Economics of Sports
Bob Donchez
[email protected]
Unit 3 Team Costs, Profit,
Winning
Business of Sports
1
Summer 2015
Profits Are A Touchy Subject
• Team owners are condemned if they worry
about profits
• Corporate CEOs are condemned if they don’t
worry about profits
• But bad things happen if teams ignore profits
• Consider the 2002-2003 Ottawa Senators
– They had the NHL’s best record
– They also filed for bankruptcy
Business of Sports
2
Summer 2015
The Importance of Leagues
• Leagues did not always exist
– Professional baseball formed 7 years before MLB
– Professional football existed 44 years before the NFL
• Before this teams barnstormed
– Traveled from town to town
– The returns were very uncertain – tied to winning
• The function of leagues
–
–
–
–
They set rules for behavior on the field – and off
They promote competition on the field
The limit competition off the field
They promote the sport
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Summer 2015
Setting Rules
• Helps the sport to spread
– Teams must agree on how to play the game
– Baseball grew only after it adopted the
“Knickerbocker Rules”
• Outlaws undesirable behavior
– Betting on games
– Performance enhancing drugs
• Helps sports become more popular
– NBA has changed several rules
• Allowed the 3-point basket
• Outlawed – then reintroduced – zone defenses
Business of Sports
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Summer 2015
Limits Competition Off The Field
• Limits the size of the league
– Too many teams hurts competition & fan interest
– Too few leaves room for competing leagues to enter
• As American League did in 1901
• Protect each team’s territory
– To move into Los Angeles, the NBA’s Clippers had
to pay a fee to the Lakers
Business of Sports
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Summer 2015
The Economics of Clubs
• What is right size of club (or league)?
• New members are a new source of revenue
– Entry fees are now hundreds of millions of dollars
– Expansion also provides access to new markets
• New members might also be a drain
– Teams must share revenue with more members
– Competitive balance may become a problem
Business of Sports
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Summer 2015
Finding the Right Size
• MLB had only one league in the 1890s
– That’s why the National League is the “senior circuit”
– National League feared having too many teams
– Limited league to 8 teams
• But many cities grew rapidly in the 1890s
– More cities were able to support teams
– The NL became vulnerable to entry
– In 1901, the American League entered “open” cities
Business of Sports
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Summer 2015
Table 5-4
Pro Sports League Rivalries (slide 1 of 2)
Dominant League
(Year Established)
Rivals
Duration
Disposition
National League (1896)
American Assoc.
1883-1891
Assimilated
Union Assoc.
1884
Assimilated
Players League
1890
Assimilated
AL
1901-1902
Merger
Federal League
1914-1915
Buy Out by MLB
Negro Leagues
1923-1950
Folded
PCL
Middle 1950s
MLB (1903)
Business of Sports
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Summer 2015
Table 5-4
Pro Sports League Rivalries (slide 1 of 2)
NFL (1922)
NBA (1949)
NHL (1917)
Business of Sports
AFL I
1926
One-Team Merger
AFL II
1936-1937
Partial Merger
AFL III
1940-1941
Folded
All-American FC
1946-1949
Partial Merger
AFL IV
1960-1969
Partial Merger
WFL
1974-1975
Folded
USFL
1983-1985
Folded
ABL
1960-1961
Folded
ABA
1967-1976
Partial Merger
WHA
1972-1979
Partial Merger
9
Summer 2015
Table 5-5
Team Movement in Pro Sports (slide 1 of 2)
Team
Moves
MLB
Angels
Los Angeles—Anaheim
Athletics
Philadelphia—Kansas City—Oakland
Braves
Boston—Milwaukee—Atlanta
Brewers
Seattle—Milwaukee
Dodgers
Brooklyn—Los Angeles
Expos
Montreal—Washington, D.C.
Giants
New York—San Francisco
Orioles
Milwaukee—St. Louis—Baltimore
Rangers
Washington, D.C.—Arlington
Twins
Washington, D.C.—Minnesota
Yankees
Baltimore—New York
NFL
Cardinals
Chicago—St. Louis—Phoenix
Colts
Baltimore—Indianapolis
Oilers
Houston—Tennessee
Raiders
Oakland—Los Angeles—Oakland
Rams
Cleveland—Los Angeles—St. Louis
Ravens
Business of Sports
Cleveland—Baltimore
Redskins
Boston—Washington, D.C.
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Summer 2015
Table 5-5
Team Movement in Pro Sports (slide 2 of 2)
NBA
76ers
Syracuse—Philadelphia
Bullets
Chicago—Baltimore—Washington, D.C.
Clippers
Buffalo—San Diego—Los Angeles
Grizzlies
Vancouver—Memphis
Hawks
Tri Cities—Milwaukee—St. Louis—Atlanta
Hornets
Charlotte—New Orleans
Jazz
New Orleans—Salt Lake City
Kings
Rochester—Cincinnati—Kansas City—Sacramento
Lakers
Minneapolis—Los Angeles
Pistons
Fort Wayne—Detroit
Spurs
Dallas—San Antonio
Thunder
Seattle—Oklahoma City
Warriors
Philadelphia—San Francisco—Golden State
NHL
Avalanche
Quebec—Denver
Coyotes
Winnipeg—Phoenix
Devils
Kansas City—Colorado—New Jersey
Flames
Atlanta—Calgary
Starsa
Business of Sports
Oakland—California—Cleveland—Minnesota—Dallas
Whalers
New England—Hartford
11
Summer 2015
Leagues as Marketers
• Individual teams do not provide enough
marketing
– Teams have little incentive to pay for advertising that
benefits other teams
– Everyone want to free ride
• League-wide marketing is a public good
– Non-rivalry:
• Team A’s benefiting from league-wide marketing doesn’t
prevent Team B from benefiting
– Non-exclusion:
• Team A cannot prevent Team B from benefiting from leaguewide marketing
Business of Sports
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Summer 2015
Maximizing Profit
• p = TR – TC
• Leagues differ in the level of profit
– NFL by far the most profitable
– NHL by far the least profitable
• Leagues differ in the variability of profit
– NFL team profits are by far the most even
– Surprisingly, the Yankees are one of least
profitable team in MLB
Business of Sports
13
Summer 2015
Gate Revenue
• Revenue from ticket sales
• If only gate revenue mattered
– Baseball would still be king
– Hockey would rival football
• NFL shares the most
–
–
–
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Home team keeps 60%
40% is shared league-wide
Policy originated from the early weakness of NFL
It is one reason why team profits are so close
• Baseball now shares 34%
• NBA teams share nothing
– Making the playoffs is a vital source of revenue
Business of Sports
14
Summer 2015
Revenue from Broadcast Rights
• TV became the largest revenue source in the
1960s
• TV is why football surpassed baseball
– Commissioner Pete got the teams to agree on a single
contract for the entire league
– Needed a limited antitrust exemption
• That’s why there are no NFL games on Saturdays until
December
• Doubleheader Game makes a national game
• The NFL’s contract now gives each team
$? M/year
Business of Sports
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Summer 2015
Contrast to Baseball
• MLB was reluctant to put on TV or
– Even opposed radio at first
– They felt that fans watching at home should
be no better off than the fan in the worst seat
• MLB favored local coverage over national
• That’s why MLB has “small-market teams”
– But the NFL does not
Business of Sports
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Summer 2015
Venue Revenue
• Revenue from stadium – other than tickets
–
–
–
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Naming rights
Signage
Parking
Especially luxury boxes
• Boxes are why the Dallas Cowboys are so
valuable
– It shares most of its media revenue evenly with NFL
– It keeps only 60% of its gate revenue
– BUT it has more luxury boxes than an other team
Business of Sports
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Summer 2015
Luxury Boxes
• Cowboy Stadium has 300 luxury boxes
– Far more than any other team
• Big source of revenue
– Rent for 10s or 100s of thousands per season
• Teams do not share most box revenue
– They count only admission in revenue sharing
– Most box revenue counts as concessions
Business of Sports
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Summer 2015
Naming Rights
• Team sells right to name facility
– Originated in 1973
– Rich Foods paid Buffalo Bills $1.5 M over 25 years
– Citigroup is now pay the Mets $400 M over 20 years
• Is it worth it?
– Study by Leeds, Leeds, and Pistolet (2008) find that
naming rights do little for the sponsor’s bottom line
– Citigroup is latest sponsor to fall victim to the “naming
rights curse” (received $45 B bailout from
government)
Business of Sports
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Summer 2015
Revenue Sharing
• Sharing varies among leagues
– NFL shares the most
– MLB and NHL have recently increased sharing
– NBA shares very few sources of income
• But its large – shared – TV contract dominates other revenue
• Some perverse results
– Weak MLB teams like the Nationals and Marlins have
higher profits than the Yankees
– The Bengals were highly profitable despite fielding
very weak teams in the 1990s and 2000s
Business of Sports
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Summer 2015
Costs
• By far the largest is player salaries
• Others include travel, venue costs, and
player development
• Opportunity costs are a major reason why
teams have moved
– Dodgers were profitable in Brooklyn but were
even more profitable in Los Angeles
Business of Sports
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Summer 2015
A Paradox
• Ted Turner once owned both the Atlanta
Braves and TBS, which showed the games
– But the Braves made very little TV revenue
• Augustus Busch once owned the St. Louis
Cardinals and Anheuser-Busch
– But the Cardinals made very little from “pouring
rights”
Business of Sports
22
Summer 2015
Paper Losses and Real Profits
• Operating Income v. Book Profit
– Operating income does not include interest payments
– Operating income does not include depreciation
• The distinction allows teams to increase profit in
fact by losing money on paper
Business of Sports
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Summer 2015
Depreciation, Taxes, and Bill Veeck
• Veeck was MLB’s most innovative owner
– He was a creative marketer
• Used 3’7” Eddie Gaedel as a pinch hitter
• Introduced exploding scoreboards
– He was a principled owner
• Integrated the American League in 1947
• Opposed MLB’s reserve clause
• Saw unique loophole in tax laws
– Team can depreciate their players
Business of Sports
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Summer 2015
An Example of
The Veeck Loophole
• In 1964 a group bought Braves for $6.2M
– The claimed team was worth $50k
– They attributed most of the value ($6.1M) to the players
• Declared players as depreciable assets
– Straight-line depreciation over 10 years
– Allowed the owners to deduct $612k/yr over ten years
• At a tax rate 50%, this cut taxes by ~$300k/yr
• Over 10 yrs taxpayers paid half the purchase price
Business of Sports
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Summer 2015
The “Subchapter S” Variant
• A sole owner can declare a “Subchapter S” firm’s
income as personal income
– This makes little sense if one looks at tax rates
– Corporate rates were lower than personal rate
• Veeck faced CTR=52% & PTR=72%
• Paper losses can be profitable – consider the Braves
– Braves $300k write-off could turn a $200k operating profit
into $100k book loss
– At 52% CTR could write off $52k against corporate income
– At 72% PTR could write off $72k against personal income
Business of Sports
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Summer 2015
Loophole’s Loose Ends
• What happens when the team is fully depreciated?
– Is the owner stuck with high-tax asset?
– There are two ways out
• Tax laws allowed a one-time switchback from Subchapter S
status
• The owner can sell the team and the new owner can start from
scratch
• Veeck revolutionized the reason for owning a team
• The loophole fell out of favor in the 1970s & 1980s
– Tax rates were reduced and flattened
– The value attributable to players was limited
– Recent tax changes have made it more popular again
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Summer 2015