Financial Structure of
Professional Sports
Leagues
Team Sports
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Professional team sports are finding it
increasingly difficult to achieve financial
success and turn a profit, due in large part to
inflated athlete salaries.
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FC Barcelona - $217 million, $8.7 million
New York Yankees $196 million, $6.2 million
Dallas Mavericks - $ 74 million
Miami Heat $74 million
Buffalo Sabres - $72.6 million
Boston Bruins - $64 million
Revenue Streams
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Traditional revenue streams to generate
income include:
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Ticket Sales
Sponsorship
Licensing & merchandising
Concessions
Parking
Fan clubs
Revenue Streams
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Teams operating today have several
additional revenue streams:
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Luxury suite sales
Premium & club seating sales
Television contracts (e.g., ABC, CBS, CBC, CTV)
Additional media contracts (e.g., satellite, Internet,
radio)
Costs
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Facility rental
Staff & player salaries
Marketing
General operating expenses
Distributing the Game
• Individual teams within a professional
league are separately operated businesses,
but they are not in competition with each
other as they would be in a free open
market.
• Each team is a member of a cartel.
• A cartel is a combination of independent
businesses formed to regulate production,
pricing, and marketing of a product.
Cartels
• The professional leagues (NFL, NBA, MLB,
NHL, MLS) are all sports cartels
• Pro leagues are independent sports teams
grouped together and governed by a league
agreement
• The league controls the marketing mix of the
team – product, place, price, promotion.
• In most cases cartels are prohibited by
federal anti-trust law.
• Pro leagues are allowed to have cartels
because of special legislation which exempts
them from anti-trust laws.
Deciding Distribution
•Regions with a large
potential customer base
are considered
favourable for a team
•Owners try to get public
funds to subsidize the
team
•Tax paid subsidies have
to be approved by the
voters – often called
corporate welfare
Attracting A Sports Team
• Condition: there are fewer teams than a
league can support (low supply,
sufficient demand)
• The lack of teams forces the cities to
compete
• Offering the best facilities at the best
price helps the cities compete for teams
• Until 1960, teams were responsible for
their own playing facility
• Now cities help support facilities
through taxes
It’s All About the Money
• Some franchises sell the naming rights to
their facilities - for large amounts of
money (Eg: Air Canada Centre, Centre
Bell, The LA Staples Center).
• In the 1990’s tax payers began showing
resistance to helping pay the bills for
athletic facilities
• The money a team makes from
attendance, broadcasting rights, and
concessions pays the salaries for the
players
• Player salaries continue to rise dramatically
It Takes Money
• The economics of pro sports involves huge
amounts of money and risk on the part of the
owners
• Few are willing to jeopardize their fortunes
without the opportunity to profit from the
venture
• New stadiums offer luxury suites and upscale
restaurants that increase the chances of
profits, but these things do not guarantee
attracting a team
• New stadiums cost around $500 million plus
approx. $100 million per year to operate.
• New Cowboys Stadium Cost $1 billion
Edmonton Oilers – Case Study
• Rexall Place is the 3rd oldest arena in NHL (opened in 1974)
• The Oilers’ lease on Rexall Place expires in less than
two years
• Construction on a new building needs to be completed
by the 2014-15 NHL season.
• Forbes ranks the Oilers in the middle of NHL teams
with a worth of US$212-million.
• The Oilers routinely sell out their current home at
Rexall Place
New Arena
• The proposed new arena would seat
18,400 with restaurants, shops and
enough space to hold parties and even
beach volleyball tournaments.
Owner – Daryl Katz
• ranks among the top 10 wealthiest
Canadians (accodring to Forbes, he has
a net worth of approximately $2.43
billion).
• made his fortune through the Rexall
Pharmacy chain.
• Katz bought the Oilers team in 2008 for
US$200-million.
The Problem
• Katz and the city of Edmonton are deadlocked
over funding for the new downtown arena pegged
at $475-million but — when loan payments, land
fees and surrounding amenities are factored in —
is actually over $700-million and rising.
• Katz has said he’s losing money on the Oilers in
Edmonton and wants a public subsidy deal similar
to the one given to NHL teams in Winnipeg and
Pittsburgh.
• need an annual $6 million public subsidy to keep
the team “viable” in the Alberta capital. (taxpayers
to help run the arena – not happy)
Who pays for it?
• $125-million will come from a tax on
tickets (about $5 to $6 a ticket).
• the team pays $5.5-million a year in
lease payments for three decades.
• City pays for construction
• the Oilers to run the arena and pay for its
upkeep [estimated at $10-million a year],
Who makes the $?
• Oilers keep all revenues from Oiler
games, trade shows, concerts, and other
events for 11 months out of the year.
Concession sales alone are estimated at
$20-million a year.
• The team would also get naming rights
for the rink (valued between $1-million
and $3-million a year) and $20-million
from the city over 10 years for
unspecified advertising.
Solution? Deadlock?
• Even with all that, the project would still
be short by at least $100-million.
• Both sides hope the provincial
government will contribute, but Premier
Alison Redford has said such a direct
subsidy to a for-profit enterprise like the
NHL is not in cards.
The Big Ticket – TV
• The biggest profit center is television revenue
• TV revenue is generated through the sale of
advertising time
• Networks sell ad time and buy the right to air
games
• The NCAA established a new 14-year
television, internet and wireless rights
agreement with CBS Sports and Turner
Broadcasting System to present the Division I
Men’s Basketball Championship beginning in
2011 through 2024 for more than $10.8
billion.
Ratings – Getting Viewers
• The cost per minute of TV
advertising is based on
the number of viewers
• TV ratings are important
in deciding which city gets
a professional team
• When 3 of the 14 biggest
TV markets lost their
professional football
teams the ratings dropped
considerably
Other Options
• An alternative to the high cost of public
financing is community ownership
• The local government or the fans own
the team – the Green Bay Packers sell
stock for the support of their team
• Currently public ownership is forbidden
in most cases
Changes in Rules
• Rule changes are being made because
of the high cost of franchises and the
aging of owners
• The NFL has more rules and controls
than the other leagues
• The MLB & NBA have syndicate
ownership in some cases – something
the NFL has tried to avoid
Vertical Integration in Sports
• Sports teams vertically
integrate by owning all
levels
– Minor league teams
– Major league teams
• Groups own different
teams– Maple Leaf Sports
Entertainment– owns Air
Canada Centre
– Manages Toronto Marles &
Toronto Maple Leafs
– Manages Entertainment
Events
The End!
Maxwell’s Music House
http://maxwellsmusichouse.ca/2012/06/maxwells-jam-house-in-the-waterloochronicle/