1. Entertainment and Media: Markets and Economics
Sports

2. 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?
Gambling
Local Affiliated: Externalities

3. Issues 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

4. 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. National Basketball Association
2016
ESPN and Turner will combine to pay the NBA around $2.6 billion annually under the terms of the new deal, which won’t take effect until the 2016–17 season. Under the current deal, which was signed in 2007, ESPN and Turner paid them $930 million annually. 
League Revenues, by year
Team Values, 2015

6. National Hockey League
Combined revenue approx 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.
half season. Lockout from October to January. Issue: Players’ 57% revenue share.

7. National Football League
2015 revenue ~ $10 billion
Long term TV contracts: 8 years, Fox, CBS, NBC, ESPN, total approx 17.6 billion
TV “Pool” approx. $900 million
Sponsorship revenue ~ $1 billion
Steady growth
“Gate” distributed 40% to teams, 60% to the league
Extremely successful.

8. Amateurs? The NCAA
Notre Dame Football rights purchased for 7 years by NBC, $45 million
NCAA football, 8 years, $1.725 billion

9. The Economic Impact Of March Madness From First Four To Final Four (billions)
The city of Houston is expecting to generate $300 million in revenue during the Final Four, which will help taxpayers feel better about the $8 million subsidy provided to by the state of Texas. This is the third time in the tournament’s 78-year history, that the “Space City” will host the Final Four. The last time Houston held the event in 2011, UConn was crowned champion for their third of their eventual four titles.
The TV money earned for the event is also striking, with an estimated $10 billion paid by CBS and Turner Sports for the broadcasting rights of the tournament in An average 30 second ad sold for $1.5 million in 2015 and over $1.1 billion was earned in ad revenue last year.

10. “Value” in a Sports League
Source of value in major sports leagues:
Major sports leagues, operating income
NHL 140M
NBA 310M
MLB 500M
NFL 790M
British Soccer
Australian Rugby
How is the value captured?

11. 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
If every team maximizes its value, does this maximize the value of the “league?”
Incentive incompatibility
Does it matter?
What are the sources of inequality in team values

12. Incentive Incompatibility
Winning is everything (Vince Lombardi)
Winning isn’t everything (Bud Selig)
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)

15. Incentive Incompatibility: The NBA Draft
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?

16. Achieving Competitive Balance
Salary Cap
Revenue Sharing
Promotion and relegation
Ownership structures
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: , 16 different teams won the Stanley cup
NBA: , 8 different teams won the Stanley cup
The result of a business model to achieve competitive balance?

18. MLB vs. NFL – Result of Collective Optimization
Football
Baseball

19. 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?

20. Capturing the Rent: Seeking Equilibrium
Trends in player costs as % of total league revenue
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
2008
52%
60%
50%
46%
New York Yankees 1996 payroll, $68M, 2004 payroll, $190M
In 2003: NFL, 65% of revenues went to players NFL lockout. The players also won 55 percent of national media revenue, 45 percent of all NFL Ventures revenue, and 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

21. 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 or (3) The entire franchise purchase of $88M in $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 =
What is going on here?
Rise of the role of media
Players asserting bargaining strength and capturing the new surplus

22. Antitrust and Public Policy
Congress’ interest in sports
Cartel Behavior
The antitrust exemption
The intersection of sports and the public interest.

23. 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
The source of the Yankees’ $220M payroll – A-Rod  Jeter, Teixera, etc.
Number hired

24. 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

25. Monopsony power becomes capture of resource (player) value

26. 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

27. 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”)

28. 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

29. 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.

30. 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.