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July 22, 2009

The Biz Beat

Doom and Gloom?

by Shawn Hoffman

"Antitrust case could be Armageddon."

That's the title of Lester Munson's apocolyptic ESPN.com article, which has caused the sports blogosphere to implode on itself, and has Teddy Roosevelt spinning in his grave. Some predictions from the article:

"Leagues will enjoy unfettered monopoly powers. ... Salaries for players and coaches will drop. ... Free agency will wither away. ... Sponsors will pay more. ... Fans will pay more for tickets, television and internet broadcasts, and for paraphernalia. ... And owners' profits will soar."

Nothing like being provocative and grabbing attention. There's just one problem: Munson's Doomsday scenario is a total fallacy. A little background: American Needle had been making NFL team- and league-branded hats for over two decades, up until the the NFL signed an exclusive deal with Reebok in 2000, effectively shutting out all other manufacturers. ANI sued the league in 2004, claiming that the NFL had violated the Sherman Antitrust Act by shutting them out of the market. The NFL countered by saying that the league should be viewed as one entity, instead of thirty-two distinct, competing franchises, making ANI's claim irrelevant.

The league won in the lower courts, but ANI refused to let it go, petitioning the Supreme Court to review the case. In a surprise move, the NFL actually supported the request, figuring that it could dispense of all future antitrust cases if the court ruled in its favor. That sent sports law professors and other assorted "experts" into a hyperbolic rampage, claiming that an NFL win would destroy professional sports as we know them.

But is that really true? Let's consider some of Munson's predictions:

"LeBron James, who had been expecting a free-agency bonanza when his contract with the Cleveland Cavaliers expired after the 2009-2010 season, opens the 2010-11 season with the Cavs, the only team with the right to sign him. Cleveland retains the NBA MVP by slotting his salary into the new league-wide scale."

If there's any claim that can be easily dismissed, it's this one. This is a collective bargaining issue, not an antitrust issue. As long as the players have a union in place, and these issues are governed by the CBA, the owners cannot unilaterally eliminate free agency, or create a set salary scale. General Motors is a single entity; it can't impose whatever salaries it chooses on its union employees.

The Maurice Clarett case, which went to the Supreme Court just a few years ago, is a perfect example here. The NFL's rule that players can only be drafted if they were three or more years out of high school is an obvious violation of antitrust laws. But because the rule is subject to collective bargaining, the courts ruled against Clarett.

Two decades earlier, when baseball's owners colluded to keep free-agent salaries down, the players union didn't sue in federal courts. Collusion was a violation of the sport's CBA, putting it under the jurisdiction of the sport's arbitration system. The players simply filed their grievances, and won hundreds of millions of dollars in damages. Had they taken the owners to court on antitrust grounds, the case almost certainly would have been thrown out.

"Minnesota Vikings defensive coordinator Leslie Frazier, the hottest commodity for every opening in the NFL over the past six months, signs on to be the new head coach of the Dallas Cowboys at a league-determined salary that will pay him far less than he'd have made if the Denver Broncos had chosen him over Josh McDaniels in 2009."

This one is certainly possible, but it begs the question: Why haven't baseball teams been doing this for the last 87 years, considering they've been exempt from antitrust laws since 1922? Maybe they haven't wanted to rock the boat, and risk getting sued. But it's just as possible that they don't feel like it's even necessary. Forcing middle managers to take massive pay cuts won't exactly boost morale, nor is it an effective way to attract top talent.

"The Ricketts family, new owner of the Chicago Cubs, scraps plans for its own cable channel because Major League Baseball has barred all such broadcasts, as well as webcasts, by individual teams."

Another swing and a miss; if the leagues were granted full antitrust immunity, wouldn't they want to use it to make more money?

"A young Detroit Red Wings fan who has saved his pennies for months shells out $300 to buy a replica sweater that would have cost him $80 in 2009."

If the teams could charge $300 for that jersey, they already would. The only reason that merchandise prices could go up is that the leagues could give certain manufacturers (i.e. Reebok) more pricing power via exclusive deals. But they've already been doing this for decades. If a league feels that prices are being held down by having a glut of manufacturers in a certain space, they'll simply cut the number of manufacturers. This ruling would just validate a practice that the leagues already use.

As for "tickets, television, and internet broadcasts," which Munson mentioned previously, the teams don't actually compete on these, unless they're in the same market. Nationally, the leagues already sell television and internet broadcast rights collectively, so this policy wouldn't change.

"Lockouts and strikes loom large in all four major team sports as an era of relative peace on the sports labor front ends and owners begin to exercise their new power over player unions."

Again, collective bargaining issues shouldn't be affected. The unions wouldn't be able to decertify and take the leagues to court anymore (this is how the NFL players won free agency), so the owners could theoretically gain some leverage in CBA negotiations. But realistically, this is only used in the most extreme situations, and I'm not sure there are any current issues that are so important that they would prompt one of the unions to decertify anyway.

So what could this ruling affect? Obviously, it would impact the leagues' exclusive deals with suppliers and licensed manufacturers. (That is, after all, the reason for the case in the first place.) Hypothetically, it could also give the leagues' governing bodies even more power over territorial rights, franchise relocations, expansion fees, and access to ownership. But more than anything, it would save them a great deal of time and money, which otherwise would be spent defending small antitrust cases such as this one.

There's actually more downside risk than upside reward, if you think about it. The leagues already act as a single entity regarding those issues listed above, meaning that a win in this case simply reaffirms their existing practices. But a loss could be a major blow; the leagues could lose control over territorial rights and ownership access, the teams would all have to negotiate supplier contracts separately, and just about every collective practice would be open to scrutiny. (If the teams are all separate entities, why should MLB Advanced Media have the exclusive right to broadcast every baseball game online?)

There's also the possibility that the court only rules on this policy in regards to licensing. Yes, it could be applied to other areas, but it's highly unlikely that the court would ever allow teams to collude on coaches' salaries.

So, my advice to everybody is to calm down. After all the commotion from hysterics such as Munson, the only thing likely to change is the NFL's legal bill.

Shawn Hoffman is an author of Baseball Prospectus. 
Click here to see Shawn's other articles. You can contact Shawn by clicking here

Related Content:  Territorial Rights

10 comments have been left for this article. (Click to hide comments)

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newsense

Doesn't declaring the NFL a single entity make it more vulnerable to antitrust law? they don't have the MLB exemption so don't they have a pro football monopoly (assuming arena football and the CFL (and NCAA?) don't constitute adequate competition)?

Jul 22, 2009 10:36 AM
rating: 0
 
cjmulligan79

Generally spot on, but you do miss one very critical issue. While you are correct that CBAs are not subject to antitrust laws (they can't be, by their very nature they are "agreements to restrict competiion"), unions do use the threat of antitrust laws in negotiations. Because if a union de-certifies, as the NFLPA did in the late 80s, the entire "players reserve" system of various leagues will be subject to the "rule of reason", assuming there is no antitrust exemption. The rub is, no one is sure (including owners) if a court would be more kind to the owners than would the players' union in CBA negotiations. Therefore, the threat of antitrust enforcement does aide the union.

Also, remember that a lot of things may be allowed, even if sports leagues are subject to antitrust laws, because the rule of reason HAS to permit some agreements among franchises--what that line is no one knows. But leagues are restricted anyway, because if they are exempt from antitrust laws, the leagues still must compete with other forms of enterntainment, including potential start up leagues.

Jul 22, 2009 10:43 AM
rating: 1
 
Shawn Hoffman

You're right on decertification, it does give the players a bit more leverage. But it would only be done when a CBA is 100% lopsided in one direction. The NFL players aren't going to give up their 60+% share of league revenue at this point. Like I wrote, decertification isn't really that much of a threat anymore, barring some really extreme situation, and I think both sides know it.

Also, any contract is really an "agreement to restrict competition." It's technically anti-competitive for A-Rod to promise to only provide his services to one team over a ten year period. Antitrust laws can be very scary when you dig down deep...

Jul 22, 2009 11:49 AM
rating: 0
 
Erik Visokey

Shawn, I don't understand your GM analogy. I'm no lawyer so maybe I don't quite get it but if the NFL were a single entity, wouldn't all of the players then work for the NFL and league management could assign them to whatever branch they like? If you work GM you can't negotiate with the New York office and the Detroit office and take the better deal. You work for the branch they send you to, right? And as for imposing salaries, they can offer you a 10% raise and say if you don't like it maybe Ford is hiring. Am I missing something?

Jul 22, 2009 11:35 AM
rating: 0
 
Shawn Hoffman

GM employees could hypothetically negotiate "free agency" into their agreements, if they wanted (it would be counterproductive obviously, since auto workers are generally pretty replaceable, whereas baseball players are scarce). In that case, each plant within GM could be considered its own unit, just as the Steelers or the Ravens could be considered individual units within the NFL.

Jul 22, 2009 11:44 AM
rating: 0
 
Erik Visokey

Why would the NFL allow players to negotiate freely with individual teams if they could avoid it? Without a legitimate competing league, it seems for most players the choice would be playing in the NFL under the NFL's terms or bagging groceries.

Jul 22, 2009 11:59 AM
rating: 0
 
cjmulligan79

That's why courts always read a "reasonable" clause into the Sherman Act. But CBAs are obviously unreasonable as employees who are supposed to be competing for jobs literally conspire to fix labor costs. That's why the CBA explicitly exempts itself from antitrust exemption.

This thing is going to be decided by rule of reason, not single entity. FTC Merger guidelines say that if you can raise your price by 5% or more, there is a presumption that you are your own market. All professionalsports leagues clearly have that much pricing power and more.

I agree with you though, the actual real-world consequences of a decision either way are negible because the thing fans care most about (player movement) is controlled by the CBA and de-certification was only a desperate (and brilliant) effort by a very weak NFLPA.

Jul 22, 2009 12:29 PM
rating: 0
 
Darsox64

"If there's any claim that can be easily dismissed, it's this one. This is a collective bargaining issue, not an antitrust issue. As long as the players have a union in place, and these issues are governed by the CBA, the owners cannot unilaterally eliminate free agency, or create a set salary scale. General Motors is a single entity; it can't impose whatever salaries it chooses on its union employees."

Absolutely untrue. You're ignoring the possibility (or more accurately) that a private organization and union can work in concert to screw the consumer. This is an important anti-trust issue, albeit one that is generally ignored. CBAs are intrinsically suspicious because they lead to outcomes that are not subject to the natural, creatively destructive processes inherent to the free market.

The real problem is the antitrust exemption that allow the leagues more or less to regulate all professional baseball in the US. If competing leagues were still fighting each other (remember that the Federal League tried to less than a decade before the exemption) AND there were no collectively bargained baseball, we would have a higher quality of the on-field product at a lower price to the consumer than we would otherwise.

That is to say, franchises would drop out and appear more frequently, players would have lower salaries, and ticket prices would be lower. And we'd have better baseball.

Jul 22, 2009 13:33 PM
rating: -1
 
Shawn Hoffman

Here's the problem with that idea: the business of spectator sports are based on the myth that the outcome of the games matter. New leagues are notoriously hard to build b/c the fans have no loyalty to the teams -- in 1901, the AL managed to break through those objections. I don't believe that it would be possible today, unless someone was willing to invest literally billions of dollars up front.

On the same level, fans suffer when teams relocate. If the 30 mlb teams were all considered distinct entities, and the courts threw the book at them, we could end up having 20 teams in New York, Boston, and Chicago. This would be similar to the European soccer system, where one of the same 2 or 3 teams wins every year.

Jul 22, 2009 14:11 PM
rating: 0
 
cjmulligan79

Darsox--you are absolutely correct that CBAs violate the spirit of the Sherman Act, but CBAs are statutorily exempt from antitrust laws.

Jul 23, 2009 05:51 AM
rating: 0
 
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