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The Economics of Public Goods and Revenue Sharing in Major League Sports

This piece explores the intricate relationship between public goods, sports franchises, and revenue-sharing models in Major League Baseball (MLB) and the National Football League (NFL). It highlights how local TV deals, like those of the New York Yankees and Boston Red Sox, have transformed financial competitiveness by enabling teams to share revenue effectively. Additionally, it addresses the challenges of financing public goods, such as sports games on cable TV, discussing concepts like the free rider problem and public-private partnerships in the context of sports economics.

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The Economics of Public Goods and Revenue Sharing in Major League Sports

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  1. February 26, 2014

  2. Prices of Other Goods • Substitute • Used in place of another product or service • Red Wings & Tigers games • Compliment • Used with another product or service • Football helmets & shoulder pads • Pricing implications?

  3. Short run • Costs are fixed • NFL season • Ticket prices • Salary cap • Coaches salaries • Long run • Costs are variable

  4. Revenue Sharing • Each MLB team will receive at least $45 million in shared TV revenue this year • Teams share 34% of their local TV money • For every million dollars a team makes from its local TV deal, the other 29 teams make $11,133

  5. TV and MLB

  6. Current Trend • Local TV money is changing the landscape • Allowing more teams to be financially competitive • Examples • Detroit Tigers • $400million over 10 years • Fox Sports Detroit • San Diego Padres • $75 million per year for 20 years, up from $14 million per year

  7. As a Points of Reference • Milwaukee Brewers • $600,000 for local TV rights in 1970 • Texas Rangers • Bankrupt in 2010 • Player payroll of $125 million in 2012 • Received $160 million upfront and an equity stake in Fox Sports Southwest “Harness the opportunity the market provides”

  8. Teams that Own Networks • New York Yankees • 30% of YES • Earns in excess of $450 million/year • Boston Red Sox • 80% of New England Sports Network

  9. Revenue Sharing and TV $$$ • Major league franchises received $28.4 billion from cable TV networks • Total market capitalization of Time Warner is $27.9 billion • Net worth of Michael Bloomberg (12th richest man in the world) is $27 billion • Where does this $$$ come from? • Your cable bill

  10. 2014 Customer Rates(Per Month) • ESPN  $5.40 • Fox Sports 1  $0.90 • TNT & TBS  $1.80

  11. Regional Networks(Per Month Fees Per Subscriber) • New York Yankees (YES Network)  $3 • New York Mets (SportsNet NY)  $2.55 • Boston red Sox (New England Sports Net)  $3.50 • Baltimore Orioles & Washington Nationals  split $2.28

  12. Public Finance • Teams and networks get paid whether or not anyone watches these games • People who get cable to watch the Oprah & Soap networks and never watch a game subsidize MLB through their monthly cable bills

  13. Are “sports games” on cable TV a public good? • What is “good” to one person may be viewed as bad as others

  14. Noteworthy Aspects of Public Goods • Even though everyone consumes the same quantity of the good, it need not be valued equally by all • Classification as a public good is not absolute; it depends on market conditions and the state of technology • impure public good: some rivalry and/or excludable to some extent • Example: TV Broadcasts, Movies, City Streets, Seashore, Restaurant Ratings

  15. Private goods are not always provided only by the private sector • publicly provided private goods (rival & excludable) Ex: Medical care • (Public provision of a good does not necessarily mean that it is also produced by the public sector, nor that it is a public good) • Example: Garbage Collection; park maintenance • Other examples of goods in which the government hires private companies to do work? • Other reasons why government might offer good or service such as education? Commodity egalitarianism – notion that some commodities ought to be made available to everyone

  16. Free Rider Problem • Attempting to avoid bearing the cost of financing a public good. • Results from the non-exclusion aspect of public good • Failing to reveal true preferences. • The larger the group • the more severe is the free rider problem • more likely a public good will not be financed by voluntary contributions. • Choosing not to contribute is rational behavior.

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