Entertainment and Media: Markets and

Economics

Professor William Greene

Entertainment and Media: Markets and Economics

Fall 2004 Sports

Professor W. Greene

What is the Market?

Major U.S. Leagues• Hockey• Baseball• Football• Basketball

Major U.S. League: NCAA Basketball and Football Smaller

• Golf• Tennis• NASCAR

Others? International

Scale

Total Industry Size• What are the components?

• How large?

Subsidiary Industries?• Gambling

• Local Affiliated: Externalities

At least $100 billion in the US

Agenda – Sports Economics

Sports Leagues and Business Models• What is a “league?”

Valuation• The value of a league

• The values of the teams in a league

Conflicting Economic Forces in Sports Leagues

Issues Revenue Models Team vs. League Profits and Valuation Competitive Balance Labor Markets and Contracting Antitrust and Public Policy Trends:

• Existing Businesses• Markets

“Science” (for the economic hobbyist)• SaberMetrics• Hot hands

• Basketball• Tennis

Revenue “Models”

Spectator Sports vs. Studio Sports• Exhibition (TV and Radio)

• The fan in the stands. [Yankees. 2.5M seats sold at $30/seat. Player payroll = $190M. The fan in the stands is irrelevant to team profitability

Sources of Revenue for Teams and Leagues• Fans

• Merchandising, licensing, etc.

• TV and Radio

• Revenue sharing

Major League Baseball

Gross Revenue $3 billion (2000)• Local Revenues 2.2 (Montreal = .012, New

York Yankees, .176)

• National TV Revenue 0.8

• Shared Revenue 0.013 The Blue Ribbon Commission (2000)

• Overall revenue

• Distribution

• Long term survival of the nation’s pastime

National Basketball Association

Total, approx 3.5 billion• Fans in the seats

• TV contracts

Player salaries: Approx 60% and rising

National Hockey League

2002-2003 Combined revenue approx. 2 billion

Average player salary approx 1.9 million Aggregate loss, 300 million (on revenue

of 2 billion!) and getting worse

National Football League

Long term TV contracts: 8 years, Fox, CBS, NBC, ESPN, total approx 17.6 billion

TV “Pool” approx. $80 million / team “Gate” distributed 40% to teams, 60% to

the league Extremely successful. Why?

Amateurs? The NCAA

Notre Dame Football rights purchased for 7 years by NBC, $45 million

NCAA football, 8 years, $1.725 billion Final Four (March Madness) $100

million in local revenues and business

Other Sports Franchises

Arena Football NASCAR Tennis and Golf Any others? How do these differ from the businesses

already considered?

Those TV Contracts

Do the networks “lose” money on huge football contracts? The Miami Fish Story• Direct benefits and costs

• Indirect benefits – promoting other products

The winner’s curse. In 1994, Fox bid $600m more than the next highest bid for NFC games

What Creates Value in a League?

Interdependence within and among teams Cooperation and competition Rent creation by star players Independent ownership and management Collaborative business arrangements Competitive processes Competitive balance

The Value of the Franchise (Team)

How computed, in principle If every team maximizes its value, does

this maximize the value of the “league?”• Does it matter?

• Sources of inequality in team values

The Value of the Hockey Franchise

Team/Principal Owner Value ($M) Income ($M)

New York Rangers/Cablevision Systems $ 272.4 -6.92

Dallas Stars/Thomas Hicks 270.7 5.63

Toronto Maple Leafs/Larry Tanenbaum 263.9 13.84

Philadelphia Flyers/Comcast-Spectacor 252 3.55

Detroit Red Wings/Michael Ilitch 245 -3.7

The Value of the Football Team The reason NFL franchises are valued higher than other sports is

because they have the highest national television deal, which brings in about $77 million annually per team. 

Team Values1. Washington Redskins $952 (mil)2. Dallas Cowboys $8513. Houston Texans $7914. New England Patriots $7565. Cleveland Browns $6956. Denver Broncos $6837. Tampa Bay Buccaneers $6718. Baltimore Ravens $6499. Carolina Panthers $64210.Miami Dolphins $683

Basketball

Baseball

Incentive Incompatibility Winning is everything (Vince Lombardi) Winning isn’t everything (Bud Selig) The New York Yankees player acquisition

“model” The leagues seek “competitive balance” Devices:

• Salary caps on players• Revenue sharing (football, not baseball or hockey)• Promotion and relegation (UK football)• Player draft rankings (US football)

Achieving Competitive Balance

Salary Cap Revenue Sharing Promotion and relegation Ownership structures

Competitive Balance?

MLB: 1984 – 2003, 13 different teams won the world series

NFL: 1984 – 2003, 11 different teams won the Lombardy trophy

NHL: 1984-2003, 10 different teams won the Stanley cup

Is there competitive balance?

Money Talks and Walks

Since 1995, when baseball began divisional playoffs, 44 of the 56 teams to make the playoffs ranked in the top 10 in player salary. In three of those seven years, the team with the highest payroll achieved the highest goal -- winning the World Series. Not once in those years has a team ranked less than No. 10 in payroll even made it to the World Series.

Labor Problems

Division of the Rent Claims to the rent Unstable equilibrium – the effect of free

agency• Examine salary outcomes

• Strikes and lockouts – why?

Capturing the Rent

League 1990 1991 1992 1993 1994 1995 1996

MLB 33.4 45.3 49.0 56.3 71.1* 61.7 53.5

NFL 52.4 47.2 60.0 64.3 67.5 67.9 67.4

NBA 39.6 40.7 43.7 48.5 41.4 46.2 46.9

NHL 29.8 32.5 37.5 41.0 41.2 38.2 51.1

Player costs a % of total league revenue

New York Yankees 1996 payroll, $68M, 2004 payroll, $190M

In 2003: NHL, 75%, NFL, 65% of revenues went to players.

*Player’s strike led to cancellation of the World Series

Monopsony

Movie stars, shortstops, late night talk show hosts, perky morning news personalities

Marginal expense on players

Supply of players

Marginal value of players

Value

Wage

Number hiredThe source of the Yankees’ $190M payroll – A-Rod Jeter, Giambi, etc.

Market Power and Equilibrium

How to maintain the monopsony equilibrium• Collude on salaries – the salary cap

• Agree not to hire each others’ players (the Reserve Clause)

Finding balance: free agency Is this legal?

• Baseball – Supreme Court

• Other sports – de facto

Salary Cap Problems Kevin Garnett, Minnesota, 1997. $126M, 6 years = (1) All of

team TV revenues from NBC or (2) $25/seat of every seat of every game for 6 years (3) The entire franchise purchase of $88M in 1995 + $38M

1996 Chicago Bulls team salary cap = $24.3M. Michael Jordan’s salary, $33M

Baseball salaries, average, almost 100 fold increase in 25 years.

What is going on here?

?

If all teams are “losing” money, why are the teams so valuable?

Antitrust and Public Policy

Cartel Behavior The antitrust exemption The intersection of sports and the public

interest.

Trends in Sports

Wither America’s Pastime Trends in other spectator sports

“Science” – The Hot Hand

SaberMetrics – The Bill James Story• SaberMetrics

• Moneyball – Billy Beane and The Oakland Athletics

• The Boston Red Sox

• Why do this?

Hot hands: Is there autocorrelation in the points scored?• Basketball

• Tennis