Entertainment and Media: Markets and Economics Professor William Greene
1/37 Entertainment and Media: Markets and Economics Sports Professor W. Greene
3/37 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
5/37 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 • “Science” (for the economic hobbyist) • SaberMetrics • Hot hands • Basketball • Tennis
4/37 Scale • Total Industry Size • What are the components? • How large? • Subsidiary Industries? • Gambling • Local Affiliated: Externalities • At least $100 billion in the US
6/37 Revenue “Models” • Spectator Sports vs. Studio Sports • Exhibition (TV and Radio) • The fan in the stands. Yankees. 4M seats sold at $50/seat. Gate is shared with the visiting team. • Player payroll = $250M. 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
8/37 National Basketball Association Player salaries: Approx 60% and rising
9/37 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.
10/37 National Football League • 2009 revenue = $6 billion • 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.
11/37 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) $100 million in local revenues and business
12/37 Other Sports Franchises • Arena Football • NASCAR • Tennis and Golf • Any others? • How do these differ from the businesses already considered?
14/37 “Value” in a Sports League • Source of value in major sports leagues: • MLB, NBA, NHL, NFL • British Soccer • Australian Rugby • How is the value captured?
15/37 What Creates Value in a League? • Interdependence within and among teams • Cooperation and competition • Rent creation by star players • Independent ownership and management • Collaborative business arrangements • Competitive processes • (Continuing our minicase… Which among these did the XFL produce?)
16/37 The Value of the Franchise (Team) • How computed, in principle • If every team maximizes its value, does this maximize the value of the “league?” • Does it matter? • Sources of inequality in team values
Aggregate Operating Income - 2008 • NHL 140M • NBA 310M • MLB 500M • NFL 790M
17/37 The Value of the Hockey Franchise Team/Principal Owner Value ($M) Income ($M) New York Rangers/Cablevision Systems $ 263 -6.92 Dallas Stars/Thomas Hicks 254 5.63 Toronto Maple Leafs/Larry Tanenbaum 241 13.84 Philadelphia Flyers/Comcast-Spectacor 262 3.55 Detroit Red Wings/Michael Ilitch 266 -3.7
21/37 Not Just an American Thing Manchester United:English Premier League Soccer: Revenue - $225million: Value - $1000m (2002) N.Y. Yankees:Baseball/MLB: Revenue - $223million: Value - $850m (2002) Redskins:NFL/Football: Revenue - $204million: Value - $845m (2001) Source: Washington Post, official accounts & Forbes Magazine. And Manchester United can count a world-wide fan base of over 50 million zealots recruited to the cause. The Manchester United Food & Beverage Group (MUFB) has opened a restaurant in the Chinese city of Chungdu. Eventual plans could see up to as many as 100 restaurants opened in the Asia market over the next ten years. MU branded football (soccer) restaurants selling shirts, posters,videos and novelty gifts - as well as food - are planned for Singapore, Malaysia, Hong Kong, Thailand, Taiwan, South Korea, the Philippines, Indonesia, Japan, India and Brunei with the stated aim of cashing in on the lucrative interest many Asian nations (estimated at 17 million fans) hold for the English game.
23/37 ? • If all teams are “losing” money, why are the teams so valuable?
24/37 Incentive Incompatibility • Winning is everything (Vince Lombardi) • Winning isn’t everything (Bud Selig) • The New York Yankees player acquisition “model” – what do we learn from this about the distribution of talent? • 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)
25/37 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?
26/37 Achieving Competitive Balance • Salary Cap • Revenue Sharing • Promotion and relegation • Ownership structures
27/37 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?
29/37 Labor Problems • Division of the Rent • Claims to the rent • Unstable equilibrium – the effect of free agency • Examine salary outcomes • Strikes and lockouts – why?
30/37 Capturing the Rent Player costs a % of total league revenue New York Yankees 1996 payroll, $68M, 2004 payroll, $190M In 2003: NHL, 75%, NFL, 65% of revenues went to players. *Player’s strike led to cancellation of the World Series
31/37 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 Jordan’s salary, $33M • Baseball salaries, average, almost 100 fold increase in 25 years. • What is going on here?
32/37 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
33/37 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
34/37 Antitrust and Public Policy • Congress’ interest in sports • Cartel Behavior • The antitrust exemption • The intersection of sports and the public interest.
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
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”
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
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.”
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 argue in favor of the NFL. Others suggest the cartel can stifle competition. (Hence the appearance before the Supreme Court.)
36/37 “Science” – The Hot Hand • SaberMetrics – The Bill James Story • SaberMetrics • Moneyball – Billy Beane and The Oakland Athletics • The Boston Red Sox • Hot hands: Autocorrelation in the points scored • Basketball • Tennis
37/37 Entertainment and Media: Markets and Economics End Class 5 – Part 5