Business of Sport

1. Business of Sport

2. Who’s Who of Sport Leagues Commissioner – Players Union – Owners – Players Agent –

3. Terms Sport Franchise – professional teams that control licenses, concessions, broadcast rights, stadium contracts, etc. Broadcasting Rights – agreement between an event and the media sponsor to host an event Collective Bargaining Agreement (CBA) – a contract agreed upon by both the owners and players association that covers things such as salary structure, rules, trading policies, free agency rules, etc. Payroll – money spent of salaries, signing bonuses, earned bonuses and contract buyouts Salary Cap – Soft Cap – Hard Cap – Luxury Tax – Revenue – money brought into a team from ticket sales, beverage sales, concessions, apparel, tv contracts, parking, etc. Revenue Sharing –

4. Major League Baseball Major League Baseball operates with a soft cap system. Each team is required to spend less than $148 million (2007) on payroll. Those teams that go over the cap limit must pay a luxury tax on the overage following the formula: 1st year – 22.5% 2nd year – 30% 3rd year – 40% The money collected from these taxes by the league are then dispersed throughout the league to the teams that did not go over the tax base on need to keep the franchise afloat. Payroll consists of salaries, signing bonuses to new players, earned bonuses in contracts and buyouts of contracts. In 2006 only 3 teams owed a luxury tax (New York $34.1 million, Boston $41.1 million, Anaheim $900 000). Teams that also generate massive revenues are required to share revenue with teams that do not have the revenue base to keep all markets afloat. Therefore, a team like the yankees will pay both Luxury Tax and Revenue Sharing fees to be dispersed throughout the league.

5. New York Yankees 2004 NY Yankee Financial Report Revenue- $ 315 million Payroll - $ 187.9 million (salary) $ 203.9 million (with bonuses) Luxury Tax $ 25 million (due Jan 31, 2005) Revenue Sh $ 60 million Profit / Loss $ (2010 – $206.7 Million without bonues - Rodriguez $33, Sabathia $24, Jeter $22)

6. Major League Baseball Salary Arbitration – If a player or team believes the contract is no longer of value an arbitrator can be elected to settle their differences. Since 1974 the players has won 199 times, the teams have won 269 times and 1400 cases were solved before a hearing date. Free Agency – A player who has been in the league for 6+ years and is not under contract for the next season may seek employment in the free market with other teams without the former team getting compensation for losing them. This is a huge bargaining tool for players to resign if they are having decent final contract years. 2006 Minimum MLB Salary = $380 000 Average MLB Salary = $ 2.7 million 24 Players per roster (September can expand to 40)

7. MLB The MLB system allows teams to spend at will. Most teams do not have the luxury to do so as their revenue does not allow them to. With large market franchise (New York) the revenue from ticket sales, merchandise and tv contracts are huge – hence the ability to spend money. However the large sums of money they disperse back to the league in the form of revenue sharing and luxury taxes are dispersed to smaller market franchises to keep them solvent and keep the league in many markets (cities).

8. Competitive Balance If the league had a flat playing field every team would be at the median salary. This does not occur in baseball however the system is designed for smaller market teams to receive larger paybacks from revenue sharing to rebound. For example, in 2005 the Tigers (25 million), Twins (22 million), Athletics (22 million) and Padres (6 million) all made huge changes with their new found revenue. The impact of big dollars is designed to add parity to baseball. Many teams will trade stars in an effort to cut payroll at the trade deadline so that they can open up possibilities the next season.

9. MLB Questions • How can the Yankees continue to pay such salaries and still continue to have the revenue to pay the huge taxes? • Explain the benefits of the soft cap system. How would baseball differ if the cap was a hard cap system? • Do you think this system is fair? Why?

10. NHL Hockey The NHL 2004-05 season was the first in sports history to be cancelled altogether because of a labour dispute. No deal was reached between the league Team Owners (represented by commissioner Gary Bettman) and the Players Union (represented by lawyer Bob Goodenow). The league as it existed with no salary cap at all was losing millions of dollars. The disagreement was over how much money was being lost and how to compensate. The owners hired the Levit firm to audit the league revenues to find out losses totalled $500 million over 2 years. Forbes magazine parted with the players finding losses were merely $200 million. League revenues were still growing at 3% annually but salaries were rising at a rate of 12% annually. To put things into perspective, player salaries had tripled in the past decade (avg. $2 million/year) with over 70% of revenues going to player salaries. Unfortunately TV ratings were so low the broadcasting rates were 20 times lower than the NFL.

11. NHL Strike Issues • Salary Rollback Union – League –

12. NHL Strike Issues • Salary Restraints Union – League –

13. NHL Strike Issues • Luxury Tax Union – League –

14. NHL Strike Issues • Salary Cap Union – League –

15. NHL Strike Resolution The 2005-06 season salary cap was set at $39 million with a floor cap also imposed at $21.5 million. This was based on 54% of the projected $1.8 billion revenue. The salary cap is designed to increase or decrease is subsequent years based on revenue (it has risen since). Player salaries were rolled back 24% across the board. No player can make greater than 20% of a teams payroll. In 2005 the highest salary was set at $7.8 million (Jagr exceeded the limit for one year as his salary was guaranteed under the old contract – he was grandfathered). A portion of all player salaries are placed in an escrow fund until it is determined whether total salaries exceeded 54% of league revenues for the year. If they do exceed 54%, players will be forced to forfeit a percentage back to the league to make up the difference. Entry level salaries were capped at $850 000, but with bonuses a rookie could make $1.7 million (even more with exceptional performance bonuses). Players with 7 years experience qualified for unrestricted free agency, meaning by the age of 25 Sidney Crosbey can shop around for any team he wishes. In the past is was the age of 31 before players could leave teams unconditionally. Under previous agreements virtually no teams tried to sign restricted free agents as the compensation was too steep. Now players are free to move in their prime playing years. Salary arbitration is now a two way street as teams will be able to take players to salary arbitration, arguing for less rather than more.

16. Trouble Ahead • What is the current NHL Salary Cap (floor and ceiling)? What percentage of league revenues is guaranteed to players and owners? • What factors in the market play a role in NHL revenues? • Why is the NHL called a ‘box office industry? Connect box office revenues to team payroll to show how the seven struggling teams got into this position. • How has the cap floor caused problems for some teams? • What are the critical sponsorship categories in sport? Which of these categories is struggling in today’s market? • If both Gary Bettman and the NHLPA are both taking of a positive start to the season, why are owners leary of the future?