Freakonomics Radio - 364. Inside the Sports-Industrial Complex

Episode Date: January 24, 2019

For most of us, the athletes are what make sports interesting. But if you own the team or run the league, your players are essentially very expensive migrant workers who eat into your profits. We talk to N.F.L., N.B.A., and U.F.C. executives about labor costs, viewership numbers, legalized gambling, and the rise of e-sports. (Ep. 5 of “The Hidden Side of Sports” series.)

When you bleed and sweat and cry with somebody every day, you know, you get to be pretty close to them. For me, shooting a basketball and seeing it go through the net became just an obsession. If you want something, you have to be aggressive. Yeah, we were awful. When players were traded here, they just couldn't wait to get out. Oh, I care so deeply, and I'm not, and it's stupid. I have no idea why I care, but I like winning. And I distinctly remember thinking like, I'm going to get better

at this and I'm going to come back and I'm going to kick your ass someday. I take esports. Yeah. Buy esports, sell NFL. You may recognize that voice. I'm Mark Cuban, and I'm an entrepreneur. Cuban is also a star of Shark Tank and owner of the NBA's Dallas Mavericks. When he said he would sell the NFL and take esports, I'd asked him to play a game of buy, sell, or hold with three stocks. The National Football League, the Ultimate Fighting Championship, or UFC, and a basket of esports. So why is Cuban selling the NFL, which is the most profitable sports league in the world? I just think CTE creates a problem. CTE being chronic traumatic encephalopathy,

or the brain damage associated with contact sports like football. So participation has been dropping the last few years and will continue to drop more. And, you know, I have an eight-year-old son. There's no way I'd let him play tackle football. If you don't want your child playing contact football, then, you know, you diminish the viewing in the house. You know, now he'd much rather play Fortnite than watch football. Okay. And you're buying esports. So say why, and especially explain to people who can't get their mind around it at all, what is the appeal of watching? I mean, there's stadiums being built.

So why do 20, 50,000 people want to go to a stadium to watch other people play video games? Because once you play, you understand the nuances of the game and it's aspirational and educational. So if you like to play League of Legends, it's hard. But one of the ways to get better is to watch other people play and to learn the nuances and to learn the strategies, particularly given that they change the rules every 90 or 120 days. And so the esports teams have got to practice hours and hours and hours a day. So it takes a real skill. It's a real sport. And you also have to realize that anybody in front of a PS2, Xbox, PC,

you know, watching these kids that play, in their mind, you know, just like maybe we watched sports growing up, it's like, hey, if they can do it, I can do it. And so that's the aspirational part of it as well. There's no physical hurdles. You can be four foot one or seven foot one. And if you've got the hand-eye coordination and the brain processing speed and, you know, anything's possible, you could do it too. Is esports really the future juggernaut Cuban describes?

At the very least, he's putting his money where his mouth is. Among his many sports technology investments is an esports betting platform called Unicorn. In this regard, Cuban is not an outlier. A lot of NBA teams, as well as teams from the National Football League and Major League Baseball and the National Hockey League and Major League Soccer, they are all investing in esports franchises that play games like League of Legends, Fortnite, and Overwatch. A lot of venture capital firms are investing as well. The global esports market is said to be approaching a billion dollars, up roughly 40% from a year earlier.

And that doesn't even include the money flowing to the game companies themselves. Blizzard Activision, which makes Overwatch, reported $4 billion in revenue in 2017 from in-game purchases. If I had told you 10 years ago that esports would be a booming industry funded by multi-b-dollar sports organizations, you probably wouldn't believe me. But if I told you 100 years ago that multibillion-dollar sports organizations would even exist, you wouldn't have believed that either.

Sports, in the very beginning, were a proxy for war. Here's John Thorne, the official historian of Major League Baseball. The 30 best men of one side against the 30 best men of another, and both sides agreed to abide by the outcome. Later on, sports became a tool of empire, of colonialism, a civilizing force, or at least that's what the civilizers said. Well, we sublimate our martial instincts by pouring them into sport. We can paint our faces. We can drink ourselves silly. We can yell insulting epithets at the umpire or certain players.

And what has sports become these past few decades? LeBron James agreed to a four-year, $154 million contract with the Lakers. Fox striking a five-year rights agreement with the NFL worth about $3 billion. Record-shattering deal. Alvarez signed a five-year, 11-fight deal worth a minimum of $365 million. Congratulations, Serena Williams just topped the forbes list of highest paid female athletes for the third year in a row rockets owner leslie alexander has agreed to a deal to sell the rockets to houston billionaire tillman for tita for 2.2 billion dollars a record for an nba franchise

yes sports has become big business how big So the answer here is actually surprisingly small. Sports has a social impact that is way, way bigger than its economic impact. That's Victor Matheson, an economist at Holy Cross and president of the North American Association of Sports Economists. So the biggest league in the world in terms of revenue generated is the NFL. And the NFL generates something like 14, 15 billion dollars a year. Add in all the other major American leagues, plus the PGA, pro tennis, mixed martial arts and so on. You've got maybe 50 billion dollars of pro sports, a few more tens of billions of dollars in college sports.

But you're still only up at $60, $70 billion. That makes spectator sports in the United States roughly the same size as the cardboard box industry in the United States. Now, obviously, none of us, you know, gather around the water cooler on Monday morning saying, hey, man, over the weekend, did you see that awesome cardboard box that American Paper just put out? Of course we don't. So obviously, you know, culturally, sports is huge. Okay, so the sports industry punches above its weight in cultural significance. That seems clear. One way to think about this is that consuming sports is

really cheap, considering how much attention we give it. That said, a $60 or $70 billion industry isn't nothing. It's an industry that offers a select few athletes the chance to become multimillionaires, and it gives billionaires somewhere to park their money that's a bit more exciting than cardboard boxes. So today on Freakonomics Radio, our Hidden Side of Sports series continues with a look at how this industry works from the ownership and management side. How does a game become a sport, become a business, become an industry? We'll get into the economics of a startup league. It took us about three or four years before we could actually turn it into a real business.

We'll hear how the big leagues are trying to get even bigger. Right now, one of the commissioner's main objectives is to spread the game globally. We'll hear what team executives hate about their own sports. The ends of NBA games is one of my bugaboos. I just can't stand the fouls and timeouts. We'll learn about an exciting legal development. Yeah, I think it'll lead to our franchise valuations doubling. And we'll get into the unusual fact that in sports, your labor force is also your product. The reality is they are management and we are labor.

Man, they're making a lot of revenues, but not much of that is going into the athletes. From Stitcher and Dubner Productions, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner. So let's begin, if you would, just say your name and what you do. My name is Lawrence Epstein. I'm the Chief Operating Officer at the Ultimate Fighting Championship. And for those who've never seen a UFC fight, or maybe who don't know anything about the UFC or MMA, mixed martial arts, just describe it.

Mixed martial arts is essentially the sports of boxing, jiu-jitsu, judo, karate, muay thai, taekwondo, and then both freestyle and DeGreco Roman wrestling all combined into one sport. And the UFC is a brand name that we operate our promotion under. Okay, so let's focus on the UFC then. How often does a fighter typically fight? We've got currently about 525 fighters under contract, and they fight on average about 2.3 times per year. Over our 25-year history, we've done about 9,500 individual bouts. Okay. What share of UFC fighters are female, and do women ever fight against men? No, absolutely no women against men, but about 15% of our athletes are currently female, and that percentage is growing.

So I understand that you recently negotiated a new TV deal. This is with ESPN for— $300 million per year over five years, $1.5 billion total. If you are not a fan of mixed martial arts, you may be wondering how such a league could be so valuable. Dana White, our president, tells this great story where he says, you know, there's four corners in any city and anywhere in the world. One corner, you got a soccer game going on. Another corner, you got a basketball game going on. On the third corner, you got some guys playing tennis. And on the fourth corner, a fight breaks out some guys playing tennis. And on the fourth corner,

a fight breaks out. What happens? Everybody runs to the fourth corner to watch the fight. So people, you know, they understand fighting, they get it. It's part of our DNA and they like it. In 2016, the mega agency WME IMG and a group of private equity firms bought a majority stake in the UFC for nearly $4 billion, billion with a B. Its ringleaders, Lorenzo and Frank Fertitta, had acquired the UFC just 15 years earlier for $2 million. Lorenzo Fertitta famously says that, you know, I paid $2 million for three letters, UFC. And that was really essentially all that was purchased.

I mean, there was literally a box of contracts and there was another box of tapes and there was a wooden octagon that had been used over the years. And so many businesses talk about, we built this thing from the ground up. We actually inherited a business that was about 10 stories underground and it took us about three or four years just to get up to the ground level before we could actually turn it into a real business. Now, how do you get that done? Because this was a sport that was nearly driven to extinction before it had the chance to get big. Senator John McCain famously called it human cockfighting, led the charge against it. So how did you turn that around state by state? We put together a set of assets that included the economic impact our events were having in regulated markets, the truth about health and safety, you know, whether our athletes were sustaining major injuries or not, and of course they weren't. Third, we had, and this was the most compelling thing, we had many of our athletes help us in this process. And, you know, introducing elected

officials to our athletes was key. And the other factor, which was really, really interesting was the staff at all of these offices around the world are generally young people. I mean, you've probably been to legislators' offices and you've got people that are, you know, right out of college, early 20s, mid 20s. And they're fans. They're fans. They love it. So they're talking to their boss, and this stuff is awesome. These people are cool. This is something that's fun to watch. And so, you know, the staffers were absolutely key in convincing the elected officials to ultimately vote in favor of regulating the sport. But, you know, the whole premise of the original Ultimate Fighting Championship was there are no rules. It was a no-holds-barred event.

And that was just something that we felt, you know, didn't have any sustainability. You had to have regulation. You had to have a regulatory environment that looked a lot like the boxing regulatory environment. And so that's what we did. So the UFC, in state-by-state petitioning, made itself legal and legitimate. But it still had one big problem. You know, we couldn't get on television. There was no interest in putting us on any television other than pay-per-view. So we put on these pay-per-view events, and we had to produce them ourselves. So we actually developed a core competency in putting on these fairly unique events with

many times 20 to 24 different cameras. This practice, interestingly, continues today. One of the reasons why we are a little bit different than the other sports organizations is that we pay all of the production expenses for our events. As far as I know, we're the only, you know, sort of major sports organization that does it ourselves. Consider, for instance, the NFL. When they do a deal with CBS Sports, they just get a check. And CBS Sports, in addition to paying them billions of dollars every year, they also handle all of the production. Okay, so the UFC early on learned how to produce its own events, but they were still a fringe sport relegated to

pay-per-view. So they did what any sensible startup sports league would do. They created a reality TV show. You take 16 athletes, you put them in a house, they do a bunch of, you know, goofy things like you always see on reality shows. And at the end of each episode, there's a fight. Winner stays, loser goes home. The show was called The Ultimate Fighter. It went on the air in 2005. We were able to do a deal with Spike Television, and they didn't pay us anything. But they said, we'll let you put this on our air. We'll give you, not all, but we'll give you half of the ad

inventory. And we went out and tried to sell that ad inventory. We were able to sell no ads at all to any sponsor. So we took that ad inventory and used it to promote our upcoming pay-per-view. And any sort of metric that you look at in the UFC, whether it's profitability or the number of fans that we have or ratings, we have this sort of hockey stick type of a graph. And the inflection point is the ultimate fighter, season one. The UFC has grown exponentially since then and has the ESPN deal to prove it. But it still relies heavily on pay-per-view as well, distributed via cable and satellite, as well as digitally via Amazon and its own UFC.tv. Their biggest pay-per-view hit to date was actually a boxing match between the undefeated fighter Floyd Mayweather Jr.

and UFC champion Conor McGregor. Epstein points to one big downside of the pay-per-view model. I mean, it's a hundred percent churn business. We sold, you know, three and a half, four million plus buys for Mayweather versus McGregor. And every one of those customers left, we didn't keep one of them. We got to resell them for the next fight. So that is a really interesting conundrum. And I'm kind of surprised that you guys haven't solved it yet. I mean, our decision has been, frankly, strategic. I mean, we've decided this is the world we want to live in, because as consumers change the way they're consuming content, we can simply shift content to different buckets to meet consumer demand. But at the end of the day, pay-per-view is a bet on yourself. And listen, if ESPN was willing to pay us what they're paying the NFL,

I think we'd probably get off pay-per-view, but they're not. And in the meantime, we're willing to bet on ourselves. Betting on themselves has served the UFC well. They have joined the pantheon of prominent American sports leagues, which they've discovered presents its own challenges. Well, the challenges are competition. And I'm not talking about just competition from other MMA promoters, but, you know, we're competing against the NFL, college football, baseball, video games, movies, YouTube videos, and the list goes on and on. The consumer is getting bombarded with options for lots of entertainment.

And, of course, the consumer only has a certain amount of bandwidth for their time and a certain amount of bandwidth for their wallet. Welcome to big time sports, where even the behemoths are worried about their future. We are the dominant sport in America. But if we really want to build our business and become an international sport, that's going to take some figuring out. That's Jed York of the National Football League San Francisco 49ers. He's the team's CEO and co-owner. I would first say that the biggest blessing and the biggest curse of the NFL are the TV contracts, where it makes you very successful, but it also makes it

so you don't really try new things and try to disrupt. How big are the NFL's TV contracts? Roughly $6 billion a year, number one in the world. Number two, at just under $5 billion, is the FIFA World Cup, which is pretty remarkable for an event whose finals are held only every four years, although they are playing to a global audience. Rounding out the top 10 global TV contracts are the NBA and Major League Baseball, the top soccer leagues in England, Germany, and Spain, along with the UEFA Champions League and the Summer and Winter Olympics. Not cracking the top 10 are the NHL, MLS, or UFC, which means that the NFL has more TV revenue than all the other big American sports leagues combined. 33 of the top 50 shows are still NFL TV games. That's Al Guido, president of the San Francisco 49ers.

The eyeballs are still there. They're just scattered. They're just in different places. And I think the NFL, along with every other league, needs to do the best job they can getting content in a fan's hands wherever they are. And that's changing dramatically. Cable subscriptions in the U.S. have been dropping fast. 54% of viewers between 18 and 29 use streaming services more than cable. That said, live sports are much better positioned than just about any other kind of content that plays on old-fashioned TV. We still do watch the Super Bowl live. The economist Victor Matheson again. We watch the World Cup live. We watch the World Series live. And that gives advertisers a chance to put their product in front of a live audience. And it's one of the last places that that happens. And this is why we still

see increasing contracts, even though the actual number of eyeballs watching sports contests is not going up particularly quickly. The NFL has also made big deals to stream its games. Amazon, for instance, recently renewed its NFL deal, paying $65 million a year for the digital rights to 11 Thursday night games that are already being broadcast on TV. That was a 30% bump over the same rights last season. Amazon reportedly beat out rival offers

from Twitter and YouTube. My nine, seven, and five-year-old don't even turn on the TV. The 49ers' Al Guido again. He'd like the NFL to grow, especially overseas. But that is complicated. In the NFL, we have what I would deem right now as an event-based strategy. We host games overseas, right? And that is immensely, I mean, it's successful.

However, it's what is the global strategy and footprint long term? What is it at the league level? What is it at a team level? And how do we incentivize our clubs to invest more money outside of their footprint? I am frustrated at the inability for us to take our rights and marks across global footprints. I'll give you a specific example. Jared Hayne was on our team a few years ago, Australian rugby player. They said he was the Michael Jordan of Australian rugby. He comes over here, he plays, he's an immediate success, sells more jerseys than any player in the NFL, right? We obviously would love to do a deal with Rio Tinto, or we'd love to open up a pop-up retail shop in Australia. We can't. Well, we can, but if we were to sell our rights and

marks and they were to use it in Australia, that revenue is split 32 ways. Doesn't necessarily come back to the team, right? 32 ways because 32 teams in the league. Right. So we make as much money on a Jimmy Garoppolo jersey as we might on a Russell Wilson jersey. Okay, let's take a step back here. Jimmy Garoppolo is a 49ers player. Russell Wilson is not. Al Guido's point is that the NFL, like most American sports leagues, is so devoted to its revenue-sharing model, from TV income all the way down to merchandising,

that the incentives can be skewed. With revenue sharing, a team can make a lot of money even if it has a losing record every year. And why invest in new ideas when others don't have to and when you get an even cut of the pie regardless? As Jed York said, that is the downside of the NFL's fat TV contracts. It makes you very successful, but it also makes it so you don't really try new things and try to disrupt. This sort of revenue sharing is a key feature of American sports leagues.

It's less business model than cartel model. It's a sort of billionaire socialism. And this is not, by the way, how the big soccer leagues work in Europe, where, interestingly, there's a lot of political socialism. The European soccer leagues do share some revenues, but unlike most American sports leagues, there are essentially no firm salary caps, and every year the weakest teams are relegated out of the league

while new ones are promoted. Well, I've always been very surprised by this. It's Stefan Szymanski, a British economist who teaches sports management at the University of Michigan. So to me, thinking as an economist, I think of this as the difference between equality of opportunity and equality of outcomes. And when I think of Europeans in general, we tend to have strong systems of social services and safety nets, which ensure really, to a large extent, equality of

outcomes within the European system. But traditionally, we have a sense of limited equality of opportunity. We have class systems, we have big social gaps. And America, we always think of as being the reverse, where there's equality of opportunity, but very limited safety net. And it seems to me the sports story is completely the opposite. In Europe, we have this incredibly hyper-competitive capitalist system where the devil take the hindmost. And we have a lot of financial failure in Europe before. But that's also one thing that goes with this incredible amount of financial distress and failure. And yet in America, there's these leagues which are essentially

closed societies, which don't allow any competition and then share out the resources equally in enormous sort of socialist fashion amongst the top team. So it seems that the mental framework for sports is at odds with the mental framework about competition in society more broadly. That said, the American sports business model is too entrenched to change much, at least anytime soon. So how, in the face of more and more entertainment competition, are these giant leagues looking to grow? Right now, one of the commissioner's main objectives is to spread the game globally. That's Kim Eng, a senior executive with Major League Baseball.

We've been very aggressive on that front. We've had games in the last couple of years from spring training to regular season games in Puerto Rico, Mexico. Next year we'll be in London. We're doing a barnstorming tour in Asia, as well as playing some regular season games in Japan. League baseball, despite declining stadium attendance, is still the world's second biggest sports league by total revenue. It hopes to maintain that status not just by bringing American baseball to the rest of the world, but by bringing the rest of the world to American baseball. We have three development centers in China. We have high-performing programs in Puerto Rico, Mexico, Nicaragua, Curacao, South Africa. And these are basically academies in which we train kids on a year-long basis, and they go to school as well. And our goal is to get them into colleges and hopefully some of them into the big leagues as soon as we can.

Coming up after the break, there is another new way for American sports leagues to make more money. There's no doubt that the proliferation of sports gaming is going to be good for all sport. And what's one thing you don't want to know before the game is played? We know better than any other sport this team is going to be that team. So how do you fix that? That's coming up right after this. As we've been hearing, even the most profitable sports league in the world, the National Football League, is concerned about its future. TV revenues are still strong, but viewership is slipping. Some people have been turned off by the sports violence and the risk to players. Others didn't like how the national anthem protests turned the game of football into a political football. And the NFL's most visible

attempt to globalize the game, it was called NFL Europe, it failed. So, as in any maturing industry, the league has been searching for new revenues. The U.S. Supreme Court recently did its part to help. In May of 2018, it struck down a federal law that had limited legal sports betting to Nevada, which should be good news for the NFL and other American sports leagues. Yes, I mean, from a revenue perspective, there's no question. That's San Francisco 49ers President Al Guido. You think about what fantasy football has done, right? It's increased the popularity of our sport. You know, gambling on sport is good for sport in the sense that it creates revenue opportunities and it creates deeper fan connection to the matches, the games, the events themselves.

And that's Lawrence Epstein of the UFC. So there's no doubt that the proliferation of sports gaming around the United States is going to be good for not just the UFC, not just the NFL, but all sport. The UFC happens to be based in Las Vegas. Sports leagues used to stay far away from Vegas, worried about the longstanding and well-deserved connection between gambling and match-fixing. The most famous fix, alleged fix at least, was the 1919 World Series. In early 2019, more than two dozen professional tennis players were arrested for participating in a match-fixing ring based in Spain. That said, even before the Supreme Court ruling, American sports leagues were starting to shed their fear of the

Vegas connection. In 2017, the National Hockey League finally put a team there, the Las Vegas Golden Knights. Their first season got underway just a few days after the horrible mass shooting in Vegas where 58 people were killed at a music festival. And the Golden Knights turned into one of the biggest feel-good stories in recent memory by making it all the way to the Stanley Cup final. And next year, the NFL's Oakland Raiders will become the Las Vegas Raiders. The embrace between professional sport and professional gambling would seem to be complete. What does this mean for the leagues and their teams? Here's Dallas Mavericks owner Mark Cuban. Yeah, I think it'll lead to our franchise valuations doubling, literally,

because there's a lot more reasons for people to pay attention, a lot more reasons for people to watch. And that's good for our bottom line. It's too early to say whether team valuations will really increase, like Cuban suspects, or even to say exactly how gambling fees will be divided. Individual states are already setting up their sports betting tax rates, and teams and players are angling for their cut as well. One idea that's been pitched is a so-called integrity fee, an incentive to keep the matches clean. I asked the sports economist Victor Matheson

who he thinks will be the biggest winners and losers as sports gambling grows in America. So I would say the biggest winners are all of the professional leagues. The people simply enjoy the sport more when they have something riding on it. Everyone tunes into all those first and second round March Madness games because everyone has filled out a bracket and is hoping their bracket isn't busted on the first day. So we know that gambling makes things exciting, but we also know gambling can lead to corruption. And so there's two really big losers here. I think the NCAA is a huge loser here because their athletes are particularly vulnerable to corruption because they're not being paid. Now, mind you, that's the NCAA's own fault for not paying their athletes.

But, you know, we don't have to worry about LeBron James or Steph Curry throwing games because they're not going to risk their $30 million paychecks and their reputations to try to make a little money from a mobster. On the other hand, an unpaid, poor 19-year-old college kid might. The other big loser might be the gamblers themselves. There are groups of people that this type of gambling will appeal to. And in particular, it was suggested that young, confident men are, this is exactly the sort of thing that will suck them in. They think, you know, they watch sports 40 hours a week. They've got to be good at gambling, they think to themselves. And guess what? There's people who are a lot better than them still. If gambling represents one way forward for the business side of sports, that is, a new revenue stream,

there is, of course, another time-honored way of staying in the black, controlling costs. In most industries, the single largest cost is labor. For the economy as a whole, the traditional number that economists use is that roughly two-thirds of all gross domestic product goes to labor, and about a third of it goes to capital. Sports, meanwhile, has had a dramatic trajectory. If you're looking back in 1970, you are seeing a world where players are making only a tiny fraction of the total revenues. The rest of that is going into the pockets of the owners. By the mid-1970s and mid-1980s, we have free agency in every sport, except maybe the NFL, which had free agency on paper, but not in reality until about the mid-90s. And in Europe, in soccer, you start

to have free agency in about 1995-ish. And at that point, you have players earning more like 50, 60, 70 percent of team revenues, so a huge increase in what they're earning. That huge increase in the athlete's share happened to coincide with a huge increase in overall revenues. But more recently... More recently, the owners have clawed a bunch of that back. And in the big leagues in the United States, the NBA, NHL, and National Football League, by agreement between the union and the leagues,

they basically split the revenue 50-50. Half of the revenue goes to the players in terms of pay and benefits, and the other half sticks with the owners as profit or, you know, to cover costs to run the league. So how costly is it to run the league and how much is left over for profits? That is very hard to say since most pro sports teams are privately owned. One notable exception is the NFL's Green Bay Packers, who are publicly held and therefore publish their financials. The Packers are a venerable team, but also a very small market team.

Green Bay is a population of barely 100,000 people. And yet, remember, they get the same share of NFL collective revenues as the New England Patriots or the Los Angeles Rams. The last couple of years, the Packers' annual revenue has been in the neighborhood of $450 million, with profits averaging around 12.5%. The current salary cap, the limit a team can spend on player salaries, is about $177 million a year, and a team is required to spend at least 89% of that amount. So you might imagine that in a league like the NFL or the NBA, with TV revenues locked up well in advance

and total labor costs limited by a union agreement, there's no way for a pro franchise to lose money. That's what I suggested to NBA owner Mark Cuban. No, that's not true at all. No, that is not true at all. Give me an example. I can't throw out names, but yeah. Well, how many NBA teams in a given year are going to lose money? More than you think. Really? Yeah. So even with the revenue sharing, with all the broadcasts and other monies distributed evenly, and with a salary cap that guarantees that you don't have to overspend a certain amount,

you're saying that, how do you lose money? Is it by lacking? Not everybody has enough, right? Yeah, lacking revenue, period. Yeah, yeah. Just like any business. Right. But what's the major variable? Is it gate revenue or is it broadcast revenue? Gate, broadcast, players, all the obvious things. One obvious difference between the cost of labor in sports versus just about any other industry, except maybe the entertainment industry, is that the employees are the product,

which makes them much more visible than employees in a typical industry and potentially much more valuable. Consider a superstar like LeBron James, who this year is earning $35.6 million, which sounds absurd until you try to calculate just how valuable he is to the sport. I mean, if LeBron James was getting what he deserved, he'd make $200 million a year or $300 million a year. That, again, is Lawrence Epstein of the UFC. His biggest star, Conor McGregor, earned a reported $100 million for that pay-per-view fight against Floyd Mayweather Jr. Oh, man. I mean, if Conor made $100 million last year, which is probably, you know, I mean, 20% of our revenues, you know, LeBron James has got to be worth 10%

of the revenues of the NBA. He's got to be. Right. So what is that? It's $400 million or something. It's a giant number. Maybe he's not Conor, which is 20% of our revenues, but he's easily 10. He's easily 10. For the record, the NBA produced about $7.5 billion in revenues last season, 10% of which would be roughly $750 million. Too bad for LeBron James that Lawrence Epstein isn't setting his salary. And what about UFC salaries? Before interviewing Epstein, I'd asked the economist Victor Matheson to compare athlete salaries in different sports. You know, if you're trying to decide what sport to go into, you probably want to go into baseball or football, where at least you're going to be earning a pretty big chunk of those television revenues.

And man, stay away from UFC because they're making a lot of revenues, but not much of that is going into the athletes. You know, the amount going to the athletes there is about 10 or 15 percent of revenues. So again, much less. Why do the UFC's athletes earn so much less? Keep in mind what Lawrence Epstein told us earlier, that the UFC, unlike other leagues, pays its own production costs. Still, you might think that compared to the big team sports, UFC athletes would do pretty well,

since team sports require so much more labor to produce. We do know that UFC fighters are not unionized, which means they don't have collective bargaining power like NFL and other team athletes do. In any case, I asked the UFC's Lawrence Epstein about this disparity. Well, you know, I think, first of all, the 15% number, I don't think that's accurate. I mean, there certainly is some fluctuation in the percentage of revenues that goes to athletes. But the reason for that, you know, primarily is that we have a variable revenue stream model in our company. So you mentioned the NFL. Let's assume they're giving 50% of the revenues to the athletes. Well, those revenues

are contracted revenues with the largest media companies in the earth, ESPN, CBS, NBC, Fox, and others. The significant part of our profitability still comes from pay-per-view events, which of course are completely variable in revenue. And so because we just don't have those contracted revenues like so many of the other sports leagues do, we're taking a lot of risk every time we put one of these major events on. I mean, you can't just agree to pay certain people a certain amount of money if you don't know whether or not that money is going to come in. And of course, the NFL and Major League Baseball and the NBA, multi-billion dollar contracts with, Lauren Murphy, who's the number five ranked female fighter in her weight class. And she told us she gets about 12 grand per fight guaranteed, another 12 grand if she wins, and a 50,000 bonus if she's the fight of the night. So she said she's

had years where she's made just 20,000 and one year where she made around 90,000. Again, for a fighter who's number five in the world in her ranking. I understand there's an ongoing antitrust lawsuit against the UFC, which claims that the UFC used an anti-competitive scheme of long-term exclusive fighter contracts, coercion, and acquisitions of rival MMA promoters to establish and maintain dominance, etc et cetera, to suppress fighter compensation. I don't expect you're going to open up on that case to me right now, but I'd like you to talk generally to this notion of a league that is making a lot of money that was bought for $4 billion and yet one where the people who are doing the actual fighting seem to be generally compensated much less than the average fan, I at least would assume. Yeah, obviously, I can't get into talking anything specific about the litigation. But, you know, as I mentioned previously, Conor McGregor made about $100 million last year. When you compare the percentage of revenues that we deliver to our athletes, it's very comparable to other sports organizations of our size and

the fact that both we have to produce the content, which adds additional expense to us, in addition to the fact that still a very large portion of our revenue is variable in nature. You know, we're actually, you know, we're very proud of what we pay our athletes and we think it's certainly consistent with other sports organizations of our size. And, you know, to a certain extent, it is a zero-sum game. And, you know, if Conor McGregor is going to make $100,000 and John Jones and these guys are going to make tens of millions, you know, there's got to be money there to do it. The guys at the top end, the women at the top end of the food chain, you know, they're happy with the ecosystem, that's for sure. Does the league provide health insurance and other benefits?

So our athletes are independent contractors, so we can't provide the type of health insurance that, you know, you and I might get with our particular employers. But about seven years ago, we began providing what's called an accident insurance policy, which would cover our athletes for any acute injury that they would sustain while they're under contract with us. In addition to that, most athletic commissions and federations around the world will require that insurance policies be in place for event-related injuries. So when you combine the event-related injuries with the accident insurance policies, our athletes are covered while they're under contract with us for any acute injuries that they would sustain. We'll hear more about these labor issues in an upcoming episode, this time from the athlete side and the union side.

For instance, here's Demoris Smith, executive director of the NFL Players Union. The reality is they are management and we are labor. And there are going to be core philosophical differences between us. And I think the challenge becomes people who are unwilling to perceive someone's life in the other shoes. And frankly, I think that's on both sides of the table. For now, let's just say there is a lot of friction between management and labor in sports.

In most organizations, there's one person whose job is to navigate that friction. There's a lot of friction between management and labor in sports. In most organizations, there's one person whose job is to navigate that friction. A person who's part of management, but who's also the primary liaison between ownership and the athletes. Not the coach. They're seldom a part of management. This person is usually called the general manager. Like this guy. Daryl Morey, general manager of the Houston Rockets. And the GM of an NBA team does what? So there's the bringing in the coaching staff, who then obviously directs the players.

There's the medical performance side, where you're keeping players performing at the highest level. There's the scouting side. And then there's the data and information side. Morey is particularly well regarded on the data and information side. He was a pioneer in NBA analytics and he recently won the league's executive of the year award. Unlike most general managers, Morey neither played nor coached basketball at a high level. He took the nerd route to the NBA, having studied computer science and statistics. Yeah, I think the nerd route is fair.

Maury also enjoys musical theater. He recently commissioned a basketball musical called Small Ball. That's accurate, yeah. One character sings the following line, You're cold calculations. You are ripping the heart from this beautiful game. Correct, yes. He sings it multiple times.

As for his day job, Maury admits the NBA has had a tremendous growth spurt. Basketball in the late 40s and early 50s was thought of as like the redheaded stepchild of sports. No one cared about basketball until maybe even the early 80s. And now? I mean, the NBA is going to be the dominant sport in the future along with soccer and e-sports.

For me, the top sports are going to be global. The bottom, just follow where people are spending their time, especially under the age of 25. It's all like dynamic games on their phones or PCs or consoles. And the fastest growing content that's watched by far is people watching people playing video games, both competitive and non-competitive. And so it really is just overwhelmingly logical

that esports is going to be one of the top sports. Darrell Morey, like the people we've been hearing from in other sports, recognizes that the modern consumer has a lot of entertainment options. Just because the sport is dominant today doesn't mean it'll even be relevant in 20 or 50 years. I do think the NBA does have a real challenge. We have a golden goose. It's laying eggs. The league would have to take a risk while the goose is laying golden eggs.

We've done, actually, more changes to our game than any of these other professional sports by far, but the reality is it's sometimes hard to change. There are a lot of things Maury would like to see changed in the NBA. For starters, he thinks they play too many games. Here's a really simple way you know the NBA has too many games. When you ask someone, should the NBA have more games or less games,

there's not a single person alive who says there should be more games. This is what Maury means when he talks about the golden goose. Cutting back on games, cut back on revenues. At least that's the conventional wisdom. Morey disagrees. Appointment viewing is what drives major advertising spend, drives everything. So I absolutely think there should be fewer games in the NBA. Is evidence for this argument? The NCAA tournament is 63 games. They make more TV money than we make in our entire 1,200-game NBA regular season. I would have it be like the Premier League. Everyone plays each other twice, 58 games.

Morey also thinks there are too many playoff games. I would do one-and-done NBA playoffs. I would get buys to the top two teams in each of the conferences, similar to the NFL. I would then have a play-in tournament to be the other four teams that then play the two teams with the buys. All the games would be one and done. One big reason he would want fewer games, including the playoffs, is that NBA games are too predictable. There needs to be more variance.

Every good sport game, board game, needs to have a real healthy mix of skill and luck. So I've seen many papers on this, but it's like 70-30, something like that. And one big problem is we're the most deterministic on a single game level. We know better than any other sport this team's going to beat that team. Like if we play one of the bottom feeder teams, I don't want to mention, you know, we'll have 90, 95% win odds on a home game. That often will create very, very low reason to tune in. And the worst part of games for Maury is what should be the best part.

The ends of NBA games is one of my bugaboos. I just can't stand the fouls and timeouts. And it's just, you know, not a good viewing experience. There is a proposed solution for that. Yeah, you stop using the clock. So let's say you're winning 85-82 with five minutes to go. Now the clock turns off and you play to 92 and you just play regular pickup basketball from that point. And it's a fantastic way to end games. This idea of turning off the clock toward the end of a basketball game and playing instead to a point total, it is called the Elam ending after its inventor, Nick Elam. Yeah, I would definitely do the Elam ending. It may strike you that Daryl Morey has an awfully long list of things he dislikes about basketball. After all, it's the game he loves, the game that employs him.

It may also strike you that Morey sounds a bit grouchy. If so, there may be a reason for this. During his tenure as GM of the Houston Rockets, they have been one of the very best teams in basketball. And yet, so far, they have failed to win an NBA championship. And Daryl Morey really likes to win. This goes for everyone we've been speaking with today. You aren't at this level in sport unless you cannot stand to lose. Just how much does Daryl Morey love to win? When we spoke with him, the NBA season hadn't yet begun. He was in Las Vegas with the Rockets

Summer League team. That's a rough equivalent of baseball spring training. In other words, games whose outcomes are meaningless. But not to Morey. Well, our dominant 4-0 Summer League team, we're trying to hang another Summer League banner, 4-0, and our highest pick on our team is 45, I think, or something like that. So we got our motley crew. But the reason you have such a motley crew is your fault, right? Because you're giving away all the high draft picks to get the Superstars?

Yes, exactly. You insightfully... I was about to mention that. Yeah, that some GM idiot has mortgaged the future to try and put together our hopeful championship team. And because of that,

we haven't had a first-round pick in several years or... So it sounds like you care. It's not just... Oh, I care so deeply. And I'm not... And it's stupid. I have no idea why I care, but I like winning.

What you don't have yet, as you've alluded, is a championship. And I'm just curious what it feels like overall. I'm guessing when you self-assess, you think, yeah, you know, I'm doing a pretty decent job. I'm sure you work hard. And again, there is a lot of outcome success, but I'm curious how big a gap the not having won the championship leaves or what it feels like. It feels like an Ives piece where it just dissonance the whole way, but no final chord at the end to satisfy you. That's how it feels, basically.

And then if you win it, it becomes Brahms or Mozart or somebody? If you win it, it becomes like Andrew Lloyd Webber. Just the perfect melody, you know. Just a nice, resolved power chord, basically. Coming up next time on Freakonomics Radio. Well, the image of the professional footballer, what is it? Every player is a multi-millionaire driving a Ferrari. That's a myth.

I've only made about $15,000 in the UFC so far this year. It's a pretty typical fighter story to be broke and trying to make it, you know. What the life of a professional athlete is really like. Also, the afterlife. I feel like I'm in a perpetual state of transition, which is interesting and uncomfortable at the same time. Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Anders Kelto, Derek John, and Alvin Melleth, with help from Matt Straub.

Our staff also includes Allison Craiglow, Greg Rippin, Harry Huggins, and Zach Lipinski. Our theme song is Mr. Fortune by The Hitchhikers. All the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts or wherever you get your podcasts. The entire archive is available on the Stitcher app or at Freakonomics.com, where we also publish transcripts, show notes, and more. If you want the entire archive ad-free, plus lots of bonus episodes, go to stitcherpremium.com slash Freakonomics. We can also be found on Twitter, Facebook, and LinkedIn, or via email at radio at Freakonomics.com. Freakonomics Radio also plays on many NPR stations. Check your local station for details.

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