Long read: The American Sports Plutocracy Is Bullshit

Billionaire population growth globally is at an all-time high. Whilst growing wealth inequality isn’t particularly great for society, many of the newly minted billionaires earned their stripes. Indeed, The Economist published an interesting piece on how for the first time, majority of billionaires have neither inherited their riches nor earned them primarily due to cronyism. The latter is debatable, but it manifests in places that makes even free market proponents think more favourably about socialism. One such place is sports. Over the years, we have featured pieces on the attractiveness of business models in sports such as the IPL. However, just when the FIFA President’s ill-thought idea of selling stakes in the football world cup franchise was forced to be abandoned, we saw the biggest deal ever in sports when Josh Kushner (brother of Donald Trump’s son-in-law) bought the Los Angeles Lakers basketball team for a staggering $12.5bn from another billionaire – Mark Walter. Derek Thompson writes about everything that’s wrong here. He begins by quoting the WSJ on the transaction:

“With his business empire under scrutiny from federal investigators, Mark Walter was on the hunt for cash when, out of nowhere, he was about to be offered an enormous pile of money …

Joshua Kushner, the chief executive of Thrive Capital, was reaching out with a potentially gigantic offer. All he wanted to know was, would Walter be willing to sell the Los Angeles Lakers?

Over the following days, they ironed out one of the most sudden and shocking deals in sports. By Wednesday, Kushner and former Disney chief executive Bob Iger had agreed to buy a controlling stake in the storied franchise at a $12.5 billion valuation, the highest price ever paid for any sports team.”

Then he has a bit of a rant about inequality: “In an age of surging wealth inequality, where stock market valuations routinely outpace median income growth by surreal factors, there is a live debate over whether billionaires should exist at all. The strongest argument for their rightfulness is that some people amass ten-figure wealth by building companies; by working within free markets to invent new technologies that millions or billions of people choose to use; and by managing complex enterprises that create billions or trillions of dollars in consumer welfare and investor value. But even this steelman case for billionaires presents as a kind of taunting insult to what often passes for sports ownership today. Professional-sports ownership offers the already-impossibly-rich a unique opportunity to become vastly richer, not necessarily by working, building, inventing, or doing anything positive at all, but rather by merely sitting on top of an asset that American law has conspired to make absurdly scarce and luridly profitable.”

Thompson then makes his point about why this is wrong: “Sports leagues are basically legal oligopolies: It’s perfectly legal to open the 31st grocery store or ice cream shop in your city. But you cannot declare yourself the 31st NBA franchise and join the NBA. The league’s existing owners control whether the NBA expands and who receives a franchise. Major sports leagues are de facto cartels with the power to block entry and competition. This artificial scarcity drives up the value of every existing franchise by insulating it from unwanted rivals who might apply market pressure.

What’s more, the league’s broadcast TV revenue is partly cartelized by law. Imagine if the major airlines made a deal to stop selling tickets independently and instead negotiated prices collectively, pooled the revenue, and split the proceeds among themselves. This would be textbook cartel behavior—coordination over competition—that might be struck down under the Sherman Act, or some other antitrust law. But the Sports Broadcasting Act of 1961 exempts professional sports leagues, such as the NBA, NFL, and MLB, from some features of antitrust litigation. Legal revenue-sharing agreements might sound like a form of corporate socialism, which benefits the poorest small-market teams. But they also create a revenue floor for every team, which protects franchise values from the risk of decline.

Thompson goes on to add aspects of player drafts, stadiums subsidised by local governments and favourable tax laws that make sports ownership a somewhat cronyist business.

He then argues against those who liken sports ownership to art: “…a Monet painting is valuable because it was painted by Claude Monet, a famous individual who once lived, and is now dead. The finality and scarcity of the Impressionist oeuvre—the fact that one can buy a painting from Monet’s Rouen Cathedral series and not worry that he will paint 100 more tomorrow—is a function of his mortality. There is no scientific or technological means by which anyone can exhume and reanimate Monet’s skeleton, sit the zombie upright in a chair, hand him a paintbrush, an easel, and a cup of tea, and say, “Now that you’re all settled, I’d like 500 additions to the Rouen Cathedral series.”

But the scarcity of sports franchises emerges from the laws of mankind, not the laws of nature. It benefits from a set of rules, laws, and customs that we made up and that can be redrawn in a way that Rouen’s facade never will be.

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