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Volume 3, Chapter 4 Revenue sharing in professional sports leagues

Volume 3, Chapter 4 Revenue sharing in professional sports leagues. Revenue sharing. Allow more teams to be competitive Preserve uncertainty of outcome of games Maximize spectator interest for the league as a whole

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Volume 3, Chapter 4 Revenue sharing in professional sports leagues

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  1. Volume 3, Chapter 4Revenue sharing in professional sports leagues

  2. Revenue sharing • Allow more teams to be competitive • Preserve uncertainty of outcome of games • Maximize spectator interest for the league as a whole • Individual team owners surrender a certain degree of autonomy in order to preserve interest in and the profitability of the league

  3. Revenue sharing • NFL most aggressive revenue-sharing system • Historical necessity, foresight and leadership of Pete Rozelle • NHL least amount of revenue sharing • Largest number of struggling franchises • Important revenue sharing problems in professional leagues • How can revenues split between rich and poor franchises without destroying incentives for the rich to keep generating prolific revenues • How can revenues split between owners who focus on profit and others focus on winning

  4. Administration of NFL • Alvin ‘Pete’ Rozelle as League Commissioner 1960-1989 • Revenue-sharing practices that allow NFL to reach unprecedented levels of popularity • Oversee league operations and temper any disputes among owners • Each team becomes member of League Executive Committee • Agree NFL constitution and By-laws or policy • Team is still free to negotiate its own stadium lease terms, select its form of business organization and staff, negotiate salary, set its own ticket prices

  5. NFL revenue sharing • TV contracts all negotiated and shared at the league level • No local TV revenues • Regardless how a franchise is run, TV money gives all NFL teams a solid revenue base • Gate revenue: 30% home team, 30% visiting team, 40% common pool to be shared equally among all teams • League-wide licensing, sponsorships shared equally • League assists teams in building/renovating stadiums • 2011 CBA: Clubs receive credit for actual stadium investment and up to 1.5 percent of revenue each year

  6. Owner selection • Rozelle proposed an ownership policy • More homogenous group of owners, less likelihood of conflict and opportunistic behavior • 4 basic rules • No corporate ownership, No public ownership: large number of decision maker • At least one person must own at least majority of team • No cross-ownership in any other sport (majority owner) • E. Stanley Kroenke purchased Rams in 2010, previous minority owner of Rams, turn over control of the Denver Nuggets and Colorado Avalanche to his son • Hope to maintain owners as group of hobbyists who are interested in sport, not profitability

  7. MLB revenue sharing, 1996-2001 • Old system: share mainly gate receipt • In 1995, visiting teams 20% gate receipt in AL, 50 cents/ticket (~4%) in NL • Also very modest sharing of local cable TV contracts • Discussed and accepted in collective bargaining agreements • CBA 1996-2001 • First revenue sharing system in MLB history, phased in between 1996-2001 • Taxed 20% net local revenue (all local revenue minus stadium expenses in 2001 • 75% distributed equally, 25% to clubs with below-average team revenue in proportion to how far below

  8. MLB revenue sharing, 1996-2001 • Exacerbated competitive imbalance • Low payroll to maximize profit • Owners pocket large share of revenue sharing money, instead of using to improve team quality • Reward owners for doing poorly • Introduction of luxury tax on high team payrolls

  9. MLB revenue sharing, 2002-2006 • Tax 34% net local revenue • Plus additional money from MLB central fund, 43.3M in 2003, 57.7M in 2004, 72.7M in 05-06 • Luxury tax: threshold increase every year • Payments: NYY 11.8M in 03, 30M in 04, 34.1M in 05. BOS 3.1M in 04, 4.2M in 05, Angels 0.9M in 04 • Minimum payroll rejected

  10. MLB revenue sharing, 2007-2011 • Each team 34% net local revenues to a pool (straight pool) • ~70% of total shared revenues • National revenues (media, licensing, sponsorship…) (split pool) • Taxes levied on teams above median in revenue and distributed to teams below in proportion to how far below the median • Luxury tax: threshold increase every year • $148 M for 2007, $155 M for 2008, $162 M in 2009, $170 M in 2010 and $178 M in 2011 • Tax rate: 22.5% first time, 30% 2nd time, 40% 3rd time

  11. NBA revenue sharing • Equal share of national TV and merchandise revenues • Gate revenues not shared

  12. NHL revenue sharing • Equal share of national TV and merchandise revenues • Gate revenues not shared • Recipients of Player Compensation Cost Redistribution Fund in CBA 2005(06)-2010(11) • Weak Canadian dollar, pay player in US dollar, hurt teams in Canada • bottom half (bottom 15) in League revenues • operate in markets with a Demographic Market Area of ≦2.5 million TV households. • team's revenue must increase faster than the league average • certain attendance levels must be met

  13. Sportsman effect • An owner sacrifices financial value by expanding the talent of the club beyond the team’s profit-maximizing level • Significant problems for other teams when overall salaries escalate • Some owners overpay to assemble winning teams • Team owners likely fall somewhere on a continuum of profit maximizing to utility maximizing • Effect of competitive balance after revenue sharing • Profit-maximizing weaker revenue franchise  tend to keep payroll low  imbalance • utility-maximizing weaker revenue franchise  improve team quality  balance

  14. Large-market problem • Historically, large-market teams win more often than smaller-market teams • A win more valuable to large-market team • Results: It hires more talent and wins more • Competitive imbalance is a fact of life as long as there is revenue imbalance • large markets still attract star players, even under salary cap • More chances for endorsements and other off-field activities • Players want to play for winning teams

  15. Economic logic underlying revenue sharing • Taxing on fixed costs associated with running a franchise incompatible • E.g. minimum payroll • Equally split local revenue would hurt long-run impacts on these revenue • Less incentive for rich teams • Taxing on quality reduce incentive to produce quality • Punish owners that try to give fans a better product • Reward owners for having bad teams with low payroll

  16. Economically justified taxes • Requirements for good tax system • Some revenue sharing necessary, tax must fall more heavily on profitable franchises • Two types of taxes necessary: one on seeking victory, one on seeking profit • Avoid taxing revenues, tax costs where possible. Taxes on franchise’s total costs and on win-loss record • Tax should allow markets to operate without introducing additional distortions. When players’ salaries are determined in competitive market, no need to separately tax this component of costs

  17. Economically justified taxes • Taxing on revenue vs cost • Taxing on revenue ultimately depress league’s revenues and both owners and players suffer in the long run. • Taxing costs strengthens owner’s existing desire to control costs and increase profitability. Owners will be better off even if players are not • What costs should be taxed • Should only on incremental costs • Provide incentive to keep expenditure below certain level • Luxury tax in MLB

  18. Economically justified taxes • Tax rate • 1. How much does it cost to win one more game? • 2. How much revenue does a franchise lose when team lose one more game. • Tax rate: (revenue sacrificed with one more loss)/(cost of winning one more game). How much one owner’s incremental expenditures cost another in lost revenues • Owners can still attempt to buy championships, but only to the extent that they compensate other owners for costs of losing

  19. Economically justified taxes • Owners who focus only on profits also impose costs on other owners • Little incentive to field a competitive team • Tax less-successful franchises • Give owners who focus only on profits greater incentive to win • Taxing losses likely stimulate more interest in winning and increase league profitablity

  20. Distribution of taxed money • Most leagues face problem of unequal distribution of profits, not insufficient profits • Return taxes proportionately to all franchises with revenues less than league average • Help them survive, but not guarantee profits • The taxes is to subsidize teams that are well run and yet still have difficulty making ends meet • Reward franchises which‘doing things right’, or fielding competitive teams at relatively low cost • Provide greater incentive for owners to financially prudent and exercise appropriate oversight over fielding competitive teams

  21. Problems in league administration • Independent actions of owners may result in decrease in welfare of league as a whole • Although initiated for increased gain to their franchise • Teams seek lucrative marketing agreements may eventually use the increased revenue to gain competitive advantage over others • Undermine interest in league product as a whole

  22. Soccer: alternative business model • Manchester United, Real Madrid, AC Milan have operating income and market values similar to Washington Redskins and NY Yankees • 900-1300 M in market value • Sales of brand-name soccer merchandise > 3 B • NFL 2.5B, MLB 2.3B, NASCAR 1.2B, NBA 1B, NHL 900M, in 2001 • Value of FC Porto of Portugal, 25th valuable soccer team in world: market value 106 M • Similar to least valuable NHL teams • 25 most valuable soccer teams • 9 in England, 4 in Germany, 4 in Italy, 3 in Spain • 0 in Latin America • European teams have almost all top players from world

  23. Profit maximization in soccer • Governments and broader social forces have traditionally limited profit seeking by team owners in Europe • Slow to accept the power and money from TV • Strict limitations on teams’ ability to loan • Growth of private TV stations, particularly on cable, TV revenue play increasingly important role in European soccer teams • >50% revenue for French teams in Ligue 1 • Similar for leagues in England, Italy, Germany, Spain • Many cable companies to invest in soccer teams

  24. Promotion and relegation • Premier League teams do not share revenue with teams in other divisions • Promotion to Premier League produce additional 30 M revenue, ~18 M from TV revenue • Italy’s Serie A teams do not share broadcast revenue with each other • Juventus, AC Milan revenue 10X of other teams • Many teams keep financially afloat by developing talented young players and then selling their rights to wealthier teams • More acceptable in open system than in fixed/closed because teams face natural limit to sales they are willing to make

  25. Champions League • Champions League (European Cup) : playoff among top teams in each European country • held by Union of European Football Associations (UEFA) • 32 teams in 8 groups, 22 automatic qualified • http://en.wikipedia.org/wiki/UEFA_Champions_League • league coefficient: rank the leagues of Europe • determine the number of clubs from a league that will participate in CL • http://en.wikipedia.org/wiki/UEFA_coefficients#League_coefficient • sponsored by a group of multinational corporations, in contrast to the single main sponsor of the Barclays Premier League, the Ligue 1 Orange or Serie A TIM (Telecom Italia Mobile)

  26. Champions League • UEFA awards €3 million to each team that qualifies for the UEFA Champions League, plus €2.4 million for participating in the Group stage. A Group stage win is worth €600,000 and a draw is worth €300,000. • In addition, UEFA pays each quarter finalist €2.5 million, €3 million for each semi-finalist, €4 million for the runners-up and €7 million for the winners • Additional high revenue for teams made to and became successful in CL • A large part of the distributed revenue from the UEFA Champions League is linked to the "market pool", the distribution of which is determined by the value of the television market in each country

  27. Financial danger of open system • Crisis facing European soccer teams comes at time when revenue have never been higher • Revenue ↑by > 200% since mid-1990s • cost (particularly payroll cost) ↑by > 450% • Strong incentive for teams on border of promotion/relegation to invest heavily in players • If fail, teams with bloated payroll and diminished revenues • Elite teams also face pressure to ensure inclusion in Champions League • If fail, expected high revenue did not fulfill

  28. World Baseball Classic • Japan has requested that sponsorship rights and the rights to merchandise products related to the Japanese team be transferred to Nippon Professional Baseball (NPB) • MLB and its players’ association each received 33% of the overall turnover from the 2009 WBC while Japan only received 13% http://www.sportbusiness.com/news/184416/world-baseball-classic-door-left-ajar-to-japan

  29. Support grassroots • Lega Serie A (top soccer league in Italy) to pay 6% income to Serie B and C (Lega Pro), 4% income to fund for grassroots sporting activity • 2008 ‘Melandri law’ : imposed the collective selling of media rights on professional sport. http://www.tvsportsmarkets.com/news/2011/oct/tribunal-upholds-redistribution-model-italian-football

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