19 Apr 2013
Archives • Gambling

How the DOJ “Liberated” Poker from the Market’s Tyranny

[Editor's note: This article was originally published at the Mises Economics Blog on April 25, 2011]

The first response of many folks to the Justice Department’s recent crackdown on online poker was, “Doesn’t the government have anything better to do?” I find this reaction puzzling. What could be a more essential function of the state than to undermine public confidence in the market?

I’m not being facetious. The axiom of all state intervention is that nothing can exist without government. In antitrust, for example, there is a famous quote, attributed to Thurgood Marshall, that the Sherman Act is the “Magna Carta of free enterprise.” If there’s no antitrust, how can there be competition? Ignoring the fact that markets functions long before the Sherman Act’s invention in 1890, the insidious implication is that no individual can have any confidence in a market that is not directly or indirectly controlled by antitrust officials.

The DOJ’s crackdown on poker, likewise, sends an important message to the general population that this was a dysfunctional market that can only be made functional by the benevolent hand of the state. Indeed, after the initial “don’t you have anything better to do” reaction, the secondary response of many poker professionals was to blame inadequate lobbying for the present situation. If only poker players were more politically savvy and organized, the theory goes, then they’d be in a better position to assert their “special” interests. And that plays right into the hands of the DOJ and the larger government it serves. After all, the feds don’t want to eliminate online poker; they simply want to ensure there is no free market for online poker.

The state’s counter-reaction, of course, is that “free” markets are inherently deceptive and harmful to consumer welfare. A key element of the poker crackdown is the notion that banks committed “fraud” by mislabeling transactions between customers and online poker providers. Banks did, in fact, do just that — because they were trying to help their customers get around the US government’s ban on online gambling. Absent the state’s intervention, there would have been no need to conceal the true nature of what were entirely voluntary exchanges. Yet now the DOJ has used these acts of concealment to further undermine public confidence in the market by stating, falsely, that there was massive “fraud.”

It’s the oldest trick in the book. One intervention undercuts public confidence in the market, so a second intervention is necessary to prevent further erosion. The gambling industry in particular is rife with this. To cite one of my favorite examples: In 2004 the Federal Trade Commission intervened in a merger between two casino operators. The FTC forced the newly combined firm to sell one of its riverboat casinos in Baton Rogue. Why? Because they were the only two such casinos in Baton Rogue, which would create a “monopoly.” Actually, at the time there were 16 casinos operating in Louisiana at the time (this was pre-Katrina), but of course, the FTC counted the two Baton Rogue casinos a distinct market.

Anyhow, the FTC completely ignored the fact that the market for “casino services” in Baton Rogue was not free at all, but rather a product of state cartelization. Louisiana’s Gaming Control Board held a monopoly on casino “licenses,” and it decided how many casinos could compete in Baton Rogue. That the merger of the two casino operators produced a hyper-local “monopoly” was incidental to the state’s decision to ban all outside competition — a move the state deemed necessary to ensure public confidence in the gambling market:

[T]he development of a controlled gaming industry to promote economic development of the state requires thorough and careful exercise of legislative power to protect the general welfare of the state?s people by keeping the state free from criminal and corrupt elements.

In other words, a free market for gambling would inevitably fail because “criminal and corrupt elements” would overwhelm the process. Hence there must be a state-run market that the public can express true confidence in. The FTC’s actions, in turn, strengthen that public confidence by ensuring “private” actors don’t conspire to undermine the carefully constructed “competitive” regime employed by the state.

The biggest threat to government control is not individual firms that “break” the law; it’s the firms that successfully operate outside of it. That is why the DOJ had to, in its mind, shut down the online poker operators. It sends a message to customers that they cannot trust shady, non-government-based gambling outfits and must seek refuge in the “free” market of federal regulation and taxes. From the DOJ’s standpoint, therefore, it simply liberated poker players oppressed by the market — and now they can seek liberty in the Providence of lobbyists and lawyers.

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18 Apr 2013
Franchise Operators

Haslam Investigation Raises Questions About Goodell’s Due Diligence

An FBI agent claims that Cleveland Browns owner James A. Haslam had personal knowledge of a scheme to overcharge customers of Pilot Flying J, a truck stop company owned by Haslam and his family. The agent cited a “confidential informant” who claimed Haslam was present at a meeting where the scheme was discussed. The agent’s statement came in an affidavit submitted by the FBI and the Internal Revenue Service to obtain a search warrant for Pilot’s headquarters.

At this stage, Haslam has not been charged with any crime, much less tried and convicted. Nobody should ever presume a person’s guilt based on the hearsay of a single FBI agent. There’s a lot of steps remaining in this unfolding process.

Still, the FBI affidavit strongly suggests Haslam and other Pilot employees participated in a scheme to commit “rebate fraud” against certain customers. We’re not talking about some hypothetical antitrust scenario regarding “anticomeptitive prices.” The FBI believes Pilot directly lied to customers about rebates they were entitled to on fuel purchases. This allegedly took place over several years and with Haslam’s knowledge.

Haslam purchased the Browns for $1.05 billion last August from Randy Lerner, who inherited the team from his father in 2002. The sale proceeded unusually quickly by NFL standards. On July 27, 2012, Lerner issued a statement confirming he’d “been approached by” Haslam as someone ”interested in making an investment in the Cleveland Browns.” Later that day, then-Browns president Mike Holmgren confirmed Lerner was selling the team outright to Haslam. The NFL, which normally takes months to review an ownership transfer, approved the sale less than a week later, on August 2. One explanation for the quick approval was that Haslam already owned a minority share of the Pittsburgh Steelers, which he purchased in 2008.

NFL franchises (aside from the Green Bay Packers) are not publicly traded stock companies. Transfer of any ownership interest is subject to league approval. Under the NFL Constitution, the “Commissioner shall conduct such investigation as he deems appropriate” of the proposed sale and make a formal recommendation to the owners, who must approve the deal by a three-fourths vote. The only exception to this rule is for transfers to the “immediate family” of the previous owner, either by death or gift. Otherwise, the commissioner is charged with investigating all proposed ownership candidates.

This means Roger Goodell had a fiduciary duty to conduct due diligence on Haslam’s purchase of the Browns. The fact that Haslam was already a minority owner of the Steelers was irrelevant. It’s therefore valid to ask if Goodell had any indication that Haslam and his company might be under federal investigation. According to the FBI affidavit, a confidential informant first approached the bureau in May 2011 about the alleged fraud. That was over a year before Haslam purchased the Browns. Furthermore, the alleged fraud has taken place over several years.

Two additional questions that might be posed to Goodell: First, was Haslam given any special consideration because his brother is Tennessee Gov. Bill Haslam?* Second, was the quick approval intended to help outgoing owner Lerner, who is losing money with his remaining sports property, the English Premier League’s Aston Villa?

Going forward, Goodell might use his disciplinary powers to sanction Haslam if the FBI charges have merit. Like players and coaches, the league constitution authorizes Goodell to fine an owner up to $500,000 for “conduct detrimental to the welfare of the League or professional football,” which can basically mean anything that generates bad press. Goodell cannot unilaterally remove Haslam as owner of the Browns. Goodell or any owner on the league’s executive committee must request a hearing before the full ownership. After such a hearing, a three-fourths vote–24 clubs–is necessary to “terminate” an ownership interest.

*Come to think of it, Gov. Haslam is a Republican. Might that explain why the Democratic-controlled FBI suddenly developed an interest in a truck stop company overcharging people for fuel? You don’t want to mess with Teamsters or their pals in the White House.

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17 Apr 2013
Bureaucracy • Coaching Carousel

Extradition Misdirection on Chip Kelly

Philadelphia Eagles coach Chip Kelly “committed at least one major violation” of NCAA rules while he was the head coach at the University of Oregon, according to a report this week by Adam Jude in The Oregonian. The alleged violation reportedly involved NCAA restrictions on the use of outside recruiting services. Kelly, named the Eagles coach earlier this year, would not be the first NFL coach to leave behind a college program facing NCAA sanctions. Seattle Seahawks coach Pete Carroll left a similar situation at USC.

DJ Dunson, writing at the Shadow League, doesn’t like the fact that “rogue coaches” like Kelly and Carroll can escape the consequences of NCAA justice. He suggests both men should be treated like fugitives by NFL Commissioner Roger Goodell:

If foreign nations can agree to extradition laws that corral individuals who’ve escaped prosecution and hand them off to the nation where their crimes were committed, the NFL and NCAA can work out a similar arrangement. The NFL set a precedent with Terrelle Pryor. Goodell needs to make a similar statement with Kelly and prove he’s the entire NFL’s disciplinarian and not just a dictator to players.

Terrelle Pryor is a quarterback for the Oakland Raiders. While playing for Ohio State in 2010, the NCAA suspended Pryor for violating amateurism rules. Rather than returning to Ohio State and sitting for four games, Pryor entered the NFL’s supplemental draft—since the deadline had already passed for the regular draft—whereupon Goodell suspended him for five games without pay. Technically, Goodell was not enforcing the NCAA’s suspension; he cited Pryor’s conduct as an “a deliberate manipulation of [NFL] eligibility rules” in that he “intentionally took steps to ensure that he would be declared ineligible for further college play,” thus enabling him to enter the supplemental draft instead of waiting for the regular draft the following year.

This “precedent” doesn’t exactly justify Dunson’s call for action against Kelly. Kelly broke no NFL rules in accepting a job with the Eagles. There is no draft system for coaches. Even if Kelly had been fired for cause by Oregon, there is no NFL rule I’m aware of that would have precluded him from accepting a position with the Eagles.

Dunson’s extradition analogy misses a critical understanding of the term. In the American and British common-law tradition, extradition requires double criminality; that is, the act justifying the extradition must be an offense in both jurisdictions. NCAA recruiting rules have no counterpart in NFL law. The alleged major violation in the Oregon case involves payments made to an outside recruiting service. In the NFL, teams are generally free to retain and pay whatever outside consultants they choose.

It wouldn’t make much business sense for the NFL to enforce NCAA penalties against coaches. For one thing, NCAA enforcement helps drive qualified coaches away from college to the NFL, as in the cases of Carroll and Kelly. And from the standpoint of American law, any formal arrangement whereby the NFL enforces NCAA penalties would raise serious antitrust suspicion. What Dunson calls an “extradition agreement,” the Department of Justice calls a conspiracy to restrain trade. The NFL can do that with the players, because the existence of the NFLPA triggers an exemption from the antitrust laws, but not with non-union management personnel like coaches.

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12 Apr 2013
Labor • Reader Mail

Eliminating the NCAA Won’t Eliminate Bureaucracy

In response to my last post on changing the NCAA’s compensation model for athletes, a pair of commenters insist that it’s simply a matter of eliminating the bureaucratic middlemen and allowing boosters to pay players:

I don’t think you quite get the role of boosters in big time programs like an Alabama or Ohio State.  It’s everything the coaches/admin can do now to keep boosters from paying or “gifting” players.  Take the NCAA out of the picture and teams like Alabama could easily pay top players 500k and a sliding scale for lesser contributors.

I’m well aware of the current and historical role of alumni/boosters. College football started out as a purely student- and alumni-run activity. Near the turn of the 20th century, university presidents brought the sport under “institutional control,” which as I discussed earlier this week at Saturday Down South is just a synonym for what Ludwig von Mises called “bureaucratic management”:

Since the goal of college football is not to make a profit for its own sake–as there are no owners to pay dividends to–bureaucratic management becomes necessary to ensure the proper functioning of the system. A nonprofit organization does not ultimately answer to consumers but is a sovereign unto itself. That’s true even of a small charity, where the goal is to serve the greatest number of people using the available resources. The point of intercollegiate athletics is to provide amenities for the greatest number of students and student-athletes possible, including those in non-revenue sports.

Even if you eliminate the NCAA you still have to deal with the non-profit universities. Their objectives and mandates are not necessarily compatible with those of athletics boosters. First and foremost, there’s the Title IX problem. If boosters start sponsoring player en masse, there’s a strong likelihood that federal regulators will still consider that university support requiring “gender equity” in the allocation of funds. Boosters probably won’t want to pay the same rate for a five-star running back as a women’s lacrosse player.

Title IX aside, the more basic problem is that unrestricted boosterism is simply incompatible with institutional control. I don’t say this as an endorsement of institutional control, mind you. It’s merely an observation on the nature of management and incentives. If boosters start funding athletes directly, they’ll logically demand a greater say in how the program is run. This already happens to some extent with large boosters (think T. Boone Pickens at Oklahoma State). The nonprofit organizational model can only tolerate so much. At some point the absence of ownership becomes a barrier to reform.

If you want college sports to have a labor system that more closely resembles the NFL or NBA, then you have to mimic their business models to some extent. That would mean, for instance, spinning off the top-tier football and basketball programs into for-profit entities with defined owners. There could be a combination of university and booster ownership of individual teams. The key point is, major athletics would be removed entirely from the realm of bureaucratic management to entrepreneurial management. That’s the only circumstance where I see the types of “pay-for-play” scenarios envisioned by NCAA critics thriving.

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10 Apr 2013
Labor

Some Army Wisdom for “Pay the Players” Advocates

There’s a wonderful passage in Colin Powell’s autobiography about his promotion from colonel to brigadier general in June 1979. As you might imagine, Powell wrote of his enthusiasm at finally becoming a general in the army. Then the reality set in:

A rite of passage for new generals was to attend “charm school,” a series of orientations beginning with a welcome by the Army Chief of Staff, then General [Bernard W.] Rogers. Fifty-two of us gathered in Pentagon conference room to hear words that I have never forgotten. After congratulating us, Rogers put everything into perspective. “Let me tell you how keen the competition is at this level,” he began. “All of you could board an airplane and disappear over the Atlantic tomorrow, and the fifty-two colonels we’d replace you with would be just as good as you are. We would not be able to tell the difference. Furthermore, many of you have to accept that you have had your last promotion. So do your best, and let the future take care of itself.” Half of us would make major general. At most, ten of us would make lieutenant general. And maybe four of us would make four stars.

Critics of the NCAA demanding a model of player compensation closer to that of the NBA and NFL might want to heed General Rogers’ words. There’s a questionable assumption underlying all “pay the players” arguments, and it’s that current players hold some unique market power that they only need act upon to secure reform. That doesn’t make much sense if you actually examine the structure of college athletics.

The army is hardly a for-profit business, but as General Rogers noted, there is robust competition among officers for a fixed number of promotions that become more limited as a person moves up the ranks. Basketball and football have a similar hierarchy. At the bottom level are high school players who compete for limited spots in Division I, with the less successful falling to Division II or Division III. Within Division I there are marquee schools like Alabama and Ohio State and lesser programs (I won’t name names). And even within a top program like Alabama there are four-year starters who will get to the NFL and backups whose football careers end at graduation.

If the players at the top of the current college football pyramid decided today to withhold their services en masse—akin to Rogers’ hypothetical about the 52 brigadier generals going down in a plane crash—college athletics would not ground to a halt. The top schools would simply replace the absent players with those from the next level of the pyramid. There are plenty of Division II and Division III players who would jump at a chance to earn the compensation and amenities offered a Division I player.

The economic reality, as Oklahoma football coach Bob Stoops eloquently told Matt Hayes of Sporting News recently, “Those 70,000 fans in the stadium are cheering and buying tickets to see Oklahoma,” not a particular group of players. After all, even the greatest college football player will be gone after four years. Professional leagues can build around long-term stars, but at the college level, the institution and its cultural identity is the product.

Coach Stoops also pointed out that contrary to media propaganda that college athletes are little more than 21st century indentured servants, his players do, in fact, benefit from the exchange of their services:

You know what school would cost here for [a] non-state guy? Over $200,000 for room, board and everything else. That’s a lot of money. Ask the kids who have to pay it back over 10-15 years with student loans. You get room and board, and we’ll give you the best nutritionist, the best strength coach to develop you, the best tutors to help you academically, and coaches to teach you and help you develop. How much do you think it would cost to hire a personal trainer and tutor for 4-5 years?

And it’s those other students and alumni who pay retail prices for their degrees (with fewer added benefits) that form the consumer base for major college athletics. The vocal minority in the media may be apoplectic with rage over the present state of affairs, but the silent majority of fans and players are quite content. If they were dissatisfied, players would strike and fans would boycott.

The truth is that’s it not greedy cartels or unscrupulous college presidents that make the top tier of college sports profitable—it’s those pesky consumers. They continue to defy the critics’ tirades and pay for a product they enjoy. Players continue to provide services for a compensation package that, while non-traditional from an employer-employee standpoint, provides immense benefits to them.

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08 Apr 2013
Viewer Mail

Bad Calls and Long-Run Effects

Thomas Byrne left the following comment earlier today:

The Wichita State/Louisville game has me wondering. I believe that a “bad” call late in a game is more damaging than the same call early in the game. Trying to apply the idea of structure of production idea. A bad call early in a basketball game allows the coach to alter his strategies (alter his production structure) to compensate for the misfortune. Shoot more threes, switch to a zone, etc. He has many options. With 20 seconds left he has fewer production (scoring) options left so the elimination of one option is much more damaging. Or it really could be the fact that the bad call was more recent and memorable? Just wondering if you had any thoughts.

My only thought is that I’m don’t see how one can isolate “bad” calls from every other event that takes place during a game. Even the good calls affect strategy, not to mention other non-officiating events like injuries or a player having a worse shooting night than expected. And as Ludwig von Mises observed in discussing the subject of long-run effects on entrepreneurial profits,

[W]e must guard ourselves against the popular fallacy of drawing a sharp line between short-run and long-run effects. What happens in the short run is precisely the first stages of the chain of successive transformations which tend to bring about the long-run effects.

A bad call is just one link in a defined chain of events called a “basketball game.” The entrepreneur–in this case, the coach–must adjust to all changes in the available data  as the game proceeds towards its inevitable conclusion. (One difference between a game and the market is there is a known time at which the game will stop; in this sense there’s a “final price” which is not the case in the market.)  Even though a coach’s options may be more limited later in the game, I’m not sure that makes a later bad call more or less meaningful. It’s simply data that needs to be considered.

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06 Apr 2013
Consumer Behavior

Fandom as Cultural Identity

Some people instinctively recoil at the suggestion economics applies to sports. A few weeks ago, a Twitter commenter chided me for stating teams within a league compete for fans. Nonsense, he insisted. Nobody who declares himself a fan of one team would ever switch to another. Fandom is immutable.

On the other side, I recall my old college newspaper editor, P.J. Doland, making the argument once that a person should only be a fan of winning teams. What benefit is there in rooting for losers? (Doland, a Chicago native, made this statement at the height of the Bulls dynasty, which may have compromised his scientific objectivity.)

Casual observation tells us that teams with a long history of losing still have some fans. Likewise, it is generally true that winning teams attract more fans, at least during the good times. Fandom itself is tricky to define. It’s not restricted to paying customers who show up at games. Nor are all those in attendance fans of a particular team. Indeed, the majority of persons who consider themselves fans of a team may never pay a single dollar for a ticket or any officially licensed paraphernalia.

In this sense my Twitter heckler was right. Fandom falls outside the scope of economics insofar as there is no exchange. Fans are not necessarily consumers and vice-versa. A fan can be someone who watches every game on free television—which isn’t hard to do in the case of the NFL—and talks about the team with his friends at the local bar. Aside from his time, the fan surrenders nothing of value in exchange for his “fan” status.

How Sports Fandom Is Like Voting

Earlier this week there was a special election here in Charlottesville to fill the office of city treasurer. Charlottesville is a one-party town. Democrats occupy all elected citywide offices. The last non-Democrat to win election was a single city councilor back in 2002. Winning the Democratic Party nomination is thus tantamount to election.

The treasurer election was noteworthy because there was an independent candidate, the first time that had happened since the 1960s. It was a spirited campaign, but in the end, the independent lost to the Democrat by a 3-to-1 margin, which is about the norm for Charlottesville.

The election was not an impartial comparison of the respective merits of the two candidates. It’s doubtful any voter conducted a “cost-benefit” analysis to determine who would make the better treasurer. The election’s real purpose was to ratify a decision already made by a handful of persons who direct the affairs of the city’s Democratic Party. The independent candidate was simply a placeholder for those against ratification.

As you might expect, turnout for this election was miniscule, about 5% of all registered city voters. Even though it was a nice day and there was no cost to vote—again, aside from time—95% percent of the population had no opinion on the matter. As with most elections, the silent majority has no time for politics, enabling the more committed minority to control the outcome.

This isn’t a critique on my part of non-voting. While voting, like sports fandom, is not an act of economic exchange, it nonetheless remains subject to the universal division of labor. Most people simply have no time for politics and implicitly delegate the study and organizing of the government to those who are interested. That is why political parties exist.

If the independent had been the Democrat (and his opponent the independent), he would have prevailed last Tuesday. People voted party not person. Even within the small subset of registered voters who did participate, the particulars of the election—and the office being sought—were unimportant. These are empirical matters and voting is by its nature an abstract act.

Consider that state and national elections typically yield a much higher turnout than purely local contests. From a purely theoretical standpoint this makes no sense. A voter is far more likely to affect the outcome of a city treasurer race than a presidential election. You might say, “But the presidency is a more important office!” Yet importance is relative. The president oversees a vast bureaucracy that rarely touches you directly. The city treasurer sends you a property tax bill and can seize your house if you don’t pay.

And because the president supervises so many different policies and offices, the likelihood you’ll agree with all—or even most—of his decisions is virtually nil. Even the most partisan Democrats, like the Charlottesville City Council, would probably disagree with a majority of the specific actions (drones, Iraq, the Drug War, etc.) taken by President Obama. Again, we’re talking about the empirical. In the abstract they still love the man.

The essence of all voting is the abstract. You support a given party because it gives you a sense of your own cultural identity. This applies equally to Democrats, Republicans, even Libertarians (the big-L type). The same is true of sports fandom. Fans may hate their team’s current coach or star player. But they remain fans because it’s not about the empirical makeup of the present team. It’s about the abstract association with other fans of the same team. Fandom is simply a part of their cultural identity.

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03 Apr 2013
Archives • Bureaucracy

Quarterbacking the Late Shift

Editor’s note: I published this article at the Mises Economics Blog in January 2010, at the height of the “Second Late Night War.” In light of NBC’s most recent public battle over the future of “The Tonight Show,” I thought it appropriate to review what I wrote three years ago.

* * *

In 1992, Jay Leno became the host of NBC’s “Tonight Show,” and Brett Favre played his first game as starting quarterback for the Green Bay Packers. Eighteen years later, Favre leads the Minnesota Vikings – Green Bay’s traditional rival – in a playoff run while Leno is poised to regain the hosting job he surrendered to Conan O’Brien less than a year ago. The ongoing drama surrounding both men emphasizes the difference between bureaucratic and entrepreneurial management in organizations.NBC and the Packers both planned the replacement of their star employees years in advance. Ted Thompson, the Packers general manager, drafted quarterback Aaron Rodgers in 2005 as Favre’s eventual successor, while NBC chief Jeff Zucker signed O’Brien to a new contract in 2004 that guaranteed him the “Tonight Show” by 2009. Long-term planning is common in any firm, but when dealing with high-profile public positions, there’s a tendency to emphasize the individual’s desires over organizational objectives. That’s what made Thompson and Zucker’s moves stand out.

Publicly, Leno and Favre cleared a path for their successors. Leno spoke on his “Tonight Show” about the importance of keeping O’Brien at NBC and the need to avoid a repeat of Leno’s own problematic transition from Johnny Carson. Favre never publicly supported Rodgers, but in 2008, after many years of wavering on the subject, Favre finally announced his retirement.

Both men then changed their minds. Leno decided he still wanted to tell jokes on television every night, and Favre wanted to continue throwing a football. NBC and Green Bay had already installed their successors, but no matter. The question now was how would each organization’s management respond?

Green Bay stuck to its guns. Rodgers was their starter going into the 2008 season. When Favre realized he couldn’t simply have his old job back, he demanded his unconditional release (he was still under contract even after retiring). Green Bay said no, primarily because they did not want Favre to sign with Minnesota and compete against the Packers in their division. Instead, Green Bay traded Favre to the New York Jets on the condition that New York didn’t turn around and re-trade Favre to Minnesota. That didn’t stop Favre. A year later, he lied about his retirement a second time to secure his unconditional release from New York, whereupon Favre signed with the Vikings.

In contrast to Favre, Leno was perfectly free to sign with another network after his contract expired in 2009. He was under no ethical duty to retire. But once word got out that he might go to ABC or Fox, NBC management panicked. Zucker and his lieutenants offered Leno a new contract that would revive his one-hour program – sans the “Tonight Show” name now contractually obligated to O’Brien – to air during the prime-time hour of 10 p.m. NBC spun the new “Jay Leno Show” as a revolutionary idea that would cut the network’s programming costs – talk shows are cheaper then scripted dramas – while keeping both of its popular hosts in the NBC family.

NBC’s refusal to “move on” proved disastrous. Leno’s 10 p.m. show tanked in the ratings and destroyed the lead-in for the affiliated stations’ local news – their major revenue source. Leno’s program also diluted the “Tonight Show” brand, as Leno and O’Brien were now directly competing for guests and viewer attention.

Zucker and NBC management responded to theirs and Leno’s failure by…blaming Conan O’Brien. Instead of simply canceling Leno’s program, NBC decided to move it to 11:35 – the “Tonight Show” time-slot for 57 years* – bumping O’Brien’s “Tonight Show” past midnight. Somehow this move would reclaim NBC’s ratings lead at 11:35, which O’Brien “lost” to David Letterman’s “Late Show” on CBS, while simultaneously improving O’Brien’s program.

O’Brien rejected this idea last Tuesday; as of this writing, NBC and O’Brien have reportedly completed a severance agreement that restores Leno to the “Tonight Show” full-time while allowing O’Brien to move to another network.

The conventional wisdom – and I admit to reciting it myself – is that NBC made a mistake when it promised O’Brien the “Tonight Show” five years in advance. But consider NBC’s own late-night history. In the early 1990s, Johnny Carson was working on a year-to-year basis; he could basically retire anytime he wanted. Behind the scenes, NBC quietly signed Leno – then Carson’s regular “guest host” – to a holding deal guaranteeing him the “Tonight Show” whenever Carson chose to retire. Unlike the 2004 O’Brien deal, however, this succession pact was signed privately and was not made public until after Carson announced his own retirement in 1991.

What transpired next, of course, was the late-night war between Leno and David Letterman, who felt he’d been robbed of the chance to succeed Carson himself. Letterman, then as now, was the more polished broadcaster and arguably the better creative choice. But Leno was the better business choice. Letterman had notoriously poor relationships with NBC management; Leno was the good corporate soldier who made a point of building relationships with the NBC affiliates – the network’s customers.

NBC erred not in picking Leno over Letterman, but in refusing to simply allow Letterman to walk away. The mistake was in trying to backtrack on a rational, long-term business decision simply to avoid some temporary bad press. Ultimately, Letterman left for CBS and temporarily enjoyed a ratings lead over Leno; over time the audience returned to Leno and the “Tonight Show” brand.

Yet not only did the current group of NBC executives fail to learn from their predecessors’ mistakes in the early 1990s; they managed to make far worse mistakes in dealing with the Leno-O’Brien situation. First, they publicly announced the succession plan; second, they openly attacked their customers by forcing them to air the Leno-at-ten program; and third, they refused to take responsibility for their actions by attempting to shift blame onto O’Brien. This was a total business failure.

Now let’s go back to the Brett Favre situation. Packers management faced public and press criticism initially for refusing to let Favre return on his own terms. But Ted Thompson and his coaching staff stood by their long-term investment in Aaron Rodgers. Even today, some people will say this was a failure; after all, Favre has the Vikings in the NFC Championship game, while Rodgers led the Packers to a first-round playoff defeat. Certainly a Vikings Super Bowl victory would vindicate Favre and discredit Thompson, right?

Well, no. It would vindicate Favre’s ego for sure. But it wouldn’t undermine the Packers’ business decision-making process. If anything, it is the Vikings who have demonstrated why the Packers made a smart move. Vikings head coach Brad Childress “recruited” Favre out of his second faux-retirement because he faced a win-or-be-fired scenario this season. During his Minnesota tenure, Childress failed to develop a long-term franchise quarterback despite his background as an offensive strategist. Favre was a quick-fix. And it worked: Midway through this season, Childress received a contract extension through 2013. He still doesn’t have a viable quarterback if and when Favre retires and stays retired.

For his part, Vikings owner Zygi Wilf also welcomed Favre, because winning in the short term aids and abets his quest to extort several hundred million dollars from Minnesota taxpayers for a new stadium. A Super Bowl win this year would help reduce political opposition to such a nonsensical project. Again, the question of how the team will operate post-Favre is secondary.

The Packers, in contrast, have a productive starting quarterback who could stay in that role – and contend for a championship – over the next decade. In a year or two, when Favre is finally retired and the press corps no longer feels compelled to exalt him, the logic of Thompson’s planning should be more readily apparent.

NBC executives have yet to learn this lesson. They insist a panicky restoration of Leno will solve their problems. They’re right to a point. It won’t solve the network’s business problems, but it solves the political problems of Jeff Zucker and his cohorts. Much like Zygi Wilf and Brad Childress, Zucker is trying to preserve his own standing regardless of the cost to his organization’s long-term success. It is a classic case of bureaucratic management.

After all, Leno is going to retire again at some point. And there’s a decent chance Leno’s ratings won’t return to their pre-2009 levels, especially given the ongoing bad press and the increased late-night competition (which may include a new O’Brien show at some point). Just as NBC had no backup plan for the failure of Leno-at-ten, it has no such plan for any other contingency. Indeed, beyond protecting Jeff Zucker and his executives from blame, NBC management appears to have no business plan at all.

Bureaucratic management is all about risk-aversion and blame-shifting. Case in point: NBC Sports and Olympics chairman Dick Ebersol publicly blasted Conan O’Brien last week as an “astounding failure” who was responsible for the current situation. Ebersol claims O’Brien would have better ratings now if he’d just taken Ebersol’s advice on how to improve the “Tonight Show.” Ebersol never specified what that magic advice was, nor why O’Brien would take notes from an executive whose own division is expected to lose $200 million covering next month’s Vancouver Olympics.

(It’s also curious that Ebersol wouldn’t lobby to keep O’Brien as “Tonight Show” host and try to improve the show going forward, rather then paying O’Brien upwards of $40 million to get him off the air. Then again, when you’ve already blown $200 million in shareholder funds, what’s another $40 million?)

In contrast, entrepreneurial management involves taking risks and responsibility. That’s what Ted Thompson did in Green Bay. Of course it was risky dumping a 16-year Hall of Fame-bound quarterback for an untested player. But Green Bay didn’t act arbitrarily or capriciously; it acted according to a long-term plan designed to keep the franchise competitive, not just at one position but throughout the entire 53-man roster. If it doesn’t work, then Ted Thompson and his staff will have no one to blame but themselves; they won’t have the luxury of hiding within the General Electric bureaucracy and blaming a freakishly tall guy with red hair. They can’t even blame Brett Favre.

*By which I refer to the slot immediately following late local news. Older readers will no doubt remember the 1960s-era Johnny Carson “Tonight Show” beginning at 11:15; over the years this moved progressively towards 11:35 as the affiliates claimed more time for their newscasts.

* * *

Postscript: Things obviously turned out great for Ted Thompson and the Packers. Aaron Rodgers led the Packers to victory in the 2011 Super Bowl and is currently negotiating a contract extension with the team. Meanwhile NBC is now making its third attempt to retire Leno from “The Tonight Show” in order to prevent its 12:35 host from jumping ship. Although in fairness to NBC, the company is under the management of a new parent company, Comcast, who may be serious about removing Leno once and for all.

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01 Apr 2013
Media Bias

A Brief Reply to Jay Bilas

In response to this morning’s post, Jay Bilas tweeted, “Clearly, you’re not suggesting that if a market isn’t totally free, indentured servitude is okay.” That’s a weak counterargument. Indentured service was a form of forced labor famously practiced in the British North American colonies. The great libertarian scholar Murray Rothbard described indentured servitude in great detail in his four-volume history of Colonial America, Conceived in Liberty:

There were seven sources of bondservice, two voluntary (initially) and five compulsory. The former consisted partly of “redemptioners” who bound themselves for four to seven years, in return for their passage money to America. It is estimated that seventy percent of all immigration in the colonies throughout the colonial era consisted of redemptioners. The other voluntary category consisted of apprentices, children of the English poor, who were bound out until the age of twenty-one.

[…]

During his term of bondage, the indentured servant received no monetary payment. His hours and conditions of work were set absolutely by the will of his master who punished the servant at his own discretion. Flight from the master’s service was punishable by beating, or by doubling or tripling the term of indenture. The bondservants were frequently beaten, branded, chained to their work, and tortured.

So let’s count the number of ways this doesn’t resemble major college athletics. First, most players already live in the United States and thus don’t need to secure passage here. Second, while you could argue college athletes serve a form of apprenticeship, and many come from poor families, they are not bound to play college sports at all. As Bilas well knows, NBA-ready players can leave after just one year in school.

Third, while college coaches are sometimes portrayed in the press as dictators, in reality their discipline is largely restricted to kicking a player off the team and withdrawing his scholarship. A coach cannot even expel a student from school if he remains academically eligible and can pay his own way. Nor is a player punished for leaving the team voluntarily. And unless Gitmo has joined the Atlantic 10, I don’t think any college program has resorted to beatings, branding, chaining or torture against a disobedient player.

That leaves the lack of monetary payment as the only plausible connection between college athletes and indentured servants. And if that’s what Bilas wants to hang his hat on, so be it. Otherwise, this is, no pun intended, a tortured metaphor.

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01 Apr 2013
Cartels • Labor

Free Markets: Good Enough for Lawyers AND College Basketball Players

ESPN college basketball analyst Jay Bilas, perhaps a closeted Austrian, declared recently on Twitter: “The free market works fine for the rest of us. It would work for athletics, too.” Bilas referred to this article by Dave Berri on the Freakonomics website extolling the virtues of abolishing the NCAA’s amateurism restrictions on player compensation:

[V]irtually everyone objecting to the NCAA adopting a free-market approach to college sports, currently works and benefits from a free labor market.  And if these people were told that their wages were capped by a rule their employer created, they would likely object. In much the same way, people should also object to the current system of compensating college athletes.

I share Bilas and Berry’s aversion to labor restrictions in college athletics. But I’m amused by the blanket statement that “the rest of us” operate in a free market that is Heaven compared to the labor hell major college basketball and football. In other words, where is this “free” market Bilas and Berri speak of?

I know nothing of Berri’s background, but I do know Bilas is an attorney. If we’re talking about restrictions on labor, the legal profession is an excellent introduction to the subject. That profession is highly cartelized. One must obtain a license—after passing an examination–from the state to “practice law,” a vague term that includes merely giving advice to individuals about the law. Before obtaining a license, however, one must get a juris doctor degree from a law school approved by the government and the American Bar Association (a professional guild of existing licensed attorneys). And one can’t even think about attending law school without a bachelor’s degree from a government-accredited undergraduate institution.

So before a person can enter the “free” market for legal services, he must acquire three expensive credentials over a period that normally lasts seven or eight years. Many aspiring attorneys assume crippling student loan debt as a result of the state’s intervention. In contrast, while a successful college basketball player may not receive a salary for the one to four years he’s enrolled at an undergraduate institution, he usually receives a full scholarship and there’s no additional licensing requirements imposed by the state before he can enter the NBA.

Of course, once a player joins the NBA, he is subject to the terms of a “collective” bargaining agreement he had no say in creating. The CBA only exists because of government intervention in the labor market. A majority of current players can form a union and receive a form of state license that allows them to set the terms by which new players may enter the league. In the NBA’s case, that means rookies are subject to a draft and strict limits on their salaries.

Dave Berri observed above that most outside observers would object if “their wages were capped by a rule their employer.” Yet professional salary caps enjoy wide support, at least passively, from many of the same critics who regularly trash the NCAA. The distinction for these critics seems to be (1) pro players still make enormous salaries even with the restrictions and (2) the pro players have a union to defend their interests. I addressed the latter argument above. There’s no incentive for a licensing guild of existing players to promote the unrestricted labor freedom of future rookies, who will obviously compete against these same veterans for scarce roster spots.

As for tolerating restrictions on labor freedom because professional players still make a lot of money—well that just undermines the entire argument for free markets. The free market is a process not an outcome. The market is based on private ownership of property and voluntary exchange. It does not depend on any particular structure. I fear that well-intended critics like Berri and Bilas are misguided in their focus on the structure of college athletics. They seem to equate “free markets” with the industrial employer-employee model. And I think that is an error.

A college basketball player may not receive a regular salary. But he has an unparalleled degree of labor freedom. He can attend and play for any college that will have him. That won’t be the case when he joins the NBA, even though the latter will pay him handsomely.

Now I’m sure Bilas and other critics will dismiss the labor freedom argument by pointing to the restriction on player transfers. That is, a player who moves from one Division I school to another must sit out a year before he is eligible to play again. The cries against the rule surface every time a coach changes jobs, as they are not subject to this provision. This may seem grossly unfair, but again, compare this to professional restrictions. As Andrew Isker said to me via Twitter, “Could you imagine how many NFL players would take a year off in order to pick any new team with no cap restrictions?”

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