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Chapter 3 The Market for Sports Broadcast Rights

Overview. The functions of ads and the market for sports broadcast rights.The complicated nature of the value of ads to advertisers.The big picture" look at the value of sports programming to media providers.The size of media revenues and their variation in a given league and across leagues.The

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Chapter 3 The Market for Sports Broadcast Rights

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    1. Chapter 3 The Market for Sports Broadcast Rights To Accompany Sports Economics 2ED Rodney Fort (PrenticeHall, 2006)

    2. Overview The functions of ads and the market for sports broadcast rights. The complicated nature of the value of ads to advertisers. The “big picture” look at the value of sports programming to media providers. The size of media revenues and their variation in a given league and across leagues. The role of commercialization in pro sports.

    3. Introduction “The money is so big, given the current ratings, that the (proposed) increase is amazing. But there are always two decisions in something like this. One is purely economical. The other is strategic: What does the other guy lose if we take something away from them?” - A Senior Vice President at Turner Sports on their next sports rights consideration.

    4. Ads and Preference Formation Two preference formation functions of ads: Start up consumption (controversial) Brand choice (well-established) *Identify target demographic and reach it efficiently. Sports broadcasts provide a nearly certain target demographic very consistently.

    5. Broadcast Rights Market Figure 3-1: Broadcast Rights Market

    6. Consider: Where does the $ Go? Compare and contrast: The good old days (three networks). The rise of cable through the 1980s. The modern market for media providers. The level of competition is so keen in the media provider market that the main flow of value is to leagues and conferences. Direct context: NFL and NBC/CBS. Indirect context: FOX v. TimeWarner Cable. College direct context: The BigTen Network v. Comcast

    7. Sports Leagues & Contracts All owners have exclusive rights to their home games. They agree to let leagues sell some or all of them. NFL: All games are sold to media providers by the league itself. Owners do not reserve any home games for individual sale. MLB, NBA, NHL: A specific number of games are sold to media providers by the league. Those not chosen for “national” broadcast can be sold by individual owners. *There are both national and local contracts in all leagues except the NFL.

    8. Media Providers & Advertising Remember: Advertisers want to “reach” their “target demographic” group. How many ads? And how much to spend? Marginal revenue product of ads: Direct ad revenue. Media provider’s own advertisements. Sequencing. Strategic value (we’ll investigate in detail).

    9. Media Provider Ownership Why own a team rather than just buy the broadcast rights? Possible reasons: Avoiding high price of broadcast rights. Gaining production efficiency. Securing possible tax advantages. Changing the competitive environment. Having fun and making money! But there are arguments that none of these really is substantial. Remains an open and interesting question.

    10. Strategy and Ad MRP Strategically, one firm’s ads have an impact on the marginal revenue product of the other: MRP1(A1,A2,X1)=MP1 (A1,A2) x MR1 (X1) A1=Firm 1 advertising level. A2=Firm 2 advertising level. X1 =Firm 1 output level. Since A1 offsets A2, it’s possible for both firms to advertise more and get no additional marginal product!

    11. A Possible Ad Outcome The equilibrium here is that both firms advertise, no net gain in sales for either, but spending increases anyway! Note: This depends on the payoffs and costs!

    12. Sponsorship Just another form of advertising attached to some teams, events, and facilities. Effective in reaching general demographic groups. For facilities, nearly $9.5 million per year in some cases.

    13. Big Rights $ and Impacts How Much Money (Table 3-9)? Recent contracts:

    14. Another Measure of Importance The ratio of all media revenues to player costs gives an idea of their importance to team owners. On average, all media revenues cover: 79% of payroll for NBA owners. 29% of payroll for NHL owners. The last time we had data on all player costs: MLB 26/30 covered ˝ or better (high 90% in Phil and Flor). NFL All but 2 covered all of their player costs! (Clev covered 1.6 times player costs!)

    15. Big Rights $ Problems? 1. Media revenue disparity reveals one source of the competitive on-field advantage to larger revenue market owners. 2. Fan perceptions: “It’s not about the game.” 3. Protecting “big money” players from the consequences of socially unacceptable behavior. 4. Costs of player pursuit of competitive advantage: Performance enhancing drugs.

    16. Summary The functions of ads and the market for sports broadcast rights. The complicated nature of the value of ads to advertisers. The “big picture” look at the value of sports programming to media providers. The size of media revenues and their variation in a given league and across leagues. The role of commercialization in pro sports.

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