Transcript

Dr Liam LentenDr Liam Lenten

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Matt Smith:

You're listening to the La Trobe University podcast. I'd be your host, Matt Smith. Good morning, good afternoon and good evening, it does all depend on where you're standing. Joining me today is Dr. Liam Lenten from the Department of Economics. Let's give him a big round of applause. Thank you for joining me today, Liam.

Liam Lenten:

Thank you for your time there.

Matt Smith:

So you're here to talk to me about sports economics. What's that all about?

Liam Lenten:

I guess if you line 100 sports economists up end to end and ask them what the three burning questions are, I'm sure you won't reach any consensus. But for the sake of trying to answer that question myself, if I could list three, I'd start with saying that labour economics or the angle within the sports industry is one of those burning questions. So that tries to get at issues such as why is it that some athletes get paid ludicrous amounts of money in some sports. Some of the figures that you probably heard of in the past is, let's say, where Michael Jordan was...

Matt Smith:

Ludicrous is a good word for it.

Liam Lenten:

Yes, exactly. Signed for $30 million back in the mid 1990's and occasionally even the pope of the Catholic Church has expressed disgust of the sorts of figures going around, so things like that. The second burning question can be thought of as one relating to public economics. Now at the moment, something that's very topical with reference from the Australian point of view is this proposed bid for Australia to host the 2018 FIFA World Cup.

So it's only in the early stages of its development. That could set the scene for a lot of this labour economic stuff in sports economics coming through in the media in the next couple of years. But we have seen this in the past. Soon after Sydney was announced as the Olympic host city in 1993, we had this huge debate in the Australian media for the following three years about, OK, now that we've got the Olympics, where is the money going to come from? What mix of it is going to be from government taxpayer sources on one hand and what proportion is going to come from private sources on the other hand? And with respect to the private sources, what form is that going to take.

Also with respect to the North American context there, they also had the same debate about bringing the team to town. And it's a well-known fact that those big pro sports leagues deliberately keep vacant cities and of course there are many cities in the US with a population of let's say a half a million or one million that don't really have a pro sports team in any of those leagues. And they're clamouring over each other, that is the city councils there or the city governments, as trying to outbid each other in order to bring the pro sports team to town. There's a lot of evidence to suggest that these things are uneconomical but there seems to be other stuff going on there. It's a matter of prestige to these cities to have the pro sports team in their town, even if it means incurring a loss.

Matt Smith:

When you say, "bring them to town," you don't mean just as a visit for a sporting event. You mean as a hometown.

Liam Lenten:

As a permanent base for those teams.

Matt Smith:

That would be big because they limit the amount of teams that can be in the competitions for a lot of sports.

Liam Lenten:

That's right. And then to that end it also makes it easier for them to cull teams that are unprofitable. In the Australian context, it's a little harder. I won't name many names but the AFL and NRL I'm sure would both love to take the axe to a couple of teams because they consider them as holding the financial development of the game back somewhat. But there are other things going on there of course as well.

So that's the second burning question and the third one relates to this notion of what we call competitive balance. That is a term that not many listeners may have been introduced to before. So what it really refers to is the evenness or otherwise of it could be applied to many things in sport, but it's usually in reference to team league sports. So for example in the AFL six different teams have won the Premiership in the last six years. In the NRL, it's eight different teams in the last eight years, effective of the end of 2008.

So this is actually quite a very high level of competitive balance. Now if you compare these leagues to some of the major European football leagues, it's a very different story. For example in the Scottish Premier League, only two teams, Rangers and Celtic, have won the title every single year since 1985. It's almost at the stage where you could bet your house that it's going to be one of those two teams who are going to win it, even before the season starts. In Spain's Primera Division it's a similar story. In the same time frame, Real Madrid and Barcelona have won all but I think three titles. And it's a pretty similar story now wherever you look in Europe.

Anyway, in terms of policies designed to even up the competition, this is where devices such as the draft, salary cap tend to come in, these are things that AFL fans will be well familiar with. Also, league revenue sharing, the TV money that comes out from leagues like the AFL and NRL tends to be split equally between the competing teams. So it mitigates the probability whereby the big teams in the leagues such as Brisbane Broncos or Collingwood or Adelaide Crows could dominate the competition on a perennial basis.

So that's what they can do. One of the reasons that I'm quite interested in sports economics is that you see a number of things that are actually counter intuitive to the economics discipline broadly. One such circumstance is how sports economists like to compare and contrast North America on one hand versus Europe on the other hand. And this is a standard thing that people who do industrial economics like to do anyway. But what we find generally, the mentality is that Europeans tend to be the regulators whereas North Americans, especially in the US, more so than Canada, tend to more believe in the operation of the free market economy.

But what we find in the sports industry is the exact opposite. It's actually the Europeans that really have, or the major football leagues of Europe, highly unregulated. There's not a lot of stuff around preventing players from moving from one team in one country to another team in another league and things like that, whereas in North America, there are lot of regulations in place. The idea of a draft and salary cap that had been taken up by the AFL and the NRL in the last 20 years had their origins in these North American sports. So we can think of sports economics in that sense as being as uneconomics.

Matt Smith:

So how is all this relevant that to what is going on in the sporting landscape at the moment?

Liam Lenten:

Well Matt, virtually every other day when I'm flicking through the major daily newspapers, I find something that can be related to one of these three burning questions or at least something else that's highly related to those things. Just this morning I was looking at the Australian newspaper and there's this story in there about how the NBL is in danger of losing the only Sydney team that's based there at the moment. The old Sydney Kings went the way of dodo birds due to financial difficulties at the end of last season. And what was the West Sydney Razorbacks who have now rebranded themselves as Sydney Spirit in order to try and capture the entire Sydney market are themselves now in danger of going under. Now if this happens it means that the biggest market in the whole country, that's Sydney, is in danger of not having a single NBL team for the first time since the leagues inception in 1979.

The NBL is kind of an interesting case because the glory days of the league were in the early to the mid 1990's, and it's very rare in the last generation or so to see a pro sports league go into financial decline. So we're not used to seeing this and it's interesting to see how the league is positioning themselves in a way to combat this. Unfortunately, it's not only Sydney that's experiencing difficulties but obviously the old Brisbane Bullets suffered a bit of a shakedown due to what was going on with their owner.

And yes, so there's a lot of positioning going around for territorial rights and this isn't just limited to the NBL but also the A-League, NRL and AFL as they try to optimize the spatial location of their teams around the country. The hot topic at the moment or the hot region is the Gold Coast. So the NRL put a team there in 2007 and so far it's proven to be a success. We have to remember that they put an unsuccessful franchise on the Gold Coast back in the late 80's which went under around about 10 years ago, but a lot of things have changed since then.

So the NRL were the first to get there but of course the NBL followed suit. The A-League has an intention of putting a new team there next season and of course the AFL had been looking at this for quite some time and have decided to expand at the Gold Coast themselves. The AFL situation is probably the most interesting case because the other leagues can probably put a team there and it needs a certain level of demand to survive. But whatever that level of demand is, you really have to multiply that by two or three in order for an AFL team to survive in that same market just because of the average size of all the other competing teams. The AFL just simply is a bigger league than these other leagues.

So yes, there's all sorts of territorial jockeying going on between those four leagues and it's a dynamic process. It's very difficult to see a situation where after a bit of rationalization, these leagues are just going to be simply happy with where all their teams are and that will never change. Some cities get bigger, we know the Gold Coast is growing very, very fast, same with Townsville and Cannes. Other cities like Hobart and Adelaide have not had experience quite the same rates of growth.

What else is topical in OZ at the moment? As in the entire cricketing world, the changing balance of power between Test Cricket on one hand. This is a form of the game that's been the preeminent form of the game for the last 130 years, versus this new phenomenon of Twenty20. And I really wish I could look into my crystal ball here and could see what would be going on in the next five years but, yeah, I have to admit I'm a bit of a traditionalist. So I really follow tests closely and I ignore Twenty20 completely, but it seems as if I'm in the minority these days. And if it turns out that that effect proliferates and that a lot of new people come into cricket because of Twenty20 and that's where the all the extra demand is coming from, well, eventually it's just going to get far too great for cricket administrators to ignore. And even for the players themselves who mostly regard Test Cricket as the ultimate form of the game. But of course their wages are directly related to demand. So eventually, it may be that they'll give up on that notion of Test being the ultimate form of the game.

Locally, on the AFL level, we see at the moment the Players' Association bargaining for the removal of some restrictions on player movements between teams. And that's a very reasonable claim. Certainly, what I find is that it never ceases to amaze me how much all of these competitive balance factors that we observe in sport can be related even to the higher education sector. So if I thought of myself as a pro player and then someone told me, "No, Liam." OK, I may be happy at La Trobe but "you could not move to another university." Well, I probably wouldn't be very happy about that.

So I can understand why the Players' Association is lobbying for this. From the fans point of view, we'd like to see that some of the better players that we admire in our teams will stay with those teams. Not that they'll be really willing to pick up and leave and move somewhere else willy-nilly. But yeah, you can understand why the Players' Association is arguing for this. It may have detrimental effects on competitive balance but that has to be weighed up against other factors as well.

And then I guess the final thing that I'll mention is the role of sport as an entertainment product. One of the nicest case studies of this was that in 1994, Hollywood experienced a bumper year and if you talk to film critics they'll tell you that it's not really because an extraordinarily large number of really, really good movies came in of Hollywood that year. Rather it was just because of this huge baseball player strike which meant that there was no baseball for a considerable number of months. And people simply shifted their expenditure on baseball to going out and seeing movies instead in the cinemas.

So that's a very important kind of case study because when it comes back to the stuff I was talking before on expenditure on new stadiums or new events. Often the proponents of that bid or that expenditure claim that if we spend this money on a new stadium that that's going to produce multiplier effects which then increase total expenditure in the economy by even more than that. Now the antagonists on the other hand will say, "No, that's not going to happen. Rather, all it's going to succeed in doing is shift or substitute expenditure away from other businesses and other forms of entertainment. So you really have a very healthy debate on that one.

Matt Smith:

So do you use sports economics outside of the office?

Liam Lenten:

Yeah. Unfortunately, Matt, my job doesn't stop when I leave the office. But I always find that one to be a plus. Again, it never ceases to amaze me how often I meet people and obviously when I tell them I work as a senior lecturer at a university in economics, their eyes glaze over initially. But then when I start to tell them about how I'm doing a lot of my research in sports economics, and then often over the next half an hour I can, like in this podcast, I can get them to appreciate some economic concepts without them truly realizing that they've learned some economics.

Matt Smith:

Like stealth teaching.

Liam Lenten:

Yeah, kind of. That's not my intention. That's just what I like to talk about over a couple of beers. But yeah, it never seems to bore a lot of people, unless of course they're not into sports. But even on those occasions, most people can appreciate those subtle intricacies of the sports industry even if they don't really follow sport themselves. So to that end, I'm really happy to be researching in it. And even in my PhD which I submitted a few years back was on models of exchange rate determination, I'm not really interested in that anymore at all.

Matt Smith:

Dr. Liam Lenten, thank you for your time today.

Liam Lenten:

Thank you very much for your time Matt.

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