Volume 3, Chapter 4
Revenue sharing in professional
sports leagues
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Revenue sharing
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Allow more teams to be competitive
Preserve uncertainty of outcome of games
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Maximize spectator interest for the league as a
whole
Individual team owners surrender a certain
degree of autonomy in order to preserve
interest in and the profitability of the league
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Revenue sharing
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NFL most aggressive revenue-sharing system
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NHL least amount of revenue sharing
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Historical necessity, foresight and leadership of Pete
Rozelle
Largest number of struggling franchises
Important revenue sharing problems in professional
leagues
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How can revenues split between rich and poor franchises
without destroying incentives for the rich to keep
generating prolific revenues
How can revenues split between owners who focus on
profit and others focus on winning
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Administration of NFL
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Alvin ‘Pete’ Rozelle as League Commissioner
1960-1989
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Revenue-sharing practices that allow NFL to reach
unprecedented levels of popularity
Oversee league operations and temper any disputes
among owners
Each team becomes member of League Executive
Committee
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Agree NFL constitution and By-laws or policy
Team is still free to negotiate its own stadium lease terms,
select its form of business organization and staff,
negotiate salary, set its own ticket prices
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NFL revenue sharing
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TV contracts all negotiated and shared at the league
level
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No local TV revenues
Regardless how a franchise is run, TV money gives all
NFL teams a solid revenue base
Gate revenue: 30% home team, 30% visiting team,
40% common pool to be shared equally among all
teams
League-wide licensing, sponsorships shared equally
League assists teams in building/renovating
stadiums

2011 CBA: Clubs receive credit for actual stadium
investment and up to 1.5% of revenue each year
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Owner selection
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Rozelle proposed an ownership policy
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4 basic rules
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More homogenous group of owners, less likelihood of
conflict and opportunistic behavior
No corporate ownership, No public ownership: large
number of decision maker
At least one person must own at least majority of team
No cross-ownership in any other sport (majority owner)
E. Stanley Kroenke purchased Rams in 2010, previous
minority owner of Rams, turn over control of the Denver
Nuggets and Colorado Avalanche to his son
Hope to maintain owners as group of hobbyists who
are interested in sport, not profitability
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MLB revenue sharing, 1996-2001
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Old system: share mainly gate receipt
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In 1995, visiting teams 20% gate receipt in AL, 50
cents/ticket (~4%) in NL
Also very modest sharing of local cable TV contracts
Discussed and accepted in collective bargaining
agreements
CBA 1996-2001
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First revenue sharing system in MLB history, phased in
between 1996-2001
Taxed 20% net local revenue (all local revenue minus
stadium expenses in 2001
75% distributed equally, 25% to clubs with belowaverage team revenue in proportion to how far below
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MLB revenue sharing, 1996-2001
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Exacerbated competitive imbalance
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Low payroll to maximize profit
Owners pocket large share of revenue sharing
money, instead of using to improve team quality
Reward owners for doing poorly
Introduction of luxury tax on high team
payrolls
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MLB revenue sharing, 2002-2006
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Tax 34% net local revenue
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Luxury tax: threshold increase every year
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Plus additional money from MLB central fund,
43.3M in 2003, 57.7M in 2004, 72.7M in 05-06
Payments: NYY 11.8M in 03, 30M in 04, 34.1M
in 05. BOS 3.1M in 04, 4.2M in 05, Angels 0.9M
in 04
Minimum payroll rejected
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MLB revenue sharing, 2007-2011
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Each team 34% net local revenues to a pool
(straight pool)
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National revenues (media, licensing, sponsorship…)
(split pool)
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~70% of total shared revenues
Taxes levied on teams above median in revenue and
distributed to teams below in proportion to how far
below the median
Luxury tax: threshold increase every year
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$148 M for 2007, $155 M for 2008, $162 M in 2009,
$170 M in 2010, $178 M in 2011-13, $189 M in 2014-16
Tax rate: 22.5% first time, 30% 2nd time, 40% 3rd time
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MLB luxury tax
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Allocation of the tax money
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The first $2,375,400 to Players Benefits Plan
long term plan and accrue interest for players
Industry Growth Fund to help the growth of
baseball worldwide
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NBA revenue sharing
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Equal share of national TV and merchandise
revenues
Gate revenues not shared
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NHL revenue sharing
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Equal share of national TV and merchandise
revenues
Gate revenues not shared
Recipients of Player Compensation Cost
Redistribution Fund in CBA 2005(06)-2010(11)
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Weak Canadian dollar, pay player in US dollar, hurt
teams in Canada
bottom half (bottom 15) in League revenues
operate in markets with a Demographic Market Area of
≦2.5 million TV households.
team's revenue must increase faster than the league
average
certain attendance levels must be met
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Sportsman effect
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An owner sacrifices financial value by expanding
the talent of the club beyond the team’s profitmaximizing level
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Significant problems for other teams when overall
salaries escalate
Some owners overpay to assemble winning teams
Team owners likely fall somewhere on a continuum
of profit maximizing to utility maximizing
Effect of competitive balance after revenue sharing
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Profit-maximizing weaker revenue franchise  tend to
keep payroll low  imbalance
utility-maximizing weaker revenue franchise  improve
team quality  balance
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Large-market problem
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Historically, large-market teams win more often
than smaller-market teams
A win more valuable to large-market team
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Results: It hires more talent and wins more
Competitive imbalance is a fact of life as long as
there is revenue imbalance
large markets still attract star players, even under
salary cap
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More chances for endorsements and other off-field
activities
Players want to play for winning teams
Economic logic
underlying revenue sharing
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Taxing on fixed costs associated with running a
franchise incompatible
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Equally split local revenue would hurt long-run
impacts on these revenue
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E.g. minimum payroll
Less incentive for rich teams
Taxing on quality reduce incentive to produce
quality
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Punish owners that try to give fans a better product
Reward owners for having bad teams with low payroll
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Economically justified taxes
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Requirements for good tax system
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Some revenue sharing necessary, tax must fall
more heavily on profitable franchises
Two types of taxes necessary: one on seeking
victory, one on seeking profit
Avoid taxing revenues, tax costs where possible.
Taxes on franchise’s total costs and on win-loss
record
Tax should allow markets to operate without
introducing additional distortions. When players’
salaries are determined in competitive market, no
need to separately tax this component of costs
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Economically justified taxes
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Taxing on revenue vs cost
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Taxing on revenue ultimately depress league’s revenues
and both owners and players suffer in the long run.
Taxing costs strengthens owner’s existing desire to
control costs and increase profitability. Owners will be
better off even if players are not
What costs should be taxed
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Should only on incremental costs
Provide incentive to keep expenditure below certain level
Luxury tax in MLB
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Economically justified taxes
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Tax rate
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1. How much does it cost to win one more game?
2. How much revenue does a franchise lose when team
lose one more game.
Tax rate: (revenue sacrificed with one more loss)/(cost of
winning one more game). How much one owner’s
incremental expenditures cost another in lost revenues
Owners can still attempt to buy championships, but
only to the extent that they compensate other
owners for costs of losing
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Economically justified taxes
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Owners who focus only on profits also
impose costs on other owners
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Little incentive to field a competitive team
Tax less-successful franchises
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Give owners who focus only on profits greater
incentive to win
Taxing losses likely stimulate more interest in
winning and increase league profitablity
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Distribution of taxed money
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Most leagues face problem of unequal distribution
of profits, not insufficient profits
Return taxes proportionately to all franchises with
revenues less than league average
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Help them survive, but not guarantee profits
The taxes is to subsidize teams that are well run and
yet still have difficulty making ends meet
Reward franchises which‘doing things right’, or
fielding competitive teams at relatively low cost
Provide greater incentive for owners to financially
prudent and exercise appropriate oversight over
fielding competitive teams
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Problems in league administration
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Independent actions of owners may result in
decrease in welfare of league as a whole
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Although initiated for increased gain to their
franchise
Teams seek lucrative marketing agreements
may eventually use the increased revenue to
gain competitive advantage over others
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Undermine interest in league product as a whole
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Soccer: alternative business model
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Manchester United, Real Madrid, AC Milan have
operating income and market values similar to
Washington Redskins and NY Yankees
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Value of FC Porto of Portugal, 25th valuable soccer
team in world: market value 106 M
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900-1300 M in market value
Similar to least valuable NHL teams
25 most valuable soccer teams
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9 in England, 4 in Germany, 4 in Italy, 3 in Spain
0 in Latin America
European teams have almost all top players from world
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Profit maximization in soccer
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Governments and broader social forces have
traditionally limited profit seeking by team owners
in Europe
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Growth of private TV stations, particularly on cable,
TV revenue play increasingly important role in
European soccer teams
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Slow to accept the power and money from TV
Strict limitations on teams’ ability to loan
>50% revenue for French teams in Ligue 1
Similar for leagues in England, Italy, Germany, Spain
Many cable companies to invest in soccer teams
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Promotion and relegation
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Premier League teams do not share revenue with
teams in other divisions
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Italy’s Serie A teams do not share broadcast
revenue with each other
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Promotion to Premier League produce additional 30 M
revenue, ~18 M from TV revenue
Juventus, AC Milan revenue 10X of other teams
Many teams keep financially afloat by developing
talented young players and then selling their rights
to wealthier teams
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More acceptable in open system than in fixed/closed
because teams face natural limit to sales they are willing
to make
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Champions League
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Champions League : playoff among top teams in
each European country
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league coefficient: rank the leagues of Europe
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held by Union of European Football Associations (UEFA)
32 teams in 8 groups, 22 automatic qualified
http://en.wikipedia.org/wiki/UEFA_Champions_League
determine the number of clubs from a league that will
participate in CL
http://en.wikipedia.org/wiki/UEFA_coefficients#League
_coefficient
sponsored by a group of multinational corporations,
in contrast to the single main sponsor of the
Barclays Premier League
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Champions League
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UEFA provides prize money to teams in each stage
Additional high revenue for teams made to and
became successful in CL
A large part of the distributed revenue from the
UEFA Champions League is linked to the "market
pool", the distribution of which is determined by the
value of the television market in each country
2014-15, Juventus the runners-up, earned €89.1 M
in total, including €30.9 M prize money
2014-15, Barcelona, the Champion, earned
€61.0 M in total, including €36.4 M prize
money
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Financial danger of open system
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Crisis facing European soccer teams comes at time
when revenue have never been higher
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Strong incentive for teams on border of
promotion/relegation to invest heavily in players
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Revenue ↑by > 200% since mid-1990s
cost (particularly payroll cost) ↑by > 450%
If fail, teams with bloated payroll and diminished
revenues
Elite teams also face pressure to ensure inclusion in
Champions League
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If fail, expected high revenue did not fulfill
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World Baseball Classic
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2009 WBC profit: MLB takes 33%, MLBPA
takes 13%, NPB Player’s Association 13%
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2009 WBC estimated profit $18 M, ~60% came
from Japanese corporate sponsors
NPBPA requested sponsorship and
merchandise related to the Japanese team be
transferred to NPBPA
voted to boycott 2013 WBC in July 2012
 agreed to participate in Sep 2012, terms not
disclosed
http://www.sportbusiness.com/news/184416/world-baseball-classic-door-left-ajar-to-japan
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Support grassroots
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Lega Serie A (top soccer league in Italy) to
pay 6% income to Serie B and C (Lega Pro),
4% income to fund for grassroots sporting
activity
2008 ‘Melandri law’ : imposed the collective
selling of media rights on professional sport.
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named after former sports minister Giovanna
Melandri
40% media revenue equally distributed to teams
http://www.tvsportsmarkets.com/news/2011/oct/tribunal-upholds-redistribution-model-italian-football