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 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 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 RangersNew York Rangers/Cablevision Systems $ Dallas StarsDallas Stars/Thomas Hicks Toronto Maple LeafsToronto Maple Leafs/Larry Tanenbaum Philadelphia FlyersPhiladelphia Flyers/Comcast-Spectacor Detroit Red WingsDetroit Red Wings/Michael Ilitch

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 Values 1.Washington Redskins$952 (mil)Washington Redskins 2.Dallas Cowboys$851Dallas Cowboys 3.Houston Texans$791Houston Texans 4.New England Patriots$756New England Patriots 5.Cleveland Browns$695Cleveland Browns 6.Denver Broncos$683Denver Broncos 7.Tampa Bay Buccaneers$671Tampa Bay Buccaneers 8.Baltimore Ravens$649Baltimore Ravens 9.Carolina Panthers$642Carolina Panthers 10.Miami Dolphins$683Miami Dolphins

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: , 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 MLB * NFL NBA NHL 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 hired The 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, $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 $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