Tuesday, November 22, 2011

A Tale of Three Sports & their Unions-Part 1 & 2

Professional sports leagues require unions. Only a voluntary contractual agreement with organized players permits the apparatus of modern professional sports. Common apparel deals and common pool distributions as well as salary caps, required minimum expenditures on salaries and revenue sharing all need these agreements to protect a league from anti-trust challenges. The contracts permit drafts, compensation limits and trades to occur without restraint of trade challenges. Modern professional sport leagues deploy these devices to several vital goals:1)guarantee profit and return on investment; 2) maintain some competitive balance across big and small market teams; 3) police drug use; 4) give bad teams a chance to become better and construct balance competition over time. Despite each owners desire to win at all costs, they have a joint interests to steward steward a profitable sport with high quality games and competitive hopes for teams and fans.
Despite the central role of unions and their continuing and unique power, two labor negotiations broke down in acrimony—one lead the union to dissolve and players to sue the league, the other has lead to an impasse that may lose the season. Baseball, on the other hand, with little fanfare, just did a “handshake” agreement to extend labor peace to 20 years. I think these different outcomes flow from both the culture created between owners and players and the structure of incentives the contracts focused upon. In particular football and basketball narrowed in on a zero sum view of revenue tied to salary caps while baseball used luxury taxes and revenue sharing to address the chasm between small and large market teams.

Most team owners are unwaveringly entrepreneurial and aggressively libertarian in their politics. They hate having a strong union. In addition they tend to be very personally invested in the status and fate of their teams. This resistance coupled with periodic attempts to break the unions have blighted professional sports with thirty years of lockouts, strikes and bitter recrimination, reaching its height in the disastrous baseball 1997 seven month baseball strike that lead to a cancelled World Series or hockey losing an entire season in 2004-2005.

All professional sports are afflicted by the trend of large market owners buying up the best talent. Left on their own most sports would degrade to permanent oligarchies with permanent winners and losers and very frustrated and lost fans. It would also degrade the talent competition where one small group of teams would regularly trounce others based upon bought talent. Many of the union authorized mechanisms on revenue and drafts are to protect owners from destroying their sport through the dynamics of inequality in revenue as how to allocate costs among players.

In the last seven months the National Football League, the National Basketball Association and Major League Baseball had their collective bargain agreements expire. The NFL involved a four-month lock out, ugly negotiations and recriminations and immense public pressure to settle. The NBA negotiations have imploded with the NBA verging on a lost season. Baseball, which has the longest and most bitter history, has a handshake agreement to put a new agreement in place without a lockout or strike four months before the start of spring training.

Why the difference? All the negotiations involved complex and unique aspects but the chasms exist over percentage of revenue dedicated to owners and players as well as devices such as salary caps and luxury taxes to save owners from themselves and sustain some competitive balance and quality product for fans and media.

What interests me is that two sports along with hockey have used salary caps to address the issue of escalating salaries and competitive equity. To me this has always made sense, and it drives me batty that baseball has never used one. Baseball permits oligarchs to dominate talent by letting teams develop players and then the oligarchs like Boston, Philadelphia and New York buy that talent when they become free agents. The irony is that the two leagues with salary caps have generated two different economic and competitive cultures that lead to the labor chaos. Yet baseball has eschewed the rational approach, but evolved this deeper peace and even a common venture model.

While unions are dying everywhere in the United States, they thrive in professional sports because of the monopoly and monopsony of the leagues and the very limited and highly skills population from which players develop. The contacts also insulate the enterprise from many anti-trust and restraint of trade charges. So why the immense differences in outcomes of the last three negotiations?
The issue driving owners remains as always maximizing profit, long term investment and maximizing their freedom and status from being owners. Given whom the owners are, they strongly prefer not to have unions or long-term agreements with their employees.

As an example, the bitterness and contractual brinksmanship in football makes the least sense. Professional football has become the most popular and profitable professional sports enterprise in the United States. If owners are to be believed, only two teams are losing money.  Attendance and contracts rise yearly. The Super Bowl like March Madness has permuted into a cultural institution. The major device to generate quality of fan interest and quality of product has been a percentage split of revenue with players and a relatively hard salary cap.

With no guaranteed salaries, the football teams can seem to pay outlandish salaries but guaranteed salaries mean little. The real money has migrated to extremely high rookie bonuses and singing bonuses. This in turn softened the salary cap considerably. This hypothetical equality is augmented by some marginal revenue sharing to prop up smaller market teams who have trouble even reaching the salary cap minimum, but more than a few teams, as in baseball have not even spent their revenue sharing money on talent or salaries.

Part II will examine how the history and incentive approach influenced the approach and outcomes of these three labor negotiations.

Part II

So how did an economically and media successful enterprise like professional football get dragged to the abyss and almost lose its season. Really bad negotiating tactics, animosity and mistrust between the negotiating teams hurt. The players believe correctly that they play the most dangerous and life threatening sport in the world besides boxing. They resent the owners cavalier cover-ups and drive for money by piling on more games at the risk of their health. The owners seemed totally deaf to these concerns driving the enmity. The real drive of the owners grew from a small group of very powerful owners who wanted to change the share split with players to maximize their large investments.

This should have been easy to resolve. The economic policies distributed playoff teams far and wide as well as guaranteeing that many unsuccessful teams could turn themselves around within one to two years. Parity in playoff access had become the norm in the NFL; it worked and inspired fanatical fan and media support. Despite all this and very strong incentives to settle peacefully, the culture of animosity and resentment of players and owners and power of the hard line owners lead to the four month lockout and a new contract at the last minute.

The players actually gained considerable advantages around health and safety issue with limits on practice and full pad time and new pensions for older players. The owners gained a more friendly percentage distribution but had to build in requirements that teams that receive revenue sharing must spend a very high percentage on salaries rather than use for profit and starve their talent pool. The salary cap remained harder than before. More  limits upon rookie compensation will lead to more rational risk spending and increase the money balance to veterans. It is not ot a bad deal that could have been struck much earlier. It was worked out after bitter negotiations that reaffirmed a culture of antagonism and rogue owners till wishing unions would disappear.

The fact that the unions did use their Armageddon play and they did disband to challenge the ownership and competitive balance structure shocked everyone, including the players. It emboldened the NBA players, and cast a shadow upon the very similar but different negotiations of the NBA.

The NBA is a mess compared to the NFL. Assuming you can ever believe owners, it claims 22 teams of 30 lost over 300 million dollars. The league had steadily lost cachet, and media interest and attendance had edge downward for a decade with a slight blip last year. The incipient pro soccer league actually passed the NBA in per game attendance. The talent level remained superb, the skill level mediocre, and the too long season and grotesque playoff schedule where half the teams make it diminishes mid season games to the point of meaninglessness. The quality of play reflected it.

The NBA’s soft cap with too many exceptions had become nonsensical only really affecting young players. The league had developed salary ratios of 3 or 4 to 1 despite a cap. Unlike the NFL, the championships remained clustered within a small number of teams with mini-dynasties. The endless playoffs at the end of an insignificant and low TV rated season, generated little interest until the very end. The NBA desperately needs a hard cap or strong revenue sharing to ensure both a quality product and some reasonable level of profits, otherwise the cycle will continue. The losses, the bitterness, the off field culture of the league heightened already bitter anger between the two sides, and neither was willing to compromise despite being well within a ball park. In negotiating terms they had hardened their positions rather than looking to their interests. Unlike the NFL where calls for President Obama’s intervention rang out, very little public pressure arose to demand a settlement. For many folks the NBA season could disappear and no one would notice or care.

The NBA has another huge problem. For many fans, college basketball and March Madness provided an easy substitute. If the NBA did not play, it hardly mattered to many basketball fans because from November through March, they could watch passionate and interesting basketball with far better TV distribution than the NBA has. This substitute effect for the NBA reflects rising college ratings and interest along side slowly declining NBA attendance and wide spread indifference.  The NBA culture and negotiations the focus upon zero sum issues and a strong substitute mean the league and players are making themselves irrelevant.

Baseball has had the longest and worst history including a cancelled world series, a nullified reserve clause and collusion actions. Yet this month a new contract will be signed with little fanfare or brittleness. In fact, baseball over the last twenty years has evolved into something resembling a partnership arrangement rather than the adversarial relation of the other sports.

Much of this grows from the abiding fan loyalty and comfort with the sine wave progress of teams and seasons. It grows because baseball essentially owns uncontested market territory from April through September. It grows from a remarkably successful economic model that generates profits, limited but effective revenue sharing from luxury taxes and stable or increasing attendance even as baseball has sunk into the shadow of football in terms of sports interest and wealth.

I wonder how much of this evolves from baseball not having a salary cap and living with incredible inequality in expenditures among teams. Maybe the lack of cap and guaranteed expenditure percentages displace the negotiations in a way that enables them to occur without being seen as zero sum games. I think the lack of a cap but very powerful luxury taxes permits the rich to spend freely but at the same time pay to subsidize others. This softens the libertarian and don't tread on me beliefs of many of the owners. Maybe a league that almost destroyed itself in 1997 and permitted itself to be humiliated by drug scandals collectively knew it could not afford the conflict.

Baseball moves much more slowly than football or basketball in talent development and team transformation. This leads owners to a longer-term view to begin with. But paradoxically baseball has had championships distributed across the widest array of teams of any sport, far more than NBA and more than the NFL.

This distribution of championships should not occur but it does for two odd reasons. First, baseball teams draft college players or invest in international or high school players and can keep them under professional contract for six years. This means that most teams keep players until their late twenties. The problem with baseball occurs when the rich teams simply buy up the best players from smaller market teams.

The catch and irony is that these rich teams must now give six to seven year contracts to players in their early thirties or late twenties, a totally absurd risk calculation. The average players peak years are 23-31, after that they steadily and and inexorably decline in skill and production. This means the rich teams are locking into huge contracts for two to four years of peak performance while the other teams got five years of peak performance years at much less money. This has resulted in older and slower rich teams who perform far more erratically than their salaries would suggest because of the age and long term contract factor. At the same time the sheer inequality has driven teams to be more innovative in player evaluation and scouting to offset these differences.

Oddly enough the bitter history seems to have generated a sense of partnership.This has been augmented by their Commissioner actually learning from past failures rather than magnifying them like basketball's David Stern.  It leads to a “handshake” contract but also mutual willingness to address issues like signing bonuses and earlier availability for arbitration as well as moving teams from leagues or adding an extra wild card team. It also leads both sides to realize the integrity of the enterprise depends upon aggressive testing and to create cutting edge technology and requirements to test for human growth hormone.This supplements mandates that players must now wear a new helmet to protect them from 100 mph fastballs.  Both sides realize they have vested interest in the reputation and physical integrity of the sport.

I think the fact the baseball achieves most of their competitive balance goals through luxury taxes rather than caps with exceptions makes the negotiations less bitter. The powerful and personally invested owners do have more freedom but they pay a heavy cost of up to 75 to 100 percent tax when they go over the agreed upon limits. The issues do not feel like zero sum games but rather permit owners to act if they are willing to pay the costs. This will now be extended to address the issues of huge rookie costs that are hurting everyone. The luxury tax money then gets redistributed. I don’t like it but the logic has worked to produce competition and balance when it should not.

Three sports. Two wars, one reached a treaty based upon the sheer money both would lose; one is on the verge of imploding for a decade over embittered relations and an economic model that does not work. One lives in hard-nosed comity because they learned their lesson and has made an incentive and penalty economic system that should not work but actually produce real competition. The culture ensnaring the two sides and the focus of economic relations had as much to do with these outcomes as the real issues involved.

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