Describe and discuss the variables, and their significance, that comprise the co

Question

Describe and discuss the variables, and their significance, that comprise the competitive economic activity of the professional sport market. There is no absolute answer for this question. Do your best to choose what you consider to be the top three variables, and discuss. Include example(s), and reference from the literature Describe and discuss the variables, and their significance, that comprise the competitive economic activity of the professional sport market. There is no absolute answer for this question. Do your best to choose what you consider to be the top three variables, and discuss. Include example(s), and reference from the literature

Explanation / Answer

In professional sport, the value of media rights, fees, and luxury suites is enormous. As a result of increasing revenues in professional sport, the economic value of teams has risen, and it will continue to rise to unpredictable levels. The purpose of this study was to examine the economic value of media rights, luxury suites, and club seats in North American professional franchises. Secondary data from league offices and networks were used to describe the significance to professional sport franchises of revenues deriving from media rights and luxury seat sales, and their symbiotic relationships.

Value of Professional Sport

Unlike industrial or financial business, which is generally valued on cash flow and assets, sport franchises are valued on their revenues. There are two reasons for this. First, in the long term, the operating expenses within each league are about the same for every team. Second, revenues most closely measure the quality of a team’s venue, and they also track athletic performance, ultimately the two most critical elements of team evaluation . The value of professional sport teams has risen over the past decade and is expected to rise to unpredictable levels during the next few years. The reason for the rise is revenues from the leagues, including gate receipts, broadcast rights fees, luxury boxes, club seats, concessions, advertising, and membership fees.

Professional sport leagues and network television have enjoyed significant growth for more than 30 years. Needless to say, many people participate in and enjoy the games of major professional sport. For example, 62% of Americans call themselves “Major League Baseball fans,” according to a 1997 ESPN/Chilton sports poll . Spectators consume sport indirectly, through television, to a far greater extent than they do directly, through personal attendance at events. More than 2,100 hours of televised sport are programmed per year by the four major networks, and cable television provides an additional 6,000 hours. Professional sport and the media, especially television, are mutually dependent institutions, and extremely popular forms of entertainment. Although each has independent origins, their relationship now makes it hard to imagine one without the other. In total, 98% of all American homes have television sets, which are on for an average 7 hr 51 min a day (Source Magazine, 1998). ESPN, which reaches 70% of American homes with televisions, broadcasts more than 8,000 hours of sport each year. Regional sport cable networks and direct satellite sport broadcasts are growing rapidly, and these generate countless thousands of hours of sport each year .

Revenue Streams

Broadcast Rights

To understand professional team sport, it is important to recognize that sport is not just games, it is business. The overall logic of professional sport is grounded in the principles of buying and selling goods, services, and labor. In the major professional sport leagues, revenues are divided among league members in varying percentages. National Football League (NFL) teams split ticket sales, or gate receipts; 60% goes to the home team, 40% to the visiting team. In Major League Baseball, the split is approximately 80–90% to the home team and 10–20% to the visiting team. The basketball and hockey leagues permit the home team to keep all gate receipts. Depending on the individual contract, a stadium or arena’s owner or an outside contractor may keep the revenues, or there may be a split with the franchise-tenant.

Revenue from national broadcast rights is shared equally among the teams that constitute the football, basketball, baseball, and hockey leagues. By the end of 1961, the U.S. Congress had passed the Sport Broadcasting Act permitting the professional sport franchises to negotiate the sale of national broadcast rights as a single economic unit. These antitrust exemptions applied to professional baseball, hockey, and basketball as well as to football. In 1962, CBS purchased the exclusive rights to broadcast the NFL, with a package worth $4.6 million a year. Two years later, assisted by 50% growth in ratings and therefore even fiercer bidding by all three networks, CBS agreed to a 300% increase and a package of $14 million for each of the following two years. This contract, incidentally, ensured the survival of the Green Bay Packers, who proceeded to dominate the league for years afterwards. Thirty-six years later, the price tag for television rights for the NFL have increased dramatically. In 1998, the rights to televise NFL games, as well as the Super Bowl, for eight years were sold to several networks for $17.6 billion.

All NFL television money is split evenly among the teams, for an average $73.3 million per team per year. The rate is thus much higher than what MLB teams derive from that league’s network TV deal, which is not quite $11 million for each club. About 65% of all revenues of NFL teams comes from the sale of television rights.

Luxury Seating

Luxury suites and clubs seats are becoming one of the most lucrative of revenue sources for professional leagues. The revenue-generating potential of such luxury seats is tremendous, and luxury seating represents the leagues’ fastest growing revenue source . For most stadium construction projects, luxury seating has become a critical strategy to maximize cash flow per seat. This potential revenue stream, for instance, has been instrumental in securing financing for Oakland-Alameda’s $121 million arena and Detroit’s $235 million Tiger Stadium. Realizing the tremendous potential revenue, many stadium and team owners are now trying to renovate and repair seats to make luxury boxes.

The development of the professional sport industry during past decades has been phenomenal. Prior to 1960, there were only a few independent sport leagues whose members could legitimately claim “major” status. Today, however, the situation is dramatically different. As professional sports have grown in recent decades, they have gained recognition as a vital part of the burgeoning mass-entertainment industry. The teams in the NBA, NHL, MLB, and NFL are worth, combined, more than $12 billion. Furthermore, over the next decade, the value of professional sport teams is going to rise to unpredictable levels.

Traditionally, revenues earned by professional team sport were a combination of media revenues, game receipts, and especially luxury boxes and club seats. In the coming 10 years, media revenues, particularly, will increase, attaining what currently seems an unthinkable position. The main reason will be the consolidation of media and entertainment companies and the voracious appetite these companies will have for sport programming. Also, among the various private sources of revenue for sport franchises (stadiums’ and arenas’ proceeds from parking fees, concessions, advertising, corporate naming rights, and special seating), luxury boxes and club seats have become one of the most valuable. The revenue-generating potential that luxury boxes and club seats offer to professional sport franchises is second only to the potential for media revenue. In conclusion, professional sport franchises now see the importance of attracting fans to their stadiums and arenas in order to increase their private revenues. Sport, especially professional team sport, can earn money in more ways than one.

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