SBJ/November 17 - 23, 2003/OpinionPrint All
The Winston-NASCAR relationship was something we will never see again.
For 33 years, R.J. Reynolds Tobacco Co. and its top brand were so much a part of stock car racing's Winston Cup Series that it was hard to tell where one started and the other left off. Their business interests were inseparable. RJR provided the money — hundreds of millions of dollars — that made it possible for NASCAR to become the No. 2 spectator sport in the nation. NASCAR provided a fervent fan base that repaid that sponsorship with consumer allegiance to a tobacco company.
The entities paired up at a fortuitous time, when each was facing hardships. Stock car racing was a regional, third-tier sport; RJR was swimming against an anti-tobacco tide. Each needed a boost, and they got it from the partnership that blossomed into three decades-plus of fresh ideas and creative marketing — building upgrades at tracks, show-car promotions, subsidies to lure other sponsors to racing and at-track tobacco sampling efforts. Winston was the first with promotions that are standard today.
R.J. Reynolds' sports role becomes almost nonexistent at the end of this NASCAR season, and its departure leaves more than memories. Its run with the Winston Cup Series says a lot about the value of sports as a marketing platform, about the way both sponsors and properties can benefit from relationships, and about the payoff from aggressive and creative strategies.
In more recent years, legal restrictions on tobacco advertising and sponsorship left Winston in a more restricted role. But despite that, RJR is leaving behind a powerful example of how sports marketing can work for mutual gain.
Most college, Olympic and professional sports governing bodies ban the use of certain performance-enhancing drugs by competitive athletes. Nevertheless, recent doping scandals evidence a willingness of some elite athletes to intentionally take prohibited substances to gain a competitive edge. These athletes risk severe sanctions and shame if caught but hope their usage of prohibited substances goes undetected and facilitates a winning performance.
Why place limits on a competitive athlete's ability to maximize his or her performance through sophisticated modern chemistry? After all, the objective of sport is superior performance and winning, which appeals to spectators and provides athletes with intangible and economic rewards. The best athletes, by virtue of superior genetics and internal physiology, already have a natural advantage. Moreover, some athletes have access to better nutrition, coaching and training facilities that provide a further competitive advantage. Yet sports governing bodies make no effort to level the playing field by regulating these factors. Clearly the controlling principle of competitive sports is athletic Darwinism, not socialism.
Sports governing bodies (and teams) unquestionably may prohibit usage of illegal recreational drugs that impair athletic performance.
But how can banning substances (including those legally available) in order to limit an athlete's maximum capabilities and performance be justified? The answer is simple. The essence of sport is that all participants must play by the same rules — even though all athletes are not created equal in terms of ability. Uniform rules are necessary to measure how athletes' unevenly distributed talents and skills translate into winning and losing. The 2003 World Anti-Doping Code states "[a]nti-doping rules, like competition rules, are sport rules governing the conditions under which sport is played," which athletes must accept as a condition of participation.
An athlete's use of banned performance-enhancing substances is by definition "cheating" that destroys competitive integrity. Just as important, these substances also are prohibited because of their adverse health effects. The Anti-Doping Code provides that a prohibited substance must satisfy at least two of these three criteria: 1) it enhances or has the potential to enhance sport performance; 2) it has an actual or potential health risk; or 3) it violates the spirit of sport. None of these criteria alone is sufficient reason for banning usage. For example, the first includes legitimate and well-accepted athletic training methods such as weight training, eating large quantities of red meat or carbohydrate loading.
Clearly there are inherent risks of injury assumed by athletes in most sports; in some competitive sports such as auto racing, death may occur during the ordinary course of competition. However, athletes using prohibited substances expose themselves to additional health risks — often of unknown magnitude — because of their off-field conduct. These risks are intensified by an athlete's real or imagined perception that competitors using banned drugs are gaining an advantage, thus creating psychological pressure to level the playing field by using the same or more powerful substances. This creates a dangerous escalating cycle of doping that harms the integrity of competition and athletes' health.
Although it is impossible to put the pharmaceutical genie back in the bottle, it is imperative that the fight against doping be continued rather than abandoned (as John Genzale advocates in his Nov. 3 column). The essence of sports is competition among individual athletes or teams, not competing manufacturers of the newest synthetic chemicals designed to artificially enhance athletic performance. For strong policy reasons, athletes must comply with the rules of the game to promote doping-free sport, maintain competitive integrity and protect their health — or be penalized for foul play.
Matt Mitten is director of the National Sports Law Institute at Marquette University Law School.
It is clear that even with a hard salary cap, the NHL would not solve its economic problems. Last year, the average team payroll was $45.8 million.
If the team cap were somehow set as low as $35 million, based on last year's payrolls, there were still 14 small-market teams with payrolls below this level. Thus, the cap would not help them become profitable if they are not already; it would only make some of the high-payroll teams more profitable.
Whatever the system of salary restraint that the league puts in place, the NHL also needs to introduce a significant degree of revenue sharing. Other than the revenue from its relatively small national television deals and licensing (approximately $6 million per team), no revenue in the NHL is shared.
While the commissioner's office appears to accept that revenue sharing is needed, its backgrounder report states that "increased revenue sharing in the absence of 'cost certainty' would serve only to reallocate the league's current level of financial loss — it would do nothing to reduce losses."
This statement is partly true, partly false. The league wants salary restraint together with revenue sharing. Fair enough. But revenue sharing by itself, as it is practiced in MLB and the NFL, does help to restrain salaries and to reduce losses or grow profits.
Why? Suppose each team pays a tax of 33 percent into a pool that is redistributed to low-revenue clubs. Now, suppose that the New York Rangers are thinking of signing Ilya Kovalchuk (imagine he is 11 years older and a free agent) and the team estimates that he would raise team revenue by $12 million.
Without a revenue-sharing tax, the team would be willing to pay Kovalchuk up to $12 million. With the tax, the net contribution of Kovalchuk is only $8 million and the Rangers' offer would be correspondingly reduced. Thus, revenue sharing based on team revenue decidedly does reduce salaries.
Further, to the extent that revenue sharing will balance the competition on the rink, fans will be more interested in the games and league revenue should grow. The NHL should rethink its position on revenue sharing. (There are superior ways to design revenue-sharing systems that will provide a greater boost to competitive balance than those practiced in MLB and the NFL, but that is a subject for another piece.)
The NHL players union also reportedly offered luxury taxes on high payrolls. The luxury tax in MLB's new agreement provided for teams with payrolls in 2003 above $117 million to pay a 17.5 percent tax.
This is a very low tax rate compared with the nominal rate of 100 percent for teams above the NBA payroll threshold — and even more so when compared with the effective luxury tax rate in the NBA, which can surpass 300 percent.
Yet the low rate set in MLB was sufficiently effective that only one team (the Yankees) surpassed the $117 million threshold in 2003. It is not clear why this happened, but it is likely that one of the reasons is that teams used the threshold as a hortatory budget limit.
The new MLB agreement, combining luxury taxes with revenue sharing and some new team debt limits, seems to have been rather effective in reversing the upward salary momentum in the labor market. Last winter, free-agent salaries fell some 16 percent. They appear headed down again this off-season.
MLB's system of parametric controls rather than a strict payroll limit has a number of advantages.
First, it preserves a significant degree of market determination of a player's value. There is, after all, no fairer method to value one's labor in a market economy.
It also gives owners more entrepreneurial leeway. They can always sign a player if they want to — they just have to pay more to do so. The system is based on incentives, not quotas.
Second, it avoids the byzantine system of cap exceptions and capology that creates a variety of distortions and headaches for the NBA, and, to a lesser extent, the NFL.
Third, it avoids having to define revenue. Since salary caps set payroll limits as a share of revenue, in cap systems the union has a right to certify that revenues are being properly reported.
This entails not only looking at team financial statements but also looking at financial statements of related businesses with overlapping ownership — and sometimes detailed financial ledgers. It can be, to be blunt, a can of worms.
Fourth, union politics and ideology make a salary cap extremely difficult to get to, even if these and other problems can be overcome.
The obvious choice, especially since the NHL commissioner's office says it is willing to consider systems of salary restraint other than a cap, is to bargain over the design and degree of revenue sharing, luxury tax and debt restriction policies. Perhaps new preferences for weak teams could be added to the draft system as well.
The sooner the two sides can do this, the better off the NHL will be. Not only will it give them more time to reach an agreement and more time to design the proper incentives into the system, but it will ensure present and prospective corporate sponsors that the hockey industry is on the right path.
Equally important, it will let the fans know that the game will go on uninterrupted.
The NHL faces enough serious challenges in the entertainment marketplace without adding more problems of its own making. Spending the next 10 months bluffing and posturing will not accomplish anything positive for either the owners or the players. It is time to start real bargaining in a spirit of cooperation.
Andrew Zimbalist is Robert A. Woods professor of economics at Smith College.
Editor's note: This is the second of two columns examining the NHL's collective-bargaining status. Last week: Sorting through the rhetoric. Today: Crafting a new agreement.
For the first time, SportsBusiness Journal and its sister publication, The Sports Business Daily, have combined forces to present one Executive of the Year Award. While we may be rushing the calendar a bit, we trust (and hope) that the last six weeks of 2003 will not mar the outstanding year our winner has had.
Our selection of Nike Chairman and CEO Phil Knight will please some and anger others. Knight and his behemoth company are admired by many for their influence and business acumen, but disliked by others as symbols for all that they think is wrong with sports. Often imitated, rarely equaled, Knight leads a global brand that is polarizing and controversial.
We come to praise Phil Knight. Our story details a man on the edge — on the edge of pop culture, consumer behavior, habits and taste — who is one of the most competitive and interesting managers of the modern era. He is a visionary who is constantly evolving, but he has remained true to one basic tenet that everyone in our business shares — a love of sports. Those who know him say Knight is driven by that feeling, and by the desire to serve the athlete.
The heavy-handed marketing machine, the labor issues, the Svengali-like influence over endorsers and the ubiquitous swoosh turn away many. But when we looked at 2003, one company, one brand, one man, stood apart in terms of accomplishment. It is for those achievements and successes — and for his support of sports — that we honor Phil Knight as our Executive of the Year.