US Professional Sports

An Industry Overview

Perspectives on the Four MajorProfessional Sports

Major League Baseball (MLB)

Founded in 1876 with the birth of the National League. American League founded in 1901.

MLB is the Granddaddy of the four major commercial sports in the U.S.

The two major leagues (National and American) now have 30 teams, including 1 in Canada.

Each team plays 162 games each year, drawing over 60 million fans annually.

Regular season runs from early April through early October.

MLB plagued by many problems, including spiraling salaries, competitive balance, drug abuse, labor disputes, and revenue sharing.

National Football League (NFL) Created in 1920, now consists of 32 American teams in

two conferences. Regular season runs from September through December

with weekly contests for the teams. They each schedule 8 home dates and 8 on the road.

The NFL paid attendance exceeds 17 million annually and generates the most revenue per game of the major sports.

NFL teams share more revenue than any league, and it has the most restrictive ownership regulations.

Public corporations (except Green Bay Packers) are not allowed and owners restricted from having outside interests in other teams.

National Basketball Association (NBA)

Dating from the 1940’s, NBA now consists of 30 U.S. teams and one in Canada (the Toronto Raptors).

The NBA’s regular season runs from October through April and consists of 82 games per team.

The typical NBA draw is over 20 million fans per year.

A serious losses in popularity in the 70’s and 80’s set the stage for a dramatic comeback in the 90’s.

National Hockey League (NHL) Founded in 1917, the NHL now consists of 24

U.S. and 6 Canadian teams. Regular season runs from October through April,

and the teams play 82 games. Historically popular in northern areas, hockey

has recently spread southward. Teams now in Tampa Bay, Miami, Raleigh,

Anaheim, Los Angeles, San Jose, Nashville, and Phoenix.

NHL attendance records are typically near 20 million fans per year, but the loss of the 04/05 season looms as a serious problem for the sport.

Additional Professional Sports Auto Racing – NASCAR Golf – PGA Boxing – WBA Wrestling – WWF Women’s Basketball – WNBA Arena Football Women’s Soccer – WUSA Men’s Soccer – MLS

Ownership & AffiliationsSelected Franchises

Baseball Ownership Texas Rangers – Tom Hicks, Investor New York Yankees – George Steinbrenner III,

CEO American Shipbuilding Co. Oakland A’s – Walter Haas, Chairman Levi

Strauss & Co. Atlanta Braves – Ted Turner, Owner cable

network WTBS and Atlanta Hawks in the NBA St. Louis Cardinals – Bill DeWitt (Managing

General Partner), investment banking San Francisco Giants – Peter Magowan,

former CEO of Safeway

Football Ownership St. Louis Rams – Georgia Frontiere, singer, etc. New York Jets – Robert Wood Johnson IV, heir to J&J

fortune Dallas Cowboys – Jerry Jones, oil holdings Baltimore Ravens – Art Modell, TV Production,

advertising Detroit Lions – William Clay Ford, Ford Motor San Francisco 49ers – Denise DeBartolo York, Real

Estate Miami Dolphins – Wayne Huizinga, Blockbuster

Video, Waste Management

Basketball Ownership Boston Celtics – Celtics, Inc. owned 48% by

Boston Celtics Ltd. Partnership Orlando Magic – Richard DeVos, co-founder of

Amway Corp. Portland Trail Blazers – Paul Allen, co-founder of

Microsoft, Corporation New York Knicks – Madison Sq. Garden L.P. which

is mostly owned by Cablevision Systems Corp. Los Angeles Lakers – Jerry Buss, and Magic

Johnson is a minority partner Chicago Bulls – Jerry Reinsdorf and a 29 member

consortium

Ice Hockey Ownership St. Louis Blues – Bill Laurie, teaching, real estate

sports franchises, married into WalMart money Florida Panthers – Wayne Huizinga, Blockbuster

Video and Waste Management, Inc. Pittsburgh Penguins – Mario Lemieux and

partners Anaheim Mighty Ducks – Broadcom co-founder

bought them from Disney in ’05 for $75 million NY Rangers – Cablevision Systems New Jersey Devils – Puck Holdings LLC, a division

of YankeeNets which is owned by George Steinbrenner

Sports Industry Growth Trends

The 90’s Boom $16 billion spent on new arenas and stadiums from ’95

through ’03. Nearly 180 new pro sports teams were born along with

13 new leagues. Now, about 800 pro sports teams exist in the U.S.

Corporate investment in sports more than tripled in the 90’s, growing to $8 billion by the decade’s end. Included were: Corporate Sponsorships: Now near $6 billion per year Naming Rights: Reliant Energy recently paid $300

million to name the new NFL stadium for Houston Texans.

Premium Seating: Over 100 pro teams realized nearly $1 billion from luxury suite revenues

Longer Term Trends From 1970 through 2000, regular season

attendance in the NBA, NFL, NHL, and MLB has grown from 49 million to 128 million.

By sport, the per annum percentage growth rates in attendance over recent decades are:

20 yrs. 10 yrs.

MLB 2.1 -0.4

NFL 4.3 2.0

NBA 3.8 0.5

NHL 2.9 2.3

Financial Perspectives

MLB Typical Revenue Estimates

Gate – $40 million Media – $35 million Stadium – $17 million Other – $3 million Total Estimated Revenues per Team $95

million Estimated average franchise value = $220

million Total MLB Revenues = $2.9 billion Total MLB Value = $6.6 billion

NFL Typical Revenue Estimates Gate – $32 million Media – $61 million Stadium – $11 million Other – $6 million Total Estimated Revenues per Team $110

million Estimated average franchise value = $400

million Total NFL Revenues = $3.5 billion Total NFL Value = $12.8 billion

NBA Typical Revenue Estimates

Gate – $25 million Media – $34 million Stadium – $8.5 million Other – $4.5 million Total Estimated Revenues per Team $72

million Estimated average franchise value = $207

million Total NBA Revenues = $2.1 billion Total NBA Value = $6 billion

NHL Typical Revenue Estimates

Gate – $37 million Media – $8.5 million Stadium – $11 million Other – $3.5 million Total Estimated Revenues per Team $60

million Estimated average franchise value = $126

million Total NHL Revenues = $1.8 billion Total NHL Value = $3.8 billion

Consumer Spending The organized sport industry is

estimated by Sports Business Journal to be as large as $213 billion annually.

This number includes Advertising, Endorsements, Sporting Equipment, Facility Construction, Licensed Goods, Broadcast Rights, Professional Services, Spectator Spending, Sponsorships, Medical Spending, Travel, Multimedia, Gambling, and Operating Expenses.

Distinguishing Features of Pro Sports Franchises

Economic1. Monopolies: Are Pro Sports Really

Monopolists?2. The Reserve Clause:

• Originated by W. Hulbert, a Chicago White Stockings Backer, in 1876

• Effectively Gave Teams Ownership of a Player’s Services Without Bidding Options

3. Free Agency: • Reserve Clause Influence Unraveled in the

1970s, When Players in All Pro Leagues Won Restricted Rights to Sell Their Services to Other Teams

Ownership

1. Almost All Private Businesses Disclosure Not Required Multiple Business Entities are

Common2. Multiple Reward Opportunities

Publicity Tax Advantages Psychic Rewards and Ego Factors

Legal, Tax, and Accounting Issues

1. Baseball’s Anti-Trust Exemption:• This unique feature dates from a U.S.

Supreme Court decision in 1922• Formal exemption still exists in baseball

and less formally in other sports2. Cross-Subsidization &Tax Strategies3. The Veeck Loophole:

Bill Veeck was first to depreciate players Depreciation provides an important tax

shield

Special Challenges to the Sports Industry

Overcrowding of the Marketplace

Viewed as a pastime, pro sports have many new activities competing for attention Video games, movies, television New sporting and fitness activities abound

Additionally, many new pro sports franchises have made the field of sport more crowded

Leveling of Attendance Although pro sport and sports

activities show strong growth trends, the four major pro sports leagues do not.

In the past decade, baseball and basketball have flattened and hockey and football show only modest attendance increases, even with franchise expansions in all leagues

Declining Health of the Leagues

In addition to flat attendance, we also see:

Falling TV ratings Increasing concern with players’

behavior Escalating salaries and costs create an

economic disconnect with many fans

Spiraling Player Salaries

Free Agency, the Legacy of the 70’s in Pro Sports

All Pro Leagues Have Some Form of Free Agency

Salaries Have Risen Rapidly as a Result

Many Teams Claim Losses Most teams claim losses, but

consider….. Owners and family members may

receive large salaries and/or bonuses Revenues may be shifted to other

entities (cross-subsidization) Losses may be used to shield owners’

other income Depreciation of players creates a

substantial tax shelter

Salary Caps Intended To Counterbalance Free

Agency Started with Basketball in Early ’80s. NBA and NFL Have Similar Cap

Provisions Via % Revenues NHL Has a Salary Cap on Rookies Salary Caps are a Very Contentious

Issue in Baseball. Luxury Tax is in Place.

Labor Relations

Key Strikes or Lockouts in Pro Sports:1. MLB Strike 1972 (8 since 1912, but 7

were since the 70s)2. NFL Strike 1987 (5 since mid 50s)3. NHL Lockout 94/95 and 04/05 (3

occurred recently, namely 2 in the 90s, and 1 last season)

4. NBA Lockout 1998/99 (2 lockouts since mid 90s)

Revenue Sharing National Broadcasting Revenues Shared

by All Pro Sports Equally Local Broadcasting Rights NOT Shared in

Pro Sports• Large Disparity of MLB Revenues in Large

Market/Small Market Teams• Major Problem in MLB

Gate Receipts Shared Somewhat in MLB; To a Larger Extent in NFL; Not Shared in NBA and NHL.

Competitive Balance Various Ways Exist to Determine if

Leagues are Balanced Statistical Study of 1999/2000

Seasons Showed Winning Percentages to be Most Dispersed in NHL, and Least Dispersed in NFL

Can Also Look at Dispersion of Championship Teams

Drugs Performance enhancing drugs create

unique problems for sports How are performances judged against

those in drug-free eras? How do we define what a drug is and

when it should be banned? How should bans be policed? What penalties should be leveled

against violators?