand” in the movie), had been an economics major at Harvard, but did he study for long enough? Let’s look at some specific claims of the Moneyballers and see how they have held up.

The best-known Moneyball theory was that on-base percentage was an undervalued asset and sluggers were overvalued. At the time, protagonist Billy Beane was correct. Jahn Hakes and Skip Sauer showed this in a very good economics paper. From 1999 to 2003, on-base percentage was a significant predictor of wins, but not a very significant predictor of individual player salaries. That means players who draw a lot of walks were really cheap on the market, just as the movie narrates.

Yet statistical analysis has become commonplace in major league sports, and the importance of on-base percentage has become more widely appreciated. As of 2004, the on-base percentage for baseball players was no longer financially undervalued, and this correction seems to persist, as shown by Hakes and Sauer in a later paper.

To a financial economist, these debates sound familiar. Using statistics, is it possible to find undervalued stocks and bonds and beat the financial markets? If such a method existed — and maybe it once did — word would get out and the bargains would disappear.1 In other words, the truth or falsity of the Moneyball method is a fluid proposition, changing over time. Everyone can look at the same numbers, there are lots of mathematicians for hire, and so secrets are hard to keep.

Another Billy Beane Moneyball idea, discussed in the book, is that closers are overrated and overpaid. These days, though, his insight has been absorbed by most teams. For example, in the just-concluded World Series, the Rangers closer (Neftali Feliz) and the Cards closer (Jason Motte) had a combined salary of less than $1 million!

This year, the Yankees’ Mariano Rivera was ranked fifth in total saves with 44. At a salary of $14.9 million, that works out to be a hefty $338,600 per save. The four closers ranked ahead of him averaged 46.5 saves and a salary of $2.9 million, or $63,771 per save — quite the bargain.

The Red Sox closer, Jonathan Papelbon, delivered 31 saves on a $12 million salary ($387,000 per), while the aforementioned Mr. Feliz had 32 saves on $457,000, or $14,281 per save. Feliz was more than 20 times as cost-effective by this measure.

As of 2011, there are only three other closers with salaries greater than $10,000,000 (Cordero, Rodriguez, and Nathan). Ten of the top 20 closers in terms of saves made less than $2.5 million (the major league average player salary is around $3.2 million), and six of these 10 made less than $500,000.

So while the money-machine Yanks and Sox overpay for their closers and get away with it, most teams have learned this Moneyball lesson and saved some bucks.

Still, this year the Twins managed to pay two different pitchers (Joe Nathan and Matt Capps) the sum of $18.3 million to amass a total of 29 saves with 12 blown saves between them.

At least the Twins have bought out Nathan’s contract instead of paying him more than $11 million again next year.

To play consistently successful Moneyball, you have to stay ahead of the curve, and that’s hard. The next generation of Moneyballers may well use sophisticated artificial-intelligence methods to gain an edge, just as the IBM-programmed Watson machine beat Ken Jennings at Jeopardy!. Pencil-and-paper statistics, or even simple computer techniques, have become the new status quo to be beaten, just as Beane showed up the crusty, old-time baseball scouts who relied on their seat-of-their-pants intuition.

It is not surprising that innovative, profitable baseball strategies remain undiscovered or are discovered slowly. Management resists innovations that may, soon enough, call for new managers. New Moneyball ideas are easily copied by other teams, so why bother? Finally, baseball is a closed network of teams facing limited outside competition, and that makes innovation less urgent.

Another lesson from financial economics — relevant for sports — is that a lot of successes are plain, dumb luck. Decades of number-crunching shows that the number of big winners in stock-picking is about equal to what dumb luck will cough up. Throwing darts at the stock pages, and buying the shares of the randomly selected companies, seems to do as well as hiring a fund manager.

Remember John Paulson? He was hailed as a genius when he shorted the housing market and made billions in 2007. Yet this same genius has anegative 47 percent annual return on his signature hedge fund (Paulson Advantage Plus) through the first nine months of this year; he lost billions by betting on a strong economic recovery in the USA.

There are a few Warren Buffetts with truly special talents, but not every rich investor is a genius or has figured out the market. Remember, the lucky will appear wise.

So what makes for a successful team?

Here’s something funny about the Moneyball strategy: It is bringing us a world where payroll matters more and more. Spotting undervalued players boosts their salaries and makes money more important for the general manager; little did Billy Beane know that in the long run he would be strengthening the hand of the large home-market teams, such as the Yankees. From 1986 to 1993, payroll explained 2.2 percent of the variation in team winning percentage, and that meant spending more money yielded little return in terms of quality on the field. In the 2004 to 2006 seasons, after the Moneyball revolution was under way, payroll explained 27.1 percent of the variation in team winning percentage, which means a stronger reason to spend more.

Still, payroll isn’t everything or even close.

This season, Tampa spent $41 million and won one more game (91) than the Red Sox, who spent $161.7 million. The Twins spent $112.7 million to win 63 games, while the Tigers and Cardinals each spent around $105.5 million to win 95 and 90 games, respectively. Sure, the Yankees spent the most ($202 million) and won 97 games, but Detroit beat them in the playoffs with a payroll about half as large. The Cardinals beat the Phillies, who spent $172.9 million. The World Series featured teams with the 11th- and 13th-largest payrolls.

So even as payroll grows in importance, baseball magic can still come from both Lady Luck and clever entrepreneurs. It’s just hard to say sometimes which is which.

The Bottom Line

Is entrepreneurship alive in sports? Yes.

Can some people stay ahead of the curve? Yes, for a while at least.

Was Billy Beane just a lucky stock-picker? Somewhat.

Are there still overvalued and undervalued assets out there for a guy in his mom’s basement to discover? Hell yes.

These days, is it easy? No.

How to Boost Your Medal Count in Seven Easy Steps

Thursday, August 2, 2012
Authors: 
Tyler Cowen

“The Olympic Games are competitions between athletes in individual or team events and not between countries.”
— International Olympic Committee

“USA, USA, USA”
— American sports fans

We are again in the midst of the quadrennial spectacle of naked nationalism and amazing athletics that are the Summer Olympics, and the question on everyone’s mind is who will win the most medals. Not which person — whichcountry.

Economists have taken time out of their busy schedules of destroying the world to provide insights into which factors help make countries successful in their bids for Olympic glory.1

The Basics

The first factor is population. If athletic ability is roughly equally distributed around the globe, the more citizens you have, the more great athletes you are likely to have. It stands to reason, for example, that Australia will likely win more medals than New Zealand, simply because it has five times the population.

Team USA madness, profiles of the most fascinating athletes, and on-the-ground reporting from Bill Simmons.

But population isn’t everything. As in most areas of modern life, money matters too. If a country is made up of subsistence farmers, it is not going to have much athletic infrastructure, government or private support, or even enough well-nourished citizens to excel in sports on the global stage. So the second main factor that economists use to predict Olympic success is per-capita income.

So, being rich in raw materials (people) and having the wealth to develop them are the main economic determinants of Olympic success. And, since population and wealth are not distributed equally across countries, neither are Olympic medals. In the 2008 Beijing games, 65 percent of the gold medals were won by athletes from only 10 of the 200 countries that competed.2

Other Strategies for Success

All is not lost for the smaller and poorer countries of the world, though. There are ways to beat the system and outperform your fundamentals.

The first way is for national governments to make a priority of the Olympics and funnel extra resources into recruiting and training athletes.

It is well known that countries who are hosting the games tend to earn significantly more medals than their respective incomes and populations predict. Interestingly, the host country also does better in the Olympiad immediately before it hosts (but after it knows it will be hosting). Host countries, many years in advance, ramp up their athletic investments to have a good showing when the eyes of the world are focused on them, and generally those investments succeed even before the host games.3

For example, 10 years ago, Britain was not a major power in the sport of track cycling. The turning point came when Chris Hoy won three gold medals at the Beijing games. But that was no accident. A $7.8 million grant, funded out of lottery revenues, gave Hoy and others the luxury of training full-time. Britain was investing in its athletic future. In track cycling in Beijing, Britain won seven of the 10 events and 12 medals in the area; the country hadn’t been expected to attain such heights for another four years. Overall, the U.K. won 47 medals in their 2008 “pre-host” Olympics, far more than they won in any Games since 1908 (they won 28 and 30 in 2000 and 2004, respectively).

In the old days, the communist countries boosted their medal totals with big investments in training and rewards for the top athletes; in the case of the Soviet Union, the investment was extensive and pretty much across the board in most of the major events. Today, countries’ efforts are often more modest. For example, the first Olympics trampoline competition was held in 2000, and circa 2012 Canada is fielding a strong group of veterans, with a good chance to take home some medals. The Canadian government has been strong with its support.

Along these lines, countries can beat the system by focusing on their comparative advantages. Countries with a lot of coastline often have an advantage in swimming, surfing, and boating compared to landlocked countries. Countries with high altitudes have an advantage in training long-distance runners compared to sea-level countries. Economists Moonjoong Tcha and Vitaly Pershin show that focusing on comparative advantage significantly boosts medal performance.4 Consider the sport of beach volleyball, where seven of the eight gold medals awarded (and 15 out of the 24 total medals awarded) were won by the U.S. and Brazil. What about the one gold medal these two countries with huge coastlines and beach cultures didn’t win? That’s right, it went to Australia.

A country can also win more medals by strategically focusing on events in which it is relatively easy to win medals. These tend to be events that are individual in nature and for which a lot of medals are handed out per event. Think boxing, or the martial arts, where a full set of medals is given in each weight class (taekwondo gives out four medals per weight class). Ireland’s best chance for a gold medal may well be Katie Taylor for women’s boxing. Commonly with team sports there is just one set of medals for the entire sport — as with men’s basketball — and of course smaller and poorer countries will have a harder time reaching the top in those areas.5 Bulgaria has found Olympic success using these strategies. They’ve won 51 total gold medals in all the Summer Olympics, and 32 of them have come in three sports: weight lifting, wrestling, and shooting (with 12, 16, and four gold medals, respectively).

Finally, a country can increase medal counts by strategically importing citizens. A country’s Olympic athletes do not have to be native-born, and countries sometimes grant citizenship very quickly to foreign-born athletes who can help their Olympic cause. Other times it’s exporting individuals that boosts a country’s chances. Spain uses both strategies; importing Serge Ibaka from the Congo and having him and the native-born Gasol brothers hone their skills in the NBA.

Olympic Extremes

Will China and India, the two countries with populations over 1 billion, dominate the Olympics of the future, especially as they become wealthier?

To date, their Olympic performances are almost polar opposites. China has become an Olympic powerhouse while India has underperformed. From 1960 to 2000, China won 80 gold medals, while India won only two. Over those 11 Olympiads, India only won eight total medals while China won over 200. While China has grown faster and is richer than India, the difference in wealth can’t begin to account for the chasm between their Olympic results.

In their book Poor Economics, MIT economists Abhijit V. Banerjee and Esther Duflo attribute India’s dismal Olympic performance at least partly to very poor child nutrition. They document that rates of severe child malnutrition are much higher in India than in sub-Saharan Africa, even though most of sub-Saharan Africa is significantly poorer than India.

Even the significant segment of the Indian population that grows up healthy is at a disadvantage relative to China. The Chinese economic development model has focused on investment in infrastructure; things like massive airports, high-speed rail, hundreds of dams, and, yes, stadiums, world-class swimming pools, and high-tech athletic equipment. And while India is a boisterous democracy, China continues to be ruled by a Communist party, which still remembers the old Cold War days when athletic performance was a strong symbol of a country’s geopolitical clout.

Another country that has been doing poorly relative to its global stature is Japan. Two papers that used income and population (along with some other factors) predicted that Japan’s medal total in 2008 should be roughly the same as in 2004, but of course it wasn’t: Japan won 37 medals in 2004 and only 25 in 2008. A lot of the problem is Japan’s rapidly aging population. Since 1970, the percentage of Japan’s population that is over 65 has more than tripled, from 7 percent to 23 percent (the corresponding number in the U.S. is around 12 percent), and by 2060 this number is expected to reach 40 percent.

A couple of nations greatly exceeded their economics-based medal forecast in the 2008 Games. Jamaica was predicted to win only four medals by Forrest, Sanz, and Tena (they wrote a well-known forecasting paper for medals) but actually won 11, while Kenya won 14 medals against its prediction of five. If you think those totals are not impressive, consider that Mexico, despite its higher income and larger population, only won a grand total of three medals in Beijing.

These two countries succeeded by focusing on their comparative advantages. All 11 Jamaican medals were in footraces of 400 meters or less or in sprint relays. Similarly, all 14 Kenyan medals were in footraces of 800 meters or more.

Unless they are able to diversify into other sports, these two countries are near their Olympic ceilings (there are only so many footraces in the Games), but their performances in those specializations have been spectacular.

Predictions

1. Medal totals will become more diversified over time. The market share of the “top 10” countries will continue to fall (it was 81 percent in 1988) as economic and population growth slows in the rich world. The developing world has greater room for rapid economic growth, and most parts of the developing world also have higher population growth. The Olympic playing field will get more and more level.

2. Japan will continue to fade, mostly because of aging and population shrinkage.

3. Italy will follow Japan for similar demographic reasons, as well as because the Eurozone crisis will continue to cut into budgets, training and otherwise.

4. Since Rio is host to the next Olympics, Brazil should do better than expected due to the “pre-host” bump.

5. Many African nations will rise. Currently about half of the approximately 1 billion people in Africa have a cell phone, and the middle class is growing. The chance that an African star will be spotted and trained at the appropriate age is much higher than before. Africa also continues to grow in population, and that means lots of young people. Most of us still think of African nations as very poor, but infant mortality has been falling and per-capita income rising across Africa for the better part of a decade now.

6. China will level off and then decline as a medal powerhouse. In less than 15 years, the typical person living in China is likely to be older on average than the typical person living in the United States, in part due to the country’s one-child policy. As of 2009 the number of over-60s was 167 million, about an eighth of the population, but by 2050 it is expected to reach 480 million people older than 60, with the number of young Chinese falling. The country will become old before it is truly wealthy.

7. Bob Costas will make you cry.

As we have all come to learn, economics is an inexact science at best. We are better at predicting trends and probabilities than a specific outcome at a specific time. So these predictions should not be used for any wagering. Except for no. 7. That’s a mortal lock.

Two Economists Explain the NBA Lockout

Monday, October 31, 2011
Authors: 
Tyler Cowen

The Golden Rule: He who has the gold, rules
Fundamental Rule of Negotiation: He who cares the least wins

In the NBA, it’s the owners who have the gold and care the least.

What do the owners have to lose?
Net revenues from the lost games and any decline in the value of their franchises due to fan alienation and depreciation of assets — namely the players they have under contract.

What do players have to lose?
Salaries from lost games and time cut off from already short career windows.

Why do owners have leverage?
They have deeper pockets and alternative sources of income. The next most lucrative financial option for players is far worse than the owners’ lowest offer.

Why do players have leverage?
Only a handful of star players have leverage. The owners’ product without the top 20-30 players in the league would stink for at least a few years. Rank-and-file players are more easily replaced and have almost no leverage at all.

Why are labor disputes in sports so weird?
The bosses control the whole sector and face little competition when it comes to hiring labor. Since the merger with the ABA in 1976, the NBA is a monopoly and operates in a manner (it monopolizes!) that would be illegal outside the sports world. Unlike in Silicon Valley, there are no NBA “start-ups.” You cannot create a new NBA team without permission of the incumbent owners. The league also has to approve changes in teams’ location and ownership.

What does this mean? The owners can get together and agree to jointly cut expenses, that is, the player salaries. Players have limited opportunities to play professional basketball in other countries, but realistically, if you are a world-class professional basketball player, you probably want to be in the NBA.

The star players are the only counterweight to management’s power. To a large extent, they ARE the NBA’s product. Because of this, the owners aren’t talking about using replacement players, and some stars are getting decent offers to play overseas during the lockout. These factors are a cause for concern for the owners and put limits on how much they can extract from the players.

Why have past CBAs been so favorable to the players?
In the past, traditional NBA owners were in the game for the fun, the control, and the bragging rights. They made money through franchise appreciation; there was less emphasis on maximizing short-run operating profits. The newer group of owners bought high, are more corporate in orientation, and the financial crisis renewed their sense of vulnerability. They’ve poured a lot of money into those teams and they aren’t comfortable with seeing red on their balance sheets year after year.

Why don’t the players settle?
Perhaps because they have done so well in the past, it’s hard for the players to accept that the owners are dead set on hammering them this time. They feel, correctly, that they have been making all the concessions. Imagine trying to redo your “chores deal” with your spouse, with one side giving in on every negotiating point. As human beings, we are programmed to reject one-sided deals, even when surrender might be the rational choice.

How far apart are the two sides?
The split on BRI (Basketball Related Income) is supposedly the biggest point of contention. Players want 52.5 percent (down from 57 in the previous contract). Owners are “adamant” on 50 percent and started with an initial lowball offer of 37.

Take the NBA’s 2009-10 BRI estimate of $3.6 billion; 2.5 percent of that is $90 million. Let’s say the life of the contract is 6 years. The total value of that over six years, with reinvestment, is around $500 million.

Is it economically worthwhile for the players to hold out for $500 million?
No. Total NBA salaries last year were over $1.5 billion, about three times the amount they are fighting over. Canceling a third of the current season would wipe out the gain of winning the extra 2.5 percent of BRI over the life of the new collective bargaining agreement. Canceling the whole season over 2.5 percent of BRI is insane for the players.

Of course there are other issues relating to the salary cap, like the length of contracts, but the BRI split seems to be the sticking point.

What’s the bottom line?
Can the owners afford to give the players a better deal? Yes.

Forbes magazine estimates that the Knicks franchise, the NBA’s most profitable, is worth about $655 million. The Milwaukee Bucks, the least profitable franchise according to Forbes, still is worth $258 million, and the Clippers, often considered the worst-run team, have a net value of $305 million. The value of the Knicks alone could more than cover what the players are asking for.

Can the players stop the owners from getting a deal that is much worse for them than the previous Collective Bargaining Agreement? No. What the players are willing to agree to is already materially worse than before. The only question that remains is how bad it will get.

Does the players’ line in the sand over 2.5 percent of BRI make economic sense? No, not if they miss many games to achieve it.

Is the owners’ offer fair? Not really.

Should the players take it? Yes.

Will the owners give in and up the ante? Very unlikely.

Will the players be rational and take what is on the plate? We can only hope so.

What Would the End of Football Look Like?

Monday, February 13, 2012
Authors: 
Tyler Cowen

The NFL is done for the year, but it is not pure fantasy to suggest that it may be done for good in the not-too-distant future. How might such a doomsday scenario play out and what would be the economic and social consequences?

By now we’re all familiar with the growing phenomenon of head injuries and cognitive problems among football players, even at the high school level. In 2009, Malcolm Gladwell asked whether football might someday come to an end, a concern seconded recently by Jonah Lehrer.

Before you say that football is far too big to ever disappear, consider the history: If you look at the stocks in the Fortune 500 from 1983, for example, 40 percent of those companies no longer exist. The original version of Napster no longer exists, largely because of lawsuits. No matter how well a business matches economic conditions at one point in time, it’s not a lock to be a leader in the future, and that is true for the NFL too. Sports are not immune to these pressures. In the first half of the 20th century, the three big sports were baseball, boxing, and horse racing, and today only one of those is still a marquee attraction.

The most plausible route to the death of football starts with liability suits.1Precollegiate football is already sustaining 90,000 or more concussions each year. If ex-players start winning judgments, insurance companies might cease to insure colleges and high schools against football-related lawsuits. Coaches, team physicians, and referees would become increasingly nervous about their financial exposure in our litigious society. If you are coaching a high school football team, or refereeing a game as a volunteer, it is sobering to think that you could be hit with a $2 million lawsuit at any point in time. A lot of people will see it as easier to just stay away. More and more modern parents will keep their kids out of playing football, and there tends to be a “contagion effect” with such decisions; once some parents have second thoughts, many others follow suit. We have seen such domino effects with the risks of smoking or driving without seatbelts, two unsafe practices that were common in the 1960s but are much rarer today. The end result is that the NFL’s feeder system would dry up and advertisers and networks would shy away from associating with the league, owing to adverse publicity and some chance of being named as co-defendants in future lawsuits.

It may not matter that the losses from these lawsuits are much smaller than the total revenue from the sport as a whole. As our broader health care sector indicates (try buying private insurance when you have a history of cancer treatment), insurers don’t like to go where they know they will take a beating. That means just about everyone could be exposed to fear of legal action.

This slow death march could easily take 10 to 15 years. Imagine the timeline. A couple more college players — or worse, high schoolers — commit suicide with autopsies showing CTE. A jury makes a huge award of $20 million to a family. A class-action suit shapes up with real legs, the NFL keeps changing its rules, but it turns out that less than concussion levels of constant head contact still produce CTE. Technological solutions (new helmets, pads) are tried and they fail to solve the problem. Soon high schools decide it isn’t worth it. The Ivy League quits football, then California shuts down its participation, busting up the Pac-12. Then the Big Ten calls it quits, followed by the East Coast schools. Now it’s mainly a regional sport in the southeast and Texas/Oklahoma. The socioeconomic picture of a football player becomes more homogeneous: poor, weak home life, poorly educated. Ford and Chevy pull their advertising, as does IBM and eventually the beer companies.

There’s a lot less money in the sport, and at first it’s “the next hockey” and then it’s “the next rugby,” and finally the franchises start to shutter.

Along the way, you would have an NFL with much lower talent levels, less training, and probably greater player representation from poorer countries, where the demand for money is higher and the demand for safety is lower. Finally, the NFL is marginalized as less-dangerous sports gobble up its market share. People — American people — might actually start calling “soccer” by the moniker of “football.”

Despite its undeniable popularity — and the sense that the game is everywhere — the aggregate economic effect of losing the NFL would not actually be that large. League revenues are around $10 billion per year while U.S. GDP is around $15,300 billion. But that doesn’t mean everyone would be fine.

Big stadiums will lose a lot of their value and that will drag down neighboring bars and restaurants, causing a lot of them to shut their doors. Cable TV will be less profitable, and this will hasten the movement of TV-watching, if we can still call it that, to the web. Super Bowl Sunday will no longer be the best time to go shopping for a new car at the dealership.

Take Green Bay as a case study: A 2009 study of the economic impact of the Packers’ stadium estimated “$282 million in output, 2,560 jobs and $124.3 million in earnings, and $15.2 million in tax revenues.” That’s small potatoes for the national economy as a whole, but for a small and somewhat remote city of 104,000, it is a big deal indeed.2

Any location where football is the only game in town will suffer. If the Jets and Giants go, New York still has numerous other pro sports teams, Broadway, high-end shopping, skyscrapers, fine dining, and many other cultural activities. If college football dies, Norman, Oklahoma (current home to one of us), has … noodling? And what about Clemson, in South Carolina, which relies on the periodic weekend football surge into town for its restaurant and retail sales? Imagine a small place of 12,000 people that periodically receives a sudden influx of 100,000 visitors or more, most of them eager to spend money on what is one of their major leisure outings. It’s like a port in the Caribbean losing its cruise ship traffic. (Overall, the loss of football could actually increase migration from rural to urban areas over time. Football-dependent areas are especially prominent in rural America, and some of them will lose a lot of money and jobs.)

Outside of sports, American human capital and productivity probably rise. No football Saturdays on college campuses means less binge drinking, more studying, better grades, smarter future adults. Losing thousands of college players and hundreds of pro players might produce a few more doctors or engineers. Plus, talented coaches and general managers would gravitate toward management positions in American industry. Heck, just getting rid of fantasy football probably saves American companies hundreds of millions of dollars annually.

Other losers include anything that depends heavily on football to be financially viable, including the highly subsidized non-revenue collegiate sports. No more air travel for the field hockey teams or golf squads. Furthermore, many prominent universities would lose their main claim to fame. Alabama and LSU produce a large amount of revenue and notoriety from football without much in the way of first-rate academics to back it up. Schools would have to compete more on academics to be nationally prominent, which would again boost American education.

One of the biggest winners would be basketball. To the extent that fans replace football with another sport (instead of meth or oxy), high-octane basketball is the natural substitute. On the pro level, the season can stretch out leisurely, ticket prices rise, ratings rise, maybe the league expands (more great athletes in the pool now), and some of the centers and power forwards will have more bulk. At the college level, March Madness becomes the only game in town.

Another winner would be track and field. Future Rob Gronkowskis in the decathlon? Future Jerome Simpsons in the high jump? World records would fall at a rapid pace.

This outcome may sound ridiculous, but the collapse of football is more likely than you might think. If recent history has shown anything, it is that observers cannot easily imagine the big changes in advance. Very few people were predicting the collapse of the Soviet Union, the reunification of Germany, or the rise of China as an economic power. Once you start thinking through how the status quo might unravel, a sports universe without the NFL at its center no longer seems absurd.

So … Tennis, anyone?