Volume 3, Chapter 4 Revenue sharing in professional sports leagues

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

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

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

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

Owner selection Rozelle proposed an ownership policy 4 basic rules 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

MLB 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

MLB 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

MLB 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

MLB 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

NBA revenue sharing Equal share of national TV and merchandise revenues Gate revenues not shared

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

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

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

Economic 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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