National Pastime: How Americans Play Baseball and the Rest of the World Plays Soccer

Chapter Five. Fans, Franchises, and Financial Failure: Why Baseball Clubs Make Money and Soccer Clubs Don't

In April 2004 Forbes published a striking comparison between soccer and baseball. The television audience of 1.1 billion for the World Cup final in 2002 dwarfed viewership for the World Series. The English Premier League alone generated TV rights income of $670 million, almost equal to Major League Baseball’s $700 million. Manchester United, with a stock market value of $1.2 billion and operating income of $92 million, is a bigger club than the New York Yankees, with an estimated value of only $832 million and reported operating losses of $26 million. According to Forbes, the top twenty European soccer clubs had an average franchise value of $443 million, revenues of $159 million, and operating income of $16 million, bigger on every count than the figures for Major League Baseball ($295 million, $129 million, and –$2 million respectively). By implication, the future of soccer looked bright and that of baseball looked bleak. Yet in July 2004 Business Week published an article headlined “Can Football Be Saved?” According to Business Week: Many of the organizations at the core of the sport—the roughly 400 first-division teams from Ireland to Ukraine— 116 chapter five Fans, Franchises, and Financial Failure Why Baseball Clubs Make Money and Soccer Clubs Don’t 05 8258-6 chap5 2/25/05 1:14 PM Page 116 Fans, Franchises, and Financial Failure 117 are in dismal financial shape. Clubs typically have a shot at turning a profit only if they qualify for the elite UEFA Champions League or the UEFA Cup, the two main postseason tournaments. Even top teams in football-crazy countries lose money. Deloitte estimates that Italy’s first-league clubs collectively lost $485 million in the 2002 season on sales of $1.4 billion—and probably lost at least $360 million last year. It all adds up to a crisis which, if left unchecked, could leave the whole game permanently weakened. Even in the much admired British Premier League, probably only five teams out of 20 made a pre-tax profit in the season just ended.1 Ten years ago, no one would have compared a baseball club with a soccer club in business terms. Baseball clubs have long been run on clear business principles and have produced significant revenue streams; soccer clubs have been largely social and political organizations that have generated a tiny cash flow and have set out to do little more than balance the books. The influx of new money, especially broadcasting income, has dramatically raised the profile of soccer clubs, but as the Business Week article suggests, the clubs still struggle to balance the books. In this chapter we compare the financial organization of baseball and soccer clubs. Notwithstanding claims that they are losing money, we argue that all the evidence points to baseball clubs as significant creators of profit. This follows from the monopolistic nature of Major League Baseball, an aspect of the game that has given rise to concern over many years. In soccer, by contrast, we argue that the nature of the competitive structure of the game limits the ability of all but a small elite to generate profits. Baseball By and large, Major League Baseball franchises make money. Of course, some make more money than others, and occasionally some owners even find themselves out-of-pocket. But the general picture is one of financial good health. The fundamental reason that makes us confident of this conclusion is that baseball is a monopoly. Monopoly, being the absence of competition , is almost always profitable. Indeed, the fact that it is easy for a monopolist to make a profit means that monopolies are usually regulated by government in order to protect the interests of consumers (consider electric 05 8258-6 chap5 2/25/05 1:14 PM Page 117 118 National Pastime power supply and its regulation). But because baseball is not regulated, the monopolists are free to make as much money as they can. Of course, there will always be an argument about how much money, and in a later section we will show how baseball can often conceal its underlying profitability. But the important point we make here is that, on the whole, the baseball monopoly is profitable, and this contrasts sharply with the financial crises experienced in the soccer world. Ownership Structure By 1915, following the demise of the Federal League, Major League Baseball had become an unchallenged monopoly. Since 1922...