Sports Finance Exam 3

nonallocated revenue

direct institutional support, students fees, general giving

Product Bundling has strong marketing advantages

•Product giveaways like hats, bats, bobble head dolls, and posters are just bundling items

future options

Happens most in case of playoff tickets •Similar to PSLs but different because a team may or may not actually appear in the playoffs. Buy the right to purchase ticket at face value sometimes •If the team does not appear, then the buyer holding the futures ticket loses the value of his/her investment. •Ticket futures are a form of insurance. If you buy, you will not be gouged. Sellers like it b/c they might make more money that just selling the ticket after the playoffs begin.

MR=MC

1.Teams will invest in players and a facility to the point where the marginal return of that investment equals the marginal cost. Teams are profit maximizing (total revenues do not dictate how much they invest)

Raising Prices have 3 effects on profits

1.Increase in price increases the cash inflow for each ticket sold 2.At higher prices, teams will sell fewer tickets, which decreases cash inflow 3.Higher prices will decrease costs because there are fewer fans.

Sports venue tax exemption

1.Public sector must participate in financing of the venue 2.Team's lease cannot contribute more than 10% of the debt service needed to repay the bonds. •In order to satisfy #2, teams and governments construct financing plans to ensure revenues from other sources are used to repay the majority of the debt. •This condition creates political issues - voters might object a general tax increase unless tangible benefits from its existence are clear

Teams' financial interest in a public entity:

1.Secure tax-exempt status of bonds sold to finance the stadium 2.Ensure the venue's exemption from local property tax

Port authority

1921 - constructed and maintains the bridges, tunnels, and mass transit system in NYC and New Jersey. Region grew so airports were created and transit needed between them A lesson learned for sports is that is in the public's best interest for an authority to have a single, clearly defined purpose

•Tulane, Wake Forest, Connecticut, Kansas, Hawaii, and Northern Illinois

6 programs lose money on football and MBB

Myth #2

Arms race drives spending •Those that support this myth think the world would be better off with less spending in college sports. Others see colleges spending irrationally as a factor that will ruin college sports and threaten university system

luxury taxes

Calculated as a percent of a team's payroll that exceeds a certain threshold. •Yankees have paid more than any other team and have paid for 16 consecutive years. Sometimes called the Yankees' tax

GEDC

Cleveland Indians threatened moving after Cavs left. Created authority to build new stadiums and revitalize downtown

Why are ticket prices inelastic?

Concessions Advertising sales larger fan base Increase TV ratings Reputation, image of team

Variable ticket pricing

Different price for different games

Too low

Economists say prices are _____

Draft balance

Empirical data suggests that balance before a draft and after are really not different

unit elastic

If the price is such that a 1% increase causes a 1% decrease in quantity, the phenomenon is labeled ____. This maximizes profit!

European teams are open

Leagues in Europe compete with each other as Germany, England, Italy, Spain all have them. Salary cap might restrict costs, but could affect the overall talent level of the league

NBA tickets

NBA ticket prices are increasing about the same rate as inflation. Most expensive tickets in NYK and LAL

ECU, FAU, and Tulane

Net positive at 3 schools over $1 million:

Monopsony

One buyer

Monopoly

One selller

Priceline strategy

Seems odd to let fans pay what they want, but many fans actually pay more. •Typically related to fundraising or non-profit activities Florida Panthers let fan make an offer, which may or may not be accepted

Roster Depreciation Allowance

Sport industry is seen as having mastered tax loopholes, although most industries have exemptions

Myth #3

Using the NCAA's own data, those hostile to college sports foist a myth on casual observers - athletic departments struggle to break even

market size and team quality

What affects the price of PSLs?

price discrimination

When firms charge different customers different prices for identical goods.

inelastic

When prices are too low, say a price increase will have a relatively small effect on quantity sold, the pricing is labeled as When the buyers demand does not change much as the price changes.

purple pricing

allows a seller to learn buyers' maximum willingness to pay so they get an excellent picture of demand. And, at the same time, the seller makes money despite giving refunds.

Generated Revenue

attendance, attendance related, media contracts, and donations earmarked by sport

Florida, Texas, Washington state, Washington DC

have no player tax

public authorities

increase borrowing power and permit flexibility for local governments borrowing for other capital assets.

Ticket resellers bundling

limits on resale price of a ticket, but entrepreneurs will bundle an extra good like a coffee cup or delivery service. No limit on resale price of a ticket if it is attached to other goods and services

Timberwolves

lowest revenue NBA

Parking and concessions

most common items to bundle

Knicks

most profit NBA

Red Sox, Dodgers and Yankees

teams that have exceeded luxury tax threshold more than once

MLB revenue sharing

•2000 Report in MLB endorsed expanded revenue arguing that smaller-market teams would have the resources to attract and retain better payers. With better players - more likely to compete for championships •It is true that revenue evens out the funds, but does not necessarily mean that small market teams will invest more in talent. There are no restrictions on how the shared revenue can or should be spent

Revenue sports pay for non revenue myth

•85% of FBS Schools (I-A) were able to cover any excess of spending over revenue in the rest of men's and women's sports with football and men's basketball net operating expenses •34% of FCS (I-AA) do •Since myth is that the ALL do, myth dispelled

Important

•As football and men's basketball, so goes athletic department's fate (myth?)

Condominium Seats

•Buyer can occupy a seat for every game or event that is held at facility for a fixed period of time (1 year to 20 years in some cases) does not have to pay for any ticket to any individual game or event during their tenure

myth 3 deconstructed

•College sports end up under attack for something they have never been, except at a few universities, which is economically self—sustaining. •Since this seems easy to understand for lay people, the argument is made that the rightful place of athletics is tenuous at best and not deserving of budget support

Best bargain FCI

•Diamondbacks were the best bargain at $132.10 in 2016

Know it

•Dodger Stadium has an all-you can eat section in right field - Smart? •If new fans who would not have come to game, then yes, especially if buy beer and souvenirs •If current fans who move from their section to this, then no.

luxury tax %

•From 2012-2016, teams who exceed the threshold for the 1st time must pay 17.5% amount they are over, 30% for the 2nd year, 40% for the 3rd, and 50% for 4 or more consecutive years

MLB

•Has NO Salary Cap - Unique •Does have a luxury tax •2018 tax was $197 million

Ticket expense

•Has become more expensive - •in 2017 for Red Sox - $97 average •In 1991 it was $9.33 (adjusted to $17.10 for inflation) •Increased the cost by 467%

Merchandise pricing

•If teams sell individual for Curry and Lebron Jersey, then Lakers and Warriors are competing to sell •If NBA is selling, they will raise the price for both jersey and increase revenue for both teams

Media prices

•If there is only one seller the price will be high (monopoly), if only one buyer (monopsony), the price will be low •This is why teams sell through the league and not individually

DDA

•In 2013, Michigan governor announced an emergency financial manager to oversee Detroit's finances when they declared bankruptcy •Within 3 months, governor proposed building new stadium for Red Wings. DDA was created to sustain property values in the city, appointed by mayor •City of Detroit give entrepreneurial motivation by letting investors purchase foreclosed buildings and abandoned buildings at a cost of $1, then assign appropriate property taxes. Capital for future development must be generated by tax revenue collected from these projects

myth 3 represents

•It suggests that the money spent on athletics is better spent elsewhere •If split out evenly all over campus, it would barely affect budgets •Argument isn't made against stem majors, engineering, or medical schools that receive even larger allocations

Low prices because

•Low ticket prices gets more fans to games. Teams have incentive to get fans into their facility •More fans=easier to find deals. More people has more people looking at advertisements, can charge higher price •Rooting for teams can be addictive. Discounted tickets drives fans up frequency escalator. •Fans like watching games with high attendance (better feel). •If fans believe they are being gouged, they are less sympathetic toward things like public sector investment in facility. Want a positive image with fans

Know this for FCI

•MLB are quite a bit less than tickets to other leagues, probably because they have more games and can't expect to pay as much when supply is greater •NHL and NBA were on par with NFL in the 90s, but NFL has skyrocketed •NFL and MLB have been increasing prices for most part of past two decades

Average FCI

•MLB league wide average in 2016 was $219.53 (large markets well over $300)

marginal tax rate

•Managers must remember that assessment of the effect of taxes focuses on the ______, not the average

Fan Cost Index (FCI)

•Measures average cost to take a family of four to a single, regular season game in an average seat.

Premium vs regular

•Minimum and maximum ticket prices charged are a good way to analyze premium vs grandstand sales. Maximum avg. is twice the minimum avg. in NFL

Conceptual

•Most businesses will raise tickets prices until the benefit of increasing prices equals the cost of raising prices. In the absence of marginal costs, this means maximizing revenue.

Ticket Prices

•Most cases, prices set by team. Estimate demand and then price tickets accordingly to be sure that the maximum number of fans will attend •Prices are changed as team executives receive feedback or observe attendance trends

NFL

•Most egalitarian of all the leagues •Money dedicated to player salaries is complicated •55% media revenue / 45% of NFL Venture Postseason revenue •Means that approximately 48% of league revenues are dedicated to players

NBA

•NBA has salary cap, luxury tax, and modest revenue share •Most complicated revenue structure

Other reasons for PSLs

•NFL treats revenue from PSLs differently. Not shared with other clubs or the players. Ticket revenue is included in the revenue sharing plans. Teams can only issue a PSL when they are building or renovating a stadium. Incentive to build a new stadium, which helps the league •Two-Part Pricing (used by Sam's and Costco). Customers pay a membership fee and get discount on products. Happens at golf courses all the time! Capture fans willingness to pay for the entire season

NHL tickets

•NHL has seen very little variation (not even at inflation). Had to lower tickets before and after lockout of 2004.

•Syracuse, Michigan State, Notre Dame, Alabama, Penn State, and Georgia •1 FCS School: Southern University

•Only 6 of 118 reporting FBS programs earned enough from football and men's basketball to cover entire athletic department budget

Big picture

•PSLs should be thought of as a futures market for tickets - If demand increases, fan can sell for profit on ticket and PSL, if demand decreases, the fan could own a PSL or tickets worth less than the face value

NHL

•Payrolls well below other leagues •After lockout, league implemented a salary cap •Also implemented a salary floor

Players union

•Power of players union rests on the ability of its membership to forego a season of play

promotion and regulation

•Practice of having various levels of leagues and promoting some teams into better divisions while relegating others to lower levels •If team in threatened with relegation, an owner might invest more in talent •Does not help team profits. Any time player investment increases, salaries rise (good for players) and costs increase (bad for owners)

Bulk discounts

•Price of a ticket is subject to change if bought for multiple games, or for multiple people

Dynamic pricing

•Prices shift depending on shifts in demand •If sales are high for a game and there are few seats left, prices for that game will increase. If sales are lagging, price will decrease

Falcons article

•Raising ticket prices a dollar would have no affect on sell outs in NFL. Only change the teams profit at expense of fans •Leagues where sell-outs are less common, raising prices doesn't change attendance very much

Product Bundling

•Sellers are willing to sell at a discount if the buyers commit to buying multiple items

CIB (Indianapolis)

•Similar in its structure to a port authority. Tasked with promoting conventions, culture, entertainment, sports, and rec activities. Instead of overseeing transit, it oversees tourism and entertainment. •Lucas Oil Stadium required extra revenue. Increased total tax rates and redirected state tax revenue produced by Professional Sports Development Area. The PSDA is a designed part of downtown. Taxes on food, income, etc. in area go to CIB. Residents avoid paying for the venues by spending their money elsewhere. 6 suburb counties put tax on food too. Collected $125 million on tax in 2015 which repay bonds used to pay for stadium

Mass Port

•Single purpose authority •Created to develop and manage transit assets, have not been as gregarious in economic development as Port Authority •Built and operates Logan Airport. Does the work that the public sector is ill-suited to perform

Game day experience

•Sport products are not sold in a vacuum but part of the fan's "Game Day Experience" •The goal is always ensure fans' LONG-TERM commitments to the team

d2 and d3

•TV revenues do not matter and crowds are small •University Admins are still devoting 3-5% of tuition revenues to college sports •Investment is still in accord with the demand by students to be athletes and by the smaller student bodies to enjoy activities of their classmates •This is not a drain on smaller university budgets but are best portrayed as a modest investment in another aspect of student life

Revenue sharing decreases players salaries

•Teams only receive percentage of any one player's marginal revenue product •All owners share the value of OBJ or Dak Prescott (in large market). This means neither the Giants or Cowboys will pay these players their true market value since their owners cannot realize the full return on their performance in the large market. **Dang Browns •This makes the players less valuable to any single owner, and players only negotiate with one owner, their ultimate salary is lower, even if producing more profits for the entire league

average tax rate

•The __________ is equal to the total amount of taxes divided by taxable income

Auction pricing at Northwesters

•University initially sets a high price for tickets and then lets the price fall until enough fans have purchased tickets. Once the auction is completed, everyone pays the final price of the auction, which is lower than the initial price •If fans are willing to pay at the current price, there is no reason for them to "game" the system by waiting

Optimal price

•We discussed demand is affected by many factors. OPTIMAL PRICE is affected by the SAME factors. •Example: Teams will charge higher ticket price in new facility because have better sight lines, improved technology, wider seats and concourses, etc.

Geography

•When NFL started draft - it was based on _______ from where players played in college (1936). College was more popular

elastic

•When prices are too high, a price increase will have a large effect on quantity sold. That is _____ pricing. when the percentage change in the quantity demanded exceeds the percentage change in price.

Jock tax

•are unique in that players are taxed in the cities they play games in, even as a visiting player

Personal seat licenses (PSLs)

•can cost a few hundred to tens of thousands of dollars •Fans have the right to future season ticket packages and sometimes a discounted ticket price. Those who do not buy a PSL pay a higher price •PSLs are often sold before a new facility is built so a team has more up front money, and therefore, needs to borrow less. NFL uses it the most! •Carolina Panthers raised $100 million in after-tax revenue •Giants and Jets raised more than $500 million

ticket taxes

•ensure that users of the venue are paying for its construction and maintenance, as opposed to general public.

Marlins and Pirates

•have come under criticism from MLB Player's Association for not spending enough on players salaries

marginal tax rate

•is defined as the percent of taxes paid on one extra dollar of income

statistical analysis

•shows that when teams raise ticket prices, it has very little effect on attendance.

If teams are maximizing revenue from tickets

•they should see that a 1% increase in prices leads to a 1% decrease in the number of tickets sold. At this point, it is impossible to get more revenue from ticket sales.