Business of professional sports

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Business of professional sports

• Gentlemen, we have the only legal monopoly
  business in the country, and we are fxxxing
  (messing) it up
• Ted Turner, ex-owner of Atlanta Braves

2
Blue Ribbon Panel on Baseball Economics, 2001

• Revenue disparity competitive balance in MLB
• Conclusion
• Large and growing revenue disparities 1995-99
• Current revenue sharing and luxury tax
  ineffective
• Cost of compete cause high ticket/concession
  prices
• Revenue disparity
• Local revenue largest income (79) gate, local
  TV/radio/cable, concession, advertising/publicatio
  n, parking, luxury suite, post-season, spring
  training
• Highest/lowest ratio local revenue gt2X between
  1995-99
• Yankee local revenue 11M more than 6 teams
  combined
• Avg total annual revenue ? Quartile I 55M, Q 4
  32M
• Difference in highest vs lowest total rev 74M ?
  129 M

3
Profit-maximizing in pro sports?

• Produce highest quality products, regardless of
  the cost?
• George Steinbrenner (Yankees), Mark Cuban
  (Mavericks)

4
Blue Ribbon Panel on Baseball Economics, 2001

• Widening payroll disparities
• Yankee approximately lowest 6 teams combined
• Highest paid player equal to Twins payroll in
  2000
• Avg payroll ? Quartile I 28 M, Q 4 4 M
• Q I 2.5X of Q4 in 1995, QI 4 X of Q4 in 1999
• Diff highest vs lowest 45M(95)?77M (99)?148M
  (03)
• Strong correlation between high payrolls and
  success on field
• Proper competitive balance will not exist until
  every well-run club has a regularly recurring
  reasonable hope of reaching postseason
• Currently many teams have no realistic hope of
  reaching postseason in spring training

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Blue Ribbon Panel on Baseball Economics, 2001

• Economic condition poor
• Only 3 teams made profit over 1995-99, despite
  revenue growth
• Club debt 604M (1993) ? 2.08B (1999)
• Franchise value not match other major sports
• Revenue sources
• Local fastest growing, ?87 95-99, varied in
  market size (local broadcast fee)
• Central Fund national TV and licensing,
  distributed evenly among teams
• Revenue sharing transfer local revenue from high
  to low

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Another view of MLB profitability Andrew
Zimbalist

• Selig testified before US congress
• 30 teams lost total 519M (Blue Ribbon report)
• Provide only 4 pages of summary to congress, but
  financial statement of each team at least 15
  pages
• Disagree by many congressmen, journalists,
  executives
• Blue Ribbon Panel can only use data provided by
  MLB
• Tom Boswell, Washington Posts baseball writer
  Fans say baseball will never see another .400
  average. When it comes to telling a straight
  story, thats what Selig bats every year.
• Former MLB COO Paul Beeston under generally
  accepted accounting principles, I can turn 4M
  profit into 2M loss and get every accounting firm
  to agree

7
Different accounting methods

• Teams used accounting methods to hide profit
• 519M represents book, not operating loss
• Include amortization ??, depreciation ??,
  interest expense, usually excluded in analysis
• Central office at least 144M for investment and
  work stoppage security in 2001
• Central fund revenues 24M/team in 2001, only
  distributed 17.9M/team
• gt10M in developing MLB website
• Revenue figures reported by seligltteams reported
• Revenue from local TV, radio, cable Cubs 23.6M
  ltWhite Sox 30.1M
• Ratings Cubs 6.8/3.8 (air/cable), Sox 3.6/1.9

8
Accounting gimmickry, waste

• Signing bonus should prorated throughout contract
• But not in teams reports
• Owners take money back from teams
• take 6-7 figure salary, Family members employed
• Travel, lodging, meal, entertainment expenses
• Jenny Colangelo (former Diamondbacks owner) can
  cut front office expense by 10 without affecting
  teams operation
• MLB franchises sale prices continue to rise
• Current situation too much imbalance
• 8-10 teams with perennial financial problems
• Need economic reform, not revolution

9
Cable TV

• Cable rights more valuable than the rights to
  over-the-air broadcasts, provide extra source of
  revenue to broadcaster
• Advertising revenue
• Subscription fee from each cable user
• Teams steadily switching to cable from
  over-the-air
• 60 MLB games on the air in 1996
• 70 MLB games on cable in 2007
• Create disparities in local revenue between large
  and small cities
• Even though attendance are similar

10
Vertical integration in sports

• Corporate control sport production, performance,
  and promotion
• Disney Angels (sold in 2003), Mighty Ducks, ABC,
  ESPN, Go.com
• News Corp Dodgers (sold in 2004), MSG Network,
  Fox Sports Network
• AOL Time Warner Braves (sold in 2007), Hawks
  (sold in 2004), Sports Illustrated, Warner
  Brothers studio, WB Network, HBO
• Ownership of team and broadcast allow corporate
  to sit on both sides of negotiation table

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Vertical integration in sports - Future

• Integrated divisionalized multinational
  corporations with satellite service, cable,
  production facilities, sport teams, content
  sources

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Team as part of corporation

• Tribune Corporation own Cubs and WGN
• Broadcasting and Cable Cubs local media earning
  59M
• Revenue sharing on teams net local revenue in
  MLB since 1996, 20 tax rate in 2001
• No local revenue sharing in NBA, NHL
• Teams use losing money in salary negotiation
• AOL/Time Warner own Braves, WTBS, Turner South
• Worth 54.3M in open market, only report 20M

13
Team as part of corporation

• YES, regional sports network began in 2002
• Owned by YankeeNets formed in 1999, bought NJ
  Devils in 2000
• Carry Yankees, Nets, NJ Devils
• Goldman Sachs paid 340M for 40 stake in YES in
  2001 (implied market value 850M)
• YES revenue from Yankees at least 120M in 2002,
  but only paid Yankees 52-54M
• YankeeNets attribute larger share of YES revenue
  to Nets
• Red Sox, through teams partnership, New England
  Associates, owned 80 NESN
• NESNs profit from broadcasting Red Sox went to
  NEA

14
Team as part of corporation

• George Steinbrenner created YES
• Regional sports network in largest media market
• Rupert Murdoch (Dodgers)
• Purchase of Dodgers already paid off because
  prevent Disney from creating RSN in southern
  California
• Tim Hicks (Rangers)
• Develop 270 acres of commercial and residential
  real estate around ballpark in Arlington
• Grow his Southwest Sports Groups
• Dick Jacobs (Indians)
• Promote value of his downtown real estate near
  Jacob Field

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Schmidt Berri, 2002
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Schmidt Berri, 2002
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Schmidt Berri, 2002
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High payroll/revenue NOT always create winning
teams
Schmidt Berri, 2002
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High payroll/revenue NOT always create winning
teams
Schmidt Berri, 2002
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Franchises sale values
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Gini coefficient measure of dispersion, from 0
(all the same) to 1 (extreme difference)
Fort Quirk, 1995
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Media

• Broadcasters found sports attract audience with
  significant buying power
• Young male in 20s-30s years old
• Otherwise hard to reach in large number because
  inconsistent viewing habits
• gt90000 hr/year sport programming in US, 4X of
  1994
• TV contracts in major sport leagues executed with
  networks available on free TV nationwide
• ABC, CBS, NBC, Fox, WB, UPN
• Emerging of ESPN in 1979 move sports to cable
  channels

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Profitability

• Sport leagues rely heavily on broadcast fees
• Networks lost significant money on sports
  programming
• Huge right fee paid to leagues
• Decreased rating, decreased advertising sales
• Fox predicted loss gt 900 million in deals with
  NFL, MLB, NASCAR
• Networks still interested in sports programming
• Ancillary benefits
• Promotion opportunities for its other nonsports
  shows, such as prime-time lineup
• Important branding opportunity
• Sports can be overall ratings driver for network

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Media

• Fox established as legitimate network when signed
  contracts with NFL, NHL in 1994
• NBC reluctant to pay huge fees to main sports
  leagues
• Turn to niche sports such as Arena Football
  League
• Advantage of cable networks
• Revenue from advertising and subscriber fee
• Cross-ownership between networks and sports teams
• Cable networks may be new source of TV contracts
• NBA 6-year, 4.6 billion with ESPN, TNT, ABC

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Regional sports networks

• NBA, NHL, MLB individual deals with broadcasters
  in home territories
• NFL all regular and postseason games controlled
  by national broadcast partners
• Cable networks include number of distinct
  regional sports networks (RSN)
• RSN programming built around home teams
• Consolidation of many RSN, Fox Sports Net (20
  RSN), control majority of NBA, NHL, MLB teams
• Leagues/teams start their own RSN
• Need to be carried by large number of cable
  systems
• New channels focus on single sport tennis, golf,
  auto racing, college sports

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History of sports and TV

• First televised sports event college baseball
  Columbia vs Princeton in 1939
• First network sports broadcast NBCs Gillette
  Cavalcade of Sports, boxing, in 1944
• Originally used to promote sale of TV sets
• TV contracts increased dramatically
• 1970 NFL 50M, MLB 18M, NBA 2M
• 1985 NFL 450M, MLB 160M, NBA 45M
• Monopoly of networks because cable and
  independent channels can not afford
• Universities challenged NCAA, negotiated
  regional- and national TV contracts

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Pro leagues rating decline

• Major sports ratings decreased year by year
• Even postseason games
• ? in sports viewers (22) lt ? in total viewers
  (30)
• Interested in sports fragmented
• Golf, extreme sports
• Figure skating, auto racing only second to NFL
• Competition from other entertainment
• Social issues
• African players vs middle-class white viewers
• Seek more personal and direct participation of
  sports/leisure activities
• Road race, rock climbing

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Sport still attractive to broadcasters

• The more difficult it becomes to attract a broad
  audience, the more attractive major sporting
  events become to networks and corporate sponsors
• Olympics the only event gets entire family in
  front of TV together
• Networks more concerned about weakening economy
  than soft ratings
• Fewer corporate sponsorship, fewer TV contract,
  fewer athlete salary

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Media history of NFL

• Before 1960, NFL TV contract a mess
• CBS broadcast for 9 of 12 teams, 35-175 K/year
• NBC for Baltimore Colts, 600 K/year
• 2 others with their own network
• Rise of American Football League (AFL)
• Established by Lamar Hunt, rejected by NFL to
  become team owner for several times
• Signed league TV contract with ABC 170 K/year
  EACH TEAM for 5 years
• First TV revenue sharing formula
• Sport Broadcasting Act in 1961
• Antitrust exemption for NFL
• Subsequently signed league-wide TV contract in
  1961

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Media history of NFL

• Monday Night Football moved from ABC to ESPN in
  2005
• Both owned by Disney
• Cable subscription fee (ESPN) produce more
  revenue than free TV (ABC)
• Cable, satellite TV, internet, fantasy games,
  wireless broadcast of NFL games
• Broadcast live all games
• Build incredible brand loyalty for each team
• Significant advertising revenue

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NFL broadcast starting with 2006

• ESPN (2006-13) Monday night (No Super Bowls)
• 1.1 B/year
• NBC (2006-2011) Sunday night
• 600 M/year
• Super Bowls 2009 and 2012
• Fox (2006-11) Sunday afternoon NFC
• 712.5 M/year
• Super Bowls 2009, 1 other year
• CBS (2006-11) Sunday afternoon AFC
• 622.5 M/year
• Super Bowls 2007, 1 other year
• DirecTV (2006-10) Sunday Ticket satellite
• 700 M/year, no Super Bowls

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Rates for Super Bowl commercial
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NBA strategy of TV exposure

• Sports Broadcasting Act allow sale of broadcast
  as league package
• Not prohibit individual teams from entering their
  own TV contract
• Less is more
• David Stern when ratings not strong, product not
  secure in identify, lots of exposure is not a
  good thing because the worst thing for a bad
  product is lots of exposure. Shape up our product
  and define exposure at the same time
• NBA limit rights of individual teams to sell
  games to broadcasters outside of designated local
  market area
• So league can maximize the value of TV rights
• Bulls and WGN vs NBA over broadcast rights

40
NBA strategy of TV exposure

• Broadcaster involved in formulating NBA season
  and TV schedule
• Broadcaster want the best product good teams,
  popular players, large cities

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New forms of media websites

• Official league websites
• NFL.com 2nd most popular sports-related website,
  behind ESPN.com
• Individual team sites
• NFL
• MLB under MLB.com
• Provide free and PAID contents
• Provide exclusive interviews/news even
  unavailable for other media
• More incentive for fan to become member
• Provide video, highlights
• Keep displaced fans in touch with their hometown
  teams

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New forms of media satellite radio and
satellite TV

• Satellite radio, potentially billion-dollar
  business
• Live broadcast of every game, home announcers
• SM Satellite Radio for MLB
• Sirius Satellite Radio for NFL
• Local radio stations may suffer
• DirecTV
• Every game live and on demand
• Viewer-selected camera angle, Red Zone channel,
  multiple screens, index and search, recording to
  hard drive
• Internet broadcasting
• every game live and on demand
• MLB.TV, NBA League Pass, NFL.com/Live, NHL
  GameCenter LIVE

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New forms of media-fantasy sports

• Fantasy football most popular
• Started with fantasy baseball
• Internet help to spread the popularity
• Newspapers, official/team websites,
  fantasy-dedicated websites
• Provide related information
• Few direct revenue from fantasy sport, but it
  help to establish strong brand awareness
• follow entire league, instead of only 1 team