Chapter Business and Finance of International Sport Leagues Brad R. Humphreys, PhD; and Nicholas M. Watanabe, PhD C H A P T E R

Chapter Objectives Understand the North American and European models of sport league organization Understand differences in team ownership in these two models Understand differences in player movements in these two models (continued)

Chapter Objectives (continued) Understand how these competing models lead to different on-field and financial outcomes Understand how hybrids of these two models have been adapted for other leagues and sports around the world

Chapter Outline North American league model Organization of North American sport leagues, ownership of North American sport teams, financing of North American sport teams European league model Organization of European sport leagues, ownership of European sport teams, financing of European sport teams East Asian league models

Major Sports Associations’ Share of Industry Revenue NFL (37.4%) MLB (28.8%) NBA (17.3%) NHL (13.3%) Other (3.2%) Source: Forbes.com

Key Features of North American Sport Leagues Static organization composition Private ownership Profit and nonprofit corporations Free agency

Organization Features of North American Sport Leagues Static composition with periodic expansion Free agency after a specified period of service Relatively large numbers of teams qualifying for postseason play Player-for-player or player-for-draft-pick trades Reverse-order draft

Training Costs and Reverse-Order Drafts: North America vs. Europe North American teams benefit by having other organizations and systems pay much of the training costs. This system is markedly different from the European one, in which players are often brought up through youth academies from a young age. The reverse-order draft rewards teams for doing poorly. In the European model, teams are punished for poor performance by being relegated to lower leagues.

Ownership of North American Sport Teams S corporations—most common, don’t pay corporate income taxes, earnings or losses are passed through to owners and paid as individual income taxes, no publicly traded shares so not required to file audited financial statements Community-owned—only a few (e.g., Green Bay Packers, Edmonton Oilers, Winnipeg Blue Bombers, Saskatchewan Roughriders)

NFL Income Analysis Sources of income: - Gate: $320 million - Media: $610 million - Venue: $110 million -Other: $60 million Average income: $1,100 million Average franchise value: $400 million Total income: $3.5 billion

NBA Income Analysis Sources of income: - Gate: $250 Million - Media: $340 million - Venue: $86 million -Other: $45 million Average income: $720 million Average franchise value: $207 million Total income: $2.01 billion

MLB Income Analysis Sources of income: - Gate: $400 million - Media: $350 million - Venue: $170 million -Other: $30 million Average income: $950 million Average franchise value: $220 million Total income: $2.9 billion

NHL Income Analysis Sources of income: - Gate: $370 million - Media: $850 million - Venue: $110 million - Other: $35 million Average income: $600 million Average franchise value: $126 million Total income: $1.8 billion

Organization of European Sport Leagues Use of a promotion and relegation system Multiple competitions at the same time (league championship, league cups, international competition, and so on) Use of youth systems, transfers, and loans to obtain new players for their teams

Advantages of Promotion and Relegation Generates more interest in matches among weak teams in a league and produces better competitive balance within a league. New franchise must work its way through from the bottom of the tier system all the way to the top. Requires long-term view. Works by having a multitiered system of connected sport leagues.

Multiple Competitions and Youth Academies Under the European model, teams play in multiple competitions at the same time, including the league championship, league cups, and international competition. European leagues do not use an entry draft. Teams operate youth academies that identify star players at a young age, sign them to contracts, and bring them into the club for training. Clubs cover much of the cost of developing and training athletes.

Case of Promotion and Relegation: English Premier League (EPL) English Premier League Npower Football League Football League One –Bottom three teams in EPL demoted to Npower (formerly Division 1). –In Npower, top two are directly promoted to EPL, and numbers 3 through 6 compete in a playoff whose winner receives the third promotional spot. –Npower demotes the bottom three to Football League One.

Multitier Competitions: EPL Case League Cup FA Cup UEFA Champions League UEFA Europa League

Ownership of European Sport Teams Corporate ownership—most common, corporations have shares traded on stock exchanges (e.g., Real Madrid). Individual ownership—trend has slowly been changing to private ownership, especially foreigners. Ten of the 20 current EPL clubs are either solely or partially owned by a non-U.K. citizens.

Cases of Foreign Ownership: Man U, Chelsea, Manchester City Read case study on page 329 of International Sport Management.

Financing of European Sport Teams Spectators, subsidies, sponsors, and local (SSSL) Media, corporations, merchandising, markets, and globalized (MCMMG)

Case Study: Manchester United Financing ManU’s deal with AIG is worth over €20 million (US$24 million) a year. ManU’s shirt sponsorship deal is enhanced by its partnership with Nike, which agreed to pay €438 million (US$517 million) over 13 years, or about €33.7 million (US$40 million) per season (Parkes, et al., 2007). About 70 percent of ManU’s corporate sponsorship revenue and about one-fifth of annual revenue comes from these two deals.

Consequences of League Design and Team Ownership European Model –Teams pay more in salaries and transfer fees. –Promotion and relegation increase fan interest and give incentives to mediocre teams to perform better. North American Model –More efficient because it reduces costs, improves competitive balance, and prevents bidding wars. –Teams do not have incentive to perform better.

Outcomes With the North American League Model Parity within North American leagues has increased in recent years, especially in the distribution of championships. In NFL, 11 different champions have emerged in the last 16 seasons. Competitive balance is a point of emphasis in North American sport leagues.

Outcomes With the European League Model The gap between the top and bottom teams in top leagues seems to be growing constantly. Much of this disparity is a product of the organization of these leagues, as well as the financing that teams receive. Disparity is caused by –league organization and –team financing.

EPL Club Financial Information Entering the 2008–09 Season