The Economics of Cricket

The game of cricket has evolved slowly since its rules were first codified in 1744 (Ashley-Cooper, 1900). In the traditional form of the game, each team has a set number of innings and the victors are the team scoring the highest number of runs in aggregate across the innings. Balls are delivered in groups of six known as overs, and the innings closes when 10 out of 11 batsmen are dismissed. International matches in this format are known as Tests, played over 5 days.

In 1963, the one-day (or limited overs) version of the game was introduced (Preston, 2006). In this form, each team only has one innings which ends after a set number of overs regardless of whether all the batsmen have been dismissed. Tactics for limited overs games are clearly distinguished from those used for the longer version. For example, since the bowling team need not dismiss all the batsmen, there is greater emphasis on bowling which will restrict run scoring. Similarly, batsmen, lacking the opportunity to slowly accumulate a score are led to more adventurous and aggressive batting strategies.

Recent innovations shorten the game further still. Twenty-20 was introduced in England in 2003 (ECB), which reduces the game to 20 overs a side, allowing a whole match to be completed in an evening.

We will examine in our essay the problems currently facing the sport, how far recent innovations to the game address these issues, and suggest ideas for further reform. The essay will explore how contracts operate for cricketers and, linked closely to this, their wage structure. We will consider agency theory in relation to the sport and the role broadcasting plays.

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Contracts

Professional cricket, analogous to any other industry, is comprised of firms. The product of the cricket industry is a form of entertainment. The quantity of entertainment produced can be measured by the revenue received by the cricket industry or alternatively the cost of the resources employed by the industry to produce entertainment. The numbers of paying customers who attend cricket matches and the number who watch or listen to cricket via media broadcasts are a proxy for the quantity of the industry’s output. The entertainment produced by the cricket industry is done so through matches, whereby teams compete to score the most runs. (Rottenberg, 2000) (Preston, 2006)

Cricket teams, the “firms” of this industry, employ scarce resources in the process of producing entertainment. These include the services of the cricketers, stadiums, playing equipment and the resources employed in the search for talented cricketers and the improvement in their cricketing skills.(Rottenberg, 2000)

The cost of a cricketer to the “firm” is the sum of the price paid for the right to their services, the training cost invested by the team and the stream of salaries paid for their services. If there are many close entertainment substitutes, highly valued and talented players will improve the teams’ prospects and demand for that teams product (entertainment) and attendance. (Rottenberg, 2000)

A team will acquire the right to the services of a player if the player’s services are worth more to that team than to any other. If the team does not currently have that right, because another team to which the player’s services are less valuable has him or her under the contract, the player’s contract will be purchased. When transactions have played themselves out, players find themselves on the teams that value them the most highly and for which they are most productive. A competitive and unconstrained market yields this result. (Rottenberg, 2000)

Teams bid to offer the highest stipends to players that they think will contribute to the greatest generation of revenue. If contracted players can freely re-contract, and if bidding for the services of those players is open to all teams, players move from teams for which they are less valuable to teams for which they are more valuable, gaining the highest wages.(Rottenberg, 2000)

In reality, according to Rottenberg’s analysis of resorce allocation in professional team sports, it appears that players would be allocated among teams in a similar way, “whether the labour market for players is freely competitive or constrained by rules that restrain competition”.

According to Rottenberg, it is “therefore then arguable, that the constraints on competition in professional sports labour markets serve some other objective than the achievement of equality of allocation of talent amongst teams”. In the international form of the game, cricketers can only negotiate with one buyer, which is known as a monopsony, the national cricket board. The result is players can expect to be paid less than their value to their teams. (Rottenberg, 2000)

Today all major cricketing nations have introduced central contracts; that is cricketers are expected to represent their national side on a regular basis and are contracted to, and paid by, their national side rather than a club. A key aspect of central contracts is that players are also instructed when they may and may not play. The move to central contracts had been the major development in cricketing contracts in the past ten years, in recent times however the development of the IPL (Indian Premier League) has caused players to review whether their contracts and the wages they can earn adequately reward them. The latest development however, and possibly very significant for the future of cricket, has been the decision by English cricketer Andrew Flintoff to become the world’s first free-lance cricketer. (Jackson, 2009b)

Central contracts were introduced by the England and Wales Cricket Board (ECB) in 2000 replacing the previous system in which players’ wages were paid by their county team. (Rubenstein, 2005) At this time players were only paid by the ECB for each international appearance they made e.g. a player would have been paid £3000 for a test match.(Preston, 2006) There are two different types of central contract on offer from the ECB, the 12-month central contract and the Incremental contract. The main differences between the contracts is that the players on the 12-month contract have their salaries paid by the ECB whereas the incrementally contracted players receive only a one-off payment from the ECB as they receive the remainder of their wage from their county side. When allowed to play for their county sides, 12 month contracted players play on a free of charge basis. When players who are not on a 12 month contract play for England, the ECB compensates their county for each county match the player misses whilst on international duty. Currently there are 11 players who have been awarded a 12 month central contract and 7 who have an incremental contract. (ECB, 2009)

Cricketers who have not been offered a contract can still gain an increment contract via a points system. Players are awarded points for representing England in different games and when a player reaches a certain points tally they automatically gain an incremental contract.

Players who play in the IPL are paid a wage depending on how much they are bought for at an auction, for example in the IPL inaugural auction Indian cricketer Mahendra Singh Dhoni was bought by Chennai Super Kings for $1.5 Million, meaning that for six weeks work he would be paid significantly more than would have been possible from his annual Indian central contract alone which would have been roughly worth $120,000 at the time. The contracts in the IPL are guaranteed for a 3 year period by the Indian cricket board (BCCI).

In the first IPL season the ECB did not allow their centrally contracted players to play in the IPL, however, by the second season they were permitted a three week window in which to play and so earned only half of the wage they were bought for. In addition, they were required to give 10% of their IPL earnings to their county club. In the second auction in 2009, English cricketers Andrew Flintoff and Kevin Pieterson were each bought for $1.55m. This high figure was perhaps due to the fact that the most highly demanded players were bought in the first year and so there was limited supply of high quality of players in the second season thereby driving the price up. (Tandon, 2009)

Andrew Flintoff became the world’s first freelance cricketer after rejecting an England incremental contract worth approximately £50,000. As stated earlier, for 6 weeks in the IPL he could earn $1.55m. If Flintoff had been contracted to England he would have only been allowed to play for 3 weeks and collected only half the wage. Flintoff can now maximise his earnings by choosing where and when he plays his cricket; he can travel around the world picking the most lucrative contracts which best suit his needs, on offer to him. (For example, had he not suffered a set back recovering from injury Flintoff planned to play for six different sides on five different continents). This could be a route followed by many other highly demanded cricketers. For instance, this is possibility open to Australian cricketer Andrew Symonds having been stripped of his Australian central contract.

Player Wages

In most cases, cricketer’s wages comprise a basic salary and commercial contracts on top. However, the determination of the basic salary varies across countries.

In Australia, top international cricketers are contracted to the Australian Cricket Board. An agreement reached between players and authorities results in 25 percent of total cricket revenue being spent on payments to players. Of this, 55 percent goes to ACB contracted players of whom there are 25. (Preston, 2006) Under this scheme, international contracts for 2009/10 range from £100 000 to £550 000 in value. (English, 2009) The fee for participating in a test match is £7 300 and for a one day international £3 000, so that match fees for an ever present player would be of similar value to the basic contract. The remainder of the revenue is paid to state level players for whom a contract would be worth between £ 20 000 and £50 000 (Preston, 2006).

In Indian cricket, the BCCI also pays 25 percent of its income to players, half of which goes to international players (Preston, 2006). A contract scheme was agreed in 2004 grading up to 20 top players in there tiers. Retainers in grade A are £80 000 in grade B £55 000 and in grade C are £33 500 (Cricinfo-staff, 2008). Money is also distributed through additional match fees and sponsorship payments amounting to between £3000 per Test and around £2500 for one day internationals, so that an ever present player may earn another £135 000 in a year. These amounts may be multiplied several times by personal sponsorship (Preston, 2006).

The ECB does not disburse a predetermined share of its revenue to players. The latest (2008) ECB accounts show total expenditure of £4.1m on players wages and salaries in 2008 (ECB, 2008). The core of the international team are contracted and a typical contract is worth between £100 000 and £150 000, with the captain earning a higher figure. (Preston, 2006) Match fees are about £5500 for a test match and £2200 for a one day international, with an additional premium for matches played abroad, so that ever-present players can double their contracted income through match fees. Further income comes from win bonuses and commercial sponsorship. An English county player can expect a salary of £50 000. (Preston, 2006)

Cricket Board

Contract value

Test match fee

One day international fee

ACB

£100 000- £550 000

£7 300

£3 000

BCCI

£33 500- £80 000

£3 000

£2 500

ECB

£100 000- £150 000

£5 500

£2 200

Although these figures have increased (Preston, 2000) in recent years, they are low when compared with other major sports, both in absolute terms, and as a percentage of total revenue. Preston (2006) suggests the reason for the comparatively low wages “must lie in the dominance of the international representative game as the main revenue source in cricket”.

The domestic club game is according to some “the least economically sustainable part of the game”. (Paton and Cooke, 2005) While international test matches or one day games are capable of drawing near capacity crowds or large broadcasting audiences, domestic cricket is far from well attended.

Figure 1: County Cricket attendance, 1994-2005. Source: ECB

For this reason, a large proportion of national cricket board’s revenue is passed down to local cricketing bodies, restricting their ability to fund large salaries for players. For example, in England in 2001, the ECB distributed around £1.3m to each of the 18 first class counties, representing around 40% or its revenue. (Preston, 2006)

This is coupled with the fact that there is no club game at the international level, and national eligibility rules prevent competition between teams for the services of players in international representative cricket, which removes the most potent means for players to bid up their salaries.

In other team sports displaying higher player salaries, such as football, the bulk of the wages derive from the club game and not from payment for international duty. (Preston, 2000)

An alternative explanation of cricketer’s comparatively low wages can be found by utilising the Marginal Revenue Product (MRP) theory. The equation for MRP is derived from the Marginal Physical Product- the productivity of the worker (MPP) and the Marginal Revenue of the last good sold (MR) and is as follows: MRP = MPP x MR. (King, 1990)

This theory can explain why top cricketers get paid considerably less than footballers. The marginal revenue is the price people are willing to pay to consume the good. In this case, this is the price people are willing to pay to watch a game, live or on TV.

In sports, marginal revenue values for each customer are very small, but this is more than offset by the huge personal volume of business that a player generates from the scale economy. According to Rosen (Rosen and Sanderson, 2001), a star sportsman is worth only a small amount more per fan than an ordinary player. However, there are lots of fans and since the total market value is divided among a very small number of players, the stars make their fortunes on ‘low mark-ups” but “high volume”.

Since football has a significantly larger fan base in the UK than cricket (e.g. 9.4 million fans pay to watch on TV compared with 2.3 who pay to watch football (Paton and Cooke, 2005)) this goes some way to explaining the difference.

However, this theory is more useful in explaining intra-sport wage differentials. Sherwin Rosen in his work on the economics of superstars (Rosen, 1981) shows that small differences in abilities and talent can result in enormous differences in compensation. For example, a salesman that can sell 10% more than his peers in a company is likely to get paid 10% more. A batsman with a 10% faster-than-average response to a ball travelling at 100 miles per hour is likely to end up earning 100 times more than the average cricketer

Further aspects of Rosen’s theory of the high wage phenomenon of sports stars are developed by Dobson and Goddard and applied to football. Importantly, they stress that there is “imperfect substitution” between sellers of certain services. The most talented players are in scarce supply and for consumers lesser talent is not perfectly substitutable for greater talent, even if there is compensation in terms of quantity. For example a batsman may be 3 times more talented than his team mate, but watching the lesser talented player on 3 occasions is not equivalent to watching the superior batsman once.

Television Revenue

Television has been the “single most important influence on the development of sport” in the last century (Gratton and Taylor, 2000). For example, after the Second World War, Cricket as a spectator sport was suffering. In 1956 a Political and Economic Planning (PEP) report stated that “the sport could not survive on gate revenue alone” (Whannel, 1992). However, the introduction of television prompted the “sponsorship explosion” of the 1960s and assured the sports mainstream continuity into the 21st century. Had it not been for the arrival of television, cricket may, according to one pessimistic commentator “have become extinct” (Whannel, 1992).

According to Hoult (2008) “there has always been a strong relationship between sports and broadcasting ” (Gratton and Taylor, 2000), thus indicating a strong correlation between levels of television coverage a cricket team receives and amount of sponsorship gained, in monetary terms. For example the England cricket team is sponsored by Vodafone for the sum of £4million a year (Glendinning, 2005), because each of its games receives huge amounts of television coverage, compared for instance, to The Derbyshire Phantoms , who receive very little television coverage, and are therefore sponsored by a small company called Printability with little monetary gain.

The revenue received from broadcasting rights is an extremely important contributor to keeping Cricket economically viable as a spectator sport. It has become so fundamentally important to the game, that when David Collier, chairman of the ECB was asked if cricket should be free to air, he stated that it “would have a disastrous effect on the level of investment in the sport” (BBC, 2009), and hence be catastrophic.

It has been claimed that showing major cricket games on free to air channels, such as BBC, could bankrupt the ECB, due to the revenue it stands to lose. This is because television revenue accounts for a substantial proportion of its income. Published accounts of the ECB show that the “gross turnover in 2004 was £75.1m, and of which 68% is attributable to broadcasting and sponsorship rights” (Preston, 2006).

The dependence on television revenues is consistent at an international level. Cricket Australia for example in 2003/04 reported “the gross turnover of cricket was $87.1m, of which 64% came from media rights” (Preston, 2006) and the Indian cricket board “reported earnings of US$16m in 2002/03, of which 62% came from broadcasting rights” (Preston, 2006). This data therefore corroborates the fact that it is financially in the interest of the ECB to allow Sky to monopolise the broadcasting of high level cricket within the United Kingdom, despite the criticisms this causes in relation to cricket becoming an elitist sport.

Taking the UK as an example, the ECB signed a four year contract worth £300million with Sky, which will end in 2013 (Hoult, 2008). It covers all England Test matches, the English Premier League Twenty20 competition, one-day internationals and other county matches too. Thus meaning broadcasting of cricket is that of a monopoly market structure, and the dominant firm is Sky.

The market observes huge legal barriers to entry, because of the “awarding of an exclusive franchise to serve the market”(Nicholson, 2005) by the ECB to Sky. Through doing this, the ECB maximizes its revenue, but the argument put forward in favour of creating franchised monopolies, is that industries such as this are natural monopolies anyway (Nicholson, 2005). Therefore regulating which firm dominates the market, in turn benefits the consumer (viewer) because the quality of the product (games televised) will be maximized, and hence the extra cost incurred by the consumer is thought to be just. By organising the market as a monopoly, “the minimum average cost can be achieved” (Nicholson, 2005). However this effect does not to filter down to the consumer, because in order to view the matches, one standard subscription fee must be paid to Sky initially.

The monopolising of the broadcasting rights can be seen internationally too. The Indian Cricket League (IPL) for example sold the broadcasting rights to Multi Screen Media and World Sport Group for almost US$1 billion in a 9 year deal running until 2017 (IPLT20, 2009). This is a Duopoly market structure because two firms are present. However the firms will collude to some extent because it makes the most sense to share the broadcasting of matches and thus act as a monopoly in an aim to minimize costs and maximize their profits.

The decision made by the ECB to sell the broadcasting rights to the highest bidder has caused much controversy. This is because it is feared cricket could become an elitist sport due to a reduction in the amount of cricket on terrestrial television, which has thus lessened the audience for the sport. The economics of satellite television has also made it increasingly hard for pubs to afford the rights to show matches, which creates the same problem. This evidence backs a theory which suggests that cricket could become a minority sport. (Whannel, 1992) However, despite the subscription fee Sky charge, the television revenue the ECB generates is not only shared amongst the highest level of cricket, but it also filters down to the grass roots level of the sport.

It has been said that reform is needed in to order to correct the market failure within the broadcasting of cricket market, and thus stop cricket becoming the interest of only a minority. The market failure has occurred because the product, which in this case is the televising of cricket matches, is thought to be unfairly distributed amongst the public. Due to cricket being a popular sport in the UK and internationally, it is argued that viewing the most important matches should be non-excludable, and thus show more characteristics of a public good.

In the UK for example, reform could happen by taking away some of the monopoly power Sky currently has, and giving broadcasting rights to the BBC to show some of the most important matches England play. This will widen the possible audience for cricket and hence stop the sport becoming that of only a minority.

However the television revenues which the ECB stands to generate by creating a duopoly situation between Sky and BBC will be significantly lower due to the lack of any exclusivity, which is worth a premium in the sports broadcasting market. This will therefore cause implications for the funding of the sport due to the highly dependent nature of twenty-first centaury cricket on television revenues.

Although there are implications linked to selling broadcasting rights, the increased funding has only helped the game develop. For example, Barnet asks, “is it coincidence standards of cricket played have improved since the introduction of television, or is it simply a case of evolution?” (Barnet, 1990). Most would agree it is due to the increased television revenues, and hence increased money within the game, which has filtered down to the grass roots level of the sport.

After having considered the effects of the ECB choosing Sky over a free to air channel such as the BBC as a case study into how television revenues effect cricket, it could be concluded that the overall benefits to cricket of the ECB awarding broadcasting rights to Sky outweighs the negative effects. Therefore meaning that although reform could have positive outcomes on the sport, at present, it is more economically viable for the ECB to maximize television revenues and hence allow Sky to monopolise the broadcasting of cricket.

Agency Theory

Professor Gunter Bamberg describes agency theory as the “branch of economics that focuses on the roles of information and of incentives when individuals cooperate with respect to the utilisation of resources” (Bamberg et al., 1987). It addresses the reasons and outcomes of the “problems that arise under condition of incomplete and asymmetric information when a principal hires an agent, such that the two may not have the same interests even though the principal has hired the agent to pursue the interest of the former” (Bamberg et al., 1989). It is widely agreed that the agency problem occurs when there is a “separation of ownership and control” (Bamberg et al., 1989) of the business leading to the agent, who runs the business, having different incentives and goals to the principal; the owner and employer of the agent.

It is important to discover why this phenomenon occurs and the reasons it is prevalent in the economics of cricket.

Agents are hired by principals because they have a specialised skill which is required to maximise the principal’s welfare. It is often the case, especially when analysing cricket, that the principal needs people with these specialised skills because they themselves do not possess them, even though this set of expertise is of paramount importance to the success of the club.

This is especially true for cricket. Although the owner of a club may have influence and duties relating to the day to day running of the club it is the players, coaching staff, and team managers who have the most direct influence on its success.

OLS regression analysis has been used to illustrate the importance of a teams success for the clubs turnover. In the example below the total turnover and the aggregate league positions over the last five years for premier league football clubs have been used as the two variables. (Burton, 2009)

From the regression analysis and the graph we can see that there is a relatively high negative correlation between the revenue and league position of a football club. i.e. the better they do, the better the annual turnover. Therefore this proves that the players and coaching staff have a significant impact on the financial results of the club.

Although the agent has been hired to maximise the welfare of the principal it is assumed that both parties are “utility maximizers” so “there is good reason to believe that the agent will not always act in the interests of the principal”. (Mason and Slack, 2005)For this reason it is important for the principal to monitor the agent’s behaviour and if necessary change “the terms of the contract that governs the principal-agent dyad”. (Bamberg et al., 1987)

When it comes to cricket there are a lot of issues other than personal performance that affects the outcomes of matches and popularity of the club. First and foremost the outcome is dependent on the overall team performance. Individual performances can be analysed in a match by reviewing their batting, bowling, and fielding statistics. However, there is a lot more behind a cricket match than what these simple results show. Players may be under a lot more pressure at different stages of the match or may even be experiencing particularly bad luck which is difficult to analyse. There is also the problem that due to the nature of sport, and especially cricket, it is often the case that players suffer bad decisions that go against them, inexplicably go through runs of bad form and often become injured due to the physical stress their bodies are put through. These factors are often out of control of the player or club and are therefore known as exogenous risk. These factors directly affect the principal’s wealth. (Bamberg et al., 1987) This can be shown by simple algebra:

∑ = exogenous risk

Y = f(x,∑) X = agents effort

Y = principal’s welath

However, as mentioned above asymmetric information causes a lot of difficulty when attempting to accurately measure an agent’s effort. Therefore it is impossible to design contracts based on the amount of effort the agent puts in, which in turn leads to a “second-best design of cooperation” (Bamberg et al., 1987). Where the first best design is the most efficient design of cooperation in terms of payment and the amount of effort agents put in. The problem with this is that even if a player is putting in a lot of effort the team may be less successful compared to when less effort is put in. This is a problem with sport, and also why payment is partly linked to team success – to ensure maximum effort from the players.

There is a huge amount of pride taken from how well a professional sportsman plays in each match or over a season. There is also a huge amount of competition at the top end level. This suggests that cricketers will play to the best of their ability to ensure success for the club. But players may have the interest of pursuing fame and fortune by playing cricket, and therefore decide it is in their interest to showboat by playing big shots instead of grinding out victories. However, it can be argued that playing in such a risky and exciting fashion the player would attract more fans, and therefore more revenue to the club.

As has been mentioned in previous sections monetary bonuses are used to help with motivation and the incentive to put maximum effort in. However, it is important to remember that even if the agent’s aims are not the same as the principals it is often the case that they have to play well for the team if they wish to achieve these goals. Problems arise when player’s goals are nothing to do with their performance on the pitch. In these circumstances agency theory comes in to play most prominently.

Overall however it is widely held that, due to the attitudes of modern sportsmen with their often insatiable need to win combined with the monetary bonuses attached to victory ,the club manages to bring the agents efforts and actions in line with the aims of the principal.

Reform

Recent years have seen several high profile contractual disputes between players and authorities over remuneration. This is possibly an indication of player’s dissatisfaction over their wages not reflecting the true market value and of their weak bargaining position. Most recently the 2003 world cup was threatened by disputes over contracts which restricted players rights in sponsorship deals with competitors of the tournament sponsors, a particularly important issue given that a large proportion of Indian player’s income coming in this form.(BBC, 2003)

While remaining comparatively low, wages have recently increased. A particularly strong spur to this enlargement was, according to Gideon Haigh, due to the ‘shock of leading players” temporary defection to a rival competition in the 1970s’. Angered at the refusal of the ACB to enter into serious negotiations over the sale of broadcasting rights to his network, Kerry Packer set up the World Series Cricket as a rival venture. The low level of player salaries made it possible for him to contract the services of many international cricketers, including most of the Australian cricket team. (Haigh, 2001)

Cricket has recently needed to face the “trauma of one of the gravest corruption scandals to hit any major sport in modern times” (Magazine, 2000). Rumours of corrupt behaviour were common throughout the 1990s and a combination of investigative journalism, whistleblowing and evidence gathered by Indian police uncovered “extensive collusion” between players and bookmakers to fix the results of matches.

Explanations focused on the dishonesty of a few prominent players, but according to some, this fails to deal with the depth of the problem in cricket at the time.(Preston, 2000) Other suggestions point to the role of low salaries, the presence of large illegal gambling markets in the countries where cricket is played, the proliferation of meaningless one-day tournaments and the opportunities for manipulation created by the complexity of the game. (Preston, 2006)

The common thread of these problems is the low level of player wages on offer in this sport, the main reason for which is that the majority of the revenues generated by national cricket bodies are passed down in order to support lower levels of the game. For example, in England each first class county receives about £1.3m each about 40% of ECB total expenditure for participating in cricket