Neil Longley the Sustained Competitive Advantage of The

Sports Economics, Management and Policy Series Editor: Dennis Coates

Neil Longley An Absence of Competition The Sustained Competitive Advantage of the Monopoly Sports Leagues Sports Economics, Management and Policy

Series Editor Dennis Coates

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Neil Longley

An Absence of Competition

The Sustained Competitive Advantage of the Monopoly Sports Leagues Neil Longley Isenberg School of Management University of Massachusetts Amherst , MA , USA

ISSN 2191-298X ISSN 2191-2998 (electronic) ISBN 978-1-4614-9484-3 ISBN 978-1-4614-9485-0 (eBook) DOI 10.1007/978-1-4614-9485-0 Springer New York Heidelberg Dordrecht London

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Springer is part of Springer Science+Business Media (www.springer.com) Pref ace

As a child growing up during the 1970s, I was always somewhat fascinated by rival sports leagues. It was truly the golden era of rival leagues: the American Basketball Association (ABA), the World Hockey Association (WHA), and the World Football League (WFL) had all formed within a few years of each other. To me, the existence of these rival leagues was perfectly “normal,” in that I assumed that interleague competition in a sport was somehow the natural state, and that rival leagues would always be around to be, at the very least, an irritant to the established leagues. While I was too young at the time to appreciate the full history and signiﬁ cance of the American Football League 10 years earlier, the rival leagues of the 1970s were very real and present to me. There was a sense of newness and freshness, and even mys- tery, about these leagues that was somehow intriguing. In many ways, these rival leagues were a contradiction. On one hand, they were to be admired: they were renegades, boldly and brashly challenging the old-guard, the establishment. They put franchises in unlikely locations, had radical innovations like a red-white-and-blue basketball, and were able to convince some of the best athletic talent of the time to spurn the established leagues and take a ﬂ ier on an upstart, unproven, competitor league. At the same time, these rival leagues were often highly unstable, and frequently seemed to be in a state of disarray—owners changed rapidly, franchises sometimes relocated or folded in midseason with little or no warning; teams had players’ jerseys and equipment seized for not paying bills; games were played in venues that were often decrepit and dingy, and the list goes on. Rival leagues were often the subject of ridicule in an unconvinced sports media, who loved to point out the “bush league” events that often occurred in these upstart leagues. To the average fan, probably the most visible impact of rival leagues was on the player front. In an era where the reserve clause reigned supreme, voluntary player mobility within the established leagues was almost unheard of—fans were accus- tomed to seeing most star players never leave their original teams. Suddenly, however, players like Bobby Hull, an NHL superstar at the time, and a player I had

v vi Preface grown-up watching, had left his long-time team, the Chicago Black Hawks, and signed a contract with a brand new team in a brand new league, and in a city (Winnipeg) that few American fans had probably ever heard of before. Football was no different—the Miami Dolphins won the 1974 Super Bowl, only to have three of the team’s biggest stars announce 2 months later that they would be joining the upstart WFL. At the time, I had diffi culty in fully appreciating the exact reasons for all of this—I knew it had something to do with money, but my analysis at that age did not delve much deeper. Years later, and now as an economist, the issue of rival leagues has continued to intrigue me. I would ultimately come to realize that this period of intense interleague competition of the 1970s was more the exception, rather than the norm. All of the rival leagues of that era eventually disappeared—they either folded, or merged with the established league—and, for the past 30 years, the professional sport industry returned to what is apparently its “natural” state, that being monopoly. To economists, who generally see competitive markets as providing many social benefi ts, this monopoly structure in sport has always been viewed with concern. However, my goal in this book is not to delineate the various redistributional and effi ciency impacts of the sport monopolies—this has been done elsewhere by many other economists, and there is now a wealth of literature examining these issues, across a wide range of specifi c topic areas. Instead, my goal is to gain further insight into the specifi c nature of the competition itself that occurred between the established leagues and the various rivals that challenged them. This approach is based on the premise that market structures are evolutionary, and that the monopoly positions of each of the four leagues today cannot be explained in an insular, static, manner, but are instead the aggregation of many dynamic processes that have occurred over several decades. The research method used in this book fi rst involves clearly delineating the assets\resources that established leagues have tended to possess, and then to determine what rival leagues of the past did to attack these advantages. This type of investigative approach is based on the premise that, by studying these periods of interleague competition of the past, one can gain critical insights into whether the monopoly leagues of today can ever realistically be challenged again in the future. Thus, while the subject matter of this book is largely historical, the implications of the book are intended to be very much forward-looking. There is actually a dearth of literature examining rival leagues in the sports economics fi eld. In fact, Quirk and Fort’s 1992 book Pay Dirt is one of the very few pieces that ever give rival leagues more than a passing mention. This lack of serious analysis is curious, particularly given the historical importance of rival leagues. Quirk and Fort note that almost half of the 103 major professional sport franchises that existed at the time of their writing owed their existence to rival leagues. In some ways, this book extends the work of Quirk and Fort but more heavily concentrates on specifying the exact nature of the market dynamics that existed in every instance where an established league was challenged by a rival. It takes a multidisciplinary approach to the analysis—supplementing a standard economics approach, where the explanations tend to focus on market structure issues, with concepts borrowed from the strategic management literature. The latter perspective Preface vii enables one to more closely discern the extent to which managerial decision making may have played in the success or failure of past rival leagues, and, as importantly, to discern what types of managerial challenges would face any rival leagues that may emerge in the future. At the same time, the book is not intended to be an exhaustive analysis of every aspect of rival leagues. Studying rival leagues is really a means to an end. The ultimate objective of the book is to gain greater insight into the nature of competition and competitive advantage within the closed-league structure of North American professional sports. The book is written so as to be of interest to a wide audience, but will be of particular interest to those with backgrounds in economics or strategic management. Some base-level knowledge of these disciplines is presumed, but those without such backgrounds should still fi nd the essence of the material readily accessible.

Amherst, MA, USA Neil Longley

Acknowledgements

As always, a project of this nature is possible only with the assistance and support of many individuals. Most importantly, I wish to thank my wife, Susan Griffi n. She has always been unfailingly supportive of my career and has made many sacrifi ces for me throughout the years. Without her, this book would not have been possible. To Susan, I owe a tremendous amount. On the professional side, I have been positively infl uenced over the years by many colleagues in sports economics, both in North America and in Europe. Rod Fort, my Ph.D. dissertation supervisor at Washington State University, was a strong early infl uence, and through his guidance I was able to grow and refi ne my interests in the discipline. I also owe an intellectual debt to Rod’s 1992 classic book Pay Dirt , coauthored with Jim Quirk; the book provides one of the very few serious scholarly analyses of rival leagues, and its intellectual ideas and exhaustive data set were of tremendous value to me in writing this book. Particular thanks are also due to the many sports economists with whom I have coauthored papers—people like Leo Kahane, Rob Simmons, Pamela Wicker, Christoph Breuer, Kevin Mongeon, and Stefan Szymanski—all of whom have been important sources of intellectual engage- ment and support. Thanks also to the many participants over the years in the sports economics sessions at the annual Western Economic Association meetings and to the participants at the annual European Conference in Sport Economics. These con- ferences have always been enjoyable and enlightening. My colleagues in the Isenberg School of Management at the University of Massachusetts, Amherst, provided a supportive environment in which to conduct the research for this book, and I thank them for that. A debt of gratitude is also due to my editor at Springer, Jon Gurstelle, who fi rst approached me about the possibility of writing this book and who has been extremely supportive throughout the process. Thanks also go to Dennis Coates, the editor for the series Sports Economics, Management and Policy ; Dennis provided many helpful comments on earlier drafts of this book. I also wish to thank Susan Westendorf at Springer for all her work on the production side of the book.

Contents

1 Introduction ...... 1 2 Some Conceptual Foundations: A Primer on the Economic Structure of Professional Sport ...... 9 2.1 Sports Leagues as Monopolies ...... 9 2.2 The Core Foundations of the Spectator Sport Business ...... 10 2.3 The Appropriate Unit of Analysis: Leagues or Teams? ...... 13 2.4 Deﬁ ning Competition...... 16 2.5 The Current State of the Monopoly Leagues: Structure, Conduct, and Policies ...... 17 3 The USFL as a Case Study ...... 23 3.1 The USFL as a Microcosm of Issues Facing Rival Leagues ...... 23 3.2 Foundations ...... 25 3.3 1983: The First Season ...... 29 3.4 1984: The Second Season ...... 31 3.5 1985: The Final Season ...... 35 3.6 A Synopsis ...... 39 4 A Brief History of Post-World War II Rival Leagues ...... 41 4.1 Emerging from the War: The Late 1940s ...... 42 4.2 The 1950s ...... 44 4.3 The 1960s ...... 47 4.4 The 1970s ...... 52 4.5 The 1980s ...... 55 5 Explaining Competitiveness: Alternate Theoretical Frameworks ...... 57 5.1 A Standard Economics Approach ...... 57 5.2 A Public Choice Approach ...... 58 5.3 A Strategic Management Approach: The Resource-Based View ...... 59

xi xii Contents

6 Property-Based Resources: Franchise Locations, Stadiums, and Players ...... 65 6.1 Production Function of Sports Leagues ...... 65 6.2 Franchise Locations ...... 66 6.2.1 Conceptual Foundations ...... 66 6.2.2 Empirical Evidence ...... 67 6.2.3 Franchise Instability: Relocations and Foldings ...... 75 6.3 Venues: Stadiums and Arenas ...... 79 6.3.1 Conceptual Foundations ...... 79 6.3.2 Empirical Evidence ...... 81 6.4 Playing Talent ...... 88 7 Knowledge-Based Resources: Managerial Competencies ...... 95 7.1 Conceptual Issues ...... 95 7.2 Empirical Evidence ...... 98 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues ...... 105

References ...... 115

Index ...... 117 List of Tables

Table 2.1 Number of franchises, established leagues: by decade ...... 18 Table 2.2 Franchise locations, by Nielsen TV markets: 2013 ...... 18 Table 6.1 NFL: franchise locations and stadiums, 1946 ...... 68 Table 6.2 AAFC: franchise locations and stadiums, 1946 ...... 68 Table 6.3 NFL: franchise locations and stadiums, 1960 ...... 69 Table 6.4 AFL: franchise locations and stadiums, 1960 ...... 70 Table 6.5 NFL: franchise locations and stadiums, 1974 ...... 71 Table 6.6 WFL: franchise locations and stadiums, 1974 ...... 72 Table 6.7 NFL: franchise locations and stadiums 1983 ...... 73 Table 6.8 USFL: franchise locations and stadiums, 1983 ...... 82 Table 6.9 NBA: franchise locations and stadiums, 1967 ...... 82 Table 6.10 ABA: franchise locations and stadiums, 1967 ...... 83 Table 6.11 NHL: franchise locations and stadiums, 1972 ...... 83 Table 6.12 WHA: franchise locations and stadiums, 1972 ...... 84 Table 6.13 MLB and Continental League franchises: 1960 ...... 84 Table 6.14 Franchise relocations: rival leagues, ﬁ rst three seasons of existence ...... 85 Table 6.15 Cities with rival league teams ...... 86 Table 6.16 Some prominent players who signed with rival leagues ...... 93

xiii xiv List of Tables

Table 7.1 Ownership turnover in rival leagues: ﬁ rst two seasons of existence ...... 99 Table 7.2 Average ownership tenure in established leagues at time of emergence of rival league ...... 102 Chapter 1 Introduction

The book will take a multidisciplinary approach to analyzing the nature of “competition” and “competitive advantage” within the US pro sport industry. By many measures, the four major pro sport leagues in the United States—the National Football League (NFL), National Basketball Association (NBA), National Hockey League (NHL), and Major League Baseball (MLB)—are now some of the most successful business entities in the country. Part of the success of the “Big Four” can be measured simply in terms of longevity—the NFL, NHL, and MLB have existed for over 90 years, and the NBA has been in business for over 60 years. Relatedly, these leagues have generally been highly proﬁ table throughout their respective existences, with franchise values steadily growing, and often at levels well above market rates of return. Not coincidental to this success is the fact that all four of these leagues currently operate as monopolies. While all have faced rival leagues at some point or another in their existence, all were able to successfully dispense with these rivals. Because of the inability of any rival leagues to survive as a long-term force, it has been monopoly, and not competition, that has been the prevailing market structure in the industry. In fact, in recent decades, the monopoly position of the “Big Four” appears increasingly impenetrable—none have faced a credible threat from a rival league since the demise of the United States Football League (USFL) in the mid-1980s. The book takes an evolutionary approach, in that it argues that the monopoly position of each of the four leagues today cannot be explained in an insular, static, manner, but is the culmination of many dynamic processes through many decades. What exists now is a function of the various historical events that precede it—of, for example, events that occurred 10 years ago, which, themselves, are a function of events 10 years before that, and so on. Today’s monopoly market structures are what could be termed “path dependent”—they did not simply “happen,” but are instead a complex function of everything that has occurred up to this point. Thus, if we are to better understand the reasons for the current competitive dominance of the Big Four, we must also understand the historical context that led the industry to this point. This book is based on the premise that studying the periods in

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 1 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_1, © Springer Science+Business Media New York 2013 2 1 Introduction which established leagues have faced direct competition from rival leagues can be particularly revealing and informative, not just in a historical sense but also to help better understand whether existing leagues can ever realistically be challenged in the future. There is much to learn from seeing how rival leagues attempted to attack the established leagues’ dominance and how the established leagues responded to these threats. Of the four major professional team sports in the United States, the sport of football has seen the most, by far, interleague competition. Seven different rival leagues have emerged since the NFL’s formation in 1920. In the early days of the NFL, most of its franchises were located in small- to medium-sized cities in the Upper Midwest. Professional football in that era was still very much a secondary sport in America to baseball. Even within the sport of football, it was college football, and not professional football, that was the dominant game, and professional football struggled in its early years to compete with the college game. Its lack of a strong foothold and its early struggles also provided the opportunity for competitor leagues to emerge. In fact, from the formation of the NFL in 1920 through to the late 1930s, three different competitor leagues, all known as the American Football League, emerged to challenge the NFL. None survived for more than 2 years, and none gained any type of a merger. After World War II, the NFL faced an immediate challenge in the form of the All-America Football Conference (AAFC). The AAFC began play in 1946 and infl icted suffi cient damage on the NFL that the two sides agreed to a merger in 1949, with three AAFC teams joining the NFL—the Baltimore Colts, San Francisco 49ers, and Cleveland Browns. A decade later, in 1960, another threat to the NFL emerged in the form of the American Football League (the fourth such league to have that name). This AFL provided a much more formidable competitor than earlier versions of its namesake and, in fact, turned out to be the most successful competitor league in the history of US professional sport. A 1966 merger agreement between the two leagues saw all eight of the original AFL teams merged into the NFL, along with two other AFL expansion franchises that had not yet begun play. While the merger agreement did not take effect until after the 1969 season, the two sides agreed to immediately cooperate on many matters, including conducting a common draft and holding an NFL-AFL championship game (now, of course, known as the Super Bowl), both starting with the 1966 season. This resounding success of the AFL in getting a complete merger with the NFL did not go unnoticed by other prospective sport entrepreneurs. In 1974, the World Football League (WFL) began play, signing several prominent NFL players. The league was cofounded by California lawyer Gary Davidson, who had previously cofounded both the American Basketball Association (ABA) in 1967 and the World Hockey Association (WHA) in 1972. Both of these leagues would go on to get mergers with the established leagues: the ABA with NBA in 1976 and the WHA with the NHL in 1979. However, the WFL proved to be much less successful than these other Davidson leagues, meeting with almost immediate fi nancial diffi culties and ultimately folding halfway through its second season. In 1983, the United States Football League (USFL) began play, signing many top college stars, including the previous season’s Heisman Trophy winner, Herschel 1 Introduction 3

Walker. The league had a number of well-fi nanced owners, including real estate mogul Donald Trump, and had a network TV contract with ABC Sports. However, none of these were enough and, after large-scale losses over its fi rst 3 years of play, the league ceased operations at the end of the 1985 season. The USFL proved to be signifi cant because not only was it the last rival league to challenge the NFL, but it was the last rival league in any of the Big Four sports, and signaled the end of the era of interleague competition in modern American sports. Baseball’s development was quite different than that of football. As “America’s pastime,” baseball’s roots as a professional sport predate the NFL by almost half a century. As early as the 1860s, professional teams had formed, with some operating independently without any formal league structure and often touring across the country. These early days of baseball were often plagued with problems— game- fi xing scandals, player eligibility issues, etc., not to mention a lack of standardization of rules. The formation of the National League (NL) of baseball in 1876 was intended to remedy many of these early problems. In what would ultimately turn out to be an historic act, the NL implemented the so-called reserve clause in 1879, a clause in player contracts which gave their existing teams the perpetual right to renew the player’s contract. In essence, the reserve clause prevented players from voluntarily switching teams. By 1901, the NL faced the emergence of a competitor in the form of the upstart American League (AL). The formation of the AL resulted in a bidding war for players between the AL and NL, and the two leagues agreed to a noncompete partnership in 1903. The two leagues faced a brief period of competition from the Federal League in 1914, but the Federal League folded after only 2 years of existence. However, out of the Federal League’s demise emerged a court challenge by the owners of the Federal League’s Baltimore Terrapins. The Terrapins owners fi led an antitrust suit against the NL and AL, alleging these leagues had conspired to monop- olize baseball. The case ultimately went all the way to the Supreme Court, which ruled in 1922 that baseball did not involve interstate commerce and hence was not subject to antitrust laws. This antitrust exemption would be an important part of baseball’s development as a business. After the demise of the Federal League, and the subsequent antitrust exemption, organized baseball faced no other serious competitive threats for almost four decades. It was an era of unmatched stability for any professional sport league. By the end of World War II, baseball had 16 franchises, the exact same 16 franchises that existed in 1903 at the time of the NL-AL partnership agreement. However, by the 1950s, baseball’s refusal to expand, combined with the departure of two (the Giants and Dodgers) of New York’s three teams to California, provided a potential opportunity for a rival league to emerge. In 1960, a group of entrepreneurs, some of whom were also involved in the formation of the AFL in football, attempted to start a rival baseball league. The league, called the Continental League, hired baseball icon Branch Rickey as its fi rst commissioner and was scheduled to begin play in 1961. However, the emergence of the Continental League quickly prompted MLB to break its half-century moratorium on expansion, and MLB announced plans to 4 1 Introduction add clubs in many of the markets the Continental League was targeting, ultimately resulting in the upstart league folding before it ever began play. In basketball, like football, it was the college game, and not the pro game, that dominated the fi rst half of the twentieth century. The fi rst signifi cant pro basketball league to form was the National Basketball League (NBL) in 1937 and had many of the stars of its day, including legendary George Mikan. Like the early days of the NFL, the NBL’s franchises were predominantly in smaller- to medium-sized markets in the Midwest. The Basketball Association of America (BAA) entered the market in 1946, with franchises located primarily in the larger markets of the Northeast. The NBL was generally unable to compete with these large-market franchises and quickly began losing both players and entire teams to the BAA. In 1949, the two leagues agreed to merge, and the merged league became known as the National Basketball Association (NBA). The NBA faced a minor threat in the early 1960s with the formation of the American Basketball League (ABL), but the ABL met a quick demise after only 1½ years of play, folding partway through its second season. A more formidable and dangerous competitor to the NBA emerged in 1967, when Gary Davidson started the American Basketball Association (ABA)—the fi rst of what would turn out to be his three competitor leagues across three different sports. The ABA and NBA waged an intense war for players over the next decade, rapidly escalating player salaries and pushing both leagues to the brink of fi nancial collapse. The war ended in 1976 when the two leagues agreed to merge, with four ABA teams joining the NBA. In hockey, the NHL was established in 1917, making it older than either the NFL or NBA. In its fi rst year, the league operated with fi ve teams, all in Canada, and was essentially a reformation of the previously existing league called the National Hockey Association (NHA). As with baseball, the competitive sport of hockey was around long before the formation of professional leagues. In fact, the Stanley Cup— the trophy given to the NHL champion—was fi rst awarded in 1893 and was originally a “challenge” trophy for Canadian amateur teams. The formation of the NHL gradually consolidated professional hockey, although the league did face relatively immediate challenges from the Western Canada Hockey League (WCHL) and Pacifi c Coast Hockey League (PCHL) during the early 1920s. The fi rst US-based NHL team, the Boston Bruins, entered the league in 1924. Over the next 20 years, various franchise shifts occurred to the point where, by 1943, the league had settled at six teams—the Montreal Canadiens, Toronto Maple Leafs, Boston Bruins, New York Rangers, Chicago Black Hawks, and Detroit Red Wings. This group of teams eventually became known as the “Original Six,” even though only one team, the Montreal Canadiens, was “original,” in the sense that it was formed as a charter member of the league. The NHL remained at six clubs from 1943 to 1967, at which point it immediately doubled in size by adding six expansion franchises. In 1972, the NHL faced its fi rst competitor league in over 50 years, with the formation of Gary Davidson’s World Hockey Association (WHA). The WHA made an immediate impact by signing Bobby Hull, one of the NHL’s biggest stars of the day, to a record-breaking contract. The two leagues went head-to-head for 7 years and agreed to merge in 1979, with four of the remaining six WHA clubs joining the NHL. 1 Introduction 5

Despite these historical periods of interleague competition, none of the established leagues have faced direct competition in over three decades: since 1983 for the NFL, 1979 for the NHL, and 1976 for the NBA. Baseball has not faced a direct competitor in almost 100 years—since the demise of the Federal League in 1917— and even the Continental League’s false-start attempt to enter the market occurred over a half century ago. This lack of competition, or even the threat of competition, has allowed the established leagues a long period of unfettered ability to set policies that maximize monopoly rents and has deeply entrenched the economic power of these leagues to withstand any possible future competitors. Within this context, the book seeks to explore the nature of the competitive advantage that these leagues apparently possess. The purpose is not only to identify how these leagues have been able to get to where they are today but also to examine the competitive threats and opportunities that these leagues face as they move forward. A key contribution of the book is that it analyzes these issues from a multidisciplinary approach. It compares and contrasts three alternate theoretical perspectives—the traditional economics approach, the public choice approach, and the strategic management approach. The traditional economics approach is the most frequently employed analytical framework when studying the industry; it tends to focus on market structure issues—cost patterns, barriers to entry, etc.—to explain the emergence and persistence of the monopoly sports leagues. The public choice approach—sometimes known as the economic theory of political decision- making—views sport monopolies as largely an outcome of public policy processes. It argues that the established sports leagues have long had a unique, and preferential, relationship with their various political overseers, resulting in advantages being conferred on these leagues that have reduced the competitive threat they have faced. Rather than extensively focusing on the multitude of specifi c cases of legislative action (or inaction), the book is interested in developing a more general theory as to why the established sports leagues have held such political power at all levels of government and how they have been able to sustain such power over many decades. However, the more central theme of the book is that these economic and public choice explanations, while informative, are incomplete and do not capture the full richness and depth of the issue. In particular, the book argues that these “outside-in” explanations focus on structural factors that are largely external to the specifi c entities themselves (i.e., the sports league), and thus fail to fully consider the extent to which “managerial quality” may be a contributor to organizational success. While it is true that economists have long recognized, at least in very broad terms, that some fi rms may be more effectively managed than others and, as such, that these superior managerial practices may be a source of competitive advantage, the economics discipline has been somewhat less interested in analyzing in any detailed way the nature of specifi c managerial decisions in specifi c situations. For example, why was the AFL extremely successful, while the Continental League of baseball—with some of the same owners as the AFL and with a very similar business model— folded before it even started play? Or, why did two of Gary Davidson’s upstart leagues, the ABA and WHA, have success in gaining a merger with the established league, while his last creation, the WFL, failed miserably in challenging the NFL 6 1 Introduction and folded halfway through its second season? Would external market conditions have caused any upstart football league to fail at that time, or were there particular aspects about the management of the WFL that contributed to its demise? It would seem that the success or failure of any given rival league is most likely a delicate mix of the state of the industry/market structure at the time and of the very specifi c managerial strategies that the particular league employed to attack the established league. In other words, not all external market structures and conditions necessarily lead to the same outcomes. To this end, the book utilizes literature from the strategic management discipline to provide a parallel explanation for the success of each of the four major leagues. This strategic management approach, while not necessarily inconsistent or contradictory with either the economics or public choice approaches, is much more focused on analyzing the specifi c managerial decisions and strategies of organizations. The “inside-out” orientation of the strategic management approach puts particular emphasis on an organization’s access to, and development of, “non-imitable” resources (termed the resource-based theory, or RBT) as a means to achieving an advantage over its competitors or potential competitors. While this RBT literature is now vast, very little of it has ever been applied to analyzing the growth and development of the established sports leagues. This notion of inimitability is at the core of the RBT—the RBT attributes the sustained competitive advantage of a fi rm to the inability of competitors to readily and easily replicate the resources possessed by that fi rm. Generally, this inimitability must be derived from one of two sources—either the resource must be protected by property rights or it must be knowledge based, such that competitors cannot imitate the resource due to lack of knowledge. For the purposes of this book, the RBT allows one to more explicitly consider the possible role of managerial choice as a variable infl uencing competiveness in the pro sport industry. Relatedly, it allows one to more directly consider the notion of resources and, more importantly, the inimitability of these resources, as a source of competitive advantage. While it is clear that, by the very nature of the issue, established leagues possess certain resources that rival leagues do not, it is less clear as to why rival leagues have had such diffi culty in imitating these resources. Within the context of this RBT approach, the book asks whether the current major professional leagues were somehow pre- destined to ultimately become impenetrable monopolies because of the inherent economic and political conditions surrounding the industry, or whether their success is due, at least in part, to particularly effective managerial strategies. The book’s primary contribution is its comprehensive and systematic analysis of the evolving competitive landscape in the professional sport industry. It argues that no single conceptual approach—whether it is the economics approach, the public choice approach, or the strategic management approach—can, in itself, adequately explain the full richness of the issue. It stresses that these various approaches should generally be viewed as complements, rather than as being mutually exclusive, and that a full understanding of the issue requires one to adopt a multidisciplinary perspective. On the other hand, the book explicitly avoids delving into the multitude of antitrust suits and subsequent judicial decisions that have characterized the major 1 Introduction 7 professional sport industry throughout its entire existence. While there is no question that these issues are important, there are two reasons why they are not examined here. First, they tend to be very well documented elsewhere, and the reader can refer to a multitude of other sources for detailed analyses. Second, these legal issues can sometimes unnecessarily confuse and complicate the discussion and reduce its richness, by moving the discussion away from the behavioral realm—i.e., where analyzing complex economic and managerial processes is paramount—and towards more fact-based, rule-of-law, explanations. The remainder of the book proceeds as follows. Chapter 2 provides a broad- based conceptual background to the issue by examining the unique nature of the professional sport business and the corresponding implications of this uniqueness for the notions of competition and competitiveness. Chapters 3 and 4 then delve more fully into some of the history of rival leagues in US professional sports. The two chapters take somewhat of a reverse-order approach to these leagues. Chapter 3 examines in detail the experiences of the USFL, the last competitor league to challenge one of the four established leagues; the USFL provides an interesting case study of the behavior of rival leagues, since many of the issues it faced were faced by rival leagues before it and since the USFL initially seemed to have many factors working in its favor. With the USFL’s story as a more modern framework and benchmark, Chapter 4 then examines the various other post-World War II rival leagues that existed before the USFL, some of which were successful, at least in the sense that they gained a merger with the established league and others of which were abject failures. Chapter 5 develops the various theoretical perspectives from which rival leagues will be analyzed, discussing both the economics and public choice approaches but particularly focusing on the strategic management approach. Chapters 6 and 7 apply the theoretical framework of Chapter 5 to the actual case studies of rival leagues presented in Chapters 3 and 4; Chapter 6 focuses on property-based resources, while Chapter 7 focuses on managerial resources. Chapter 8 provides summary and integrative analyses and assesses the likelihood of the competitive environment changing in the future. Chapter 2 Some Conceptual Foundations: A Primer on the Economic Structure of Professional Sport

2.1 Sports Leagues as Monopolies

The notion of competition is fundamentally at the core of a capitalist society. When fi rms actively compete against each other in a market, several social benefi ts are generated. In general, competition tends to lower costs, reduces production ineffi - ciency, and leads to a more effi cient allocation of societal resources. In other words, resources fl ow to their most productive uses. Competition is a dynamic process in that it is inherently forward looking, leading to innovation and creativity amongst producers. These benefi ts ultimately fl ow through to consumers, who enjoy a more wide range of product choices, higher-quality products, and lower prices. In general, the lower the degree of competition in a given market, the less present are these array of benefi ts—all else equal, less competitive markets can result in greater production ineffi ciencies, reduced innovation, fewer product choices, and higher prices for consumers, with the latter directly resulting in higher profi ts for producers. Competition is revered in American society, not only as an economic concept but also as a social and cultural foundation and perhaps even as a moral ideal. Politically, the federal government has long taken an active role in promoting competition through the use of antitrust laws. Antitrust policy has generally been concerned about the dominance of fi rms in a market. Where there has been a tendency for this domination—either due to natural monopoly causes or anticompetitive actions— policymakers have used a variety of remedies, including the forced breakup of monopolies, monetary fi nes, and price and output regulation. Compared to many other countries, the United States has a history of taking a particularly interventionist approach to competition policy. The Sherman Antitrust Act of 1890 attempted to control the trusts that had dominated American business during the latter part of the nineteenth century; antitrust policy was further refi ned and extended with the Clayton Antitrust Act of 1914. There have been several notable instances of activist antitrust policy. It began with the Supreme Court’s 1911 decision, pursuant to the Sherman Act, to force the breakup of the Standard Oil monopoly. More recently, the federal government reached an agreement with AT&T

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 9 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_2, © Springer Science+Business Media New York 2013 10 2 Some Conceptual Foundations… in 1984 that broke the telephone monopoly into several smaller competing fi rms. In 1998, Microsoft met the wrath of the Department of Justice’s antitrust unit, and the subsequent (lower) court decision ruled that Microsoft be broken into two separate units; however, the breakup ruling was later overturned on appeal. There are many markets in the United States that are oligopolistic in nature, i.e., they are dominated by a small number of large fi rms; for example, Coke and Pepsi in the cola market and McDonalds, Burger King, and Wendy’s in the fast-food hamburger market. However, much rarer is the situation where there is only one fi rm in the market. These markets where there is a complete absence of competition are termed monopolies. Under almost any defi nition of the term, the four major professional sports leagues in the United States—the NFL, NBA, NHL, and MLB—currently operate as monopolists in their respective industries. As mentioned in Chapter 1, while all of these leagues that comprise the “Big Four” have faced competitor leagues at some point in their histories, no rival leagues have emerged to challenge one of the Big Four in over 30 years. Even more importantly, unlike some instances of monopoly where the monopolist has faced price and output regulation by government—for example, as in the electric utility industry—the professional sport industry has operated largely immune from government oversight. While numerous congressional investigations into the professional sport industry have occurred over the decades, these investigations have generally not resulted in any meaningful or signifi cant policy initiatives. Zimbalist (2006 ) refers to baseball, with its antitrust exemption dating back to 1922, as “the only unregulated, legal monopoly we have in this country” (p. 174). The monopoly position of sports leagues potentially allows them to gain leverage over a variety of other stakeholders—suppliers, employees, third-party partners, governments, etc. For example, the lack of alternative leagues can reduce labor market competition for players and, all else equal, may result in a wealth transfer from players to owners. The monopoly power of leagues also gives them increased bargaining power over TV networks and sponsors, allowing leagues to capture higher prices for league broadcast deals and for sponsorships. Monopoly leagues also gain political power within the host cities, and threats by its teams to relocate— with no competitor league to fi ll the void—can lever large-scale public subsidies for arenas and stadiums.

2.2 The Core Foundations of the Spectator Sport Business

Within this context, the purpose of this book is to explore the nature of competition within professional team sports. An examination of competition and competitiveness must begin with an understanding of the unique structure of the pro sport industry and, correspondingly, an examination as to whether this unique structure fundamentally changes how one must view the nature of competition. 2.2 The Core Foundations of the Spectator Sport Business 11

The spectator sport industry is in the business of selling entertainment. At its most basic level, the business premise of the spectator sport business is quite simple— consumers will pay to watch two teams competing in a sporting contest. This is broadly similar, to say, the live theater business, where consumers will pay to watch a Broadway show. Not all sporting contests are of equal entertainment value, just as not all theater productions are equal. First, the absolute quality of the event and its “performers” matters. For example, most individuals would pay more to see a Broadway show than a production from a local community theater—with the Broadway show, the actors are more well known and accomplished, and the quality of acting and directing is higher. Furthermore, the Broadway show is a more polished event, with a more appealing physical theater and with more history and reputation. Analogously with sports, watching a high-school football game is very different than watching an NFL game. With the latter, the players are more talented and are able to athletically perform at a much higher level than high-school players, and the stadium is more conducive to a higher-quality experience—it is often indoors and immune from weather vagaries, the seating is more comfortable, the concessions offer a wider range of choices, etc. At the same time, there are also elements to spectator sport that are quite different than other forms of entertainment like Broadway shows. In sport, what is being sold is the opportunity to view a contest between two teams in which the outcome is uncertain. This uncertainty is really what deﬁ nes and separates the spectator sport business from other forms of entertainment. Unlike a Broadway show or a Hollywood movie, the outcome of a sporting event is not scripted—no one, including those staging the event, knows beforehand what the outcome of the event will be. Sport events unfold in real time. Economists have extensively studied this issue and have categorized this notion of “uncertainty of outcome” into three dimensions.1 First, fans want individual games to be closely contested, with outcomes not determined until near the end. Extending this to the season, fans want teams to be closely grouped during a season—if some teams are far in front of the standings, or far in back, fan interest may drop. Finally, balance is also important across seasons—fans do not want the same teams to be successful (or unsuccessful) each year and prefer some turnover in the standings from year to year. In general, then, fans value the notion of competition and competitiveness, and predictability lessens fan interest. However, added to this desire for uncertainty and competiveness is a further complicating factor associated with the sport industry; speciﬁ cally, spectator sports tends to engender partisan behavior on the part of the fan, whereby some fans may strongly identify with one of the participating teams and may thus have a strong

1 See Humphreys and Watanabe (2012 ) for a comprehensive review of the competitive balance literature. 12 2 Some Conceptual Foundations… personal stake in the outcome. Thus, spectators are often not simply detached observers of an event played by others—the team essentially becomes an extension of the person, where it is not uncommon to hear fans referring to their favorite team as “we.” One of the arguments later in the book is that this intense fan loyalty to a particular club—beyond any type of loyalty consumers may show to brands or fi rms in other industries—is a key factor in reducing the viability of potential rival leagues. Given consumers’ desire to view sporting contests, and their propensity to identify with specifi c teams, entrepreneurs have a business opportunity by organizing and staging such contests. However, by necessity, the staging of such games obviously requires two teams, not one. Thus, the sport entrepreneur needs to fi nd at least one other entrepreneur willing to establish a team. Assuming the two teams are at arm’s length from each other, the teams have an interesting and complex relationship with each other. While they may be competitors on the fi eld, they have an off-fi eld dependency. Assume, for the moment, that only two teams exist and that they repeatedly play each other. If both teams build a separate and distinct fan base, each team has a fi nancial interest in defeating the other team—each team is more popular with its own fans when that team wins, rather than loses, and hence winning teams generate more revenue than losing teams. However, if one team starts winning too often, the opposing team may lose fan interest, eventually threatening the existence of that team but also threatening the existence of the winning team, since the winning team would have no one left to play. Thus, the relationship between the two teams is not, for example, like the relationship between McDonalds and Burger King—with the hamburger chains, the demise of one of the fi rms would unequivocally benefi t the other, since they are competing for the same consumer dollar and hence are substitutes. Since fans would inevitably lose interest in seeing the same two teams playing each other repeatedly, sport entrepreneurs may have incentives to expand the number of teams against whom they can compete. One possibility is that the network of teams is loosely organized—for example, in the early days of sport competitions in America, “barnstorming” teams were popular. These teams travelled across the country playing local teams. Eventually, however, more formal leagues began to develop. Leagues offered a number of advantages over loose affi liations. First, they allowed for a formal schedule to be developed—the competition would become not just about a single game in isolation, but about a season-long series of contests, where an eventual champion would be declared. Leagues also had the advantage of providing consistency and standardization across teams, thus increasing the “fair- ness” aspect of on-fi eld competitions—the rules of the game can be standardized, player conduct can be monitored and regulated, both on and off the fi eld, etc. Relatively early on, team owners in major professional leagues began to see governance as critical and saw that a central entity needed to be created to oversee operations of the various league members. The fi rst commissioner appointed in major professional sports—Kenesaw Mountain Landis in 1920—was the result of the “Black Sox” gambling scandal of the previous year. Baseball owners saw that their interests were interlinked and that problems with one franchise could affect other franchises, and ultimately affect the league’s continued existence. 2.3 The Appropriate Unit of Analysis: Leagues or Teams? 13

As leagues became stronger and more developed, their power and infl uence as entities increased. Leagues are the adjudicating mechanism to deal with competing and contradictory economic incentive structures facing individual owners. On one hand, individual owners are business partners with other franchise owners in the league; there is a certain amount of common interest amongst owners, and the fi nancial success of one franchise is at least partially dependent on the success and popularity of other franchises in the league. These common interests are both direct and indirect. Indirectly, the revenues of any given franchise are impacted by the overall popularity of the league—i.e., of the popularity of the other franchises collectively. However, the links are also direct—in the current era of league governance, each of the four major leagues has some degree of revenue sharing amongst franchises. Thus, increased revenues from one franchise can have direct and positive effects on all franchises. Further to this notion of collective dependence, one could consider, for example, a franchise like the Dallas Cowboys of the NFL. While they operate in a lucrative local market where football is extremely popular, the value of this franchise is still heavily infl uenced by the fact the Cowboys are members of the NFL and are partners with the other 31 franchise owners in the NFL. The Cowboys’ brand without the NFL, even if such a scenario were possible, would be much less valuable. In effect, as leagues have developed and become more prominent over time, the value of an individual team in a league was as much driven by the league to which the team belonged—i.e., its partner franchises in other cities—as it was by the characteristics of the individual team itself. However, counter to this notion is the fact that, in the short run at least, each team also has an incentive to improve performance, even if it means, by necessity, that other teams would be harmed. Sport competitions are a zero-sum game—if one team wins, the other team must lose. Thus, similar to a classic cartel scenario, each benefi ts from colluding with other teams, but some teams simultaneously have incentives to “cheat” on specifi c aspects of the collusive agreement. Thus, sports leagues have a collective incentive to regulate the behavior of individual franchises and to ensure that the actions of one franchise do not damage the league as a whole. As we will see later, one manifestation of this could be salary caps, where individual clubs are limited as to what they can spend on payroll. However, as we will also see later, such mechanisms can only be successful if the league is a monopoly.

2.3 The Appropriate Unit of Analysis: Leagues or Teams?

When evaluating the nature of competition and competitiveness in professional sport, a question arises as to whether it should be (1) leagues or (2) individual teams that are the appropriate level of analysis. To answer this question, one must consider that modern North American sports leagues are “closed,” in that the existing collection of individual owners in the league maintains strict and complete control over all aspects of franchise location 14 2 Some Conceptual Foundations… decisions. New franchises are only admitted with the collective approval of the other franchise owners. As well, all existing franchises in a league are granted geographic “territorial rights” by the league that prevents any other franchise in the league from relocating into their territory. Thus, an entrepreneurial owner cannot independently start a franchise in a city and gain entry into the league. The territorial rights ensure that each franchise owner is granted a local monopoly. This is quite different than the “open” leagues found, for example, in European domestic soccer leagues, where teams enter and exit leagues through promotion and relegation systems. In these open leagues, a club could form at a lower-level league and then eventually get promoted to the higher tier league. Entry into the top tier league in each country is earned by club performance and is not granted by existing clubs currently in the league. In the 20-team English Premier League (EPL), for example, 6 of these teams during the 2012–2013 season were London based, and as many as 9 London teams have participated in the EPL, at one time or another, over the league’s 20-year existence. Such a concentration of teams in one location, even in a city the size of London, would be unheard of in North American sport, simply because existing North American franchise owners have their geographic territory protected by the league to which they belong. Nor can competition occur in the form of “franchise free agency,” a situation where a franchise in an established league voluntarily left that league to join a competitor league. While such a possibility would seem unlikely in the current era, given the huge values of the brands of the established leagues, franchise movement between leagues has actually occurred in past eras and has sometimes helped rival leagues compete with the established leagues. For example, as will be discussed later in the book, the Brooklyn Tigers of the NFL left that league in 1946 to join the rival All-America Football Conference (AAFC) and helped to quickly establish the upstart league as a viable threat. The owner of the Tigers—Dan Topping—also co-owned the New York Yankees baseball club. When Topping bought the Tigers in 1945, his intent was to relocate the team from Brooklyn to Yankee Stadium in the Bronx. However, the NFL disallowed the move, since the Tigers would have been within the territory of the NFL’s New York Giants, who played their games just across the East River in Manhattan’s Polo Grounds. Unhappy with this decision, Topping pulled his franchise out of the NFL to become a founding member of the AAFC. In basketball, similar types of interleague franchise shifts also occurred during the late 1940s. In 1948, four teams from the established league, the National Basketball League (NBL), left that league to join the upstart Basketball Association of America (BAA), the latter being the forerunner to what would become known as the NBA. In 1949, six more teams abandoned the NBL for the BAA, thus causing the NBL to fold. Since that era, all leagues have introduced greater legal protections that contrac- tually bind the franchise to the league. In economic terms, such league protections could be quite rational, in the sense that individual franchises gain a considerable portion of their value by simply being members of the league. In other words, and as discussed earlier, the Dallas Cowboys are a valuable franchise today, in part, 2.3 The Appropriate Unit of Analysis: Leagues or Teams? 15 because they are members of the NFL, and benefi t from all of the externality effects that membership in the NFL provides. Thus, the Cowboys’ value is embedded not just in the fact that they play high-level football in a city and a state where the game is extremely popular, but because they do so as members of the NFL. An illustra- tion of this is that the Dallas Texans franchise of the upstart American Football League (AFL), which began play in 1960—the same year the Cowboys’ NFL expansion franchise began play—was never able to compete with the Cowboys’ NFL affi liation. After 3 years of attempting to compete, and despite much greater on-fi eld success than the Cowboys, the Texans moved to Kansas City in 1963 to become the Chiefs. Thus, individual franchises are inextricably tied to the league to which they are members—an individual franchise would have little or no value as a stand-alone entity. Nor, in today’s world, would an individual franchise likely even desire to leave the league. Each of the Big Four has developed such high brand recognition that franchises would lose considerable value if they left. However, one could perhaps envision a scenario where a group of franchises left an established league to form an offshoot rival league. This could be analogous to what occurred in England in 1992, where a group of leading soccer clubs separated from the Football Association (FA) to form the Premier League, where they were able to keep all of the revenues they generated, rather than share them with small-market clubs. In US sports, it is not entirely beyond the realm of possibility that something similar could occur, if a group of clubs felt that they could collectively be more profi table outside the league than inside. The relatively high level of revenue sharing that now occurs in many leagues may actually increase the incentive for some of the wealthier clubs to consider forming their own league. For example, in the NFL, large- market teams such as Dallas, New England, Philadelphia, Washington, and the New York Giants receive the exact same share of the national television contract as do small-market teams like Buffalo, Jacksonville, and Kansas City. In effect, the large-market teams are cross subsidizing the small-market teams, and, at least in the short run, the large- market teams would be more profi table without providing such transfers. However, a renegade group of NFL owners forming their own league would only gain if two conditions were satisfi ed. First, the teams would have to be able to keep their names and logos in order to ensure fan acceptance and identifi cation with the new league. However, such a possibility is precluded by league contracts that ensure the league owns the rights to its franchise’s names and logos.2 Second, any renegade franchise would have to believe that the gains from not having to cross subsidize smaller-market franchises would be greater than the losses from losing the NFL brand and its commensurate revenue potential.

2 For example, in 1994, the NFL ﬁ led suit to prevent a Canadian Football League franchise in Baltimore from using the name “Colts,” even though the NFL’s Baltimore Colts had left for Indianapolis 10 years earlier. 16 2 Some Conceptual Foundations…

In essence, then, established leagues have gone to great lengths to insulate themselves from competitive threats. Thus, while the monopoly proﬁ ts in established leagues are earned at the local (i.e., franchise) level, they are a direct result of the protections granted at the league level. League policies ensure these local proﬁ ts cannot be threatened from within—i.e., from a new franchise being granted entry into the market or from an existing franchise moving into the market. It is only through the formation of an entire rival league that individual clubs in the established league can face competition. This is the essence of the foundation of this book—i.e., that it is leagues, and not individual teams, that are the critical entity in the North American sport business, and that it is leagues upon which one must focus in order to better understand the nature of business competition in the industry.

2.4 Deﬁ ning Competition

An argument sometimes heard is that, while teams and leagues face no direct competition from a rival league, they still face competition in the broader sport and entertainment market. For example, one could argue that while the NBA faces no direct competition from a competitor league, it does compete for the broader consumer entertainment dollar with the other major pro leagues, with college basketball (and/or football), and with a host of other entertainment options. Viewed even more broadly, one could even say the NBA competes with several non-sport options, such as amusement parks, concerts, and theaters. While there is some validity to these notions, they can be overstated and have the potential to mislead. Certainly at one level, teams and leagues do compete with teams and leagues in other sports for the consumer entertainment dollar. For example, teams like the Philadelphia Flyers of the NHL and the Philadelphia 76ers of the NBA do, to a certain degree, compete for season ticket holders—some fans may choose to attend either Flyers games or 76ers games, but not both. These fans may make choices based on the relative success of each of the clubs, on the entertainment value of the product, on ticket prices, etc. Similarly, these teams would also compete in the Philadelphia market for sponsorship dollars and local TV packages. Rascher et al. ( 2009 ), for example, found that during the 2004–2005 season-long lockout in the NHL, the NBA increased its revenues by an average of over $1 million per team, revealing some level of cross-substitutability between the NHL and NBA product. However, the extent of this type of competition can be overstated. First, the 76ers and Flyers, as entertainment products, are not perfect substitutes for some fans. In fact, there would be a signifi cant group of Flyers fans that would have little or no interest in basketball or the 76ers and vice versa. Economists formally measure this concept by calculating the degree of cross-price elasticity, which, in essence, measures the degree to which consumers see two products as substitutable. Thus, by any reasonable defi nition of the term, the Flyers operate in a monopoly environment, even though they face competition from non-sport entities. More generally, if one defi nes the unit of analysis broadly enough, then, in the extreme, almost any business competes with all others in the economy. For example, a 2.5 The Current State of the Monopoly Leagues: Structure, Conduct, and Policies 17 fashion retailer competes with a concert promoter, in the sense that a consumer could spend his/her disposable income on buying a new suit or on attending a concert of his/her favorite band. At some level, such comparisons border on the absurd and move well away from the notion of competition and competitive markets as we typically defi ne them. What about the more specifi c case of leagues within the same sport as the established league—for example, the Extreme Football League (XFL) of the early 2000s or the United Football League (UFL) that existed from 2009 to 2012? Can’t these leagues be considered competition? They are competition, but in the same broad sense that McDonalds competes with a movie theater for the consumer dollar, not in the more important sense of McDonalds competing with, say, Burger King, in the specifi c space of fast-food hamburger restaurants. McDonalds and Burger King compete for “market share”—McDonalds and movie theaters do not. Using this analogy helps to defi ne which professional leagues over time could be considered true rival leagues and which are not. While the exact defi nition is open to interpretation and debate, it is the argument of this book that, to be considered a rival league, the league must be competing in the same competitive space as the established league—in other words, it must be directly targeting some of the revenues, and monopoly profi ts, of the established league. Correspondingly, then, it must be selling the same, or a very similar, product as the established league. In sports, this product-quality notion translates into the level of on-fi eld playing quality—i.e., what differentiates the four established leagues from other (minor) leagues in the same sport is that the established league employs all of the best players in the game. Other leagues, like the XFL or UFL, never competed with the NFL for players, but instead employed those players that were unable to earn spots on NFL rosters. Thus, one should not mistake “minor leagues” as competitors—minor leagues serve an entirely different market segment and have no intention of infl icting harm on the established league. Thus, some type of head-to-head competition between the leagues for players is generally seen as a prerequisite for a league to be considered a rival. Rival leagues, if they are to have any chance of capturing some of the monopoly profi ts of the established leagues, must lure at least some players away from the established league—this is the only means by which the rival league can show fans that it is competing in the same quality space as the established league.

2.5 The Current State of the Monopoly Leagues: Structure, Conduct, and Policies

If one takes a current snapshot of the Big Four sport monopolies, there is a remarkable similarity across the leagues, not only in terms of their structure but also in terms of their conduct and policies. Presumably this similarity is not by coinci- dence, but is a function of the monopoly power of these leagues. The absence of competition allows monopoly leagues to explicitly choose a structure and set of policies that maximize expected proﬁ ts; this is different than competitive markets, 18 2 Some Conceptual Foundations…

Table 2.1 Number of NFL MLB NBA NHL franchises, established 1950 13 16 11 6 leagues: by decade 1960 13 16 8 6 1970 26 24 17 14 1980 28 26 23 21 1990 28 26 27 21 2000 31 30 30 30 2010 32 30 30 30

Table 2.2 Franchise locations, by Nielsen TV NFL MLB NBA NHL markets: 2013 Number of top-10 markets served 9 10 10 8 Number of top-20 markets served 17 18 18 14 Number of top-30 markets served 24 22 21 18 where individual fi rms must constantly respond to market forces. The current states of the Big Four can be examined along several dimensions: output market and franchise locations, revenue sources and allocations, input costs and player relations, and profi tability. In terms of output market decisions, a defi ning characteristic of North American sports leagues is that they operate as “closed” leagues. Each league—or, more cor- rectly, the existing franchise owners in a league at any given time—makes unilateral decisions regarding league membership; this is in contrast to the “open” leagues found in much of the rest of the world, where clubs enter and exit leagues based on a promotion and relegation system. Economists have long argued that monopolists have a profi t incentive to restrict output to a level below the competitive outcome— by restricting output, monopolists are able to increase price above its competitive level. Monopolists will continue to restrict output until the effects of increased price are more than offset by the effects of decreased output/sales. Applied to professional sports, this would suggest that the monopoly leagues in North America have an incentive to grant fewer franchises than what could be profi tably supported—in other words, there will be cities that could support a franchise, but who are unable to gain entry into the league. This undersupply of franchises also gives leagues considerable leverage in dealing with cities, particularly as it relates to the public funding of arenas and stadiums. By leagues leaving viable markets unserved, existing franchises are able to present credible threats to relocate if suffi cient public funding is not secured from the current host city. These issues would seem to underlie the fact that all four leagues have made very similar franchise location decisions. In terms of the number of franchises, there is a high congruence across leagues. Three of the leagues—the NBA, the NHL, and MLB—have the exact same number of franchises (30), while the NFL has slightly more at 32. Not only are these current franchise numbers very similar, each league has shown similar growth patterns over the last several decades. Table 2.1 shows the number of franchises in each league, decade by decade, over the past half century. As well, the location of current franchises shows remarkable similarity across the four leagues. Table 2.2 shows the number of top-10, top-20, and top-30 markets 2.5 The Current State of the Monopoly Leagues: Structure, Conduct, and Policies 19 in the United States that is served by each league. The table shows a defi nite pattern. Each league has a strong presence across the major markets in the United States, but this presence is far from complete. For example, of the country’s top-30 markets, the NFL is in 24 of these, MLB in 22, the NBA in 21, and the NHL in only 18. Perhaps most stark is the NFL’s lack of presence in Los Angeles, despite that market being the second largest in the country. There has not been an NFL team in Los Angeles since the Rams left for St. Louis in 1995 and the Raiders left for Oakland that same year. The NFL is presumably not returning to Los Angeles until a new stadium is built, but that position would undoubtedly change if a competitor league existed, since a competitor league would almost assuredly move into the unserved Los Angeles market. In terms of the fi nancial performance of sports leagues, this is somewhat more diffi cult to accurately discern, since leagues and their member teams do not publicly release fi nancial data. The media often attempt to estimate such performance, with Forbes magazine’s analyses being the most comprehensive. Forbes’ tracking of pro sport fi nances now goes back over 15 years and includes estimates of both league and team performance. In terms of absolutes, the NFL is the largest of the four leagues, generating approximately $9 billion in annual revenues, followed by MLB at $7 billion, the NBA at $5 billion, and the NHL at $3 billion. For all four leagues, gate receipts and media rights fees are the dominant source of revenues, with mer- chandise sales and sponsorship revenues also contributing signifi cant amounts. In the early eras of professional sports, gate receipts were the dominant source of revenues, but media rights fees have now become equally important for most leagues, if not more important in some leagues. For example, about 70 % of all NFL revenues come from the league’s network TV contract. What is also important about league revenues is not just their absolute levels, but also their distribution amongst franchises. Different leagues have somewhat different levels of revenue sharing amongst their franchises, although there are some common principles and themes. First, all four leagues share national TV contracts equally amongst their member franchises. However, the impacts of this equal sharing vary substantially across leagues, based on the relative importance of the national TV revenues as a percentage of league total revenues. In the NFL, all regular season and playoff TV rights for all teams are sold as part of the national contract—individual franchises cannot sell their TV rights in their local markets (except for preseason games). Thus, in effect, all TV revenues in the NFL are national revenues and hence are equally distributed. Contrast this with the other three leagues, where franchises are allowed to sell media rights in their local markets. While these other three leagues all do have national TV contracts, and the revenue generated from these contracts is distributed equally, as in the NFL, the value of these contracts is much smaller than in the NFL. The value of the local rights for any given franchise will depend on the market size of that franchise—in general, franchises in larger markets will have greater local media revenues than those in smaller markets. For example, in baseball, the annual value of the New York Yankees local TV contract is more than ten times what the Kansas City Royals generate from their local TV deal. The same is also true, on a smaller scale, for gate receipts—larger markets will have an inherent revenue advantage over smaller markets. 20 2 Some Conceptual Foundations…

These issues directly relate to the monopoly power possessed by leagues—the local monopolies that each franchise possesses through territorial rights mean that large markets are protected from intrusions into their territory by other league members; the result is that revenues across a league’s franchises can be quite widely varying. If left uncorrected, this uneven distribution of revenues can cause competitive balance problems for a league—in essence, large-market teams have a greater revenue payoff from winning than do smaller-market teams and hence have an incentive to buy greater amounts of talent in the players’ market. Long-term imbalance problems may decrease fan interest in the game and may ultimately threaten the viability of small-market franchises. As a means to address these imbalance issues, leagues have adopted various measures to level outcomes. First, all leagues have some type of internal revenue sharing arrangements. Second, three of the four leagues have adopted some type of a salary cap. A salary cap is really somewhat of a misnomer, since it is not a cap on individual player salaries, but rather a cap on a team’s payroll. Only MLB operates without any type of cap. The NFL and NHL both have a hard cap—where the upper (and lower) bounds of team payroll are absolute and cannot be violated—while the NBA has long operated with a “soft” version of the cap, whereby teams can exceed the cap under certain provisions. As well, both MLB and the NBA have a luxury tax, whereby teams whose payroll exceeds a certain threshold are required to pay a “tax” on the excess amount. The thought is that such a tax will slow down the spending on payroll of large-market teams, since it increases the marginal cost of signing players if the team is at or near the threshold. Redistributional mechanisms like salary caps are, themselves, only possible in leagues that are monopolies. Restrictions on the amount that individual teams can spend on players can only be successful if all teams abide by these rules. In a closed, monopoly, league, such rules can be easily enforced. However, if a competitor league exists, competitors will have no requirement, or desire, to abide by the restrictions. In fact, salary caps would not continue to exist in the established league, simply because it would limit the established leagues’ ability to retain players in the face of potentially higher salary offers from the rival league. Witness that in European soccer, where domestic leagues operate independently from one another, no country’s domestic league has implemented salary caps. If the English Premier League, for example, introduced a salary cap on its teams, many players would simply defect from that league and go to leagues where there was no cap, say Germany or Spain. In the three leagues that have some form of a salary cap—the NFL, NHL, and NBA—players’ associations in these leagues have only agreed to these caps in return for a guarantee that players receive a certain predefi ned percentage of league revenues. These provisions are set out in each league’s CBA. The exact percentage going to players varies across leagues and with each new CBA, but, in general, players have tended to receive about 50 % of league revenues. Again, as with salary caps, this guaranteed distribution to players could only occur in a monopoly league. If a competitor league were to exist, established leagues would not be willing to introduce a salary cap, and without a salary cap, they would not be willing to provide revenue guarantees to players. With interleague competition, the competitive 2.5 The Current State of the Monopoly Leagues: Structure, Conduct, and Policies 21 dynamics of the marketplace determines allocations to owners and players, not predetermined contractual agreements. Another key aspect of leagues’ relationship with their players pertains to player mobility rights. At one time, players in all four leagues were bound to the teams that had originally signed them—under the so-called reserve clause, teams had the right to perpetually renew players’ contracts, effectively prohibiting any voluntary player mobility between teams. While leagues argued that this was needed to preserve competitive balance—i.e., to prevent large-market teams from buying up all the talent—it really was more about suppressing player salaries by denying them any opportunity to sell their services on the open market. Players in all four leagues now have free agency rights, whereby they are able to sign with any other team in the league upon expiration of their contract. Baseball players were the fi rst players to win unrestricted free agency rights, in 1975, and as a result of an arbitrator’s decision; over the next 20 years, players in the other three leagues gradually won such rights, although the specifi c provisions of such free agency rights vary by league and by CBA. While the monopoly power of sports leagues can manifest itself in many forms, its ultimate effect is to generate abnormal (excess) returns for owners—i.e., returns above a risk-adjusted market rate. As discussed earlier, one problem in identifying this effect is that the fi nancial statements of the major North American professional sport teams are generally not public information. Almost all teams are privately held and hence have no obligation to publicly reveal their fi nancial performance. Nor do these teams generally have any incentive to voluntarily release this information. Teams often have an incentive to “plead poverty” to their stakeholders, i.e., fans, players’ associations, and cities regarding stadium funding, in the hope that this will increase their bargaining power with these groups. In addition, liberal tax rules that have existed for over half a century allow pro sport teams to depreciate player contracts, thus making their reported “net income” fi gures well below their actual cash fl ows. In other words, the fi nancial statements of teams, if taken at face value, signifi cantly underestimate the true returns to owning the team. However, information on profi tability can be gleaned in other, more indirect, ways. For example, Quirk and Fort (1992 ) examine the growth rates in franchise values over the entire history of professional sports to the time of their writing. Franchise values are a type of summary statistic, in that they represent the dis- counted value of all expected future cash fl ows. Quirk and Fort fi nd that, using these franchise values, the professional sport industry enjoyed a long period of above- normal returns. In a more recent study, Fort (2006 ) specifi cally focuses on MLB franchises during the modern era and fi nds that the sale prices of franchises have grown at twice the economy-wide benchmark rate, although these franchise growth rates have fl uctuated considerably from era to era. Humphreys and Mondello (2008 ), using data on franchise sales over the 1969–2006 period, fi nd average annual price increases of over 15 %. Using, then, the conceptual foundations of this chapter as a framework, the next two chapters examine the actual case histories of the various rival leagues that have existed since World War II. Chapter 3 The USFL as a Case Study

3.1 The USFL as a Microcosm of Issues Facing Rival Leagues

As a rival league, the USFL was quite unremarkable. It lasted only 3 years, had numerous franchise and ownership changes, and lost tens of millions of dollars. Perhaps more importantly, it failed to gain the merger with the NFL that so many of the upstart league’s owners desperately sought. The USFL’s failure came in spite of what appeared, at the time, to be a solid foundation for success. It had several well-fi nanced and high-profi le owners, including Donald Trump. It secured a signifi cant network TV contract, with ABC, and also had a cable deal with the fl edgling ESPN network. It gained immediate credibility with the media and public by signing several high-profi le players prior to the start of its fi rst season, including Heisman Trophy winner Herschel Walker. As well, its decision to play during the spring season not only brought a novelty effect to the league but also avoided a direct head-to-head battle with the NFL in the output market. As importantly, the external environment at the time seemed favorable. Market demand for football was strong. By the early 1980s, football had long overtaken baseball as America’s most popular spectator sport, with interest and TV ratings for both the NFL and college football continuing to rise. However, at the same time, and to the potential benefi t of the USFL, the NFL was in the midst of several signifi cant problems. In 1982, 1 year before the start of the USFL, Al Davis had moved his Oakland Raiders franchise to Los Angeles, a move strongly opposed by the NFL. Davis would go on to win an antitrust case against the league, an outcome which essentially prevented the NFL from controlling franchise relocations. In 1984, the Baltimore Colts took advantage of the court ruling and moved to Indianapolis, again without the NFL’s approval.

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 23 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_3, © Springer Science+Business Media New York 2013 24 3 The USFL as a Case Study

In addition, the NFL was experiencing diffi culties on the labor front. NFL players would not win free agency rights for another decade, and the 1980s were a time of acrimonious relations between the league and its players. In 1982, NFL players went on strike for 57 days, resulting in the NFL regular season being shortened from 16 games down to 9. Labor hostilities in the NFL continued through the USFL’s existence, and the NFL would go on to see another strike in 1987, 2 years after the demise of the USFL. The 1987 strike saw the NFL use replacement players for 3 weeks, a move that quickly precipitated an agreement with the NFLPA and the subsequent return of regular players. Despite the USFL’s failure, studying the dynamics of the USFL can provide an effective lead-in to many of the issues discussed in this book. In the universe of all rival leagues, the USFL is particularly important, in part because it was the last rival league to challenge one of the established leagues and its demise signaled the end of the 25-year “Golden Era” of competitor leagues. Of all the competitor leagues, the USFL existed in an era that most closely resembles the current professional sports landscape in America. By the 1980s, the four major established leagues were already at a mature stage in their development. For example, the NFL of the early to mid-1980s was closer to what it is today, rather than say the NFL of the early 1960s when it was challenged by the AFL. Thus, if history is to be of value in assessing the prospects for a competitor league in the future, the experiences of the USFL may be of more value than some of the earlier competitors. More broadly, the USFL also has an appeal because of its place in modern popular culture. Many of the alumni of that league—including Jim Kelly, Doug Flutie, Herschel Walker, and Steve Young—are still well known to current football fans, providing a direct modern-day lineage to the league that is not found for many earlier rival leagues, simply given the passage of time. Relatedly, the USFL has been given further present-day notoriety by being the subject of one of ESPN’s popular and award-winning “30-for-30 movies.” The 2009 movie, entitled “Small Potatoes,” traced the league’s quick demise and particularly examined the role that Donald Trump may have played in that demise. Perhaps most importantly, however, more is known about the inner workings of the USFL than many of the rival leagues that preceded it. This is crucial because a theme of this book is that it is not just structural market forces that determine success, but the specifi c managerial dynamics and competencies that each league brings. Much of this type of information can only come from so-called insider accounts. One source in particular—a book by former USFL Director of Communications Jim Byrne, entitled “The $1 League” ( Byrne 1987 )—provides a unique insight into the behind-the-scenes dynamics of the USFL’s decision-making and sheds light on important managerial issues not generally visible to the outside. Byrne’s accounts form the basis of much of what follows in the remainder of this chapter. While a more extensive history of post-World War II rival leagues will be left for later chapters, this focus on the USFL can both introduce and “jump-start” the thought process about rival leagues. Ultimately, it will be seen that while some diffi culties experienced by the USFL were relatively unique to that league, many others were also encountered by rival leagues that preceded it. 3.2 Foundations 25

3.2 Foundations

The roots of the USFL can be traced back to a single individual, David Dixon. Dixon was a New Orleans antique dealer and was instrumental in securing an NFL franchise (the Saints) for that city in the mid-1960s. He was also a key player in the construction of the Louisiana Superdome, which ultimately became the Saints’ home. By the early 1980s, Dixon’s association with the Saints and the NFL had long ended, but he remained interested in the sport and began to think about how a rival league might be able to compete with the NFL. He had witnessed the WFL’s resounding failure during the mid-1970s and sought to learn from that league’s mistakes. In contrast to the WFL, Dixon saw the AFL as the model for rival leagues and felt the AFL’s success was based on several crucial factors—the fi nancial strength of its franchise owners, the securing of a national TV contract, and the attraction of several high-profi le players to the league while simultaneously maintaining fi nancial integrity. He tried to replicate these attributes in his design of the USFL. Attracting wealthy owners to the new league—owners that had the ability to withstand considerable losses in the early years—was critical to Dixon’s plan. The WFL’s undercapitalized owners quickly put that league under fi nancial duress, which ultimately was a major factor in its demise. Dixon also recognized the USFL’s success would be dependent on it securing a national TV contract and that placing franchises in the country’s major media markets was a prerequisite for securing such a contract. Gaining immediate credibility in the eyes of the fans was also seen as critical, and Dixon envi- sioned that teams would play in major stadiums, with well-known coaches and with several high-profi le players, all the while keeping costs contained. Perhaps most importantly, Dixon also believed that a rival league’s best chance for success was to avoid direct head-to-head competition with the NFL in the output market. As such, his plan for the USFL was that it would play during the spring season, rather than the fall—this would allow the new league to carve out a niche in the less-crowded spring sports market and increase the league’s prospects for attracting fans and a network TV contract. In 1980, Dixon contracted a consulting fi rm to investigate the prospects for the USFL’s success. The resulting report from the consultants showed there was considerable market potential for a spring football league, and Dixon, encouraged by these conclusions, proceeded to develop the specifi cs of his plan, in preparation for the league to begin play in the spring of 1983. Dixon’s plan called for a 12-team league in the USFL’s inaugural season, with franchises placed in all of the top media markets in the country. In the USFL’s second season, the plan was to add 4 more teams, bringing the total to 16. Each team’s budgeted revenues for the fi rst three seasons would be $4.1 million per year, $2.5 million of which would come from gate receipts—based on Dixon’s assumed average attendance of 25,000 per game—with another $1.5 million coming from a yet unsigned national TV contract and the remaining $100,000 coming from the sale of radio rights. 26 3 The USFL as a Case Study

On the expense side, Dixon budgeted expenditures at $5 million per year per team; thus, given the $4.1 in estimated revenues, each team was projected to lose $900,000 for each of the league’s fi rst 3 years. However, given the vast wealth of the owners he was bringing into the league, Dixon viewed these projected losses as being very manageable, particularly with the expectation that teams would begin to break even in the league’s fourth year. Dixon was apparently very aware of the importance of cost control, particularly player salaries—he knew that entering into an all-out bidding war with the NFL for players would rapidly escalate salaries and, given the USFL’s inferior revenue potential relative to the NFL, could spell a quick demise for the new league. Dixon’s plan was that team payroll in the USFL would be about 45 % of revenues; given his projected revenues of $4.1 million per team, this suggested a budget for player salaries of $1.845, or about $45,000 per player, compared to the NFL’s average salary in 1983 of approximately $130,000. Dixon felt this budget would still allow teams to sign “one or two glamorous players.” To further ensure the fi nancial integrity of the new league, Dixon would require that each franchise owner secured a $1.5 million letter of credit that could be used as a buffer against any unexpected fi nancial diffi culties. Dixon offi cially announced formation of the USFL on May 11, 1982, less than 1 year before it was scheduled to begin play in March 1983. Prior to the announcement, the league had been negotiating with the ABC television network regarding a national TV contract, but an agreement had yet to be fi nalized at the time of the announcement. Dixon struggled with a “chicken or egg” conundrum regarding the TV deal—was it better to fi rst secure a TV deal before offi cially announcing formation of the league, in hopes that the TV deal would immediately increase the league’s credibility, or should the league announce its formation fi rst, in hopes that such an announcement would increase its leverage with TV networks? Dixon elected to go with the latter. While both NBC and ABC expressed interest in the USFL, ABC was viewed as the better fi t, particularly with their lack of high-profi le sport programming on Sunday afternoons during the spring season. Dixon delegated the actual contract negotiations to Mike Trager of Robert Landau Associates, who was retained by the USFL to negotiate on the league’s behalf. The USFL ultimately signed a 3-year agreement with ABC that paid the league $9 million during the fi rst season; in addition, the league also signed a deal with ESPN for $4 million per season. At the time, ESPN was in its infancy, having been formed only 4 years before, in 1979, and was eager to fi ll its programming schedule. With the ABC and ESPN contracts combined, TV revenues for the league’s inaugural 1983 season would be $13 million, or approximately $1.1 million per team in the 12-team league. While such a fi gure did not quite match Dixon’s projected $1.5 million per team for TV revenues, it nevertheless was relatively close. Dixon’s belief that television would ultimately be the key to the USFL’s success led him to hire ESPN President Chet Simmons as the league’s fi rst commissioner. Simmons had a distinguished track record in the television business, having been a producer at ABC in the early 1960s when the network signed a deal with the fl edging AFL, later moving to NBC in 1964 when that network acquired AFL rights, and 3.2 Foundations 27 then ultimately becoming ESPN’s fi rst president in 1980. In Dixon’s view, Simmons intimate understanding of the television business made him the perfect choice to be the USFL’s fi rst commissioner. This focus on television rights fees led the USFL to have a decidedly large- market bias in its franchise locations. The eight largest metropolitan areas in the country—New York, Los Angeles, Chicago, Philadelphia, Detroit, Washington, San Francisco/Oakland, and Boston—were all awarded franchises and would directly compete with NFL clubs in their local markets. Two other USFL franchises, Denver and Tampa Bay, were also located in NFL markets. Only the USFL franchises in Phoenix and Birmingham were without an NFL competitor. With the exception of Boston, all of the USFL franchises that were located in NFL markets also used the same stadium as NFL teams. The USFL’s decision to play in the spring season meant that these stadiums were generally idle at that time of year, and allowed the USFL to avoid scheduling confl icts with the NFL team that would have inevitably occurred had the new league played in the fall. The USFL was also aided by the fact that stadiums during that era were almost all publicly owned, and while NFL teams generally disliked USFL teams using these facilities, they had few means to prevent it from occurring. An exception was in San Diego, where the NFL Chargers successfully lobbied the city council to prohibit a proposed USFL franchise for that city from using Jack Murphy Stadium, resulting in the franchise being shifted to Los Angeles. Numerous other USFL franchises, while ultimately gaining approval to use NFL facilities, found that such approvals came only after substantial delays, making it more diffi cult to sell season tickets when the stadium situation was unresolved. In many cases, the approvals came late in 1982, less than 6 months prior to the league’s March 1983 opening—for example, the Chicago Blitz gained approval for Soldier Field only in late October; similarly, the Philadelphia Stars had to wait until November 15 to be approved for Veterans’ Stadium, while the Denver Gold only gained approval for Mile High Stadium on December 3. In Boston, the problems were somewhat different in that the NFL stadium, Sullivan Stadium in Foxboro, Massachusetts, was not publicly owned, but was owned by New England Patriots owner Billy Sullivan. The USFL’s Boston Breakers were unable to come to any agreement with Sullivan to use the stadium and were forced to play in antiquated Nickerson Field on the campus of Boston University. Dixon knew that the league would not be profi table in its early years and assembled an ownership group that he believed had the fi nancial resources to withstand these early losses. In fact, Michigan Panthers owner Alfred Taubman, a shopping mall developer, was considered one of the wealthiest individuals in America at the time. Numerous other owners had also made their fortunes in real estate development: Tad Taube of the Oakland Invaders, Ron Blanding of the Denver Gold, Myles Tanenbaum of the Philadelphia Stars, and Donald Trump of the New Jersey Generals. While Trump was the original owner of the New Jersey franchise, he sold it to Oklahoma oilman Walter Duncan before the USFL’s inaugural season, although Trump would infamously become re-involved with the USFL when he would buy the New Jersey franchise back from Duncan less than 2 years later. 28 3 The USFL as a Case Study

The remainder of the ownership group included individuals from a variety of backgrounds. The Chicago Blitz franchise was owned by Ted Dietrich, a Phoenix cardiovascular surgeon. Marvin Warner, a banker with major interests in the Ohio Home State Savings Bank and a former US ambassador to Switzerland, held the Birmingham Stallions franchise. High-profi le Washington attorney Berl Bernhard owned the Washington Federals franchise, while John Bassett, a movie producer and son of a Canadian media magnate, owned the Tampa Bay Bandits. The Boston Breakers were owned by Boston entrepreneur George Matthews, while Jim Joseph owned the Phoenix franchise and Alan Harmon held the Los Angeles Express franchise. Dixon’s strategy with respect to players was that each team needed to sign a few high-profi le players while at the same time staying within the strict budgetary controls that Dixon had set out. Like the AFL before it, the USFL focused largely on college players, rather than established NFL stars. The USFL’s fi rst draft was held in January 1983, 4 months prior to the NFL draft, giving the upstart league a signifi - cant advantage in wooing key college players before the NFL could. In addition to the draft, the USFL adopted a territorial protection system whereby each USFL team was assigned fi ve colleges from which it could protect 26 players; these protected players were then not subject to the league-wide draft. The intent of this territorial protection system was to increase fan identifi cation with players by keeping local college stars on the nearby USFL team, something which was unlikely to occur in an open draft system. However, somewhat peculiarly, not all territorially protected colleges were necessarily in the same geographic region as the USFL club—for example, one of the New Jersey Generals’ colleges was the University of Oklahoma, no doubt due to Generals’ owner Walter Duncan being from that state, while one of the Boston Breakers colleges was the University of Nebraska. To the dismay of the NFL, 7 of the 12 fi rst-round draft picks in the 1983 USFL draft signed with the upstart league; a number of these players undoubtedly would have been high picks in the subsequent NFL draft had they not signed with the USFL. The group of seven players included running backs Tim Spencer of Ohio State, Craig James of SMU, and Gary Anderson of Arkansas; quarterback Reggie Collier of Southern Mississippi; receiver Trumaine Johnson of Grambling; offensive lineman Irv Eatman of UCLA; and defensive back David Greenwood of Wisconsin. Added to this group of drafted players were several prominent territorially protected players that also signed with USFL teams, including University of North Carolina running back Kelvin Bryant, signed by the Philadelphia Stars, and University of Michigan receiver Anthony Carter, who signed with the Michigan Panthers. By far the biggest signing for the USFL in its inaugural season was University of Georgia running back Herschel Walker, winner of the 1982 Heisman Trophy. Walker had won the Heisman as a junior and had one more year of college eligibility remaining. At the time, the NFL prohibited its teams from drafting underclassmen, but the USFL chose to not honor this practice and decided to pursue Walker. Initially, the Chicago Blitz owned Walker’s USFL rights, but Walker wanted to play in New York if he was to join the new league, so an arrangement was worked out to transfer his rights to the New Jersey Generals. Just prior to the start of the 1983 season, 3.3 1983: The First Season 29

Walker signed with the Generals for a reported $1.2 million per year for 3 years, plus a $1 million signing bonus, as well as a stake in one of the oil wells of Generals’ owner Walter Duncan. Walker actually signed a personal services contract with Duncan, rather than a contract with the Generals, so that Walker’s contract would not count against the $1.8 million informal payroll cap per team that the league had established. Since ABC has been pressuring the USFL to sign some “name” players so as to increase fan interest in the league, the USFL asked ABC to help cover part of Walker’s contract, a request which was quickly rejected by the TV network.

3.3 1983: The First Season

The USFL’s fi rst season got underway on March 6, 1983. By almost any measure, the league’s opening weekend was a resounding business success. Average attendance the fi rst weekend at the six venues was over 39,000, with both Arizona and Denver having crowds over 45,000. TV viewership was equally impressive. Nationally, the league drew a 14.2 rating and a 33 share. For a start-up league, these numbers compared very favorably to the long-established NFL, whose 1982 ratings across three different networks averaged approximately 16.6. Perhaps most importantly for the USFL, it performed very well in major markets—New York had a 16.6 rating, Chicago a 14.7 rating, and Philadelphia a resounding 19.5 rating. However, after the fi rst weekend, many early season games were plagued by rain and generally poor weather, one of the hazards of playing in the early spring. Within 1 month of the start of the USFL’s fi rst season, attendance had dropped precipitously, down to less than 20,000 per game by week 4. Television viewership also showed dramatic declines; week 4’s numbers came in at a 6.4 rating and 15 share, off over 50 % from week 1’s 14.2 rating and 33 share. Part of this decline in attendance and TV ratings could have been expected; as with any new venture, a novelty effect existed for the new league, with some fans watching USFL games purely out of curiosity early in the season. The league could not necessarily expect to sustain the lofty heights of its fi rst week success. However, there were also more serious and ominous explanations for the rapid deterioration in attendance and viewership. In particular, the league’s contract with ABC was starting to be viewed by many owners as a major problem. Even before the midpoint of the fi rst season, the relationship between the owners and ABC was rapidly disintegrating. The ABC contract required that the league schedule three Sunday afternoon games each week, which amounted to half of the league’s weekly set of games; of these three games, ABC could choose to either televise one game nationally or else (at least) two games regionally. From the owners’ perspective, the problems were twofold. First, unlike the NFL TV contracts with its network partners, the USFL/ABC contract did not allow for blackouts—thus, games were televised into the home team’s market. While this no-blackout policy helped ABC’s ratings, owners were beginning to see this as a major reason for the league’s rapidly plummeting 30 3 The USFL as a Case Study attendance—fans were simply staying away from stadiums and instead were watching the game on television. In addition, there were no provisions in the contract for so-called “crossover” games, whereby fans in the home team’s market would see an alternate league game on TV, rather than the home game of their local team. A second concern for owners was that ABC had “exclusivity” on Sunday afternoons. This became a problem in those weeks where ABC chose to televise only one game nationally, rather than two or three games regionally. In these instances, the exclusivity clause prevented the other two Sunday afternoon games from being shown on television, even by a local TV station in the markets of visiting teams. This restriction made it diffi cult for teams to gain the wider exposure, recognition, and loyalty that came with having its road games on television. Issues had also arisen with the USFL’s cable contract with ESPN. ESPN had very low penetration rates in many cities, due largely to the network’s very young age. For example, in Chicago, ESPN was in less than 10 % of households. In light of this, Chet Simmons was able to negotiate an arrangement with ESPN whereby the league could simulcast ESPN-covered games on local TV stations in markets like Chicago. This agreement between ESPN and the USFL concerning simulcasts was met with strenuous objections by ABC, who felt the arrangement overexposed the league’s product and hence devalued ABC’s investment. The specifi cs of the ABC contract quickly became a lightning rod for owners. Tad Taube of the Oakland Invaders was one of the fi rst to express dissatisfaction, but he was quickly joined by most of the other owners, with Marvin Warner of the Birmingham Stallions being particularly incensed with ABC. ABC had televised a number of Birmingham’s early season home games, and Warner felt that his club’s attendance was particularly damaged by ABC’s no-blackout policy. In many ways, the owners seemed initially unaware of many of the details of the ABC contract and only began to explore the specifi cs of the contract well after it was signed. The contract was negotiated prior to Chet Simmons arrival as commissioner, and as the USFL’s fi rst season progressed, he was coming under constant pressure from owners to renegotiate the TV deal, particularly the blackout and exclusivity provisions. However, Simmons advances to ABC regarding renegotia- tion were quickly rebuffed by the network. Other serious issues were also emerging during the USFL’s fi rst season. Most importantly, there was increasing divisiveness and friction amongst some owners regarding payroll spending and the (informal) salary cap. The owners seemed to be dividing into two groups—the fi scal conservatives and the free spenders. Owners such as Ron Blanding (Denver), Myles Tanenbaum (Philadelphia), and Tad Taube (Oakland) fell into the former category and were particularly vocal in their criticism of Chicago Blitz owner Ted Dietrich, who was spending freely on both collegiate players and on NFL free agents. Michigan Panthers owner Alfred Taubman was also thought to be spending well in excess of the informal cap. Blanding felt the only way his franchise could be fi nancially viable was to stay within the agreed- upon $1.3 million salary budget. Tad Taube believed there was a “gentlemen’s agreement” amongst the owners to observe the cap. In a similar vein, Birmingham’s owner Marvin Warner stated that observing the salary cap was a “matter of trust” 3.4 1984: The Second Season 31 amongst the owners (Byrne, p. 43). LA Express owner Alan Harmon was more blunt and said the spending of Dietrich and the Blitz would “destroy the league.” The fi nancial results from the league’s fi rst year were less than impressive. The league’s 12 teams lost a collective $30 million, led by Michigan’s $6 million loss. Michigan’s player payroll that fi rst year was estimated to be almost $4 million, more than three times the $1.3 limit agreed upon by the owners. While these payroll expenditures resulted in large fi nancial losses for the team, they did produce a high- quality product on the fi eld, with the club winning the USFL championship in the league’s inaugural season. The Chicago Blitz, the league’s other high-payroll club, had less success; the team was only mediocre on the fi eld and struggled at the gate, averaging only 18,000 fans per game. The Denver club—whose owner Ron Blanding was the most fi scally conservative of all owners and who was at the forefront of urg- ing his fellow owners to show restraint in their salary expenditures—was reportedly the only franchise to earn a profi t in the fi rst year, albeit a modest $150,000. Denver kept their payroll to $1.5 million, very close to the agreed-upon limit, while at the same time averaging over 40,000 fans per game. Throughout the fi rst season, Commissioner Chet Simmons was facing mounting pressure on several fronts. Owners continued to be concerned about the ABC TV contract issue and felt Simmons was not doing enough to renegotiate the terms of the deal. As well, several owners were displeased that Simmons had not taken more decisive action on controlling the payroll expenditures of owners like Dietrich in Chicago and Taubman in Michigan. Parallel to this concern was that some owners— like Blanding in Denver, Bernhard in Washington, and Joseph in Phoenix—needed to be forced to spend more on payroll so as to be able to fi eld more competitive teams. Owners seemed to recognize that the huge payroll inequality in the league during the fi rst year, which the commissioner seemed to have little ability to deal with, posed a serious threat to the competitive balance of the league and, by extension, to the long-term viability of the league. Birmingham owner Marvin Warner was particularly displeased with Simmons and had apparently resorted to frequent personal attacks on Simmons during league meetings.

3.4 1984: The Second Season

The off-season between the 1983 and 1984 seasons was a time of signifi cant change and turmoil for the USFL. As a sign of the fi nancial stress the league incurred in its fi rst season, several franchises had ownership changes during the off-season, with some franchises relocating to different cities. Boston Breakers owner George Matthews decided he could not be successful in that market without access to Sullivan Stadium in Foxboro (home of the NFL Patriots) and sold his team to New Orleans real estate developer Joe Canizaro, who moved the franchise to the Louisiana city. Chicago Blitz owner Bill Dietrich, after coming under constant criticism from his fellow owners during the league’s fi rst season for his payroll expenditures, purchased the Arizona Wranglers franchise from Jim Joseph and then 32 3 The USFL as a Case Study proceeded to move the entire Blitz organization, including coaches and players, to Arizona. The ownership of the Blitz franchise in Chicago was then transferred to Milwaukee cardiologist James Hoffman. In Denver, Ron Blanding had apparently had enough of his free-spending fellow owners and sold the franchise to Doug Spedding for a reported $10 million. The Los Angeles franchise—after a disap- pointing fi rst season where the club averaged only 19,000 fans in the massive LA Coliseum—was sold to William Oldenburg, a San Francisco mortgage broker. And fi nally, in what would eventually turn out to be an event critical to the league’s future path, Oklahoma oilman Walter Duncan sold the New Jersey Generals franchise to New York real estate mogul Donald Trump. In addition to these changes to the USFL’s existing franchises, the league added several new expansion franchises for the 1984 season. Expansion was not a new idea—even before the leagues’ inaugural season, USFL founder David Dixon had always planned for the USFL to add four teams for the 1984 season. While some owners, like Tanenbaum of Philadelphia and Duncan of New Jersey, had long opposed expansion—feeling the league needed to stabilize before increasing in size—the large-scale losses incurred during the league’s 1983 season now prompted many owners to see expansion fees as a cash cow to offset at least some of their fi rst-year losses. Tampa Bay owner John Bassett was a particularly strong proponent of expansion, perhaps because he held territorial rights to all of Florida and thus would be entitled to compensation should another Florida team enter the league. In the end, the league decided to add six teams for 1984, two more than Dixon’s original plan. The primary criterion for expansion was market size, with cities like Houston, Pittsburgh, Seattle, and Minneapolis being high on the USFL’s list of expansion candidates. Expansion fees were set at $6 million per team, payable over a 3-year period, allowing the existing 12 owners to collectively capture $36 million from the six new entrants. Both Seattle and Minneapolis were ultimately dropped as expansion candidates, due to problems in both cities in securing access to the appropriate stadiums—the Kingdome in the case of Seattle and the Metrodome in the case of Minneapolis. The six cities that did secure franchises were Houston (Gamblers), San Antonio (Gunslingers), Pittsburgh (Maulers), Memphis (Showboats), Tulsa (Oklahoma Outlaws), and Jacksonville, Florida (Sharks). The new owners ranged from the respected and well-known Edward DeBartolo in Pittsburgh—one of the largest developers and operators of shopping malls in the world and owner of the NHL’s Pittsburgh Penguins—to a variety of controversial fi gures. Falling into the latter category was San Antonio owner Clinton Manges, often viewed as somewhat eccentric and with a checkered business history, having been involved in several lawsuits. The Houston franchise was partially owned by high-profi le dentist and player-agent Jerry Argovitz, who would later be accused of a confl ict of interest between his agency business and his USFL franchise ownership. Rounding out the group of new owners were real estate developer Fred Bullard in Jacksonville; Logan Young Jr. in Memphis, who was heir to a margarine empire; and Bill Tatham Sr. in Tulsa, who was involved in the failed WFL a decade earlier and who had originally planned to place his USFL franchise in San Diego, but was denied access to Jack Murphy Stadium by the San Diego city council. 3.4 1984: The Second Season 33

The USFL’s original goal of making large-market cities the focus of expansion efforts was seemingly not met. The inability to get stadium deals in cities like Seattle, Minneapolis, and San Diego resulted in the league expanding into several cities that were smaller than what the league had originally planned. Four of the six expansion franchises—Jacksonville, Memphis, Tulsa, and San Antonio—were in what could be termed small- to medium-sized markets, markets not typically associated with hosting a major professional sport team. Despite the cash fl ow that expansion generated for existing owners, not all of these owners were onboard—Oakland Invader’s owner Tad Taube viewed the expansion as a “quick fi x,” with “question- able markets” and “incompatible owners.” Legendary NFL coach George Allen, and coach of the Chicago Blitz during the 1983 season, commented publicly that he felt expansion so early in the league’s existence was a poor idea—a comment that apparently infuriated Commissioner Chet Simmons. The move towards locating franchises in smaller markets also meant these franchises were often relegated to playing in inferior stadiums—stadiums not considered to be of major-league status. The Oklahoma franchise played home games in Skelly Stadium on the campus of the University of Tulsa. Not only was the stadium old, having been built in 1930, but parking was a major problem as well. San Antonio played at tiny and somewhat decrepit Alamo Stadium; the stadium had a capacity of only 18,000, which could be expanded to 32,000 with the use of folding chairs, hardly an image that refl ected major-league status. Of the six expansion franchises, only the Pittsburgh Maulers and Houston Gamblers played in major venues, and both shared their respective facilities with an NFL team—Three Rivers Stadium for Pittsburgh and the Astrodome for Houston. Initially, the Maulers had diffi culty in securing a lease for Three Rivers, and the club suspected the NFL’s Steelers were infl uencing the issue behind the scenes. On the player front, the 1984 season saw the USFL sign several more high- profi le college stars. Running back, and 1983 Heisman Trophy winner, Mike Rozier signed with the new Pittsburgh franchise; star University of Miami quarterback and fi rst-round NFL draft choice Jim Kelly signed with the new Houston franchise; and 1983 Heisman Trophy runner-up Steve Young of Brigham Young University signed with the Los Angeles Express franchise. The latter two players went on to become Hall of Fame quarterbacks in the NFL. Los Angeles also signed three top college offensive linemen—Mark Adickes of Baylor, Mike Reuther of Texas, and Gary Zimmerman of Oregon—to serve as protection for Steve Young. Marcus Dupree, a standout at Oklahoma who transferred to Southern Mississippi and subsequently had to sit out a year of college football, left school to sign with the newly relocated Breakers franchise in New Orleans. Players like Young and Rozier signed personal services contracts with their club owners, protecting them against the demise of the franchise and/or league. The league was also starting to more actively sign NFL players to so-called “futures” contracts, whereby current NFL players signed USFL contracts that took effect at some point in the future, whenever the player’s NFL contract expired. The highest profi le of these signings was New York Giants star linebacker Lawrence Taylor signing with Donald Trump’s New Jersey Generals. Taylor signed the contract, valued at $3.25 million for 4 years, in December 1983, to take effect in 1988. 34 3 The USFL as a Case Study

One month later, Taylor reconsidered and negotiated with Trump to opt out of his USFL contract. Earlier in 1983, star tight end Dan Ross of the NFL’s Cincinnati Bengals had signed a futures contract with the Boston Breakers, to take effect in the 1984 season, after Ross had fulfi lled his contractual obligations to the Bengals for the 1983 season. Ross’s teammate at Cincinnati, receiver Cris Collinsworth, was also rumored to be signing a futures contract with John Bassett’s Tampa Bay USFL franchise, but such a signing never materialized. While such futures contracts provided the USFL with increased publicity, some USFL owners were concerned that the strategy could backfi re if the NFL adopted a similar approach and began signing star USFL players to NFL futures contracts. As the 1984 season unfolded, the governance of the league became more complicated and unsettled. The arrival of Donald Trump as owner of the New Jersey franchise took the focus of the league in a very different direction. Immediately upon his entry into the league, Trump began advocating to his fellow owners that the USFL move to a fall schedule, thus setting up a situation where the league would compete head-to-head with the NFL in the output market. The rationale for moving to the fall revolved around the notion that football was a sport naturally played in the fall and that if the USFL was going to be taken as a serious competitor to the NFL—and perhaps ultimately gaining a merger with the NFL—then the new league must move away from its spring schedule. Trump felt the revenue potential in the fall was higher, even with the direct competition from the NFL, and believed that both CBS and NBC would have possible interest in televising USFL football during the fall season. The issue quickly became a divisive force in the league, and owners began to divide into two camps—those that supported the move to the fall and those that felt the new league must stay the course and continue to play in the spring. Owners like Myles Tanenbaum in Philadelphia and Alfred Taubman in Detroit led the pro-spring faction, knowing that their USFL clubs shared a facility with an NFL team and that the two could not coexist together in the same facility during the same season. If the USFL were to move to a fall schedule, their only options would be to fold their franchise or move it to another city. What was particularly concerning for the league was that Philadelphia and Michigan had been two of the fl agship franchises of the league during its fi rst season and that their departures would be particularly damag- ing to the public image of the league. John Bassett in Tampa Bay was also a strong opponent of moving to the fall, and the relationship between he and Trump became particularly strained. Other owners began to question Trump’s motives, and Oakland’s Tad Taube suggested that perhaps it would be in the best interests of the USFL if Trump were to secure an NFL franchise for Shea Stadium, and thus becoming the only NFL team in the city of New York following the departure of both the Giants and Jets to East Rutherford, New Jersey, several years earlier. Philadelphia’s Myles Tanenbaum, in what seemed to be a thinly veiled criticism of Trump, said that he (Tanenbaum) “invested…only if the league partners acted in good faith for the benefi t …of all” (Byrne, p. 121). As Trump’s relationship with his fellow owners was becoming increasingly strained, Trump was also publicly critical of Commissioner Chet Simmons. In a 3.5 1985: The Final Season 35

Los Angeles Herald Examiner article, Trump called Simmons “useless” and expressed displeasure about Simmons handling of both the ABC contract and the proposed movement to the fall season. Parallel with these controversies, major new problems emerged on the ownership front during the 1984 season. The most serious situation developed in Los Angeles, a fl agship franchise for the league. Even with Steve Young as quarterback, the club had been averaging fewer than 16,000 fans per game. In June 1984, partway through the league’s second season, the New York Times reported that William Oldenburg, who had purchased the LA Express franchise prior to that season, was experiencing fi nancial diffi culties, and shortly thereafter the league took over ownership of the franchise. Commissioner Chet Simmons apparently knew very little about Oldenburg when Oldenburg bought the franchise. In a candid revelation, Oakland owner Tad Taube admitted that the league may not have fully done its “homework” when investigating Oldenburg’s fi nancial situation prior to approving his ownership bid for the Express—unbeknownst to many in the league, several of Oldenburg’s past projects had apparently gone into bankruptcy. Los Angeles was not the only problem spot. New Chicago Blitz owner James Hoffman departed after only 4 months of ownership, forcing the league to deal with another crisis in a large-market franchise. Eventually, Eddie Einhorn, who had worked previously for CBS Sports and was part owner of baseball’s Chicago White Sox with Jerry Reinsdorf, purchased the Blitz. In Memphis, the expansion Showboats saw their owner, Logan Young Jr. quickly run out of cash, and the club was sold to cotton trader Billy Dunavant. The Washington Federals were reportedly in deep fi nancial diffi culties after the fi rst season, and the club was sold to Sherwood Weiss, who planned on relocating the franchise to Miami for the 1985 season. While the 1984 season did have some bright spots for the league—for example, the expansion Jacksonville Jaguars were well received in that city and actually broke a USFL attendance record in the second week of the season, with an announced crowd of over 73,000—any successes were largely overshadowed by the increasingly acrimonious relationships amongst the owners and by the large-scale losses that many teams were suffering. Losses for the LA Express reportedly totaled $15 million, while the expansion Pittsburgh Maulers lost $10 million. Nationally, TV viewership was also down—the 1984 USFL championship game received a 9.7 rating and a 19 share, compared to an 11.9 rating and 23 share for the championship game the year prior. For the season as a whole, 1984 ratings were 6.5, compared to 6.0 in 1983.

3.5 1985: The Final Season

The 1984 season had seen the locus of power shift dramatically in the league. Donald Trump was seemingly becoming increasingly inﬂ uential, and his constant pressure to convince other owners to shift to a fall schedule was beginning to have an impact. Tad Taube of Oakland, in a letter to Chet Simmons, expressed the view that the USFL and NFL cannot coexist and that the USFL’s only opportunity for a merger would be to move to the fall and thus compete directly with the NFL. 36 3 The USFL as a Case Study

Birmingham’s Marvin Warner also supported the fall move, believing his team would be a strong candidate to be merged with the NFL, should a merger ever come about. Chicago’s new owner Eddie Einhorn was another fall supporter and had begun to very closely align with Trump. In fact, Trump had orchestrated a situation where Einhorn was given league responsibility for negotiating TV rights. By October 1984, Einhorn was portraying to other owners that a move to the fall would be a fi nancial windfall for the league, saying that teams could earn $5 million per year in rights fees, a many-fold increase in what they earned per year under the terms of the existing ABC contract. Einhorn’s optimistic projections swayed other owners, and both Denver’s Doug Spedding and Memphis’s Billy Dunnavant moved to the pro-fall side. Other owners were less swayed by Trump and his push for the move to the fall. Tampa Bay’s John Bassett’s relationship with Trump was cool, and Bassett was also suspicious of Eddie Einhorn’s claims. Both Alfred Taubman in Michigan and Myles Tanenbaum in Philadelphia remained strongly anti-fall, primarily because both shared a stadium with an NFL team, making the fall unworkable for the USFL team—the NFL’s Detroit Lions, for example, had exclusivity in the fall for the Pontiac Silverdome. Taubman was particularly upset by the talk of moving to the fall, as he had invested millions to sell the notion of spring football in the Detroit area. In an effort to bring an independent perspective to the issue, Simmons and the owners agreed to hire the management consulting fi rm McKinsey. The lead consul- tant on the project, Sharon Patrick, painted a somewhat indicting view of the league’s management structure, stating that the USFL was not a “league” by any accepted defi nition, in that there was no common interest and goals amongst the owners—that there was “signifi cant disagreement…about the key strategic goals and objectives for the league,” particularly as it pertained to the desire to ultimately merge with the NFL. The report recommended the league attempt to stabilize its situation before making further changes in its strategic direction. These recommen- dations included the league scaling back team budgets to $5.5 million per year; abandoning, at least temporarily, plans for further expansion; attempting to renegotiate the current TV contract with ABC; and, perhaps most importantly, continuing to play in the spring until at least the end of the 1986 season. Trump, generally unhappy with the report, particularly the recommendation to delay any plans to move to the fall, quickly dismissed its fi ndings. By the fall of 1984, it seemed inevitable that the league would switch to a fall schedule after the conclusion of the spring 1985 season. In anticipation of this move, Myles Tanenbaum relocated his Philadelphia Stars franchise to nearby Baltimore, which had just lost the NFL Colts to Indianapolis earlier in the year. Tanenbaum made the decision to move without the knowledge or approval of his fellow owners; both the Michigan and Pittsburgh franchises were also quietly considering Baltimore as an option and were angered by Tanenbaum’s unilateral decision. At a subsequent league meeting, the issue became so heated that a physical confrontation was apparently not out of the possibility. The proposed move to the fall also resulted in a series of other franchise changes; any USFL club that shared a facility with an NFL team would now be forced to 3.5 1985: The Final Season 37 move or shut down. With Baltimore closed as an option, Alfred Taubman moved his Michigan franchise to California and merged it with Tad Taube’s Oakland Invaders; the Pittsburgh Maulers ceased operations, leaving the league after just one season; the Washington Federals’ proposed sale to Sherman Weiser, who was to move the team to Miami, fell through, and the franchise was eventually sold to Donald Dizney and moved to Orlando; the New Orleans Breakers moved to Portland, while the Oklahoma Outlaws moved to Phoenix and merged with the Arizona Outlaws. The increasing divisiveness amongst owners was also becoming apparent on other fronts. Large-market owners, led by Tad Taube of Oakland, were successful in changing the policy on national TV revenues, whereby (beginning in 1985) these owners would now receive a larger than proportionate share of such revenues; they justifi ed this change by arguing that these large markets drove national ratings much more so than did small markets. Taube, who, like Trump, now viewed a merger with the NFL as the singular goal of the USFL, also proposed a policy whereby any USFL teams not included in a merger with the NFL be prohibited from taking any future legal action against the NFL. While Taube’s proposal was ultimately rejected by the other owners, it revealed a further division in the owners’ ranks. It pitted those owners who owned USFL franchises in non-NFL cities and hence who might be attractive to the NFL in a merger—cities like Oakland, Baltimore, Phoenix, Birmingham, Jacksonville, and Memphis—against other owners whose franchises had no chance of being merged. In a related matter, John Bassett of Tampa proposed that any owner of a non-merged franchise have the right to purchase a 49 % share of a merged team for $9.8 million. The proposal was rejected by the Board. On October 17, 1984, the USFL took a step that many had long expected—it fi led an antitrust suit against the NFL. The suit was for $1.32 billion and was spear- headed by Donald Trump. Trump assigned one of his personal lawyers, Roy Cohn, to lead the case, even though Cohn was not an antitrust lawyer. As with most other issues in the USFL at that time, the decision to fi le the suit was not unanimously supported. Tad Taube, for one, was critical; he resented Cohn’s involvement and was generally uncomfortable with the timing of the suit, feeling that Trump had rushed the decision. As these developments unfolded, Chet Simmons was becoming increasingly mar- ginalized and powerless as commissioner. While owners like Trump and Marvin Warner in Birmingham had been openly and relentlessly critical of Simmons, many others were also concerned with Simmons’s performance, particularly his inability to renegotiate the ABC contract to better deal with the exclusivity and blackout issues. Prior to the start of the 1985 season, Simmons was replaced as USFL commissioner by Harry Usher. Usher had been the number two executive at the 1984 Los Angeles Olympic Organizing Committee, under Peter Ueberroth. Ueberroth had gone on to be commissioner of Major League Baseball, and landing Usher was seen to be somewhat of a coup for the USFL. However, in many ways, Usher’s appointment as commissioner was a case of too little, too late. Usher seemed no more effective in managing the group of owners than did Simmons. Marvin Warner of Birmingham, for example, continued to attack ABC over its blackout and exclusivity policies and suggested that ABC should have 38 3 The USFL as a Case Study been a defendant in the antitrust suit. Usher continued to let the spring/fall debate remain open for discussion, thus creating further uncertainty and negative publicity for the league. John Bassett, a pro-spring advocate and nemesis of Donald Trump, said that he would have to either relocate or fold his Tampa Bay franchise if the league moved to the fall; Bassett also fl oated the idea of starting a new spring league, separate and apart from the USFL. Bassett went public with his frustrations about the USFL, saying in an on-air interview with ABC that “mismanagement” was at the root of the league’s problems. Harry Usher had many other crises to deal with. He was unable to secure a fall contract with either NBC or CBS, nor was he successful in renegotiating the existing ABC contract. In fact, as the 1985 season progressed, the league was basically crumbling around him, with ownership problems continuing to mount and with several franchises on the verge of collapse. A new problem spot was Birmingham, where owner Marvin Warner was forced out as Stallions owner after the demise of his Ohio Home State Savings Bank. In Tampa, minority owner Steve Arkey, who was Marvin Warner’s son-in-law, was accused of improprieties relating to the collapse of Ohio Home State Savings. Arkey committed suicide shortly after the end of the 1985 season. In Los Angeles, where Jay Roulier had taken over the franchise after William Oldenburg’s fi nancial diffi culties, the massive fi nancial problems continued and Roulier was quickly out, with the franchise taken over by the league. To illustrate the disinterest in the Express in the local market, attendance for one late-season home game for the Express was announced at 3,055, although estimates put the actual number of people in the stadium at less than half of that. There were even reports of a “fi re sale,” with the club shopping around some of its high-priced players to the NFL. The Express proved to be a diffi cult franchise to fi nd a new buyer, with its combination of low attendance and high player costs, and the league was forced to continue to operate the franchise or else risk its collapse partway through the 1985 season. San Antonio was another problem franchise, with reports that players had not been paid for several weeks. In addition, Donald Trump continued to make headlines. He signed Heisman Trophy winner Doug Flutie of Boston College—the third successive Heisman winner the USFL had landed—but had asked his fellow owners to share in the costs of signing Flutie. They refused. There were a couple of positives for the league. Eddie Einhorn had managed to negotiate a new agreement with the fl edging ESPN for the league’s cable rights. As well, the 1985 season got off to a strong start, with opening day national TV ratings of 7.9, no doubt driven by Doug Flutie’s fi rst appearance as a New Jersey General. Overall, however, the 1985 season continued the league’s decline. By season’s end, Usher had very little support amongst the owners, with Donald Trump particularly critical of Usher’s leadership. In addition, the LA franchise remained ownerless, and four clubs reportedly did not meet payroll for their fi nal game. The cumulative 3-year losses across all clubs were estimated to be $200 million. The league’s last hope seemed to rest on the 1.32 billion antitrust suit it had fi led against the NFL. The trial began on May 14, 1986—ironically, the day on which Tampa owner John Bassett died after a long battle with cancer. On July 29, 1986, the 3.6 A Synopsis 39

USFL won the antitrust suit, but was awarded only $1 in damages, with the jury ruling that the USFL’s failure was a consequence of its own mismanagement, rather than the anticompetitive actions of the NFL. On August 4, 1986, the USFL sus- pended play for the fall 1986 season, with the plan to restart play in the fall of 1987. However, such a restart did not occur, and the league ofﬁ cially folded.

3.6 A Synopsis

The USFL endured a tumultuous 3-year existence and ended in failure, in spite of the fact that it seemed primed for success at its founding. The story of the league’s struggles reveals some themes about the ingredients necessary for a rival league to be successful, themes that will be found with other rival leagues and themes that will be explored in further depth later in the book. The themes can be divided into four very broad categories. • Franchise location: Rival leagues face a critical trade-off here: while larger markets provide a greater potential fan base, both in terms of gate attendance and TV viewership, they also present greater competition, in that established leagues are more likely to already exist in these markets. In contrast, smaller markets unserved by the established league reduce the direct competitive threat of the established league, but raise questions as to whether the market is of sufﬁ cient size to adequately support a franchise. The USFL made a very clear choice on this issue and decided to compete head-on with the NFL in the output market— of the USFL’s 12 charter franchises, 10 were in markets already served by the NFL. As will be seen later, this was a much higher percentage than any previous rival league. While the USFL decided to go head-to-head with the NFL in these ten markets, it presumably felt that its decision to play in the spring, rather than fall, mitigated some of this direct competition and allowed the league to survive in these NFL markets. In the short run, the USFL’s decision to focus on large markets paid off in the form of a national network TV contract with ABC—a contract that may not have been possible had the league focused on smaller- to medium-sized markets. • Stadiums: Related to franchise location decisions is the question of stadium availability. In markets already served by the established league, teams often control the use of the stadium and/or have ﬁ rst priority for its use. The USFL was initially able to avoid this issue by playing a spring schedule, i.e., during the off- season of the NFL. However, the USFL’s planned moved to the fall disrupted this plan and forced franchise relocations for a number of clubs. For USFL teams not in markets already served by the NFL, a different type of problem existed. In these cases, available stadiums were not always up to major-league standards, whether in terms of seating capacity, amenities, age, or overall upkeep and appearance. Playing in inadequate or outdated stadiums runs the risk that a rival league will not be viewed as a serious competitor and can quickly damage the image and reputation of the league. 40 3 The USFL as a Case Study

• Players : The USFL, like rival leagues before it, recognized that attracting at least some high-profi le players to the league is necessary if the league is to be considered a legitimate rival. However, a conundrum exists in that such players command large salaries and must be paid at a time when the league is in its infancy and, by extension, has relatively low revenues. This combination implies that teams in rival leagues will incur losses in the short run, as revenues are insuffi - cient to cover player costs. One of the keys to a rival league’s success is having enough owners that are able and willing to sustain such losses for an indefi nite period. When this does not occur, franchises fold or relocate, destabilizing the entire league. • Management: Effective management takes many forms. Owners must not only be able to effectively manage their own franchise, but, as importantly, must be able to work collaboratively with their fellow owners in the league. The latter is particularly important, since sport leagues are, by their nature, a collective venture. Part of this relates to the degree of congruence of interests and perspectives across owners: the greater this congruence, the more likely owners are able to work effectively together to reach common (league) goals. The USFL seemed particularly plagued by problems here—owners disagreed over a wide variety of issues, including what action to take about the fl awed ABC TV contract, the importance of cost control relating to player salaries, the effi cacy of Chet Simmons’s and Harry Usher’s leadership as commissioners, the pace at which expansion would occur, and, seemingly most importantly, whether or not the league should move to a fall schedule. All of the above themes, but particularly the fi rst three, would be what economists typically refer to as barriers to entry and are the basis on which established leagues retain their monopoly power. If rival leagues are to succeed, they must ultimately overcome these barriers. The barriers themselves might be quite different from each other—for example, location may be more of a “natural” barrier, whereas the control of stadiums is not, and is more a case of rent-seeking behavior of established leagues. In the context of the USFL’s brief existence and the various problems it incurred, the following chapter examines the other major rival leagues that have existed since World War II. All of these leagues preceded the USFL, and, as will be seen, all endured, to some degree or another, many of the same issues faced by the USFL. Chapter 4 A Brief History of Post-World War II Rival Leagues

The USFL marked the end of the “Golden Era” of rival leagues, in that it was the last in a line of several rival leagues that had arisen in the post-World War II era to challenge the established leagues. With the USFL as a more modern-day benchmark, this chapter delves into the experiences of earlier rival leagues, some more successful than the USFL and others equally unsuccessful. Ultimately, the question is this: what drives the relative success or failure of rivals? For example, why was the USFL so unsuccessful, when it appeared to have many factors working in its favor? Did the external conditions facing the USFL at the time preclude any chance of success for the league, or was the USFL’s failure entirely of its own making? Contrast this with the resounding success of the AFL or the more limited success of the ABA and WHA—what was it about these leagues that allowed them to be more successful challengers to the established leagues? Were they at the right place at the right time, or was it something more complex than this? Answers to these questions not only are important in a historical sense, but can also provide valuable insights into the viability of interleague competition in the future. The chapter provides a historical background and context that underpins the analysis that follows in the remainder of the book. It provides an overview of the development of both the established leagues and the rival leagues that came and went along the way. Its focus is on the post-World War II period, or what could be termed the modern era of professional sports. After World War II, professional sports started to become a more important component of American life; perhaps not coincidentally, the professional sport industry also started to undergo a transforma- tion itself, emerging from its more unstable and uncertain past and beginning to embrace more modern business and management practices. The historical overview that follows is presented in a chronological format, simply because competition is, by its nature, an evolutionary process.

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 41 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_4, © Springer Science+Business Media New York 2013 42 4 A Brief History of Post-World War II Rival Leagues

4.1 Emerging from the War: The Late 1940s

As World War II ended in 1945, monopolies existed in each of the four sports—the NFL in football, the NL and AL in baseball, the NHL in hockey, and the NBL in basketball. The end of the war, and the optimism and pent-up demand that went along with it, brought about an almost immediate entry of two rival leagues into the pro sport marketplace. Both the AAFC in football and the BAA in basketball began play in 1946. In football, the AAFC’s inaugural 1946 season saw the league fi eld eight teams, a number almost comparable to the NFL’s ten teams. Half of the league’s teams were located in non-NFL cities (Buffalo, Miami, San Francisco, and Cleveland), while the other four AAFC teams were located in NFL markets. With the latter, AAFC teams were located in Chicago (Rockets) and Los Angeles (Dons), to compete with the NFL’s Bears and Rams, respectively, while two AAFC teams were placed in New York (New York Yankees and Brooklyn Dodgers), to compete with the NFL’s Giants. The case of the Los Angeles market is particularly interesting. In a somewhat strange twist of events, the NFL’s Cleveland Rams moved to LA in 1946, ostensibly to avoid competing head-to-head with the upstart Browns of the AAFC. This resulted in LA, which had no professional football franchise in 1945, having two franchises in 1946, the NFL’s Rams and the AAFC’s Dons. Combined with the AAFC’s 49ers in San Francisco, this marked the beginning of the westward shift in franchises in American pro sports. The West, and California in particular, was just beginning to emerge as a major economic force in the country. The Cleveland Browns were clearly the fl agship franchise of the new league. The franchise hired Paul Brown, at the time the renowned coach of college football’s Ohio State Buckeyes. Brown was revered within the state of Ohio but also had high name recognition nationally, which gave the new league instant credibility across the country. The presence of Paul Brown no doubt helped Cleveland recruit better playing talent to the team than would otherwise have been possible. The Browns were able to sign several NFL players off the now-departed (to LA) Cleveland Rams roster but, even more importantly, also signed several former college stars, most of whom were serving in the military and returning from the war; the best known of these was quarterback Otto Graham, who went on to be one of the dominant players of his era. The Browns, and to some extent the AAFC as a whole, were also pioneers in the reintegration of African-Americans into pro football. While African-Americans had played in the NFL during the league’s early days, the league had maintained an unwritten segregationist policy since the 1933 season, and no African-American had played in the NFL for 13 seasons by the time the AAFC formed in 1946. With the AAFC’s arrival, the NFL also integrated, partly because the city of Los Angeles refused to lease the LA Coliseum to the newly relocated Rams unless the club desegregated. In many respects, the AAFC was quite successful. In its inaugural 1946 season, its eight franchises averaged 24,589 fans per game, not that far off the NFL’s average of 31,493 (Quirk and Fort 1992 ). Even more impressively, in the AAFC’s fi nal 3 years (1947 to 1949), the rival league actually slightly outdrew the NFL. 4.1 Emerging from the War: The Late 1940s 43

However, these robust average attendance fi gures belied underlying problems for the upstart league. One problem was that the attendance fi gures were signifi cantly driven by one franchise, the Cleveland Browns—in 1946, for example, the Browns averaged an astounding 57,138 fans per game, more than 30,000 fans greater than the next AAFC team, and more than any NFL team save for the New York Giants. In some sense, the Browns, and the AAFC as a whole, were a victim of the Browns’ success. Coach Paul Brown built a powerhouse team on the fi eld that went on to win the league championship in each of the 4 years of the AAFC’s existence. The Browns lost only 4 out of the 58 games they played during those 4 years. This competitive imbalance seemed to turn off even the Browns’ own fans—in the league’s fi nal season of 1949, the Browns averaged only 31,580 fans per game, down over 25,000 per game from the heights reached only 3 years earlier in the team’s and league’s initial season. Additionally, fi nancial pressures were mounting on many teams in the AAFC, largely due to the bidding war for players that had arisen between the AAFC and NFL. With both leagues reportedly suffering large-scale losses (Quirk and Fort 1992 ), the two leagues agreed to merge after the 1949 season. With the merger, three AAFC clubs—the Browns, 49ers, and Baltimore Colts—became members of the NFL. In addition, the AAFC’s New York Yanks were purchased by the owner of the NFL’s New York Bulldogs franchise, with the Bulldogs franchise being can- celled and essentially replaced by the Yankees, and the AAFC’s Los Angeles Dons merged with the NFL’s Rams, with the new merged team being known as the Rams, and the Dons name ceasing to exist. Because the merged Baltimore AAFC franchise infringed upon the territorial rights of the NFL’s Washington Redskins, the Colts paid $150,000 to Redskins owner George Marshall as compensation. The Cleveland Browns franchise continues to exist today in the form of the NFL’s Baltimore Ravens; the Browns relocated to Baltimore in 1996 and were eventually replaced in Cleveland by an expansion franchise in 1999, also called the Browns, but unrelated in lineage to the original Browns AAFC franchise. The 49ers and Colts also remain part of the NFL today—the 49ers in their original home in San Francisco and the Colts in Indianapolis. After the merger in 1949, the Colts played only one season in Baltimore. A franchise—technically a different one than the original—was then placed back in Baltimore for the 1953 season, where the franchise remained until 1984, when it relocated to Indianapolis. The other league to emerge in the immediate post-war era was the Basketball Association of America (BAA), formed in 1946, the same year as the AAFC. Basketball in 1946 was somewhat different than football in that the established league in basketball—the National Basketball League (NBL)—was itself relatively new, having been formed only 9 years earlier, in 1937. Professional basketball was still in its infancy, with college basketball being the primary commercial entity of that era. Somewhat like the early days of the NFL in the 1920s, the NBL was a league whose franchises were in small- to medium-sized markets, largely in the Midwest. By 1946, the NBL had 12 franchises, in such places as Oshkosh, Sheboygan, Fort Wayne, Syracuse, and Rochester, but also had franchises in two very large markets, Detroit and Chicago. The NBL’s position as the only professional basketball league ended in 1946 with the formation of the BAA. In some 44 4 A Brief History of Post-World War II Rival Leagues ways, the BAA was an outgrowth of the NHL, even though the leagues played different sports. At the time, there were six franchises in the NHL, all in large cities. Four franchises were located in the United States—Boston, New York, Chicago, and Detroit—with the other two franchises in the Canadian cities of Toronto and Montreal. Owners of these franchises and/or of the arenas in which they were ten- ants saw a professional basketball league as a way to increase the utilization of these buildings. The BAA’s initial season of 1946–1947 saw the league operate with 11 franchises; of these, fi ve played in NHL buildings, with Montréal being the only NHL city not in the BAA. The BAA’s Boston Celtics were owned by Walter Brown, who also owned the Boston Garden, home of the NHL’s Bruins; in New York, Madison Square Garden Corporation owned both the BAA’s Knicks and the NHL’s Rangers; the Chicago Stags franchise in the BAA was owned by Bill Wirtz, owner of the NHL’s Chicago Black Hawks, while the Norris family owned both the Red Wings of the NHL and the new Detroit Falcons franchise in the BAA. Finally, Maple Leaf Gardens—a publicly traded company controlled by Conn Smythe—owned the BAA’s Toronto Huskies to go along with its Toronto Maple Leafs NHL franchise. This presence in high-population markets, and access to large arenas, provided the BAA with a distinct advantage over the NBL in terms of revenue-generating potential. In turn, this allowed the BAA to pursue a superior level of playing talent. While, initially, all of the best basketball players were in the NBL, this changed quickly, and within the fi rst 2 years, many star players jumped from the NBL to the BAA. The NBL could not withstand such player defections, and numerous franchises began to experience fi nancial diffi culties. Following the 1947–1948 season, four franchises—Minneapolis, Indianapolis, Fort Wayne, and Rochester—all with- drew from the NBL to join the BAA. These franchises represented the core of the NBL, and their defection to the upstart BAA marked the beginning of the end for the NBL. With six more franchises defecting from the NBL to the BAA after the 1948– 1949 season, the NBL collapsed, leaving the BAA as the only major pro basketball league. With the integration of the NBL teams into the BAA, the latter reconstituted itself and changed its name to the NBA, beginning with the 1949–1950 season. This series of events represented what has turned out to be a unique situation in modern American professional sport in that it was the rival league, not the established league, that survived. As such, this anomaly provides potentially important insights into the nature of competition and survival in professional sports leagues in that it is an important counterexample to the typical pattern.

4.2 The 1950s

In terms of assessing the competitive landscape of major North American sports, the 1950s were something of a contradiction. In one sense, it was a relatively quiet period. None of the four established leagues—with the newly formed NBA now moving from rival to established—faced a single direct competitor league. It would prove to be the last decade for 40 years—until the 1990s—that no competitor league emerged in any of the four sports. 4.2 The 1950s 45

At the same time, however, the 1950s saw major economic, social, and political forces develop that would ultimately go on to change the competitive landscape in sports. It laid the foundation for changes that would occur during the 1960s and beyond. With the war over, consumer demand that had been pent up during wartime was released, and the result was a major increase in incomes and spending. Americans experienced renewed prosperity, having more dollars to spend on discre- tionary items and working fewer hours, thus having increased opportunity for leisure activities. Parallel with this economic growth, there were several key demographic and geographic changes that occurred during the 1950s. First, there was a movement to the suburbs. With automobiles now commonplace amongst American families and with family incomes rising, subdivisions were being created outside traditional city centers, giving Americans larger homes and more physical space. However, within the context of this book, there was an even more important geographic change— Americans were relocating to warmer parts of the country, leaving the population- dense Northeast and Upper Midwest. The West, and to a lesser extent the Southwest and South, all started to experience signiﬁ cant inﬂ ows of population. California, in particular, experienced a major population boom, but states like Washington, Colorado, Arizona, Texas, and Florida also witnessed rapid growth. At the same time, the 1950s saw the emergence of a technological advance—the television—that would revolutionize American society and would ultimately have a profound effect on sports. For sports in general, this growth in television penetration presented an entirely new outlet for the product. Now, the ability to show a game to millions of people on TV presented a new range of possibilities to generate revenue and to promote growth and interest in the game. Curiously, sport teams and leagues did not initially embrace the TV revolution; in fact, it would be decades before some owners saw the opportunities that TV presented. In the 1950s, teams and leagues generally saw TV as a potential threat, in that they believed fans would stay at home and watch games on TV, rather than attending live events, and thus hurting gate revenues. The 1950s also saw explosive growth in the overall US population, with the postwar baby boom in full swing. However, the major pro sport industry generally showed little inclination to react to this. Baseball provides perhaps the most interesting case. As the decade of the 1950s closed, the 1959 season saw MLB with 16 franchises, 8 in the NL and 8 in the AL—the exact same number of franchises as in 1903, the year the two leagues ceased competing against each other. Over that 56-year time period, from 1903 to 1959, the US population grew from 80 million to 178 million, and yet MLB did not add a single new franchise. In fact, as late as the 1953 season, MLB was operating not only with the same number of franchises as in 1903, but these 16 franchises were in the exact same location as in 1903—not a single franchise had relocated during that time period. There may have been many reasons for this reluctance to expand. Commercial air travel was still in its infancy and was relatively expensive; thus, increasing the geographic footprint of a league brought considerable costs on all members of that league. As well, expansion meant bringing in new owners and the commensurate risks associated with allowing a newcomer into a long-established club. 46 4 A Brief History of Post-World War II Rival Leagues

However, the 1953 season marked the end of this remarkably long period of franchise stability and foreshadowed things to come. Over the next 4 years, four MLB franchises would shift locations. The AL’s St. Louis Browns were the ﬁ rst to move, becoming the Baltimore Orioles for the 1954 season; 1 year later, the NL’s Braves would leave Boston for Milwaukee. These franchise shifts were ultimately overshadowed by the changes that would occur in the fall of 1957, when, within 2 weeks of each other, both the NL’s New York Giants and Brooklyn Dodgers announced they were relocating to California—the Giants to San Francisco and the Dodgers to Los Angeles. In that era, and unlike today, individual franchise owners could make such moves unilaterally and did not need the approval of their fellow owners. The move by the Giants and Dodgers was opportunistic on the part of the owners of the two franchises, Horace Stoneham of the Giants and Walter O’Malley of the Dodgers. Both saw the huge market potential in California and preemptively acted before their fellow owners did. Additionally, both the Dodgers and Giants were playing in aging, long-outdated, stadiums, in New York, and had been unsuccessful clearing political hurdles that would have allowed them to build new stadiums. Within the ﬁ rst few years of moving to California, both the Dodgers and Giants were playing in new, state-of-the-art facilities. The moves of the Dodgers and Giants are particularly interesting in light of MLB’s reluctance throughout the 1950s to consider expanding beyond 16 teams. Outside political pressure was starting to mount for baseball to consider expanding, particularly given the rapidly growing population in the West. Subcommittees in both the Senate and House conducted hearings during the 1950s on baseball’s reluctance to expand. Somewhat ironically, the House Subcommittee hearings were led by Emanuel Celler of Brooklyn, whose constituency would soon lose its franchise when Walter O’Malley moved the Dodgers to California. In the hearings, MLB generally argued that the time was still not right to expand. Congress itself took no real action, and the hearings passed with the situation unchanged. The relocation of the Dodgers and Giants was the result of unilateral actions by the franchises themselves and was not the decision of the leagues. MLB seemed resolved to resist expansion, even in the face of mounting public and political pressure and in the face of some existing owners beginning to act unilaterally to capture emerging opportunities in the marketplace. While baseball garnered the most attention because of its preeminence amongst all other sports at the time, the other major pro leagues were no more eager to expand than was MLB. The NFL actually ended the 1950s with fewer franchises (12) than when the decade started (13). Like baseball, the NFL was seemingly impervious to the rapidly changing economic and demographic climate and rebuffed young entrepreneurs like Lamar Hunt of Dallas, who wanted to place an NFL expansion franchise in that rapidly growing city. The NFL was also handcuffed by an internal policy that required expansion decisions to gain unanimous approval amongst owners; with George Marshall of the Redskins and the Bidwell/Wolfner family that owned the Cardinals being unequivocally opposed to expansion, expansion could not occur even if a majority of NFL owners were in favor of expanding. 4.3 The 1960s 47

Hockey was a similar story; the six franchises that began the 1950s were the same six franchises that ended the decade. Chicago continued to be the most westerly franchise in the United States, and Toronto the most westerly franchise in Canada, despite the rapid population growth in the western parts of both countries. In hockey, the opportunity that expansion presented may have been more uncertain, particularly in the United States, where hockey was very much a niche sport. At that time, it had no grassroots foundation as a participant sport in most parts of the United States, but did have a strong regional following as a spectator sport in some parts of the country. In Canada, however, the game had an intense national following, making several cities possible candidates for expansion franchises. Only in basketball was there any franchise movement or expansion during the 1950s. The merger in 1949 of the NBL and BAA resulted in the newly formed NBA having 17 teams. However, several of these franchises, particularly those with origins in the smaller market NBL, were fi nancially weak, and by 1954 the NBA had shrunk to just eight franchises. League membership fl uctuated signifi cantly throughout the decade, mostly due to the growing pains of a new league trying to establish its brand as a league, but also because the game of professional basketball was still much less popular than the college version of the game.

4.3 The 1960s

The economic, political, and demographic changes of the 1950s—while largely resisted by the established leagues like the NFL and MLB—fi nally produced signifi - cant change in the pro sport industry as the 1960s begun. The NFL and MLB, both long unwilling to expand, each faced the emergence of a credible rival league in 1960. In football, Texas oilman Lamar Hunt had been actively seeking an NFL expansion franchise for Dallas since as early as 1957. Not only was Dallas in the heart of football-crazed Texas, but Dallas was becoming an emerging economic force, driven by its new-found oil wealth. However, the NFL resisted Hunt’s advances several times and continued to show little real interest in expansion, whether it be to Dallas or anywhere else. Hunt had also tried to purchase the fl ailing Chicago Cardinals NFL franchise, with the intent of moving it to Dallas; however, no deal was able to be worked out. Hunt, eventually growing frustrated with the NFL, decided to form a competitor league called the American Football League (AFL), the fourth such rival league to go by that name, but what would turn out to be by far the most successful. Over a 2-year period, Hunt put together a team of investors in eight cities, with the plan to begin play in the 1960 season. The original lineup of cities included Dallas, Houston, Los Angeles, Denver, Buffalo, Boston, New York, and Minneapolis. Only two of these franchises were in NFL markets—the New York Titans (later renamed the Jets) would compete against the Giants, and the Los Angeles Chargers would compete against the Rams. Of the eight franchises, fi ve were in what could be termed emerging growth 48 4 A Brief History of Post-World War II Rival Leagues areas of the country in the West and Southwest—Houston, Dallas, Denver, Minneapolis, and LA. In addition to the New York franchise, the AFL also placed franchises in two other Northeast cities unserved by the NFL, Boston and Buffalo. Hunt would own the Dallas franchise, while the Houston franchise was owned by another Texas oilman, Bud Adams, who, like Hunt, had tried, and ultimately failed, to buy the NFL’s Chicago Cardinals. The Buffalo franchise was owned by Ralph Wilson, Denver by Bob Howsam, Los Angeles by hotel magnate Conrad Hilton, Minneapolis by Max Winter, New York by Harry Wismer, and Boston by Billy Sullivan. With the formation of the AFL, the NFL responded quickly and abruptly reversed its long-standing opposition to expansion, announcing plans to expand to Dallas and Minneapolis. Thus, after years of rebuffi ng Lamar Hunt’s interest in obtaining an NFL expansion franchise for Dallas, the announcement of the formation of the AFL—a league that included Hunt’s Dallas Texans franchise—prompted the NFL to suddenly reverse its past opposition to expanding to Dallas. Clint Murchison, also a Texas oilman, was awarded the Dallas NFL franchise to begin play in 1960, the same year the AFL was to start. This created a dilemma for the AFL, as Lamar Hunt’s Dallas franchise was viewed as being a fl agship of the new league and was not expecting immediate competition from an NFL club in the same city. Hunt, however, was committed to his hometown Dallas market and decided to keep his AFL franchise in Dallas and go head-to-head with the Cowboys. A similar scenario played out in Minneapolis, where local businessman Max Winter was slated to own one of the AFL’s original eight franchises. A last-minute intervention by the NFL convinced Winter to abandon the AFL for the NFL, and Winter was awarded the Minnesota Vikings franchise that began play in the NFL in 1961. The AFL franchise slated for Minneapolis never played a game in that city; unlike the situation in Dallas, the AFL elected not to go head-to-head with the NFL in the Minneapolis market, and the AFL franchise was shifted to Oakland before the start of play in the AFL’s inaugural season, where it became known as the Raiders. The AFL played its fi rst game on September 4, 1960, in Boston. As would be expected for an upstart league, the AFL struggled with attendance in its early years. Some of its eight franchises experienced particularly severe problems; generally, these franchises were in cities where there was an NFL competitor. In Dallas, for example, despite a valiant effort, the NFL’s Dallas Texans were unable to overcome the popularity of a Cowboys’ NFL franchise. By 1963, Lamar Hunt abandoned the idea of head-to-head competition and moved the Texans franchise to Kansas City, where it became the Chiefs. Similarly, the Los Angeles Chargers franchise experienced considerable struggles in competing with the NFL’s Rams. Conrad Hilton, the Chargers owner, decided in 1961 to move the franchise 80 miles south to San Diego, where it became known as the San Diego Chargers. The New York Titans franchise also struggled and by 1963 was on the verge of bankruptcy. The franchise was saved when Sonny Werblin purchased the club from original owner Harry Wismer and changed the name to the Jets. While the AFL was not an immediate hit with consumers, it had a resiliency in its early years that allowed it to survive long enough to start to become a factor in the eyes of football consumers. The emergence of television greatly benefi ted the 4.3 The 1960s 49 league in its early years. With the NFL having contracts with only CBS and NBC, the upstart ABC network was shut out of NFL coverage and was readily amenable to a TV package with the fl edgling AFL. The strategy of the AFL on the player front was to sign high-profi le college stars, with these players supplemented by established pro players who were unsuccessful in making NFL rosters. In general, the AFL strategy on players did not target NFL stars. The strategy seemed to emanate from the belief that high-profi le college stars would lend credibility to the new league, but at a cost that was somewhat less than if the AFL attempted to lure away established players from the NFL. The AFL made an immediate impact on this front, signing 1959 Heisman Trophy winner Billy Cannon of LSU literally out from under the LA Rams. The Rams, whose general manager at the time was future NFL Commissioner Pete Rozelle, believed they had an agreement with Cannon and that Cannon was to sign a contract with the Rams immediately following his last college game, the 1960 Sugar Bowl. Much to the astonishment of the Rams, the AFL’s Houston Oilers had already reached an agreement with Cannon, who then proceeded to sign the contract on the fi eld immediately after the end of the Sugar Bowl game. Like the AAFC before it, the AFL also heavily recruited African-American players. While the NFL’s color barrier was offi cially broken in 1946, the established league was still relatively slow in increasing the number of African-American players in the late 1950s. In fact, the Washington Redskins did not employ their fi rst African-American player until 1960, and even then it was at the pressure of the NFL. The AFL strategy of signing high-profi le college stars reached its pinnacle in 1964, when the New York Jets signed star Alabama quarterback Joe Namath to a then-record contract, reportedly the highest ever in professional sport up to that time. In part due to the Namath signing, the value of the AFL’s TV rights skyrock- eted, and the league signed a new 5-year contract with NBC, to start in 1965, that would pay each team approximately $1 million per season, almost the same as what each NFL team was getting from that league’s contract with CBS. The NFL had fi nally had enough, and merger talks between the two leagues began shortly after the Namath signing. Ultimately, a merger agreement was reached in 1966; the agreement specifi ed that the two leagues would offi cially merge in 1969, although they agreed to coexist and avoid competing for the intervening 3 years. Ten AFL franchises entered the NFL—all eight of the original franchises plus two expansion franchises (Miami Dolphins and Cincinnati Bengals) that began play in the AFL subsequent to the signing of the merger agreement. In order to avoid running afoul of antitrust laws, the merger was facilitated by Congress, with House majority whip Hale Boggs of Louisiana being particularly instrumental in assuring political support for the merger. The NFL rewarded this support by granting New Orleans (Saints) an NFL expansion franchise to begin play in 1967. In baseball, a somewhat parallel situation to football was playing out at exactly the same time. MLB’s reluctance to expand during the 1950s, combined with New York losing two of its three MLB teams in 1957, created the opportunity for a rival league to emerge. In 1959, the Continental League of baseball was offi cially established and planned to begin play in the 1961 season. Ironically, the origins of the 50 4 A Brief History of Post-World War II Rival Leagues

Continental League were somewhat innocuous and non-threatening to MLB. In 1958, the city of New York appointed William Shea to lead a campaign to secure an expansion MLB franchise for New York in light of the defections of both the Giants and Dodgers to California 1 year earlier. By 1959 it was becoming apparent that MLB had no immediate interest in placing a franchise in New York, and Shea, along with individuals in several other cities, began to discuss the possibility of forming a new league. To help their cause, they brought baseball icon Branch Rickey aboard and appointed him president. Over the next 2 years, the specifi c structure of the competitor league began to take shape. The league would have eight clubs, located in Buffalo, Toronto, Atlanta, Dallas, Houston, Denver, Minneapolis, and New York. The league was able to put together a credible ownership group, with one of its owners—Bob Howsam in Denver—also owning that city’s franchise in the AFL. However, the Continental League faced an immediate and critical problem, and one not encountered by the AFL—access to quality players for the new league. In football, there were no minor leagues, and players not on NFL rosters were essentially free agents, thus giving the upstart AFL a large pool of talented players from which to draw. In baseball, however, each MLB team controlled literally hundreds of players throughout its minor-league system, the great majority of whom would never play a game in the major leagues. These players had signed minor-league contracts that had, in essence, perpetually bound them to the MLB club for their entire career. Unless the Continental League could break MLB’s control over players, and simultaneously baseball’s antitrust exemption, the Continental League had no chance for success. Knowing the gravity and intractability of this problem, the Continental League turned to Congress for assistance. A June 1960 bill that would have overturned baseball’s antitrust exemption, and would also have limited each major-league team to control no more than 100 players, was narrowly defeated in the Senate, thus effectively striking the death knell for the rival league. As in football, the threat of a rival league suddenly convinced MLB to expand, ending its almost 60-year run with 16 franchises and reversing the anti-expansion stance it had taken during the 1950s. In fact, the ultimate death blow to the Continental League came later in 1960, when MLB announced plans to add expansion franchises in New York (the Mets), Houston, and Los Angeles (the Angels), locations critical to the Continental League’s strategy. The Mets joined the NL in 1961, along with a franchise in Houston, then called the Colt .45s and now known as the Astros. Joining the Angels in the AL was an expansion franchise for Washington DC. Washington had just lost their franchise in 1961 when the Senators, a charter member of the AL, moved to Minnesota to become the Twins, taking advantage of the rapid growth in that region of the country. Not wanting to be without a team in the nation’s capital, the AL immediately granted an expansion franchise to Washington to replace the departed team, with the expansion team also known as the Senators. By the end of the 1960s, baseball had expanded again, this time by four teams, with Kansas City (Royals) and Seattle (Pilots) joining the AL in 1968 and Montreal (Expos) and San Diego (Padres) joining the NL 1 year later. Like the expansion Washington Senators in 1961, the Kansas City Royals were a “replacement” 4.3 The 1960s 51 franchise; 1 year earlier, Charlie Finley had moved his Kansas City A’s to Oakland, temporarily leaving Kansas City without a team. The Seattle franchise turned out to be short-lived. Plagued by poor attendance and playing in an antiquated stadium, losses quickly mounted, and the team was bought 1 year later by a group led by future MLB Commissioner Bud Selig, who moved the franchise to Milwaukee where it became known at the Brewers. In basketball, two competitor leagues emerged during the 1960s. The fi rst was the American Basketball League (ABL), which began play in 1961. It was founded by Abe Saperstein, founder of the Harlem Globetrotters, and had eight teams in the league during its initial season. A young George Steinbrenner, 31 at the time, who would later go on to own the New York Yankees for over 30 years until his death in 2010, owned the ABL’s Cleveland franchise (the Pipers). The league lasted only 1 ½ years and failed to have any discernible impact on the NBA. Five years later, however, the NBA saw a much more serious competitor emerge in the form of the ABA. The ABA was founded by Gary Davidson, a Southern California lawyer, and his business partner Dennis Murphy. The two would later go on to establish rival leagues in both football and hockey during the 1970s, but the ABA was their fi rst foray in the sport business. The ABA began play in 1967 with 11 franchises. The ABA took a very aggressive strategy in the players’ market, and an all-out bidding war quickly developed between the two leagues. The ABA was able to attract several high-profi le college and high-school players to the new league, including Spencer Haywood, Julius Irving, and Moses Malone, along with established NBA stars like Rick Barry. Unlike the AFL in football that preceded it, the ABA experienced almost immediate franchise instability, with many owners, unable to sustain losses, quickly divesting their holdings. In 1968–1969, average attendance in the ABA was under 3,000 per game, less than half the NBA’s average of 6,400 (Quirk and Fort 1992 ). While ABA franchises like Denver, Kentucky, and Indiana had respectable attendance—all over 4,000 per game—there were several problem franchises in the league, with Houston, for example, averaging only 820 fans per game during the 1968–1969 season (Quirk and Fort 1992 ). At the same time, however, several ABA franchises were relatively solid fi nancially, and the league was able, at some level at least, to overcome this instability and continue operating as a going concern. In addition to securing the services of several high-profi le stars, the ABA introduced a number of innovations that drew fans away from the more staid NBA. The ABA played with a distinctive red, white, and blue multicolored basketball and introduced the 3-point fi eld goal. The ABA’s game was much quicker, more offensively creative, and generally had a fl air that the NBA lacked. By the close of the decade of the 1960s, the ABA, while still fragile, had survived its shaky start-up and appeared poised to survive, if not thrive, for the foreseeable future. In hockey, the NHL’s long-standing aversion to expansion ended during the 1960s. After 25 years of operating with the exact same six franchises, the NHL added six expansion franchises for the 1967–1968 season, instantaneously doubling the league’s size. The NHL’s decision to expand seemed largely preemptive, as it 52 4 A Brief History of Post-World War II Rival Leagues hoped to dissuade a rival league from forming. Unlike the other three established leagues, the NHL had not faced the direct threat from a rival league, but the league had been under growing pressure to add more teams, particularly in Canada, where the game was very popular, but where there were only two NHL franchises. Curiously, when expansion did come about in 1967, none of these six new expansion franchises were in Canada. The league was intent on growing the game within the United States and wanted to expand its footprint across a wider geographic area in the country. Of the six new franchises, two were in the Northeast (Philadelphia and Pittsburgh), two were in the Midwest (St. Louis and Minnesota), and two were in California (Los Angeles and Oakland). The 1960s, then, were a momentous period in the evolution of competition within the major professional sport industry. After decades of stability—where the established leagues refused to expand, even in the face of a growing population and important demographic changes—the 1960s produced an unprecedented period of activity. Competitor leagues emerged in three of the four sports and forced the established leagues to revamp their business strategies, essentially forcing them to expand into new markets or else risk losing these markets to the upstart leagues.

4.4 The 1970s

The dynamic competitive environment that developed during the 1960s continued unabated into the 1970s. The decade of the 1970s would see both the NFL and NHL face the emergence of a rival league, to go along with the competition the NBA was already facing with the ABA. In fact, for a brief period in 1974 and 1975, competitor leagues existed in three of the four major sports, with only MLB not facing competition; thus, the 1970s could truly be described as the “Golden Era” of competitor leagues. Not unrelatedly, the decade also saw each of the Big Four undertake unprecedented expansion of their own. Starting with football, the NFL, after a decade-long battle with the AFL that only offi cially ended with the formal merger in 1969, faced a new competitor almost immediately. Buoyed by the AFL’s success, the new WFL offi cially formed in 1973 and announced it would begin play for the 1974 season. The WFL’s founders were Gary Davidson and Dennis Murphy, founders of basketball’s ABA in 1967. The success of the ABA, at least in the sense it was continuing to survive and compete against the NBA, elevated the profi le of Davidson and Murphy and gave the WFL a measure of instant credibility. The WFL began in 1974 with 12 franchises. Like other rival leagues before it, the franchise locations were a mix of large markets—where the WFL would compete directly with an NFL team—and smaller markets in non-NFL cities. Somewhat different than the AFL before it, the WFL focused on attracting established NFL stars to the new league, rather than targeting just college players. The WFL signaled its aggressive player recruiting strategy when the league’s Toronto Northmen franchise 4.4 The 1970s 53 signed three star players from the 1974 Super Bowl champion Miami Dolphins— running backs Larry Csonka and Jim Kiick, along with receiver Paul Warfi eld. Other major signings of the new league included such NFL stars as quarterback Daryle Lamonica of the Oakland Raiders and running back Calvin Hill (father of future NBA star Grant Hill) of the Dallas Cowboys. In spite of the experience of Davidson and Murphy, the WFL encountered almost immediate problems. While early attendance fi gures were reasonable, many reports suggested that the league was drastically infl ating such fi gures to gain credibility. Unlike the AFL before it, the WFL’s TV contract was unimpressive—it had a small deal with a relatively unknown network called TVS, a syndicator of sport programming. Franchise instability in the league was almost immediate, with the Detroit franchise folding partway through the league’s inaugural season. Also in mid-season, both the Houston franchise and New York franchise relocated: Houston to Shreveport and New York to Charlotte. The league began its second season of play in 1975, but with losses mounting, the WFL folded in October of that year, unable to complete the season. One year after the WFL folded, the NFL added expansion franchises in Seattle (Seahawks) and Tampa Bay (Buccaneers). In hockey, the early 1970s saw the NHL face a rival league for the fi rst time in its modern era. Gary Davidson and Dennis Murphy established the World Hockey Association in 1972, 5 years after they founded the ABA and 2 years before they would found the WFL. Their franchise location strategy in the WHA was generally similar to what it was in their other two start-up leagues—franchises in key large markets that would compete directly with the established league, mixed with franchises in smaller markets. The league placed 6 of its 12 franchises in NHL markets— New York, Philadelphia, Chicago, Los Angeles, Minnesota, and Boston (New England Whalers). The league also placed franchises in four midsized Canadian cities—Winnipeg, Edmonton, Ottawa, and Quebec City. These midsized Canadian markets were an important element of the WHA strategy. While the game’s origins were in Canada and almost 100 % of the NHL players at the time were Canadian, the NHL had generally been reluctant to expand in the Canadian market. Other than Montreal and Toronto, both long-time members of the league, most other Canadian cities were viewed as being too small to adequately support an NHL team. The NHL eventually relented and expanded into Vancouver, Canada’s third largest city after Montreal and Toronto, in 1970, but had no other plans to expand further in Canada. The WHA adopted an aggressive strategy in the labor market, signing many established stars from the NHL. The 1972 Stanley Cup champion Boston Bruins lost three key players, goaltender Gerry Cheevers and forwards Derek Sanderson and Johnny McKenzie. However, the WHA’s biggest signing was Chicago Black Hawks superstar Bobby Hull, one of the best players to ever play in the NHL up to that point. Hull signed with the Winnipeg Jets for $250,000 per year, at a time when star NHL players were earning about $50,000 per year. All-time NHL leading scorer Gordie Howe came out of retirement to sign with the New England Whalers, where he joined his two sons, Mark and Marty. 54 4 A Brief History of Post-World War II Rival Leagues

The WHA also targeted the Canadian junior leagues, the almost sole developer of amateur talent at the time, and the hockey equivalent to college basketball or football. The WHA signed a wealth of young emerging talent—Wayne Gretzky, Mark Messier, Michel Goulet, and Rob Ramage were only a few of the many teen- agers that the WHA signed straight out of junior leagues. Like many other rival leagues, the WHA experienced considerable franchise volatility. Of the 12 teams that began play in 1972–1973, only three of these remained in the same location at the end of the league’s 7-year existence. By the start of the 1978–1979 season, the WHA had shrunk to seven teams; however, most of the franchises that remained were relatively solid fi nancially and were in strong hockey markets. The WHA’s signing of Wayne Gretzky, a star in Canada from the time he was a young boy and predicted by some even at that time to be the best hockey player ever, signaled to the NHL that the WHA was not going away and was going to continue to pose a large threat to capturing some of the game’s biggest stars. The WHA averaged 8,108 fans per game in 1978–1979, not at the NHL’s average of 11,408 (Quirk and Fort 1992 ), but respectable nonetheless. In 1979, the two leagues agreed to a merger, with the NHL absorbing four WHA teams—Edmonton, Winnipeg, Quebec City, and Hartford. With the merger, the NHL’s franchise count increased to 21, up from 6 just 12 years earlier. Thus, in a little over a decade, the NHL has increased in size by three and one-half times. In addition to its initial expansion in 1967, where it added six teams, the NHL also expanded by two teams in 1970, 1972, and 1974. The Buffalo Sabres and Vancouver Canucks were added in 1970, the New York Islanders and Atlanta Flames in 1972, and the Washington Capitals and Kansas City Scouts in 1974. All three rounds of these expansions, but particularly the latter two, could be directly attributable to the NHL attempting to stave off the entry of a competitor league. Much to the surprise of many, Vancouver had been passed over in the 1967 expansion, and the NHL attempted to remedy what many saw as a strategic error by awarding the city a franchise in 1970. Similarly, the awarding of the New York Islanders franchise was against a backdrop that the WHA was preparing to place a franchise on Long Island. Of the post-1967 expansion franchises, neither Atlanta nor Kansas City survived in their original locations; the Atlanta franchise moved to Calgary in 1980, where they kept the Flames name, while the Kansas City franchise moved to Denver in 1976 (Colorado Rockies) and then to New Jersey (Devils) in 1982. In basketball, the ABA continued to do battle with the NBA through the early part of the 1970s. The intense competition was taking its toll, as skyrocketing salaries drove many teams in both leagues towards fi nancial disaster. The two leagues began merger talks as early as 1970 and, in fact, reached a merger agreement, but the NBA players’ association fi led suit to block the agreement, fearing a merger would effectively end competition in the labor market. The 1970 merger agreement was never consummated, and the leagues continued to compete against each other for six more years. Finally, in 1976, a merger was fi nalized, and four ABA teams— the New Jersey Nets, Denver Nuggets, San Antonio Spurs, and Indiana Pacers— joined the NBA, with the ABA’s three remaining teams from the 1975–1976 season ceasing operations. 4.5 The 1980s 55

Despite the fi erce competition from the ABA, the NBA (and like the NHL in hockey) expanded during the early 1970s, adding teams in Buffalo, Portland, and Cleveland in 1970 and New Orleans in 1974. When combined with the fi ve expansion franchises it added in the late 1960s, the NBA added nine expansion franchises during the ABA’s 10-year existence. Thus, even in the NBA’s weakened fi nancial state, it presumably felt the need to continue to expand or risk losing potentially attractive markets to the ABA. With the NBA-ABA merger, the NBA operated with 22 teams in 1976–1977, the fi rst year after the merger, up from only 10 teams in 1966–1967, the last year before the emergence of the ABA. In general, the 1970s marked the most tumultuous time in major professional sport markets to that point and, for that matter, even to this day. Unlike the decades that preceded it, established leagues expanded quickly, in part as a proactive measure to increase their geographic footprint and take advantage of new revenue opportunities, but more so as a reactive measure to ward off competitor leagues that were seeking to enter unserved markets.

4.5 The 1980s

The dynamic competitive environment of the 1960s and 1970s cooled markedly in the 1980s. In fact, only one competitor league, the previously discussed USFL, would emerge during the 1980s. The quick, and perhaps somewhat unexpected, demise of the USFL marked the end of an era in North American professional sports. No legitimate competitor league has emerged since then. The Big Four leagues reestablished themselves as the sole provider of elite-level competition in their respective sports. While the Big Four have continued to expand over the past 30 years, this has slowed markedly, relative to the 1960s and 1970s. Since the folding of the USFL in 1985, the NFL has added four expansion teams, three in the 1990s and one in the 2000s. Similar expansion patterns have been evident in the other leagues. MLB has added only four teams since its 1977 expansion; in hockey, the 21 franchises that comprised the NHL immediately following the NHL- WHA merger in 1979 have since increased to 30 franchises, with all nine expansion franchises added between 1993 and 2000. The NBA added eight expansion franchises since the 1976 merger with the ABA, only one of which has been since 1995. Chapter 5 Explaining Competitiveness: Alternate Theoretical Frameworks

The case histories of rival leagues presented in the previous two chapters are critical to understanding the nature of competition and competiveness in the major professional sport industry. These histories raise several important questions: • Why has monopoly, rather than competition, been the norm in the industry? • Where rival leagues have existed, why have some been more successful, at least in the sense of forcing a merger with the established league, than have others? • What does this imply about the possibility of credible rival leagues emerging in the future? Perhaps somewhat surprisingly, these questions have been understudied in the academic literature. This chapter provides three distinct theoretical perspectives on analyzing these questions. Two of these perspectives are rooted in the economics literature, while the third comes from the strategic management ﬁ eld. These perspectives should be viewed as complementary, rather than competing, in that no one approach can, in itself, sufﬁ ciently explain the complexities of the issue.

5.1 A Standard Economics Approach

A distinct literature has developed within the economics discipline that applies economic concepts to the study of the sport industry. The literature can be traced back to the seminal work of Rottenberg ( 1956 ) and is now vast, encompassing several subﬁ elds across a wide range of topics. The issue of market structure—and particularly the monopoly status of major professional leagues—has dominated much of this literature. The sport industry provides a rare real-world opportunity to test the impacts of monopoly market structures. As such, much of the work of sport economists has focused on examining the outcomes of monopoly. Economists have examined a wide range of areas in which the monopoly power of sports leagues manifests itself—from ticket pricing, to labor relations with players, to negotiating favorable stadium deals with local governments.

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 57 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_5, © Springer Science+Business Media New York 2013 58 5 Explaining Competitiveness: Alternate Theoretical Frameworks

In contrast, there is considerably less research that examines the causes of such monopolies and the corresponding inability of rival leagues to sustain themselves. In fact, Quirk and Fort (1992 ) is one of the very few pieces that actually give the issue of rival leagues any serious consideration. They provide a comprehensive history of the evolution of rival leagues in US sport and then develop a theoretical model that attempts to explain both the conditions under which rival leagues will enter the market and the conditions necessary for the rival league to be sustained. Quirk and Fort base their analysis on the notion of market potential and conclude that “rival leagues succeed only when enough market potential is left unexploited to support eight or more teams…” (p. 359). Further to their focus on output market conditions, they argue that successful rival leagues require gross (my emphasis) mistakes by established leagues (and not merely “ﬁ ne-tuning” mistakes), such as when the NFL left several viable markets unserved during the 1950s, and thus provided the opportunity for the AFL to emerge.1 Parallel to this output market argument, others have explained the failure of rival leagues by referring to input markets. The argument here is that rival leagues face prohibitive “barriers to entry”—i.e., that established leagues control key production inputs, like players, stadiums, and TV contracts, making it difﬁ cult or impossible for new leagues to successfully enter.

5.2 A Public Choice Approach

The public choice approach—sometimes known as the economic theory of politics—argues that legislators, rather than altruistically serving the public interest, are themselves self-interested and seek to maximize their probability of reelection. Public choice theory—which saw major intellectual contributions from James Buchanan, the 1986 Nobel Prize recipient in economics—is counter to the more altruistic view of politicians that has long been part of traditional political science theory. According to the public choice view of politics, legislators are able to potentially enact legislation that is detrimental to social welfare—such as legislation that protects the monopoly position of established sports leagues—because voters are largely unaware of the negative effects of these laws. In addition, any negative effects are highly dispersed across millions of politically unorganized voters. A public choice explanation of the existence of monopoly sports leagues is that legislators have little incentive to foster competition in professional sport markets. Many constituents are not even aware of the additional costs, in terms of, say, ticket prices, that they may incur because of the monopoly behavior of their favorite team, and, furthermore, may not even be concerned about this cost if they believed that

1 Another potential factor in this particular case was the NFL’s apparently slow recognition of the signifi cant increase in demand for football caused by the 1958, sudden-death overtime, Colts-Giants NFL championship game, the fi rst championship game to be televised. 5.3 A Strategic Management Approach: The Resource-Based View 59 any policy remedy would adversely affect their local team. As well, professional sport teams and their owners have high profi les in their host cities and often have a synergistic relationship with local politicians. Longley ( 2011 ), for example, examined the 1960 Senate vote pertaining to the Continental League’s desire to have baseball’s antitrust exemption overturned and to limit MLB teams to no more than 100 players in their minor-league system. His analysis showed that Senators from states with MLB teams were more likely to vote against the Continental League’s interests than were Senators from states without an MLB team. He concludes that, since many more states have MLB teams now than in 1960, the prospects of Congress enacting legislation that is not in the interests of MLB appear remote, at best. Along similar lines, Quirk and Fort (1992 ) note how government actions have actually encouraged and/or facilitated mergers (AFL-NFL, ABA-NBA, and WHA- NHL) of professional sports leagues, indicating little political interest in increasing the competitiveness of these markets.

5.3 A Strategic Management Approach: The Resource-Based View

The traditional economics approach and the public choice approach are both what could be termed “structural” explanations for the existence of sport monopolies. There is no doubt that both approaches make signifi cant contributions to our understanding of sport monopolies. Clearly, market structures do matter; for example, the greater the market potential in the output market that is left unexploited by the established league, the greater the opportunity for a rival league to emerge. Additionally, it is also clear that legislators have a political incentive to favor established leagues. However, these explanations, while true, are also incomplete. Taken to their extreme, they imply that competitive outcomes are predetermined by structural conditions in that market. In essence, these explanations leave little, if any, room for the potential role of management. Thus, an alternate perspective, and one that is the primary focus of the analysis in this book, is that management “matters”—that some organizations are more successful because they are better managed. For example, was the AFL successful in the early 1960s solely because of the missteps of the NFL? Could any collection of eight owners been equally as successful as the original AFL owners were, or was there something unique about that particular group? Similarly, the USFL’s failures as described in Chapter 2 seem, at least on the surface, as related to management issues as they were to external structural issues within the football marketplace. As such, this section moves the discussion out of the economics realm and instead examines an important theory in the strategic management literature, the resource-based theory (RBT). Compared to both the traditional economics approach and the public choice approach, the RBT explains competitive outcomes in a market as the result of internal management processes in individual fi rms, rather than being solely the result of structural conditions in the external market. The resource-based 60 5 Explaining Competitiveness: Alternate Theoretical Frameworks theory has existed for over 30 years and has now developed to the point where it is considered one of the most powerful and prominent theories for understanding organizations (Barney et al. 2011 ). Barney et al. ( 2011 ) argue that, while the roots of RBT ultimately trace back to the late 1950s, with Penrose’s ( 1959 ) work on the relationship between organizational resources and organizational growth, the more modern origins of RBT as a distinct and formal theory of organizational success are more recent, dating only to the 1980s. The development of RBT during the 1980s was in contrast to the prevailing “market structure” focus of that decade, as popularized by the work of Porter (1980 , 1985 ). Porter’s work focused on factors external to the organization to identify the organization’s optimal strategic choices. In essence, organizational strategy was dictated by the characteristics of the environment and industry in which an organization operated. In contrast, the RBT was inward focused, in that it viewed organizations as heterogeneous entities, and sought to explain organizational success by examining factors internal to the organization. One of the fi rst signifi cant contributions to what would later become the RBT was from Lippman and Rumelt ( 1982 ). Their work developed the notions of “inimitability”—the inability of competitors to readily and easily replicate the resources possessed by the fi rm—and causal ambiguity. Causal ambiguity refers to the diffi - culty that competitors often have in ascertaining exactly what factors are responsi- ble for a given organization’s success. The concepts of inimitability and causal ambiguity would later go on to become central elements of RBT. Other seminal contributions soon followed. Wernerfelt (1984 ), who is generally credited (Barney et al. 2011 ) with being the fi rst to use the term resource-based view, asserted that it was important to focus on a fi rm’s resources, as opposed to their products, while Barney ( 1986 ) argued that sustained competitive advantage could emanate from an organization’s culture. By 1991, the RBT had developed a substantial literature and had become suffi - ciently important to warrant a special issue in the Journal of Management . The editor of that issue, Jay Barney, framed the collection of articles by providing a synthesis of the state of the literature to that point, along with a paradigm for moving forward. In that article, Barney (1991 ) argued that there are four major characteristics that a resource must possess if it is to provide a competitive advantage—it must be valuable, rare, inimitable, and non-substitutable. In many ways, 1991 marked the beginning of what would become an explosive growth in the RBT literature. The basic tenets of the RBT, as articulated by Barney ( 1991 ) and those preceding him, provided the basis for a wide range of articles that added both depth and breadth to the core seminal literature. Considerable attention has been given to more clearly defi ning the nature of resources. For example, Kogut and Zander (1992 ) argue that knowledge is an important resource and developed the notion of combinative capabilities. Castanias and Helfat ( 1991 ) argue the importance of CEOs as a resource and categorize CEO skills as general, industry specifi c, or fi rm specifi c. The synergistic nature of resources has been emphasized by Teece et al. ( 1997 ), who introduced the notion of dynamic capabilities and argued that sustained competitive advantage resulted from the confl uence of assets, processes, 5.3 A Strategic Management Approach: The Resource-Based View 61 and evolutionary paths. Gavetti ( 2005 ) elaborated on the micro-foundations of dynamic capabilities, stressing the importance of cognition and hierarchy. A critical aspect of RBT is that resources must be inimitable if they are to be a source of sustained competitive advantage. Miller and Shamsie (1996 ), among others ( Amit and Schoemaker 1993 ; Hall 1992 , 1993 ; Lippman and Rumelt 1982 ), argue that this inimitability must be derived from one of two sources—either the resource must be protected by property rights or it must be knowledge-based, such that competitors cannot imitate the resource due to lack of knowledge. Property-based resources are created through patents, deeds, or contracts and essentially give the fi rm exclusive ownership and control over product inputs, production processes, or distribution channels. By their nature, these property-based resources are only valuable to a fi rm if competitors are denied access to their use at the same cost as the fi rm in question. Miller and Shamsie argue competitors are generally aware of these property-based resources and their value to the fi rm in question, but are unable to replicate these resources either due to some sort of explicit restriction, such as legal contracts or trade restrictions, or due to fi rst mover advantages. They suggest that insightful (or fortunate) fi rms are able to gain control over these crucial property-based resources before competitors become aware of their true value. In contrast, knowledge-based resources are more subtle, more diffi cult to defi ne, and correspondingly more diffi cult for competitors to directly observe. Miller and Shamsie suggest that these skills may be technical, creative, or collaborative in nature and involve elements that make it diffi cult for competitors to discern how these resources impact fi rm success (Lippman and Rumelt 1982 ). They further elab- orate on their distinction between property-based and knowledge-based resources by identifying two types of resources within each category. They term discrete resources as those that have value independent of the specifi c organizational context in which they are employed, while systemic resources are defi ned as those whose value is derived from their place within a broader network. As such, property-based resources that are discrete are more stand-alone, examples of which might include control over valuable inputs, facilities, locations, or production processes. This control could emanate from long-term legal agreements, from patents, from government regulation, or from any one of a number of other sources that prevent competitors from accessing such resources. They argue that these discrete property-based resources are most valuable when the fi rm’s environment is relatively predictable and stable; conversely, in rapidly changing environments, these types of resources may be quickly rendered obsolete. For example, a long- term lease on prime retail space will lose value as a resource if population or tastes change to shift consumers away from that location. With systemic property-based resources, the value is on the interdependence of these assets with each other, not in them as stand-alone entities. For example, an expansion in the number of retail/distribution outlets enhances the overall distribution network by creating economies of scale through allocating fi xed marketing and administrative costs over a greater number of outlets and by more fully capitalizing on the brand image of the fi rm. However, these systemic property-based resources, 62 5 Explaining Competitiveness: Alternate Theoretical Frameworks like the discrete property-based resources, are still vulnerable to environmental change, and their value can be compromised by changing market conditions and/or production/technological processes. Thus, in situations where environmental conditions are relatively stable, or change only very slowly, property-based resources will tend to provide a fi rm with a long-term, impenetrable, competitive advantage. However, where environmental conditions are more dynamic, property-based resources will be less valuable to an organization than knowledge-based resources. Miller and Shamsie argue that knowledge-based resources—such as specifi c technical or creative skills—are, by their very nature, much more adaptable to changing external environments than are property-based resources. As well, because knowledge-based resources are more esoteric and ambiguous, they are less directly observable by those external to the organization and hence are more diffi cult for competitors to replicate. In essence, competitors do not know exactly what it is they are trying to replicate. Miller and Shamsie argue that knowledge-based resources are less important in stable environments—in fact, they may actually be less valuable in these situations than property-based resources—because property-based resources are protected from imitation through legal enforcement of ownership rights, whereas knowledge-based resources have no such protection. However, in a rapidly changing external environment, knowledge-based resources are much more adaptable to these changing conditions than are property-based resources. As with property-based resources, knowledge-based resources can be either discrete or systemic—the former pertains to the fi rm possessing a collection of technical and creative skills amongst its employees, whereas the latter pertains to the integration and coordination of those specifi c skills into a collaboratively functioning team. These systemic knowledge-based skills are the most diffi cult for competitors to understand and ultimately imitate and hence are the most critical for sustaining a long-term competitive advantage in dynamic environments. Effective collaboration and teamwork are diffi cult to imitate because they are often ambiguous and fl uid and specifi c to particular time and place. Miller and Shamsie note that such skills tend to be very fi rm-specifi c—and hence diffi cult to copy—because they emanate from an infrastructure, history, and collective experience that is unique to that fi rm. Berman et al. ( 2002 ) examine these issues within the context of a sport setting and focus on the concept of “tacit knowledge” in the NBA. Tacit knowledge is knowledge which cannot be codifi ed and can only be learned through experience; hence, it cannot be separated out and sold through a market mechanism. Correspondingly, tacit knowledge, by its nature, cannot be imitated and therefore can be a source of sustained competitive advantage for an organization. Critical to many organizations is not just the tacit knowledge possessed by individuals within the organization, but an even more ambiguous, but very real, tacit knowledge of how these individuals interact with each other within the organization. Berman et al. focus on this group-level tacit knowledge and examine the effects of such knowledge on the on-court performance of NBA teams. Since tacit knowledge at the group level cannot actually be observed, it must be proxied; Berman et al. use shared experience—i.e., the average number of years that players on a team have been members of that team—as their measure of tacit knowledge. Their results indicate 5.3 A Strategic Management Approach: The Resource-Based View 63 that, ceteris paribus, there is a positive relationship between shared experience and a team’s on-court performance. The work of Berman et al. has subsequently spawned many similar studies using sport team performance, with most also focusing on the notion of shared experience as a key contributor to group performance. What is of particular interest to the issue in this book is whether such fi ndings apply not only to on-court/on-fi eld performance but also to the actual operation of sports leagues themselves and the ability of franchise owners to effectively manage the collective interests of the league. As a fi nal note regarding the RBT, the theory is not without its critics. As Miller and Shamsie note, a criticism of the RBT is that, while it is well developed from a conceptual perspective, rigorous empirical testing of such theories has been more limited. One result is that the notion of a resource is often amorphous and has not always been well defi ned in an operational sense. They argue that attempts to more specifi cally defi ne the types of resources adds precision to the research and avoids the tendency to retrospectively and vaguely attribute value to a fi rm’s resources because that fi rm performed well. Using, then, the RBT as the primary theoretical lenses, the following two chapters proceed to analyze the sources of the competitive advantage possessed by the established leagues. Chapter 6 Property-Based Resources: Franchise Locations, Stadiums, and Players

For the purposes of the analysis in this book, the RBT has some advantages over both the traditional economics approach and the public choice approach in that it allows one to more explicitly consider the possible role of managerial choice as a variable infl uencing competitiveness in the pro sport industry. Relatedly, it allows one to more directly consider the notion of resources and, more importantly, the inimitability of these resources, as a source of competitive advantage. While it is clear that, by the very nature of the issue, established leagues possess certain resources that rival leagues do not, it is less clear as to why rival leagues have had such diffi culty in imitating these resources. The fi rst task in the analysis is to delineate the set of resources that are critical to pro sports leagues.

6.1 Production Function of Sports Leagues

To be able to identify the specifi c nature of resources employed by sports leagues, one must fi rst consider the characteristics of what economists term the production function. All fi rms in all industries have some type of a production function. A production function is simply the way in which inputs, like capital and labor, get combined to produce the good or service. For example, a pizza restaurant uses raw materials like dough, meat, and vegetables and combines them with labor expertise (the baker/chef) and capital equipment (the ovens) to produce the product. While the various degrees of these inputs may vary across different restaurants—and, in fact, these varying degrees of inputs can be a basis on which restaurants compete with each other—all competitors in the market must employ some combination of these basic inputs. As discussed in Chapter 2, in the pro sport industry, the primary output produced is the entertainment value of the two competing teams. From this simple notion, and from the case histories of rival leagues discussed in Chapters 3 and 4 , we can begin to construct a set of resources necessary to produce the output. At the most basic

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 65 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_6, © Springer Science+Business Media New York 2013 66 6 Property-Based Resources… and fundamental level, there are four critical resources that underlie all others in the production of spectator sport contests. They are: • Franchise locations • Venues: stadiums and arenas • Playing talent • Managerial capabilities The ﬁ rst three are what Shamsie and Miller would call property-based resources and are discussed in this chapter, while the last is a knowledge-based resource and is discussed in Chapter 7 . What will ultimately be important is not simply identifying and examining the nature of these resources, but, most critically, determining their degree of imitability by potential competitors.

6.2 Franchise Locations

6.2.1 Conceptual Foundations

One of the most fundamental strategic decisions of any league is to determine the cities/markets in which it will place franchises. In general, market size matters—larger markets provide a greater potential fan base from which to draw support, whether through gate attendance or through TV viewership. Thus, all else equal, sports leagues will tend to gravitate towards larger population centers. Of course, this is not absolute, and the franchise location decision is often the result of a complex set of interactions of several variables. For example, existing leagues, when making expansion decisions, may also evaluate the quality of the local ownership groups involved, the venue that is available in the city, the income/wealth of the area, etc. With hockey in the United States, there is an additional element involved, in that the game does not have a strong following in all regions of the country, so location decisions are not simply a function of market size—there must also be considerable interest in the game itself. Thus, certain large markets, for example, Miami, Atlanta, Houston, or Phoenix, may not necessarily be good locations for a franchise, despite the size of those markets. For rival leagues, they generally face the reality that established leagues will already have franchises in the most lucrative markets. This, then, forces a crucial decision for the rival league. It can choose to enter the same markets as the established league and compete head to head: the advantage of this strategy is that not only are these markets already proven, but it is these markets which are the most likely to generate monopoly rents, since it is these markets which beneﬁ t the most from the established league’s territorial protections. Alternatively, the rival league can choose to enter markets that are not currently served by the established league. The advantage of this strategy is that the rival league avoids direct competition with the established league, but it also risks entering markets that are too small to support a franchise. 6.2 Franchise Locations 67

The established league’s presence in the country’s best markets has some degree of imitability, in that the rival league is free to establish in the same markets— territorial rights only apply internally within the established league and obviously cannot be enforced with a rival league. Thus, franchise location, in a pure geographic sense, is completely imitable. What is less imitable is a multitude of factors that go along with the location— including reputation, brand loyalty, and history—that the club in the established league has already built in that market. These factors delve into what RBT scholars would call market-based resources—the incumbent in the market has the advantage of having built a relationship with customer groups that the entering rival cannot pos- sibly replicate, at least not in the short run. The spectator sport market is strongly based on history and brand loyalty—new franchises, by defi nition, have neither. Even expansion franchises in established leagues have often found it diffi cult to develop an immediate following. For example, several expansion franchises in the NBA and NHL relocated within their fi rst decade of play—in the NHL, the Atlanta Flames moved to Calgary, with Kansas City moving to Denver, and then to New Jersey; in the NBA, New Orleans moved to Utah, Vancouver moved to Memphis, etc. Marketing scholars often talk about how the sport industry is different than others— fans are not just buying a product or service, but are, in fact, emotionally invested in the product. The product being sold in sport is esoteric and may be considerably more complicated than it fi rst appears. For instance, what is being sold is not simply the current game on the fi eld, but the history of the teams and league that preceded it. When the Boston Red Sox won the World Series in 2004, part of the public attention surrounding the outcome came from the very fact that the Red Sox hadn’t won the World Series in the 86 preceding years. Thus, “history” was a major part of this story. Watching a Lakers-Celtics game in 2013, no matter how skilled the current players are, is still enmeshed with the long rivalry the two clubs have had over the decades preceding it, and evokes images of Wilt Chamberlain, Magic Johnson, Bill Russell, and Larry Bird. This history, by defi nition, can only come with a league’s longevity, giving established leagues an inherent natural advantage. Because of the peculiar bonds that fans develop with their sport teams, switching allegiances in sport is not like, say, switching cell phone carriers. In many ways, the established league’s history is inimitable and is therefore not a basis on which a new league can compete. In fact, it may be one of the greatest barriers that new leagues face.

6.2.2 Empirical Evidence

In examining the actual empirical evidence, there are two separate but related issues—how have established leagues positioned themselves geographically in the marketplace over the years, and how have various rival leagues responded to such positioning? Football provides a good starting point, since four different rival leagues emerged since World War II; all faced different franchise conﬁ gurations in the NFL, and all took somewhat different strategies to compete with this conﬁ guration. 68 6 Property-Based Resources…

Table 6.1 NFL: franchise locations and stadiums, 1946 Pop Years City Franchise rank in city Stadium Age Capacity AAFC competitor New York Giants 1 21 Polo Grounds 56 52 NY Yankees Brooklyn Dodgers Chicago Bears 2 26 Wrigley Field 32 38 Chicago Rockets Chicago Cardinals 2 26 Comiskey Park 36 50 Chicago Rockets Philadelphia Eagles 3 13 Shibe Park 37 23 None Detroit Lions 4 12 Briggs Stadium 34 58 None Los Angeles Rams 5 0 LA Coliseum 23 105 LA Dons Boston Yanks 11 2 Fenway Park 34 35 None Pittsburgh Steelers 12 13 Forbes Field 37 41 None Washington Redskins 13 9 Grifﬁ th Stadium 35 32 None Green Bay Packers 16 25 City Stadium 21 25 None (Milwaukee) Average 6.9 14.7 34.5 45.9 Median 4.5 13.0 34.5 39.5

Table 6.2 AAFC: franchise locations and stadiums, 1946 Population NFL NFL City Franchise rank Stadium Age Capacity competitor stadium New York Yankees 1 Yankee Stadium 23 70 NY Giants No New York (Brooklyn) 1 Ebbets Field 33 34 NY Giants No Dodgers Chicago Rockets 2 Soldier Field 22 74 Chicago No Bears Chicago Cardinals Los Angeles Dons 5 LA Coliseum 23 105 LA Rams Yes San Francisco/ 49ers 6 Kezar Stadium 21 60 No N/A Oakland Cleveland Browns 7 Municipal 15 83 No N/A Stadium Buffalo Bisons 15 Civic Stadium 9 35 No N/A Miami Seahawks 27 Burdine Stadium 9 35 No N/A (Orange Bowl) Average 8.0 19.4 62.0 Median 5.5 21.5 65.0

Starting with the AAFC, Tables 6.1 and 6.2 show the franchise location and stadium profi les of each NFL and AAFC team as of 1946, the AAFC’s inaugural season. Focusing on franchise location for the moment, the NFL in 1946 was a ten-team league, with franchises in all fi ve of the country’s largest metropolitan areas—New York, Chicago (two franchises), Philadelphia, Detroit, and Los Angeles—along with franchises in Boston, Pittsburgh, Washington, and Green Bay/Milwaukee. With the latter, the Green Bay Packers franchise, although offi cially located in Green Bay, had, since 1933, been playing a number of home games each year in nearby Milwaukee, 6.2 Franchise Locations 69

Table 6.3 NFL: franchise locations and stadiums, 1960 Population Years AFL City Franchise rank in city Stadium Age Capacity competitor New York Giants 1 35 Yankee Stadium 37 67 NY Titans Los Angeles Rams 2 14 LA Coliseum 37 102 LA Chargers Chicago Bears 3 40 Wrigley Field 46 37 None Philadelphia Eagles 4 27 Franklin Field 65 61 None Detroit Lions 5 26 Briggs (Tiger) 48 58 None Stadium San Francisco/ 49ers 6 14 Kezar Stadium 35 60 Oakland Oakland Raiders Cleveland Browns 8 14 Municipal 29 83 None Stadium Pittsburgh Steelers 9 27 Forbes Field 51 35 None Washington Redskins 10 23 Griffi th Stadium 49 29 None St. Louis Cardinals 11 0 Sportsman’s Park 58 31 None Baltimore Colts 12 7 Memorial 10 58 None Stadium Dallas Cowboys 13 0 Cotton Bowl 30 68 Dallas Texans Green Bay Packers 16 39 Lambeau Field 3 33 None (Milwaukee) Average 7.7 20.5 38.3 55.5 Median 8.0 23.0 37.0 58.0 and thus the relevant geographic market extends well beyond the city of Green Bay. The NFL’s franchises were a mix of old and new—four of the ten franchises had been located in their cities for over 20 years, dating back to the formation of the NFL in the early 1920s, while on the other end, the Boston Yanks had been formed only 2 years earlier, in 1944, and the Los Angeles Rams were entering their fi rst year in Los Angeles, having just relocated from Cleveland during the off-season. The AAFC entered the market with eight franchises. Of these, all but two, Buffalo and Miami, were in the country’s top-seven markets. The AAFC placed two franchises in New York, one in Chicago and one in Los Angeles, all of which competed with NFL clubs in those cities. In many ways, however, and as discussed earlier, the AAFC’s fl agship franchise was in Cleveland, where the Browns arrival essentially forced the 1945 NFL champion Cleveland Rams to relocate to Los Angeles. The AAFC also placed a franchise in San Francisco, the sixth largest market in the United States, and heretofore unserved by professional football. Both San Francisco and Cleveland were larger than four NFL markets—Boston, Pittsburgh, Washington, and Green Bay/Milwaukee. By the time of the arrival of the AFL in 1960, the NFL had grown to 13 teams (see Table 6.3 ), including teams in Cleveland, San Francisco, and Baltimore, all AAFC franchises that entered the NFL in 1949 when the two leagues merged. The NFL’s lineup was now a “who’s who” of large-market cities—it had franchises in 12 of the country’s 13 largest markets, with only Boston, at number 7, being absent from this list. The AFL (see Table 6.4 ) quickly fi lled this gap in Boston, and, of its seven other franchises, four were in markets that ranked 13th or lower in population—Dallas (13th), Houston (15th), Buffalo (17th), and Denver (24th). In addition, the AFL 70 6 Property-Based Resources…

Table 6.4 AFL: franchise locations and stadiums, 1960 Population NFL NFL City Franchise rank Stadium Age Capacity competitor stadium New York Titans 1 Polo Grounds 70 56 NY Giants No Los Angeles Chargers 2 LA Coliseum 37 105 LA Rams Yes San Francisco/ Oakland 6 Kezar Stadium 35 60 San Francisco Yes Oakland Raiders 49ers Boston Patriots 7 Nickerson Field 45 21 No N/A Dallas Texans 13 Cotton Bowl 30 68 Dallas Yes Cowboys Houston Oilers 15 Jeppesen Stadium 18 35 No N/A Buffalo Bills 17 War Memorial 23 47 No N/A Stadium Denver Broncos 24 Mile High 12 34 No N/A Stadium Average 10.6 33.8 53.3 Median 10.0 32.5 51.5 placed franchises in the country’s two largest markets, New York and Los Angeles (Los Angeles had recently surpassed Chicago as the country’s second largest market), and in the Bay Area (Oakland), the country’s sixth largest market. Of the eight AFL franchises, four competed in the same market with an NFL team. The AFL’s Titans competed with the NFL’s Giants in New York, the Chargers and Rams competed in Los Angeles, as did the Texans and Cowboys in Dallas, and the Raiders and 49ers in the Bay Area. However, two of these head-to-head situations were not part of the AFL’s original plan; the Raiders franchise was intended for Minnesota, but moved to the Bay Area after the NFL awarded a franchise to Minnesota; somewhat similarly, the Texan’s AFL franchise originally believed they would have the Dallas market to themselves, but were forced to immediately compete with the NFL’s Cowboys after the NFL hastily awarded the city an NFL franchise to begin play in 1960, the same year the AFL started. Thus, only in New York and Los Angeles did the AFL intend to compete directly with the NFL. Ironically, it was in these two markets where the AFL encountered immediate problems. Both franchises drew poorly in their respective cities, and the Chargers spent only 1 year in Los Angeles, moving to the much smaller San Diego market in 1961, while the Titans franchise suffered major ﬁ nancial losses and was on the verge of folding when Sonny Werblin bought the franchise from Harry Wismer in 1963 and renamed the club the Jets. With the WFL in 1974, its franchise location strategy exhibited a stark dichot- omy. It had franchises (see Table 6.6) in each of the country’s ﬁ ve largest markets, all directly competing with the NFL. It also placed a franchise in Houston (13th largest market) to compete with the NFL Oilers, but it then located its remaining six franchises in what could be viewed as small markets, at least by the standards of major professional sports leagues. The largest of these six small markets was Portland, Oregon, ranking 25th in US population, with other franchises in Memphis (37th), Birmingham (39th), Honolulu (48th), Jacksonville (60th), and Orlando (66th). No rival league before it, nor any rival league since, has ever had such a high percentage of its franchises in such small markets. By comparison to the NFL at the 6.2 Franchise Locations 71

Table 6.5 NFL: franchise locations and stadiums, 1974 Pop Years WFL City Franchise rank in city Stadium Age Capacity competitor New York Giants 1 49 Yale Bowl 60 71 NY Stars New York Jets 1 14 Shea Stadium 10 60 NY Stars Los Angeles Rams 2 28 LA Coliseum 51 95 Southern California Sun Chicago Bears 3 54 Soldier Field 50 56 Chicago Fire Philadelphia Eagles 4 41 Veterans Stadium 3 66 Philadelphia Bell Detroit Lions 5 40 Tiger Stadium 62 54 Detroit Wheels San Francisco/ (San Francisco) 6 28 Candlestick Park 14 61 None Oakland 49ers San Francisco/ (Oakland) 6 14 Alameda County 8 55 None Oakland Raiders Coliseum Washington Redskins 7 37 RFK Stadium 13 57 None New England Patriots 8 14 Schaefer Stadium 3 61 None Pittsburgh Steelers 9 41 Three Rivers 4 50 None Stadium St. Louis Cardinals 10 14 Busch Memorial 8 55 None Baltimore Colts 11 21 Memorial Stadium 24 60 None Cleveland Browns 12 28 Municipal 43 80 None Stadium Houston Oilers 13 14 Astrodome 9 50 Houston Texans Minnesota Vikings 14 13 Metropolitan 18 48 None Stadium Dallas Cowboys 15 14 Texas Stadium 3 65 No Green Bay Packers 17 53 Lambeau Field 17 55 None (Milwaukee) Atlanta Falcons 18 8 Fulton County 8 59 None Stadium Cincinnati Bengals 19 6 Riverfront Stadium 4 56 None San Diego Chargers 20 13 San Diego Stadium 7 53 None Buffalo Bills 21 14 Rich Stadium 1 80 None Miami Dolphins 22 8 Orange Bowl 37 76 None Kansas City Chiefs 23 11 Arrowhead 2 78 None Stadium Denver Broncos 24 14 Mile High Stadium 26 52 None New Orleans Saints 26 7 Tulane Stadium 48 81 None Average 12.2 23.0 20.5 62.8 Median 11.5 14.0 11.5 59.5 time (Table 6.5), the smallest market in that league was New Orleans, ranking 26th in the country and well above ﬁ ve of the WFL franchises. As Tables 6.5 and 6.6 show, the average NFL city ranked 12th in the nation’s population, whereas the average WFL city ranked only 25th. This focus on much smaller markets by the WFL was not necessarily completely by design. Three franchises shifted before the start of the league’s inaugural season, and all from large markets to small markets; the Portland franchise was intended for New York, Memphis was intended for Toronto, and Orlando was intended for Washington. 72 6 Property-Based Resources…

Table 6.6 WFL: franchise locations and stadiums, 1974 Pop NFL City Franchise rank Stadium Age Capacity NFL competitor stadium New York Stars 1 Downing 38 22 NY Giants No Stadium Los Angeles (Southern 2 Anaheim 10 43 LA Rams No California) Stadium Sun Chicago Fire 3 Soldier Field 50 56 Chicago Bears Yes Philadelphia Bell 4 JFK Stadium 48 102 Philadelphia Eagles No Detroit Wheels 5 Rynearson 5 22 Detroit Lions No Stadium Houston Texans 13 Astrodome 9 45 Houston Oilers Yes Portland Storm 25 Civic Stadium 48 20 None N/A Memphis Southmen 37 Memphis 9 50 None N/A Memorial Stadium Birmingham Americans 39 Legion Field 47 69 None N/A Honolulu Hawaiians 48 Honolulu 48 25 None N/A Stadium Jacksonville Sharks 60 Gator Bowl 46 72 None N/A Orlando (Florida) Blazers 66 Tangerine 38 52 None N/A (Citrus) Bowl Average 25.3 33.0 48.2 Median 19.0 42.0 47.5

In contrast to the WFL a decade before it, the USFL took very much of a large- market approach to its franchise location strategy. Ten of its 12 franchises in its inaugural 1983 season were in NFL markets, with Phoenix and Birmingham being the only USFL clubs to not face an NFL competitor. In fact, the average US population ranking of the USFL’s 12 franchises was 12.1, compared to the 13.1 average for the NFL’s 28 franchises. This almost exclusive focus in its inaugural season on large, NFL-type, markets seemed to be largely driven by the USFL’s belief that securing lucrative TV contracts was the key to the league’s future. The USFL faced a problem that earlier rivals to the NFL did not encounter to the same degree. Table 6.7 shows that by 1983, the USFL’s inaugural season, the average NFL franchise had spent almost 30 years in the city in which it was currently located; in fact, only 3 of the NFL’s 28 franchises had spent less than 10 years in their current city, with 7 NFL franchises having over 40 years’ tenure in their current location. Thus, by the time the USFL arrived, the average NFL team had 30 years of history and 30 years on which to build brand loyalty and fan identiﬁ cation. Compare this with earlier rival leagues. For example, when the AFL emerged in 1960, the average NFL team had only 20.5 years of tenure in their current city, a ﬁ gure approximately one-third lower than what the USFL faced in 1983. Going back to 1946 and the AAFC, the average tenure of the ten NFL teams was only 14.7 years, with two of these ten teams having two or fewer years in their current location. 6.2 Franchise Locations 73

Table 6.7 NFL: franchise locations and stadiums 1983 Pop Years City Franchise rank in city Stadium Age Capacity WFL competitor New York Giants 1 58 Giants Stadium 7 77 New Jersey Generals New York Jets 1 23 Shea Stadium 19 60 New Jersey Generals Los Angeles Rams 2 37 Anaheim Stadium 17 69 LA Express Los Angeles Raiders 2 1 LA Coliseum 60 93 LA Express Chicago Bears 3 63 Soldier Field 59 66 Chicago Blitz San Francisco/ 49ers 4 37 Candlestick Park 23 61 Oakland Oakland Invaders Philadelphia Eagles 5 50 Veterans Stadium 12 71 Philadelphia Stars Detroit Lions 6 49 Silverdome 8 80 Michigan Panthers New England Patriots 7 23 Schaefer Stadium 12 61 Boston Breakers Dallas Cowboys 8 23 Texas Stadium 12 65 None Houston Oilers 9 23 Astrodome 18 50 None Washington Redskins 10 46 RFK Stadium 22 57 Washington Federals Miami Dolphins 11 17 Orange Bowl 46 80 None Cleveland Browns 12 37 Municipal Stadium 52 80 None Atlanta Falcons 12 17 Fulton County 17 61 None St. Louis Cardinals 14 23 Busch Memorial 17 55 None Pittsburgh Steelers 15 50 Three Rivers 13 50 None Stadium Minnesota Vikings 16 22 Metrodome 1 62 None Seattle Seahawks 17 7 Kingdome 7 65 None Baltimore Colts 18 30 Memorial Stadium 33 60 None San Diego Chargers 19 22 San Diego Stadium 16 53 None Tampa Bay Buccaneers 20 7 Tampa Stadium 16 73 Tampa Bay Bandits Denver Broncos 22 23 Mile High Stadium 35 52 Denver Gold Cincinnati Bengals 23 15 Riverfront Stadium 13 60 None Green Bay Packers 24 62 Lambeau Field 26 55 None (Milwaukee) Kansas City Chiefs 25 20 Arrowhead 11 78 None Stadium New Orleans Saints 27 16 Superdome 8 71 None Buffalo Bills 33 23 Rich Stadium 10 80 None Average 13.1 29.4 21.1 65.9 Median 12.0 23.0 16.5 63.5

Thus, the mere passage of time tends to, ceteris paribus, work against rival leagues for the simple reason that it allows the established league to be that much more entrenched in the minds of consumers. Extending this analysis beyond just football, Table 6.9 examines the state of the NBA in 1967, the year the ABA emerged as a competitor league. The NBA was a 12-team league, with franchises in eight of the country’s ten largest markets, along 74 6 Property-Based Resources… with franchises in midsized cities such as Seattle (16th), Cincinnati (19th), and San Diego (20th). The NBA was still a relatively young league in 1967; Table 6.9 shows that the average NBA team had a tenure of just 7.9 years in its current location. Some NBA franchises were very much in their infancy; for example, 6 of the 12 franchises had been in their current location for 5 years or less. Compare this to, say, the situation the WFL faced in football 7 years later, where the average NFL franchise had accumulated 23 years of tenure, or the almost 30 years of tenure for the average NFL franchise by the time the USFL arrived in 1983. All else equal, the NBA’s lack of a long-term history for many of its franchises should have worked in the ABA’s favor. Given this lack of entrenchment for most NBA teams, it is somewhat curious that the ABA generally elected to place franchises in smaller, non-NBA cities. Only 3 of the ABA’s 11 charter franchises were in NBA markets, and even with these, the competition was more indirect than direct, in that each of these ABA franchises played in a different geographic region of the particular metropolitan market that they shared with an NBA team. The New York ABA franchise played out in Teaneck, New Jersey, and the Los Angeles franchise played in Anaheim, while the Bay Area franchise was situated in Oakland. The decision process used to choose franchise locations was not always sophisticated, at least by today’s standards. As a cofounder of the ABA, Gary Davidson was given the opportunity to own a franchise in the league in a location of his choice. He chose Dallas, saying his decision was a “shot in the dark” and that he “didn’t have any better basis for this than the fact that Dallas seemed to be the best city without a pro basketball franchise” (Davidson and Libby 1974 , p.37). Five years after the formation of the ABA, the WHA entered the hockey market in 1972 to compete with the NHL. The NHL was a 16-team league entering the 1972 season (Table 6.11 ), with a stark mix of old and new franchises—while 6 franchises dated back over 40 years in their cities, the other 10 franchises were expansion franchises added within the previous 5 years. The WHA countered with a 12-franchise league (Table 6.12 ), 8 in the United States and 4 in Canada. Of the 8 US-based franchises, 6 were in NHL markets—New York, Los Angeles, Chicago, Philadelphia, Boston, and the Twin Cities. However, 3 of these 6 (Philadelphia, Los Angeles, and the Twin Cities) had only been in existence for 5 years, all entering the NHL in 1967 when the league doubled in size from 6 teams to 12 teams. The two remaining US-based WHA franchises were in Cleveland, and the nontraditional hockey market in Houston, Texas. The latter franchise was originally slated for Dayton, Ohio, but arena availability issues in that city forced the franchise to move to Houston before the start of the WHA’s inaugural season. The other four WHA franchises were located in very small (by US standards) Canadian cities—Edmonton, Winnipeg, Ottawa, and Quebec City. At the time, the NHL had only three Canadian- based franchises—both Toronto and Montreal had been in existence for decades and were part of the league’s “Original Six,” while Vancouver had been added as an expansion franchise 2 years earlier, in 1970. The four Canadian-based WHA franchises were all in cities well under 500,000 people; to put this in perspective, Orlando, with an MSA population of about 450,000, was considered a very small market (ranking 66th in the country) when it entered the WFL in 1974, and all four 6.2 Franchise Locations 75

Canadian-based WHA franchises were smaller than Orlando. However, these small populations belied the fact that hockey was extremely popular in Canada, and the WHA obviously felt the intense interest in the game in that country would sufﬁ - ciently compensate for these small market sizes. In baseball, while the Continental League disbanded before it ever began play, it did identify the eight cities in which it would place franchises—New York, Dallas, Minneapolis, Houston, Buffalo, Atlanta, Denver, and Toronto (see Table 6.13 ). Other than New York, all were located in markets where they would not compete with MLB, with population ranks ranging from 13th (Dallas) to 24th (Denver). No other rival league, in any sport, had so few franchises in markets occupied by the established league.

6.2.3 Franchise Instability: Relocations and Foldings

The discussions of the previous subsection relate to the franchise choices of rival leagues at the time they began play in their inaugural seasons. From a strategic management perspective, this initial lineup of franchises is critical because it is the product that the rival league fi rst takes to the marketplace and is the product on which the fi rst impressions of the fans and media are formed. Since rival leagues are free to place franchises in any location they wish, this particular mix of charter franchises presumably refl ects the rival league’s best plan as to how to attack the established league. In reality, however, this lineup of charter franchises is often quite different than what the rival league originally planned. For example, the WFL had six franchise shifts before it ever began play (see Table 6.14 ). While one of these was driven by an external political factor—the Canadian government’s threats to bar the WFL from operating in Canada forced the league to move its planned Toronto franchise to Memphis—most were due simply to insurmountable issues at the local level, either fi nancial problems with the proposed ownership group or diffi culties in securing playing venues. One WFL franchise actually moved twice before the start of play—fi rst from Washington (where it was known sequentially as the Washington Capitals, then Washington Ambassadors, then Washington- Baltimore Ambassadors) to Norfolk, Virginia, and then from Norfolk to Orlando, Florida. The franchise lasted only 1 year in Orlando and then moved to San Antonio, Texas for the league’s second, and last, season. The other Dennis Murphy/Gary Davidson league of the same era, the WHA, also experienced several changes to its charter lineup, with four franchises relocating before the league began play in 1972. In some instances, the rival league’s relocations were due to the counterstrategies of the established league—witness, for example, the NFL awarding an expansion franchise to Minnesota, forcing the AFL to abandon that market and move the franchise to Oakland. A similar situation occurred in hockey, where the NHL placed an expansion franchise on Long Island in 1972 (the New York Islanders), thus usurping the WHA’s plans to locate there and forcing the WHA franchise to relocate to (the less preferred) Madison Square Garden in Manhattan. These preemptive moves by 76 6 Property-Based Resources… the established league are more likely to occur when the established league views the rival league as a credible threat. When rival leagues are forced to change their lineup of charter franchises, two problems arise. First, these relocations imply, almost by defi nition, that the rival league is moving away from some of its most preferred locations and to locations that are second-best. These relocations may result in the rival league being in markets that it had not originally intended. For example, as discussed above, the WFL relocations moved it out of major markets such as Boston, Toronto, and Washington; correspondingly, smaller markets such as Norfolk and Portland were not part of the WFL’s original plan. The second problem for the rival league with these franchise shifts before the start of play is that they may signal an instability and lack of “major- league” status to fans and the media at a critical time in the league’s existence, and may decrease the league’s credibility even before it begins its fi rst season. Once a rival league actually begins play, franchise instability becomes an even more critical issue, simply because such shifts are even more visible to the public and media, and become de facto admissions that the league has made past mistakes and is encountering problems. Table 6.14 shows how each rival league fared with respect to franchise relocations. If one takes the general view that less instability is preferred, early rival leagues like the AAFC and AFL were the most successful. The AAFC had only one franchise shift—from Miami to Baltimore—in its 4 years of existence. The AFL saw only two franchise shifts during its entire 10-year run—the relocation of the Chargers franchise from LA to San Diego after the league’s fi rst season and the shift of Lamar Hunt’s Dallas Texans to Kansas City at the end of the AFL’s third season. Conversely, the four other rival leagues listed in Table 6.14 all experienced high levels of instability, much of this happening in each league’s critical early years, when gaining credibility and fan acceptance is paramount. The ABA experienced two franchise shifts at the end of its fi rst season—the Minnesota Muskies moved to Miami, while the inaugural league champion Pittsburgh Pipers moved to Minnesota to take the place of the departed Muskies. In a somewhat strange set of events, the Minnesota franchise then moved back to Pittsburgh at the end of the ABA’s second year. Also moving at the end of the second year were the newly crowned ABA champion Oakland Oaks, to Washington, and the Houston Mavericks, to Charlotte, North Carolina. With the ABA champions in each of the fi rst 2 years relocating immediately after their respective championships, on-court success was apparently not a guarantee of a franchise’s longevity in a city. Another three franchises relocated after the league’s third season, bringing the total number of relocations to eight, in only 3 years. The Oakland/Washington franchise relocated for the second time in two seasons, leaving Washington after only 1 year and moving to Norfolk, Virginia. Also moving were the Anaheim Amigos, to Salt Lake City, and the New Orleans Buccaneers, to Memphis. Thus, within 3 years, the ABA had lost franchises in four of its six largest markets—Los Angeles (Anaheim), San Francisco/Oakland, Houston, and Minnesota. In addition, one of the other original top-six franchises (Pittsburgh) had already relocated for a year before returning to that city (the Pittsburgh franchise would ultimately fold after the ABA’s fi fth season). In turn, the ABA now found itself in a number of very small markets, such as Memphis, Norfolk, Salt Lake City, and Charlotte. 6.2 Franchise Locations 77

The WHA also experienced major franchise instability and, like the ABA, had eight franchise relocations within the league’s fi rst three seasons. At the end of the league’s fi rst season, the Ottawa franchise moved to Toronto, and the Philadelphia franchise moved to Vancouver; both moves were to Canadian markets in which the NHL was located and was a quick departure from the WHA’s initial strategy of locating only in those Canadian markets in which there was not an NHL team. More problems arose for the WHA partway through its second season, when its fl agship New York franchise abandoned (in midseason) that market and relocated to a small, decrepit arena in Cherry Hill, New Jersey, a suburb of Philadelphia. After fi nishing the season in Cherry Hill, the franchise moved again, this time to San Diego, California; also after that second season, the LA Sharks franchise relocated to Detroit (Michigan Stags), and the New England Whalers relocated from Boston to Hartford, but kept their same name. The situation did not get any better in the third year. The newly relocated Michigan Stags moved in midseason to Baltimore, where the franchise proceeded to fold at the end of the season. The end of the third season also saw the folding of the charter Chicago Cougars franchise, along with the move of the Vancouver Blazers franchise to Calgary. The Blazers lasted only 1 year in Vancouver after relocating from Philadelphia, unable to compete with the NHL’s Canucks. Calgary, which had no NHL franchise at the time (the Flames would not arrive until 1980, moving from Atlanta), was originally scheduled to receive a charter WHA franchise, but the franchise moved to Cleveland before the start of the league’s fi rst season. Some of the WHA’s franchise shuffl es bordered on the bizarre. For example, Denver received an expansion franchise for the 1975–1976 season, but the club moved to Ottawa only 3 months into its fi rst season (on January 2, 1976) and then proceeded to collapse only 2 weeks later, playing only two home games in Ottawa. The 1975–1976 season also saw the charter Minnesota Fighting Saints franchise fold partway through the season (after 59 games of the 80-game season), only to be revived the following year when the Cleveland Crusaders franchise moved to Minnesota, with the franchise taking the Fighting Saints name. The outcome of this version of the Fighting Saints was no better, and the club again folded in the middle of the season, playing only 42 games this time. The WFL was also plagued by midseason franchise instability. In its inaugural 20-game 1974 season, the Houston Texans moved to Shreveport after only 11 games, the New York Stars moved to Charlotte after 13 games, and the Detroit Wheels folded outright after 14 games. By comparison to the WHA and WFL, the USFL had greater initial stability, with only one franchise shift, and no foldings, occurring during its fi rst two seasons (Boston to New Orleans after the fi rst season). However, the USFL’s problems arose before the start of its third season, after the decision was made to switch to a fall schedule. Four franchises ceased operations (Michigan, Chicago, Pittsburgh, and Oklahoma), while three others relocated, fore- shadowing the leagues collapse 1 year later. It is certainly clear from examining the case histories of rival leagues that franchise instability is the bane of these leagues. It creates uncertainty in the minds of fans, inhibiting them from emotionally investing in the new product, for fear that their favorite team will be short-lived. As well, it creates signifi cant image problems 78 6 Property-Based Resources… for the league and gives the impression of a “fl y-by-night” operation. However, what is not always clear is why such instability occurs. The geographic location in which a franchise is located simultaneously encompasses several dimensions, and it is not always possible in every case to clearly separate out which of these dimensions causes the franchise’s failure. For any given geographic location, a rival league’s success in that location is dependent on factors such as the population and income of that market, the relative popularity of the sport in question, and the extent of any competition from the established league in that market. In some instances, rival leagues simply misread some or all of these factors and erroneously placed franchises in cities where there was little or no chance of building a fan base. However, in other instances, the failure of a franchise in a particular market was not necessarily due to the geographic location itself—instead, other factors, like the fi nancial and managerial strength (or lack thereof) of the ownership group, as well as the availability of an appropriate playing venue, were crucial (both of these issues will be discussed later in the book). In fact, the high, and almost immediate, franchise instability experienced in leagues like the ABA, WHA, and WFL, probably had very little to do with the potential long-term viability of certain locations and was primarily driven by the inability and/or unwillingness of owners to sustain mounting short-run losses. As the established leagues have demonstrated, building fan loyalty can be a slow and gradual process, and with some franchises in rival leagues spending a year or less in a given city, there was little or no opportunity for any such loyalty to develop. Notwithstanding this notion that geographic locations cannot be evaluated in isolation from factors like ownership quality and stadium availability, Table 6.15 does show that rival leagues tended to have certain “favorite” locations for placing franchises. In terms of the very large markets, of the seven rival leagues studied, New York had a franchise in all seven, while Los Angeles had franchises in six. Of the next tier of large markets, Chicago and the Bay Area (Oakland or San Francisco) had franchises in four of the leagues, while Philadelphia and Detroit had franchises in three. Clearly, all rival leagues have seen the need to have a presence in at least some of the country’s largest markets, with New York being an automatic choice in all cases. Rival leagues also showed a fondness for cities like Houston (six leagues), Denver (fi ve leagues), Minneapolis/St. Paul (three leagues), and Dallas (three leagues), all cities that, at the time, were on the cusp of dramatic growth, but were largely unserved by the established leagues. Some smaller cities, like Memphis, San Antonio, and Birmingham, were also favorites, having had franchises in three rival leagues. In hindsight, none of these cities established themselves as true major- league markets and currently have only two major professional franchises amongst the three of them—the NBA’s Spurs in San Antonio, who joined the NBA in the merger with the ABA, and the NBA’s Memphis Grizzlies, who relocated from Vancouver in 2001. Perhaps rival leagues saw markets like these as being more favorable, and having more long-term growth potential, than what ultimately turned out to be the case. Finally, Table 6.15 also shows the manner in which rival leagues entered various cities and hence can provide insight into whether a league’s entry into a market was 6.3 Venues: Stadiums and Arenas 79 part of a broader strategic plan or was simply a reaction “on the fl y.” For example, the New York franchises were charter members in all seven of the rival leagues, as were the six Los Angeles franchises and the four Chicago franchises. In addition, fi ve of the six Houston franchises were charter members of their respective leagues, with the sixth franchise (the Houston Gamblers of the USFL) entering as an expansion franchise. Similarly, in Denver, four of its fi ve franchises were charter members, with the other being an expansion team. In all of these instances, the rival leagues planned in advance to enter these markets and clearly saw these locations as important to its survival and success. Conversely, there were other locations that tended to gain franchises as the result of relocations. For example, Baltimore had franchises in three different rival leagues, but none of these were charter or expansion franchises; all were the result of relocations of franchises that had encountered diffi culties in other cities. Charlotte, North Carolina, was a similar type of situation; both of that city’s franchises—one in the WFL (in midseason) and the other in the ABA—had started elsewhere. In these relocation situations, the level of scrutiny and vetting of the location could be expected to be less than what one would expect with charter and expansion franchises, since the decisions are often made hastily and within the context of a more urgent situation.

6.3 Venues: Stadiums and Arenas

6.3.1 Conceptual Foundations

Intricately linked to the franchise location variable is the stadium variable: for rival leagues, it isn’t merely a matter of selecting a certain geographic market, since the success of entering a market is also signifi cantly driven by gaining access to an appropriate playing venue. No matter how much potential a particular geographic location has, nor how talented a league’s players might be, those players still need a venue in which to play—a matchup between the Dallas Cowboys and the New York Giants being played at a high-school football stadium will obviously not generate the same revenues as it would if the game were at Cowboys Stadium. Miller ( 2007 ) confi rms the fi nancial importance of stadiums, fi nding that MLB teams playing in brand new stadiums experience an increase in franchise values, ceteris paribus. Stadiums generate revenues in several ways. The most traditional revenue source has been gate receipts, which is simply the product of the quantity of tickets sold and the average price per ticket. However, more modern stadiums now generate substantial other ancillary revenue, including stadium naming rights, in-stadium sponsorships, concessions, and parking. Correspondingly, a stadium’s “quality” as an asset can be measured along several dimensions: • Capacity: All else equal, larger-capacity stadiums have the ability to generate more revenue, simply because a greater quantity of seats can be sold. However, the issue is not quite this simple. Small stadiums, by their nature, create scarcity, 80 6 Property-Based Resources…

and when the product is in high demand (think of the Boston Red Sox and Fenway Park, or the Chicago Cubs and Wrigley Field), the monopoly sport club can price tickets at higher levels than if there were not these capacity constraints. Clubs understand this relationship between capacity and price—witness the current era of “vintage” baseball stadiums, beginning with Camden Yards in Baltimore in 1992, where most of the new stadiums have lower capacities (substantially in some cases) than the stadiums they replaced. • Sight lines/viewing quality: Somewhat related to the above point, the ability of fans to easily see not only the fi eld of play but also the scoreboard, sponsors’ signage, etc. is a dimension on which many new stadiums are more effective than their predecessors. Part of this is related to design confi guration, and part of it is related to size. For example, at one time, many baseball clubs played in what were really football stadiums (Three Rivers Stadium in Pittsburgh, Riverfront Stadium in Cincinnati, Veterans Stadium in Philadelphia, and many others), with these stadiums offering suboptimal viewing experiences for baseball. • Aesthetic qualities of stadium: Increasingly, teams sell their games as not simply the opportunity to view a sport contest, but rather as a more multidimensional experience. This could include everything from the overall physical appearance and beauty of the stadium to its integration into the surrounding area. As well, the stadium itself may be a signal as to the franchise and league’s status— modern state-of-the-art facilities may signal to the public that the team/league is of “major-league” quality. • Amenities: Again, with the emphasis on the quality of overall experience, many modern stadiums now include more upgraded concession facilities, picnic areas, and playground areas for children. • Premium seating: Perhaps the most important advantage that modern stadiums possess over their predecessors is the presence of a large volume of premium seating, whether it be luxury boxes or club seats. Premium seats are signifi cant revenue drivers for all major professional sports clubs, and stadiums/arenas without suffi cient numbers of such seats are considered obsolete by the major professional sports industry. From a potential rival league’s perspective, a critical question is whether stadiums are a resource possessed by established leagues that are inimitable. The answer to this question is quite straightforward—at the most basic level, stadiums, as a physical structure, are clearly imitable. The knowledge and ability to build sports stadiums is widely available and can be purchased in the marketplace. Teams in the established leagues do not build stadiums themselves; they simply contract those fi rms that do build stadiums. Conceivably, a team in a rival league could do exactly the same thing. This would be no different than a new airline purchasing an aircraft from Boeing. However, the issue may not be quite so simple. While the physical construction of stadiums is not proprietary knowledge held by the established leagues, teams in the established leagues may still have less obvious competitive advantages in this area. First, the history of sports stadiums in America over the past half century is that established leagues have been able to procure large subsidies from local 6.3 Venues: Stadiums and Arenas 81 governments for the construction of stadiums—in other words, teams in established leagues are having tax dollars pay for stadium construction and have not been required to pay for the full cost of stadium construction themselves. In some cases, governments (cities) have maintained ownership of the facility, while in other cases the team has been granted ownership, despite the funding from government. This distinction is potentially important, because it may determine whether teams in the rival league can secure access to play in the stadium. Where stadiums are publicly owned, it may be possible for rival leagues to negotiate use of the stadium with public offi cials (although even in these cases teams in the established league may control scheduling of the venue). However, where ownership resides with the team in the established league, it will be almost certain that the rival league will be denied access to the stadium. Given this synergistic relationship between local governments and teams in established leagues, rival leagues face considerable barriers to entry. It would be highly unlikely that a local government would subsidize a second stadium in the same city. Without access to the existing stadium, the rival league’s only other option would be to build their own stadiums. The diffi culty is that such a scenario would be prohibitively costly, to the point, obviously, where even teams in the established leagues do not want to incur this cost. Many stadiums now cost well over $1 billion to construct, with long payback periods, often of 25 years or more. The fact that some stadiums (more so than arenas) remain idle for much of the year makes their economics particularly diffi cult. The bottom line is that fi nancial realities dictate that rival leagues must typically fi nd venues that already exist. If the established league controls the stadium—either through direct ownership of the stadium or through an exclusive lease with a government-owned stadium—the rival league, by necessity, is forced to play in inferior facilities. If this occurs, not only are there direct revenue implications for the rival league, there are also negative optics for the rival league in that it could be viewed as not being of major-league status.

6.3.2 Empirical Evidence

Tables 6.1 through to 6.12 show the stadium arrangements of both the established league and the rival league in each of the head-to-head competitive battles. Starting with football, Table 6.2 shows that, while four of the eight charter AAFC teams competed in NFL markets, only one of these four teams shared a stadium with the NFL counterpart; both the AAFC Dons and NFL’s Rams (newly relocated from Cleveland) played in the LA Coliseum. However, if one examines the average age and capacity of AAFC stadiums and compares them to NFL stadiums at the time, the AAFC had a distinct advantage. AAFC stadiums were considerably newer (averaging 19 years, versus the NFL’s 35 years) and larger (averaging a capacity of 62,000, compared to the NFL’s 46,000). For example, in New York, the AAFC’s Yankees played at Yankee Stadium, a much newer and larger facility than the Polo Grounds, where the NFL’s Giants played. Similarly in Chicago, the AAFC’s Rockets 82 6 Property-Based Resources…

Table 6.8 USFL: franchise locations and stadiums, 1983 Population NFL NFL City Franchise rank Stadium Age Capacity competitor stadium New York (New Jersey) 1 Giants 7 76 NY Giants Yes Generals Stadium NY Jets Los Angeles Express 2 LA Coliseum 60 93 LA Rams Yes LA Raiders Chicago Blitz 3 Soldier Field 59 66 Chicago Bears Yes Oakland Invaders 4 Oakland 17 55 San Francisco No Coliseum 49ers Philadelphia Stars 5 Veterans 12 71 Philadelphia Yes Stadium Eagles Detroit (Michigan) 6 Silverdome 8 80 Detroit Lions Yes Panthers Boston Breakers 7 Nickerson 68 21 New England No Field Patriots Washington Federals 10 RFK Stadium 22 57 Washington Yes Redskins Tampa (Tampa Bay) 20 Tampa 16 73 Tampa Bay Yes Bandits Stadium Buccaneers Phoenix (Arizona) 21 Sun Devil 25 70 None N/A Wranglers Stadium Denver Gold 22 Mile High 35 52 Denver Yes Stadium Broncos Birmingham Stallions 44 Legion Field 56 69 None N/A Average 12.1 32.1 65.3 Median 6.5 23.5 69.5

Table 6.9 NBA: franchise locations and stadiums, 1967 Pop Years ABA City Franchise rank in city Arena Age Capacity competitor New York Knicks 1 21 Madison Square Garden 0 19 Yes Los Angeles Lakers 2 7 Great Western Forum 0 18 Yes Chicago Bulls 3 1 Chicago Stadium 38 19 No Philadelphia 76ers 4 4 Spectrum 0 18 No Detroit Pistons 5 10 Olympia 40 15 No San Francisco Warriors 6 5 Cow Palace 26 15 Yes Boston Celtics 8 21 Boston Garden 39 15 No St. Louis Hawks 10 12 Kiel Auditorium 33 9 No Baltimore Bullets 11 4 Baltimore Civic Center 5 13 No Seattle Supersonics 16 0 Seattle Center Coliseum 5 14 No Cincinnati Royals 19 10 Cincinnati Gardens 18 10 No San Diego Rockets 20 0 San Diego Sports Arena 1 14 No Average 8.8 7.9 17.1 14.9 Median 7.0 6.0 11.5 15.0 6.3 Venues: Stadiums and Arenas 83

Table 6.10 ABA: franchise locations and stadiums, 1967 Pop NBA NBA City Franchise rank Arena Age Capacity competitor arena New York (New Jersey) 1 Teaneck Armories 31 4 New York No Americans Knicks Los Angeles (Anaheim) 2 Anaheim Convention 0 9 Los Angeles No Amigos Center Lakers San Francisco/ (Oakland) 6 Oakland Coliseum 1 14 San Francisco No Oakland Oaks Arena Warriors Pittsburgh Condors 9 Civic Arena 6 13 No N/A Houston Mavericks 13 Sam Houston 30 9 No N/A Coliseum Minnesota Muskies 14 Met Center 0 16 No N/A Dallas Chaparrals 15 Dallas Convention 10 8 No N/A Center Arena Denver Rockets 24 Denver Auditorium 59 8 No N/A Arena Indianapolis (Indiana) 25 Indiana State 28 8 No N/A Pacers Fairgrounds Coliseum New Orleans Buccaneers 26 Loyola University 13 7 No N/A Fieldhouse Louisville (Kentucky) 34 Louisville 62 5 No N/A Colonels Convention Center Average 15.4 21.8 9.2 Median 14.0 13.0 8.0

Table 6.11 NHL: franchise locations and stadiums, 1972 Pop Years WHA City Franchise rank in city Arena Age Capacity competitor New York Rangers 1 46 Madison Square Garden 4 17 Yes New York Islanders 1 0 Nassau County Coliseum 0 15 Yes Los Angeles Kings 2 5 Great Western Forum 5 18 Yes Chicago Black Hawks 3 48 Chicago Stadium 43 19 Yes Philadelphia Flyers 4 5 Spectrum 5 18 Yes Detroit Red Wings 5 46 Olympia 45 15 No San Francisco/ (Oakland) Seals 6 5 Oakland Coliseum 6 14 No Oakland Boston Bruins 8 48 Boston Garden 44 15 Yes Minneapolis/ (Minnesota) 14 5 Met Center 5 16 Yes St. Paul North Stars Pittsburgh Penguins 9 5 Civic Arena 11 13 No St. Louis Blues 10 5 St. Louis Arena 43 14 No Buffalo Sabres 21 2 Memorial Auditorium 32 16 No Atlanta Flames 18 0 Omni 0 15 No Montreal Canadiens 55 Montreal Forum 48 18 Toronto Maple Leafs 55 Maple Leaf Gardens 41 16 Vancouver Canucks 2 Paciﬁ c Coliseum 4 15 Average 7.8 20.8 21.0 15.9 Median 6.0 5.0 8.5 15.5 Table 6.12 WHA: franchise locations and stadiums, 1972 Pop NHL NHL City Franchise rank Arena Age Capacity competitor arena New York Raiders 1 Madison 5 17 New York Yes Square Garden Rangers New York Islanders Los Angeles Sharks 2 LA Sports Arena 13 15 Los Angeles No Kings Chicago Cougars 3 International 38 9 Chicago No Amphitheater Black Hawks Philadelphia Blazers 4 Philadelphia Civic 41 10 Philadelphia No Center Flyers Boston (New England) 8 Boston Arena 62 5 Boston Bruins No Whalers Cleveland Crusaders 12 Cleveland Arena 35 10 No N/A Houston Aeros 13 Sam Houston 35 9 No N/A Coliseum Minneapolis/ (Minnesota) 14 St. Paul Auditorium 40 5 Minnesota No St. Paul Fighting North Stars Saints Edmonton (Alberta) Oilers Edmonton Gardens 59 5 No N/A Ottawa Nationals Ottawa Civic Center 5 10 No N/A Winnipeg Jets Winnipeg Arena 17 10 No N/A Quebec City Nordiques Le Colisee 23 10 No N/A Average 7.1 33.6 10.0 Median 6.0 38.0 9.0

Table 6.13 MLB and Continental League franchises: 1960 City MLB franchise Pop rank Continental League New York Yankees 1 Yes Los Angeles Dodgers 2 No Chicago Cubs 3 No Chicago White Sox 3 No Philadelphia Phillies 4 No Detroit Tigers 5 No San Francisco/Oakland SF Giants 6 No Boston Red Sox 7 No Cleveland Indians 8 No Pittsburgh Pirates 9 No Washington Senators 10 No St. Louis Cardinals 11 No Baltimore Orioles 12 No Dallas 13 Yes Minneapolis 14 Yes Houston 15 Yes Milwaukee Braves 16 No Buffalo 17 Yes Atlanta 18 Yes Cincinnati Reds 19 No Kansas City A’s 23 No Denver 24 Yes Toronto Yes 6.3 Venues: Stadiums and Arenas 85

Table 6.14 Franchise relocations (and franchise foldings in brackets): rival leagues, fi rst three seasons of existence AAFC AFL ABA WHA WFL USFL (football: (football: (basketball: (hockey: (football: (football: Time period 1946–1949) 1960–1966) 1967–1976) 1972–1979) 1974–1975) 1983–1985) Before inaugural 1 1 0 4 6 2 season begins During fi rst season 0 0 0 0 2 (+ 1 0 folding) End of fi rst season 1 1 2 2 1 1 During second 0 0 0 1 0 0 season End of second 0 0 3 3 League 3 (+4 season folds foldings) During third season 0 0 0 1 N/A 0 End of third season 0 1 3 1 (+ 2 N/A League folds folding) played at Soldier Field, with a capacity of 74,000, compared to relatively small Wrigley Field (capacity of 38,000), home of the NFL Bears. In Cleveland, the AAFC Browns played in cavernous Municipal Stadium, which had been home to the NFL’s Rams before their departure to Los Angeles at the end of the preceding season. In an era preceding the emergence of television, where gate revenues were the primary driver of revenues, stadium age and capacity was of particular importance, and the AAFC’s decided advantage in this regard was no doubt a factor in that league outdrawing the NFL at the gate. By the time the AFL emerged in 1960, the NFL was in an even more vulnerable strategic position than they were in the late 1940s. The NFL’s capital stock of stadiums was aging rapidly—the NFL’s 13 teams were playing in stadiums that averaged 38 years of age, with six of these stadiums being over 45 years old (see Table 6.3 ). Many of the NFL stadiums of the era were really baseball stadiums that the NFL just happened to use—for example, Briggs (Tiger) Stadium in Detroit, Forbes Field in Pittsburgh, Griffi th Stadium in Washington, and Sportsman’s Park in St. Louis. While the AFL’s stadiums (Table 6.4) were by no means new—the average age of the eight stadiums was 34 years, only slightly newer than the NFL—the AFL was at least competitive in this regard. The AFL arrived at an opportune time, in that it just preceded the boom in stadium construction in America that would start in the late 1960s and continue into the early 1970s—a boom that would see most NFL teams get new stadiums and do so at taxpayers’ expense. Table 6.5 refl ects this boom. By the time the WFL emerged in 1974, the average age of an NFL stadium had dropped to 21 years, down from 38 years only 14 years earlier, when the AFL started play. In fact, the median age of NFL stadiums was even lower, at only 11.5 years; fully half of the NFL’s 26 clubs at the time were playing in stadiums that had been built within the previous 10 years. This provided a formidable challenge to the WFL in 1974. Despite the publicly owned nature of these stadiums, the NFL had fi rst priority in terms of scheduling, 86 6 Property-Based Resources…

Table 6.15 Cities with rival league teams AAFC AFL Continental ABA WHA WFL (football: (football: League (basketball: (hockey: (football: USFL 1946– 1960– (baseball: 1967– 1972– 1974– (football: City 1949) 1966) 1960) 1976) 1979) 1975) 1983–1985) Total New York 2 (C) 1 (C) 1 (C) 1 (C) 1 (C) 1 (C) 1 (C) 8 Houston 1 (C) 1 (C) 1 (C) 1 (C) 1 (C) 1 (E) 6 Los Angeles 1 (C) 1 (C) 1 (C) 1 (C) 1 (C) 1 (C) 6 Denver 1 (C) 1 (C) 1 (C) 1 (E) 1 (C) 5 Chicago 1 (C) 1 (C) 1 (C) 1 (C) 4 Minneapolis 1 (C) 2: 1(C) 1 (C) 4 and 1(R) Baltimore 1 (R) 1 (R) 1 (R) 3 Birmingham 1 (R) 1 (C) 1 (C) 3 Dallas 1 (C) 1 (C) 1 (C) 3 Detroit 1 (R) 1 (C) 1 (C) 3 Memphis 1 (R) 1 (C) 1 (E) 3 Miami 1 (C) 1 (E) 1 (R) 3 Oakland 1 (C) 1 (C) 1 (C) 3 Philadelphia 1 (C) 1 (C) 1 (C) 3 Pittsburgh 2: 1(C) 1 (E) 3 and 1(R) San Antonio 1 (R) 1 (R) 1 (E) 3 San Diego 1 (R) 1 (E) 1 (R) 3 Boston 1 (C) 1 (C) 2 Buffalo 1 (C) 1 (C) 2 Charlotte 1 (R) 1 (R) 2 Cincinnati 1 (E) 1 (E) 2 Cleveland 1 (C) 1 (C) 2 Indianapolis 1 (C) 1 (E) 2 Jacksonville 1 (C) 1 (E) 2 New Orleans 1 (C) 1 (R) 2 Orlando 1 (C) 1 (R) 2 Phoenix 1 (E) 1 (C) 2 Portland 1 (C) 1 (R) 2 Washington 1 (R) 1 (C) 2 Atlanta 1 (C) 1 Hartford 1 (R) 1 Honolulu 1 (C) 1 Kansas City 1 (R) 1 Louisville 1 (C) 1 Norfolk 1 (R) 1 Salt Lake 1 (R) 1 City San Francisco 1 (C) 1 Shreveport 1 (R) 1 St. Louis 1 (R) 1 Tampa 1 (C) 1 Tulsa 1 (E) 1 C charter franchise, E expansion franchise, R relocated franchise 6.3 Venues: Stadiums and Arenas 87 and with the WFL season partially coinciding with the NFL season, WFL clubs were generally unable to gain access to these new facilities. Of the six WFL franchises that competed in NFL cities, only two (Chicago and Houston) played in NFL stadiums, and in Chicago’s case, the stadium was an aging facility (Soldier Field), the fourth oldest in the NFL. Generally, the WFL was left to play in substandard stadiums, at least by the standards of major professional sports—stadiums like Downing Stadium in New York and Rynearson Stadium in Detroit, both with capacities of about 22,000. Downing Stadium was particularly decrepit and in disrepair and was a major image problem for the league in its fl agship market. The WFL also played in small, aging stadiums in both Portland and Honolulu, stadiums approaching 50 years in age, with capacities under 25,000. In all, the median age of the 12 WFL stadiums was 42 years, compared to the aforementioned 11.5 years of NFL stadiums. This put the WFL at a tremendous disadvantage, both in terms of revenue generation potential and in terms of the external optics, and was undoubtedly a factor that contributed to the league’s quick demise. Perhaps learning from the WFL’s stadium debacle, the USFL seemed intent on making the stadium issue a priority. Of the ten USFL franchises located in NFL cities, eight played in the same venue as the NFL team; only in Oakland and Boston was the USFL team not sharing the facility with an NFL team. Even in Oakland, the USFL Invaders played in an NFL-quality facility, the Oakland Coliseum; the NFL’s Raiders had just vacated the Coliseum the year before when the franchise relocated to Los Angeles. It was only, then, the Boston USFL that franchise played in an inferior facility compared to their NFL counterpart. The Breakers, unable to secure access to Schaefer Stadium in Foxboro, were forced to play at Nickerson Field, a small, aging facility on the campus of Boston University and a far stretch from a “major-league” facility. Not surprisingly, the Breakers struggled to draw fans at Nickerson Field and were the only USFL franchise to relocate at the end of the league’s fi rst season, moving to New Orleans where they would share the Superdome with the NFL’s Saints. Overall, however, the USFL was much more successful than any previous rival league in gaining access to major-league playing venues, a result driven, in part, by the league’s decision to play during the spring season, and thus avoiding scheduling confl icts with NFL teams occupying the same venue. In basketball and hockey, the ABA’s and WHA’s arena lineup was relatively weak, similarly to the WFL’s situation in football, and nowhere near the impressive collection of venues the USFL was able to put together. In basketball, none of the three ABA franchises located in NBA markets played in an NBA facility. The New Jersey Americans (later Nets), unable to fi nd a suitable venue in New York (where they were to be called the New York Americans), were forced to play in the Teaneck Armory in Teaneck, New Jersey, a facility that was over 30 years old, and housed only about 4,000 fans. Like the New York Stars in the WFL, the Americans were playing in the rival league’s fl agship market, but in a facility that was hugely substandard. By contrast, the NBA’s Knicks moved into the brand new Madison Square Garden during ABA’s initial season. The ABA arenas in Houston, Denver, Indianapolis, and Louisville were also problematic—all aging, low-capacity facilities, in various states of disrepair. The ABA did have some impressive new 88 6 Property-Based Resources… facilities—arenas in Anaheim, Oakland, and the Twin Cities were all less than 1 year old. Ironically, none of these franchises were successful in these locations, despite the new facilities, with all experiencing serious attendance problems very early on; both the Minnesota and Anaheim franchises relocated after the fi rst ABA season (Anaheim stayed in the metropolitan area, but moved to the LA Sports Arena), and Oakland moved to Washington at the end of the ABA’s second season, proving that, while arena quality is important, it is far from being a guarantee of success in a particular location. In hockey, of the six WHA franchises in NHL markets, only one played in an NHL arena. Not only that, the WHA franchises in Philadelphia, Boston, Chicago, and Minnesota—all NHL locations—played in particularly decrepit facilities, averaging over 45 years in age, and hardly the type of facility that would draw fans away from the established league. Perhaps not surprisingly, none of these franchises fared well; for example, Philadelphia left after one season, moving to Vancouver; the New England franchise moved from Boston to Hartford after two seasons; and Chicago folded after three seasons. The median age of all 12 of the WHA venues was (a remarkably high) 38 years, compared to a median of only 8.5 years in the NHL’s 16 facilities. Perhaps what saved the WHA is that a few of its franchises did get new arenas shortly after the league’s inception. The Minnesota Fighting Saints moved into a brand new arena midway through its fi rst season, and while the franchise did not survive to the end of the WHA’s 7-year existence, it did last parts of 5 years in the critical Minnesota market. The New England Whalers moved into a new building in Hartford, Connecticut, in 1975, following their move from Boston, and the Edmonton Oilers moved out of ancient Edmonton Gardens and into the new Northlands Coliseum in 1974. Perhaps not coincidentally, both the Whalers and Oilers franchises were ultimately absorbed into the NHL with the 1979 merger agreement.

6.4 Playing Talent

The players, and their performance on the ﬁ eld, are the core inputs of the spectator sport product. It is the athletic talent of players that consumers pay to watch. In general, consumers are willing to pay more to watch better talent—for example, they prefer Major League Baseball to AAA baseball, AAA to AA, etc. and will pay accordingly. As seen in previous chapters, all competitor leagues have recognized this and have understood that attracting high-proﬁ le players to the league is an essential prerequisite to competing. Not only do better players increase the entertainment value of the sport product, they draw positive attention to the league and give it a degree of legitimacy in the minds of the public and media. Elite athletic talent is in short supply in society. It takes many years to develop, with most professional athletes having started playing the sport as young children. In general, this talent is developed independent of professional leagues. While players may further enhance their talents once signed by a pro team, most of the development of a player’s athletic skills has occurred throughout their lifetime. 6.4 Playing Talent 89

In sports like football and basketball, professional leagues rely almost exclusively on buying talent, rather than developing that talent themselves. In these sports, college sports are the primary developers of preprofessional athletic talent. In contrast, baseball and hockey have somewhat different player development systems, where players are often signed to professional contracts before they are ready to play in the top league, with these players then often spending considerable time in the club’s minor-league system. However, in both hockey and baseball, the situation has changed over the years, particularly in hockey, where many star players directly enter the NHL from junior leagues or college hockey, without ever spending time in the minors. Because the monopoly sports leagues possess, by defi nition, all of the best athletic talent in its sport—i.e., there is nowhere else for this talent to play—when a rival league enters the market, it must induce at least some of this talent to leave the established league. If the rival league does not employ any talent from the established league, then it is not a true rival league, at least not by the defi nition used in this book. The question then arises as to how the rival league can compete for players. In other words, to what extent are the players in the established league an inimitable resource and, by extension, a source of sustained competitive advantage for the established league? Since rival leagues do not have the ability to develop their own talent, they must go into the marketplace and buy the talent that currently exists. In essence, they must fi nd a way to attract talent to the new league and away from the established league. If the established league has the means to retain the athletic talent—whether through legal or economic means—the resource becomes inimitable, and the rival league cannot effectively compete. Rival leagues face huge impediments in signing players away from the established league. For players, the decision calculus in signing with a rival league is complex, with a variety of factors to weigh. Three factors are particularly important: risk, visibility, and salary. All three are closely linked. At the most basic starting point, rival leagues pose a signifi cant “default” risk for players. The league is new and unknown, owners are less experienced operating a sport business, and fan interest—which ultimately drives revenues—is uncertain. When a player signs a contract with a team in any league—established or rival—there is an inherent risk that one day the team will become insolvent and will be unable to meet its salary obligations to the player. However, this risk is much greater for teams in rival leagues. Such risk is not merely a hypothetical possibility, but has in fact been a fairly common occurrence across many rival leagues. Stories abound from rival leagues, particularly the WFL, but also in leagues like the WHA and USFL, of teams being unable to “meet payroll.” Players also risk losing “visibility” when they sign with a rival league. To the extent that players can have income sources that extend beyond the salaries they earn from their clubs—for example, through endorsements of products—these opportunities for outside income may decrease. The lack of awareness on the part of the public about the new league may consequently decrease a player’s marketability as an endorser. The new league is less likely to get the same level of media attention, 90 6 Property-Based Resources… and players in these leagues may be tainted by the perception that these leagues are inferior or are of second-class. Given both this increased default risk and decreased visibility, players and their agents could be expected to command a large salary premium, over and above what the player is making in the established league, as a condition for the player to jump to the rival. However, rival leagues are in somewhat of a predicament—with no established revenue base for a new league, a player’s marginal revenue product (MRP) in the rival league will always be much lower (at least initially) than in the established league, and yet the rival league will be forced to pay higher salaries for these players. The conundrum for rival leagues is one of circularity—they need star players to redirect revenues away from the established league, but, conversely, they need the promise of revenues (either immediate or future) to sign these players. Thus, starting a rival league becomes somewhat of a large “leap of faith.” One possible way for rival leagues to work around this inevitable problem is to focus on only a few marquee players—just enough to bring the league publicity and credibility, but not so many as to create fi nancial ruin. A problem with this strategy is that, with few high-caliber players, the overall quality of play in the league could be quite low. Furthermore, while athletic talent is largely embodied within the individual possessing that talent, there can also be considerable external or social dimensions to this talent. For example, Tom Brady possesses a high amount of athletic talent that enables him to be a star quarterback, but playing quarterback is not a solitary activity—his inherent talent as a quarterback is more valuable when he plays with more talented teammates. In any team game, the talents of one player are inherently intertwined with the talents of other players on that team. Thus, Tom Brady’s on-fi eld performance—and the corresponding amount that fans will pay to watch that talent—is higher when he is surrounded by more talented teammates. In addition to this teammate effect, there may also be what could be termed an “opponent effect.” The spectator value in observing Tom Brady’s athletic talents is enhanced when he competes against opponents that are also highly talented. Both the opponent effect and externality effect raise diffi culties for competitor leagues in that any given star player’s athletic talent will be more valuable when he is surrounded by other high-quality players, both teammates and opponents. One potential strategy for rival leagues to jump-start their player quality stock is to tap into player groups that have been underutilized by the established league; in the past, this has occurred with African-Americans in football (both the AAFC and AFL) and Europeans in hockey (WHA). This can also occur with respect to age. The ABA signed Moses Malone out of high school at a time when the NBA was not even drafting college underclassmen, let alone high-school players. The NFL’s self- imposed no-underclassmen rule was not honored by the USFL, who famously signed Herschel Walker after his junior year at the University of Georgia. In hockey, at the time the WHA emerged in 1972, the NHL required players to be 20 years old to be eligible for its amateur draft. The NHL was ultimately forced to amend this rule when the WHA made it clear that it would not abide by any such restriction and began signing several so-called “underage” players out of junior hockey—in fact, Wayne Gretzky signed with the WHA’s Indianapolis Racers when he was only 6.4 Playing Talent 91

17 years old. A diffi culty here, however, is that this strategy can ultimately be imitated by the established leagues, so any competitive advantage accruing to the rival league cannot be sustained in the long run. It may, however, be long enough for the rival league to gain awareness and credibility in the minds of consumers. Returning to the issue of inimitability, while one might take for granted today that players are a nonproprietary resource—i.e., their services are actively traded in the marketplace, and hence they cannot represent an inimitable resource to established leagues—established leagues have not always accepted this position. With players in established leagues being bound to their teams through contracts, the emergence of rival leagues can lead to disputes over the interpretation and legitimacy of these contracts, and with established leagues trying to protect their stock of player assets using legal means. For example, in the era prior to free agency—when the reserve clause, or varia- tions on it, predominated in all four established leagues—instances arose where these established leagues attempted to legally enforce a perpetual claim on their players. In essence, there was an attempt to make players an inimitable resource. Perhaps the most notable example of this occurred in 1972 with the NHL. The reserve clause in the NHL was similar to what existed in other established leagues and essentially gave NHL teams the right to unilaterally and perpetually renew a player’s contract. This prevented any voluntary player mobility between teams in the NHL and effectively gave teams’ absolute monopsony power over their players. When the WHA came into existence, many NHL players signed contracts with teams in the WHA. Two notable cases were Derek Sanderson, a star with the 1972 Stanley Cup Champion Boston Bruins, signing a contract with the WHA’s Philadelphia Blazers, and Chicago Black Hawks star Bobby Hull signing with the WHA’s Winnipeg Jets. The NHL acted to prevent these and other defections by seeking injunctions from the courts, arguing that the reserve clause bound players to their NHL teams—the NHL was essentially taking the position that the reserve clause not only applied within the NHL but also acted to prevent players from leaving the NHL for a rival league. Several of these cases were joined in the case Philadelphia World Hockey Club vs. Philadelphia Hockey Club Inc., with Judge Leon Higginbotham ruling in November 1972 in favor of the WHA, thus allowing these players to change leagues. With legal maneuvers such as these being unsuccessful, it became clearer that the reserve clause could not be used by the established leagues to sustain a long-term competitive advantage and that their claim to perpetual ownership of players would not withstand legal challenge. However, there were several instances of established leagues at least temporarily preventing their players from joining rival leagues. For example, Rick Barry, the ABA’s most high-profi le signing in its inaugural season, was prevented from joining his Oakland Oaks ABA team that fi rst season when his former NBA club, the San Francisco Warriors, successfully argued in court that Barry had not fulfi lled his contract to the Warriors and still owed them an additional year (his so-called “option” year). Rather than playing for the Warriors, Barry elected to sit out the entire 1967–1968 season and then joined the Oaks in the ABA’s second season. A similar situation occurred with NBA icon Wilt Chamberlain, who left the Los 92 6 Property-Based Resources…

Angeles Lakers after the 1972–1973 season to join the ABA San Diego Conquistadors, but was legally prevented from playing for the Conquistadors in 1973–1974 because the courts ruled he still owed an option year to the Lakers. Unable to play, Chamberlain coached the Conquistadors for the 1973–1974 season and then offi cially retired as a player after the season, never actually playing a game in the ABA. Beyond these attempts by the established leagues to enforce contractual claims on their players, rival leagues in hockey and baseball have also faced other types of barriers in gaining access to players. In these sports, established leagues have long been vertically integrated, maintaining extensive minor-league development systems. For example, during the prime of the minor-league system in baseball during the mid-twentieth century, many major-league clubs controlled up to ten minor- league teams each and over 500 players each. When the threat of the Continental League emerged in the late 1950s, the strategic benefi ts of this extensive minor- league system were critical. It was a mechanism to control the large volume of baseball players who were not in the major leagues and who would potentially have been attractive to competitor leagues. The reserve clause perpetually bound these minor-league players to their major-league teams. Thus, any competitor league would simply have been unable to fi eld teams with suffi cient talent to challenge Major League Baseball. The Continental League appealed to Congress in 1960 to overturn baseball’s antitrust exemption and to prohibit MLB teams from controlling any more than 100 players in their minor-league system. The narrow defeat of the bill in the Senate was a critical factor in the Continental League folding before it ever began play.1 In the other three sports, every rival league that has emerged in the modern era has, to one extent or another, signed players away from the established league— either players already playing in the established league or young players about to enter the league from the amateur ranks (i.e., college sports, or junior leagues in the case of hockey). The list of star players signing with rival leagues is long. Table 6.16 provides a summary of some of the more prominent players to play in rival leagues. Some of these players were already stars in the established leagues, while others were younger players just entering the professional ranks. The various rival leagues have taken somewhat different strategies with respect to the issue. Most have focused more on college sources, but others have explicitly targeted stars in established leagues. For example, the AAFC and AFL in football tended to pursue college players rather than pros. The USFL and WHA did some of both, while the WFL tended to rely much more heavily on targeting established NFL players. In almost all cases, rival leagues struck quickly and attempted to make a “grand entrance” in their very fi rst year: the AFL signed Heisman Trophy Winner Billy Cannon out from under the LA Rams, the ABA signed defending NBA scoring champion Rick Barry, the WFL signed the Miami Dolphins Super Bowl trio, the

1 See Shapiro (2010 ) for an extensive discussion of the political dynamics surrounding the Continental League’s attempted formation. 6.4 Playing Talent 93

Table 6.16 Some prominent players who signed with rival leagues AFL (football: ABA (basketball: WHA (hockey: WFL (football: USFL (football: 1960–1966) 1967–1976) 1972–1979) 1974–1975) 1983–1985) College players NBA veterans NHL veterans NFL veterans NFL veterans Billy Cannon Rick Barry Bobby Hull Larry Csonka Brian Sipe Joe Namath Wilt Chamberlaina Gordie Howe Jim Kiick Joe Cribbs Billy Cunningham Gerry Cheevers Paul Warﬁ eld Cliff Stoudt College players Bernie Parent Daryle Lamonica Doug Williams Julius Irving Derek Sanderson Calvin Hill College players George Gervin Junior players Ken Stablerb Herschel Walker Artis Gilmore Wayne Gretzky Bill Bergeyb Doug Flutie Spencer Haywood Mark Messier Craig Morton b Mike Rozier Dan Issel Mark Howe Reggie White Moses Malonec Mike Gartner Kelvin Bryant Jim Kelly Steve Young Gary Zimmerman a Did not actually play in ABA b Denotes “futures” contract—did not actually play in WFL c Signed out of high school

WHA signed NHL superstar Bobby Hull, the USFL signed Heisman Trophy winner Herschel Walker, etc. This type of strategy is intended to bring immediate publicity and credibility to the league but also carries the risk of the league fi nancially over- extending itself before it is able to build a signifi cant and stable revenue base. Of course, the more “up-front” money a league receives from guaranteed commit- ments like TV contracts, the less risky is this strategy. By necessity, the salary premiums paid by rival leagues to attract high-profi le players have been large. When quarterback Joe Namath signed with the AFL’s New York Jets in 1965 straight out of a stellar college career at the University of Alabama, his average yearly salary with the Jets exceeded $100,000 per year, a huge premium over what NFL stars were earning. A decade later, Gary Davidson’s WFL pulled off a major coup by convincing three stars from the defending Super Bowl champion Miami Dolphins to sign with the new league. Larry Csonka, Jim Kiick, and Paul Warfi eld signed a joint 3-year contract with the Toronto Northmen for a reported $3 million (combined), with Csonka receiving about $1.4 million of this, or almost $500,000 per year. At the time, Csonka was earning about $80,000 per year with the Dolphins (Harris, 1986 ). In basketball, Moses Malone was a high- school phenom in 1974 when he signed a reported 7-year, $3 million contract with the ABA’s Utah Stars. This average annual salary of over $400,000 more than doubled what established NBA stars were earning, even though Malone had never played a single college basketball game, let alone a professional game. In hockey, the WHA’s Winnipeg Jets signed NHL star Bobby Hull in the upstart league’s initial season of 1972. Hull’s contract was for a reported $250,000 per year—more than doubles what he was apparently earning in the previous year with the NHL’s Chicago Black Hawks. 94 6 Property-Based Resources…

How were these rival leagues able to pay such high salaries, when their revenues were generally well below the levels of the established leagues? Somewhat ironically, it was the reserve clause itself which beneﬁ tted the formation of rival leagues; it gave large monopsony power to owners and allowed them to pay only a small portion of revenues to players. Scully (1974) estimated that many MLB players during the early 1970s earned only about 25 % of their MRPs. Compare this to today, where players associations (in the three leagues with salary caps—the NFL, NBA, and NHL) have negotiated CBAs that have seen players receive anywhere from 50 to 60 per cent of league revenues. Thus, the rise in power of labor unions over the past four decades, and the corresponding winning of free agency rights within established leagues, has drastically reduced the opportunity for rival leagues to emerge. In short, players in established leagues are no longer “underpaid.” Chapter 7 Knowledge-Based Resources: Managerial Competencies

7.1 Conceptual Issues

In contrast to property-based resources examined in the previous chapter, this chapter examines the extent to which knowledge-based resources may be a source of sustained competitive advantage for established leagues. Following the discussion of Chapter 5 , knowledge-based resources in sports leagues might take many possible forms. In general, knowledge may be embodied either in some type of technical know-how or in the form of managerial capabilities. Starting with the former, unlike many sectors in our modern economy, the professional sport business is not particularly knowledge-driven, at least in the sense of embodying sophisticated and complex production technologies. Its core product— the on-fi eld competition between teams—is produced solely from the physical abili- ties of the athletes involved and involves no proprietary technical processes or knowledge. As such, the production process is completely transparent and is therefore easily imitable by competitors. In addition, given the nature of the sport business, creativity and innovation, at least as it pertains to the on-fi eld product, are not rewarded in the marketplace—for example, the game of football is governed by rules that are decades old, leaving little room for competitors to innovate and “build a better product.” In fact, the importance of tradition and history in sports means that fans do not generally want a “new and improved” version of the game, in the sense that consumers might want, say, a new and improved smartphone. Thus, when it comes to the core product itself, established leagues possess no real knowledge advantage over potential competitors. If, then, knowledge is to be a factor in the sustained competitive advantage of established leagues, this knowledge must come more at the managerial level, rather than the product level. It is possible that established leagues possess greater knowledge about the various managerial functions associated with operating sports leagues—functions relating to fi nance, marketing, human resource management, etc. In addition, managing a sports league involves building long-term relationships with several groups of stakeholders, including players’ associations, fans,

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 95 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_7, © Springer Science+Business Media New York 2013 96 7 Knowledge-Based Resources: Managerial Competencies broadcasters, governments (stadium developments, taxes, etc.), and various third parties (suppliers, contractors, etc.) Owners in the established league may have, for example, information advantages regarding the cost and revenue structures of the business, effective marketing strategies, and dealing with TV networks. Established leagues have been able to build this knowledge capital through time. The sport business, like any other business, has its own uniqueness and distinctiveness, of which owners must understand if they are to be successful—longevity allows learning by doing. The more important question, however, is whether such knowledge is inimitable. To the extent that some of this knowledge is, in the parlance of Chapter 5 , “discrete,” in the sense that it is possessed by specifi c individuals, it is not fully inimitable. Rival leagues can hire key individuals with the managerial know-how to operate the league. For example, a new rival league negotiating a contract with a TV network can recruit an executive from the established league, or from a TV network, that has experience in such matters. Something similar occurred in the USFL, when it hired Chet Simmons away from ESPN to be the league’s fi rst commissioner. The belief was that Simmons’s inside knowledge of the TV business would help the USFL to negotiate a more favorable contract for its TV rights. However, even this is not so straightforward, as many factors may still be different between the situations, making past knowledge and experience not fully transferable. For example, an executive with experience negotiating TV rights for an established league may not always be the best choice for negotiating TV rights for an upstart rival league; the latter is obviously at a very different stage in its life cycle and has much less negotiating power than an established league, making the strategies and nuances of negotiating quite different. In general, however, managerial knowledge across a wide variety of functional areas is readily purchasable in the marketplace. In many ways, the sport industry is no different than any other industry in this regard, in that all upstart fi rms, regardless of industry, always face an incumbent that has more experience and industry know- how. Since many upstart fi rms in other industries are able to successfully overcome this disadvantage, it would not seem that this issue, in itself, would be the reason for the persistent monopoly outcomes in the sport industry. In fact, if one is to explain these monopoly outcomes based on knowledge-based resources, one must identify what is different about the sport industry compared to other, more competitive, industries. In other words, what aspects of the managerial function make it particularly diffi cult for rival sports leagues to replicate the established league’s actions? The answer to this question lies in the way in which sports leagues are organized. Leagues are really just the collection of individual owners—the league, as a legal entity, is owned by its member teams. Leagues are actually nonprofi t entities, even though each of their member teams are profi t seeking. Thus, team owners play two roles. They own their own individual franchises and seek to maximize profi ts for this entity. However, each owner, along with the other owners, also must collectively manage the league as a whole. It is at this collective level that the most critical decisions for a league are made, decisions regarding issues like league expansion, 7.1 Conceptual Issues 97 franchise shifts, salary caps, and revenue sharing. These collective decisions are much more complex processes than decisions at the team level. At the team level, the owner of the franchise has the authority to make all decisions, unilaterally if need be. In essence, the hierarchal structure of the fi rm ultimately resolves any confl icts within the fi rm—while collaboration and cooperation are valuable, the owner ultimately retains the residual power to enforce his or her wishes. In contrast, decisions at the league level cannot be resolved simply by appeal to the hierarchal structure, primarily because there is no hierarchal structure at the league level. Each of the league’s member teams has equal voting power, and consensus and collaboration become paramount to an effectively functioning league. Established leagues, by their mere continued existence, have already worked through the complexities of inter-team cooperation. Effective inter-team cooperation requires the right group of owners, committed not only to the success of their own franchise but also to a level of collaboration with other owners that will ensure the survival and success of the league as a whole. In a sense, this inter-team cooperation is an esoteric and intangible resource, which is diffi cult for a rival league to readily duplicate, but is crucial to the success of the rival. As a related issue and as mentioned earlier in the book, rival leagues are faced with what could be termed the indivisibility problem. Sports leagues, by their very nature, are multiunit entities—there cannot be one team in a league, or even two or three. In the past, rival leagues have typically entered the market with 8–12 teams, but by today’s standards, even that would be a very small footprint, given that all the established leagues have at least 30 franchises. This indivisibility problem is somewhat unique to the sport industry and presents a particular barrier to new entrants. In many industries, certain fi rms hold dominant positions and are market leaders and yet still face competitive pressures. For example, the airline industry has long been dominated by a small group of major carriers—companies like Delta, United, and American—but has still seen the entry of several upstart fi rms in recent decades. Airlines like Southwest and JetBlue have been very successful carving out a niche in the market. Similarly, in the fast-food restaurant business, while companies like Burger King, Wendy’s, and McDonalds heavily dominate the market, small-scale competitors continue to have opportunities to enter the market. The difference between these industries and the sport industry pertains to the scale effect. In the restaurant business, for example, an upstart competitor can enter the local market and compete with McDonalds in that particular market. If the competitor provides better quality, better service, or any one of a number of other possible improvements, there will be a redirect of at least some revenues away from McDonalds. However, at the same time, this competitor can be quite successful by limiting their scope to a single market—they do not have to compete with all McDonalds, just one. Similarly, JetBlue can compete with Delta on certain routes; it doesn’t have to compete with Delta on all routes that Delta fl ies. Compare this to the spectator sport industry, where an entrepreneurial owner cannot independently start a franchise in Dallas to compete with the Cowboys. The closed nature of US sports leagues means such an owner would never be allowed to enter the NFL. Instead, this new owner must partner with many other entrepreneurs 98 7 Knowledge-Based Resources: Managerial Competencies in many other cities to form an entire league. However, the probability of success now drops dramatically. Rather than just one entrepreneur needing to be successful, all (or most) of the other entrepreneurs also must be successful. Part of this success relies on choosing the right partners, but part also relies upon the partners being able to work together in a cooperative manner. In turn, part of the ability to work together is dependent on the degree of common interests amongst the various owners. As a fi nal point, notice that the above issues all pertain to league management, not team management, and that the two are fundamentally different. Teams are generally like any other non-sport fi rms, in that their goal is to maximize owner profi ts; as such, effective management at the team level is no different than effective management in any other organization. However, as discussed in Chapter 2 , since the basis of competition in the professional sport business is at the league level, it is the managerial issues at this league level which are the ultimate determinants as to whether rival leagues can effectively compete. The empirical evidence on such league-level management issues is explored in the following subsection.

7.2 Empirical Evidence

To assess the role that managerial quality may play in the competitive landscape of the professional sport industry, it is necessary to examine both the managerial competencies of the various rival leagues and the corresponding managerial competencies of the established league against which each rival league was competing. Starting with the rival leagues, historical analysis suggests that several factors are crucial to a league’s survival and success. In the most basic sense, a league needs a sound business model, individual owners that are suffi ciently capitalized to sustain short-run losses, and a set of common interests amongst owners that will allow the group to make collective decisions that foster overall league success. Unfortunately, none of these factors are directly observable. For example, a league’s business plan/ model and any detailed and reliable fi nancial data on owners are proprietary types of information and are thus not generally available for public scrutiny. In addition, outside observers are not privy to internal discussions and meetings amongst team owners, and thus there is no way to discern the extent to which owners act as a cohesive decision-making group. Therefore, all of these various factors must be evaluated in a more indirect manner. One way to do this is to observe outcomes and, from these outcomes, deduce the management factors that may have led to them. One metric that may be relevant is the degree of turnover amongst owners in the rival league. High turnover may be a symptom of a poor business model—for example, placing franchises in the wrong markets—and/or of attracting owners that are insuffi ciently capitalized to sustain the losses that are inevitable in the early years of a start-up league. This high ownership turnover, in addition to being the result of poor decisions at the league level, can, in itself, also cause management problems. Thus, there is some circularity to the issue. Because the nature of league management requires owners to work 7.2 Empirical Evidence 99

Table 7.1 Ownership turnover in rival leagues: ﬁ rst two seasons of existence AAFC AFL ABA WHA WFL USFL (football: (football: (basketball: (hockey: (football: (football: 1946–1949) 1960–1966) 1967–1976) 1972–1979) 1974–1975) 1983–1985) Average number 1.38 1.13 1.45 2.50 2.75 2.11 of different owners per franchise during league’s ﬁ rst two seasons

together for a collective purpose, the greater the turnover in ownership, the less likely a cohesive decision-making unit can emerge. This relates to the notion of shared experience, fi rst discussed back in Chapter 5 . Shared experience allows group members to develop an understanding and comfort with each other and can contribute signifi cantly to effective group processes. It creates a form of group-level tacit knowledge, something which, over time, becomes inimitable. However, where turnover in ownership is high, as in many rival leagues, this shared experience, by necessity, remains low, even as the league itself ages. Table 7.1 shows the ownership turnover rates for the various rival leagues. The entries show the average number of owners per franchise over the fi rst 2 years of a league’s existence. This 2-year time frame is selected for two reasons: fi rst, all rival leagues examined survived at least into their second year (the WFL folded partway through its second season), making cross-league comparisons more feasible, and second, the early years are particularly critical to a rival league’s success, and high ownership turnover early in a league’s existence is often a deathblow to the league. In Table 7.1 , a value of 1.00 is the boundary on the low end and would indicate that all franchises in the rival league had only one owner during the league’s fi rst 2 years, i.e., there was no ownership turnover with any franchise. Correspondingly, a value of 2.00 would indicate the average franchise had two owners during the 2-year time period, i.e., each franchise was sold once during that time frame. The results in Table 7.1 show a stark contrast across the various rival leagues. On one side, leagues like the WFL, WHA, and USFL were all plagued by very rapid ownership turnover. For example, the average WFL franchise had 2.75 different owners during the league’s fi rst 2 years; the WHA and USFL didn’t fare much better, coming in at 2.50 owners and 2.11 owners, respectively. In contrast, a league like the AFL experienced almost no early turnover—the average number of owners per franchise during the league’s fi rst two seasons was a very low 1.13. The only franchise that sold during this time was the Denver Broncos. In fact, up until the merger announcement in 1966, only one other AFL franchise was sold, that being the New York Titans ownership transferring from Harry Wismer to Sonny Werblin in 1963. The USFL provides a particularly effective case study when looking at the issue of group processes and group dynamics and is a major reason why the league was extensively examined in Chapter 3. Owners in that league appeared to have 100 7 Knowledge-Based Resources: Managerial Competencies divergent interests across a wide variety of issues; for example, some wanted strict cost control on payrolls, while others spent freely, trying to buy the best team possible; some owners wanted the league to expand rapidly, others did not; most importantly for the USFL, some owners wanted to move to a fall schedule, while others wanted to stay in the spring. Similar disunity issues existed in other leagues as well. ABA cofounder Gary Davidson once observed that ABA owners were “more wor- ried their individual interests than the group interest” (Davidson and Libby, p. 38) and that the ABA owners “never stopped fi ghting amongst themselves” and “never stopped pulling in different directions” (Davidson and Libby, p. 39). Things were apparently no different with the owners in the WHA, with Davidson commenting in 1974 that the “infi ghting is murderous” (Davidson and Libby, p. 192). These divergent interests amongst owners have multiple sources. Two are particularly important. First, in any league, rival leagues or not there will be the inevitable tensions between small-market owners and large-market owners. How these tensions get resolved will ultimately go a long way to determining the league’s success. For example, we saw in Chapter 3 how some large-market USFL owners began advocating for a larger-than-proportionate share of the national TV contract. While this did not ultimately come to fruition, it was an indication of the types of small-market/large-market tensions that can arise. In contrast, the AFL was extremely innovative for its time in that it adopted a policy whereby all eight franchises equally shared the revenues from its national TV contract with the ABC network—such an egalitarian policy regarding national TV revenues would eventually become the norm across all major North American professional leagues. A second source of potential divergence amongst owners relates to differences in the underlying reasons for joining the rival league in the fi rst place. Clearly, there have been some owners that have seen their membership in the rival league as simply a “back door” to gaining membership in the established league—for these owners, gaining a merger with the established league is the singular objective. The route to gaining a merger is to infl ict signifi cant fi nancial damage on the established league, even it means large short-run losses for owners in the rival league. In the USFL, Donald Trump certainly appeared to fall into this category, although there were several other owners who also apparently had NFL aspirations. In contrast, some owners in rival leagues see membership in the league as a more long-term business venture, independent of any potential merger with the established league. These types of owners tend to be more cautious about lavish short run spending on payroll and are more interested in establishing and building a lasting brand; the expectations here would be that the rival league ultimately gains a long- term share of the overall market and coexists with the established league for the indefi nite future. In the USFL, owners like Denver’s Ron Blanding and Tampa Bay’s John Bassett would seem to have fallen into this category. This longer-range perspective was particularly prevalent in the AFL—there is little evidence to suggest that any of the original AFL owners were motivated by gaining a quick merger with the NFL, and there seemed to be a general commitment amongst owners to a more slow and steady building of the league. 7.2 Empirical Evidence 101

Some rival leagues also attracted a third type of owner—one who was particularly driven by the notoriety and perks of owning a professional sport franchise. These owners often had large, outgoing, personalities and were highly visible business people in their local communities; they enjoyed the spotlight and notoriety that owning a professional sport team provided. In some ways, the team became a vehicle for personal self-promotion. Many of these types of owners were not suffi ciently capitalized or were not of the appropriate business or personal pedigree to gain entry into the established league. Rival leagues, with their relatively low entry fees, provided an appealing alternative. Related to the last point, rival leagues were also known to be occasionally lax in their screening of prospective owners. For example, Chapter 3 discusses how the USFL, desperate to fi nd an owner for its fl ailing Los Angeles franchise, failed to conduct its due diligence before allowing William Oldenburg to purchase the franchise. The WFL was also a league that was known for ownership diffi culties. For example, the Detroit ownership group was headed by Louis Lee, a 28-year-old lawyer with no previous experience in the professional sport business. He was the lead owner of a 31-person ownership group, most of whom, as Gluck ( 1975 ) says, were not “big money” individuals, but rather were high-end professionals like doctors and lawyers. The result was not surprising: the Detroit franchise folded partway through the WFL’s inaugural season, having been unable to meet payroll for several weeks. Gluck also related the story of how Ken Bogdanoff—in his mid-20s and only a few years removed from being an undergraduate at Temple University and whose most signifi cant work experience to date was being the assistant ticket manager for the Philadelphia Flyers—was almost awarded ownership of the Philadelphia WFL franchise. This is not to suggest that rival leagues were unaware of the importance of fi nding well-capitalized owners; owners who could sustain considerable short-run losses. Chapter 3 relates how USFL founder David Dixon budgeted franchise expenditures at $5 million per year for the fi rst 3 years, with projected yearly losses of $900,000 each of those years. Ten years earlier in the WFL, Gary Davidson projected fi rst-year team budgets to be between $2.3 and $2.7 million, with expected annual losses of $1 million. In the WHA, one of Davidsons’s other leagues, Davidson suggested fi rst-year team budgets be $1.25–$1.5 million, with projected losses of $500,000 per team and with teams expecting to break even by the third year. However, it turned out that projections such as these were often moot, with owners either overspending or being unable to generate suffi cient revenue or both, thus resulting in large-scale and immediate losses that owners were unwilling or unable to sustain. It appeared that league founders were often unable to follow their own fi nancial plan, bringing owners into the league that were insuffi ciently capitalized. WFL founder and commissioner Gary Davidson came under criticism from Chicago Fire owner Tom Origer during the league’s fi rst season; Origer complained that Davidson had not lined up sound investors and that Davidson was only interested in the $250,000 (up-front) entry fee (Gluck 1975 ). George Mikan, the ABA’s fi rst commissioner, once commented that the ABA’s founders “didn’t demand anything 102 7 Knowledge-Based Resources: Managerial Competencies

Table 7.2 Average ownership tenure in established leagues at time of emergence of rival league (in years) NFL: NFL: NBA: NHL: NFL: NFL: 1946 (AAFC) 1960 (AFL) 1967 (ABA) 1972 (WHA) 1974 (WFL) 1983 (USFL) All owners 13 20 7 12 17 23 Six longest- 19 33 12 27 44 51 tenured owners of the men they accepted as owners…if a man could produce a $5,000 check, he was in” (Davidson and Libby 1974 ). ABA cofounder Gary Davidson offered a different perspective on the selection of owners, saying “Ideally, you accept only the wealthiest, most businesslike, and most dedicated men to own the teams in the league. Realistically, you take what you can get” (Davidson and Libby, p. 49). Part of the issue also relates back to the problem of fi nding owners who were prepared to follow the league’s prescribed fi nancial plan. Too often, rival leagues found themselves having an owner (or owners), eager to buy instant on-fi eld success, that greatly exceeded the agreed-upon payroll limits. As Bob Woolf, the renowned player agent of the 1970s, said, “all it takes is one WFL owner to say ‘I don’t care what it costs, I’m going to buy a winning team’, and that will blow the roof off as far as money is concerned” (Gluck 1975 ). Similar “overspending” was also prevalent in the USFL, where teams like the Michigan Panthers and New Jersey Generals had player payrolls well beyond the league’s prescribed, but largely unenforceable, limit. In contrast to this ownership instability often found in rival leagues, established leagues, by their very nature, tend to have owners with much longer tenure. Thus, when rival leagues enter the market, they are competing against a league whose owners have worked with each other for several years, if not decades. As such, established leagues have already worked through many of the complexities and challenges of inter-team cooperation. Table 7.2 shows the average tenure of owners in the established league at the time that each rival league emerged. It then breaks this down further by showing the average tenure of the six longest-tenured owners, under the rationale that it is often a select few owners that actually guide the strategic decisions of a league. Starting with football, when the AAFC formed in 1946, the average NFL owner had a tenure of 13 years in the league, with the six longest tenured having an average of 19 years. MacCambridge describes NFL owners at the end of World War II as a “tightknit fraternity, loathe to accept outsiders” (p. 7). By the time of the AFL’s arrival in 1960, these tenure fi gures had increased to 20 and 33, respectively. In 1974, when the WFL began operations, the average tenure of NFL owners was actually lower (17) than it was 14 years earlier (20). This decrease was attributable to the many new franchises that had joined the NFL, both through the AFL merger and through the NFL adding several expansion teams during the 1960s. More importantly, however, the average tenure of the six longest-tenured NFL owners continued to increase, rising to 44 by 1974 and then rising again to 51 in 1983. Thus, by the time of the USFL’s emergence, a core group of six NFL owners had been league members, and had worked collaboratively with each other, for over half a century. 7.2 Empirical Evidence 103

Turning to the NBA, its numbers were somewhat lower than in the NFL, due to both the NBA’s relative newness and its signifi cant instability during its early years. When the ABA arrived in 1967, the average NBA owner had been in the league for only 7 years, and even the six longest-tenured owners averaged only 12 years in the league. As in the NBA, the average tenure in the NHL was also quite low (12) when competition arrived in 1972 in the form of the WHA, but the NHL did have a signifi - cant advantage over the NBA in terms of its longest-tenured owners, with the top six in the NHL averaging 27 years, compared to only 12 in the NBA. In addition to the ownership tenure issue, a further factor that must be considered when analyzing a leagues’ management structure is the role that the league commissioner plays. The commissioner has the diffi cult task of governing the owners on matters relating to the management of the league, while at the same time serving at their collective pleasure. In essence, the commissioner has the delicate job of being both a leader and a follower to the same group of individuals. While long-tenured commissioners can create greater cohesiveness and unity amongst owners due to their long-established working relationships with the owners, the opposite is also true: i.e., long-tenured commissioners are also the by-product of a more cohesive ownership group. The latter is due to a sorting effect, whereby commissioners only remain in the position if they are pleasing enough owners. Strong commissioners not only bring functional skills to the position, but, even more importantly, bring an ability to work with a diverse group of owners—many of whom have somewhat confl icting interests—and meld this into an effective work team. This ability to effectively and effi ciently mediate disparate interests is critical to a league’s success and is largely inimitable by rival leagues, at least in the short run. Established leagues have tended to have long-serving commissioners. When the USFL formed in 1983, the NFL’s commissioner at the time, Pete Rozelle, had been in that position for 23 years, having taken over in 1960 following Bert Bell’s death the previous year. Bell himself had been NFL commissioner for 13 years. Rozelle would ultimately stay in the position until 1989. In fact, Rozelle is often credited with unifying NFL owners into a more cohesive “group think” mentality, convincing large-market owners that revenue sharing was in the best long-run interests of the league. Similar longevity can be found in other sports. Clarence Campbell was president1 of the NHL for 37 years, from 1946 until 1983, and had been in the position for 26 years by the time the WHA formed in 1972. In baseball, Ford Frick was 9 years into the commissioner’s job when the Continental League emerged in 1960 and would ultimately serve fi ve more years in the position. Frick had been only the third commissioner in baseball since the offi ce was formed in 1920. In the NBA, Maurice Podoloff served as commissioner from the league’s inception in 1946 to 1963, with Walter Kennedy taking over the position for the next 15 years. In fact, in the NBA’s 67-year history (to 2013), the league has had only four commissioners.

1 The NHL did not adopt the term “commissioner” for its top position until 1993. Prior to that, the term “president” was used. 104 7 Knowledge-Based Resources: Managerial Competencies

Contrast this stability with the track record of rival leagues, where most of these leagues experienced high levels of turnover in their commissioner position. Take the USFL, for example. In its short 3-year existence, it had two different commissioners— Chet Simmons lasted 2 years and then was forced out to make way for Harry Usher, who served as commissioner for the league’s third, and fi nal, season. Chapter 3 related how both men were subjected to constant criticism from several owners. Both Simmons and Usher were highly accomplished senior executives—Simmons as a former head of ABC Sports, NBC Sports, and ESPN and Usher as executive vice president and general manager of the 1984 Los Angeles Olympic Organizing Committee. The diffi culties both Simmons and Usher encountered likely had less to do with their leadership capabilities and more to do with the fact that USFL owners were a disjoint group, with widely disparate interests and expectations. Leagues like the ABA, WHA, and WFL also experienced considerable turmoil in their commissioner position. Somewhat astonishingly, the ABA had seven different commissioners during its 9-year existence. Its fi rst commissioner, George Mikan, actually shared senior management duties with Gary Davidson, who was the league’s president. However, the two apparently clashed, and Davidson was out as president after just 1 year, while Mikan lasted only 2 years in the commissioner position. Davidson also didn’t last long in the WFL. As founder of that league, he became its initial commissioner but left the position before the end of the league’s fi rst season after coming under heavy criticism from several owners, particularly the aforementioned Tom Origer of the Chicago franchise. Conversely, the AFL showed much greater stability in the commissioner position. Joe Foss, a decorated World War II veteran and a former governor of South Dakota, was the league’s fi rst commissioner and held the position for 7 years. Al Davis then took over the commissioner’s role in 1966, just prior to the AFL-NFL merger agreement. What is curious about the AFL situation is that it often appeared that league founder Lamar Hunt was the de facto commissioner, with all crucial league decisions fl owing through him. In fact, Hunt negotiated the league’s merger agreement with the NFL without the knowledge of Al Davis, providing clear indication of the reduced importance of the commissioner position within the AFL’s strategic decision-making process. In summary, then, it is apparent that these knowledge- based resources—particularly as they relate to the governance of the league—are paramount to any league’s survival, but are also much more tacit and esoteric than are property-based resources, and hence much more diffi cult for any rival league to easily replicate. Chapter 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues

This book has taken the premise that studying the history of past rival leagues allows one to gain critical insights into the nature of competition and competitiveness in the spectator sport industry; in turn, this allows one to assess whether the current monopoly position of the Big Four will ever be challenged again. In this fi nal chapter, the goal is to identify the unifying themes amongst the specifi c case studies presented and to begin to build a more general theory as to why established leagues have been able to maintain such absolute dominance. At the most basic and fundamental level, the explanation for this dominance is quite straightforward. An economics-based explanation would suggest that the established leagues control critical inputs to production and that control over these inputs creates strong barriers to entry. The strategic management discipline would frame the issue somewhat differently and would argue that the established leagues possess certain critical resources that rival leagues are not able to imitate. Both approaches, however, get one to the same basic place. The key, then, is to move beyond these broad concepts and attempt to assess the underlying nature of these inputs/resources. Clearly, the fi rst mover status of established leagues confers upon them a number of advantages—they already have franchises located in many or all of the most lucrative markets, they have stadium arrangements in those cities, and they employ all of the best athletic talent. Any rival league entering the market must overcome these factors. However, none of these factors are, in themselves, insurmountable obstacles—all could be considered a form of property-based resources that can be acquired through market-based transactions. In the most basic sense, rival leagues are free to enter any market they wish, are free to build stadiums in those markets, and are free to bid athletic talent away from the established league. The issue, however, is not quite so simple, for in order to effectively compete with the established league, the rival league must be able to conduct these market transactions in a way that does not place the rival league at a huge and insurmountable fi nancial disadvantage. Thus, while a rival league may be free, in principle, to move into markets already occupied by the established league, the rival league is at

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 105 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0_8, © Springer Science+Business Media New York 2013 106 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues an inherent disadvantage because the established league has already had time to build a brand loyalty and identity amongst the fan base. This fi rst mover effect is particularly important in the spectator sport industry, given that many fans person- ally identify with the team and given the importance of selling “history” and “tradition.” The product being sold does not have a “use value” in the traditional sense, as, say, a smartphone might have, but rather is much more esoteric and is really more about delivering a sense of self and state of mind to the customer. By necessity, rival leagues enter the market without any tradition or history and must survive long enough to be able to develop these attributes. Similarly, established leagues also have fi nancial advantages with respect to stadiums. The longevity of established leagues has allowed them to have already built working relationships with local politicians, potentially resulting in favorable (i.e., below market price) lease arrangements on publicly owned facilities and/or heavy taxpayer subsidization of stadium construction costs, thus making it diffi cult for the rival league to compete on equal terms. As a result, rival leagues often have had no choice but to play in substandard, “minor-league” stadiums and arenas. In addition, rival leagues also face inherent fi nancial disadvantages on the players’ front. Because of the various risks that rival leagues pose to players, players will demand a large salary premium to jump to the upstart league. At the same time, however, the lower revenue-generating potential (at least in the short run) of the rival league means that the MRP of these players is generally much lower in the rival league compared to the established league. Thus, the rival league is faced with double-sided fi nancial squeeze: paying relatively high salaries but generating relatively low revenues. The inevitable result is large-scale losses, at least for the early years of a rival league’s existence. Thus, if a rival league is to survive, it must do so within the context of this fi nancial reality. This means that team owners in rival leagues must be very well fi nanced and must have the fi nancial capabilities to sustain these losses for many years. However, it has been the argument of this book that perhaps the biggest hurdle facing rival leagues pertains to the unique management structure found in sports leagues, whereby leagues are collectively managed by their individual franchise owners. Many critical decisions are made at the league level, including those relating to such issues as salary caps, revenue sharing, and franchise locations. Since each franchise owner has a unique set of interests, each may have a very different perspective on these league-wide issues. Unlike individual franchises—where the managerial decision-making process is hierarchal—the management structure at the league level is truly collective. Each owner has one vote, and disagreement must be resolved by consensus and collaboration, rather than through any unilaterally imposed decision by those at the top of the organizational hierarchy. Widely disparate interests amongst owners that cannot be successfully mediated are likely to spell demise for any league. This ability of owners to collaboratively work together is a type of knowledge-based resource and is extremely diffi cult for a new rival league to imitate. Established leagues have a huge advantage over rival leagues in this regard, because the former, by its mere continued existence, has already worked through the complexities of inter-team cooperation. In the parlance of the strategic management literature, the high levels of shared experience amongst owners in 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues 107 established leagues allow them to develop group-level tacit knowledge that simply cannot be quickly replicated by any rivals. With these conceptual notions as a framework, some bottom-line assessments can be made as to the reasons for the successes/failures of each of the rival leagues. The best starting point is the AFL, simply because it was the most successful, by far, of all the rival leagues, having all eight of its original franchises merged into the NFL. The AFL’s success can be attributed to a number of factors, all of which came fortuitously together at the right time. First, the external environment was very favorable for the emergence of a rival league. The postwar boom in population and incomes provided a rapidly growing market potential. Americans were becoming wealthier, were much more willing to spend their dollars on leisure and entertainment, and were migrating west and south. As well, the AFL emerged at a time when professional football was becoming a much more popular game in America and was beginning to displace baseball as the country’s most popular sport. The thrilling, nationally televised Colts- Giants 1958 NFL championship game that went into overtime further fueled this shift and, somewhat ironically, would ultimately benefi t the AFL. In addition, the AFL was the fi rst rival league of the TV era, and AFL leaders had the foresight to see the importance of TV to the league’s success. The AFL’s partnering with the fl edgling ABC network provided the vehicle to deliver the AFL’s product to a much wider market and shed the league’s short-run reliance on gate receipts. Perhaps most importantly, AFL owners had strong leadership in Lamar Hunt, were reasonably well capitalized, and seemed to be unifi ed in their belief that challenging the NFL was a mid- to long-range venture and would not produce any immediate payoffs. However, the AFL’s success was not just about what the AFL did, but was also about what the NFL did not do. The NFL’s reluctance to expand during the booming 1950s provided an important window of opportunity for the AFL, in that many viable, and potentially lucrative, markets were left unserved. This reluctance to expand was, in part, a signal that the NFL had considerable internal management diffi culties, in that owners failed to fully realize that the external environment around them was rapidly changing. The owners were also hamstrung by their own internal decision-making processes, where decisions to expand required a unanimous vote, which effectively gave every single owner full veto power. With an owner like George Marshall of the Washington Redskins, a vehement opponent of expansion, the league was effectively prevented from expanding, even if a majority of owners had wanted expansion. Other management issues also existed in the NFL. Perhaps because of complacency, the league had somewhat of an “old-school” mentality through the 1950s, with Eagles cofounder (in 1933) Bert Bell serving as commissioner from 1946 until his sudden death (at an NFL game) in 1959. By many accounts (see MacCambridge 2004 ), Bell and many of the other owners were not fully seeing the rapidly changing environment in which the NFL was operating. Davis ( 2008 ) describes the NFL under Bell’s leadership as a “folksy, mom-and-pop operation” (p. 123). Bell’s replacement as commissioner, Pete Rozelle, had only been in the position for 8 months by the time the AFL started play in September 1960. Even though Rozelle would ultimately go on to become one of the most renowned commissioners of all time, in any sport, Rozelle was only 33 years old at the time of his 108 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues appointment and had been elected commissioner as a compromise choice after NFL owners were unable to agree on seemingly more preferred candidates. The NFL also had other vulnerabilities. On the players’ side, it had been very slow to accept African-Americans into the league, and although the NFL color barrier was (re)broken in 1946, African-American players still comprised only a small portion of NFL players in the league. This left a largely untapped market of high- performing players that the AFL was able to capitalize upon and allowed the AFL to produce a much higher-quality product on the fi eld than what would have otherwise been the case. The NFL also had an aging infrastructure in terms of its playing facilities, with the average age of its stadiums approaching 40 years old, signifi - cantly older than the average AFL stadium. In baseball, the Continental League experienced a very different outcome from its counterpart rival league in football, the AFL, despite the many similarities between the two leagues; similarities in the reasons for their formation, the time of their formation, league structures, franchise locations, and even one of the ownership groups. In dispensing with the Continental League, Major League Baseball possessed a number of advantages that the NFL did not have in dealing with the AFL. First, Major League Baseball had the antitrust exemption, thus allowing it a much wider latitude of business practices to meet the impending competition without threat of legal sanction. Secondly, MLB’s network of minor-league teams effectively tied up two crucial resources than any competitor league needs—it tied up potential players and it tied up the output markets in which franchises would be placed. Congress’s 1960 decision to not overturn baseball’s antitrust exemption, and to correspondingly fail to restrict the number of minor-league players that major- league teams could control, effectively spelled the end for the Continental League. While the AFL was easily the most successful of all the rival leagues, three other leagues—the AAFC, ABA, and WHA—could be termed moderately successful, for the reason that all were able to gain a partial merger with the established league. The AAFC benefi tted from the fact that the NFL had still yet to solidify its place within the major pro sport market and was coming off the particularly tumultuous war years. The AAFC was the fi rst major professional league to locate in the rapidly growing California market (LA Dons and San Francisco 49ers), and the presence of the iconic Paul Brown in Cleveland gave the league instant credibility. Ironically, the complete on-fi eld dominance of the Browns probably contributed to the league’s demise, and the initial successes of the league quickly faded into falling attendance and mounting losses as the years passed. While both the ABA and WHA also gained partial mergers, it was almost as if these two leagues were successful in spite of themselves. Both were plagued by high levels of franchise and ownership turnover—usually the death knell for rival leagues. Both leagues were only a shell of their former selves by the time of their mergers—each had only 6 teams, down from a high of 11 in the ABA and 14 in the WHA. Furthermore, both were often plagued by negative public images—arising from teams not meeting payroll, from several teams playing in decrepit buildings that were far from major-league status, etc.—and were often the target of ridicule from the media. The key for these two leagues, however, was the development of a 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues 109 few relatively strong franchises, franchises that had developed signifi cant follow- ings, that were on relatively solid fi nancial footings, and that would continue to present competitive challenges for the established leagues into the future. Of the eight ABA and WHA franchises that were merged (four in the ABA and four in the WHA), seven of them (the exception being New York/New Jersey in the ABA) were in markets in which the established league did not have a franchise, and most were in markets in which there was no other professional team, in any sport. These franchises thus developed a prominence within their local markets that worked favorably for their continued survival. The ABA and WHA also had the advantage of competing with established leagues that, themselves, were in fl ux. When the ABA emerged in 1967, the NBA was less than 20 years old and had experienced many franchise shifts of its own during those early years. While the NHL had a much longer history than the NBA— the NHL was over 50 years old when the WHA began play in 1972—the NHL had only six franchises up until 1967 and then, attempting to preempt a rival league, undertook a very rapid expansion strategy over the next 7 years, growing in size to 18 teams by 1974. Several of these expansion decisions seemed hasty, and some turned out to be misguided—Oakland, Atlanta, and Kansas City, in particular—and put the league in a weakened state. The remaining two rival leagues—the WFL and the USFL—were abysmal failures by almost any measure. They were the shortest-lived of any of the rival leagues, with the WFL folding partway through its second season and the USFL folding after only three seasons. Neither was able to mount any serious threat to the NFL. The reasons for the WFL’s demise are relatively straightforward. Perhaps buoyed by the success of the AFL before it or by the continued staying power of Gary Davidson’s other two creations, the ABA and the WHA, the WFL seemed almost overconfi dent in its approach and failed to adequately take care of the basic foundation issues. It had too many owners that were severely undercapitalized, had too many franchises in small markets, and played in too many stadiums that were not of major-league status. It also faced a very different NFL than what the AFL had faced in 1960. By 1974, the NFL had grown to 26 franchises, up from only 12 when the AFL started 14 years earlier, with part of this rapid growth attributable to the NFL’s absorption of the AFL. Thus, the WFL faced a situation where there were substantially fewer viable, unserved, markets than what the AFL enjoyed. The NFL’s capital infrastructure had also been transformed, with many NFL teams now playing in modern, state-of-the-art facilities—in fact, the median age of NFL stadiums dropped precipitously, from 37 years in 1960 down to only 11.5 years in 1974. Also critically important, by 1974 Pete Rozelle had been in the commissioner’s position for 14 years and had transformed owners into a much more unifi ed and focused group than what had been the case in earlier eras, and with revenue sharing now a major part of the NFL’s strategy. In contrast to the WFL, the USFL seemed much better prepared to challenge the NFL. It assembled an impressive collection of apparently well-fi nanced owners, it had franchises in most major markets, it played in NFL-caliber stadiums, and it had secured a national TV contract with a major broadcast network. While the USFL’s 110 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues demise cannot be attributed to any single factor, the apparent disunity amongst owners, largely driven by the hugely disparate interests of these owners, is certainly a critical factor. These differences were so great, across so many different issues, that the league essentially imploded on itself. This is not to necessarily suggest that the USFL could have survived even without these managerial issues, since the NFL by that point was a mature organization that presented formidable competition, regardless of the strength of the rival league. Since it has been almost 30 years since the demise of the USFL—and correspondingly since any of the Big Four has faced any type of competition—history would suggest that it is highly unlikely any rival leagues will ever emerge again. A lot has changed in the major professional sport industry since the USFL played its last game in 1985, none of it boding well for any future potential rival league. First, the simple progression of time works in favor of established leagues. In an industry that is selling elements like history, tradition, and loyalty, the mere passing of each year automatically adds value to the product being sold. The passing of time also increases the shared experience amongst owners in the established leagues, increasing tacit group knowledge and making it that much more diffi cult for a rival to gain a foothold. As the popularity of the established leagues and their member franchises continues to grow through time, with now decades of unfettered monopoly in all four leagues, these leagues have been able to rapidly grow their revenues. Technological advances have opened up new revenue sources over the past two decades, including satellite TV and online and new media. Thus, potential rival leagues in today’s market now face an even more dominant established league than ever before. Rival leagues of the past have been unable to generate short-run revenues anywhere near what the established leagues have been producing—if a rival league were to form today, these differences would be even larger, as the rapid growth in TV revenues, both in absolute terms, but even more importantly as a percentage of total revenues, gives established leagues a level of revenue that rival leagues cannot even come close to in the short run. This revenue growth means that players in the established league have a much higher MRP than they did 50 years ago. As well, players today have free agency rights—something which did not exist when any of the previous rival leagues operated—and hence earn a much higher percentage of their MRPs than did their coun- terparts from earlier eras. If, based on the experiences of past rival leagues, star players need at least a two- to threefold increase in salary to defect to the rival league in order to compensate for the increased risk they incur, star players of today would likely demand salaries in the range of $30–$80 million per year, depending on the sport. The thought that rival leagues could, or would, pay such salaries would not seem feasible, given the relatively low revenues such leagues generate in the short run. Thus, potential rival leagues operating in today’s market face a conundrum—to truly compete against the established league, they must bid at least some players away from that league. However, the salaries of these players in the established league are driven by the high level of revenues in that league—a level that the new league cannot hope to match in the short run. Inevitably, this combination of lower revenues and higher salaries will lead to large operating losses, something of course which many rival leagues in the past have experienced. 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues 111

The factors necessary for a rival league’s sustainability are interconnected in multiple and complex ways. For example, the long-run ability of a league to attract talent depends on its revenue generation potential. In turn, this revenue generation potential is impacted by how quickly teams and the league can develop fan awareness and brand loyalty and can maintain a level of franchise stability. These latter two are also linked—franchise instability makes fans more cautious about emotionally investing in a team or league, for fear that the team or league will be short-lived. Rival leagues of today would also face much greater diffi culties in fi nding suitable markets in which to locate and then, correspondingly, suitable stadiums within those markets. The geographic footprint of the established leagues now covers almost all of the major markets in the country, leaving few, if any, highly profi table markets that are unserved—a situation that many rival leagues of the past capitalized upon as established leagues were slow to expand. In addition, the sharp trend in established leagues towards privately owned facilities (albeit with high subsidization by government) effectively prevents access by the rival leagues to these state-of-the- art facilities, compared to the era of publicly owned facilities in the 1970s and 1980s. The issue is further complicated by the fact that new leagues face the challenge not only of producing a few strong franchises but of producing many strong franchises. Because of the nature of sports leagues, even a small group of weak franchises can be enough to cause a league’s demise. As in established leagues, an individual owner in a rival league is highly dependent on his/her fellow owners in the league—these externalities across franchises in a league require simultaneous success across several owners. There is a critical interlinkage amongst the clubs in any given league in that the willingness of fans to support a particular team is, in part, driven by the perceptions of the league within which the team plays. Thus, it becomes critical for most (if not all) teams in the league to exhibit sustainability. Leagues that can avoid constant franchise turnover are much more likely to have sustainability and to ultimately present the threat of real competition to the established league. However, even if all of these factors could somehow be addressed, any rival league must still overcome the problems associated with the complexities of league- level collective decision-making processes. These complexities emanate from the drastically different objectives that owners bring to the league and are something which past rival leagues, with the exception of the AFL, have been unable to overcome. Perhaps a “single-entity” structure, as pioneered by Major League Soccer (MLS), is an approach that any future rival leagues could benefi t from. In this type of structure, the league owns all franchises and generally assigns players to teams; each team is then “managed” (but not owned) by individuals, who are then compensated by the league for such management services. The potential advantage of the single-entity structure is that it could prevent some of the infi ghting amongst owners that has been lethal to many past rival leagues. However, the 2010 “American Needle ” case has brought into question the legalities of the single-entity structure, so uncertainty exists as to whether such structures might be viable options for future rival leagues. Despite these massive barriers facing potential rival leagues in today’s market, one should never completely dismiss the possibility of a rival league emerging in the future. In fact, since the demise of the USFL in 1985, there have been several rumors 112 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues of rival leagues forming, although none of these potential rivals ever got anywhere near the stage of actually beginning play. These potential rival leagues have often developed during labor disputes in the established league. In baseball, the idea of forming the so-called United Baseball League (UBL) was developed during the strike-shortened 1994 MLB season; it was to begin play in 1996, but the new league never got off the ground. In hockey, rumors of a “new” WHA emerged in 2005, as the NHL was in the midst of a lockout that resulted in the league cancelling the entire 2004–2005 season. Again, however, the rival never developed any further than the discussion stage. In football, Oakland Raiders owner Al Davis commented during the labor negotiations of 2006 that the NFL needed to reach an agreement with its players or risk the entry of a rival league.1 In hockey, “Research in Motion” (maker of the Blackberry) cofounder Jim Balsillie was often rumored in the media to be considering the formation of a rival league after he had been rejected (on numerous occasions) from buying an existing NHL franchise. However, Balsillie’s fortune shrank precipitously as “Research in Motion” shares plummeted, and any talk of a rival league quickly disappeared. Of the four major sports, basketball would actually seem to offer the greatest opportunity for a rival league to emerge. Roster sizes are relatively small (13 in the NBA and could be even smaller in a rival league), keeping payroll costs contained. As well, in basketball, much more so than other sports, team performance can be heavily infl uenced by one or two individuals, given that there are only fi ve players on the court at any given time. In fact, the NBA—in contrast to, say, the NFL—has long adopted a marketing strategy that has focused more on star players, rather than team brands. This would seem to provide a potential rival league with the opportunity to sign only a few star players from the established league and in the process generate signifi cant publicity and credibility, while fi lling most other roster sports with lesser-known, and less-expensive, players. In addition, a rival league in basketball has advantages over football with respect to fi nding suitable facilities. There are literally dozens of modern, state-of-the-art, arenas across the county that are unused by the NBA and that could serve as viable venues for a rival league franchise. In considering the possibility of future rival leagues emerging, one should also not underestimate the role of what could be termed the mega-wealthy individual. AFL founder Lamar Hunt had the advantage of coming from an extremely wealthy Texas oil family. In more recent times, the aforementioned Jim Balsillie had a net worth of $3.4 billion (according to Forbes ) at the height of his success in 2008. It was at this time that rumors of Balsillie forming a rival league emerged. To put Balsillie’s wealth at the time in perspective, his $3.4 billion net worth was almost 60 % of the aggregated value of all 30 of the NHL teams combined. Put another way, Balsillie had enough wealth to collectively buy, outright, 18 of the NHL’s teams. Even if the emergence of a credible rival league now seems highly unlikely, established leagues may still face some token competition in the input (players) market from non-North American leagues. This is particularly true in hockey, where

1 “El hombre Knows Sports: Al Davis to the Rescue?” CBSSportsline.com, March 9, 2006. 8 The Way Ahead: The Prospects for the Reemergence of Rival Leagues 113

Russia’s Kontinental League has successfully lured several NHL-caliber players to that league, including NHL star Ilya Kovalchuk. The same is also true, but to a somewhat lesser extent, in basketball, where several NBA-caliber players—none of which could be considered stars—have elected to play in one of the European leagues. However, the long-run ability of these foreign leagues to compete with North American leagues for players is still limited by the revenue-generating ability of these foreign leagues. The Kontinental League in Russia has benefi tted from several of its clubs being operated by Russian oligarchs who have invested large sums of money into the clubs (similar to what Russian Roman Abramovich has done in soccer with Chelsea in England), allowing these clubs to occasionally pay salaries that are competitive with the NHL. However, in the absence of this outside “benefac- tor” money, it is unlikely that the Kontinental League could ever generate enough revenues on its own merits to effectively compete with the NHL for players. This reduced revenue potential is largely due to Russia being a much less wealthy country than Canada and the United States, with consumer disposable income in Russia being markedly lower. In neither baseball nor football is there any real foreign competition for players. In baseball, while there are professional leagues in Asia that are of quite high quality, almost all of the movement of players has been from Asia to North America, with (MLB-quality) American players rarely going the other way. In football, while the NFL did face considerable competition for players during the 1950s from the Canadian Football League (CFL), the CFL has since become much more a minor league and no longer poses any threat to the NFL in the players’ market. In the end, there is little to suggest that the competitiveness of the major professional sport industry in North America will look much different in 10 years, or 20 years, than it does today. It seems highly unlikely that the monopoly position of the Big Four will ever be challenged again. This monopoly status is secured by the uniqueness of the spectator sport industry itself, where history, fan identifi cation and loyalty, and political infl uence only increase with the longevity of the established leagues. Perhaps most importantly, the closed league structure of North American leagues creates a scale effect, where entry into the market becomes indi- visible in that any rivals must enter as a group (league) and where the success of these rival leagues is determined in many ways, by their weakest members. Of course, the analysis in this book is far from the fi nal word on the issue. Our understanding of rival leagues, and their corresponding role in the competitive structure of the professional sport industry, can always be enhanced from further research. Such research, however, will, by necessity, generally be limited to qualitative assessments, as in this book, since the sample size of rival leagues is very small, thus precluding any type of rigorous econometric testing. References

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A Barry, Rick , 51, 92, 93 AAFC. See All American Football Conference Basketball Association of America (BAA) , (AAFC) 4, 14, 42–44, 47 ABA. See American Basketball Association Bassett, John , 28, 32, 34, 36–38, 100 (ABA) Bell, Bert , 103, 107 ABC TV , 31, 40 Bernhard, Berl , 28 ABL. See American Basketball League (ABL) Blanding, Ron , 27, 30–32, 100 Abramovich, Roman , 113 Brown, Paul , 43, 108 Adams, Bud , 48 Brown, Walter , 44 AFL. See American Football League (AFL) Buchanan, James , 58 African Americans , 42, 90, 108 Bullard, Fred , 32 All American Football Conference (AAFC) , 2, 14, 42, 43, 49, 68, 69, 72, 76, 81, 85–87, 90, 92, 93, 99, 102, 108 C American Basketball Association (ABA) , 2, 4, 5, Campbell, Clarence , 103 41, 51–55, 59, 73, 74, 76–79, 82, 83, Canadian Football League (CFL) , 15, 113 85–88, 90–93, 99, 100, 102–104, 108, 109 Canizaro, Joe , 31 American Basketball League (ABL), 4, 51 Cannon, Billy , 49, 92, 93 American Football League (AFL) , 2, 3, 5, 15, Causal ambiguity , 60 24–26, 28, 41, 47–53, 58, 59, 69, 70, Celler, Emanuel , 46 72, 75, 76, 85–87, 90, 92, 99, 100, 102, CFL. See Canadian Football League (CFL) 104, 107–109, 111, 112 Chamberlin, Wilt , 67, 91, 93 American League (AL) , 3, 42, 50, 112, 113 Clayton Act , 9 American Needle case , 111 Cleveland Browns , 2, 42, 43, 68, 69, 71, 73 Antitrust , 3, 6, 9, 10, 23, 37–39, 49, 50, 54, 59, Closed leagues , 18, 113 92, 108 Cohn, Roy , 37 Argovitz, Jerry , 32 Competitive balance , 11, 20, 21, 31 Arkey, Steve , 38 Continental League , 3–5, 49, 50, 59, 75, 84, AT&T , 9 86, 92, 103, 108 Csonka, Larry , 53, 87, 93

B BAA. See Basketball Association of America D (BAA) Davidson, Gary , 2, 4, 5, 51–53, 74, 75, 93, Balsillie, Jim , 112 100–102, 104, 109 Barriers to entry , 5, 40, 58, 81, 105 Davis, Al , 23, 104, 112

N. Longley, An Absence of Competition: The Sustained Competitive Advantage 117 of the Monopoly Sports Leagues, Sports Economics, Management and Policy 5, DOI 10.1007/978-1-4614-9485-0, © Springer Science+Business Media New York 2013 118 Index

DeBartolo, Edward, 32 Kiick, Jim , 53, 93 Dietrich, Ted , 28, 30 Knowledge-based resources , 61, 62, 66, Dixon, David , 25, 32, 101 95–104, 106 Dizney, Donald , 37 Kontinental Hockey League , 113 Dunavant, Billy , 35 Duncan, Walter , 27–29 L Landis, Kenesaw Mountain , 12 E Luxury tax , 20 Einhorn, Eddie , 35, 36, 38 English Premier League (EPL) , 14, 20 ESPN , 23, 24, 26, 27, 30, 38, 96, 104 M Extreme Football League (XFL) , 17 Major League Baseball (MLB) , 1, 3, 10, 18–21, 37, 45–47, 49–52, 55, 59, 75, 79, 84, 88, 92, 94, 108, 112 F Major League Soccer (MLS) , 111 Federal League , 3, 5 Malone, Moses , 51, 90, 93 Flutie, Doug , 24, 38, 93 Manges, Clinton , 32 Foss, Joe , 104 Marshall, George , 43, 46, 107 Free agency , 14, 21, 24, 91, 94, 110 Matthews, George , 28, 31 Frick, Ford, 103 McKinsey , 36 Messier, Mark , 54, 93 Microsoft , 10 G Mikan, George , 4, 101 Gretzky, Wayne , 54, 90, 93 MLB. See Major League Baseball (MLB) MLS. See Major League Soccer (MLS) Murchison, Clint , 48 H Murphy, Dennis , 51–53, 75 Harmon, Alan , 28, 31 Haywood, Spencer , 51, 93 Heisman Trophy winner , 2, 23, 33, 38, 49, 92 N Hierarchal structure , 97 Namath, Joe , 93 Hilton, Conrad , 48 National Basketball Association (NBA) , Hoffman, James , 32, 35 1, 2, 4, 5, 10, 14, 16, 18–20, 44, 47, Howe, Gordie , 53, 93 51–55, 59, 62, 67, 73, 74, 78, 82, 83, Howsam, Bob , 48, 50 87, 90–94, 102, 103, 109, 112, 113 Hull, Bobby , 4, 53, 91, 93 National Basketball League (NBL) , 4, 14, Hunt, Lamar , 46–48, 76, 104, 107, 112 42–44, 47 National Football League (NFL) , 1–5, 10, 11, 13–15, 17–20, 23–31, 33–39, I 42, 43, 46–50, 52, 53, 55, 58, Inimitability , 6, 60, 61, 65, 91 59, 67–75, 81, 82, 85, 87, Inter-team cooperation , 97, 102, 106 93, 94, 97, 100, 102–104, 107–110, Irving, Julius , 51, 93 112, 113 National Hockey Association (NHA) , 4 National Hockey League (NHL) , 1, 2, 5, 10, K 16, 18–20, 32, 42, 44, 51, 52, 55, 59, Kelly, Jim , 24, 33, 93 67, 74, 75, 77, 83, 84, 88–89, 90–94, Kennedy, Walter , 103 102, 103, 109, 112, 113 Index 119

National League (NL) , 3, 42, 45, 50 Supreme Court , 3, 9 NBA. See National Basketball Association Sustained competitive advantage , 6, 60–62, (NBA) 89, 95 NFL. See National Football League (NFL) 1958 NFL championship game , 107 NHA. See National Hockey Association T (NHA) Tacit knowledge , 62, 99, 107 NHL. See National Hockey League (NHL) Tanenbaum, Myles , 27, 30, 34, 36 NL. See National League (NL) Tatham, Bill , 32 Taube, Tad , 27, 30, 33–35, 37 Taubman, Alfred , 27, 30, 34, 36, 37 O Taylor, Lawrence , 33 Ohio Home State Savings Loan , 38 Territorial rights , 14, 20, 32, 43, 67 Oldenburg, William , 32, 35, 101 Trump, Donald , 3, 23, 24, 27, 32–38, 100 O’Malley, Walter , 46 Open leagues , 14, 18 Origer, Tom , 101, 104 U Original Six , 4, 74 Uncertainty of outcome , 11 Ownership turnover , 98, 108 United Baseball League (UBL) , 112 United Football League (UFL) , 17 United States Football League (USFL) , 1, 2, 7, P 23–40, 55, 59, 72, 74, 77, 79, 82, Paciﬁ c Coast Hockey League (PCHL) , 4 85–88, 89, 93, 96, 99–104, 109–111 Path dependency , 1 Usher, Harry , 37, 38, 40, 104 Podoloff, Maurice , 103 Property-based resources , 61, 62, 65–94, 105 W Walker, Herschel , 2–3, 23, 24, 28, 90, 93 R W a r ﬁ eld, Paul , 53, 93 RBT. See Resource-based theory (RBT) Warner, Marvin , 28, 30, 31, 36–38 Research in Motion , 112 Weiss, Sherwood , 35 Reserve clause , 3, 21, 91, 92, 94 Werblin, Sonny , 48, 70, 99 Resource-based theory (RBT) , 6, 59–61, 63 Western Canada Hockey League (WCHL) , 4 Revenue sharing , 13, 15, 19, 93, 103, 106, 109 WFL. See World Football League (WFL) Rickey, Branch , 3, 50 Wilson, Ralph , 48 Roulier, Jay , 38 Winter, Max , 48 Rozelle, Pete , 49, 103, 107, 109 Wirtz, Bill , 44 Rozier, Mike , 33, 93 Wismer, Harry , 48, 70, 99 Woolf, Bob , 102 World Football League (WFL) , 2, 5, 6, 25, 32, S 52, 53, 70–79, 85–88, 92–93, 99, 101, Salary cap , 13, 20, 30, 94, 97, 106 102, 104, 109 Sanderson, Derek , 53, 91, 93 World Hockey Association (WHA) , 2, 4, 5, Selig, Bud , 51 41, 53, 54, 59, 74, 75, 77, 78, 83–93, Shared-experience , 62, 63, 99, 106, 110 99–104, 108, 109, 112 Shea, William , 50 Sherman Act , 9 Simmons, Chet , 26, 30–35, 37, 96, 104 X Spedding, Doug , 32, 36 XFL. See Extreme Football League (XFL) Standard Oil monopoly , 9 Steinbrenner, George , 51 Stoneham, Horace , 46 Y Sullivan, Billy , 27, 48 Young, Logan , 32, 35