The Amtraking of Sports?

July 29, 2006 7:53 PM by S.M. Oliva | Other posts by S.M. Oliva | Comments (3)

Recently the Seattle Sonics basketball franchise was sold to an investment group based in Oklahoma City. This has led to speculation that the Sonics will be relocated to Oklahoma City, where local government officials recently built an arena in hopes of luring a team. Currently, the Oklahoma City arena is occupied by the NBA’s Hornets franchise, which started as an expansion team in Charlotte, North Carolina in the 1980s, only to move to New Orleans in 2002. After Hurricane Katrina, the NBA announced a two-year relocation to Oklahoma City, but league officials have promised to return the Hornets to New Orleans for the 2007-2008 season.

The Sonics’ sale and threat to move is due to the unwillingness of Seattle and Washington State officials to subsidize a new arena for the team. Amazingly, the Sonics former owner, Starbucks boss Howard Schultz, blamed the government for his own failure to run the Sonics profitably. Schultz and his partners claimed losses of $60 million, which Schultz blamed on a poor lease deal with the city-owned KeyArena. Schultz sad the Sonics couldn’t be “competitive on the court� if it had to pay for its own arena. Clay Bennett, the head of the Sonics new ownership group, has given the city 12 months to reach a deal with him to avoid moving the team.

Schultz has a point. It is difficult for professional sports teams to compete against one another when some franchises receive government subsidies and others don’t. Local politicians are generally eager to give such subsidies, because (1) it’s not their money, (2) the local press is supportive due to their own interest in covering teams, and (3) stadiums function as a patronage machine, dispensing jobs and other favors.

Government stadium subsidies have become especially popular with sports leagues because of the growing consolidation of power in the league commissioners’ offices. Sports commissioners are a strange type of chief executive. They have no equity in the businesses they run, and they often have the ability to pick their own employers by manipulating ownership sales, league expansion, and franchise relocations.

Many commissioners have been hired for their political or legal expertise as opposed to financial or management prowess. The first sports commissioner, baseball’s Kenesaw Mountain Landis, was a federal judge with a reputation for abuse of power. Other political commissioners included baseball’s Albert B. Chandler, a former Kentucky governor and U.S. senator, and the NBA’s Lawrence O’Brien, the former Democratic Party chairman whose office was the target of the Watergate burglary. And anytime a commissioner’s job becomes open, numerous politicians are considered as candidates, something you don’t commonly see in most private-sector businesses.

Commissioners are thus politicians first and second, with businessman perhaps occupying third place. Take the example of the NBA’s Hornets. By all economic indicators, the team would fare much better by remaining in Oklahoma City permanently than returning to New Orleans. Attendance has been much higher in Oklahoma City than in pre-Katrina New Orleans. The Hornets would also have a growing Oklahoma City market all to themselves in terms of major professional sports. Returning to New Orleans means dealing with an uncertain arena situation and the prospect of asking for more government handouts from a ruthlessly corrupt Louisiana administration.

Yet NBA Commissioner David Stern has forbidden any discussion of keeping the Hornets in Oklahoma City. His reasons are exclusively political. Stern doesn’t want to face criticism from politicians and sportswriters for “abandoning� New Orleans. Stern is not making decisions based on the best interests of his employers—the NBA’s owners—but rather he’s preoccupied with not being perceived as the bad guy.

The same is true of departing NFL Commissioner Paul Tagliabue. He kept the New Orleans Saints in limbo last season, to the point of tampering with the integrity of the game by forcing the team to play a “home� game in the opposing team’s stadium. Tagliabue has been under enormous pressure to keep the Saints in New Orleans despite the poor economic outlook. Here’s a useful, if off-color, comment from the sports blog Kissing Suzy Kolber responding to a column by Sports Illustrated writer Peter King.

[Peter King:] Prohibit the moving of the Saints for five years: Make this a "for the good of the game" issue. It's ludicrous to think of kicking a city when it's so down. Now's the time to be a good neighbor and a loyal corporate partner, not greedy.

Wrong. There’s never a bad time to be greedy. This does not help the game. There’s no reason [Saints owner] Tom Benson shouldn’t be allowed to do what [Los Angeles/St. Louis Rams owner] Georgia Frontiere did, what [St. Louis/Arizona Cardinals owner] Bill Bidwell did, what every other owner in this League does: get the best deal for your team. S**t, the only reason the team hadn’t already left was because the city was paying the team to stay. And now the city’s payments are coming up light, so the team must find the city in the local bowling alley, punch the city in the face and, before the city can get up, give it a couple kicks to the ribs. Then as the team walks away, it turns and points at the city, now laying in the fetal position on the lane, and screams, "You better have my money next week! No more extensions!"

Violent imagery aside, there is a basic lesson that media pundits like King fail to grasp. Businesses move all the time in response to changes in the market. Many New Orleans residents and businesses have already relocated, never to return to the Bayou. In theory, there is no ethical reason that the Saints and Hornets cannot do the same.

But theory is complicated here by the enormous network of government subsidies involved. As noted above, the city was paying the Saints to stay in New Orleans. The Hornets 2002 deal to move from Charlotte—where the team was losing between 15 and 20 million dollars per year—had Louisiana paying $10 million in subsidies upfront, followed by millions more annually paid by tax increases. Given this politicization of sports, it’s not unreasonable for press and politicians to demand “loyalty� from franchise owners.

The problem is that sports leagues are becoming state-run utilities. The financial strength of a league is based on two primary factors: sale of broadcast rights and primary tenancy of facilities. The NFL was second fiddle to baseball for many years until the league started negotiating single television contracts and moving out of baseball stadiums into football-centered stadiums. The National Hockey League, in contrast, has suffered from a poor television deal and the fact that many teams are secondary tenants in buildings that are not optimal for ice hockey.

While stadiums are often heavily subsidized, television remains a relatively free market. NFL teams can actually cover their entire player personnel budgets with the revenue from national television contracts. But if those revenues were to substantially decline, a number of franchises would be in trouble and have to rely even more on their government-subsidized stadiums to stay afloat.

It’s not difficult to imagine professional sports as the passenger railroads of the mid-21st century. The television audience is continuing to fracture, making multi-billion dollar national sports contracts unprofitable. Leagues may start to move more programming in house, as the NFL has started to do with its cable network, but the revenue charging rent to cable systems is unlikely to match over-the-air rights fees. (And there will undoubtedly be future antitrust and other regulatory challenges to the league’s “monopolistic� broadcasting practices, which will make in-house moves more expensive if not impossible.) And as revenue decreases, labor costs will continue to increase because of the legal monopoly granted to the NFL Players Association. All of this will put renewed pressure on stadium-based revenues.

In ten to 20 years, there will probably be a new cycle of demand for new taxpayer-funded stadiums. Some existing stadiums won’t even be paid off by then, but that won’t matter to the leagues and their political sponsors. Everyone will assume more debt—primarily at taxpayer expense—to prevent even a single franchise from going out of business. (We can also expect another round of politically-driven expansion in this cycle, despite the continuing decline in player development infrastructure, particularly in basketball and football.)

Each additional layer of state intervention will make professional sports increasingly unprofitable and bureaucratically managed. The long-term consequence will be greater political control of sports. This could take many forms. Some franchises may become wards of the state in Amtrak-like “public corporations.� We could see the creation of a federal-level sports administration—particularly if the recent anti-steroid hysteria continues to attract the attention of Congress and Justice Department prosecutors. Antitrust litigation may lead to the court-ordered breakup of one or more sports leagues (a proposition I’ve actually seen in some academic papers.) And there are undoubtedly many more scenarios that could play out.