Pearlstein: It's Time to Break the NFL's Monopolies
Wednesday, October 21, 2009; 10:00 AM
Washington Post business columnist Steven Pearlstein was online Wednesday, October 21 at 10:00 a.m. ET to discuss Supreme Court case involving the NFL and its continuing attempts to expand its antitrust exemption, which allows teams like the Redskins to do well financially even while the team is playing poorly.
Read today's column: Trust-Busting the NFL.
A transcript follows.
Chicago, Ill.: I'm not at all familiar with the specifics of the trust concessions for major sports, such as baseball and football, but what responsibilities do these leagues have to congressional oversight? Shouldn't there be more attention paid to the business practices of a legal monopoly than there is to any other industry? It seems like congress is not interested in anything but purely cosmetic regulation of sports, and only steps in to ask questions about visible and politicized issues like steroid use while ignoring larger long-term issues like public stadium financing and ticket price increases. If sports are important enough to our national character to be allowed to remain monopolies by our government, the people should have more of a say over how those sports operate as a business entity. As it is, major sports are being increasingly monetized at the expense of the average fan.
Steven Pearlstein: They are not official monopolies. But they have been allowed to become monopolies over the years by the public, first and foremost, and by the government. Let me explain.
The public, meaning the fans, actually likes the fact that there is only one league. Its easier to think about, it means there is a clear path to having a national champion, etc. So it is a natural monopoly in that respect. We used to have American and National Leagues, competing, in baseball and football, but they gradually got together, to the point that these are now really only ways to divide the leagues for scheduling purposes (yes, I know, American League pitchers don't bat, etc.).
Legally, the leagues are a creation of the individual teams, which are individual businesses. The antitrust law allows these independent businesses to get together in a League to coordinate things that make the whole enterprise possible, like setting rules and scheduling games, etc. From an antitrust standpoint, these are perfectly benign.
But over the years, the Leagues have gradually become much more active in other ways. It required an act of Congress for the NFL to negotiate a single national television contract, which wouldn't have been necessary if the antitrust law hadn't stood in the way. Baseball got an exception for negotiating with the labor union in the wake of the Curt Flood decision. Things like that. Again, the feeling was that these were exceptions to the general rule that the teams should compete for talent and capital and fans in other ways, particularly when they are in the same or adjascent cities.
But now the Leagues want to have what amounts to a blanket exemption from the antitrust laws in all of their "core" functions, which turns out to be just about everything that you'd care about -- in effect, to act like a single business entity rather than a collection of independent businesses that cooperate sometimes but compete at other times.
Allen, Texas: It would not be a stretch to regard the structure of the NFL as a "socialist system"- why do you suppose it has never been accused of this by free marketeers? Too successful?
Steven Pearlstein: It is a socialist enterprise, run by and for the major internaal constituencies, which is the owners, first, and then the players. They work together to use their monopoly power to extract monopoly rents, and then fight like cats and dogs to split up the booty.
Atlanta, Ga.: Steven
What do you make of the current exclusivity arrangement the NFL has with DirecTV to broadcast games? I find that DirecTV will not sell its 'Sunday Ticket' package unless one also purchases a base programming package. I don't feel receiving NFL games on cable is a God-given right, but do feel the NFL is employing monopolistic practices by not opening up the Sunday Ticket to other cable/satellite carriers. When might that arrangement end? Thanks.
Steven Pearlstein: Right now they are using DirecTV as the instrument for extending their football monopoly to the distribution of games on video. They have made it clear, however, that they want to own the distribution channel themselves and now share their monopoly profits with DirecTV. That is their ultimate game plan, which by the way won't include a free, over-the-air broadcast of local team games on local television, unless they are forced to do so.
Fort Worth, Tex.: Seriously? The NFL? We're watching the Treasury and the Fed cozying up as never before to Wall Street and you're worried about the NFL? Not sure what your future plans are Steven, but I wouldn't count on another Pulitzer.
Steven Pearlstein: I like to call out selfish rent-seeking wherever I find it. If you've read the column with any regularity, you would know that there have been 99 columns on Wall Street for every one about something like the NFL.
Richmond, Va.: My goodness....is there nothing you don't want the government's hand in?
Please explain why the government should have anything to do with sports?
Steven Pearlstein: They should simply enforce the same antitrust law on sports teams that they enforce on every other business and business joint venture. I guess you'd repeal the Sherman Antitrust Act, then?
Dan Snyder's guest house, Md.: Ah yes, the drunks at the games and TV timeouts are definitely Snyder's fault, as is the war in Afghanistan, and the small size of everyone's 401k.
On topic, how is what the NFL asking for different from MLB's antitrust exemption? MLB has been unable to suppress free agency and dictate other economic terms as you predict the NFL will.
Steven Pearlstein: This case isn't just about the NFL asking for something. It's about ALL the leagues asking for something, since what is decided in this case will apply to all leagues and, frankly, to lots of other joint ventures set up by companies that are supposed to compete against each other.
College Park, Md.: What is the probability that the Court will use the American Needle case to overturn its rulings in Flood v. Kuhn, Toolson v. Yankees, and Federal Baseball Club v. National League?
Steven Pearlstein: Well, that is essentially what the leagues are asking for, to allowed to act as a single entity in doing what businesses do in virtually all of the business activities in which baseball teams now engage. That doesn't mean the owners will hand everything over to the League. But it will allow them to collude on anything that increase their profits, which probably means at the expenses of either their employees or their customers.
Not an inferior product: The NFL trust may be a monopoly, but compared to the other big sports leagues, it produces a superior product. From a gambling perspective, these 17 weeks of clock-work like upsets and human interest story lines are pure manna from heaven. It's easier to predict the stock market than to predict an NFL week.
Steven Pearlstein: I agree that, generally, the NFL collectively produces a good product. But what signals that it is something other than fully competitive is that even consistently lousy teams in major markets can make a ton of money and increase in value even when the "product" is inferior.
Washington, D.C.: I understand the antitrust exemption is based on a Supreme Court decision from the 1920's to the effect that staging an exhibition of baseball skills is not interstate commerce. Essentially the court said that virtually no one is going to cross state liners to see a baseball game, for gosh sakes.
In the 21st century this is way out of date. Can't some clever lawyer get this revisited?
Steven Pearlstein: No, you're way off base and out of date on the law here. I'm not a lawyer, but this has to due with the antitrust law and how it applies to collusive activities of independent businesses that compete in other ways. There is now a "rule of reason" analysis required under Section 1 of the Sherman Act to determine if a certain cooperative activity does or does not reduce competition and harm consumers, when weighed against the benefits. The benefits in many cases have to do with efficiencies, or cost savings, which in a competitive market are then passed on to consumers in large part. But because each sport is really its own market and there is only one league in each market, the benefits of efficiencies AREN'T passed on to consumers. They are retained by the leagues and the member teams, which divide them between the owners and the players.
Bowie, Md.: First, the Redskins don't even have a monopoly on professional football in my neighborhood. (Lots of kids wearing purple numbers 5 and 52.)
Second, it's not that hard to alter my market basket for sports entertainment -- college football, baseball, basketball and hockey have seasons overlapping all or part of the NFL's.
Third, this isn't exactly Standard Oil monopolizing the retail gasoline industry. A jury determined in 1986 that the NFL's monopoly is worth exactly three dollars.
Steven Pearlstein: You give what is always the standard industry defense, that the real market isn't just football, but all entertainment (or, in the case of Whole Foods, it isn't high-end organic food, but all food), and since baseball and hockey are viable "substitutes" for watching or rooting for football, then you have to consider the relevant market as all sports or even all entertainment. As the courts have repeatedly found, that's just a crock. I know it. You know it. The fans know it. They are not anything close to perfect substitutes for each other.
Washington, D.C. : Hello Mr. Pearlstein, Where do you come down on the issue of draft exclusion? More specifically, is it fair that a class of individuals are automatically excluded from the NFL Draft without even having a seat at the collective bargaining negotiation table (e.g., athletes like Maurice Clarett and Mike Williams, who were barred from entering the Draft for not being 3 years removed from high school)?
Steven Pearlstein: Well, this is one of those areas where you would get a lot of debate on whether the collusion involved (agreeing not to compete for athletes that haven't graduated from college, say) is really anti-competitive, or whether it serves a larger social purpose and actually controls a destructive type of competition known colloqually as an "arms race" or a "race to the bottom" that, in effect, doesn't hurt consumers. I'd say in this case it falls in the latter category, and is a legitimate function of the league, just like setting schedules and the rules of the game.
Washington, D.C.: Let's discuss the real issue here: If Congress can explicitly grant the NFL an antitrust exemption, it can also explicitly withhold that exemption for certain D.C.-based teams that can't even score 20 points per game.
The heck with waiting around to fire Jim Zorn -- let's attack the root cause of the problem and have Congress fire Dan Snyder!
Steven Pearlstein: Funny.
Washington, D.C.: Doesn't the NFL compete with other sports for fans?
Steven Pearlstein: Only up to a point.
Washington, D.C.: If the Supreme Court rules against the NFL, what impact would that have on revenue sharing and the salary cap? Those two mechanisms have been the foundation of the NFL's recent success, because it levels the playing field and allows teams in smaller markets to compete with the large market teams. Taxpayers in small markets will not want to subsidize stadiums if the NFL stacks the deck against their teams.
Steven Pearlstein: That is a very good question, and one the Leagues will make a big deal of at the Court. If competing businesses can engage in revenue sharing, Mr. Justice Alito (R-Eagles), then it is certainly okay for them to (fill in the blank: negotiate all TV deals or negotiate all stadium deals). But the law, as now understood, requires that a judge look at the particular facts of that activity and decide if the activity will impact competition in a negative way such that it harms consumers. In the case of revenue sharing, I think you can make a pretty good case that it is consumer positive, in that it creates a more level playing field between big market teams and small market teams, which means the outcome of games is more in doubt, which increases fan interest and revenue for all the teams. All the government is saying is that the activity needs to be studied and analyzed -- not that it should be prohibited per se. It is the leagues that are asking for a blanket treatment, in this case a blanket exemption.
Washington, D.C.: Steve,
NFL Properties, the IP rights licensing arm of the NFL, has been around for a while now, and it holds the exclusive right to market and license the trademarks of all 32 teams. Why should the NFL, or any other professional sports league for that matter, be allowed to market its teams' IP rights exclusively through a single source? How is NFLP itself not collusion among the NFL and the teams, many of whom (the Redskins and Cowboys, for instance) would stand to make more money licensing their own IP rights individually?
Steven Pearlstein: It is a form of collusion that was allowed as competitively benign. Maybe that was a mistake. But you are taking the position of the NFL that is is only about marketing and promotion. The government's argument, which is right, is that it is also a significant source of direct revenue in which the teams should be competing among themselves to sell shirts -- that the Red Sox should be competing to sell more Mike Lowell shirts nationally against the Yankees competing to sell Derek Jeter shirts. And one way they might compete is to compete on the basis of price. But if they all get together to produce and market the shirts nationally through a single producer and distributor, then the prices are the same and the teams are indifferent to which shirt is sold. And you've eliminated a very important area of competition among the teams.
By the way, this is not a trifling consideration, as anyone who has been to a Washington Nationals Game understands, since half the fans at any game are usually rooting for the visiting team. So marketing outside a team's natural geographic area is not uncommon.
Washington, D.C.: So you'd do away with the NFL draft, right, because teams shouldn't be able to collude over labor? And you'd do away with revenue-sharing and the salary cap, knowing that this would kill the small-market franchises in Green Bay, Buffalo, and elsewhere?
Steven Pearlstein: No, I'll say it again. You have to look at each activity and decide if it is anti-competitive. If what the draft is doing is simply creating a benign structure through which the teams do, in fact, compete for talent, then it is not, on balance, anti-competitive and is a form of collusion that passes muster under the antitrust law. It is not ME or the government that wants to think about these things in a black and white way (if you can do x, you should also be allowed to do y). It is the leagues that are looking to paint with a broad legal brush.
Alexandria, Va.: Mr. Pearlstein, I'd like to know more about your assertion in this morning's column that an anti-trust exemption would lead to the end of free agency. Major League Baseball enjoys an anti-trust exemption and has free agency. If it's too dense of a legal argument to explain here, I'd love a link or two to get a better understanding of this issue. Thanks.
Steven Pearlstein: Major League Baseball enjoys a legislative exemption to the anti-trust laws as it relates to free agency. If the Supreme Court issues a decision whose effect is to say that MLB (or any other league) is not constrained by the antitrust law on the issue of negotiating for talent, then there is no need for the example and the law becomes "nugatory," as the government termed it in its brief. I had to look it up, but nugatory means with little or no effect or impact. In other words, the law would become irrelevant, granting an exemption to a law that the Supreme Court says doesn't apply to the major sporting leagues.
NFL vs. USFL: ESPN had a documentary on the USFL recently and it covered a court case brought by the USFL against the NFL's anti-trust exemption. The USFL won that battle but lost the war (after being granted $3.76 as their judgement). It didn't help with the jury that a young Donald Trump was the face of the USFL at the trial. The documentary implied that Trump wasn't interested in creating a thriving USFL alternative as he was using the court case as leverage for a merger of the leagues, or at least negotiating an NFL team and its related monopoloy profits for himself. Wasn't the NFL anti-trust exemption challenged by the old AFL?
Steven Pearlstein: I suspect that is just what Trump was after, not creating enduring competition for the NFL monopoly but rather creating enough short-term competition to be bought off by being brought into the monopoly. That said, the NFL has engaged in lots of anti-competitive behavior to try to nip this competition in the bud, and it has resulted in a fair amount of litigation. What the NFL is now asking is for the Supreme Court to relive it of the need to keep defending itself in court by establishing a principle that would allow them to get all of these legal challenges be dismissed on summary judgment. One argument they make, in fact, is that it will reduce the burden on the court system, which is always the last refuse of legal scoundrels.
50 Yard line: But doesn't baseball have a bigger exemption??
"Baseball's exemption from antitrust laws--which prohibit actions that unreasonably restrain competition--stems from a 1922 Supreme Court decision in which the Court ruled that antitrust law did not apply to baseball. The rationale was that baseball games were local affairs, not interstate commerce. The Supreme Court upheld the antitrust exemption twice, first in 1953 and again in the famous 1972 case in which Curt Flood sued Bowie Kuhn in his attempt to have the reserve clause declared illegal and have himself declared a free agent. "
Why are they aiming at football?
Steven Pearlstein: I'm not a lawyer but the short answer is that things in the law have changed since 1922.
Washington, D.C.: Steven's point is that the government should NOT get further involved, i.e., grant the NFL (and all pro leagues) and EXEMPTION from the laws.
I'm not sure how you can interpret the article as calling for more government intervention. It most certainly does not.
Steven Pearlstein: Thank you.
Washington, D.C.: Hey Bowie,
You just demonstrated that NFL teams (like the Redskins and Ravens) often compete with each other for fan support. This is why they should never be able to collude to do things like set ticket prices, as the NFL argues they should in this case. Also, in the NFL v. USFL case, a jury decided that the damages incurred by the USFL were only $1 (trebled to $3), which is much different than saying that the NFL's monopoly only costs consumers $1.
Steven Pearlstein: And thank you.
Falls Church, Va.: In what sense is the NFL a monopoly? It operates as a cartel for certain purposes, but it competes with other football leagues, other sports, and other entertainment options, both for players and for fans.
Steven Pearlstein: It is a monopoly in the sense that it is the only league in the market for professional football. That doesn't mean it is an illegal monopoly. But because it is a monopoly, its activity should be subject to a high degree of scrutiny, particularly when it comes to collusive behavior by the individual teams.
Fairfax, Va.: Your position may be viable for the rich NFL, but it would kill the leagues in smaller sports, particularly women's sports.
Steven Pearlstein: As I say, antitrust analysis is fact and case specific.
Washington, D.C.: This article doesn't arise out of a "worry" about the NFL manufactured by the author. It was written precisely because the (conservative-leaning) Supreme Court took on a case that could potentially exempt pro sports (whose owners are, by and large, conservatives) from the laws that you and I have to abide by, whether we're running a small business or a multi-million dollar enterprise. That seems odd, and certainly deserves to be written about and discussed.
Note: the conservative parentheticals above are simply there to demonstrate that this case is not indicative of the Obama administration wanting government involved in more issues. In fact, the Solicitor General (appointed by Obama) specially argued that the Court should NOT have taken the case. Yet it still did.
Steven Pearlstein: All that is true, although the reason the solicitor general urges the court not to take a case often have to do with whether she feels it offers the best fact case for resolving a certain issue.
Northfield, Minn.: Wouldn't the American Needle ruling (that the NFL is a single entity incapable of conspiring to violate the Sherman Act) also apply to the NCAA? How could anyone reasonably argue that a consortium of independent universities is incapable of conspiring to abuse its fans?
Steven Pearlstein: It would definitely impact the NCAA and would overturn a recent case, in fact, in which the court slapped down a form of NCAA collusion.
Steven Pearlstein: I'm afraid I've got to cut things a bit short today, folks. Hope to "see" some of you next week.
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