Sport Finance Exam 2

In 1994, economists estimated the value of Major League Baseball to be

$2 billion

1921

-Radio broadcasts of baseball began -Real fear that radio would hurt attendance

Results of teams adding media corporations to their holdings and vertically integrated television and radio into their operations

-Substantial growth in profits -Debate on use of media funds at heart of labor conflict in NFL -Wide range of news outlets and bloggers has made the suppression of negative stories difficult - but NFL worked hard to underreport concussion details/statistics

Depreciation in sports

-The sports industry is unique in that it can denote players as capital instead of labor because of the "Veeck Loophole" -This means they can deduct a percentage of player salaries from their book profit

How was Howard Schultz (Starbucks billionaire) able to sell the Seattle Supersonics for $350 million after a loss of $217.9 million?

-Well-known tax allowance for pro sports team owners allows large depreciation write-offs on the "roster value" of the team -Under firm structuring for tax purposes, any remaining losses can pass through owner's 1040 form to shelter other income -Since losses are counted after depreciation reduced to 78.5, it actually sends the true loss value on the Sonics down to $6.6 million over 5 years

What is Peter Rozelle's idea?

-if teams surrender their local television rights and permit the league to sell a package of all games to a single network, teams would then equally share the revenue earned -wanted a league where any team could win on any given Sunday

estimated value of franchises

1. Cowboys- 4.2 billion 2. Yankees- 4 billion 3. Machester United- 3.69 billion 4. Barcelona- 3.64 billion 5. Real Madrid- 3.58 billion

Market Penetration

1. Focuses on one product's sale compared to the sale of all similar products in a market. Could mean looking at its ticket sales relative to all tickets sold to sport and entertainment events in their market 2. Focuses on the volume of product sales in a particular market compared to the same product in different markets. Could mean looking at team's total ticket sales as a percent of a measure of population (total population or sport fans, etc). Then would compare their region vs other teams in the same league in other regions 3. look at penetration rate while displaying total attendance numbers

Unraveling the myth

1. It can make sense to assess the net value of ownership only by identifying all the value of ownership. Owner's successfully claim they lose money by looking at the bottom line 2. With all values specified, the idea of losing money on a team can be put in perspective 3. Even when prices fall, there is good reason for it

Owner's lose money myth is destructive in two ways

1. Misdirects attention from the actual value of owning a team 2. When the economy is down, it is much easier to believe ownership irrationality

Does a media bubble exist? Possible, but...

1. Sport has ability to consistently attract large audiences 2. Need of advertisers to place their product messages before large numbers of people 3. Consumers' willingness to pay fees through their cable and satellite providers for the entertainment provided by sport

Five Factors that Affect Demand

1. Tastes and Preferences 2. Income level of consumers (Individuals and Businesses) 3. Population Size 4. Price of Substitutes 5. Future Expectations

Since 2000, __ teams have won Super Bowl and __ have won the World Series

12

Professional sports teams can depreciate the value of his/her roster for up to

15 years, following the purchase of a franchise

when did direct revenue for teams from broadcast start?

1890's: Western Union offered free telegraph services to teams in exchange for the right to transmit updates to saloons

Era of the home television (NFL and MLB)

1950s

MLB grows by _____ in 1st year of stadium and decrease to normal after 9 years

44%

Research suggests that between ________________ of teams fans will switch allegiances to another team in the same league if the original teams leaves for a new city

5 and 15%

Despite big markets getting more money, ___ teams have won World Series in last 11 years

8

Which sport has a lot of quantity of a product (lot of games)?

Baseball

Who was the first to start sport marketing?

Bill Veeck

What cities are the only sport markets that have lost population size between 2000 and 2016?

Buffalo, Cleveland, Detroit, New Orleans and Pittsburgh

Which city is the market that is best suited for selling to both general seating (7th household) and luxury products (3rd corporate)?

Chicago

College Vertical Integration

Conference would own 51% of network and provide all of the programming. Fox Entertainment Group would own 49% and provide the hardware and distributional mechanism required

Asset depreciation

Corporations can take advantage of tax laws to reduce their earned income, which in turn reduces the amount of taxes paid

T/F Tax shelters from owning a team show up on financial statements

F

T/F college sport went through a period where the media was relied upon to expand its popularity

F

T/F it's harder to have high penetration rates in small markets

F

T/F players from different countries doesn't change attendance levels and create new fan segments

F Ichiro/Mariners

T/F NFL has local TV rights

F only national broadcasting

T/F Winning typically creates low expectations for the next season, so attendance tends to be high at beginning of following season

F winning creates high expectations

Principal Agent Problem

In sports, to avoid this problem...player contract incentives must been aligned with team and owner incentives

Which city is the largest city to ever host the Super Bowl?

Jacksonville

What league has higher seasonal attendance than other leagues and winning has a larger effect on attendance?

MLB

Big exception to superstars effecting attendance

Michael Jordan's Wizards tenure

Highest average household spending cities were

Minneapolis, San Diego, Seattle, and Denver

Teams that see same players on team for longer times (Chipper, Favre, etc.) see increased attendance over teams that turn over roster, except in

NBA

What was the initial issue with NCAA and networks?

NCAA controlling how many times one team could appear on national tv

What leagues is not normally studied in this area because most teams sell most, if not all , of their seats every year regardless of facility age

NFL

Corporate payrolls the highest in

NY, LA, Chicago, DC

MLB media rights

National package that is divided equally among clubs, but each team retains right to sell their games that are not nationally televised in their local markets

_______________ get consumers to their seats earlier

Promotions

Are the Red Soxs are Yankees more diversified?

Red Sox

T/F Each England Premier club can spend as much as it wishes on players without incurring a penalty or fine

T

T/F If a baseball team won when a boy was 8-12 years old, they were much more likely to be a fan of that team

T

T/F Leagues would always rather have large market teams involved instead of small market

T

T/F Lease, concession and broadcast contracts can also be depreciated

T

T/F Only once in 20 years has the league championship not been won by one of the 5 major teams

T

T/F Small payroll teams beat large payroll teams frequently

T

T/F Teams are able to determine whether or not broadcasting revenue will cover player payroll

T

T/F Teams in regions with larger corporate payrolls are typically better equipped to sell their entire inventory of tickets

T

T/F The fandom for women tends to be less dependent on age

T

T/F teams used to treat newspaper writers like gold

T

T/F very few negative stories on early athletes

T Owners pressured newspapers, newspapers felt negative stories would make fans lose interest and they would lose revenue

T/F NFL teams are much more likely to play before sellout crowds than baseball games regardless of win/loss

T NFL (10 home) vs MLB (81 home)

T/F Teams becoming part of larger conglomerates, it is not easy to know how the team contributes to the profits of an owner's related businesses

T Teams can have different values depending on who buys the team (media, concession, etc.)

T/F NCAA argued that too many televised games would lead to adverse effects on attendance

T but Supreme Court overruled NCAA (Oklahoma case)

Team owners have an incentive to do what to prepare for negotiations with players union?

Team owners have incentive to show financial loss or low profits

Can owners make the case that the value of the roster makes up the entire value of the franchise?

We know that isn't necessarily the case, but it does work for tax purposes

_____________ draw large wherever they play

Yankees

Managing owner is normally a

a billionaire among multimillionaires and the team is only one element of owner's portfolio

Researchers asked people to name the five greatest soccer players of all time and they consistently named players from when they were in

adolescence

Phase 1 of media

advertising for teams and leagues

Owners have adopted same complicated, peak-load computer simulation ticket price approach used by

airlines and hotels (they fight for every dollar)

2006 Big Ten

announced it would extend contract with ESPN/ABC but games not selected would be shown on own network

England's Premier League is the

antithesis of NFL's on any given Sunday any team can win

On other side, owners spend massive amounts of money in ___________________________________ trying to keep cost side in order

arbitration and salary negotiations

Market penetration data is used to

assess the popularity of a single product (like MLB)

Individual level

athletes face the same financial decisions as other workers (they just have more money in the short-term...and hopefully the long-term)

Marginal analysis

decision making based on incremental changes

CFL and European Basketball limit foreign players because

decreasing attendance

Due the size of K.C. Royals market, it is far more ________ to elevate demand by asking residents to attend more games that already have high average and generate the revenue needed to pay salaries of established star athletes

difficult

Teams with one team (Jacksonville, San Antonio) must each sell

fewer than .5 tickets per resident to sell out entire supply of tickets

Initial relationship between teams and media was one of

financial reciprocity

1910 World Series

first live rights for $500 dollars and images were shown in movie theaters

Sports was ________ for newspapers and relatively _______ to cover

high profit low cost

Higher population =

higher price

NFL teams values are pretty ______________ with salary caps and high amount of revenue sharing

homogeneous

New facilities have a _____________________ effect

honeymoon or novelty effect -New facilities increase in short term, but return to normal or lower levels

League structures like salary caps, luxury taxes, revenue sharing, and player drafts all have a _____ impact on team value

large

Lockout is

league based

Research has shown that MLB teams have _____ attendance if another team is nearby, especially if other team is successful

less

In New York, where the supply of tickets exceeds 13.7 million, teams need to sell

less than one ticket to each resident to secure sellouts - 20 million residents makes it easier to sell at a given price level

The biggest long-term factor for a team is its

location

a superstar can attract more television viewers and this increase did not translate to

lower ticket sales

Variable such as ___________ is important for short term demand

marketing

what is the defining financial component for teams profitability?

media

Phase 2 of media

media as major revenue source

Phase 3 of media

media vertically integrated with teams

Teams with more _________ tend to have slightly higher attendance at their games even after win/loss records taken into account

offense

Depreciation is what kind of expense?

operation expense

What is traditionally the largest expense for a franchise?

payroll

Which media phase elevated player salaries and team values?

phase 2

Strike is

player based

Owners are criticized for

pricing policies

Media was a vehicle for team to _________

publicize or advertising

While having a big-name player does increase attendance, the effect is actually

relatively small

Conjoint Production

requires at least 2 producers

Conjoing Consumption

sports fans commonly engage in this as sport experience is usually far better when one watches a game with others

Firm level

sports franchises face many of the same financial decisions as other businesses

Indirect relationship between media and teams

teams earned income from media but it was through the creation of new fans

For many teams, ____________ revenue is more important than stadium revenue

television

depreciation value of an asset =

the total cost of the capital including installation

Important aspect of the product that teams and athletes sell is _________________________ in games and matches

the unpredictability of outcomes

NHL teams revenue comes from

their largest proportion of yearly revenues from gate receipts

NFL teams revenue comes from

their largest proportion of yearly revenues from the National TV broadcasting contract

Depreciation

value of capital that is lost over time

These market penetration figures don't account for

visiting teams fans and no adjustments have been made for price of ticket or revenue data

The challenge for sports business leaders is to understand

what will maximize the benefits received by fans (consumers)

Law of Demand

when prices increase, consumers will want less of a good

What is is fastest way to increase the demand for tickets in short term

winning

Short term demand factors

• Attendance • Winning • Other Factors (Superstar, Offense) • Marketing • Competitive Balance • Television

Wealth measurement

• Federal government provides these statistics in the U.S. Department of Commerce's Bureau of Labor Statistics in an annual survey they conduct on discretionary income • Department of Commerce also looks at annual changes in household income due to current economic trends

Uniqueness of Sport

• In sport, every team and individual athlete NEEDS other competitors • Sport is enjoyed live by millions through the broadcast, and each of these consumers is engaged in using the same product at the same time

Market segments in sports

• Larger regions usually have more fans and more corporate clients • Both individual and corporate fans want to see a winning team, and both groups enjoy amenities of new and well maintained facilities

Economic Competition

• Regions are building more facilities, competition between venues to host teams and events increases • Runs risk that too many teams and too many facilities makes in unprofitable for everyone • Understand demand relative to discretionary income of residents

Other owner benefits

• Related business opportunities (Cotton Bowl-Jerry Jones) • Owners can take profit from team side and pay themselves salary • The team may buy services from the owner or owners businesses • Low interest loans are common • Vertical integration can have owners allocating resource between team, stadium operations, and regional broadcast partner

For the four major North American sports leagues, the largest sources of revenue are roughly the same

•Broadcasting rights •Gate receipts •Sponsorships •Concessions •Licensing & Merchandise

Financial analysts spend time valuing companies with data and industry knowledge

•Sports see a lack of data •Complicated ownership structures •Impossible for NCAA since tied to so many aspects of university •Politics also clouds numbers as unions and owners fight over data

Why do we care about revenue generation?

•Winning leads to home playoff dates, which results in an overall increase in attendance AND an increase in gate revenue •Winning and playoff appearances are of enhanced importance to NHL franchises compared to NFL franchises