Sports Leagues and Teams I: Structure and Economics

Prof. Kenneth L. Shropshire The Global Business of Sports Module 1.0

Begin with the end in mind.

Stephen Covey, The 7 Habits of Highly Effective People, Habit #2

The Global Business of (team) Sports: 7 Modules

1. 2. Sports Leagues and Teams I: Structure and Economics Sports Leagues and Teams II: Globalization, Leadership and Ownership Economic Drivers I: Media Rights Economic Drivers II: Stadiums and Arenas Athlete Compensation, Agents and Unions The Olympics and FIFA World Cup Global Success Strategies
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3. 4. 5. 6. 7.

What we will cover

Goal: to analyze the multibillion dollar global team sports business and contemplate: a truly global, successful sports league. Initial Focus: 1. Module 1: History and structure of leagues Leagues and teams: focus on revenues League models NFL examples Revenue and sharing Manchester United revenues Valuation Delivery throughout?: Multiple segments per lecture (1.1, 1.2, etc.) check-in quizzes intermittently Discussion forums throughout
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My Background
Professor, Legal Studies Department, Wharton School, University of Pennsylvania Director, Wharton Sports Business Initiative Special Counsel, Duane Morris LLP Executive, Los Angeles Olympic Organizing Committee, 1984 Olympics Law Degree, Columbia University Economics Degree, Stanford University (American Football Scholarship)

Lecture 1.1

History of Sports Business

Current Leagues

League Structures

The History of Sports Business

Ancient Greek Athletics

Cincinnati Red Stockings

Timeline: International League Examples

776BC
Athletai of Ancient Greece compete in Ancient Olympic Games until 393 AD (this was revived in 1896 as the Modern Olympics)

1883

Home Nations (currently the RBS 6 Nations)

1888

The Football League (currently Barclays Premier League)

1903

Tour de France

1963

Fuball-Bundesliga

Timeline: U.S. Leagues

1869

Cincinnati Red Stockings

National Association of Professional Baseball Players 1871

1876

National League
American League
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1901

Timeline: U.S. Leagues

1917

National Hockey League

1920

National Football League

National Basketball League 1937 1946 - BAA

1949

NBA; merger of NBL/BAA

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Beyond Merger

How did they avoid this fate?

Global Sports Business Size

Source Size ($ billion) Description

Sports Business Journal (SBJ)

213 +

Size of industry in 2007

A.T. Kearney

480-620

Size of industry in 2011 Annual revenue by 2015

PricewaterhouseCoopers (PwC)

145.3

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Overview of International Leagues

The following are some leagues in the international scene: Football: English Premier League (20 teams); La Liga (20 teams); Bundesliga (18 teams); Serie A (20 teams); Ligue 1 (20 teams); Dutch Eredivisie (18 teams); Russian Premier League (16 teams); Portuguese Liga (16 teams); Scottish Premier League (12 teams); Brasileiro Petrobras (20 teams) Primera Division de Argentina (20 teams); Liga MX (18); J. League (18 teams); K-League Classic (14 teams) Basketball: Euroleague Basketball (16 teams) + many domestic leagues Basketball (16 teams) + many domestic leagues

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Overview of International Leagues

Baseball: Nippon Professional Baseball (Japan), 12 teams 2 minor professional leagues: Eastern, 7 teams, Western, 5 teams Korean Professional Baseball (9 teams) Plus leagues in Australia (6 teams), Mexico (16 teams), D.R. (6 winter teams + 28 MLBaffiliated summer teams), Puerto Rico (5 teams), China (7 teams), Venezuela (8 teams) Others: Super rugby (15 teams 5 each from AU, NZ, SA) Indian Premier League (9 city teams)

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Overview of Current U.S. Status

Number of teams in Big Four team sports: 32 NFL, 30 NHL/MLB/NBA NASCAR, WTA, LPGA, PGA, ATP in individual sports

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Overview of Current U.S. Status

Plus the following 62 start-up leagues and niche sports: 22 affiliated (17) and independent (5) Baseball Minor Leagues, 237 teams 11 Basketball Leagues, 141 teams 9 Football Leagues, 81 teams 6 Hockey Leagues, 121 teams 9 Soccer Leagues, 139 teams 3 Lacrosse Leagues, 21 teams Team Tennis (WTT), 8 teams Softball (NPFL),4 teams 6 Motorsport series 3 Volleyball leagues/tours 3 Golf tours Action sports tours/events, horse racing, rodeo (PBR, PRCA), fishing, billiards, bowling, boxing, MMA (UFC, Bellator)

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How to get to the next level?

Four Successful League Structures

Closed
Open Superleague

Single-entity
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Overview of Global League Structures and Revenue Sharing Information

Closed sports leagues as socialist cartels Cooperation across leagues Higher degree of socialist behavior (mainly redistribution of wealth) appears to create stronger leagues

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Overview of Global League Structures

Open, promotion and relegation model (e.g. EPL) Teams ascend or descend league hierarchy based on performance Facilitates competition, but unlikely to be adopted in US because of $$

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Overview of Global League Structures

Superleague structure, as in Union of European Football Associations, Champions League Highly profitable, but decidedly capitalistic (rich teams get richer)

Media Break: Podcast: What if your favorite team gets

relegated to the minors?
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Overview of Global League Structures

Single-entity structure, MLS model Control by a single operating company protects against reckless behavior especially in the startup phase As leagues mature, they move away from this model

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Recap
Weve discussed the history of the sports business industry, the emergence of some leagues, their structures and overall size. Next well take a look at some of the major revenue sources and methods of sharing

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Lecture 1.2

League revenues

EPL & NFL

Team revenues

Manchester United Case

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League revenues (U.S. and others)

Revenue ($bn)
10 9 8 7 6 5 4 3 2 1 0

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Global Leagues Revenue Sources

Ticket sales Sponsorship, licensing and merchandising Media (Module 3) Stadium or Arena Revenues (Module 4)

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Case: Green Bay Packers Financials, 2012

Line Items Figure

Revenues National Revenue (National TV revenue, Road-game share, Other national NFL revenue) Local revenue Total revenue Expenses Player Costs Operating expenses (excl. Play cost above)
Operating profit

$171.6 M

$130.4 M $302.0 M $155.4 M $103.9 M

$42.7 M

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Case: Measuring Financial Success

Financial Success: Difficult to determine because of data collection and analysis The simple way to think about it is: Revenues = Tickets Sales + Broadcast + Sponsors/ Commercial + Stadium related rev. etc. Expenses = Player Salaries + Operating Exp. + Non-operating exp. + Transfer costs, etc. Profits = Revenues - Expenses

Example: European Soccer Leagues

Amount ( millions_2011)

Total Revenues
Total Expenses Operating Loss

13,169
14,835 1,666

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Case: National Football League (NFL)

In order to understand the revenues and expenses of this type of business, we will analyze some of the categories we have from the Green Bay Packers in more depth from both a team and league perspective
Sponsorships Team expenses Revenue sharing

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NFL League Sponsorships, 2012

SPONSOR Gatorade Pepsi Anheuser-Busch Papa Johns Campbells Soup Dairy Management Inc. Quaker Mars Snackfood Frito-Lay CATEGORY Isotonic Beverage Soft Drink Official Beer Official Pizza Soup Dairy, Milk, Yogurt, Cheese Hot Cereal Chocolate & Non-chocolate Confectionery Salted Snack/Popcorn/Peanuts/Dips SINCE '83 '02 '11 '10 '98 '03 '12 '02 '00

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NFL League Sponsorships, 2012

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Team Structure
Lets take a step back to the team level: How do teams generate revenues? Where do teams spend? What makes some teams in some leagues successful and others not?

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Team Revenues, Expenses and Success?

-Licensing

-Player salaries & development

-Championships

-Sponsorship/Advertising -Concessions/Parking -Ticket sales

National vs. local -Merchandising -Revenue sharing model

-Staff compensation -Team and game related -General and Admin

-Marketing -Facility -Debt Service

-Revenues -Fan base -Player commitment

-Brand Equity: Longstanding culture

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Revenue Sources?
Luxury suites & Club seats Advertising Sponsorships Naming rights Stadium club Other game/ non-game related Local TV and radio Gate Club seats Concessions Novelties and programs Parking Merchandise

Corporations

Broadcast/ cable television Satellite television League Network Radio (e.g., satellite, broadcast) Digital Media (e.g. League.com)

Media

Consumer products/ licensing Sponsorship International Postseason gate Hospitality (e.g. Superbowl) Events (e.g. Draft, Kickoff) Youth

Individual

Other

Local

National

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The Worlds 5 Most Valuable Sports Teams?

Team
Manchester United Real Madrid

Value ($ billion)
2.23 1.88

Owner
Glazer family Club Members

New York Yankees

Dallas Cowboys Washington Redskins

1.85
1.85 1.56

Steinbrenner family
Jerry Jones Daniel Snyder

Forbes 2012 Estimates

Relevant news article Forbes The Worlds 50 Most Valuable Sports Teams

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Case: Green Bay Packers Financials, 2012

Line Items Figure

Revenues National Revenue (National TV revenue, Road-game share, Other national NFL revenue) Local revenue Total revenue Expenses Player Costs Operating expenses (excl. Play cost above)
Operating profit

$171.6 M

$130.4 M $302.0 M $155.4 M $103.9 M

$42.7 M

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Average Team Revenues, 2010-11

NHL (2010-11)

NBA (2010-11)

MLB (2010)

NFL (2010)
0 50 100 150 200 250 300

Revenue ($ million)

Source: Forbes Estimate 39

Ticket prices compared: U.S. Leagues

League Average Ticket Price ($) Highest ranked (Team abbreviation - $)
NYJ-121

Lowest ranked (Team abbreviation - $)

CLE-54

NFL 2011

77.36

MLB 2011 NBA 2010-2011

NHL 2011-2012

26.91 47.66
57.10

BoSox-53 LAL-95
TOR-124

PIT-15 MEM-23
DAL-30

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Recap
We discussed revenue sources, expenses, and various measures of success. Next we will focus on revenue sharing.

What is Revenue Sharing?

Best overall example is League Thinkwe all do better together as opposed to separately. But how this is executed varies across leagues.if it exists at all

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Central Issues in Revenue Sharing

Revenue pool composition Central revenues (paid directly to league) Local revenue pools (paid directly to clubs) Alternative allocation rules used to distribute shared revenues 1. Larger allocations to teams with low local revenue generating capability o MLB 2. Equal allocation to all teams in league 3. Larger allocation to teams with high revenues or most wins o EPL allocates national television revenues via a formula that better-performing team on the field receive the highest allocations, which increases the absolute revenue differences between clubs

How is it practiced?

Owners in the NBA, NFL, (and formerly the NHL) determine the league revenue sharing policy unilaterally MLB and NHL owners must collectively bargain with the player union over the terms of their revenue sharing All leagues equally divide national media and licensing revenues Gate receipts: NFL: 66% home team/34% visiting teams NBA: 94% home team/6% league NHL: 100% home team (however, top revenue clubs and playoff gate taxed) MLB: Share 34% of net local revenues (not just gateafter deducting out ballpark related expenses)

Other Local Revenues?

Other local revenues (luxury box premiums, local media contracts, local advertising and sponsorship/signage revenues, naming rights, etc.) are generally not shared on a line-item basis in the NBA, NFL, or NHL. MLB same 34% local calculation noted

When new revenues emerge

NBA Jersey sponsorships? Revenue division? Likely to be collectively bargained by the business
Would be added to basketball-related income 50% of which NBA players would receive as their salaries

Case: Jerry Jones vs. the NFL

In 95, Jones entered into local contracts with Pepsi and Nike, despite the Leagues deals with competing companies The NFL sued Jones for $300 million Jones countersued for $700 million, claiming the NFL prevented teams from marketing themselves Jones and the NFL settled, allowing Jones and other owners to pursue local sponsorship deals For example, Coors and Pepsi are the official beer and soft drink of the NFL, but individual teams may have deals with Budweiser and Coke

Goal: Competitive Balance

More in Module 5 Player allocation
draft free agency

Spending limits
Salary caps Luxury taxes Financial Fair Play

Comparison: Team focus in the EPL

Lets focus on the principal revenues of a top team in the English Premier League (EPL) Manchester United Sponsor Deals

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Case: Manchester United

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Manchester United Sponsor Deals

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Man. Utd. Commercial Revenue, 2012-13

Sponsor
Nike

Category
Kit supplier

Annual Value (million)

$40

Aon

Shirt sponsor

$31
$18.9 ($69 in 2014) $15.7 $6 $3.8 $3

Chevrolet * to be shirt sponsor- 2014 Auto DHL Hublot Bwin Singha Logistics Timekeeper Online game and betting Beer

Casillero Del Diablo

Thomas Cook Smirnoff T oshiba Medical Systems STC

Wine
Travel Responsible drinking partner Medical Integrated telecomm. (Saudi Arabia)

$3
$2 $2.4 $2.4 $2.4

PCCW
Turkish Airlines

Integrated telecomm. (Hong Kong)

Airline

$2.4
$2.4 52

Man. Utd. Commercial Revenue, 2012-13

Sponsor
Epson Mister Potato Yanmar TM Globacom Viva Kuwait MTN

Category
Office equipment Savory snack Global Integrated telecomm. (Malaysia) Integrated telecomm. (Nigeria, Ghana, Benin) Integrated telecomm. (Kuwait) Integrated telecomm. (South Africa, Zambia, Rwanda, Uganda, Swaziland, Botswana)

Annual Value (million)

$2.4 $2.4 $2.4 $2.4 $2.4

$2.4
$2.4 $2.4

Integrated telecomm.
Airtel Zong Globul Mamee (India, Sri Lanka, Seychelles, Bangladesh) Integrated telecomm. (Pakistan) Integrated telecomm. (Bulgaria) Noodles (Asia, Oceania, Middle East regions)

$2.4
$2.4 $2.4

Viva
Turk Telekom

Integrated telecomm. (Bahrain)

Integrated telecomm. (Turnkey) (Turkey)

$2.4
$2.4 53

Case: Valuation? Los Angeles Dodgers and Manchester United

$2.15 billion: purchase price $3.09 billion: market cap

Purchased by group of investors led by Magic Johnson under Guggenheim Baseball Management Potential Regional Sports Network like Yankees (YES Network) Real Estate development

Glazer family took company private in 2005 with an LBO of $1.47 billion but now done an IPO on NYSE Raised $100 million which is small compared to the likes of Facebook which raised $16 billion on its IPO

Media Break: News Article

Manchester Utd IPO Dodgers Acquisition: Magic Johnson and Stan Kasten (CEO Guggenheim) speak at Dodgers Stadium
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Recap
Weve analyzed the revenue sources of leagues and teams, had our initial focus on how revenues are shared drawing examples from the U.S. and Europe

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For more information

A few interesting documents*:
Bundesliga Report 2013 Financial analysis of the league and its successes PwC: Changing the game. Outlook for the global sports market to 2015 Brand Finance: The worlds most valuable football brands 2013 W.R. Hambrecht & Co Professional Sports Market and Franchise Value report
* Reports available in PDF form on the course site

For more information

Relevant news articles
Premier League finances: the full club-by-club breakdown and verdict 'The lowest of lows': Wigan's relegation after years of escapes "heartbreaking" says boss Martinez

For more information

Relevant video clips
Top 20 Richest Football Clubs in Europe Forbes The Worlds 50 Most Valuable Sports Teams NFL and the Superbowl Revenues Manchester Utd IPO Dodgers Acquisition: Magic Johnson and Stan Kasten (CEO Guggenheim) speak at Dodgers Stadium Inside Sports TV Deals and overall revenues for 2012 forecasts

For more information

Textbook Reading (recommended)

The Business of Sports

Chapters 2, 3 and 6

Next Module
Continue our examination of teams and leagues focusing on global popularity and presence (as opposed to revenues), leadership and ownership. Also continuing the bigger question regarding achieving success globally.
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