Wednesday’s Book Review: “Keeping Score: The Economics of Big-Time Sports”

Keeping Score: The Economics of Big-Time Sports. By Richard G. Sheehan. South Bend, IN: Diamond Communications Inc., 1996.

Although it is now more than 20 years old and sports have changed significantly since the mid-1990s, there are several important insights in this book about the economics of sport in America. At the time this was written the author, Richard G. Sheehan, was a professor of finance and business economics at the University of Notre Dame, and his knowledge of statistical analysis and economics proved invaluable in writing this book. I recently read this book and found it illuminating when considering the nature of the sports business.

Sheehan leads with individual chapters on the major team sports in the United States—Major League Baseball, the NBA, the NFL, college football, and the NHL—tracing their individual situations and economic circumstances. In essence, MLB is largely capitalistic and everyone for themselves while the NFL is a socialistic system in which revenue sharing dominates everything. Both extremes, and everything in between have their pros and cons, which Sheehan lays out. Sheehan also lays out the manner in which salary caps, revenue sharing, salaries and arbitration and free agency, and competitive balance work.

In the case of MLB, my specific area of interest, he recommends against a salary cap as being counterproductive but comes down in favor of greater revenue sharing. That approach has worked well in the NFL, allowing teams in such small markets as Green Bay to be successful.

Sheehan finds that one of the greatest problems of all professional sports is that owners have divergent priorities. He boils this down to a scale in which there are two different extremes, winning games and championships on one end and maximizing profits on the other.

Sheehan asserts that almost all sports teams make money, some make an ungodly amount of money, but a few—a very few—lose money. If as an owner you want to win championships then you must spend more on the franchise, which cuts into your profits. If you are willing to forego championships, you can use the team as a cash cow. There are examples of owners that do one or the other. Most want both; most can’t have both all the time.

There are four conclusions that Sheehan reaches about sports in America. As he writes: “First, all four leagues on average have been and remain very profitable. The average return to major league professional franchises has been greater than the average return on stocks. Second, profits are not evenly distributed. In each league, some franchises barely break even or lose money.…Third owners have different motives for buying and owning a professional sports franchise. Some are in it primarily for the money while others are in it primarily for wins or ego or civic pride. And fourth, not all franchises are competently managed” (pp. 155-56). No kidding.

Sheehan also pooh-poohs arguments about small market versus large market teams and their inability to compete with each other. This seems to have taken hold in MLB largely because of the dominance of the New York Yankees, even as other large market teams have failed to be nearly as successful.

If market size was really the determining factor the Yankees, the New York Mets, the Chicago Cubs, the Chicago White Sox, the Los Angeles Dodgers, and the Los Angeles Angels of Anaheim would dominate the championships every year. They don’t. The Dodgers and Angels have fielded some very good teams and won some championships, as did the White Sox in 2005, but they have hardly been dominant.

As Sheehan writes, “Market size may play a small role, but it is a long way from the whole explanation of profits, wins or anything else. Whether a team wins and whether it is well run both contribute more to financial success” (p. 161). That helps explain the success of the St. Louis Cardinals over the years, a team that has enjoyed good seasons and championships for years.

When it comes to labor relations, stadium deals, and the like Sheehan has some very pointed comments about the ridiculous position of owners: “Putting it most baldly, restricting free agency only restricts the players from selling themselves; it does not restrict owners from selling them. It should not be surprising that owners like that policy. However, it has no economic justification. The owners can only be viewed as a gaggle of greedy hypocrites as long as they simultaneously play one city against another or one TV station against another to wring the best contract possible, and yet say that players should be denied the unfettered ability to pit owner against owner to wrest the best possible contract” (p. 186).

Richard Sheehan’s Keeping Score: The Economics of Big-Time Sports is a thoughtful and useful book about the economics of sport. He has one final comment that I found particularly apropos: owners should stop belly-aching about their bottom line and how they are losing money, etc., etc., etc., until they open their books and allow audits. In other words, prove it. Virtually none do so.

Failure to take this action, Sheehan believes, should result in government at all levels “pull[ing] the plug on all subsidies. In a nutshell: no information—no tax breaks, no anti-trust exemption and no municipal subsidies” (p. 327).