In business of sport, US one of less-free markets

Behind the upstart US soccer team's unexpected success in the World Cup lie two surprises.

The first is that they are still in the competition at all. By reaching Friday's quarterfinals for the first time in 72 years, Claudio Reyna and his teammates have buried an anomaly that has long nagged at the edges of American sport: that the sole superpower, the driving force behind globalization, should be no more than a likeable underdog when it comes to the most globalized phenomenon on the planet – soccer.

Another peculiar paradox persists, though. The United States may champion free- market capitalism at home and abroad, chiding its European allies for allowing too many restrictions on the free play of commercial forces. But when it comes to sport, the boot is on the other foot.

The tight regulations that hem in basketball, soccer, or American football players and team owners smack almost of socialism to Europeans, accustomed to a "winner take all" system that would seem to be more naturally American.

"In the land of the free market there is not much of a market when it comes to sport," says Stefan Szymanski, an economist at Imperial College in London. "There's an awful lot of regulation and very stark constraints, whereas in Europe we allow almost no intervention at all."

That means that European soccer club owners are not constrained by salary caps, so they could offer star US striker Brian McBride, or any other player who catches their eye during the World Cup, whatever money it would take to lure them away.

Neither do European clubs have to abide by a draft system, which in America gives even the humblest teams a chance to bag great players. In England, Germany, Spain and elsewhere, it's just a question of cash. Nor do club owners have to share out their TV revenues equally among themselves, as do NBA and NFL teams, thus pumping cash into the least popular clubs as generously as the most popular. The big European soccer teams earn more money from TV because they appear more often.

And just as in US baseball, where each team negotiates its own TV deal, that is widening the gap between a handful of privileged giants – Manchester United, Real Madrid and Bayern Munich among them – and the rest.

Those superteams have spent their higher TV and merchandising income on ever more expensive players, which makes them ever more unbeatable, and widens the gap yet further.

But just as American baseball owners are discovering, this is not necessarily very good for business, and could contain the seeds of destruction. "As the inequalities grow" between a few top clubs and everybody else, argues Michel Desbordes, a sports economist at the University of Orsay, in Paris, "the sporting spectacle becomes less interesting. And if there is not much suspense, in a few years TV companies will not be willing to pay so much."

Already in Europe, the soccer business bubble has burst. Shares of the 20 English clubs that launched themselves on the stockmarket have slumped by two-thirds in the past two years. Of the 20 clubs in the elite Premier League, only Manchester United is expected to make a profit this year.

These problems, say some analysts, go to the heart of the central question: How far can you go in making a business out of sport?

"In a classic business, the aim is to squash your opposition," points out Dr. Desbordes. "But in sport you have to have someone to battle against or there is no point any more." Adds Dr. Szymanski: "Sport is the only industry where you need your competitors to make your product."

The US sports leagues use their rules and regulations to encourage competitive balance, so as to maintain the fans' enthusiasm by keeping them in suspense. Nowhere is this clearer than in Major League Soccer (MLS), where a handful of owners swap players from team to team so as to deny any one team the sort of dominance that the top European clubs enjoy.

In the European Union, which applies antitrust legislation to soccer, just as it would to any other industry, that would constitute illegal collusion among members of a cartel. European law, says Szymanski, "makes sporting competitors economic competitors, too" treating each team as an economic unit. US law, on the other hand, treats each league as the economic entity, thus putting the NBA in competition with the NFL, for example, but not pitting the Lakers against the Nets.

That offers even the least successful teams some protection (and it helps that nobody gets relegated from a US league, whereas European soccer teams are promoted or relegated from division to division, depending upon their results).

The less successful European soccer teams would love such protection. In England, around 30 of them are facing bankruptcy because they had budgeted on a deal with ITV Digital television, which went bust earlier this year when it could not sign up enough paying subscribers to watch their games.

That is the sort of fate that MLS is trying to avoid, by ensuring – however artificially – that no group of superteams emerges at the expense of other league members to condemn them to potentially lethal second-tier status. It is an issue that baseball owners are facing up to as well, as they seek to impose salary caps on players, and that the European soccer giants will likely have to address sooner rather than later.

In seeking to extract maximum competitive and economic advantage from their dominant position, argues Daniel Rascher, head of the Berkeley, Calif. consulting firm Sports Economics, "the big teams are being shortsighted. If smaller teams start collapsing, it is only going to hurt the whole sport."