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- [00:01]
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- [00:36]
Muriel Wilkins
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- [01:06]
Brian Kenny
Welcome to HBR on strategy, case studies and conversations with the world's top business and management experts. Hand selected to help you unlock new ways of doing business in June 2022, the first live golf event teed off outside London. The new tour, backed by Saudi Arabia's government, offered players larger prizes and more flexibility, with ambitions to disrupt the sport. In response, its primary rival, the PGA Tour, suspended all of their players who participated in the LIV Golf event. And tensions between the two golf entities escalated until LIV Golf filed an antitrust lawsuit accusing the PGA Tour of anti competitive practices. But then, in June 2023, the two TORs suddenly announced that they were merging. How should a dominant organization like the PGA Tour respond to a challenge from an innovative new competitor? What can we learn from the PGA Tour's response to liv's entrance into its market? And at what point does it make more sense to treat a competitor as a partner? Today we bring you a conversation with former Harvard Business School Associate Professor Alex McKay, who studied the competitive and regulatory issues at stake for a business case study he wrote about LIV Golf and the PGA Tour. This episode originally aired on cold call in September 2023. Here it is.
- [02:38]
Alex McKay
On July 11, 2023, the Senate Permanent Subcommittee on Investigations convened a hearing on a proposed merger of the P Tour and its upstart rival, the LIV Golf Tour. Golf may be a genial game, but there was nothing cordial about the demeanor of the committee members who teed off on PGA Tour executives for over three hours, firing questions and expressing their concerns about the configuration of the deal and its implications on the global stage. It's a hearing that just weeks earlier would have been unimaginable because since its launch in 2022, the lift tour was vilified by the PGA Tour and as the avowed enemy of golf, the beneficiary of a rich but ruthless foreign regime Seeking to cleanse its reputation by association with the sport, the PGA Tour was the keeper of the flame, sworn to uphold the integrity of the ancient but honorable game, one that has remained virtually unchanged since the rules of golf were first formalized in Leith, Scotland, in 1744. But as we often see, disruption happens when you least expect it. Today on Cold Call, we've invited Professor Alex McKay to to discuss his case titled Live Golf. I'm your host, Brian Kenny, and you're listening to Cold Call on the HBR podcast network. Alex McKay's research focuses on matters of competition, including pricing, demand, and market structure. And today we're here to talk about a subject near and dear to my heart, which is golf. Alex, thanks for joining me.
- [04:00]
It's a pleasure to be here.
- [04:01]
I was very excited when I heard that you were writing this case because I'm a golfer. I really love the game. And like anybody who follows golf, this was an amazing series of events that started back in 2022 and continues to un and really unexpected way. So I think people will love to hear about this as a case of disruptive innovation within an existing sports league, but also some of the drama that surrounds it and some of the politics. So thanks for being here to talk about it.
- [04:24]
Yeah, it's been very exciting, for sure.
- [04:26]
So why don't we just start by asking you what the central issue is in the case and what your cold call is. To start the discussion in class, I'll.
- [04:33]
Just provide a little bit of background. This case is set at the end of 2022. So Liv Golf had just completed its first season and right away, when it launched in June, things got very contentious between LIV Golf and the PGA Tour. Immediately, some players from the PGA Tour that participated in LIV were suspended, and players that sort of were on both sides of this divide were saying very contentious things to each other. In August, LIV Golf actually launched an antitrust lawsuit against the PGA Tour, which accused them of committing anti competitive practices that were legal violations. September, the PGA Tour filed a countersuit. The DOJ said it was going to investigate the actions the PGA Tour had taken against LIV Golf. So it was a very heated time. And the key question we kick things off with is, should the PGA Tour continue to fight LIV Golf or should it try to cooperate? We've had an update since then on what the PGA Tour has tried to do, and I think it's still valuable to think about that question in light of the changes in the reaction of the players. But the second question we get to and I think is still, very important to think about from a business point of view is should the PGA Tour have done anything differently? And you can evaluate that in light of what they did in 2022, but you can also evaluate that leading up to 2022, as far back as 2019, 2015, or even before that. How did the PGA Tour allow the entry of LIV to happen? And did they take the right actions in response?
- [06:01]
Yeah, those are great questions and we'll touch on some of that. Why did you decide to write this case?
- [06:05]
I teach a course on competition, antitrust and regulation, and my research covers these same themes. I'm very interested in questions about market power, like when a large firm has the ability to exert influence over its customers and other market participants. And this situation with the PGA Tour and LIV golf is actually a great example of that because we have a new entrant in a market with a large established competitor. So we can evaluate the responses by this large established competitor. In particular the legal limits of the behavior as established by antitrust law.
- [06:40]
As I read the case, I was thinking about the fact that it seems to me like most sports leagues are monopolistic. The NFL, Major League Baseball. What was the landscape in golf like before LIV came around?
- [06:51]
Before liv, the PGA Tour was the dominant professional golf Tour globally. The second tour was the European Tour, which Rory McIlroy had at one point called a stepping stone to the PGA Tour. So that's how players generally viewed the competition between the different tours. And so there were a number of other tours, but none quite the size of PGA Tour. Now there are also the four major events, and it's important to distinguish those because the four major golf tournaments are actually run independently from the PGA Tour. And that distinction is actually a big factor in the fight between live in the PGA Tour, as I'm sure we'll get to. So those four events are run independently, but for the most part, the top professional golfers are affiliated with the PGA Tour and then also play in the four majors.
- [07:37]
There's coopetition there, I guess is one way to describe that.
- [07:39]
Yes, exactly.
- [07:40]
Okay, so the PGA Tour, I think somewhat surprisingly, is a non profit organization. How do they make their money? What's their business model?
- [07:47]
They operate about 40 weekly events, including the main tour. They also have the developmental tours. They primarily make money through media rights and by selling sponsorships for individual tournaments. So for example, in 2020, they signed a nine year, $6.3 billion deal with CBS and NBC to broadcast roughly 30 of their main events. And they also have streaming Deals and other features of the media rights and in addition to the sponsorship, all that adds up to good deal money. In 2019, they reported $1.5 billion of revenue.
- [08:21]
Okay, but how do they maintain their nonprofit status?
- [08:23]
That's an interesting question. Of the $1.5 billion, about 500 million is paid out to players in terms of prize money. And, you know, there's other money that's given to employees of the PGA Tour, but they actually made about $70 million in net earnings. They can maintain their nonprofit status because they raise a good deal for charity. So a good deal of the money they raised does go to charity. In 2019, it was about 204 million. And for sports leagues, they can register as a nonprofit if they also sort of have a mission statement that promotes a common interest. And so this is something that many of the leagues had at one point. Major League Baseball and the NFL were, at one point, nonprofits, but they gave those up in 2007 and 2015. Because a key distinction is they should not be engaging in the regular business of a kind to generate profit. And there's a little bit of a fine line there between, like, are they generating profit or are they promoting the common interest of a sport?
- [09:19]
Yeah, Yeah. I want to talk a little bit about the spirit of competition on the PGA Tour and professional golf. If you look at other sports leagues, they're all comprised of teams, and it's people playing together to accomplish something. Golf is one of the only sports where you're playing as an independent agent, I guess, for lack of a better word. And there's no farm league, per se. There are golfers who come up through the college circuit. There are golfers who just attempt it on their own. How do you qualify to get on the PGA Tour?
- [09:44]
On the PGA Tour, the players are all independent contractors that sort of have to make the case that should be on the tour. And the main way they do it is just by playing really excellent golf. So they can play on these developmental tours the PGA Tour runs, and they can get developmental points. And at some point, you know, once you hit a certain threshold, you qualify for the tour. Now, qualifying for the tour isn't the end, though. The PGA Tour maintains a ranking list for its players, but based on the points they've accumulated. And that ranking list determines which players enter each of the PGA Tour's events. So you could be on the tour, but you may not qualify for the field for a particular event, especially the most prestigious ones, if you don't place high enough on that ranking it is.
- [10:24]
A meritocracy, you know, by definition. And your commitments there don't end as a player. You're responsible for financing your travel. And, you know, if you've got coaches, you've got to pay your own team. And you also have obligations to the Tour itself. Can you talk a little bit about that?
- [10:39]
You know, it could easily cost the players over $100,000 for equipment, training, travel, that sort of thing. And so if you don't win, you know, any prize money over the course of the year, you could actually lose money as a PGA Tour player, at least until 2022, when the PGA Tour implemented some changes along those lines. Now, as a member, to maintain your membership, you're also required to participate in a certain number of events, typically at least 15 events. And you're also prohibited from playing in other golf tournaments or appearing on any golf broadcast unless you have a release from the commissioner of the PGA Tour.
- [11:17]
Okay. And all of this becomes really relevant when we talk about the LIV Tour and what it means to be a player on the LIV Tour, which is really, really different than on the PGA Tour. So we're going to get to that in a minute. Before we do, I wanted to talk a little bit about antitrust laws and how they apply to professional sports leagues, because that really is at the heart of what's going on between these two entities.
- [11:37]
Actually, for the most part, antitrust laws apply to professional sports leagues just like any other organization. You know, if you think about professional football, basketball and hockey leagues, they consist of independent teams that are under separate ownership. Now, the one exception here is Major League Baseball, which has its own antitrust exemption that's specifically carved out for that league. What's happened for the other sports, though, is they have received specific exemptions. One of them is to negotiate for media rights. So that's why the NFL can collectively bargain for media rights. And the other is because the players in the NFL are unionized. The NFL can act as a single entity when negotiating with those players because the players in those leagues are unionized. And because of the special meteorites deal, they can do these things jointly. But other than that, if they do any other actions that the antitrust law would consider suspect, they would be subject to that law.
- [12:32]
Okay. The PGA Tour, though, is structured differently. There's no unionization there.
- [12:36]
Right. So there's no unionization of the players. And so it raises some questions as to what that means for the setting of the wages of these players and also with respect to their ability to participate in other tours.
- [12:47]
Yeah, yeah. Let's talk about the LIV Tour now. Who's involved? How did it come to be sort of, what's the setup there?
- [12:53]
It's sort of the confluence of these two different forces that came together to give rise to the LIV Golf Tour. The first is that there was an investor group primarily led by, as it turns out, funding from Saudi Arabia that had been looking to invest in golf for a number of years, starting back as far back as 2020. And they had been approaching players with potential interest. They had actually approached the European Tour about a potential partnership. And eventually by say the middle of 2021, they had landed a number of big name players from the PGA Tour that had committed to participate in their league. Phil Mickelson, Brooks Koepka, Dustin Johnson were three of the biggest names they had gotten. The other factor was Greg Norman, who was a famous professional golfer, and he had actually tried to start an alternative league back in the 90s. For decades, Norman had had complaints against the PGA Tour, how it operated, what say it gave to the players and their compensation. And he hoped that a new golf league would be able to offer sort of better benefits to the players.
- [13:53]
Okay, okay. And the war of words between Greg Norman and the PGA Tour, you know, had been going on for quite some time. It was very public.
- [14:00]
That's correct, yes.
- [14:05]
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- [14:32]
Muriel Wilkins
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- [15:09]
Alex McKay
How did the Livtor attract people like Phil Mickelson and Brooks Koepka? Those are big, big names.
- [15:14]
The idea that Norman had and the Tour had was that we can attract some of the biggest names by offering them better compensation. And this came primarily in two forms. One was they were going to offer better payouts for each tournament. When they initially launched, they offered record setting purses, which is like the combined prize money from a tournament of $25 million per event. And in addition to this prize money, they offered these golfers guaranteed contracts, which is something that players on the PGA Tour did not get in any way. Dustin Johnson, for example, was offered a four year contract of around $125 million.
- [15:50]
Wow.
- [15:51]
So regardless of how he, he was going to be making a good amount of money.
- [15:55]
If our listeners don't know the average purse on the PGA Tour, they're big. It's not small money, but it's singles of millions. It might be 3 million. That would be a big purse. So what the Liv tour is doing is just throwing gobs of money in the players directions.
- [16:10]
That's correct. So the combined purse is a little higher. But an individual player might win something like between 1 and $3 million for winning a tournament. But the way that golf works is unless you're Tiger woods, you're not winning multiple, multiple events every year. And so, you know, you can see these numbers and you could calculate, well, if I won every event, I would make a lot of money. But in practice, that's not how it happens. And in fact, you know, there are 200 plus golfers on the tour. Some of them lose money, as we discussed earlier.
- [16:40]
Yeah. And many golfers like Tiger woods and Rory McElroy have endorsement deals with brands that also augment. In fact, they probably make more money from those deals than they do from actually playing golf. So there's a whole bunch of golfers out there that are really just struggling, you know, to win and to make a reasonable wage considering all their expenses. There's also some other key differences between the two tours just in terms of the competitive aspects and the, the actual play of the game. Can you talk about that?
- [17:05]
Yeah. So the other key differences were around innovation in the sport of golf. So for the most part, golf hadn't changed. And LIV golf sort of thought that they could spice up the events and make them more interesting to a broader audience. So one key change is they only play three days of golf three rounds, which is 54 holes compared to the typical 72 hole course. And that's actually where the name Liv comes from. Liv is in Roman numerals, the number for 54. So they thought this would be more attractive both to the audience, but also to the players as well, because they only had to compete for three days. You know, they offered 14 tournaments with more flexibility. So instead of sort of having four major tournaments or say six big events and having to participate in a bunch of smaller events, they were saying all of these events are opportunities for you to earn a lot of money. You don't have to play in Every single event. But you're going to have that flexibility to play in these high end events. And in fact, that was a key factor in recruiting a number of the players who said, this flexibility on the tour is something that I enjoy. Finally, with respect to innovation, they adopted the slogan of golf, but louder. So they had some other things where, you know, they played music on some of the golf courses, they allowed players to play the tournament in shorts, which was a big deal that was unheard of. The events are done with what's called a shotgun start system, which means they, they line up players on every hole and everyone starts at the same time. And so there's no real dead time on certain holes. You know, the way the PGA Tour operates is everyone starts on hole one and progresses their way through.
- [18:37]
Yeah. And there's no cuts, which really gets to the heart of, you know, in the PGA Tour, if you don't play well, you don't get to play on the weekend. You have no shot at winning the tournament. But on the lift Tour, everybody gets to play.
- [18:46]
That's right. Another element they added was a team event. So they thought this was an important element from a marketing perspective as they grouped players of four into teams and in fact, your team could win the event. And what that also did is that gave the opportunity for players to earn some money. Even if they didn't have the best day, you know, on the golf course.
- [19:03]
They'Re spending lots of money to innovate and to compensate players and attract players to their tour. How are they going to make money?
- [19:09]
The hope was that they would make money through two key avenues. The first is sort of a traditional media rights angle that all sports leagues sort of participate in. And in fact, in January of this year, they did sign a meteorites deal. The other angle was also new to golf and was adopted from the Formula one concept, which was that each of these teams could have separate owners. And the idea was that once LIV Golf grew in popularity, the sport and the league would sell the ownership rights for these teams off to other investors. You want to invest with them and make money that way. And this is again how it's done in Formula One. Internally, Liv Golf had reportedly valued these teams greater than $100 million apiece.
- [19:53]
Wow. So let's talk about how the PGA Tour reacted to liv. They weren't going to take this lying down. How did the commissioner react to this and how did the players react?
- [20:03]
First of all, the moment that the players hit their first tee shot off the first LIV Golf event in England, the Commissioner Jay Monahan suspended all the players participating in the event from the PGA Tour, effectively giving them, you know, what appeared to be a lifetime ban. He continued to suspend players that left the PGA Tour for LIV throughout the summer, the PGA Tour also, in order to keep players and prevent them from being attracted to the money offered by liv, increase the payouts of their events. So he announced that there would be eight elevated tournaments with payouts of up to 25 million. So matching LIV Golf's event. He also implemented this program called the Player Impact Program, that effectively rewarded the top 10 players for media attention and things like that. In fact, five of the top 10 players left the PGA Tour for LIV Golf. But what the commissioner did in the summer is extended that program. He said, we're going to pay out a total of $100 million to players that get the most media attention and offering it even to more players. Finally, what the commissioner also did is he implemented guaranteed payouts for participating players on the Tour. So he guaranteed at least $500,000 for every member who participated on the Tour. Okay, so these changes in compensation were met with a lot of interest by the other side because, you know, initially when LIV had launched this program, they were getting a lot of flack for guaranteed contracts. Tiger woods said something along the lines of, what are the incentives for the players to compete if they have guaranteed money? Of course.
- [21:34]
Yeah, yeah, yeah. Well, and the other thing the commissioner did, too, I think halfway through the season, announced that there were certain events where players would be guaranteed to play through the weekend. Again, these are the top, most visible players. And that was an effort to satisfy the sponsors, but effectively doing away with the cut, which LIV had also done. Yeah.
- [21:51]
And, you know, so the players that had left for LIV sort of reacted to this and said, you know, Lee Westwood said, I laugh what the PGA Tour players have come up with, it's just a copy of what LIV is doing. And, you know, Phil Mickelson said with a smirk, it's great that they magically found a couple hundred million. That's awesome.
- [22:09]
Phil's always got a smirk. Yeah.
- [22:12]
So there's these changes that are happening, you know, in terms of the nature of the business, but at the same time, it's very personal. The people on the PGA Tour were criticizing LIV golf and criticizing particular the players. Tiger woods said that players who joined LIV Golf said they turned their backs on the tour. Royal McElroy, who was the number one golfer at the time, said, there's no room in the golf world for LIV golf if LIV Went away tomorrow, I'd be super happy. And he said that the behavior of the players was duplicitous. These tensions just continued to escalate. It was reported that players lost friendships. You know, a lot of these golfers were good friends with each other, and they just couldn't understand how you might leave for LIV Golf. And the people who left for LIV Golf might say, well, how could you not understand what I'm doing?
- [22:55]
Yeah. And I would say, you know, as a fan. Speaking as a fan, the fans, I think, were torn about this, too. Some fans were like, yeah, good for the LIV Tour. Other fans were like, no, I'm completely dedicated to the PGA Tour. So there were definitely divides, really, across the whole spectrum of the game, which makes what happened next absolutely astonishing, which was on June 6th when Jay Monahan of the PGA Tour announced that the PGA Tour was going to merge with the LIV Tour. Can you talk a little bit about that development and what that deal looked.
- [23:25]
Like just leading into this announcement? There are a couple things that were happening in the first half of 2023. I mean, some players were expressing concern about the fact that golf was tearing itself apart, but at the same time, other people were very adamant that you had to pick a side. And Monahan had said, you know, they've gone down their path, we've gone down ours. There's no reconciliation. You know, it was pretty clear that, at least from the top, there was no chance of reconciliation. So this announcement was a major surprise. Leading up to it, LIV Golf had secured a media rights deal. And what had happened was the players had participated in a number of the major tournaments. And, in fact, the LIV Golf players had played very well in the Masters. Koepka and Phil Mickelson tied for second, effectively. And, you know, a lot of the LIV Golf players felt vindicated by their quality of competition. Then, actually, Koepka won the PGA Championship. I think from a question of is LIV Golf going to have a high standard of the game? They answered a lot of those questions in the first half of 2023. So I think that's important background to this announcement that happened next, because, you know, I think there are probably some people who believe that LIV Golf would just go away and peter out. The players would stop competing. And that's not really what happened. The announcement that the PGA Tour and the LIV Golf would be tied up under a new entity came as a surprise to many onlookers, but actually came as a surprise to pretty much all of the players on the PGA Tour. And LIV Golf as well. From what we know, this deal appears to have been negotiated by a small group of people that didn't want it leaked. But in fact, the reality is we're still not entirely sure what the deal is going to look like. After this deal was announced, the commissioner received a lot of pushback from the players who felt like they had been betrayed.
- [25:11]
Well, we should also add that jay Monahan throughout 2022 really did vilify the LIV Tour and particularly the relationship they have with the Saudi government.
- [25:20]
Yeah, he had taken a very aggressive stance against the source of funding for LIV golf. And so for him to then go and say, actually the PGA Tour is going to take funding from the exact same sources, a lot of the players felt confused. They felt betrayed. This was a massive shock. The players only meeting that happened after the announcement got very heated. You know, immediate reactions by the PGA Tour players were along the lines of, it's insanity. You know, some people thought the LIV Tour was dead in the water, but now they were sort of being rescued by this infusion of money. Monahan owned up to this. He said, I recognize everything I've said in the past in my prior positions. I recognize that people are going to call me a hypocrite. But in the end, just came out this week that he had to step away for about a month, and he said he was suffering from anxiety from the pushback of the deal. This was not welcome news to many of the players on the PGA Tour. It was not welcome news to many of the fans who had agreed with the position taken by the commissioner in the past year.
- [26:18]
Yeah. And speaking as a communications professional, I would say it was not handled well on the communications front either. So there's another case study to be written about that down the road. Let me ask you this. You know, I teased this up in the introduction as a case about disruptive innovation, which it sounds like to me, but I'll ask that question to you. Do you see the LIV Tour as having been a disruptor to the established PGA Tour?
- [26:41]
I think that's an appropriate characterization, yes. One key theme of LIV golf was innovation. We're going to change the format of the sport. We're going to change how players are compensated. We're going to change the tone around what golf is, and we're going to try to reach a different audience that had been reached before. There was still a question of whether or not they would ultimately be successful on their own. And I think that question remains. This deal that was announced is actually not a done deal. It's been undergoing review. The Senate has investigated it. The Department of Justice has announced it's investigating it. It's ultimately not clear what the deal would look like. It has been announced that at least the players are being told that they should expect to play through 20, 24 and beyond. And so I think there's a real question of whether or not this entity can exist and succeed.
- [27:32]
Yeah, I think we've seen many examples of firms being disrupted and buying up the competition, much in the same way that the PGA Tour has moved forward with LIV in this proposed deal. Alex, this has been a great conversation. I knew it would be. Let me ask you to end here with one final thought about if you want our listeners to remember one thing about this LIV case, what would it be?
- [27:54]
I think this is a great case in which to think about what is best. When we're trying to say, you know, what should the PGA Tour do? We're thinking about what is best, often from the perspective of the PGA Tour as a business. But you could also think about it what is best for the sport of golf? And those might not be the same answer. Furthermore, you might want to ask what is best for the golfers themselves. And in the long run, what's best for the golfers may actually be best for the sport. This is a situation where you have these different stakeholders with different needs and interests, and they're coming into conflict. And LIV golf is in some ways trying to take this source of conflict and use it for its own benefit.
- [28:34]
They say that competition is good for the customers ultimately, and I would say that's probably true in this case, too.
- [28:39]
I know that personally, I've found that storyline of LIV versus the PGA Tour to be very entertaining when it comes to the majors.
- [28:46]
Yeah, Alex, thanks for joining me on Cold Call.
- [28:48]
This has been wonderful. Brian, thank you.
- [28:56]
Brian Kenny
That was former Harvard Business School Associate Professor Alex McKay in conversation with Brian Kenny on Cold Call. We'll be back next Wednesday with another handpicked conversation about business strategy for from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books and videos with the world's top business and management experts, find it all@hbr.org this episode was produced by Ann Sanney and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Erica Truxler Ramsey, Kabaz, Nicole Smith, Ann Bartholomew. And you, our listener. See you next week.
- [30:00]
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