Entertainment and Media: Markets and Economics

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Entertainment and Media Markets and Economics

• Professor William Greene

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Entertainment and Media Markets and Economics

• Fall 2004
• Sports
• Professor W. Greene

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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

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Scale

• Total Industry Size
• What are the components?
• How large?
• Subsidiary Industries?
• Gambling
• Local Affiliated Externalities
• At least 100 billion in the US

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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

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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

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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

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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 0.013
• The Blue Ribbon Commission (2000)
• Overall revenue
• Distribution
• Long term survival of the nations pastime

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National Basketball Association

• Total, approx 3.5 billion
• Fans in the seats
• TV contracts
• Player salaries Approx 60 and rising

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National Hockey League

• 2002-2003 Combined revenue approx. 2 billion
• Average player salary approx 1.9 million
• Aggregate loss, 300 million (on revenue of 2
  billion!) and getting worse

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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?

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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

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Other Sports Franchises

• Arena Football
• NASCAR
• Tennis and Golf
• Any others?
• How do these differ from the businesses already
  considered?

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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 winners curse. In 1994, Fox bid 600m more
  than the next highest bid for NFC games

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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

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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

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The Value of the Hockey Franchise

Team/Principal Owner Value
(M) Income (M) New York Rangers/Cablevision
Systems 272.4 -6.92 Dallas Stars/Thomas
Hicks 270.7
5.63 Toronto Maple Leafs/Larry Tanenbaum
263.9 13.84 Philadelphia Flyers/Comcast-Spectaco
r 252 3.55 Detroit Red Wings/Michael
Ilitch 245 -3.7
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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)
• 2. Dallas Cowboys 851
• 3. Houston Texans 791
• 4. New England Patriots 756
• 5. Cleveland Browns 695
• 6. Denver Broncos 683
• 7. Tampa Bay Buccaneers 671
• 8. Baltimore Ravens 649
• 9. Carolina Panthers 642
• 10.Miami Dolphins 683

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Basketball
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Baseball
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Incentive Incompatibility

• Winning is everything (Vince Lombardi)
• Winning isnt 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)

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Achieving Competitive Balance

• Salary Cap
• Revenue Sharing
• Promotion and relegation
• Ownership structures

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Competitive Balance?

• MLB 1984 2003, 13 different teams won the
  world series
• NFL 1984 2003, 11 different teams won the
  Lombardy trophy
• NHL 1984-2003, 10 different teams won the
  Stanley cup
• Is there competitive balance?

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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.

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Labor Problems

• Division of the Rent
• Claims to the rent
• Unstable equilibrium the effect of free agency
• Examine salary outcomes
• Strikes and lockouts why?

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Capturing the Rent
Player costs a 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
New York Yankees 1996 payroll, 68M, 2004
payroll, 190M In 2003 NHL, 75, NFL, 65 of
revenues went to players. Players strike led to
cancellation of the World Series
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Monopsony

• 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 190M payroll A-Rod
? Jeter, Giambi, etc.
Number hired
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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

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Salary Cap Problems

• Kevin Garnett, Minnesota, 1997. 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 1995
  38M
• 1996 Chicago Bulls team salary cap 24.3M.
  Michael Jordans salary, 33M
• Baseball salaries, average, almost 100 fold
  increase in 25 years.
• What is going on here?

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?

• If all teams are losing money, why are the
  teams so valuable?

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Antitrust and Public Policy

• Cartel Behavior
• The antitrust exemption
• The intersection of sports and the public
  interest.

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Trends in Sports

• Wither Americas Pastime
• Trends in other spectator sports

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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