Inning 3: Producing the Pro Sports Product

Some of the toughest economic issues in sports—or any other business—revolve around one very basic question:

What is the most effective way to organize materials, labor, and capital to produce goods and services?

A. From Amateur Recreation to Organized Enterprise

Baseball was the 1840s equivalent of beach volleyball. The idea might sound far-fetched at first, but think about it. Both sports began as a loosely organized form of amateur recreation and evolved into a highly structured business that sells a product based on fun and leisure.

Stage One: Just Having Fun

A quirky collection of amateur baseball players in 1845—or beach volleyball players in 1980—get together on weekends to compete for fun. Bragging rights are the only thing at stake.

The atmosphere is relaxed and the organizational structure is loose. Maybe there's a club president to schedule the weekend competitions and a club treasurer to collect dues for refreshments or club jerseys. But that's as structured as things get because everyone is more interested in fun than profit. No one even thinks about selling tickets to the handful of friends, family members, and curiosity seekers who show up to watch.

Stage Two: Fun and Profit

Things start to get more serious when some of the participants realize that their game is a potential moneymaker. Promoters develop a formal competition schedule. Then they enclose the playing area with fences to keep out nonpaying spectators. Some of the more business-minded promoters even pay popular players in the hope that "star power" will attract more ticket buyers.

None of this sits well with purists, who worry that money is taking the enjoyment out of their recreation. They miss the fun and spontaneity of the old days.

Stage Three: It's a Business

The debate between purists and professionals is over. Now there is no denying that the game has become a product with commercial value. The loose organization and spontaneity of the early days are a distant memory. Athletes have become paid employees. Spectators have become paying customers. And event organizers have become team owners, who focus on how to get the maximum commercial value from their product.
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B. The Role of Inputs

Economists sometimes talk about factors of production or inputs—labor, materials (land, natural resources, or raw materials), and capital. Here's what that means in the pro sports business.

• Labor includes, players, coaches, trainers, groundskeepers, and umpires or referees—all the people who make the games happen on the field.

• Materials include the land where a ballpark sits and the water and fertilizer that help keep the grass looking good.

• Capital is the actual ballpark structure, the arena building, training equipment, a Zamboni, and the "tools" of the game; it can be something as simple as a baseball bat or as complex as an exploding scoreboard.

There is also human capital—the special skills and talents an athlete possesses: a strong arm, an extraordinary sense of balance, an uncanny ability to make the right move under pressure. Teams invest in human capital when they do things to help players sharpen their skills. A major league team that supports minor league player development is investing in human capital. Players who work out during the off-season are investing in their own human capital.

The production process uses inputs—labor, materials, and capital—to create a more valuable product or service. Professional sports organizations use the special skills of pitchers, quarterbacks, point guards, and goalies to produce a season's worth of games that is worth more than the players' combined salaries.

But of course, athletic talent isn't the only input. Uniforms, training facilities, travel costs, advertising, and any number of other things go into producing a sports product.
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C. Uncommon Sports Questions

Q. Why do people organize professional sports teams?

A. Lots of reasons—attention, recognition, ego, civic pride, or maybe just because they think sports are fun. But the main reason for organizing a professional sports team is to make money—to generate revenue and make a profit.

Q. What's revenue?

A. Total Revenue = (Price) x (Quantity). For example, the total ticket revenue for a single game would equal the price per ticket multiplied by the number of tickets sold.

Q. Is revenue the same as profit?

A. No. Profit = (Total Revenue) - (Total Cost). Costs are things like player salaries, travel expenses, stadium maintenance, and equipment costs.

Q. What is a professional team's primary business goal?

A. A sports team—or any other profit-oriented business—wants to have the largest possible (positive!) difference between total revenues and total costs. To put it simply, a team would like to take in as much revenue as possible from ticket sales, concessions, broadcasting rights, and licensing fees, while paying out as little as possible in salaries and other costs. (For more on sports revenues, see Inning 4.)

Q.So, what is the most effective way for a sports team to organize production in order to maximize revenues and profits?

A. Glad you asked. We'll explore that question in the next section.
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D.Why Form a League?

Could individual teams succeed without a league? Maybe, but they would be a lot less prosperous.

Even if there were no NFL, the Dallas Cowboys, the Chicago Bears, the Pittsburgh Steelers, and the Denver Broncos might still be able to assemble talented teams and make a respectable profit. But together, in a strong, well-run league, team owners have a better chance to improve the quality of their product and protect the value of their investment. Forming a league is the most effective way for team owners to produce a sports product.

A league adds value to the professional sports product by doing things that fans often take for granted:

• Scheduling—A league establishes a formal schedule and requires teams to play every game. Sounds like a simple thing, but it is vital to a professional sport's economic survival.
  
  Without schedules, professional sports would be very different. Fans would have to rely on word-of-mouth to find out about a game, and TV crews probably wouldn't bother to show up for a game that might or might not happen. Teams would have to scramble for a place to play because they couldn't afford to build and maintain ballparks unless they had a solid base of paying customers and a steady stream of revenues. In short, professional sports would be like playground games for poorly paid adults.

• "Protect the Best Interests of the Game" —A league establishes rules, standards, and business practices that are intended to maintain the quality of play and the overall value of the league's product. Can players use certain types of equipment? Are the contests getting too violent? Would a rules change make the game more exciting? Is the revenue gap between rich teams and poor teams leading to lopsided competition? These and other issues are decided by league officials in consultation with team owners.
  
  
• Joint Revenue Agreements—A league handles negotiations with outside vendors such as television networks, trading card companies, and apparel manufacturers. Joint negotiations almost always bring in more money per team, because the teams have more bargaining power when they are united in a league.
  
  
• Marketing—League-wide marketing campaigns help teams hold the interest of longtime fans and attract the attention of new fans.

But most important of all . . .

• A league controls the number of teams. When team owners join together in a strong league, they have the power to say when, where, and how much their league will expand. Not only can they control the total number of teams, they can also protect one another by limiting the number of teams in a particular market area. If investors want to start a team, they have to submit a proposal to the league and win the approval of existing team owners. Then, even if the proposal is approved, the new investors must buy their way into the league with a very steep franchise fee that is split among the existing owners.

Of course, if enough investors are determined to start new teams, they can try to establish a league of their own. But going head-to-head against the "Big Four" is no easy task.

Could individual teams succeed without a league? Maybe, but they would be a lot less prosperous. (National League owners, 1897). Photo courtesy of The Boston Public Library, Print Department.

The one truly successful new league in modern sports history was the American Football League, which eventually merged into the NFL. Its survival proved the old adage that "timing is everything." Conditions for starting a new pro football league were ideal in 1960: Fans were going wild for the game; the relationship between sports and television was beginning to flourish; and the NFL had been slow to expand into new markets.

But more often than not, new leagues end in failure. The American Basketball Association, the American Basketball League, and the World Hockey Association lasted only a few seasons. The United Baseball League never even made it to opening day.

The biggest barrier facing a new league is lack of television money. Without it, teams can't afford to attract and keep the talented players that fans want to see. But in order to win a sizable television contract, an upstart league needs to demonstrate that it can: 1) lure enough viewers away from the established leagues, and 2) offer networks the same degree of prestige they derive from televising the NBA, the NHL, the NFL, or MLB.

Which raises the issue of fan expectations. Maybe the viewers who watch the National Arm Wrestling Championship or American Gladiators are looking for straightforward fun and entertainment, but traditional sports fans seem to expect more. Those exuberant souls, who paint their faces and take off their shirts in sub-freezing weather, are really conservatives at heart. They want the "real thing."
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E. Baseball "Turns Pro"

Early baseball teams were often gentlemen's clubs for dues-paying amateurs—doctors, lawyers, clerks, and the occasional skilled artisan. To this day, baseball teams are still called ball clubs.

But other groups—firefighters, police officers, factory workers, saloon owners, neighborhood associations, religious groups—formed teams, too.

The following timeline looks at how baseball went from an amateur game to a moneymaking enterprise. Read it and you'll see why so many important economic issues are related to the way a business organizes the production process.

After helping to devise the rules for baseball, Alexander Joy Cartwright headed west in The California Gold Rush of 1849 and eventually found his way to Hawaii, where he's buried. Photo courtesy of National Baseball Hall of Fame Library, Cooperstown, New York.

1846 —Two ballclubs, The New York Nine and the Knickerbockers, cross the Hudson River on June 19 and make their way to Elysian Fields in Hoboken, New Jersey, where they meet in the first recorded game of organized baseball. One of the Knickerbockers, a bank clerk named Alexander Joy Cartwright, has helped to devise the game's rules and serves as umpire. But that doesn't help his team. The Nine beat the Knickerbockers 23 to 1.

1856—The New York Mercury makes the first journalistic reference to baseball as "The National Pastime."

1857—Amateur ballclubs in and around New York City form the National Association of Base Ball Players to oversee the quality of play. Association rules prohibit players from receiving compensation or betting on games, but both rules prove difficult to enforce.

1858—For the first time, spectators pay to see a baseball game. All-stars from New York and Brooklyn meet at a neutral site—Fashion Race Course on Long Island. The game's organizers charge an admission price of 50 cents to cover groundskeeping expenses, but the price doesn't deter fans. The game draws a large crowd of paying spectators and demonstrates that baseball is a product with commercial value.

The Cincinnati Red Stockings, 1869. Courtesy of Prints and Photographs Division, Library of Congress.

1869 —The Cincinnati Red Stockings become baseball's first professional team—players are paid openly rather than under the table. On a national tour they post a record of 59 wins, no losses, and one tie. Two years later, they go into a long losing streak, and their fans desert them. Many of the Red Stockings stars move to Boston, where they form the core of a new team.

1871—Ten ballclubs in the Northeast and Midwest organize themselves in the National Association of Professional Base Ball Players. Each team pays a $10 entrance fee.

The Association, which is run by its players, has three main goals: 1) maintain a regular schedule, 2) make money, and 3) keep the players happy. It fails at the first two, and has only limited success with the third. During its brief existence, the Association has to grapple with team failures, financial instability, and friction between rich and poor teams.

Union army prisoners playing baseball at Confederate prison camp in Salisbury, North Carolina, 1864. Courtesy of National Archives.

1875 —William A. Hulbert, president of the Chicago White Stockings, wants to field a winning team. He lures Albert Spalding and three other top players away from the Boston Red Stockings, but he worries that other teams in the National Association of Professional Base Ball Players may try to retaliate against him.

William Hulbert. Photo courtesy of National Baseball Hall of Fame Library, Cooperstown, New York.

1876 —Hulbert organizes owners of several teams into the National League of Professional Base Ball Clubs. Each team pays annual dues of $100 and agrees to go along with Hulbert's organizational philosophy, which emphasizes the interests of team owners and the league. Teams must be located in cities with a population of 75,000 or more, and the league guarantees each team a territorial monopoly. The charter clubs are Boston, Chicago, Cincinnati, Hartford, Louisville, New York, Philadelphia, and St. Louis. Teams can be added only if owners approve, and two "no" votes are enough to block a new franchise.

Although some teams soon fail, the league survives and becomes known simply as the National League. (To this day, a few sportswriters and broadcasters still call it "the senior circuit" because it is older than the American League.)

1879 —National League players are breaking their contracts and jumping to other teams for more money. Team owners fear that escalating salaries will drive them to financial ruin, so they reach an informal agreement not to tamper with one another's best players.

John Montgomery Ward. Courtesy of Prints and Photographs Division, Library of Congress.

1885 —Nine members of the National League's New York Giants, led by star pitcher and Columbia Law School graduate John Montgomery Ward, form the first players union—the Brotherhood of Professional Base Ball Players. Their two major grievances are the reserve system, which forces a player to spend his entire career with the same team, and the $2000 salary cap imposed by National League team owners. By 1886, every National League team except St. Louis has formed a chapter of the Brotherhood.

1889—Declaring that, "Players have been bought, sold, or exchanged as though they were sheep instead of American citizens," John Montgomery Ward launches the Players' League. The league's owners and players will share profits, and there will be no reserve system.

1890—The competition for fans and players weakens both the National League and the Players' League. But National League owners—led by Albert Spalding, who is now president of the Chicago club—bluff everyone into believing that they are in better financial shape than they really are. Players' League investors decide to cut their losses, and the new venture folds after just one season.

Byron "Ban" Johnson. Photo courtesy of Prints and Photographs Division, Library of Congress.

1893 —Cincinnati sportswriter Byron "Ban" Johnson helps to establish the Western League. He hopes it will offer families an alternative to the rough play and foul language that characterize National League games.

1900—The Western League changes its name to the American League.

1901—The American League plays its first season as the country's self-proclaimed second major league. It draws more fans than the National League, and its teams attract many of the National League's top players.

1903—Team owners in both leagues decide that cooperation may be more profitable than competition. They reach an agreement that grants equal status to the American League and serves as the basic business framework for what will become Major League Baseball.

To find out how the business of baseball changed in modern times, see Inning 6, How Free Agency Happened: A Timeline.
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