SM 203 Exam 1 Study Guide
Briefly describe the 3 ways in which sport has been/is organized in Europe and North America. What are the key elements of each type of system? How is each system used today in North American sport?
- Tournament Structure Highly dependent upon corporate sponsorship Links with charity and celebrities Communities/corporations take responsibility for prize money Tourist/entertainment dollars offset costs - Club System England is the birth of Modern sport, all traced back to England Volunteer management Democratic decision-making Participant-financed Many sports still rooted in club structure: Non-varsity college sport European football, cricket, rugby Professional tennis Professional golf Olympic governing bodies - Leagues (Major Sports) National League Baseball - William Hulbert Created first profit oriented league Set schedule enhanced public's faith in the sport Owners assume financial risk Pennant races created to attract fans over the season Created strong civic ties / territorial rights Revenue sharing Player reserve system
How does the structure of North American professional sport leagues differ from that of European professional sport leagues? What are the advantages and disadvantages of each?
1) Membership (specifically NFL vs EPL) NFL-decided by existing members limited expansion. EPL-determined on sporting merit (promotion, regelation), tiers, can form, start at bottom work way up (More competitive, no tanking). 2) Rule Making: Nfl is self governed, EPL acknowledges regulatory oversight of national and international associations (FA, UEFA, FIFA) 3) Player Market: NFL- Draft system, salary cap EPL- no restraints (players can go anywhere, no salary cap, true free market) 4) Revenue Market: NFL- Extensive revenue sharing (gate revenues, broadcasting, merchandising) EPL- Limited sharing of broadcast income, free market structure since anybody can start team 5) Bankruptcy: NFL/all US teams- never go bankrupt. collective bargaining, need competition to excel, want everyone to succeed. EPL- Teams go bankrupt all the time, there's not always a next year's need to be competitive or else you are gone. Bad for consistency/fan base, but good for consumers, survive on your own.
Fenway Sports Group LLC, managed by John Henry, owns the Boston Red Sox Major League Baseball team. This group also owns Liverpool Football Club, a soccer team in the English Premier League. Though it may seem that the business of owning these two sport franchises is very similar, the structures in which each franchise exist are very different. Discuss three (3) significant business advantages that the Fenway Sports Group has with their Major League Baseball that they do not have with their English Premier League team.
1) Shared Revenue Owners for the Red sox have a great deal of cooperation and sharing of their resources. Revenue, broadcasting, and merchandise. MLB teams receive over 100 million in shared revenue. (48% of team revenue pooled and divided evenly amongst all teams. 3.3% of the total to each team.) EPL: clubs have to make it on their own. With the little shared revenue they have it is dependent on team finish. Most through shared million is 55 mill. The Red Sox can fall back on shared revenue if they have a poor season, while teams in the EPL have to have a successful season and be dependent on their placement in the league. 2) Anti-Trust Laws Red Sox: Get to use a draft system when signing players. Players have union that meets with league board to decide on contract max/competitive balance tax(230 million dollars) EPL has zero restrictions on how much players can get paid/ask how much to get paid. Teams with the most money will buy out all the best players. Example: Liverpool on average appears to be paying more than the sox 3) League Structure The Red Sox will not be punished for putting out a bad team. They have no worries about losing their spot in the league. Losing games still = revenue and reward with top draft pick EPL teams have the risk of being relegated on the pyramid. Play well to get back to the top but will only have good results if competing at the top. Losing games for them hurts revenue 4) Territorial Rights The Red Sox are given security in that no new teams can spout up in the territory they have, which ensures continued fan support. Even if a new team comes into their territory, they are giving financial compensation for it. Helps build fan identification/personal attachment between fans and the team=more revenue (3 hour car ride to nearest team) The EPL has no security over their fans and preventing teams from coming near. Constant battle to promote their games to get butts in seats to produce revenue. (13 minute walk to nearest team)
What are assets in business? How do assets play an important role in the accounting practices used by professional sport franchise owners?
Any resource owned or controlled by a business to produce economic value Player contracts are considered assets for sport teams Why does this matter? Player contracts depreciate over time, which reduces the team's taxable income Teams pay less tax to the government as a result Membership in a league is most important asset → receive money from expansion teams, can get local governments to pay for stadium costs
What is "consumer surplus?" How does a monopoly affect consumer surplus? How would competing leagues affect consumer surplus?
Consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than the most that they would be willing to pay. A monopoly minimizes consumer surplus, competing leagues would increase consumer surplus because consumers could choose which league's games they would want to go to and then get the lowest possible price.
What is the concept of "fan identification?" How and why is it an important concept in attracting and maintaining a fan base?
Fan Identification - The personal commitment and emotional involvement customers have with sport organization - Enhanced long-term loyalty in sport fans - Sponsorship opportunities resulting from ability to tap into strong emotional connection between a fan and their sport team
How are men's and women's professional golf and tennis governing bodies structured? What role do players serve in these organizations?
Golf: LPGA: Ladies Professional Golf Association PGA: Professional Golf Association Tennis: WTA: Women's Tennis Association ATP: Association of Tennis Professionals Business of tennis prior to 1968: ITF controlled international tennis USTA controlled national tennis Management is labor Partnership between players and tournaments Decision-making Players have a direct say in business practices Sponsorship: Team sports: Ancillary revenue in business structure Money comes from media, ticket sales, merchandise, etc. Golf and tennis: Core revenue for business structure Underwrites tournaments
Describe/define what the law of supply and demand entails. What are examples in sport that exemplify this principle?
Law of Supply and Demand o When prices are high, people aren't willing to buy at that price o When prices are low, people are more willing to buy Producers willing to produce more to have more consumers EX: High player salaries are an issue of supply and demand. Athletes supply the talent and people demand to see it on television or by paying a lot to see the athletes in person, number of players looking for teams vs. number of players teams are looking for
You are talking to a friend about this class and you mention that the owners of most professional sport franchises are billionaires who made their fortunes in other business sectors. Your friend is impressed and states that it makes sense that these successful "capitalists" could easily focus their business talents on owning and operating a professional sport since professional sport is just another capitalistic business. You point out that owning a professional sport franchise in North America may be a better example of socialism than capitalism. Your friend can't believe that you would take such a radical (and un-American) view and states that you do not know what you are talking about. What are three (3) arguments you would make to defend your view that professional sport leagues in the U.S. are socialistic structures?
League system=socialist One way that U.S. sports leagues operate in a socialist structure is due to the limited choices they have. Across the board in the major leagues, there is a set amount of teams in place, and those trying to join them are often face difficulties, like having to be approved to join or paying expensive fees if permitted to join. If you look at the NFL, the last time that they allowed a new team to join was back in 2002, and made them pay a $700 million dollar fee to join. Beyond this, with limiting the number of teams, you are only presenting consumers with a limited number of options on what they want to 'buy into'. Another example of how our sports league in the US is that they are able to operate as a legal monopoly. This is because all of the major leagues are faced with zero competition from outside leagues. Even when a new league emerges, it seems that they always fall flat and never are able to reach the same success of the top. One example of this can be seen through the XFL and the NFL. Several years ago the XFL was forced to file for bankruptcy, meanwhile the NFL is signing these huge media deals and continually draws in the masses to their product. One last example on how they operate in a socialist structure is through equal distribution of income, or in sports terms shared revenue. In a capitalist society, in order to make money you have to work hard to create a good product which outperforms your competitors. However, in our sport leagues, it does not matter how good the product is, the money will always be there due to shared revenue. Take a look at the 0-16 Lions. Even though they were the worst team in the league, they were still given the same amount of money as the best team.
How does the economic power of today's owners impact players' ability to make changes in the work environment? How have labor disputes in North American professional sport leagues changed over the last 25 years? Why have these changes occurred?
Most owners are billionaires who made their money in other businesses They do not rely on franchise profits for income Current situation greatly favors owners/league in management-labor relations Over the last 40 years, multiple work stoppages have occurred in all 4 major leagues: NFL: 6 NBA: 3 MLB: 8 NHL: 4 Owner Lockout: Management ceases business operations in an effort to settle a labor dispute What other businesses can do thi without experiencing great harm? None Other businesses would suffer from loss of market share and revenue decline Since 1995, all work stoppages in professional sport have been the result of a lockout Owners will be unscathed financially Players will suffer without regular income and succumb to the wills of the owners
What is the National Labor Relations Act and how does it apply to professional sport?
National Labor Relations Act- Can form unions, engage in collective bargaining, and use pressure tactics (strikes). Although collective bargaining restrains trade or commerce, NLRA made an exception for it (as long as both sides agree they are engaging in collective bargaining).
Historically, what impact has the presence of competing leagues had on professional sports leagues? How or why do rival leagues ultimately merge into a single league?
No significant impact. Bad financial practices, gave huge contracts (with money they didn't have) to good players which impacted them negatively financially. Not the same talent. Didn't have the same talented players on the field/court, so they couldn't compete with the top leagues. When there are two leagues corporate sponsorship and media rights can start bargaining with each league meaning less money for each league, one league ends up buying the other.
Describe/discuss current issues sport marketers face as they attempt to create demand for the sport product.
Obtain the best possible understanding of who the "target market" is and what they want Includes the marketing of: Products: Equipment, apparel, footwear Services; Skill lessons or club memberships Entities: League, teams, or individuals Staff: Recruitment and retention (relationships) Changing media consumption (cord cutting, growth of social media, etc.) changes who the primary audience is and sport marketers need to adjust accordingly
How do owners use their monopoly power to control and regulate professional sport leagues? How does this monopoly power affect other groups (i.e. players, fans, cities, media)?
Owners use their monopoly power to control and regulate professional sports leagues with control of expansion and expansion fees, public subsidies, fan costs, media rights, labor restrictions, and inefficient management. They also have territorial monopolies, can participate in revenue sharing, labor allocation, media contracts, and owner restrictions. There are also free agency restrictions with monopoly power. labor (salaries, mobility, entry, lockouts), media coverage (rights fees)
What are the two main sectors of the sport business industry? What are the characteristics of each segment? What are general trends associated with each segment?
Participatory Sector Fitness and recreation centers, community sports, sports facilities (local golf courses, marinas, gyms, martial arts dojos, etc). Biggest share of the sports market, 56% Fitness and recreation centers dominate 一 about 40% of the whole participatory sector Spectator Sector Clubs and sports teams, event revenue, media rights, sponsorship, merchandising Fastest growing sector Future growth rate of 5.9% Media revenue made up 23.7% of sector in 2018 Merchandising market expected to be fastest growing in the future at a rate of 7%
How do the structures and business practices of professional golf and tennis compare to the structures and business practices of North American professional sport leagues?
Revenue distribution: Team sports: Management and labor compete for resources Determined via collective bargaining Individual sports: Money is distributed to tournaments and players Extra $ = bonuses to players Salaries: Contracts: Negotiated with management Pre determined for the season Dependent upon prior or future performance Salary cap restrictions in some sports Guaranteed minimum amount Large annual earnings Prize money: Dependent upon current performance Must play to earn $ Limited by available prize money Smaller annual earnings Larger life-time earnings Access to sport: Team sports: Controlled by management Expansion Draft Free agency Career longevity: Average 2-3 years Dictated by management One major tier: Minor leagues for MLB, NHL, NBA Golf and tennis: Q-School or tournament placement Meritocracy Career longevity: Average 10 years Dictated by performance Multiple tiers: Promotion and relegation model
What is the Sherman Act and how does it apply to professional sport?
Sherman Anti-Trust Act: prohibits every contract, combination, or conspiracy in restraint of trade or commerce. Prohibits monopolies! Breaks up trusts, monopolies. Lot of restraint of trade goes on within sports that is prohibited by Sherman, but collective bargaining/NLRA allows for it to happen.
How does the "business" of professional team sports (e.g. structure; competitive practices; labor market; management/labor relations) compare to that of other corporate businesses? What are the similarities? What are the differences?
Similarities: Governing structure: Management, board of directors. Collective Bargaining (negotiating contracts). Differences: Power dynamics (Team owners have all the power!). Relationship between Board of Directors and CEO. How business occurs (Corporation, revenue sharing, etc.). Revenue Sharing. No competition in the sports world, teams work together want each other to be successful. Sport owners love unions, other business owners hate them. Lockouts/strikes. Selection of labor (sports have drafts, free agency). Leagues are basically cartels. In sport leagues players can't just quit and look for new gig, only 1 league!
Marketing activities related to the upcoming Major League Baseball playoffs are currently underway. However, MLB has to market something very different than the cars, beverages, services and electronics that will be advertised by other companies during the playoffs. Discuss three (3) differences related to marketing the "MLB product" compared to marketing other products advertised during the playoffs.
Sport Product is inconsistent and unpredictable, like in the MLB playoffs the outcome of a game is never known till the end and the possibilities that could occur are the main selling points, whereas in traditional marketing being unpredictable is looked upon as negative and hurt the product you are trying to promote. Real World: fans get the excitement of pennant races and unpredictable games every year vs. an iphone that has a previous standard set from the year before that it must meet and improve upon. Sports Marketers have to compete and cooperate with other teams in their league. Although the end goal is to beat the team they are playing, they also have to promote/boost the brand of the opposing team in order to create as much hype for a game as possible. However, in traditional marketing, companies do not have to promote the brand of their competitors, and their end goal is to come out on top while diminishing the competition they face. Real World: Take Bud Light for example, in many of their commercials you can often find them putting down other beer companies while showing how theirs is superior When it comes to sports marketing, consumers expect the best from their teams, so to appease these teams will market themselves as the best. However, if they fall short of the expectations placed on them, then the fans interest will begin to lessen. Due to a marketing success being dependent on teams success, there really is no true model to follow due to the variability of sports. In traditional marketing however, companies are only going to market what they are ready to sell and know will receive mainly positive feedback from consumers. Further, they are also able to experiment with different marketing strategies and are able to see the trends on how well they do, giving them a model to follow for future products. Real World: marketing an iPhone vs a struggling Pirates team that promotes a playoff berth
What is sport marketing?
The anticipation, management, and satisfaction of sport consumers' wants and needs through the application of marketing principles and practices; includes marketing of products such as equipment, apparel, and footwear, services and experiences such as attendance or participation, entities such as leagues, teams, or individuals, and the recruitment and retention of volunteers as a relationship marketing exercise Create "demand" for products and services § Create, promote, deliver goods and services to consumers and businesses o Obtain the best possible understanding of who the "target market" is and what they want o Includes the marketing of: § Products: Equipment, apparel, and footwear § Services: Skill lessons or club memberships § Entities: Leagues, teams, or individuals § Staff: Recruitment and retention
How does the sport product differ from traditional consumer products? What is the significance of the "conjoint" nature of the sport product?
The sport product is unique in many ways. It is unpredictable. It is a conjoint activity No other products require cooperation with their competitors One team needs another team to create the product Not much demand for intra-squad competitions
What are the various types of ownership in professional sport? What are different motives for ownership? How do these motives impact the operation/business practices of a sports franchise?
Type of Pro Sports Ownership: Individual or small group - Steve Ballmer (Clippers Family - Fords (Detroit Lions) Corporate - Atlanta Braves (Liberty Media) Ownership Motives: Profit maximizers: Generate profits directly from sport franchise activity/success Utility maximization: Leverage the value of the sport franchise to develop business in nearby areas Real estate development Media companies You make money every day of the year, not just gamedays League structure relevance: Limited number of franchises and closed entry No promotion/relegation system No threats to market share Little concern about devaluation of franchise worth Territorial rights No threats to market share No civic ties and emotional connection with fans Revenue sharing Financial solvency regardless of team success/efficiency Allocation of labor Limits on free agency, won't lose best talent "Rewarded" for poor performance via reverse-order draft
What is shared revenue? What is variable revenue? What are sport examples of each?
Variable Revenue: Revenue that is retained by the business generating it Standard revenues in a free market economy ExMedia, sponsorships, naming rights Shared Revenue: Revenue that is equally divided among all businesses/teams/governing bodies within a league/conference/organization Ex: Big ten, tv contracts