Most of us are sports enthusiasts. We believe what we see and what we see is the end result on our television sets. Have you ever wondered how cricketers, who face only a few deliveries a season, footballers who score about two goals a week and tennis players who play four tournaments a year are so exceedingly rich?
The life of a sport star is very intriguing and a lot goes behind the making of one. There can be found companies, which offer the organisers their employees, who are specially trained to work in sports events, in different jobs, from waiter to a doorman. All this leads to a situation, where the events are organised more and more on the rules set by the companies. This is where money creeps in. I must say that all sport stars are brilliant economists in their own right. All that we have studied in the field of Economics, Commerce and Finance is actually put to use in the daily affairs of sports globally. I have brought you a closer look into the economics surrounding Sports, the new entertainment business.
All the Accounting Standards and Concepts that we have studied hold true in the books of accounts of a sporting organisation as well. For example, every sports organisation follows the Entity Concept. This is the main reason why we collectively call a group of players, a team. When a team enters into contracts with third parties, the owners enter in the team’s name. We don’t say that Giancarlo Fisichella signed for Vijay Mallya’s F1 team. Instead we say, “Giancarlo Fisichella signed for Force India.” Hence, the team has an identity of its own. Secondly, team players have a dual role in the accounts of the firm. A player, for instance Arsenal footballer Francesc Fabregas, can be treated both as a unit of labour as well as a fixed asset. Labour, because he is one of the many players producing goods (goals) and an asset owing to the fact that he has been acquired by the firm to produce the goods in the years to come.
Naturally, even players are subjected to an accounting phenomenon called ‘depreciation’. Let us say, that David Villa Sanchez has signed a four-year deal with Valencia CF for $32 million. Hence, as per UEFA principles, each year his contract value will depreciate by one-fourth the amount. So at the end of the first year, he will be valued at $24 million and at $16 million at the end of the second year. If another team wishes to purchase Villa after two years, they will have to pay a minimum of $16 million. Similar is the case of ‘appreciation’. For example, in the year 2000, Nicolas Anelka was purchased by Arsenal for a meagre $1 million. However, owing to his brilliant form and demand post Euro 2000, he was sold to Spanish powerhouse Real Madrid for a whopping $40 million. As per the Cost Concept, an asset is recorded at the price paid to acquire it and this cost is the basis for all subsequent accounting for the asset. Let us consider that renowned Pakistani Hockey player Sohail Abbas has been acquired by PHL side Hyderabad Sultans for a price of $ 900,000 and the cost of his visa and work permit is an additional $ 100,000. Hence, his value now stands at $1 million and any further transactions will be based on this figure. Such is the peculiar nature of accounting in the sphere of sports as well.
Sports should not be typecast as a pure economic phenomenon. It is anything but that. This is because it has social and cultural implications as well. The amount of welfare that arises from sports like cricket and football exceeds their respective revenues. Sports create a sentiment of unity wherein players from different races, religions and backgrounds function together as a team to achieve a common goal. Such an ideal is yet a dream far away.
The world of sport is entirely based on the concept of Globalisation. In any other sphere of idea of citizens of foreign countries moving across international boundaries with equal recurrence is unimaginable. This is not the case in the world of sports, which enables economists to study consumer behaviour, labour and hence accounting for sports organisations is filled with intrigue. Obviously, wherever we have globalisation and full commercialisation, we are bound to have a greater concentration of quality and success. For example, in the English Premier League, Arsenal FC is a club in North London and has a French Manager, Arséne Wenger. When he took over, the only foreign player in this English side was Frenchman Patrick Vieira. Today, the only English player at Arsenal is Theo Walcott, who struggles to find a place in the starting line-up. Liverpool’s Spanish boss Rafael Benitez has bought mostly Spaniards ever since taking charge of the Merseyside club.
The reason behind this is that the richest clubs are able to rope in talent, which usually is imported from European countries like Spain, France, Germany and Italy. If doctors, engineers, scientists, lawyers and other professionals were to move freely, there would have been a higher concentration in the richer countries and this would lead to greater economic disparity across continents. This is exactly the problem in the world of sport. It is because of sporting competitions like IPL, EPL, PHL, NFL, NBA and many more that there is a concentration of foreigners in the host countries. These rich countries have the purchasing power and they literally purchase human capital from any corner of the globe.
Let us discuss a couple of aspects of economic theory and their application in the world of sport. The most prominent one is the Game Theory. As we all know, Game theory is a branch of applied mathematics and economics wherein players choose from given alternatives to maximise their economic returns. For the sake of simplicity, let us study a case of two players where Player A does best given what Player B is doing and vice versa. In the world of competitive football, domestic league players are under contract to play for their respective clubs. Once a player is nearing the end of his contract, he gets a renewal provided his performance of the terms of the contract has been satisfactory. A club may also choose not to extend that player’s contract or the player himself may choose not to sign an extension. Under such circumstances, the player is deemed to be out of contract, or simply, he is a ‘Free Agent’. Several new clubs tend to lure free agents with lucrative offers and this transaction is free, as the old club receives no transfer fees. Usually, clubs do not unnecessarily like to lose players because with the departure of players, their likelihood of winning trophies diminishes. Clubs specially dislike losing players who have played for a long time and have blended well with the team. Departure of players also has an impact on team morale and team chemistry.
Let me talk a bit about the Indian Premier League. It has been the talk of the town for much of this summer. The real contest commenced much before the matches when the eight franchises vied against each other to rope in the best of names in world cricket. The bids were humongous granting the players elevated status. The most expensive player turned out to be our very own captain Mahendra Singh Dhoni, acquired by the India Cements owned Chennai Super Kings for Rs 6.5 crores. The entire auction process has relevance to Game Theory. The eight franchises participating in the auction can be looked upon as ‘eight players’ who are trying to secure the services of Dhoni for their respective teams. The bid is subject to transfer kitty constraints. This is a perfect example of a real life game, where we have rational individuals interacting in a strategic environment, their decisions being contingent upon the decisions of the other players.
Game Theory finds its application in the world of Tennis as well. When Roger Federer serves, Rafael Nadal has two areas to send it back. Thereafter the court transforms into a square matrix.
The second aspect of economic theory that I would like to draw your attention to is the Law of Returns to Scale. When players play together, it has been observed that not only do they benefit individually, but the team benefits as well. In other words, concentration of world class players in a single team helps the team benefit. This is exactly why; bookies and cricket pundits had already predicted that the Hyderabad Deccan Chargers would win the first edition of the IPL. This is the reason why McLaren Mercedes won the laurels in the company of both Lewis Hamilton and Fernando Alonso.
A single article is not enough to establish the relation between Sports, Commerce and Economics. The kind of money generated by Sports is astounding. Even better, it is becoming a classic case of sports and commerce merging to propel sports towards the league of big businesses and huge returns. Such is the status of sports in this age that it has led industrialists to invest in it. However, to earn maximum returns, it is essential to think deep, to think not only from the heart but the mind as well. Sports have now become a vast field of study owing to the abundance of facts and data easily available. It has aided in bringing different cultures closer and is a means of widening horizons. The sports industry has already given a lot to the Indian Economy this year and it will reap favourable results in the years to come, that too in such a manner that India will one day become a stalwart in global sports. With a country big enough to host the Olympics, things are on the rise. It did take Lalit Modi 13 years to establish his idea of a cricket league. Within a period less than that I am afraid sports economy will have to be included in the syllabus of Business Schools, quite similar to Harvard Business School that has had a whole paper study dedicated to Spanish giants, Real Madrid. India shining in sports and the economy booming out of it – a vision no longer far away.
[Image Source: http://www.leggully.com/wp-content/uploads/2008/05/iplsponsors2.jpg]