Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Professor William Greene

2. Entertainment and Media: Markets and Economics Sports

3. What is the Market? • Major U.S. Leagues • Hockey • Baseball • Football • Basketball • Major U.S. League: NCAA Basketball and Football • Smaller • Golf • Tennis • NASCAR • Others? • International: World football • At least $200 billion in the US • Subsidiary Industries? • Gambling • Local Affiliated: Externalities

4. Issues • Revenue Models • Team vs. League Profits and Valuation • Competitive Balance • Labor Markets and Contracting: Conflicting Economic Forces • Antitrust and Public Policy • Trends: • Existing Businesses • Markets

5. Revenue “Models” • Spectator Sports vs. Studio Sports • Exhibition (TV and Radio) • The fan in the stands. Yankees. 4.5M seats sold at $50/seat. Gate is shared with the visiting team. • Player payroll = $250M. The fan in the stands is not adequate to determine team profitability • Sources of Revenue for Teams and Leagues • Fans in the stadium • Merchandising, licensing, etc. • TV and Radio, Internet • Revenue sharing and gate sharing as visitors

6. National Basketball Association

7. National Hockey League • 2002-2003 Combined revenue approx. 2.3 billion • Average player salary approx 1.9 million • 75% of gross revenue paid out in salaries • Aggregate loss, 300 million (on revenue of 2.3 billion!) and getting worse • 2004: No season – lockout • 2009: Combined revenue approx… 2.3B. • 2012-2013 half season. Lockout from October to January. Issue: Players’ 57% revenue share.

8. National Football League • 2009 revenue = $6 billion • Long term TV contracts: 8 years, Fox, CBS, NBC, ESPN, total approx 17.6 billion • TV “Pool” approx. $80 million / team • “Gate” distributed 40% to teams, 60% to the league • Extremely successful.

9. Amateurs? The NCAA • Notre Dame Football rights purchased for 7 years by NBC, $45 million • NCAA football, 8 years, $1.725 billion • Final Four (March Madness)  $100 million in local revenues and business. (Claimed)

10. “Value” in a Sports League • Source of value in major sports leagues: • Major sports leagues, 2008 operating income • NHL 140M • NBA 310M • MLB 500M • NFL 790M • British Soccer • Australian Rugby • How is the value captured?

11. What Creates Value in a League? • What Creates Value in a League? • Interdependence within and among teams • Cooperation and competition • Rent creation by star players • Independent ownership and management – the impression of competition • Collaborative business arrangements • (Continuing our minicase… Which among these did the XFL produce?) • If every team maximizes its value, does this maximize the value of the “league?” • Does it matter? • What are the sources of inequality in team values

12. MLB vs. NFL (2009) – Result of Collective Optimization

13. Football Baseball

14. Incentive Incompatibility • Winning is everything (Vince Lombardi) • Winning isn’t everything (Bud Selig) • The New York Yankees player acquisition “model” – what do we learn from this about the distribution of talent? • The leagues seek “competitive balance” • Devices: • Salary caps on players • Salary taxes on large payrolls • Revenue sharing (football, not baseball or hockey) • Promotion and relegation (UK football) • Player draft rankings (US football)

15. Incentive Incompatibility: The NBA Draft • Promotion by giving early draft picks to low ranked teams. • Teams want to lose games this year so they can win games next year (a dynamic programming problem) • NBA wants teams to want to win games • A solution to align incentives?

16. Achieving Competitive Balance • Salary Cap • Revenue Sharing • Promotion and relegation • Ownership structures

17. Competitive Balance? • MLB: 1980 – 2013, 19 different teams won the world series • NFL: 1980 – 2014, 17 different teams won the Lombardy trophy (won the Super Bowl) • NHL: 1980 - 2013, 16 different teams won the Stanley cup • NBA: 1980 - 2013, 8 different teams won the Stanley cup • The result of a business model to achieve competitive balance?

18. Labor Problems • Claims to the rent: Players and Owners • Division of the Rent • Unstable equilibrium – the effect of free agency • Examine salary outcomes • Strikes and lockouts – why?

19. Capturing the Rent: Seeking Equilibrium Player costs as % of total league revenue 2008 52% 60% 50% 46% New York Yankees 1996 payroll, $68M, 2004 payroll, $190M In 2003: NFL, 65% of revenues went to players. 2012 NFL lockout. The players also won 55 percent of national media revenue, 45 percent of all NFL Ventures revenue, and 40 percent of local club revenue In 2003: NHL, 75%, In 2011, NHL players 57%. Led to 2012 lockout. *Player’s strike led to cancellation of the World Series

20. Salary Cap Problems • Kevin Garnett, Minnesota, 1997. $126M, 6 years = (1) All of team TV revenues from NBC or (2) $25/seat of every seat of every game for 6 years or(3) The entire franchise purchase of $88M in 1995 + $38M • 1996 Chicago Bulls team salary cap = $24.3M. Michael Jordan’s salary, $33M • Beckham rule in Major League Soccer • Baseball salaries, average, almost 100 fold increase in 25 years. Several $200M+ deals for MLB players • Five $100M+ quarterback deals in the NFL in 2012-2014.= • What is going on here? • Rise of the role of media • Players asserting bargaining strength and capturing the new surplus

21. Antitrust and Public Policy • Congress’ interest in sports • Cartel Behavior • The antitrust exemption • The intersection of sports and the public interest.

22. Monopsony and the Reserve Clause/Studio System Movie stars, shortstops, late night talk show hosts, perky morning news personalities Marginal expense on players Supply of players Value Marginal value of players Wage The source of the Yankees’ $220M payroll – A-Rod  Jeter, Teixera, etc. Number hired

23. Market Power and Equilibrium • How to maintain the monopsony equilibrium • Collude on salaries – the salary cap • Agree not to hire each others’ players (the Reserve Clause) • Finding balance: free agency • Is this legal? • Baseball – Supreme Court • Other sports – de facto

24. The American Needle Case • American Needle: Hat maker vs. National Football League • Narrow issue: purchasing by the league vs. the individual teams • Broader issue • Economies of a “league” • Anticompetitive mechanism provided by the league – monopsony power

25. Cartels • MLB – The Antitrust Exemption. “Baseball is a game.” Enshrined the reserve clause – a monopsony in the market for players • NFL – 1962 Sports Broadcasting Act. Produced a monopsony for broadcasting services (or a monopoly for the “signal”)

26. American Needle v. NFL: Background In 2000, NFL authorized NFL Properties to solicit bids from companies who wished to obtain an exclusive headwear license Reebok won the bid and won a 10-year exclusive license to make hats and other headwear featuring NFL team logos Because of this exclusive license, NFLP refused to renew American Needle’s (and all other headwear vendors’) licenses

27. American Needle v. NFL: Background American Needle filed a lawsuit against the NFL, NFLP, the 32 NFL teams separately, and Reebok, claiming that such an exclusive license violated Section 1 of the Sherman Antitrust Act Section 1 prohibits any “contract, combination…or conspiracy, in restraint of trade.” NFL and other respondents argued that the NFL was immune from antitrust liability because it is a “single entity” not a cartel.

28. American Needle v. NFL: Single Entity Argument Economists argue that a group of competitors (whether football teams or tennis players) can add value if they collaborate to adopt standards of play Standardization function of NFL adds to value of products of 32 member clubs in same way that other standards organizations add to value of products that make use of them But it would seem foolish to expose NFL team members to antitrust liability for meeting to develop playing rules or to select the date and location of the Super Bowl Many issues argued in favor of the NFL. Others suggest the cartel can stifle competition. (Hence the appearance before the Supreme Court.) SCOTUS rejected the single entity argument for the commodity markets – American Needle won the right to a trial on the case. http://www.footballoutsiders.com/ramblings/2010/breaking-down-american-needle-case

29. Entertainment and Media: Markets and Economics End Class 5 – Part 4