Transcript Entertainment and Media: Markets and Economics Sports 5:D - 1(26) Sports What is the Market?       Major U.S.

Entertainment and
Media: Markets and
Economics
Sports
5:D - 1(26)
Sports
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: World football
At least $200 billion in the US
 Subsidiary Industries?


5:D - 2(26)
Gambling
Local Affiliated: Externalities
Sports
Issues






5:D - 3(26)
Revenue Models
Team vs. League Profits and Valuation
Competitive Balance
Labor Markets and Contracting:
Conflicting Economic Forces
Antitrust and Public Policy
Trends:
 Existing Businesses
 Markets
Sports
Revenue “Models”

Spectator Sports vs. Studio Sports




Exhibition (TV and Radio)
The fan in the stands. Yankees. 4.5M seats sold at $50/seat.
Gate is shared with the visiting team.
Player payroll = $250M. The fan in the stands is not
adequate to determine team profitability
Sources of Revenue for Teams and Leagues




Fans in the stadium
Merchandising, licensing, etc.
TV and Radio, Internet
Revenue sharing and gate sharing as visitors
5:D - 4(26)
Sports
National Basketball Association
5:D - 5(26)
Sports
National Hockey League




5:D - 6(26)
2002-2003 Combined revenue approx. 2.3
billion
 Average player salary approx 1.9 million
 75% of gross revenue paid out in salaries
 Aggregate loss, 300 million (on revenue of
2.3 billion!) and getting worse
2004: No season – lockout
2009: Combined revenue approx… 2.3B.
2012-2013 half season. Lockout from October
to January. Issue: Players’ 57% revenue share.
Sports
National Football League





5:D - 7(26)
2009 revenue = $6 billion
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.
Sports
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. (Claimed)

5:D - 8(26)
Sports
“Value” in a Sports League
 Source of value in major sports leagues:
 Major sports leagues, 2008 operating income




NHL
NBA
MLB
NFL
140M
310M
500M
790M
 British Soccer
 Australian Rugby
 How is the value captured?
5:D - 9(26)
Sports
What Creates Value in a League?

What Creates Value in a League?







Interdependence within and among teams
Cooperation and competition
Rent creation by star players
Independent ownership and management – the impression of
competition
Collaborative business arrangements
(Continuing our minicase… Which among these did the XFL
produce?)
If every team maximizes its value, does this
maximize the value of the “league?”


5:D - 10(26)
Does it matter?
What are the sources of inequality in team values
Sports
MLB vs. NFL – Result of Collective Optimization
Football
Baseball
5:D - 11(26)
Sports
Incentive Incompatibility





Winning is everything (Vince Lombardi)
Winning isn’t everything (Bud Selig)
The New York Yankees player acquisition “model” –
what do we learn from this about the distribution of
talent?
The leagues seek “competitive balance”
Devices:





Salary caps on players
Salary taxes on large payrolls
Revenue sharing (football, not baseball or hockey)
Promotion and relegation (UK football)
Player draft rankings (US football)
5:D - 12(26)
Sports
Incentive Incompatibility: The NBA Draft




5:D - 13(26)
Promotion by giving early draft picks to low
ranked teams.
Teams want to lose games this year so they
can win games next year (a dynamic
programming problem)
NBA wants teams to want to win games
A solution to align incentives?
Sports
Achieving Competitive Balance
Salary Cap
 Revenue Sharing
 Promotion and relegation
 Ownership structures

5:D - 14(26)
Sports
Competitive Balance?





MLB: 1980 – 2013, 19 different teams won the world series
NFL: 1980 – 2014, 17 different teams won the Lombardy trophy
(won the Super Bowl)
NHL: 1980 - 2013, 16 different teams won the Stanley cup
NBA: 1980 - 2013, 8 different teams won the Stanley cup
The result of a business model to achieve competitive balance?
5:D - 15(26)
Sports
Labor Problems
Claims to the rent: Players and Owners
 Division of the Rent
 Unstable equilibrium – the effect of free agency



Examine salary outcomes
Strikes and lockouts – why?
5:D - 16(26)
Sports
Capturing the Rent: Seeking Equilibrium
Player costs as % of total league revenue
League
1990
1991
1992
1993
1994
1995
1996
2008
MLB
33.4
45.3
49.0
56.3
71.1*
61.7
53.5
52%
NFL
52.4
47.2
60.0
64.3
67.5
67.9
67.4
60%
NBA
39.6
40.7
43.7
48.5
41.4
46.2
46.9
50%
NHL
29.8
32.5
37.5
41.0
41.2
38.2
51.1
46%
New York Yankees 1996 payroll, $68M, 2004 payroll, $190M
In 2003: NFL, 65% of revenues went to players.
2012 NFL lockout. The players also won 55 percent of national media
revenue, 45 percent of all NFL Ventures revenue, and 40
percent of local club revenue
In 2003: NHL, 75%,
In 2011, NHL players 57%. Led to 2012 lockout.
*Player’s strike led to cancellation of the World Series
5:D-17(26)
Sports
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 or
(3) The entire franchise purchase of $88M in 1995 + $38M
• 1996 Chicago Bulls team salary cap = $24.3M. Michael
Jordan’s salary, $33M
• Beckham rule in Major League Soccer
• Baseball salaries, average, almost 100 fold increase in 25
years. Several $200M+ deals for MLB players
• Five $100M+ quarterback deals in the NFL in 2012-2014.=
• What is going on here?
•
•
5:D - 18(26)
Rise of the role of media
Players asserting bargaining strength and capturing the new surplus
Sports
Antitrust and Public Policy

Congress’ interest in sports



5:D - 19(26)
Cartel Behavior
The antitrust exemption
The intersection of sports and the public
interest.
Sports
Monopsony and the Reserve
Clause/Studio System
Movie stars, shortstops, late night talk show hosts, perky morning news
personalities
Marginal expense on players
Supply of players
Value
Marginal value of players
Wage
Number hired
5:D - 20(26)
The source of the Yankees’
$220M payroll – A-Rod  Jeter,
Teixera, etc.
Sports
Market Power and Equilibrium

How to maintain the monopsony equilibrium




Finding balance: free agency
Is this legal?


5:D - 21(26)
Collude on salaries – the salary cap
Agree not to hire each others’ players (the Reserve
Clause)
Baseball – Supreme Court
Other sports – de facto
Sports
The American Needle Case
American Needle: Hat maker vs. National
Football League
 Narrow issue: purchasing by the league vs. the
individual teams
 Broader issue



Economies of a “league”
Anticompetitive mechanism provided by the league –
monopsony power
5:D - 22(26)
Sports
Cartels
MLB – The Antitrust Exemption. “Baseball is a
game.” Enshrined the reserve clause – a
monopsony in the market for players
 NFL – 1962 Sports Broadcasting Act. Produced
a monopsony for broadcasting services (or a
monopoly for the “signal”)

5:D - 23(26)
Sports
American Needle v. NFL: Background
In 2000, NFL authorized NFL Properties to solicit bids from companies who
wished to obtain an exclusive headwear license
Reebok won the bid and won a 10-year exclusive license to make hats and other
headwear featuring NFL team logos
Because of this exclusive license, NFLP refused to renew American Needle’s (and
all other headwear vendors’) licenses
5:D - 24(26)
Sports
American Needle v. NFL: Background



American Needle filed a lawsuit against the NFL, NFLP, the 32 NFL
teams separately, and Reebok, claiming that such an exclusive
license violated Section 1 of the Sherman Antitrust Act
Section 1 prohibits any “contract, combination…or conspiracy, in
restraint of trade.”
NFL and other respondents argued that the NFL was immune from
antitrust liability because it is a “single entity” not a cartel.
5:D - 25(26)
Sports
American Needle v. NFL: Single Entity Argument





Economists argue that a group of competitors (whether football teams or
tennis players) can add value if they collaborate to adopt standards of play
Standardization function of NFL adds to value of products of 32 member clubs
in same way that other standards organizations add to value of products that
make use of them
But it would seem foolish to expose NFL team members to antitrust liability
for meeting to develop playing rules or to select the date and location of the
Super Bowl
Many issues argued in favor of the NFL. Others suggest the cartel can stifle
competition. (Hence the appearance before the Supreme Court.)
SCOTUS rejected the single entity argument for the commodity markets –
American Needle won the right to a trial on the case.
http://www.footballoutsiders.com/ramblings/2010/breaking-down-american-needle-case
5:D - 26(26)
Sports