Returns go where there is scarcity. The land in Champagne is intrinsically scarce. Other factors can be made scarce, or to cease to be scarce, as the history of broadcasting tells us.
When Stanley Matthews retired from football, there was still an agreement between clubs to limit the earnings of players to not much more than the national average weekly wage. Today, successful sportsmen are fabulously wealthy. You can buy unit trusts to invest in football. And Bernie Ecclestone, a racing promoter, has plans to float Formula 1 racing for a reported £2½ billion. What is going on?
Returns go where there is scarcity. Many people know that you can match all but the finest champagnes with cheaper sparkling wines from other parts of France or the New World. But the marketing efforts of the great champagne houses of Reims and Epernay established grand marques – like Moet et Chandon and Veuve Cliquot – and the associations which make champagne, even today, a drink for a very special occasion.
But whose were the profits which these achievements and that identification generated? At first, they accrued to the firms which had created these legendary brands. But although the firms controlled the names of their houses, they did not control the name of champagne. That belonged to a French department. The system of apellation controlée ensured that only wine from that region could carry the name champagne. There is only a limited amount of wine-growing land in the Champagne region. The returns bubbled back to the scarce factor, and the value of Champagne vineyards now far exceeds that of land of equivalent quality on the wrong side of the official border.
In the 1980s, the growers tried to grab a larger share of the champagne spoils. By selling directly to shops and customers, they could bypass one element in the chain that was no longer scarce – the distribution capability of the great champagne houses. They could not get all the profits, because they did not have access to the great names. But many obscure brands of entirely palatable champagne appeared in the supermarkets, and not everyone felt ashamed to celebrate with a sparkling bottle from Sainsbury’s or Tesco.
For a time, growers and champagne houses together tried to earn higher returns than the market would support. The premium sought for champagne became excessive and choked off demand, or left it in the bottle. Eventually pricing became more realistic and the various parties agreed on a distribution which reflected the relative contributions of the two scarce factors in the chain of production – the vignobles of the Champagne region and the mystique of the grand marques.
The spread of video recorders in the same period massively increased revenues from the sale of films. Who benefited from these increased revenues? Not, as people were first inclined to think, video distributors and video stores. Look at the lists of bankrupt companies of the last few years and you will find many failed ventures of video entrepreneurs. You need to look for the scarce factors, and there is no scarcity of premises from which to distribute video nasties and bad movies. The scarce factors were the names and the talent needed to create blockbusters. The cost of making films rose in line with the rise in film revenues. The new money went to pay Arnold Schwarzenegger and to indulge Stephen Spielberg.
Some factors, like the land in Champagne or the genius of a Spielberg, are intrinsically scarce. Some are made scarce, some cease to be scarce. The history of broadcasting illustrates all these things. For almost all of the twentieth century, broadcasting was dominated by the scarcity of spectrum on the airwaves. Governments allocated that scarce factor. Initially they allocated it to themselves, or their agencies, and most early transmissions came from public sector broadcasters. Later they began to allocate it to private companies. Lord Tompson, one of the early franchisees, famously described what he had been given as a licence to print money. More recently, that scarcity of spectrum lost its importance as there came to be many new ways of sending electronic messages.
So who benefited? Again, the rule is to look for scarcity. You saw the rising price of scarcity when the cast of Gardeners’ Question Time migrated to Classic FM. And you see it again when the price paid for the TV rights to famous movies, or the football league, is bid up. But do not buy football teams indiscriminately. That is the equivalent of setting up a video store to benefit from the video boom, and is already burning fingers in just the same way. Search for the scarce factors; and you find them in the truly great clubs, like Manchester United, and the truly great players. The returns from the massive increase in revenues associated with football will end up there.
So is Formula 1 motor racing worth its reported flotation tag of £2.5 billion? Bernie Ecclestone is no doubt right when he reckons that competition in the sporting rights market will lead to a similar increase in what is spent on motor sport. But ask again where the scarce factors are. There are some drivers, like Michael Schumacher, with truly exceptional talents. There are some circuits – not many – whose glamour cannot be reproduced by either Melbourne or Adelaide – Monaco, perhaps Spa and Monza. Formula 1 needs them more than they need Formula 1.
And scarcest of all are the great teams. You cannot have a Grand Prix without Ferrari, Williams, McLaren and Benetton. Shell was willing to pay Schumacher’s £16 million salary to put its logo on the side of his Ferrari. At the moment these teams are battling over shares of the television spoils and eventually they will win. And is Bernie Ecclestone scarce? Or is he just motor racing’s equivalent of the champagne house, without the same cachet attaching to his name?