Monday, February 5, 2007

Deep Pockets: Determining the Real Value of Athletes

Two weeks ago I watched the New Orleans Saints play the Chicago Bears in an NFC Playoffs game. Although the Saints lost, 39-14, AOL sports describes the thrill watching “in a bit of dash and daring Reggie Bush took a short pass from Drew Brees in the third quarter and rocked, rolled and dismembered 88 yards for a touchdown." Adding insult to injury, Bush "turned and pointed at the nearest Bears defender as he neared the goal line and executed a perfect somersault into the end zone." Unfortunately, this type of bad behavior has become commonplace in professional sports today and is reminiscent of similar theatrics Bush performed when he led the USC Trojans to the national championship in 2005. Looking for bigger challenges and rewards, Bush passed up his senior season at USC and signed "a six-year contract with the Saints in 2006 that guarantees $26.3 million with a $51 million total." Shocked at these figures and Bush’s lackluster regular season statistics, sport critics proclaimed, "Saints and Madison Avenue have already made Bush a star and a millionaire many times over, it's time for him to earn it." But just like their counterparts in the entertainment fields, athletes’ salaries are determined by their unique skills, agents’ ingenuities, and values to their teams. Despite his detractors, Bush shows that extraordinary skills can command an expensive price tag that fans are more than willing to pay.

A professional athlete’s value is directly related to his ability to generate revenue for the team. It is completely unfair to compare an athlete’s salary to someone in the normal work force such as a teacher, engineer, or small businessman. All these jobs are essential for the welfare of the local community but they do not demand the extraordinary physical skills nor place the participants under the ever present scrutiny of the public eye as professional athletes. A popular career website notes “athletes continually push themselves, training year-round to perfect their game. Their careers are constantly in jeopardy as the probability of injury is high.” Besides the uncertainty in their jobs, the playing season robs players of a normal family life as they devote off playing times to constantly honing their physical skills and studying opponents. Even worse, they wind up spending more than half their time away from home as their team schedule requires periodically touring across the country. With this in mind, “all these factors, coupled with the very public nature of the job can quickly wear down an athlete's psyche and damage his or her personal life.”

Forbes.com lists the highest wage earner during 2006 as film mogul Steven Spielberg. At $322 million income, he “made the bulk of his cash from the sale of DreamWorks SKG's live-action business to Paramount." In comparison, sport’s top money maker was Tiger Woods, who "earned $58 million in career tournament winnings, $12 million more than his closest competitor. Add to that lucrative deals with blue chips like Nike, Accenture, General Motors and American Express, and it's no wonder golf's crown prince can afford playthings like his recent purchase of 155-foot yachts and a ten-acre oceanfront estate." While not many athletes can even hope of reaching the payroll heights of Tiger Woods, a dramatic shift in high end salaries from individual sports to team sports has occurred during the last decade. Forbes’s Kurt Badenhausen reports "the salary explosion in team sports means that basketball (14 entries) and baseball (13 entries) players now dominate the list of highest priced players. Overall, the 50 highest earners pulled in a combined $1.1 billion, 40% of which came from endorsements. The minimum to make the list was $15 million versus less than $5 million in 1994." Thus, if we compare the highest salaries of professional baseball and basketball players to entertainment and business leaders, sports salaries are not necessarily inflated. For example, USA Today lists the richest baseball franchise, New York Yankees, paying out more than $20 million apiece to Alex Rodriguez, Derek Jeter, and Jason Giambi. It is only a matter of time until the entire Yankee lineup will all be millionaires!

Michael Rice, a weblog baseball editor notes “it is impossible to pick up a newspaper sports section these days without reading how the New York Yankees are paying too much money for players and such deep pockets is bad for baseball." But he disagrees with these Yankee critics by showing that “ in 1977 the New York Yankees had a payroll of $3,474,325 out of a total league payroll of $23,854,375 (14.56%) while in 2003 the percentage had only risen to 15.71%." While one could claim the Yankees have historically overpaid their players, on a percentage basis the Yankees are simply keeping pace financially with opposing teams. A recent Harris Poll of 874 U.S. adults "found New York Yankees again on top as the country's favorite baseball team." Not surprisingly, MLB.com lists the three Yankee sluggers as leaders in statistical performance metrics (hits, RBIs, and home-runs). Due in a large part to their outstanding skills and fan popularity, Forbes magazine reports “The New York Yankees' value increased 17 percent in the past year to $1.2 billion." From this business perspective, their salaries are commensurate with other leaders in the entertainment industries who also are paid on performance. In a similar fashion, Forbes.com shows NBA’s former Lakers teammates Shaquille O’Neal and Kobe Bryant “commanding salaries of $31 million and $30 million respectively." With humor almost as large as his size, O’Neal accepted a salary cut this year so he could “address all of my family's long-term financial goals while allowing the Heat the ability to acquire those players that we need to win a championship." One can only wonder what kinds of children’s goals would require this much cash?

Even if sport salaries are in line with the entertainment and business industries, the general public is still alarmed that ticket prices are quickly becoming unaffordable to the general public. Sport’s commentator Mike Simmons warns that "corporations are scooping up tickets at high prices and writing off the costs as business expenses." These inflated priced tickets are hoarded as enticements to select customers and rewards for high performing employees. In addition, “they are simultaneously paying premium dollars to get stadium naming rights and advertising spots." Soon only the rich can afford to attend professional sports events while the rest of us watch the games on cable television.

One of the key reasons for professional athletes salary jumps with subsequent rises in ticket prices is the bidding war over free agents by wealthy owners. In this year’s most publicized international baseball bidding contest, CBS Sports reports "The Boston Red Sox emerged Tuesday night as winners of the bidding for Daisuke Matsuzaka with a $51.1-million US offer." When Boston season ticket holders receive their new price lists they may question who exactly is the winner from this bidding war? Football forecaster Neil Warner points out that over in the NFL the owners finally acceded to the players’ demand for free agency as long as they could "protect themselves from each other as a result of the bidding wars for players that they feared would follow." Today, MLB, NBA and NFL all have salary caps but ticket prices still seem to be rising without limit. Warner warns that “the salary cap has been shot full of holes, almost as many holes as the NBA’s cap." Clever club lawyers and unscrupulous owners make “the amount of money each club spends on player salaries bears little resemblance to the salary cap." Almost as tragic as the added burden on fans’ wallets is the impact on “above-average NFL veterans who have gradually worked their way into the middle of the salary range but are sacrificed in favor of cheaper, marginal players.” This financial solution appears to be a winner takes all approach.

For the 2006-07 season, InsideHoops.com states “The NBA salary cap for 2006-07 is officially $53.135 million, up $3.6 million from the previous season." In addition, the NBA has instituted a luxury tax threshold of $65.4 million and ESPN reports "Teams with payrolls over that will have to pay a dollar-for-dollar tax on the amount of their payroll that exceeds the $65 million. The resulting tax revenues will be handed over to poorer teams to financially balance the league and maintain parity in personnel. What ultimate affect this tax will have on future ticket prices and player salaries is unclear but the good news is that “it seems to be working. As it stands right now, only one team, the Knicks, are way over the luxury tax threshold." We can only hope that professional sports will not become a pastime for only the rich and famous.

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