Sports Economics 101

Posted in: Iowa City Owl
I’m writing to tell you what you should already know but recent events have caused me to sadly acknowledge is a reality so many whom are fans of professional sports teams are refusing to deal with. Money rules the world. All of it. That includes sports. Professional sports franchises hire athletes and executives to make the franchise a winner in the financial realm as a first priority.  Winning on the field of play is secondary to that because the organizations have to pay to play.

The other part of this story I have to tell is that there is a limited
amount of wealth available to be had in the pro sports business. There
isn’t any P.E. teacher making sure everyone gets their fair share
either. To explain this concept let’s look at the National Football
League. The total gross revenue of the league as a whole is around
nine billion dollars. If you think the 32 franchises divide that up
equally, you’re deluded. In 2009, the Dallas Cowboys were the most
profitable franchise with $420 million in gross revenue.  That same
year, the Detroit Lions grossed just $210 million, half as much as
Dallas. This is by no means unique to the NFL. In the NBA for the
2008-2009 season the Los Angeles Lakers averaged $1.96 million in
ticket revenue per game while the Memphis Grizzlies averaged $322,105
in the same category. Major League Baseball’s most valuable team, the
New York Yankees, has a worth (1.7 billion) that is nearly six times
that of the Pittsburgh Pirates ($304 million), the league’s least
valuable. Sure all these figures may seem like a lot of money in
comparison to the salary most of us make, but remember we are dealing
with economics of scale and that just like with any other business,
all the operating costs of the franchise must come out of that
revenue. Profit is made by getting more of the pie than your
competition. What’s good for the goose is very often not good for the
gander.

What separates the goose from the gander? Three elements consistently
lead to profitability for a sports franchise (hint:  winning
championships isn’t one of them): attendance of games, broadcast
contracts and “star power.” First let’s compare attendance figures for
the three pro sports.  When you look at the total attendance numbers
for the NFL in 2010, you surprisingly find that Dallas had the largest
total attendance for the season and Detroit was fifth from the bottom.
 The Lakers had the eighth-highest attendance average in the NBA for
the 2010-2011 season while the Grizzlies had the fourth-lowest. The
second-most well attended team in Major League Baseball for 2011 was
the Yankees and the Pirates were 22nd of the 30 teams.  It’s funny how
the numbers jive, isn’t it?  What you may not think about is that when
people go to a game, they pay for parking, concessions and souvenirs.
A butt in the seat means much more than just a ticket sale.

There are many more butts that are potential customers that won’t be
in those seats at the stadiums but watching on televisions from any of
numerous places.  Once again, these resources are limited as a
particular nationally broadcast network can only cover one game at a
time.  How the teams compete for that resource could be another
article but for now we’ll be satisfied with the fact that it is not
equal, actually, not even close. Dallas was on primetime TV five times
in 2010, Detroit not at all for the NFL. The NBA on TNT featured the
Lakers nine times during the 2010-2011 season and the Grizzlies were
blanked. The Yankees were broadcast on ESPN 19 times last season
compared to zero exposures for Pittsburgh.  A great example of this is
the Los Angeles of Anaheim Angels’ recent signing of free agents
Albert Pujols and CJ Wilson.  It was the recent sale of their
broadcasting rights to the tune of $3 billion over 20 years that gave
the Angels the capital to invest.  The Angels’ idea is that Pujols and
Wilson will provide a return, yes a financial one, on the investments
made.  That’s a big part of the philosophy of a lot of professional
sports organizations’ plan to make a profit, the “star power.”

Players who consistently post outstanding statistics and help their
teams win games achieve a level of fame amongst the media and fans.
Media outlets interview them regularly and that exposure makes fans
interested in following their careers.  So what does a star player
mean to a team financially?  First off, they are usually going to
demand a higher salary than more anonymous players.  The economic
principle of risk-reward comes into play for the teams.  Having that
player on the team, however, can manufacture revenue.  Fans will come
to games and watch the contests on TV to see them play.  Networks will
pony up money to win broadcasting rights for teams that are full of
big name players because the chances of a high Nielsen rating and
selling advertising are better.  The Cowboys had six representatives
on the Pro Bowl roster in 2009.  No team had more that season.  The
2011 NBA All-Star game featured as many Lakers as it did any other
Western Conference team.  Last season the Yankees had eight players
selected to the All-Star team, most in the AL.

A person could argue that teams like the Cowboys, Lakers and Yankees’
consistent good performances on the court/field are what have brought
the high returns.  I would say it is exactly the inverse.  The high
revenue of those teams has made them consistent winners in the actual
games.  There of course is no way to prove that good attendance,
lucrative broadcast contracts or having several well-known players on a team directly causes them to win more games but it is also impossible to prove that those factors do not directly lead to more games.  We can only see correlations between those factors and wins, and those correlations are all strong.

The three factors of attendance, broadcast contracts and “star power” combine to determine the financial success of a franchise like the Planet Team did to form Captain Planet.  Understanding the economics in sports is a key to accurately comprehending the world of professional athletics.  Winning the money championship, not talent, not scouting, not player development, not coaching, not the style of play, is the sole biggest factor that plays into consistently winning on the court/field.  A team with low revenue may every once in a while have a special season and a team with high revenue may have down years but history has shown those to be the exception instead of the rule. Professional sports are about money, not winning.  If you’re not convinced yet, you should be after the next economics in sports lesson, how losing games has made and will continue to make money for some franchises.
Please login to post.