1. Volume 3, Chapter 4 Revenue sharing in professional sports leagues

2. Revenue sharing Allow more teams to be competitive
Preserve uncertainty of outcome of games
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

3. Revenue sharing NFL most aggressive revenue-sharing system
Historical necessity, foresight and leadership of Pete Rozelle
NHL least amount of revenue sharing
Largest number of struggling franchises
Important revenue sharing problems in professional leagues
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

4. Administration of NFL
Alvin ‘Pete’ Rozelle as League Commissioner
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
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

5. NFL revenue sharing
TV contracts all negotiated and shared at the league level
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 percent of revenue each year

8. Owner selection Rozelle proposed an ownership policy 4 basic rules
More homogenous group of owners, less likelihood of conflict and opportunistic behavior
4 basic rules
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

9. MLB revenue sharing, 1996-2001 Old system: share mainly gate receipt
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
First revenue sharing system in MLB history, phased in between
Taxed 20% net local revenue (all local revenue minus stadium expenses in 2001
75% distributed equally, 25% to clubs with below-average team revenue in proportion to how far below

10. MLB revenue sharing, 1996-2001 Exacerbated competitive imbalance
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

11. MLB revenue sharing, 2002-2006 Tax 34% net local revenue
Plus additional money from MLB central fund, 43.3M in 2003, 57.7M in 2004, 72.7M in 05-06
Luxury tax: threshold increase every year
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

12. MLB revenue sharing,
Each team 34% net local revenues to a pool (straight pool)
~70% of total shared revenues
National revenues (media, licensing, sponsorship…) (split pool)
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
$148 M for 2007, $155 M for 2008, $162 M in 2009, $170 M in 2010 and $178 M in 2011
Tax rate: 22.5% first time, 30% 2nd time, 40% 3rd time

13. NBA revenue sharing
Equal share of national TV and merchandise revenues
Gate revenues not shared

14. NHL revenue sharing
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)
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

15. Sportsman effect
An owner sacrifices financial value by expanding the talent of the club beyond the team’s profit-maximizing level
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
Profit-maximizing weaker revenue franchise  tend to keep payroll low  imbalance
utility-maximizing weaker revenue franchise  improve team quality  balance

16. Large-market problem
Historically, large-market teams win more often than smaller-market teams
A win more valuable to large-market team
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
More chances for endorsements and other off-field activities
Players want to play for winning teams

17. Economic logic underlying revenue sharing
Taxing on fixed costs associated with running a franchise incompatible
E.g. minimum payroll
Equally split local revenue would hurt long-run impacts on these revenue
Less incentive for rich teams
Taxing on quality reduce incentive to produce quality
Punish owners that try to give fans a better product
Reward owners for having bad teams with low payroll

18. Economically justified taxes
Requirements for good tax system
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

19. Economically justified taxes
Taxing on revenue vs cost
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
Should only on incremental costs
Provide incentive to keep expenditure below certain level
Luxury tax in MLB

20. Economically justified taxes
Tax rate
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

21. Economically justified taxes
Owners who focus only on profits also impose costs on other owners
Little incentive to field a competitive team
Tax less-successful franchises
Give owners who focus only on profits greater incentive to win
Taxing losses likely stimulate more interest in winning and increase league profitablity

22. Distribution of taxed money
Most leagues face problem of unequal distribution of profits, not insufficient profits
Return taxes proportionately to all franchises with revenues less than league average
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

23. Problems in league administration
Independent actions of owners may result in decrease in welfare of league as a whole
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
Undermine interest in league product as a whole

24. Soccer: alternative business model
Manchester United, Real Madrid, AC Milan have operating income and market values similar to Washington Redskins and NY Yankees
M in market value
Sales of brand-name soccer merchandise > 3 B
NFL 2.5B, MLB 2.3B, NASCAR 1.2B, NBA 1B, NHL 900M, in 2001
Value of FC Porto of Portugal, 25th valuable soccer team in world: market value 106 M
Similar to least valuable NHL teams
25 most valuable soccer teams
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

25. Profit maximization in soccer
Governments and broader social forces have traditionally limited profit seeking by team owners in Europe
Slow to accept the power and money from TV
Strict limitations on teams’ ability to loan
Growth of private TV stations, particularly on cable, TV revenue play increasingly important role in European soccer teams
>50% revenue for French teams in Ligue 1
Similar for leagues in England, Italy, Germany, Spain
Many cable companies to invest in soccer teams

27. Promotion and relegation
Premier League teams do not share revenue with teams in other divisions
Promotion to Premier League produce additional 30 M revenue, ~18 M from TV revenue
Italy’s Serie A teams do not share broadcast revenue with each other
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
More acceptable in open system than in fixed/closed because teams face natural limit to sales they are willing to make

28. Champions League
Champions League : playoff among top teams in each European country
held by Union of European Football Associations (UEFA)
32 teams in 8 groups, 22 automatic qualified
league coefficient: rank the leagues of Europe
determine the number of clubs from a league that will participate in CL
sponsored by a group of multinational corporations, in contrast to the single main sponsor of the Barclays Premier League

29. Champions League
UEFA awards €3 million to each team that qualifies for the UEFA Champions League, plus €2.4 million for participating in the Group stage. A Group stage win is worth €600,000 and a draw is worth €300,000.
In addition, UEFA pays each quarter finalist €2.5 million, €3 million for each semi-finalist, €4 million for the runners-up and €7 million for the winners
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

30. Financial danger of open system
Crisis facing European soccer teams comes at time when revenue have never been higher
Revenue ↑by > 200% since mid-1990s
cost (particularly payroll cost) ↑by > 450%
Strong incentive for teams on border of promotion/relegation to invest heavily in players
If fail, teams with bloated payroll and diminished revenues
Elite teams also face pressure to ensure inclusion in Champions League
If fail, expected high revenue did not fulfill

31. World Baseball Classic
Japan has requested that sponsorship rights and the rights to merchandise products related to the Japanese team be transferred to Nippon Professional Baseball (NPB)
MLB and its players’ association each received 33% of the overall turnover from the 2009 WBC while Japan only received 13%

32. Support grassroots
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.