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Volume 3, Chapter 4Revenue sharing in professional sports leagues

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Revenue sharing

Allow more teams to be competitive Preserve uncertainty of outcome of games

Maximize spectator interest for the league as a whole

Individual team owners surrender a certain degree of autonomy in order to preserve interest in and the profitability of the league

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Revenue sharing NFL most aggressive revenue-sharing system

Historical necessity, foresight and leadership of Pete Rozelle

NHL least amount of revenue sharing Largest number of struggling franchises

Important revenue sharing problems in professional leagues How can revenues split between rich and poor franchises

without destroying incentives for the rich to keep generating prolific revenues

How can revenues split between owners who focus on profit and others focus on winning

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Administration of NFL Alvin ‘Pete’ Rozelle as League Commissioner

1960-1989 Revenue-sharing practices that allow NFL to reach

unprecedented levels of popularity Oversee league operations and temper any disputes

among owners Each team becomes member of League Executive

Committee Agree NFL constitution and By-laws or policy Team is still free to negotiate its own stadium lease

terms, select its form of business organization and staff, negotiate salary, set its own ticket prices

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NFL revenue sharing TV contracts all negotiated and shared at the league

level No local TV revenues Regardless how a franchise is run, TV money gives all

NFL teams a solid revenue base Gate revenue: 30% home team, 30% visiting team,

40% common pool to be shared equally among all teams

League-wide licensing, sponsorships shared equally League assists teams in building/renovating

stadiums 2011 CBA: Clubs receive credit for actual stadium

investment and up to 1.5 percent of revenue each year

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Owner selection Rozelle proposed an ownership policy

More homogenous group of owners, less likelihood of conflict and opportunistic behavior

4 basic rules No corporate ownership, No public ownership: large

number of decision maker At least one person must own at least majority of team No cross-ownership in any other sport (majority owner) E. Stanley Kroenke purchased Rams in 2010, previous

minority owner of Rams, turn over control of the Denver Nuggets and Colorado Avalanche to his son

Hope to maintain owners as group of hobbyists who are interested in sport, not profitability

9MLB revenue sharing, 1996-2001 Old system: share mainly gate receipt

In 1995, visiting teams 20% gate receipt in AL, 50 cents/ticket (~4%) in NL

Also very modest sharing of local cable TV contracts Discussed and accepted in collective bargaining

agreements CBA 1996-2001

First revenue sharing system in MLB history, phased in between 1996-2001

Taxed 20% net local revenue (all local revenue minus stadium expenses in 2001

75% distributed equally, 25% to clubs with below-average team revenue in proportion to how far below

10MLB revenue sharing, 1996-2001

Exacerbated competitive imbalance Low payroll to maximize profit Owners pocket large share of revenue sharing

money, instead of using to improve team quality Reward owners for doing poorly

Introduction of luxury tax on high team payrolls

11MLB revenue sharing, 2002-2006

Tax 34% net local revenue Plus additional money from MLB central fund,

43.3M in 2003, 57.7M in 2004, 72.7M in 05-06 Luxury tax: threshold increase every year

Payments: NYY 11.8M in 03, 30M in 04, 34.1M in 05. BOS 3.1M in 04, 4.2M in 05, Angels 0.9M in 04

Minimum payroll rejected

12MLB revenue sharing, 2007-2011 Each team 34% net local revenues to a pool

(straight pool) ~70% of total shared revenues

National revenues (media, licensing, sponsorship…) (split pool) Taxes levied on teams above median in revenue and

distributed to teams below in proportion to how far below the median

Luxury tax: threshold increase every year $148 M for 2007, $155 M for 2008, $162 M in 2009,

$170 M in 2010 and $178 M in 2011 Tax rate: 22.5% first time, 30% 2nd time, 40% 3rd time

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NBA revenue sharing

Equal share of national TV and merchandise revenues

Gate revenues not shared

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NHL revenue sharing Equal share of national TV and merchandise

revenues Gate revenues not shared Recipients of Player Compensation Cost

Redistribution Fund in CBA 2005(06)-2010(11) Weak Canadian dollar, pay player in US dollar, hurt

teams in Canada bottom half (bottom 15) in League revenues operate in markets with a Demographic Market Area of

2.5 million TV households.≦ team's revenue must increase faster than the league

average certain attendance levels must be met

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Sportsman effect An owner sacrifices financial value by expanding

the talent of the club beyond the team’s profit-maximizing level Significant problems for other teams when overall

salaries escalate Some owners overpay to assemble winning teams

Team owners likely fall somewhere on a continuum of profit maximizing to utility maximizing

Effect of competitive balance after revenue sharing Profit-maximizing weaker revenue franchise tend to

keep payroll low imbalance utility-maximizing weaker revenue franchise improve

team quality balance

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Large-market problem Historically, large-market teams win more often

than smaller-market teams A win more valuable to large-market team

Results: It hires more talent and wins more Competitive imbalance is a fact of life as long as

there is revenue imbalance large markets still attract star players, even under

salary cap More chances for endorsements and other off-field

activities Players want to play for winning teams

17Economic logic underlying revenue sharing Taxing on fixed costs associated with running a

franchise incompatible E.g. minimum payroll

Equally split local revenue would hurt long-run impacts on these revenue Less incentive for rich teams

Taxing on quality reduce incentive to produce quality Punish owners that try to give fans a better product Reward owners for having bad teams with low payroll

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Economically justified taxes Requirements for good tax system

Some revenue sharing necessary, tax must fall more heavily on profitable franchises

Two types of taxes necessary: one on seeking victory, one on seeking profit

Avoid taxing revenues, tax costs where possible. Taxes on franchise’s total costs and on win-loss record

Tax should allow markets to operate without introducing additional distortions. When players’ salaries are determined in competitive market, no need to separately tax this component of costs

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Economically justified taxes Taxing on revenue vs cost

Taxing on revenue ultimately depress league’s revenues and both owners and players suffer in the long run.

Taxing costs strengthens owner’s existing desire to control costs and increase profitability. Owners will be better off even if players are not

What costs should be taxed Should only on incremental costs Provide incentive to keep expenditure below certain level Luxury tax in MLB

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Economically justified taxes Tax rate

1. How much does it cost to win one more game? 2. How much revenue does a franchise lose when team

lose one more game. Tax rate: (revenue sacrificed with one more loss)/(cost of

winning one more game). How much one owner’s incremental expenditures cost another in lost revenues

Owners can still attempt to buy championships, but only to the extent that they compensate other owners for costs of losing

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Economically justified taxes

Owners who focus only on profits also impose costs on other owners Little incentive to field a competitive team

Tax less-successful franchises Give owners who focus only on profits greater

incentive to win Taxing losses likely stimulate more interest in

winning and increase league profitablity

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Distribution of taxed money Most leagues face problem of unequal distribution

of profits, not insufficient profits Return taxes proportionately to all franchises with

revenues less than league average Help them survive, but not guarantee profits

The taxes is to subsidize teams that are well run and yet still have difficulty making ends meet

Reward franchises which‘doing things right’, or fielding competitive teams at relatively low cost

Provide greater incentive for owners to financially prudent and exercise appropriate oversight over fielding competitive teams

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Problems in league administration

Independent actions of owners may result in decrease in welfare of league as a whole Although initiated for increased gain to their

franchise Teams seek lucrative marketing agreements

may eventually use the increased revenue to gain competitive advantage over others Undermine interest in league product as a whole

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Soccer: alternative business model 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

25 most valuable soccer teams 9 in England, 4 in Germany, 4 in Italy, 3 in Spain 0 in Latin America European teams have almost all top players from world

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Profit maximization in soccer Governments and broader social forces have

traditionally limited profit seeking by team owners in Europe Slow to accept the power and money from TV Strict limitations on teams’ ability to loan

Growth of private TV stations, particularly on cable, TV revenue play increasingly important role in European soccer teams >50% revenue for French teams in Ligue 1 Similar for leagues in England, Italy, Germany, Spain

Many cable companies to invest in soccer teams

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Promotion and relegation Premier League teams do not share revenue with

teams in other divisions Promotion to Premier League produce additional 30 M

revenue, ~18 M from TV revenue 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 More acceptable in open system than in fixed/closed

because teams face natural limit to sales they are willing to make

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Champions League Champions League : playoff among top teams in

each European country held by Union of European Football Associations

(UEFA) 32 teams in 8 groups, 22 automatic qualified http://en.wikipedia.org/wiki/UEFA_Champions_League

league coefficient: rank the leagues of Europe determine the number of clubs from a league that will

participate in CL http://en.wikipedia.org/wiki/

UEFA_coefficients#League_coefficient sponsored by a group of multinational corporations,

in contrast to the single main sponsor of the Barclays Premier League

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Champions League UEFA awards €3 million to each team that qualifies

for the UEFA Champions League, plus €2.4 million for participating in the Group stage. A Group stage win is worth €600,000 and a draw is worth €300,000.

In addition, UEFA pays each quarter finalist €2.5 million, €3 million for each semi-finalist, €4 million for the runners-up and €7 million for the winners

Additional high revenue for teams made to and became successful in CL

A large part of the distributed revenue from the UEFA Champions League is linked to the "market pool", the distribution of which is determined by the value of the television market in each country

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Financial danger of open system Crisis facing European soccer teams comes at time

when revenue have never been higher Revenue ↑by > 200% since mid-1990s cost (particularly payroll cost) ↑by > 450%

Strong incentive for teams on border of promotion/relegation to invest heavily in players If fail, teams with bloated payroll and diminished

revenues Elite teams also face pressure to ensure inclusion in

Champions League If fail, expected high revenue did not fulfill

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World Baseball Classic

Japan has requested that sponsorship rights and the rights to merchandise products related to the Japanese team be transferred to Nippon Professional Baseball (NPB)

MLB and its players’ association each received 33% of the overall turnover from the 2009 WBC while Japan only received 13%

http://www.sportbusiness.com/news/184416/world-baseball-classic-door-left-ajar-to-japan

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Support grassroots

Lega Serie A (top soccer league in Italy) to pay 6% income to Serie B and C (Lega Pro), 4% income to fund for grassroots sporting activity

2008 ‘Melandri law’ : imposed the collective selling of media rights on professional sport.

http://www.tvsportsmarkets.com/news/2011/oct/tribunal-upholds-redistribution-model-italian-football