If A Lockout Befalls A League And No One Hears It Then Does It Not Make A Sound?

            After the devastating impact that Hurricane Sandy had on both New York and New Jersey, the NBA canceled the game between the Brooklyn Nets and New York Knicks despite being the first regular season contest at the new Barclays Center. This is now the second year the NBA has had to cancel at least one regular season game. Last year’s lockout forced the NBA to play a 66-game schedule (as supposed to the standard 82-game schedule). The NFL also considered canceling games last year during its lockout and ended up reducing its pre-season schedule by two contests.

           One thing that the NFL and NBA had in common was that it was difficult not hear about each lockout on a frequent basis. Almost everyday there was “news” about the current state of the negotiations, who was “winning” the lockout public relations battle, and when the players would return to their teams. In fact, the extensive coverage has been cited as one reason that overall attendance, ratings, and interest either matched or exceeded levels the year before the lockouts occurred in both leagues. In fact, one could argue that these lockouts actually were beneficial for the leagues as they brought increased attention to the NFL and NBA at times when audiences are traditionally focused on other sports.

            However, this argument does not appear to apply to the NHL even though its lockout shares many similarities with both the NFL and NBA. The issues that separate the owners and players are very similar the ones that caused the NFL and NBA lockouts – mainly how do the leagues divide its revenues. Currently, the NHL players receive 57% of all hockey related revenue and the owners have proposed that the players receive only 50% of the revenues. Also similar to the NFL and NBA, attendance, ratings, and revenues have increased consistently on annual basis over the past five years before the lockout. In addition to signing a 10-year $2 billion extension NBC Sports, the NHL had signed new multimillion dollar sponsorship deals with companies like MillerCoors and Tim Hortons to new lucrative new deals (the MillerCoors deal is still working its way through the courts after a suit filed by Labatt’s). Similar to NBA players, many top NHL players have agreed to play in other overseas leagues while lockout negotiations occur.

            Despite its similarities to the NFL and NBA, the NHL has not received the same coverage and attention as compared other leagues even though this lockout has already had a much greater impact on its season. The league has announced it has canceled all games through the end of November, and it is considering both canceling The Winter Classic and The NHL All-Star Game. It is increasingly likely that the entire 2012-13 will be canceled as well.

            And, yet, relatively few people seem to care. Headlines like “Fan Take: Hard to Care About NHL Lockout This Time Around” showcase one of the two dominant memes about the work stoppage. The first one is that NHL fans do not care because NHL lockouts occur so frequently. This is the second lockout in less than a decade and the fourth since 1992. As Zac Wassink states, worrying about NHL work stoppage is “like complaining about being hot in summer and cold in winter: You know what's coming, there's nothing you can do about it.” With so many teams in the NHL still losing millions of dollars on annual basis despite significant changes in revenue distributions and player salaries after the 2004-05 season, Wassink’s analysis makes a lot of sense. There have been so many NHL lockouts that fewer fans will care when each subsequent one does occur.

            Yet, the other meme is the one that should frighten the NHL. This one suggests it is likely that people do not care about the lockout because they are no longer paying attention to the NHL at all. There are so many more options for fans, media, and sponsors to choose from for their sporting dollar than ever before. The NHL directly competes with the NFL, NBA, and MLB during various different times in its season in addition to competition from collegiate and high school sports. This does not even account for other entertainment options that are competing for NHL audiences like movies, television, restaurants, museums, etc. 

The increase in competition poses a significant challenge to the NHL because its teams require committed fans that will to attend games to be successful. A recent Forbes article highlights the fact that the average NHL teams rely on in-game dollars for 50% of their annual revenues while the average teams in the NFL, NBA, or MLB rely on in-game attendance for no more than 33% of its annual revenue. After the 2004-05 lockout, the league rebounded because the “the fans came back in droves. During the 2005-06 season 25 of the 30 teams had an increase in attendance from the 2003-04 season. Moreover, the average cost (tickets, concessions, parking, etc.) for a family of four rose from $256 in 2003-04, to $283 at the start of the 2007-08 campaign. The latest figures from Team Marketing Report, for 2011, show the average cost at $329, a 29% increase since the season before the 2004-05 lockout.”

The NHL is betting that these per cap dollar trends will occur after the current lockout ends. This may not be the case as the sports environment is different now than it was in 2004-05. If the NHL lockout continues then it becomes increasingly unlikely that its teams with fail to hear the number of cheers echoing through its arenas as occurred before the lockout. And that it is noise the NHL cannot afford to stifle.    

Crowdsourcing Decision Making In Sports

            Most people consider the Constitution of the United States as one of the foundations of modern democracy. Yet, a document starting with “We the People…” was not actually created by a wide number or variety of people. In fact, one of the most common critiques of the Constitution is that it was drafted, debated and voted on by a relatively small number of rich white males. It would seem impossible for the Constitution to be written by such a small and non-diverse group of people it were created today.

In fact, Iceland has taken an entirely different approach with its new consitution. Iceland decided to rewrite its constitution after catastrophic results to its banking and political system during the 2008 financial and economic crisis. Rather than having a Constitutional Council write a document on solely on its own, Iceland decided to take “to the Internet to raise ideas and provisions from the public. A first draft was made available online in April 2011 and citizens could comment through a Facebook page. The council also remained open about decision-making posting status updates to Twitter and videos on YouTube.” In essence, Iceland decided to crowdsource its constitution by allowing citizens to provide feedback and comments to the document. Not only did the council obtain some good ideas for revisions to the Constitution but it also allowed the citizens to “buy-in” into the document. Half of Iceland’s citizens participated in the process and two-thirds agreed that using a “crowdsourced document as the frame for the new constitution” was a good idea.

            This is maybe an interesting case study in direct democracy, but how does it apply to sports? There are two main applications of crowdsourcing to the sports industry. Sports organizations often operate as top-down organizations. This means that senior managers make decisions often with limited input for more junior employees. Using crowdsourcing techniques like collective decision markets allows employees to propose and vote on initiatives that sports organization can pursue during the course of a season or fiscal year. Because employees have buy-in (they proposed the ideas) then they are more likely to support these initiatives and have higher job satisfaction.

            Crowdsourcing and collective decision making does not have to stop for strategic initiatives typically found on the business side of a sports organization. The ultimate application of crowdsourcing concepts in sports would be to allow an organization’s different audiences (such as fans, media, sponsors, and employees) to vote on certain types of front office, coaching, and player personnel decisions. In particular, crowdsourcing can be used as component for decisions that come with predictions of future performance (such as draft picks or free agent signings).

This may seem like a completely farfetched idea. Why would any team allow people with varying degrees of expertise in sports to have input on these types of decisions? One only has to listen to a local radio sports show or read some Tweets or Facebook posts to see how bizarre some recommendations may be. In addition, organizations pay millions of dollars to general managers, coaches, scouts, and recruiters to identify and evaluate the best talent for their teams.

Yet, books like The Wisdom of Crowds by James Surowiecki and The Signal and the Noise: Why So Many Predictions Fail-but Some Don't by Nate Silver highlight scientific studies that show how using the average predictions of groups of people making independent forecasts are better predictors future performance than those of individual experts in areas ranging from economics to guessing the weight of an ox. Both Surowiecki and Silver identify two main causes of error in experts’ predictions. The first is that experts are overconfident in their predicative abilities and often overfit their models to a particular data set or not account for how new information can impact their predictions. Second, experts in fields often follow localized “herd” mentality. Rather than making independent predictions, managers will follow other managers’ behavior because it is harder to be blamed or lose your job if you are following industry standards. The book and movie Moneyball showed how difficult it was for Billy Beane to think differently. He used certain types of quantitative analyses to evaluate players that clearly would improve the Oakland A’s chances of winning games but was originally considered a pariah in Major League Baseball because no else was employing these techniques.

            This does not mean the scouting and background knowledge are not critical to the evaluation process. Silver points out that Beane has actually spent more money on scouting since Moneyball was published. It is absolutely critical to obtain as much information as possible to make informed decisions. Yet, the evidence supports that a sports organization could be better served to follow a process similar to what the Icelandic government did with its constitution. It could provide its fans, media, sponsors, and employees with opportunities to evaluate players using its information generated by the organization and allow people to vote on whom the organization should select, sign, or draft. Using this approach could allow sports organizations to avoid the two most common errors that can cause inaccurate forecasting.

            How a team uses this crowdsourcing information would have to be determined by the individual sports organization (i.e. a team would not have to sign a player because the collective decision market says this is what is should do). Yet, it would be difficult to argue that an organization’s core audiences would not be more invested in a team if it had some real or perceived ability to influence a team’s decision making process. By having this buy-in, it would make it more likely that these audience members would buy more products and service offerings like tickets, merchandise, and sponsorship because they are a part of the process. If crowdsourcing could work for something as important as writing a constitution then it could be successful for something only a little less important – deciding which general manager, coaches, and players one’s favorite team signs or hires. 

Clarifying The Benefits Of Trading

            In his article “The True Cost of Winning in the MLB”, Grantland’s Michael Bertin tries to debunk a claim that the Oakland A’s “spend less than any other MLB team per win” because the metric used to support this claim is faulty. Or he sort of does. Actually, the article seems more like the end of Fight Club where a hallucinogenic Ed Norton is arguing with himself (with the other “version” of himself being played by Brad Pitt). Bertin first goes on to say that payrolls at the beginning of the year often do not match payrolls at the end of the year. He uses the Houston Astros and the Boston Red Sox as examples of teams that dumped a significant amount of salary through late season trades. These examples shows how it is hard to calculate how much teams pay per win because who is on these teams can change throughout the year. However, he later states that team’s effective salaries remain constant. Both the Astros and Red Sox actually ended up having to pay much of the salaries of the traded players. Therefore, a team’s Opening Day salary could be used to calculate the cost per wins because they often are responsible for contracts even after trading players. Yes, we are as confused typing these sentences as you are by reading them.

            Yet, this was not the most head-scratching part of the article. Bertin also states, “You can't do much to effect revenue in season, so why would you want to wildly increase costs by taking on more salary? You can't raise ticket prices mid-season. Even adding players in August won't impact attendance that much (if you're in a playoff race, you're probably already drawing well; if not, you're not)... By two-thirds of the way through the season, a team isn't finding more money in an old shoe box (unless Carl Pohlad left behind some boxes somewhere).”

While these statements are somewhat easier to understand than his cost per wins logic, Bertin’s argument here is actually a little more difficult take. First, he completely discounts the efforts made by a team’s ticket sales and marketing professionals, who make up a large portion of an organization’s business operations staff, throughout the course of the season. According to Bertin, teams are essentially paying these people to do nothing because ticket sales are totally dependent on if a team is in a playoff race or not. Second, he discounts any impact that dynamic ticket pricing would have on a team’s ticket sales. Dynamic ticket pricing allows teams to adjust ticket prices based on factors like if the team adds new players from a trade. In fact, adjusting for changing circumstances is the whole point of dynamic ticket pricing. Third, a team trading for players will likely increase jersey / merchandise sales. This means there is a larger amount of new merchandise revenue available for an organization even if it has to split the money with all 30 other teams per Major League Baseball’s revenue sharing agreements.

             Ironicaly, Bertin’s comments represent an old way of thinking about off the field success even as he examining a relatively new metric for measuring on the field success. Sports managers and decision makers should not (and most do not) allow their teams to stand idle if there are ways to increase revenue during the season. While this does not always mean that teams should trade for more expensive players, it can mean that organizations can make trades to enhance a team’s bottom line.   

What Presidential Debates Actually Have To Do With Sports

There is one thing that both Republicans and Democrats can probably agree on when it comes to presidential debates – there is an over abundance of sports metaphors and clichés used both by candidates and commentators. Debates are typically described with “winners and losers”, “which candidate takes the lead”, and who “scores the most points”. Candidates “practice” for debates with “coaches” and “coordinators”. Because President Barack Obama is a well-known basketball fan, many pundits described his performance last night with comments like, “President Obama engaged in a four corners basketball strategy and tried to run out the debate clock.”

Despite the overuse of sports imagery when it comes to Presidential debates, the candidates actually did discuss issues that are highly relevant and topical to the sports industry. A significant portion of the debate centered on Medicaid, Medicare, Social Security, and the Affordable Healthcare Act. In particular, the Medicare and Social Security debate have the strongest parallels to the healthcare issues currently being discussed in the sports industry. These programs have functioned like a defined benefit plan typical to traditional pension plans. Many people ages 65 or older receive certain guaranteed benefits based on their income levels and need for healthcare services. The combination of these programs covers a large majority (if not all) of these healthcare costs. Obama wants to largely keep the same system that exists now for Medicare and Social Security in place while reducing the costs that the government pays to service providers. Romney, using a similar version of the plan articulated by his candidate for Vice President Paul Ryan, wants to start changing Medicare by adding with what is commonly known has a voucher system. In this version of defined contribution plan, the government would provide senior citizens with a certain amount of money through a voucher and allow people to choose how they want to spend their money.

This is almost the exact same issue that was at the center of the National Football League’s lockout of its referees. Essentially, the referees wanted to continue a defined benefit plan that would be similar to how Medicare currently functions. The NFL would pay referees’ pensions at a certain levels given their ages and years of service to the league. The NFL wanted to move to a defined contribution plan that would work more like the voucher system. Essentially, the NFL would make smaller contributions but allow the referees the chance to pursue their own strategies for their retirement investments. The NFL and its referees agreed to a hybrid approach in which all referees employed by the NFL before 2017 would have a defined benefit plan. All referees employed after 2017 will have a defined contribution plan.

While the regular NFL referees returning to work may have grabbed the most headlines, there is potentially a much more important development on the sports pension / healthcare front that could reshape the entire sports industry. The state of California recently passed legislation for college athletes who suffer serious or career-ending injuries that “requires the universities to pay future medical costs for on-the-field injuries… They also will have to cover insurance deductibles and pay health care premiums for low-income athletes, among other provisions.”

There is little doubt that financially supporting athletes who suffer career-ending injuries while playing sports is morally and ethically the right thing to do. The real question has always been whether this is economically feasible or sustainable. Supporters say this is feasible because this legislation only applies to schools with $10 million in media revenues. Yet, even these schools are struggling to keep athletic programs from being eliminated. For example, the University of California, Berkeley, which makes more than $10 million in media revenue, has eliminated sports programs all together because of a lack of funding. In addition, unfunded pension liabilities are crippling both the public and private sectors. State governments face massive budget shortfalls because of their unfunded pension liabilities (i.e. they do not have the money to pay the benefits that were promised to government workers) while one of the major causes of the bankruptcies of General Motors was the pensions payments that needed to be made to its retired workers.

It is worth paying attention to the impact of California’s new legislation has on these schools. In particular, will these new costs cripple athletic departments and/or cause more programs within athletic departments to be eliminated. In addition, this new legislation may spur other states to pass similar bills. Former athletes are much more likely to have significant healthcare costs after their careers than the average person of the same age. This means they often are the type of person that is the most expensive for health insurance companies and government supported healthcare programs. More and more state governments may want to transfer these costs back to these colleges and universities, particularly private institutions, to help reduce their own liabilities when it comes to healthcare.      

The only thing that we know for certain is that most organizations are really just beginning to deal with the health care crisis in the sports industry. It will be interesting to see how the debate and policies in the public sector shape the future of the sports industry on these issues.