The Industrial Organization of Sports

1. The Industrial Organization of Sports Part I: Profit Maximization

2. Profits a Touchy Subject • We don’t want teams to worry about p • We want Ford to worry about it • Are sports purer than business? • Nostalgia ain’t what it used to be • Bad things can happen if forget bottom line • Case in point: Ottawa Senators • Best record in NHL: 2002-2003 • Declared bankruptcy: 2003

3. Alternatives to Profits • Personal publicity • Team as toy • The “Ego Premium”: $40-70 Million • Spillovers • Team helps sales in other areas • Ted Turner • Chris von der Ahe • Civic-mindedness?

4. Basic Question • Why is NFL most profitable sport? (Excel) • Every team profitable • Profits and market values greatest • What happened to baseball? • Half the teams lost money last year • Why is NHL a basket case? • Lowest profits and market values by far • Underlying question: Why do leagues exist?

5. Think of League as Synonymous with Team Sports • Wasn’t always so: • 7-year gap in baseball (1869-1876) • Took another 20 to stabilize • 44-year gap in football (1876-1920) • Took another 15 to stabilize • Alternative? • Barnstorming • Uncertain payoff • Dependent on winning • Red Stockings in 1869 vs 1870

6. Leagues andThe Economics of Clubs • James Buchanan – Nobel Laureate • What is right size of league? • New members a new source of revenue • Entry fees • $50M fee put Ottawa in debt from outset • Access to new markets • May also be a drain • Must divvy up among more members • Revenue sharing • Competitive Balance

7. Getting It Right Can Be Hard: Baseball in 1901 • NL only league in early 1890s • Saw problems if too many teams • Uncompetitive & unprofitable franchises a drain • Zero sum rule: Add city A => Delete city B • 1890s: Cities Grow Rapidly • More cities able to support teams • NL vulnerable to entry • In 1901 AL entered “open” cities

8. Gate Revenue:Earliest Source of Revenue • Revenue from ticket sales • NFL shares the most • Home team keeps 60% • 40% goes league-wide • Originated in early weakness of NFL • One reason why profits so close • Luxury boxes an important exception • Baseball started sharing 34% this year • Roughly 3X what used to share • NBA & NHL share nothing • Making playoffs vital source of revenue • Ottawa’s early exits hurt

9. Television: The Key to the NFL’s Success • Became dominant revenue source in 1960s • Reason why football surpassed baseball • Needed limited antitrust exemption • No NFL on Saturdays in Fall • Doubleheader Game makes a national game • Has 8-year $17.6 billion contract • Without TV: NFL’s revenues comparable to NHL • Baseball Luddites • Reluctant to put on TV – or even radio – at all • Favored local coverage over national

10. TV a Key to Equality • Revenue shared equally • True for all leagues – but pot much larger • KC: A small market for MLB but not NFL • Green Bay would have disappeared • Ottawa faces double whammy • Small network contract for NHL • Small local media market

11. Venue Revenue:Why Are Cowboys so Valuable? • One of most valuable franchises BUT • Smaller media market than Houston • Houston couldn’t keep the Oilers • Shares bulk of media revenues • Gate revenue not huge • Texas Stadium not huge (~66,000) • Shares 40% of home revenue • Key is stadium deal

12. Luxury Boxes • Texas Stadium refurbished in 1989 • Has 370 luxury suites: ~1.5X next highest • “Venue revenues” 6X league average • One reason for moves in NFL • New stadia all have more than older • Naming rights Untapped in Dallas • Reliant pays Houston $300M over 30 years • Is it worth it? • Naming Rights “Curse” • What do CMGI, Enron, PSINet, and United Airlines have in common?

13. Luxury Boxes:An Exception to Sharing • Big Revenue • Rent for 10s or 100s of thousands • Don’t have to share revenue • Count only admission in revenue sharing • Most of revenue counts as concessions • Does not count against “salary caps” • Caps form upper AND lower limits • Players want to see counted

14. Recent NFL Moves • What do they have in common? • All go from larger city to smaller city • NFL no longer has team in LA • Bad for NFL – why? • Why do they move? • Large individual benefits • Biggest source of “private income” • Costs widespread

15. Tragedy of the Commons • Individual benefits – but group hurt • Eventually individual also hurt • But keeps doing it • Name from “Commons” • Common Green in center of town • People put livestock there • Why bother to use own land? • Result: overgrazing • Common Resource • Rivalry but no exclusion • Examples: Overexploitation • Applies to NFL – but NOT baseball

16. Paper Losses and Real Profit • Profits are not the only way to get rich • Bush tax plan in reverse • The O’Malleys & “unprofitable” Dodgers • Operating Profit vs Book Profit • Deduct interest payments • Bias to issue debt & not equity • Much debt from initial purchase (ego premium) • Deduct Depreciation • What is depreciation? • What depreciates?

17. Depreciation, Taxes & Veeck • Bill Veeck – my favorite owner • Innovative marketer • From Eddie Gaedel to exploding scoreboards • Could use his autobiographies as MBA text • Moral figure • Integrated AL • Opposed exploitation of players • Saw unique loophole in tax laws • Team can depreciate players • What is depreciation?

18. An Application of The Veeck Loophole • In 1993 group bought San Antonio Spurs for $75M • Claimed players worth 50% (maximum): $37.5M • Depreciate players over 3.5 years • Straight-line depreciation: deduct ~$10.7 annually • Turns $0.3M profit into $10.4M loss

19. The “Subchapter S” Variant • What is a “Subchapter S” corporation? • Sole owner declares team income as personal income • Can write off $10.4M against other income • If (rich) owner in 40% tax bracket • Reduces taxes by $4.16M