Chapter 3
For the Money or the Glory?
Prepared by Griffin Edwards
For the Money or the Glory?
Chapter Outline of Key Points (1 of 5)
Do Teams Profit-Maximize?
1.
Classic Utility Theory
▪
▪
We aim to maximize utility by engaging in a behavior until the
marginal benefit equals marginal cost.
This approach suggests teams may be able to “buy” wins.
For the Money or the Glory?
Chapter Outline of Key Points (2 of 5)
Do Teams Profit-Maximize?
1.
2.
Classic Utility Theory
Revenue and Profits in Sports
▪
▪
In some sense, sports organizations are businesses like any
other and seek to make the most money possible, but sports
are complicated by the fact that there is a clear “winner” with
competitors.
The profitability of sports teams varies between U.S.- and
European-based sports teams.
For the Money or the Glory?
Chapter Outline of Key Points (3 of 5)
Do Teams Profit-Maximize?
1.
2.
3.
Classic Utility Theory
Revenue and Profits in Sports
The Monopoly Model in Sports
▪
▪
Sports leagues are run very differently in the United States
compared to Europe.
The source of the discrepancy can be traced back to the late
19th century in the United States.
For the Money or the Glory?
Chapter Outline of Key Points (4 of 5)
Do Teams Profit-Maximize?
1.
2.
3.
4.
Classic Utility Theory
Revenue and Profits in Sports
The Monopoly Model in Sports
Promotion and Relegation
▪
Typically leads to more competitive leagues and, as a
consequence, less monopoly profits in sports
For the Money or the Glory?
Chapter Outline of Key Points (5 of 5)
Do Teams Profit-Maximize?
1.
2.
3.
4.
5.
Classic Utility Theory
Revenue and Profits in Sports
The Monopoly Model in Sports
Promotion and Relegation
Elasticity
For the Money or the Glory?
Utility Theory (1 of 3)
• To a player, what’s more important, the big payday or the
trophy?
–
–
Clint Dempsey, Jozy Altidore, Michael Bradley?
LeBron James?
• Utility
–
The level of satisfaction or happiness a person is able to
achieve
For the Money or the Glory?
Utility Theory (2 of 3)
• Life’s goal?
–
–
•
Maximize utility
What maximizes your utility?
Utility maximization
–
–
Marginal benefit = marginal cost
Marginal benefit:
▪
–
The additional utility gained from the marginal decision
Marginal cost:
▪
The additional cost associated with the additional decision
For the Money or the Glory?
Utility Theory (3 of 3)
• Opportunity costs in sports
–
What does LeBron give up when he moves from Cleveland
to Miami?
• Sunk costs
–
Ignore them
▪
Wrong major? Wrong lineup?
For the Money or the Glory?
Profit in Sports (1 of 18)
• What do team owners claim to want?
–
“This is a community asset. If all I do is make a few bucks
and the community isn’t happy, that’s not good. The beauty
of this is that the fans are the customers. If you buy a
company, you have to make the customers happy or they’re
going to leave you. Winning brings folks in—so we have to
figure out how to win, how to compete. I know this city needs
that.” –Tom Gore
For the Money or the Glory?
Profit in Sports (2 of 18)
• What do you think team owners really want?
–
How profitable are sports teams?
For the Money or the Glory?
Profit in Sports (3 of 18)
Table 3.1 Revenue and Operating Income for the National
Football League
NFL Team, 2014
Total Revenue (in millions)
Operating Income (in millions)
Dallas Cowboys
$700
$300
New England Patriots
$523
$212
Washington Redskins
$447
$115
San Francisco 49ers
$446
$154
New York Giants
$444
$133
New York Jets
$423
$102
Houston Texans
$416
$129
Philadelphia Eagles
$407
$105
Green Bay Packers
$391
$101
Denver Broncos
$387
$82
Chicago Bears
$385
$104
Baltimore Ravens
$378
$103
Seattle Seahawks
$377
$67
Pittsburgh Steelers
$376
$68
Carolina Panthers
$362
$53
Miami Dolphins
$359
$58
For the Money or the Glory?
Profit in Sports (4 of 18)
NFL Team, 2014
Total Revenue (in millions)
Operating Income (in millions)
New Orleans Saints
$358
$77
Arizona Cardinals
$348
$95
Cleveland Browns
$347
$53
San Diego Chargers
$344
$59
Jacksonville Jaguars
$344
$92
Tennessee Titans
$342
$73
Tampa Bay Buccaneers
$341
$75
Kansas City Chiefs
$340
$62
Indianapolis Colts
$336
$68
Atlanta Falcons
$336
$69
Cincinnati Bengals
$329
$60
Buffalo Bills
$326
$26
Detroit Lions
$321
$64
Los Angeles Rams
$317
$67
Minnesota Vikings
$306
$51
Oakland Raiders
$301
$46
$12,157
$2,923
For the Money or the Glory?
Profit in Sports (5 of 18)
Table 3.2 Revenue and Operating Income for the Major
League Baseball
MLB Team, 2015
Total Revenue (in millions)
Operating Income (in millions)
New York Yankees
$516
$13.0
Los Angeles Dodgers
$438
-$73.2
San Francisco Giants
$409
$72.6
Boston Red Sox
$398
$43.2
Chicago Cubs
$340
$50.8
New York Mets
$313
$46.8
Los Angeles Angels of Anaheim
$312
$41.7
St Louis Cardinals
$300
$59.8
Washington Nationals
$293
$22.5
For the Money or the Glory?
Profit in Sports (6 of 18)
MLB Team, 2015
Total Revenue (in millions)
Operating Income (in millions)
Texas Rangers
$275
—$4.7
Kansas City Royals
$273
$39.0
Seattle Mariners
$271
$16.8
Houston Astros
$270
$66.6
Detroit Tigers
$268
$11.0
Atlanta Braves
$266
$27.8
Philadelphia Phillies
$263
—$8.9
Pittsburgh Pirates
$244
$35.3
San Diego Padres
$244
$32.9
Toronto Blue Jays
$241
$1.2
For the Money or the Glory?
Profit in Sports (7 of 18)
MLB Team, 2015
Total Revenue (in millions)
Operating Income (in millions)
Chicago White Sox
$240
$20.2
Minnesota Twins
$240
$18.5
Baltimore Orioles
$239
$8.8
Cincinnati Reds
$237
$9.0
Milwaukee Brewers
$234
$27.0
Colorado Rockies
$227
$5.5
Arizona Diamondbacks
$223
$17.4
Cleveland Indians
$220
$18.0
Oakland Athletics
$208
$32.7
Miami Marlins
$199
$15.8
Tampa Bay Rays
$193
$8.2
$8,394
$675.3
For the Money or the Glory?
Profit in Sports (8 of 18)
Table 3.4 Revenue and Operating Income for the National
Hockey League
NHL Team, 2012-13
Total Revenue (in millions)
Operating Income (in millions)
New York Rangers
$229
$83.1
Montreal Canadiens
$219
$91.3
Toronto Maple Leafs
$192
$70.0
Chicago Blackhawks
$182
$44.8
Boston Bruins
$158
$26.6
Vancouver Canucks
$152
$35.5
Pittsburgh Penguins
$151
$20.2
Philadelphia Flyers
$146
$13.6
Detroit Red Wings
$135
$3.7
For the Money or the Glory?
Profit in Sports (9 of 18)
NHL Team, 2012-13
Total Revenue (in millions)
Operating Income (in millions)
Los Angeles Kings
$132
$2.2
Washington Capitals
$132
$5.8
Dallas Stars
$132
$17.5
Calgary Flames
$130
$25.9
San Jose Sharks
$126
$8.2
Minnesota Wild
$125
$1.1
New Jersey Devils
$125
$4.5
Anaheim Ducks
$122
-$0.8
Tampa Bay Lightning
$121
-$1.4
For the Money or the Glory?
Profit in Sports (10 of 18)
Table 3.4 Revenue and Operating Income for the National
Hockey League
NHL Team, 2012-13
Total Revenue (in millions)
Operating Income (in millions)
Edmonton Oilers
$119
$17.2
Ottawa Senators
$119
$18.5
Winnipeg Jets
$116
$10.9
Buffalo Sabres
$113
$2.8
St Louis Blues
$111
-$7.1
Nashville Predators
$110
$2.0
Colorado Avalanche
$106
-$3.7
Columbus Blue Jackets
$99
$4.5
Carolina Hurricanes
$99
-$11.7
New York Islanders
$93
-$14.0
Florida Panthers
$93
-$20.2
Arizona Coyotes
$92
-$4.5
$3,979
$446.5
For the Money or the Glory?
Profit in Sports (11 of 18)
• In general, how are North American sports teams doing?
• What about the NBA?
For the Money or the Glory?
Profit in Sports (12 of 18)
• NBA commissioner Adam Silver on the business of making
money in the NBA?
–
“I don’t know the precise number and don’t want to get into it,
but a significant number of teams are continuing to lose
money and they continue to lose money because their
expenses exceed their revenue. . . .” Some of these
expenses include payroll, arena and practice facility costs,
and sales and marketing infrastructure.
For the Money or the Glory?
Profit in Sports (13 of 18)
Table 3.3 Revenue and Operating Income for the National
Basketball Association
NBA Team, 2014-15
Total Revenue (in millions)
Operating Income (in millions)
New York Knicks
$307
$108.9
Los Angeles Lakers
$304
$133.4
Houston Rockets
$237
$74.6
Chicago Bulls
$228
$67.6
Brooklyn Nets
$220
-$5.7
Golden State Warriors
$201
$57.6
Cleveland Cavaliers
$191
$24.8
Boston Celtics
$181
$57.4
Miami Heat
$180
$20.8
Dallas Mavericks
$177
$24.3
Los Angeles Clippers
$176
$20.6
San Antonio Spurs
$170
$31.9
Toronto Raptors
$163
$23.5
Portland Trail Blazers
$157
$4.1
For the Money or the Glory?
Profit in Sports (14 of 18)
NBA Team, 2014-15
Total Revenue (in millions)
Operating Income (in millions)
Oklahoma City Thunder
$157
$20.9
Phoenix Suns
$154
$21.8
Detroit Pistons
$154
$16.0
Memphis Grizzlies
$147
$10.3
Washington Wizards
$146
$2.9
Utah Jazz
$146
$27.5
Minnesota Timberwolves
$146
$15.1
Orlando Magic
$143
$35.4
Atlanta Hawks
$142
$7.0
Charlotte Hornets
$142
$3.7
New Orleans Pelicans
$142
$19.7
Sacramento Kings
$141
$4.2
Denver Nuggets
$140
$26.3
Indiana Pacers
$138
$19.0
Milwaukee Bucks
$126
$11.6
Philadelphia 76ers
$124
$13.9
$5,180
$899.1
For the Money or the Glory?
Profit in Sports (15 of 18)
• Why do Silver’s comments and the data seem to be at
odds with each other?
For the Money or the Glory?
Profit in Sports (16 of 18)
• Meanwhile, in Europe:
Table 3.5 Revenue and Profit for the English Premier League
EPL Team, 2012-13
Revenues
(in millions of
British pounds)
Profit Before Tax
(in millions of
British pounds)
Revenue
(in millions of
U.S. dollars)
Profit Before Tax
(in millions
U.S. dollars)
Manchester United
£363
- £9
$570.42
-$14.14
Arsenal
£283
£7
$444.71
$11.00
Manchester City
£271
-£52
$425.85
-$81.71
Chelsea
£260
-£56
$408.56
-$88.00
Liverpool
£206
-£50
$323.71
-$78.57
Tottenham Hotspur
£147
£4
$231.00
$6.29
Newcastle United
£96
£10
$150.85
$15.71
West Ham United
£91
-£4
$143.00
-$6.29
Everton
£86
£2
$135.14
$3.14
Aston Villa
£84
-£52
$132.00
-$81.71
For the Money or the Glory?
Profit in Sports (17 of 18)
Revenues
(in millions of
British pounds)
Profit Before Tax
(in millions of
British pounds)
Revenue
(in millions of
U.S. dollars)
Profit Before Tax
(in millions
U.S. dollars)
Sunderland
£76
-£13
$119.43
-$20.43
Norwich City
£75
£1
$117.85
$1.57
Fulham
£73
-£2
$114.71
-$3.14
Southampton
£72
-£7
$113.14
-$11.00
West Bromwich Albion
£70
£6
$110.00
$9.43
Stoke City
£67
-£31
$105.28
-$48.71
Swansea City
£67
£21
$105.28
$33.00
Queens Park Rangers
£61
-£65
$95.86
-$102.14
Reading
£59
-£2
$92.71
-$3.14
Wigan Athletic
£56
£1
$88.00
$1.57
£2,563
-£291
$4,027.49
-$457.28
EPL Team, 2012-13
For the Money or the Glory?
Profit in Sports (18 of 18)
• What is driving the differences in profitability between North
American and European sports teams?
–
The American Way (Monopoly) vs. The European Way
(Competition)
For the Money or the Glory?
Monopoly in American Sports (1 of 3)
• The Knickerbocker Club 1842
–
Initially played with amateurs
• After losing his best player, William Hulbert, owner of the
Chicago White Stockings, proposed the following:
–
–
–
1 league
1 team per city
1 league, 1 team per city, 1 sport in the United States . . .
• What does that sound like?
For the Money or the Glory?
Monopoly in American Sports (2 of 3)
• Monopoly
–
–
–
•
One (or a few) seller(s), many buyers in market
How many sellers of professional football?
Professional soccer?
What does the NFL stand to gain from a monopoly?
–
–
–
Referee lockouts and “fail mary’s”
Exclusive contracts with advertisers
Control over players like forcing Marshawn Lynch to do
postgame interviews
For the Money or the Glory?
Monopoly in American Sports (3 of 3)
• What results?
–
X- inefficiency
▪
The inefficiency that results from lower-quality product that
stems from the lack of competition
For the Money or the Glory?
Competition in European Sports (1 of 4)
• Football Association 1863
–
–
Amateurs vs. pros
All regulated by the FA
▪
This would be like the NFL concerning itself with my weekend
flag football league.
• Promotion and relegation
–
–
Top three up, bottom three down
What does this get us?
For the Money or the Glory?
Competition in European Sports (2 of 4)
Table 3.6 Location of English Premier League Teams: 2016-17
EPL Team, 2016-17
Location
Population (in thousands)
Arsenal
London
8,250
Chelsea
London
8,250
Crystal Palace
London
8,250
Tottenham Hotspur
London
8,250
West Ham United
London
8,250
Everton
Liverpool
552
Liverpool
Liverpool
522
Manchester City
Manchester
511
Manchester United
Manchester
511
Leicester City
Leicester
444
Hull City
Kingston upon Hull
284
For the Money or the Glory?
Competition in European Sports (3 of 4)
EPL Team, 2016-17
Location
Population (in thousands)
Stoke City
Stoke-on-Trent
271
Southampton
Southampton
254
AFC Bournemouth
Bournemouth
188
Swansea City
Swansea
179
Middlesbrough
Middlesbrough
175
Sunderland
Sunderland
174
Watford
Watford
132
Burnley
Burnley
82
West Bromwich Albion
West Bromwich
73
For the Money or the Glory?
Competition in European Sports (4 of 4)
Table 3.7 Locations Without an English Premier League
Team: 2002-03 to 2012-13
English Cities with 300,000+ People and Without
an EPL Team, 2016-17
Population (in thousands)
Birmingham
1,086
Bristol
536
Sheffield
518
Leeds
475
Bradford
350
Coventry
326
For the Money or the Glory?
Competition vs. Monopoly in Sports (1 of 2)
• What do we stand to gain from promotion/relegation?
–
–
–
–
Makes the season more interesting, not just at the top, but
also at the bottom of the table
Provides a chance for “small market” teams to will their way
to the top
Makes it possible for more than one team to spring up within
a city
More competition makes sport more entertaining
For the Money or the Glory?
Competition vs. Monopoly in Sports (2 of 2)
• In the absence of promotion/relegation?
–
LA Clippers
▪
▪
–
1984-2011 won only 26.8% of games
Bottom three in 9 seasons
Is insulating a team a good thing?
For the Money or the Glory?
Elasticity (1 of 6)
• Recall the law of demand
–
–
–
As price of the good goes up, people generally want less of
the good
Increasing price will lead to fewer sales but more money
made per sale
Decreasing price will lead to more sales but less money
made per sale
• Businesses arrive at a selling price, in part, based on the
elasticity of the good
For the Money or the Glory?
Elasticity (2 of 6)
• Elasticity
–
–
–
The ratio of the percent change in one variable relative to
another variable
Elasticity = Percentage Change in Y / Percentage Change in
X
The sensitivity (or responsiveness) of changes in quantity
demanded to changes in price
For the Money or the Glory?
Elasticity (3 of 6)
Table 3.8 Relationship Between Sales and Price
Relationship Between
Sales and Prices
Elasticity
If Price Declines
If Price Increases
% Change in Sales >
% in Prices
>1
Increase Sales🡪Increase
Revenue
Decrease Sales🡪Decrease
Revenue
% Change in Sales <
% Change in Prices
<1
Increase Sales🡪Revenue
Continues to Fall
Decrease Sales🡪Revenue
Continues to Rise
% Change in Sales =
% Change in Prices
=1
Increase Sales🡪Same
Revenue
Increase Sales🡪 Same
Revenue
For the Money or the Glory?
Elasticity (4 of 6)
• Teams profit-maximize when price elasticity of demand is
one
–
There are no opportunities to increase revenue
• Are teams pricing tickets at unit elasticity?
For the Money or the Glory?
Elasticity (5 of 6)
Table 3.10 Literature Background Regarding Price Elasticity
Author and Date
Sports
Estimate of Price Elasticity of Demand
Demmert (1973)
MLB
-0.93
Noll (1974)
MLB
Inelastic
Siegfried and Eisenberg (1980)
MLB
-0.25
Bird (1982)
English Soccer
-0.2
Scully (1989)
MLB
-0.61
Coffin (1996)
MLB
-0.11 to -0.68
Depken (2001)
NFL
-0.58
Garcia and Rodriguez (2002)
Spanish Soccer
-0.3 to -0.9
Hadley and Poitras (2003)
MLB
-0.21
Winfree et al. (2003)
MLB
-0.06
For the Money or the Glory?
Elasticity (6 of 6)
• Based on our understanding of elasticity, and these
studies, all these teams in all these leagues are
“underpricing” tickets.
• Why not?
–
–
–
–
They just don’t
Home field advantage
Public choice
More to making money than ticket sales
For the Money or the Glory?
Discussion Questions
• Which professional athletes come to mind when thinking
about the utility-maximization decision of chasing trophies
or paydays?
• Could a promotion/relegation system work in the NFL or
MLB or NBA?
• Based on the information presented in this chapter, what is
the goal of the team? What should it be?
• What other factors might be influencing ticket pricing
decisions?