Entertainment and Media: Markets and Economics

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Entertainment and Media Markets and Economics

• Sports

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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 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 wont take effect until the
201617 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
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National Hockey League

• 2002-2003 Combined revenue approx. 2.3 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.
• 2012-2013 half season. Lockout from October to
  January. Issue Players 57 revenue share.

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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.

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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

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 tournaments
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 2016. An average 30 second
ad sold for 1.5 million in 2015 and over 1.1
billion was earned in ad revenue last year.
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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?

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What Creates Value in a League?

• 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

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Incentive Incompatibility

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

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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?

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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 1980 - 2013, 16 different teams won the
  Stanley cup
• NBA 1980 - 2013, 8 different teams won the
  Stanley cup
• The result of a business model to achieve
  competitive balance?

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MLB vs. NFL Result of Collective Optimization
Football
Baseball
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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?

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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. 2012 NFL lockout. The
players also won 55 percent of national media
revenue, 45 percent of all NFL
Ventures revenue, and 40 percent
of local club revenue In 2003 NHL, 75,
In 2011, NHL players 57. Led to 2012
lockout. Players strike led to cancellation of
the World Series
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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
  or(3) The entire franchise purchase of 88M in
  1995 38M
• 1996 Chicago Bulls team salary cap 24.3M.
  Michael Jordans 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
  2012-2014.
• What is going on here?
• Rise of the role of media
• Players asserting bargaining strength and
  capturing the new surplus

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Antitrust and Public Policy

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

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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
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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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Monopsony power becomes capture of resource
(player) value
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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

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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)

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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 Needles (and all other
headwear vendors) licenses
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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, combinationor
  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.

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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.

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eaking-down-american-needle-case