KINS 4520 Exam 2

Conjoint production

Requires at least two producers

What is the point of a draft?

Restricting payer play. Create a monopsony situation where there is only one team with which players can negotiate

Price discrimination in sports

Fanatics have a very high demand for sports, while there are casual fans. Teams will get more revenue if charging different prices

Winning

Fastest way to increase the demand for tickets in short term. Creates high expectations for the next season, more loyal fans

Television revenue vs. stadium revenue

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

What do teams produce?

Games, merchandise, and fan experiences

Effect of having a big name player

Increases attendance but relatively small

Player taxes

"Jock taxes", unique that players are taxed in cities they play games in, even as a visitor. Earning income in various states, must pay state taxes on all income

Personal seat licenses

-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 don't buy PSL pay higher price -Colleges started trend, identified as contributions -Thought of as future market for tickets (if demand increases, a fan can sell for profit)

Market penetration rates

-Can focus on one product's sale compared to the sale of all similar products in a market (ticket sales relative to all tickets sold in market), Can focus on the volume of product sales in a particular market compared to the same product in different markets (ticket sales as a percent of a measure of population, comparing their region to other teams in same region), Can focus on displaying total attendance numbers (illustrates value of large markets, which tend to have smaller PR, but sold more)

Tax exempt status for universities

-For some of their incomes, taxes are not paid -Gray area of altruistic giving and simply purchasing a product

Taxes

-Impact expenditure decisions and profitability -Managers must remember that assessment of the effect of taxes focuses on the marginal tax rate, not average

Ticket taxes

-Increase the cost of sports and entertainment tickets by adding additional fee -Ensure that users are paying for construction and maintenance rather than general public

NFL

-Most egalitarian (equal rights) of all leagues -Money dedicated to player salaries is regulated

Future options

-Mostly for playoff tickets -Buying right to purchase ticket at face value, sometimes don't make playoffs -If team doesn't appear, buyer holding future tickets loses the value

MLB

-No salary cap -Luxury tax -Tax paid by team depends on the amount they have exceeded it by and the number of times they have exceeded the threshold

NHL

-Payrolls well below other leagues -After lockout, league implemented salary cap and floor

Condominium seats

-Price is normally $100k+ -Buyer can occupy seat for every game or event held at facility for fixed period of time

NBA

-Salary cap, luxury tax, and modest revenue share -Most complicated revenue structure

Media prices

-Teams don't price media contracts, sell rights to highest bidding media company -One seller= price is high, one buyer= price is low

Unit elastic

1% increases causes a 1% decrease in quantity. Maximizes revenue

Raising prices have three effects on profit

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

Why revenue sharing?

1. Some revenue generated by league 2. Payments can also be seen as way to discourage owners from small markets from demanding to relocate to larger market 3. Decreases player salaries

State taxes

All but seven states have some form of an income tax. Lebron left Cleveland for smaller contract in Miami but difference in salary is small

Market penetration rates data is used to

Assess the popularity of a single product (like MLB)

Market penetration impact

Can demonstrate just how dedicated fans are, especially smaller market

Only sports markets that have lost population size between 2000 and 2016

Buffalo, Cleveland, Detroit, New Orleans and Pittsburgh

Luxury taxes

Calculated as a percent of a team's payroll that exceeds a certain threshold

Revenue sharing

Change the payoff structure, creates an even financial situation between winning and losing teams. Small market teams benefit because they pay less for talent but receive transfer of money from larger-market teams

Team Marketing Report

Company that produces Fan Cost Index for four major leagues, measures average cost to take a family of four to a single regular season game in average seats

Why are ticket prices inelastic?

Concessions, advertising/ sponsorship sales, larger fanbase, increase television ratings, team's reputation

What does profitability depend on?

Delivering to customers exactly what they want in the manner in which they want it

Average tax rate

Equal to the total amount of taxes divided by taxable income

Penetration rates while displaying total attendance numbers

Helps illustrate the value of large markets, which tend to have lower penetration rates than small markets, but often sell more tickets. Insights into challenges of teams to remain profitable in the midst of a recession

Sport venue age

Higher levels of attendance and revenues can be caused by a new venue. Higher attendance in last year of an old facility.

Basic economics

If team charges high price, it is likely that fewer units will be sold and vice versa

Competitive balance

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

Biggest long term factor for a team

Location. NYC is soon to have five major arenas: is there sufficient disposable income in NY market to buy supply of tickets?

Highest average household spending cities

Minneapolis, San Diego, Seattle and Denver

Game specific determinants

More fans attend weekend games/ at more favorable times, home team's opponent can also make a big difference, promotions have short terms demand effect, marketing can build a brand that creates loyal fans

Ticket trends

NBA ticket prices are increasing about the same rate as inflation, MLB has seen maximum ticket prices skyrocket over past decade

Salary caps

NFL, NHL, NBA, and MLS all have one. Ensures all teams have similar payrolls

Attendance

Naturally affects other revenue streams like concessions, parking, etc. Also affects businesses around stadium

Most common items to bundle

Parking and concessions

Marginal tax rate

Percent of taxes paid on one extra dollar of income

Bill Veeck and birth of sport marketing

Planted famous ivy at Wrigley, had a game where fans voted on managerial decisions, bat day giveaways, fireworks for home runs

Draft

Player's rights are controlled by single team

Issues with salary caps

Players don't like them, teams front or back load to manipulate them

Promotion and regulation

Practice of having various levels of leagues and promoting some teams into better divisions while regulating others to low levels. If team is threatened with regulation, an owner might invest more in talent

Five factors that affect demand

Preferences, income level of consumers, population size, price of substitutes, future expectations

Problem with the draft

Profit-maximizing teams should invest talent to the point where marginal returns from that talent equals marginal costs. Draft model doesn't change that relationship. In the end, teams with smaller market sizes often trade rights to players for excess profits

Economic competition

Sport managers must understand the substitutes that exist in each region. Miami is the only NBA team in area but competes with MLB, NFL, NHL

Conjoint consumption

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

Maximizing profit

Statistical analysis shows that when teams raise ticket prices, it has very little effect on attendance

Product bundling

Teams bundle goods with ticket purchases. Sellers are willing to sell at a discount if the buyers commit to buying multiple items. An empty seat is a perishable good (worthless after game)

Demand

The relationship between price and quantity of product

Challenge for sports business leaders

Understanding what will maximize the benefits received by fans (consumers)

Original player draft

When NFL started draft, it was based on geography from where players played in college

Price discrimination

When firms charge different customers different prices for identical goods. Ex. senior citizen or child discount

Elastic pricing

When prices are too high, a price increase will have a large effect on quantity sold

Inelastic pricing

When prices are too low, say a price increase will have a relatively small effect on quantity sold, pricing is inelastic

Law of demand

When prices increase, consumers will want less of a good

Winning and fan loyalty

Winning has short term effect but is tied to long term effect too. 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. Fandom for women tends to be less dependent on age

MLB teams have less attendance if...

another team is nearby, especially if other team is successful

Teams could price tickets...

lower and hope fans come with bargain admission price but spend more on food, beverage, and souvenirs which have higher profit margins

Ticket prices are usually set by...

the team. Estimate demand and then price tickets accordingly to be sure that the maximum number of students will attend