Economic View: A few winners, lots of losers

In case you hadn't noticed, this morning marks the start of a new season of Formula One, which ranks with the Premier League and America's National Football League as one of the great businesses of sport.

Even for people interested in cars, it is a pretty extraordinary achievement to make the succession of near-identical cars whizzing round a circular track seem worth watching. It is not like the days of great road races such as the Mille Miglia, when drivers raced real sports cars round 1,000 miles of real Italian roads - though regrettably killing rather a lot of people in the process, hence the race's demise in 1957.

But it works in the commercial sense that it packs in the TV punters. Other sports work well as businesses too: both the American and British versions of football; many (not all) of the Olympics disciplines; tennis; golf. Then there are the sports that you might imagine would be commercial draws but don't quite gain the necessary audiences to make the big time: cricket and (sadly since it is a wonderful game) hockey. And then there are niche sports that do rather better than you might expect: the old faithfuls of snooker and darts, and new exotica such as beach volleyball, where the women's world championships started only a decade ago.

Why should some sports be so hugely successful in commercial terms, while others languish? The start of Formula One coincides with the publication of a report from the Oxford Review of Economic Policy, no less, on the economics of sport.

Someone leafing though this might wonder whether it is really wise to let economists loose on such a subject, since they tend to come up with phrases such as "elasticity of demand" and "outcome uncertainty". One article in the US literature is entitled: "A Test of the Optimal Production Network Externality in Major League Baseball".

But the more we understand the economics of sport, the more chance that governments and sports authorities can frame policies both to foster them and to curb abuses. Four main developments are identified in the lead article of the review, written by Professor Stefan Szymanski of Imperial College.

First, sport has become important from an economic point of view. Second, litigation has risen. Third, the demand for teaching sports economics in the universities is greater than ever. And finally, the sporting world provides lots of examples of incentives and labour-market behaviour.

The first three all come from the same point: spectator sports are a normal, if not luxury, good and as society becomes richer, it tends to spend more money on this kind of activity. On the other hand, it is not a very big industry. Deloitte, the accounting and consultancy group, has just published its annual report on football clubs. The European league, ranked by income, is shown in the left-hand graph, with Manchester United at the top. It is ahead of the largest US sports club (actually a baseball club), the New York Yankees, and well ahead of the largest American Football club, the Washington Redskins (see second graph).

The actual businesses are quite small. Man U is a global brand, worth £700m. But that is only about the same amount as they hope to get for The Daily Telegraph. It has revenues of £173m, which is less than a single successful Hollywood movie.

Move down the scale and most other sports businesses are tiny. In 2001, the whole First Division in English football generated only £200m, while county cricket made just £66m (next graph).

Yet top sports personalities earn huge amounts. How so? Well, actually pay is part of the problem for British and European football. It is so hugely competitive that the stars extract too greater a proportion of the revenue to leave much for the businesses. American Football is a better business in the sense that the clubs are more valuable: they manage to extract more revenue relative to the amount they have to pay players.

The explanation for sports star pay, now at levels that would have seemed ridiculous 20 years ago, comes in three parts. First, sports stars have short careers. Perhaps golfers last the longest, yet the drop-out rate on the links is huge (last graph). Nearly 40 per cent of professional golfers drop out after the first year and after 10 years, only 10 per cent are still at work.

But (and this is the second part of the explanation) these rates are not because of ill health or inability to play. They are simply because most golfers cannot cover their costs. The bulk of the money goes to a very few at the top.

And that leads to the third element of the explanation. The reward structure of all these big-money professional sports is such that it sucks in too many people. The glittering peaks are so high that thousands and thousands of people want to have a crack. But there is only room for a few winners. And those winners scoop not only the prizes but also the sponsorship deals, where the competition is tougher still.

Modern sport has no room for the good second-rater. This phenomenon was highlighted in a wonderful book The Winner-Take-All Society, by Robert Frank and Philip Cook. The authors pointed out that we were moving to a world economy - not just in sport - where the few at the top took much of the pot.

And that, surely, is the thing to ponder this weekend if you find yourself distracted by the hullabaloo over the Australian Grand Prix. How do we wean ourselves off a world where we only admire winners, be they in motor racing, football, the media, the arts or indeed the business world?

Until we do respect achievements for their intrinsic value, we will be dissatisfied and miserable.