Structure of Sports Leagues

Closed League (7)

-Closed League=Single Entity Ownership -Closed League-League is a single entity that controls all of the transactions and interactions within the teams of the league •All operations of the league are made by central league offices -Investors purchase a share of the league itself rather than an individual team or share of a team -Closed league have important advantages over promotion and regulation leagues from the team's aspect •They are assured that they will continue to play in the highest league after a string of woeful seasons •They are assured that they will face no competition from entrants into a local market. This removes the fear of loss of fans. -Pro: ability to manage costs across all teams, which eliminates disparities between large markets and small markets -Con: It is difficult to cater to demand differences across local markets; teams must bow to a single decision that is good for some teams in the league but not others -MLS and WNBA are transitioning from a single-entity system to a franchise system

Closed Leagues and Territorial Monopolies (2:3,5)

-Closed leagues have a fixed membership that can only be changed by formally voting to expand •American professional leagues set extremely high expansion fees for teams looking to enter •These are monopoly prices because they reflect an underlying scarcity in teams that is maintained by monopoly leagues to maximize their income from expansion and the market value of existing teams when they are sold. -Closed leagues can prevent competition among local teams in a league by creating exclusive territorial rights •In the U.S., each team has a well-defined geographical region that is considered their home territory •No team can stage matches in another home team's area without first obtaining permission •When granted, it requires substantial compensation •Ex: The NY Mets paid the NY Yankees $10,000,000 for the right to share NYC

Revenue Sharing Definition

-Leagues have revenue sharing to promote financial parity in the front office and competitive balance on the field -Revenue sharing is not universally praised •Critics argue that it penalizes teams for creating a higher quality product •Critics argue that it creates a welfare class of teams that can turn significant profits by keeping payroll down because it revenues fall they will cash a big check from a big-market team

Incentives/Impacts on Competitive Balance with Open Leagues (7:1,3,4,1,1,3,1)

-Open League=Franchise League -Small teams can keep themselves afloat by developing talented young players then selling their rights to wealthier teams •This increases competitiveness by retaining the viability of low-level teams •This is more acceptable in open leagues than closed leagues because teams face a natural limit to the sales they are willing to make -Teams at the bottom of a league have a greater incentive to improve team quality than would be the case in a league of fixed membership •It not only increases revenues in the current season, but also increases the probability of enjoying greater profits the next season. •They invest more money in players that will increase the likelihood of being promoted and decrease the likelihood of being relegated. •The danger of this is that if this investment strategy fails, teams are left with bloated salaries and diminished returns -Teams at the top have less incentive because there is no opportunity for promotion and they are unaffected by the fact that some teams will be relegated. -The net effect is to reduce the quality gap between the best and the worst teams. -Promotion and regulation affect demand. •For teams at the top of a lesser league, success and possibility of promotion towards the end of a season may enhance demand for end of season games. Playoff for last promotion spot increases revenue. •The same is true of teams in danger of relegation -Yo-yo Teams-Squads that regularly bounce back and forth between two leagues

Description of team profits and cable contracts (3)

-Operating Income-The net revenue from day to day operations -Accounting Profit-Difference between total revenue and total cost •This is what teams use to report profits •In addition to day to day sources of income, it includes interest and depreciation -A significant portion of income comes from broadcasting revenues

Costs for the four major sports leagues in North America (5)

-Player salaries -Administrative and advertising Advertising and administrative costs incurred at both the local level and the league level -Travel Travel costs increase with size of team -Venue Venue costs vary significantly based on public financing of stadiums -Player development (to some extent) MLB and, to a lesser extent, NHL pay a portion of payer development costs in the minor league system

Open vs. Closed Leagues (3: 1,3,3)

-The most important distinction between open and closed leagues is the degree to which they centralize decisions about resource allocation and league membership. -Closed League-League is a single entity that controls all of the transactions and interactions within the teams of the league •All operations of the league are made by central league offices •Investors purchase a share of the league itself rather than an individual team or share of a team -Open League-Membership in a league is not fixed. Teams can move from one league to another and back again. •Movement greatly complicates the structure and relationship between leagues •Promotion and relegation leagues like English soccer. Each year, the three worst teams are relegated to a lower division and the three best teams are relegated to a higher division

Number of teams at the top in a professional hierarchy (3)

-The number of teams at the top of the professional hierarchy is too small and this results in a monopoly. -In closed leagues, the number is too small because big cities have too few teams and leagues monopolize franchises to maximize their value. -In open leagues, the number is too small because existing teams have a strong incentive to stop expanding before the number of viable members is exhausted because leagues face no serious threat of entry

Vertical Integration (5)

-Vertical Integration-The combination of different stages of production -There has been vertical integration between teams and TV outlets as sports teams have become increasingly involved in the TV outlets that broadcast their games -Alone, both the team and the broadcaster have monopoly power -Bringing the two monopolies together creates a super monopoly with even greater power to exploit consumers. -Economic theory shows that the vertical integration of a team and media may benefit both the owners and consumers •While two separate monopolies apply their monopoly power twice, a single vertically integrated monopoly applies its monopoly power only once. The result is a lower price and higher quantity for the consumers

NBA Revenue Sources (5:1,4,3,2,1)

1) Gate Revenue-Revenue from ticket sales 2) Broadcast Revenue-Revenue from both local and league-wide national broadcast rights -Trade off between television (broadcast revenue) and attendance (gate revenue) -Odd broadcast agreement rights from the merging of the NBA and ABA -Responsible for 1/4 of the median team's total revenue 3) Licensing Agreements-sale of official team paraphernalia to fans -How these revenues translate to team revenue is not completely clear because league officials claim a share and because a portion of the licensing revenue is frequently set aside for official league charities -Digital revenues are on the rise. Digital revenue is still included in this category of licensing revenue but in the future it may be its own category. 4) Venue Revenue-Non ticket revenue from the stadium that includes parking, concessions, luxury seating -For the most part, it is directly related to how many people come to games so it is more variable 5) Stadium Naming Rights-Companies pay large sums of money to put their names on stadiums

NHL Revenue Sources (5:1,4,3,2,1)

1) Gate Revenue-Revenue from ticket sales 2) Broadcast Revenue-Revenue from both local and league-wide national broadcast rights -Trade off between television (broadcast revenue) and attendance (gate revenue) -Receives far less than the other three teams in network revenue -Most disparities in revenue among NHL teams stems from large differences in local TV revenue 3) Licensing Agreements-sale of official team paraphernalia to fans -How these revenues translate to team revenue is not completely clear because league officials claim a share and because a portion of the licensing revenue is frequently set aside for official league charities -Digital revenues are on the rise. Digital revenue is still included in this category of licensing revenue but in the future it may be its own category. 4) Venue Revenue-Non ticket revenue from the stadium that includes parking, concessions, luxury seating -For the most part, it is directly related to how many people come to games so it is more variable 5) Stadium Naming Rights-Companies pay large sums of money to put their names on stadiums

MLB Revenue Sources (5:4,3,4,2,1)

1) Gate Revenue-Revenue from ticket sales -League with largest variation in gate revenue -Big market baseball teams generate the highest revenue and it drops off significantly for smaller market teams -Substantial portion of net gate revenue is shared 2) Broadcast Revenue-Revenue from both local and league-wide national broadcast rights -Trade off between television (broadcast revenue) and attendance (gate revenue) -TV contracts with local and regional broadcasters. The growth of regional sports networks has increased profitability. 3) Licensing Agreements-sale of official team paraphernalia to fans -How these revenues translate to team revenue is not completely clear because league officials claim a share and because a portion of the licensing revenue is frequently set aside for official league charities -Digital revenues are on the rise. Digital revenue is still included in this category of licensing revenue but in the future it may be its own category. -League with the greatest licensing revenue 4) Venue Revenue-Non ticket revenue from the stadium that includes parking, concessions, luxury seating -For the most part, it is directly related to how many people come to games so it is more variable 5) Stadium Naming Rights-Companies pay large sums of money to put their names on stadiums

NFL Revenue Sources (5:4,4,4,2,1)

1) Gate Revenue-Revenue from ticket sales -League with smallest variation in gate revenue -This is because football games usually draw close to capacity crowds -Revenue is shared 2) Broadcast Revenue-Revenue from both local and league-wide national broadcast rights -Trade off between television (broadcast revenue) and attendance (gate revenue) -Prosperity of NFL stems from its huge network contracts -Revenue is shared 3) Licensing Agreements-sale of official team paraphernalia to fans -How these revenues translate to team revenue is not completely clear because league officials claim a share and because a portion of the licensing revenue is frequently set aside for official league charities -Digital revenues are on the rise. Digital revenue is still included in this category of licensing revenue but in the future it may be its own category. -League with second greatest licensing revenue, just behind MLB 4) Venue Revenue-Non ticket revenue from the stadium that includes parking, concessions, luxury seating -For the most part, it is directly related to how many people come to games so it is more variable 5) Stadium Naming Rights-Companies pay large sums of money to put their names on stadiums

Revenue Sharing the the Major Sports Leagues (4:1,3,3,3)

1) NHL -Fourth most extensive revenue sharing as determined by the coefficient of variation of revenue in each league 2) NFL -Most extensive revenue sharing as determined by the coefficient of variation of revenue in each league -Very complex revenue sharing system. Small-market low revenue teams receive transfer payments from large-market high revenue teams -Revenues from TV contracts is the type of revenue that is most extensively shared. It is also the leagues greatest source of revenue. 3) NBA -Third most extensive revenue sharing as determined by the coefficient of variation of revenue in each league -Equally shared league-wide national broadcast rights -No gate or local broadcast revenue sharing This is the reason why disparities still exist 4) MLB -Second most extensive revenue sharing as determined by the coefficient of variation of revenue in each league -Does not share as much revenue as NFL, but it has achieved a degree of revenue parity that is much greater than it had previously been -Disparities in local revenue from regional sports network broadcasting

Salary Caps and Floors in Major Sports Leagues

NHL -Hard salary cap -Salary floor NFL -Hard salary cap -Hard salary floor NBA -Soft cap + luxury tax -Salary floor MLB -Luxury tax in lieu of salary cap

Definitions: salary floor, salary cap, luxury tax (2,3,3)

Salary Floor -Lower bounds on team payrolls -This can increase competitive balance by encouraging teams to pursue a minimum level of talent Salary Cap -Rule that places a limit on the amount of money a team can spend on player's salaries -Good for league, bad for individual teams -Pros: keeps costs down; increases parity between teams→increases competitiveness→increases uncertainty → increases demand → increases league revenue Luxury Tax -Surcharge put on the aggregate payroll of a team to the extent to which it exceeds a predetermined guideline level that was set by the league -Does not limit the amount of money spent. Rather, it encourages adhering to guidelines by taxing on the money spent above a threshold -Ensures parity between large and small market teams