Baseball lessons

Last week, at a seminar organised by the Centre For The Study Of Financial Innovation, Prof Stefan Szymanski pointed out that David Beckham earns vastly less than his equivalent in major league baseball in the US.

By John Plender, FT.com 
Published: October 25 2004

I used to think that soccer was a business like investment banking, where the employees cream off the big returns and leave shareholders with the leavings from the table. Last week, at a seminar organised by the Centre For The Study Of Financial Innovation, Stefan Szymanski of Imperial College persuaded me otherwise. David Beckham, he pointed out, earns vastly less than his equivalent in major league baseball in the US. Rather, it is the structure of the UK business that makes it financially unrewarding.

Sports are unusual in business in that each team depends on the others to play the game. Without opponents, no team can produce anything. So a minimum of co-operation among teams is required. In US baseball the team owners have managed to ensure that there is always excess demand for franchises from economically viable cities. In a monopolistic system cities compete in granting public subsidies far in excess of the economic and social benefits generated by the team. In this closed system no team is ever relegated and the owners make big money.

Soccer is more open. Any UK city or town can play host to a team and the system of promotion and relegation operates rather like moral hazard. Fear of loss of revenue on relegation encourages soccer management to sign big cheques to improve the player squad. Yet investing in the player squad produces a much more uncertain return than investing in fixed assets in a conventional business. So soccer is a lousy business proposition.

Szymanski also enlightened me on soccer's failure to sweep the US. Americans, it seems, scorn the way weak teams can win by concentrating on defence, think it crazy that a third of games end in a tie and are shocked that stars such as Beckham are unpatriotic enough to play for foreign clubs and are traded like horsemeat.