Rodney Fort's Sports Economics

Rodney Fort's Sports Economics

Economics of Sports Bob Donchez [email protected] Unit 3 Team Costs, Profit, Winning Business of Sports 1 Summer Profits Are A Touchy Subject Team owners are condemned if they worry about profits Corporate CEOs are condemned if they dont worry about profits But bad things happen if teams ignore profits Consider the 2002-2003 Ottawa Senators They had the NHLs best record They also filed for bankruptcy Business of Sports 2 Summer

The Importance of Leagues Leagues did not always exist Professional baseball formed 7 years before MLB Professional football existed 44 years before the NFL Before this teams barnstormed Traveled from town to town The returns were very uncertain tied to winning The function of leagues They set rules for behavior on the field and off They promote competition on the field The limit competition off the field They promote the sport Business of Sports 3 Summer Setting Rules

Helps the sport to spread Teams must agree on how to play the game Baseball grew only after it adopted the Knickerbocker Rules Outlaws undesirable behavior Betting on games Performance enhancing drugs Helps sports become more popular NBA has changed several rules Allowed the 3-point basket Outlawed then reintroduced zone defenses Business of Sports 4 Summer Limits Competition Off The Field Limits the size of the league Too many teams hurts competition & fan interest Too few leaves room for competing leagues to enter As American League did in 1901 Protect each teams territory To move into Los Angeles, the NBAs Clippers had to pay a fee to the Lakers

Business of Sports 5 Summer The Economics of Clubs What is right size of club (or league)? New members are a new source of revenue Entry fees are now hundreds of millions of dollars Expansion also provides access to new markets New members might also be a drain Teams must share revenue with more members Competitive balance may become a problem Business of Sports 6 Summer Finding the Right Size MLB had only one league in the 1890s Thats why the National League is the senior circuit National League feared having too many teams Limited league to 8 teams

But many cities grew rapidly in the 1890s More cities were able to support teams The NL became vulnerable to entry In 1901, the American League entered open cities Business of Sports 7 Summer Table 5-4 Pro Sports League Rivalries (slide 1 of 2) Dominant League (Year Established) Rivals Duration Disposition National League (1896) American Assoc. 1883-1891

Assimilated Union Assoc. 1884 Assimilated Players League 1890 Assimilated AL 1901-1902 Merger Federal League 1914-1915 Buy Out by MLB Negro Leagues

1923-1950 Folded PCL Middle 1950s MLB (1903) Business of Sports 8 Summer Table 5-4 Pro Sports League Rivalries (slide 1 of 2) NFL (1922) AFL I 1926 One-Team Merger

AFL II 1936-1937 Partial Merger AFL III 1940-1941 Folded All-American FC 1946-1949 Partial Merger AFL IV 1960-1969 Partial Merger WFL 1974-1975

Folded USFL 1983-1985 Folded ABL 1960-1961 Folded ABA 1967-1976 Partial Merger NHL (1917) WHA 1972-1979 Partial Merger

Business of Sports 9 NBA (1949) Summer Table 5-5 Team Movement in Pro Sports (slide 1 of 2) Team Moves MLB Angels Los AngelesAnaheim Athletics PhiladelphiaKansas CityOakland Braves BostonMilwaukeeAtlanta Brewers

SeattleMilwaukee Dodgers BrooklynLos Angeles Expos MontrealWashington, D.C. Giants New YorkSan Francisco Orioles MilwaukeeSt. LouisBaltimore Rangers Washington, D.C.Arlington Twins Washington, D.C.Minnesota Yankees

BaltimoreNew York NFL Cardinals ChicagoSt. LouisPhoenix Colts BaltimoreIndianapolis Oilers HoustonTennessee Raiders OaklandLos AngelesOakland Rams ClevelandLos AngelesSt. Louis Ravens ClevelandBaltimore

Redskins BostonWashington, D.C. Business of Sports 10 Summer Table 5-5 Team Movement in Pro Sports (slide 2 of 2) NBA 76ers SyracusePhiladelphia Bullets ChicagoBaltimoreWashington, D.C. Clippers BuffaloSan DiegoLos Angeles Grizzlies

VancouverMemphis Hawks Tri CitiesMilwaukeeSt. LouisAtlanta Hornets CharlotteNew Orleans Jazz New OrleansSalt Lake City Kings RochesterCincinnatiKansas CitySacramento Lakers MinneapolisLos Angeles Pistons Fort WayneDetroit Spurs

DallasSan Antonio Thunder SeattleOklahoma City Warriors PhiladelphiaSan FranciscoGolden State NHL Avalanche QuebecDenver Coyotes WinnipegPhoenix Devils Kansas CityColoradoNew Jersey Flames AtlantaCalgary Starsa

OaklandCaliforniaClevelandMinnesotaDallas Whalers New EnglandHartford Business of Sports 11 Summer Leagues as Marketers Individual teams do not provide enough marketing Teams have little incentive to pay for advertising that benefits other teams Everyone want to free ride League-wide marketing is a public good Non-rivalry: Team As benefiting from league-wide marketing doesnt prevent Team B from benefiting Non-exclusion: Team A cannot prevent Team B from benefiting from leaguewide marketing Business of Sports

12 Summer Maximizing Profit p = TR TC Leagues differ in the level of profit NFL by far the most profitable NHL by far the least profitable Leagues differ in the variability of profit NFL team profits are by far the most even Surprisingly, the Yankees are one of least profitable team in MLB Business of Sports 13 Summer Gate Revenue Revenue from ticket sales If only gate revenue mattered Baseball would still be king Hockey would rival football NFL shares the most

Home team keeps 60% 40% is shared league-wide Policy originated from the early weakness of NFL It is one reason why team profits are so close Baseball now shares 34% NBA teams share nothing Making the playoffs is a vital source of revenue Business of Sports 14 Summer Revenue from Broadcast Rights TV became the largest revenue source in the 1960s TV is why football surpassed baseball Commissioner Pete got the teams to agree on a single contract for the entire league Needed a limited antitrust exemption

Thats why there are no NFL games on Saturdays until December Doubleheader Game makes a national game The NFLs contract now gives each team $? M/year Business of Sports 15 Summer Contrast to Baseball MLB was reluctant to put on TV or Even opposed radio at first They felt that fans watching at home should be no better off than the fan in the worst seat MLB favored local coverage over national Thats why MLB has small-market teams But the NFL does not Business of Sports 16 Summer

Venue Revenue Revenue from stadium other than tickets Naming rights Signage Parking Especially luxury boxes Boxes are why the Dallas Cowboys are so valuable It shares most of its media revenue evenly with NFL It keeps only 60% of its gate revenue BUT it has more luxury boxes than an other team Business of Sports 17 Summer Luxury Boxes Cowboy Stadium has 300 luxury boxes Far more than any other team Big source of revenue

Rent for 10s or 100s of thousands per season Teams do not share most box revenue They count only admission in revenue sharing Most box revenue counts as concessions Business of Sports 18 Summer Naming Rights Team sells right to name facility Originated in 1973 Rich Foods paid Buffalo Bills $1.5 M over 25 years Citigroup is now pay the Mets $400 M over 20 years Is it worth it? Study by Leeds, Leeds, and Pistolet (2008) find that naming rights do little for the sponsors bottom line Citigroup is latest sponsor to fall victim to the naming rights curse (received $45 B bailout from government) Business of Sports 19

Summer Revenue Sharing Sharing varies among leagues NFL shares the most MLB and NHL have recently increased sharing NBA shares very few sources of income But its large shared TV contract dominates other revenue Some perverse results Weak MLB teams like the Nationals and Marlins have higher profits than the Yankees The Bengals were highly profitable despite fielding very weak teams in the 1990s and 2000s Business of Sports 20 Summer Costs By far the largest is player salaries Others include travel, venue costs, and player development Opportunity costs are a major reason why teams have moved Dodgers were profitable in Brooklyn but were

even more profitable in Los Angeles Business of Sports 21 Summer A Paradox Ted Turner once owned both the Atlanta Braves and TBS, which showed the games But the Braves made very little TV revenue Augustus Busch once owned the St. Louis Cardinals and Anheuser-Busch But the Cardinals made very little from pouring rights Business of Sports 22 Summer Paper Losses and Real Profits Operating Income v. Book Profit Operating income does not include interest payments Operating income does not include depreciation

The distinction allows teams to increase profit in fact by losing money on paper Business of Sports 23 Summer Depreciation, Taxes, and Bill Veeck Veeck was MLBs most innovative owner He was a creative marketer Used 37 Eddie Gaedel as a pinch hitter Introduced exploding scoreboards He was a principled owner Integrated the American League in 1947 Opposed MLBs reserve clause Saw unique loophole in tax laws Team can depreciate their players Business of Sports 24 Summer

An Example of The Veeck Loophole In 1964 a group bought Braves for $6.2M The claimed team was worth $50k They attributed most of the value ($6.1M) to the players Declared players as depreciable assets Straight-line depreciation over 10 years Allowed the owners to deduct $612k/yr over ten years At a tax rate 50%, this cut taxes by ~$300k/yr Over 10 yrs taxpayers paid half the purchase price Business of Sports 25 Summer The Subchapter S Variant A sole owner can declare a Subchapter S firms income as personal income This makes little sense if one looks at tax rates Corporate rates were lower than personal rate Veeck faced CTR=52% & PTR=72% Paper losses can be profitable consider the Braves Braves $300k write-off could turn a $200k operating profit

into $100k book loss At 52% CTR could write off $52k against corporate income At 72% PTR could write off $72k against personal income Business of Sports 26 Summer Loopholes Loose Ends What happens when the team is fully depreciated? Is the owner stuck with high-tax asset? There are two ways out Tax laws allowed a one-time switchback from Subchapter S status The owner can sell the team and the new owner can start from scratch Veeck revolutionized the reason for owning a team The loophole fell out of favor in the 1970s & 1980s Tax rates were reduced and flattened The value attributable to players was limited Recent tax changes have made it more popular again Business of Sports 27

Summer

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