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Volume 1, Chapter 2 The profitability of sports teams: international perspectives

Volume 1, Chapter 2 The profitability of sports teams: international perspectives. Profits in north America vs Europe. Teams in North America do NOT want to appear too profitable Antitrust suits Teams in Europe fortunate if they make any profit

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Volume 1, Chapter 2 The profitability of sports teams: international perspectives

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  1. Volume 1, Chapter 2The profitability of sports teams:international perspectives

  2. Profits in north America vs Europe • Teams in North America do NOT want to appear too profitable • Antitrust suits • Teams in Europe fortunate if they make any profit • In English Premier League 1993-2004, correlation coefficients • Team salary and team revenues: 0.927 • Team revenues and team operating profits: 0.347 • Increase in team revenues go to team salary

  3. Profits in north America vs Europe • Difference in club objectives • NA: toward profits • Europe: not-for-profit organizations • Different incentives • NA: closed league structure • Europe: promotion/relegation • Regulation of player labor markets • NA: close regulation • Europe: lack of control • Support from local authorities • NA: subsidize sports stadia • Europe: subsidize team’s wage bill, e.g. Real Madrid and Barcelona in Spain

  4. Official numbers less than estimated by Forbes: 1. Cross-subsidizing other parts of their groups 2. Transferring costs from parent companies to teams

  5. Financial crisis in English soccer • Premier League: 20 teams • 72 in other 3 divisions (English Football League) • Widening disparities of revenue growth by division • Tendency for revenue growth • Growth of wage bill • Lack of profitability in lower divisions • Very few clubs folded due to financial deficits (last in 1962) • Teams in debt were sold to new owners at low prices but agree to take on the debt

  6. Financial crisis in European Football • Football began economic boom in 1990s • 4-year TV contract to BskyB L647M in 1997, L1.6B to BskyB in 2002 by Premier League • Only very few teams benefit • Many teams in financial crisis • ITV Digital TV signed L315M with English Football League (bottom 3 divisions, 72 teams) in 2000 • Pay-per-view in Great Britain • ITV bankrupt in 2002, court ruled ITV not responsible for remaining ~L200M • TV ratings remarkably low (few thousands viewers)

  7. Financial crisis in English soccer • Largest debts for teams in Championship League • The tier just below Premier League, average attendance ~17000 in 2010-11 • Clubs already spent the money on debts, buying new players, ground improvement • Compete for players of moderate quality • Teams aim for PL • Higher revenue from TV, gates, sponsorship, merchandise,… • Parachute payments: demoted teams receive a share of PL broadcast income for 2 seasons following relegation • Market size fundamental determinant of league standings • Despite promotion/relegation

  8. Lessons learned • Player contracts shorter in length, more performance based • Automatically lower salary after relegation • Points deduction to deter clubs from entering administration (bankrupt)

  9. Revenue in Top Division of European Soccer Teams 2011/12 Deloitte Annual Review of Football Finance, 2013

  10. Total Wages and Ratio to Revenue in Top Division Deloitte Annual Review of Football Finance, 2013

  11. Average Match Attendance in Top Division Deloitte Annual Review of Football Finance, 2013

  12. Attendance and Sources of Revenue in Premier League Deloitte Annual Review of Football Finance, 2013

  13. TV Revenue Sharing in European Soccer • Premier League only shared within the league • 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

  14. Financial Danger of Open System • 2007/08- 2011/12 only the Bundesliga (€190m) and Premier League (€121m) were the only ‘big five’ leagues to generate an operating profit • before player trading and finance costs

  15. Large Differences in Revenue and Market Values in European Soccer • 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

  16. Market for broadcast rightsNorth America vs Europe • NA: networks + cable + satellite + internet… • Europe: a single company by sealed-bid auction • BSkyB (Sky Sports) in England • Now BSkyB + ESPN • BSkyB: use sports broadcasting to increase customer subscription package • Several European broadcasters merged or bankrupt  greater concentration of sports provision among fewer remaining companies • Italian Serie A and Serie B to create league channel in 2013, more competition for broadcaster

  17. Market for broadcast rightsNorth America vs Europe • TV revenues not equally shared in Europe • In PL: equally fixed share, fee for each live broadcast, prize money based on standings • Big clubs (MU, Chelsea…) receive much greater broadcast revenues than smaller clubs • Individual vs collective selling of broadcasting rights, arguments: • Individual would raise profits for individual clubs because more games should be shown • Collective would raise total league profits and effective distribution • 20% increase in broadcasting fees in 2010-11 in Italian Serie A after collective selling

  18. Market for playersNorth America vs Europe • NA: player unions, but more regulated • Entry draft, restrictions on FA • Europe: player unions may only influence pension plans and insurance for injury • No entry draft, FA for all players after contract • Trade players for cash, rather than for players/draft picks • Incentives to overpay players in promotion/relegation system • Playoff systems that give mid-table teams chance of promotion • 4th place in PL qualify for UEFA Champion’s League

  19. Market for playersNorth America vs Europe • Teams spend their surpluses from ordinary players on superstars who extract all available rents • Big clubs, the only ones who can afford superstars, make less profits by high payments to superstarts • Hidden monopsony rent, suited for Barcelona, Real Madrid, Inter Milan…

  20. Conclusions • Team profits • NA: team revenues convert into team profitability • Europe: this connection not exist • Revenue opportunities, especially concessions, merchandise, sponsorship • Not maximized in Europe • Greater commercial expertise gradually being introduced into Europe • Costs • High growth of player salaries in Europe • Leagues should reinforce their attempts to construct offsetting incentives • Penalties for overspending? Salary cap?

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