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02/28/95

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Fans will decide outcome of baseball strike, sports economist says

STANFORD -- For once, baseball fans may get to cast the decisive vote. That, at least, is the prediction on how the baseball strike will end by Stanford sports economist Roger Noll.

The most likely scenario, Noll told an audience of about 50 on Monday, Feb. 27, is that the strike will end in May when it becomes clear how many fans are prepared to pay to watch replacement players. If the fans in each park number in "the low single-digit thousands," the players will win the strike; if the fan totals are around 10,000 per park, the owners will win.

Team owners in mid-size markets, including owners of the San Francisco Giants and the Oakland Athletics, have the most to lose or gain and are therefore the swing votes on the owners¹ side of the table.

Median-salary players, who can expect less than three more years of salary from baseball, could undermine the players' resolve to hang in for the long haul.

Noll, who has been a consultant to the players' union recently, placed the odds of winning at roughly 35 percent for the owners and 65 percent for the players.

Media sports coverage of the strike has emphasized the egos around the bargaining table, Noll said, but his lecture to the invited guests of the Stanford Center for Economic Policy Research focused on the economic rationality of the strike from both sides' points of view. Yes, owners and players have egos, he said, but one side or the other will fold "when it becomes apparent there are significant costs" to holding out.

Noll, who is the Morris M. Doyle Centennial Professor of Public Policy, has been an economist of professional sports since the early 1970s. A graduate of Cal Tech and Harvard, he played basketball in high school and college, and was recently ranked by Sporting News as the 93rd most influential person in sports - ahead of football color commentator John Madden. He has been a consultant to several players unions as well as sports team owners, the NCAA, the old U.S. Football League and even Nike, the athletic shoe giant.

Noll delights in puncturing myths about the sport, telling his audience Monday that the survival of the San Francisco Giants is far less important to the Bay Area's economy than the survival of Macy's department store in Stanford Shopping Center. Even though sports coverage consumes more space in newspapers than economic news, he said, baseball teams are relatively small businesses.

The strike that began last August, he said, is a result of league expansion over 30 years, which gradually diluted the power of the team owners in the largest markets, and a shift in the proportion of baseball revenue that is kept by each team rather than shared by teams within their leagues.

The relative growth of unshared revenue, such as local cable broadcast rights and concessions, prompted "an increasing gap between rich and poor,² Noll said. "We fans no longer buy [just] T-shirts. We buy $100 jackets, and that revenue is all kept by the team.²

Luxury box revenue has become a significant unshared source in the newer "full-entertainment" sports facilities, and a person who rents an apartment overlooking the outfield in the Toronto Blue Jays¹ stadium must also buy a season ticket for his or her balcony, according to Noll.

Eight baseball strikes in the past have been resolved in the players' favor, he said, but the majority of owners now have more financial incentive to hold out than in the past because, he estimates, they have more than $2 billion in potential increased profits - "in discounted, present-value terms" - to gain or give up to players' salaries over the next decade.

Long-time sports columnist Leonard Koppett, who was in the Stanford audience, said many people he knows in the sports world believe the money at stake is much higher because "over the next 10 to 15 years, sports revenue from TV is going to explode beyond what anybody can imagine." Noll agreed that $2 billion was a "conservative" estimate.

The players also have $2 billion in future earnings at stake, he said, but because of the short careers of the average, journeyman player, the union in general has a much shorter time horizon than the owners.

Why the strike is rational

Not resolving the strike last season was rational to both sides and it remains that way until some key event changes either side's view of the stakes, Noll said.

"The entire profitability of sports is in the play-offs for owners," Noll said, and the owners had net losses of $300 million from the 1994 season being cut short. That is roughly 15 percent of the $2 billion in future profits they stand to gain if they win their battle with the players, he said, which means that even if they feel they have only a 15 percent chance of ultimately winning, holding out is a calculated risk.

The players are paid on a per-game basis. They lost roughly one- third of last season's salaries, or about $300 million also. Since the stakes are also $2 billion for them, the union also feels it is worth holding out if it has a 15 percent chance of winning.

"That's a huge boundary in probability," Noll said, which makes the incentives low to resolve a strike.

The calculations are complicated, however, by the fact that not all players and all owners have equal stakes. Owners of major-market teams, in the past, have offered to give the other owners any player salary savings they could win at the bargaining table, but they forced a settlement on the smaller market owners when a strike threatened to last too long. The small cities now have a voting majority, so they can't be forced to fold as in the past.

Name players have more to lose and over a longer time frame than the median player, whose salary is $500,000 per year for a total career of 3.9 years, Noll said. Baseball is a pyramid with two to eight players per team who "will play as long as they walk.² But most players "get cut for purely economic reasons, not because their skills have deteriorated."

These shorter-term players do not see $2 billion on the table but rather that they stand to lose another season's salary, which - combined with the loss of one-third of the previous season - begins to approach half of all the earnings they expect to make from baseball. This is why owners of sporting teams find it relatively easy to "buy off" existing union members, in exchange for restrictions on future players, such as rookie drafts, and long lead times to free-agency.

Possible scenarios

Because it only takes about three weeks for players to get in shape to play full games, Noll said, no one feels the pressure to settle until about three weeks before the season is to begin in April. Postponing the start of the season is not nearly as expensive for the owners as it is to the players, who are paid for each season game.

Noll listed three future events that could possibly change one side or the other's assessments of the costs and benefits:

  • A National Labor Relations Board ruling, expected as early as next week, that is likely to say that the owners have committed an "unfair labor practice" by centralizing negotiation of players¹ salaries. The ruling could trigger some owners to switch sides and vote for a settlement, Noll said, but he thinks it is more likely they will hang together and, if the union wins an injunction, lock out the players.
  • The fans' decision to stay away or go to the parks when the season begins. "We don't know if 50 or 50,000 fans will show up," he said, but teams need about 12,000 fans per game to be profitable, including revenue from broadcasters, who, Noll believes, are likely to stop paying fees to the teams if the attendance is low. Cities, which get leasing revenue from teams, are also likely to feel pressure if attendance is small. Players have plans to field some of their own teams if they can find a place to play by June.
  • Players could also lose if a significant number of them cross the picket lines in early season, making it easier for the fans to return as well. Noll asked his Stanford audience of mostly economics faculty and students and Silicon Valley business people how many thought 10,000 fans would show up in April for a Giants game. Four people raised their hands, but one noted that weather is a discouraging factor in April.

"If at the end of April, there are 5,000 fans," Noll said, "the players will eventually win because the broadcast contracts and stadium leases will be canceled.

"The single most likely event is that there will be a settlement about the end of May and the players will win because I think the replacement player strategy won't work," he said.

If it does work, "the players will lose and the settlement will happen around the first of May," he predicted.

"It all turns on whether people go to see the word Giants or to see Barry Bonds."

-kpo-

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