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?
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