Entertainment and Media: Markets and Economics

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

2. Entertainment and Media: Markets and Economics Fall 2004 Sports Professor W. Greene

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

4. Scale • Total Industry Size • What are the components? • How large? • Subsidiary Industries? • Gambling • Local Affiliated: Externalities • At least $100 billion in the US

5. Agenda – Sports Economics • Sports Leagues and Business Models • What is a “league?” • Valuation • The value of a league • The values of the teams in a league • Conflicting Economic Forces in Sports Leagues

6. Issues • Revenue Models • Team vs. League Profits and Valuation • Competitive Balance • Labor Markets and Contracting • Antitrust and Public Policy • Trends: • Existing Businesses • Markets • “Science” (for the economic hobbyist) • SaberMetrics • Hot hands • Basketball • Tennis

7. Revenue “Models” • Spectator Sports vs. Studio Sports • Exhibition (TV and Radio) • The fan in the stands. [Yankees. 2.5M seats sold at $30/seat. Player payroll = $190M. The fan in the stands is irrelevant to team profitability • Sources of Revenue for Teams and Leagues • Fans • Merchandising, licensing, etc. • TV and Radio • Revenue sharing

8. Major League Baseball • Gross Revenue $3 billion (2000) • Local Revenues 2.2 (Montreal = .012, New York Yankees, .176) • National TV Revenue 0.8 • Shared Revenue 0.013 • The Blue Ribbon Commission (2000) • Overall revenue • Distribution • Long term survival of the nation’s pastime

9. National Basketball Association • Total, approx 3.5 billion • Fans in the seats • TV contracts • Player salaries: Approx 60% and rising

10. National Hockey League • 2002-2003 Combined revenue approx. 2 billion • Average player salary approx 1.9 million • Aggregate loss, 300 million (on revenue of 2 billion!) and getting worse

11. National Football League • 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. Why?

12. 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

13. Other Sports Franchises • Arena Football • NASCAR • Tennis and Golf • Any others? • How do these differ from the businesses already considered?

14. Those TV Contracts • Do the networks “lose” money on huge football contracts? The Miami Fish Story • Direct benefits and costs • Indirect benefits – promoting other products • The winner’s curse. In 1994, Fox bid $600m more than the next highest bid for NFC games

15. What Creates Value in a League? • Interdependence within and among teams • Cooperation and competition • Rent creation by star players • Independent ownership and management • Collaborative business arrangements • Competitive processes • Competitive balance

16. The Value of the Franchise (Team) • How computed, in principle • If every team maximizes its value, does this maximize the value of the “league?” • Does it matter? • Sources of inequality in team values

17. The Value of the Hockey Franchise Team/Principal Owner Value ($M) Income ($M) New York Rangers/Cablevision Systems $ 272.4 -6.92 Dallas Stars/Thomas Hicks 270.7 5.63 Toronto Maple Leafs/Larry Tanenbaum 263.9 13.84 Philadelphia Flyers/Comcast-Spectacor 252 3.55 Detroit Red Wings/Michael Ilitch 245 -3.7

18. The Value of the Football Team The reason NFL franchises are valued higher than other sports is because they have the highest national television deal, which brings in about $77 million annually per team.  Team Values 1.Washington Redskins $952 (mil) 2. Dallas Cowboys $851 3. Houston Texans $791 4. New England Patriots $756 5. Cleveland Browns $695 6. Denver Broncos $683 7. Tampa Bay Buccaneers $671 8. Baltimore Ravens $649 9. Carolina Panthers $642 10.Miami Dolphins $683

19. Basketball

20. Baseball

21. Incentive Incompatibility • Winning is everything (Vince Lombardi) • Winning isn’t everything (Bud Selig) • The New York Yankees player acquisition “model” • The leagues seek “competitive balance” • Devices: • Salary caps on players • Revenue sharing (football, not baseball or hockey) • Promotion and relegation (UK football) • Player draft rankings (US football)

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

23. Competitive Balance? • MLB: 1984 – 2003, 13 different teams won the world series • NFL: 1984 – 2003, 11 different teams won the Lombardy trophy • NHL: 1984-2003, 10 different teams won the Stanley cup • Is there competitive balance?

24. Money Talks and Walks • Since 1995, when baseball began divisional playoffs, 44 of the 56 teams to make the playoffs ranked in the top 10 in player salary. In three of those seven years, the team with the highest payroll achieved the highest goal -- winning the World Series. Not once in those years has a team ranked less than No. 10 in payroll even made it to the World Series.

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

26. Capturing the Rent Player costs a % of total league revenue New York Yankees 1996 payroll, $68M, 2004 payroll, $190M In 2003: NHL, 75%, NFL, 65% of revenues went to players. *Player’s strike led to cancellation of the World Series

27. Monopsony 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’ $190M payroll – A-Rod  Jeter, Giambi, etc. Number hired

28. 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

29. 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 (3) The entire franchise purchase of $88M in 1995 + $38M • 1996 Chicago Bulls team salary cap = $24.3M. Michael Jordan’s salary, $33M • Baseball salaries, average, almost 100 fold increase in 25 years. • What is going on here?

30. ? • If all teams are “losing” money, why are the teams so valuable?

31. Antitrust and Public Policy • Cartel Behavior • The antitrust exemption • The intersection of sports and the public interest.

32. Trends in Sports • Wither America’s Pastime • Trends in other spectator sports

33. “Science” – The Hot Hand • SaberMetrics – The Bill James Story • SaberMetrics • Moneyball – Billy Beane and The Oakland Athletics • The Boston Red Sox • Why do this? • Hot hands: Is there autocorrelation in the points scored? • Basketball • Tennis