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