Written by Daniel Rosenkranz
When people think of monopolies, they typically point to large corporations such as Amazon or Apple. The sports industry is rarely mentioned, although the key players in the industry hold some of the most powerful monopolies in the world. In the major sports, there is often one league that captures the viewership, top players, status, and most importantly, revenue. This was the case for the PGA tour in the golf industry since its founding in 1929. However, this year the polarizing LIV tour entered the picture. LIV is challenging the PGA tour’s monopoly in the golf industry, but its current business model is unproven.
The LIV tour was founded by former professional golfer and entrepreneur Greg Norman, and funded entirely by the Saudi Public Investment Fund. The tour received immediate backlash for its strong and public association with the Saudi government, a known violator of human rights. Despite the controversy, LIV carried out its roll-out plan with hopes of “supercharging” the game of golf. LIV tournaments are shorter (shotgun start, no cuts, 54 holes), played in a team competition format (12 teams of 4), and occur less frequently than the PGA. The design is to make the game of golf more entertaining and favor the viewer experience. They held 8 events in the 2022 season and have 14 scheduled around the globe for the 2023 season. The subsequent follow-up question is: how did LIV get its players, and why is it threatening the PGA? The answer is less focused on LIV’s revolutionary changes, and more to do with a simple overriding temptation: money.
LIVs business model is as follows: Sign highly-established, popular golfers from the PGA tour and other world tours to come full-time to LIV using extremely large signing bonuses. One of the first golfers to sign was Master’s winner Dustin Johnson (DJ) . DJ’s signing bonus was reported to be a staggering $125 million. DJ, among others, was willing to ignore LIV’s controversy and leave behind potential future success on the PGA tour. It’s understandable DJ would take this deal as it guarantees a substantial income and time to spend with his family. LIV offered many top players these signing bonuses, and throughout the year a significant number of golf’s biggest stars broke ranks and signed with LIV. The rest of LIV’s players aren’t superstars, and were lured in by LIVs enticing tournament purses.
In order to contextualize the earnings differential, it is helpful to include quantitative analysis. Each LIV tournament has a total purse of $25 million, distributed $16 million to the winner and extending to each and every player, with last place still guaranteed $120,000. The median prize is $416,000, and when multiplied across the 14 events of a season results in an average yearly earnings of $5.8 million. The PGA reported an average earnings of $1.5 million in 2021; however, purses were increased in 2022 so a safe assumption is the average professional made $1.75 million. PGA players are not focused on the average, they are alternatively focused on the top quadrant of earnings. In both cases there are special circumstances, LIV’s top players are acquiring the large signing bonuses, and PGA’s top players have highly valuable brand deals and sponsorships, which is not an option for LIV golfers. LIV has made it clear their players will not pursue deals with outside companies. Robert Walters, one of LIVs lawyers, explained “the idea is LIV golf will have a dozen teams, each team will have a team suit on.” Hence, indicating LIV golfers will lose the revenue stream of brand partnerships that is valuable to professionals on the PGA tour.
There isn’t an exact science for comparatively analyzing the players revenue streams, but judging on the average yearly earnings gives an estimation. It is evident that LIV golfers will earn more based on the metrics. However, there are multiple factors at play setting up a key question for pros, “how much money will it take me to abandon the PGA and join LIV?” LIV is aware they lack the prestige, sponsorships, TV partnerships, and their players can not currently score Official Golf World Ranking (OGWR) points. Hence, they attempt to draw players in with cash. Each player has their own exact amount of money LIV would need to pay them to leave. A player that’s winding down their career, looking to play fewer tournaments, spend more time with family and make guaranteed earnings will have a lower number. Comparatively, a young talented player vying to compete and win a major tournament and hoping to earn recognition will have a high number. It is crucial to recognize the stark difference in prestige between the two tours. The PGA will never be expected to pay their players as much as LIV because of their tournaments, sponsorship opportunities, and accessibility to majors. However, because of LIV’s pool of funds, there is competition between the two tours and it has resulted in a restructuring of the economics of the golf industry.
The modifications that occurred can be explained using relatively simple microeconomic theory. The PGA had a factor market monopoly over the golf industry, and in turn set the tournament purses, or the ‘wage level’. In the past, the PGA determined the size of the purses strictly on viewership and prestige. However, when a new firm enters the market, the monopoly is forced to increase wages to compete with the new firm that is offering to pay their laborers more. When LIV started paying the golfers higher ‘wages’, the PGA understood it needed to shift or it would be driven out of the now-competitive industry. As a result, the PGA announced it would increase the total prize money in the 2022-2023 season by $53.8 million. Although there are a multitude of other factors involved, the added competition has led to higher wages for professional golfers.
Typically, higher wages signal a strong and healthy economy. However, when analyzing LIV’s effect there are some key flaws. LIV golfers lack the incentive to try and win. They are receiving guaranteed money for showing up, or have already signed bonuses that marginalize the value of winning an individual tournament. In addition, not being able to score OGWR points means their performance in LIV events has no impact on their world rank. This rank is essential because it is what is used to determine qualification into the four majors. Even the top players that aren’t consistently earning points will slide down the rankings and eventually not make the cut list. Meanwhile those that stayed on the PGA must continue to vie for top placements. PGA placements have a greater effect on earnings differential, score players OGWR and FedEx points, and come with more prestige.
LIV Golf has created long-awaited competition in the golf industry, which has brought to the table necessary changes to pace and compensation. However, unless LIV golfers become eligible for OGWR points, its business model is designed in such a way that it is harmful to the game of golf in the long run. LIV golfers are going to lack passion and effort, causing an unpleasant viewing experience, and the demolition of their supporter base. Without restructuring, LIV is at risk to be a retirement home for washed-up professionals or the select few who can command DJ-like massive signing bonuses.
References
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