Sports franchises - History of Business in the U.S.
Definition: Professional athletic teams playing in one of the major sports leagues governing team competition
Significance: Once a secondary financial investment by wealthy fans, ownership of professional sports teams has been transformed into a major business. Moreover, the financial benefits of hosting professional teams and sporting events has led to increasing efforts by city governments to attract and keep such franchises.
Professional sports in the United States began in the last half of the nineteenth century and the early part of the twentieth century. Although many early professional sports associations failed and neither owners nor athletes tended to make much money, efforts to make such leagues successful continued. In regard to team sports, franchise owners were typically wealthy fans who also had other businesses to offset financial losses fromtheir sports teams. As the country became richer and cities grew, interest in spectator sports increased. By the last quarter of the twentieth century, professional athletics had become a very lucrative business. Both owners and athletes frequently earned very large amounts of money.
Professional athletics were not immediately successful in the United States. Leagues often failed, and ownership of a club was a very risky business investment. In 1869, professional baseball was the first professional team sport to emerge. Two years later, the first professional baseball league, the National Association was formed, but it lasted for only a short time. In 1876, the National League replaced it. During these initial years, professional baseball struggled financially. Owners of teams suffered from bad reputations.
In 1882, a new league, first known as the American Association, formed. It challenged the National League by having lower ticket prices and locating teams in big cities. In 1903, after changing its name to the American League, it made an agreement with the National League, and together the two eventually became known as Major League Baseball (MLB). By this time, professional baseball had become quite popular. Some teams became worth large amounts of money and star players were becoming relatively wealthy.
As a result of the relative financial success of professional baseball, a significant issue arose that would later become relevant to all team sports: the regulation of player movement and compensation. All other industries were required to adhere to the Sherman Antitrust Act of 1890, which outlawed collusion between multiple companies in a given industry to set prices. In 1922, professional baseball’s method of regulating players was challenged in a U.S. Supreme Court case, Federal Baseball Club v. the National League.
The Court upheld the heavily regulated method used by professional baseball, ruling that it was an amusement and not a traditional business, thereby meriting an exemption from the Sherman Act. As a result, the use of the reserve clause remained legal. This meant that when a player’s contract expired, the team with whom the contract was signed still retained the rights to the player. The other, professional team sports in the United States would use the reserve clause as well.
Two major developments came in later decades—the construction of new stadiums and television. Beginning during the 1960’s, a trend emerged in regard to the building design of stadiums. Unlike older structures that were typically constructed solely with private funds, the new stadiums were often built by cities and then rented to football and baseball teams, as they were designed to accommodate both sports. The municipalities earned revenue from advertising and the sale of concessions. This trend continued through the 1970’s.
Television had a major impact on all of the four major team sports. Eventually, it became another source of revenue for all of them. Teams in larger markets, however, would develop an advantage, especially when the cable television boom emerged during the late 1970’s, as those franchises could negotiate individual contracts with local cable stations.
As the bargaining power of players increased, the athletes were able to challenge owners more easily. These disagreements, however, led to multiple work stoppages in all four of the major team sports. The Major League Baseball Players Association experienced three work stoppages during the 1970’s. It was the third that had the greatest impact. Though no games were canceled, the lockout of 1976 was significant because it resulted in the creation of free agency. This led to substantial increase in the salaries of good players. Though baseball experienced additional work stoppages, the popularity of the sport increased. In 1981, a strike led to the cancellation of seven weeks of games. Despite this, Major League Baseball recovered, and revenue increased nearly fourfold between 1975 and 1984, to $624 million. Furthermore, the average player’s salary increased to approximately $330,000 by the mid- 1980’s.
Major League Baseball experienced its longest work stoppage during the mid-1990’s. In August, 1994, fearing the adoption of a salary cap, players went on strike. The league failed to resolve the dispute by the end of the season, and the remaining games were canceled, including the World Series. An agreement was not reached until April, 1995, resulting in the cancellation of the first three weeks of games for the 1995 season as well. Major League Baseball survived the season-ending strike. During the early twenty-first century, although ratings and attendance declined slightly, the league still enjoyed a national broadcasting contract with the FOX network. Its players earned an average salary of $2.5 million, and the lack of a salary cap made it difficult for smaller-market teams to compete.
The first professional hockey league emerged in the United States in 1904. The International Professional Hockey League folded after just three years. In 1910, the National Hockey Association was formed. For years, it had only six teams, with four in the United States and two in Canada. Eventually the National Hockey League (NHL) came on the scene.
Owners of NHL teams were making significant profits during the late 1950’s, but the players were paid low salaries. As a result, players attempted to forma union. Their efforts, however, were blocked. In 1967, the players’ second effort at forming a union succeeded, as the National Hockey League Players’ Association (NHLPA) came into existence. The NHL was also challenged by the formation of new professional leagues during the 1960’s. In response, the league doubled its number of franchises in 1967, with each new team paying $2 million to join.
The most significant challenge to the National Hockey League by a competitor occurred during the 1970’s. The World Hockey Association (WHA) formed in 1972. Once again, the NHL’s response was expansion. In 1979, the two leagues merged, with four teams from the WHA joining the NHL.
The NHL adopted a major plan of expansion during the late 1980’s. The league made this decision because of the increase in popularity of hockey during the decade. Each new franchise was required to pay $50 million. This figure far exceeded the $32 million that the National Basketball Association (NBA) was charging new clubs at the same time.
The National Hockey League experienced a major labor-management disagreement concurrent with the one in the MLB that ended its 1994 season. The NHL owners imposed a lockout prior to the 1994-1995 season. As a result, the first half of the season was canceled, as an agreement was not reached until January 1995.
The most significant work stoppage in the history of American professional sports occurred in 2004-2005. The entire NHL season was canceled. When the strike was resolved, a salary cap was imposed, aimed at helping the small-market teams. Television exposure was reduced, however, as sports cable network ESPN no longer covered the league’s games.
The National Football League (NFL) was created in 1920. Probably more than any other sport, football was indebted to television for its rise in popularity. Television had a major impact on professional sports, as it provided another source of revenue. Related to this, the NFL implemented one of the most innovative business ideas in the history of professional sports during the early 1960’s. Its teams agreed to divide the money earned from television broadcasts of their games. This became known as revenue sharing. The policy meant that teams agreed not to negotiate individual television contracts. Instead, the NFL, along with the other professional sports leagues, could negotiate television contracts as a single entity. To do so, Commissioner Pete Rozelle successfully lobbied Congress to grant the league an exemption to the Sherman Antitrust Act.
This exemption facilitated revenue sharing, which was adopted as a way to achieve more competitive balance among the league’s teams. The first television contract to broadcast NFL games following Rozelle’s lobbying was given to the Columbia Broadcasting System (CBS) for $4.65 million in 1962. Just two years later, it increased to $14.1 million. Television played an important role in the rise in popularity of the league. In 1961, the NFL also acted to officially recognize the community ownership model of the Green Bay Packers, the only professional team in the four major professional sports that is operated in this manner. The NFL does not permit any other franchise to be publicly owned.
The television contract helped create a competitive and popular league. The 1980’s, however, was a tumultuous decade for the sport. The league experienced two major disruptions in 1982 and 1987. In each season, the players went on strike, leading to significant work stoppages and adjustments. In 1982, seven weeks of games were canceled. At the time, the average player’s salary was $120,000. In 1987, another strike occurred because of the disagreement over free agency. Only one week of games was canceled, but replacement players were used the following three weeks until the strike ended.
Regardless of the work stoppages, the league remained popular. The NFL’s increase in popularity had an impact on television too. When ESPN acquired the rights to broadcast Sunday night games in 1987, it became a major success. The network would eventually create ESPN2 and other channels. The same result occurred when FOX acquired the rights to broadcast NFL games in 1994. The new network obtained several new affiliates after doing so, whereas CBS, which lost its rights to FOX, also lost affiliates.
The disagreement over free agency was finally resolved in 1993. NFL players were granted free agency in that year. Furthermore, they were guaranteed a percentage of the league’s gross revenue. In return, the owners were allowed to adopt a salary cap.
The NFL has arguably been the most successful of the four major professional sports leagues. For example, the television rights for broadcasting NFL games are the largest and most expensive of any sport. According to the current contract, five networks pay a combined total of $21.4 billion over six years (2006-2011) to broadcast league games. The networks are CBS, FOX, the National Broadcasting Company (NBC), ESPN, and the NFL Network. In addition, sharing of all revenue is in place. Furthermore, the average player’s salary in 2005 was nearly $1.4 million.
The National Basketball Association (NBA) was formed in 1949. Though the league did well during its first few decades, trouble eventually developed. During the 1970’s, the NBA struggled as the popularity of the league declined. Low television ratings led CBS to decline live broadcasts of the NBA finals during the week in 1980 and 1981. Instead, those games were shown on tape delay after the local news in the eastern and central time zones.
During the mid-1980’s, the NBA regained popularity. Great players such as Michael Jordan, Larry Bird, and Earvin “Magic” Johnson helped attract fans, but the policies of Commissioner David Stern also played a role. After taking the position in 1984, he pursued new policies that helped boost the financial status of National Basketball Association franchises. They included the salary cap and greater marketing of the association. From 1986 to 1990, CBS paid $173 million to broadcast league games, almost twice as much as the previous four-year contract.
A major work stoppage occurred in 1998. The owners imposed a lockout, which lasted until January, 1999. The first half of the season was canceled. The league eventually recovered fromthe stoppage. It has the highest average player’s salary of any league, at $4.9 million.
By the end of the 1990’s, the popularity of professional sports also created some problems for their fans. One was the price of tickets. During the decade, ticket prices increased by three times the country’s inflation rate. When concessions were added, the average cost for a family of four to attend an NBA game was $267 in 1999, a 31 percent increase since 1995.
An additional issue was the use of public money to pay for expensive new venues. Owners were using fan loyalty to request increasingly more public money to help finance the construction of arenas and stadiums, which increased dramatically. If they did not receive the money, they would threaten to move the franchise, and sometimes acted on their threats. The design of the new stadiums also became an issue. Many of them included luxurious “sky boxes.” The owners were able to make more money by having fewer people in attendance but charging more for luxury seats, which were beyond the finances of average fans.
The dominance of professional leagues in the United States and Canada was also challenged. Basketball and hockey leagues in Europe are beginning to attract some of the top players in their games. Seven players from the NBA agreed to play for professional teams in Europe after the 2007-2008 season.
Despite the challenges to the NBA and the NHL by European leagues, American professional sports were generally thriving during the early twenty-first century. Between 2000 and 2004, the number of people attending sporting events rose by more than 10 percent. The NFL has increased its revenue to $7.6 billion. Furthermore, the last team to join the league paid $700 million to do so, a fivefold increase in a five-year period. As of 2008, hockey was the only major sport that lacked a lucrative television contract. Approximately one-quarter ofNHLfranchises were struggling financially.
Conrad, Mark. The Business of Sports: A Primer for Journalists. Mahwah, N.J.: Lawrence Erlbaum Associates, 2006. Thorough coverage of the financial aspect of sports. Topics include the structure of the various professional sports leagues, the relationship between players and owners, and the business component of college athletics and the Olympics.
Danielson, Michael N. Home Team: Professional Sports and the American Metropolis. Princeton, N.J.: Princeton University Press, 2001. Examines the links between the four major professional team sports leagues and their teams’ hometowns. It analyzes the role of government in attracting and keeping franchises in their respective areas.
Euchner, Charles C. Playing the Field: Why Sports Teams Move and Cities Fight to Keep Them. Baltimore: Johns Hopkins University Press, 1994. Focusing on three case studies, the book examines the leverage owners of professional sports teams have over local governments.
Fort, Rodney D., and James Quirk. Pay Dirt: The Business of Professional Team Sports. Princeton, N.J.: Princeton University Press, 1992. Historical overview of how the four major professional team sports became big businesses.
Mangan, James A., and Paul D. Staudohar, eds. The Business of Professional Sports. Champaign: University of Illinois Press, 1991. A collection of essays that address contemporary issues in the business aspect of professional sports.
See also: advertising industry; Baseball strike of 1972; education; Intercollegiate sports; Television broadcasting industry.