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The Industrial Organization of Sports. Part I: Profit Maximization. Profits a Touchy Subject. We don’t want teams to worry about p We want Ford to worry about it Are sports purer than business? Nostalgia ain’t what it used to be Bad things can happen if forget bottom line

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the industrial organization of sports

The Industrial Organization of Sports

Part I:

Profit Maximization

profits a touchy subject
Profits a Touchy Subject
  • We don’t want teams to worry about p
  • We want Ford to worry about it
    • Are sports purer than business?
    • Nostalgia ain’t what it used to be
  • Bad things can happen if forget bottom line
  • Case in point: Ottawa Senators
    • Best record in NHL: 2002-2003
    • Declared bankruptcy: 2003
alternatives to profits
Alternatives to Profits
  • Personal publicity
    • Team as toy
    • The “Ego Premium”: $40-70 Million
  • Spillovers
    • Team helps sales in other areas
      • Ted Turner
      • Chris von der Ahe
  • Civic-mindedness?
basic question
Basic Question
  • Why is NFL most profitable sport? (Excel)
    • Every team profitable
    • Profits and market values greatest
  • What happened to baseball?
    • Half the teams lost money last year
  • Why is NHL a basket case?
    • Lowest profits and market values by far
  • Underlying question: Why do leagues exist?
think of league as synonymous with team sports
Think of League as Synonymous with Team Sports
  • Wasn’t always so:
    • 7-year gap in baseball (1869-1876)
      • Took another 20 to stabilize
    • 44-year gap in football (1876-1920)
      • Took another 15 to stabilize
  • Alternative?
    • Barnstorming
    • Uncertain payoff
    • Dependent on winning
      • Red Stockings in 1869 vs 1870
leagues and the economics of clubs
Leagues andThe Economics of Clubs
  • James Buchanan – Nobel Laureate
  • What is right size of league?
  • New members a new source of revenue
    • Entry fees
      • $50M fee put Ottawa in debt from outset
    • Access to new markets
  • May also be a drain
    • Must divvy up among more members
    • Revenue sharing
    • Competitive Balance
getting it right can be hard baseball in 1901
Getting It Right Can Be Hard: Baseball in 1901
  • NL only league in early 1890s
    • Saw problems if too many teams
      • Uncompetitive & unprofitable franchises a drain
    • Zero sum rule: Add city A => Delete city B
  • 1890s: Cities Grow Rapidly
    • More cities able to support teams
    • NL vulnerable to entry
      • In 1901 AL entered “open” cities
gate revenue earliest source of revenue
Gate Revenue:Earliest Source of Revenue
  • Revenue from ticket sales
  • NFL shares the most
    • Home team keeps 60%
    • 40% goes league-wide
    • Originated in early weakness of NFL
    • One reason why profits so close
    • Luxury boxes an important exception
  • Baseball started sharing 34% this year
    • Roughly 3X what used to share
  • NBA & NHL share nothing
    • Making playoffs vital source of revenue
      • Ottawa’s early exits hurt
television the key to the nfl s success
Television: The Key to the NFL’s Success
  • Became dominant revenue source in 1960s
  • Reason why football surpassed baseball
    • Needed limited antitrust exemption
      • No NFL on Saturdays in Fall
      • Doubleheader Game makes a national game
  • Has 8-year $17.6 billion contract
    • Without TV: NFL’s revenues comparable to NHL
  • Baseball Luddites
    • Reluctant to put on TV – or even radio – at all
    • Favored local coverage over national
tv a key to equality
TV a Key to Equality
  • Revenue shared equally
    • True for all leagues – but pot much larger
    • KC: A small market for MLB but not NFL
    • Green Bay would have disappeared
  • Ottawa faces double whammy
    • Small network contract for NHL
    • Small local media market
venue revenue why are cowboys so valuable
Venue Revenue:Why Are Cowboys so Valuable?
  • One of most valuable franchises BUT
  • Smaller media market than Houston
    • Houston couldn’t keep the Oilers
    • Shares bulk of media revenues
  • Gate revenue not huge
    • Texas Stadium not huge (~66,000)
    • Shares 40% of home revenue
  • Key is stadium deal
luxury boxes
Luxury Boxes
  • Texas Stadium refurbished in 1989
    • Has 370 luxury suites: ~1.5X next highest
      • “Venue revenues” 6X league average
  • One reason for moves in NFL
      • New stadia all have more than older
  • Naming rights Untapped in Dallas
    • Reliant pays Houston $300M over 30 years
    • Is it worth it?
      • Naming Rights “Curse”
      • What do CMGI, Enron, PSINet, and United Airlines have in common?
luxury boxes an exception to sharing
Luxury Boxes:An Exception to Sharing
  • Big Revenue
    • Rent for 10s or 100s of thousands
  • Don’t have to share revenue
    • Count only admission in revenue sharing
      • Most of revenue counts as concessions
    • Does not count against “salary caps”
      • Caps form upper AND lower limits
        • Players want to see counted
recent nfl moves
Recent NFL Moves
  • What do they have in common?
  • All go from larger city to smaller city
  • NFL no longer has team in LA
    • Bad for NFL – why?
    • Why do they move?
  • Large individual benefits
    • Biggest source of “private income”
  • Costs widespread
tragedy of the commons
Tragedy of the Commons
  • Individual benefits – but group hurt
    • Eventually individual also hurt
    • But keeps doing it
  • Name from “Commons”
    • Common Green in center of town
    • People put livestock there
      • Why bother to use own land?
      • Result: overgrazing
  • Common Resource
    • Rivalry but no exclusion
      • Examples: Overexploitation
  • Applies to NFL – but NOT baseball
paper losses and real profit
Paper Losses and Real Profit
  • Profits are not the only way to get rich
    • Bush tax plan in reverse
    • The O’Malleys & “unprofitable” Dodgers
  • Operating Profit vs Book Profit
    • Deduct interest payments
      • Bias to issue debt & not equity
      • Much debt from initial purchase (ego premium)
    • Deduct Depreciation
      • What is depreciation?
      • What depreciates?
depreciation taxes veeck
Depreciation, Taxes & Veeck
  • Bill Veeck – my favorite owner
    • Innovative marketer
      • From Eddie Gaedel to exploding scoreboards
      • Could use his autobiographies as MBA text
    • Moral figure
      • Integrated AL
      • Opposed exploitation of players
  • Saw unique loophole in tax laws
    • Team can depreciate players
      • What is depreciation?
an application of the veeck loophole
An Application of The Veeck Loophole
  • In 1993 group bought San Antonio Spurs for $75M
    • Claimed players worth 50% (maximum): $37.5M
  • Depreciate players over 3.5 years
  • Straight-line depreciation: deduct ~$10.7 annually
  • Turns $0.3M profit into $10.4M loss
the subchapter s variant
The “Subchapter S” Variant
  • What is a “Subchapter S” corporation?
  • Sole owner declares team income as personal income
    • Can write off $10.4M against other income
  • If (rich) owner in 40% tax bracket
    • Reduces taxes by $4.16M