Sports Economics Essay

Sports Economics

Introduction

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The National Football League (NFL) broadcasting rights are one of the most expensive broadcasting rights sold in the US. The National Football League Organization is considered to be the most popular spectator sports as far as the professional sports are concerned. The NFL was established in 1920 as the American Professional Football Association. The league underwent various changes with the passing years. The NFL now consist of two structured bodies the AFC and the NFC. The NFL acts a trade association for thirty-two franchise owners (“The Business of Professional Football”).

The franchise owners treat their teams as a separate business entity. However, the operations of the team are carried out under the shared revenue model. Under this model, the revenue generated through broadcasting, merchandising and licensing is shared equally among the thirty two teams. The shared revenue model is based upon the lines of socialist thought to create an environment where all owners are at the same par. This has been done so that owners are at ease and they don’t require to take risk while recruitment and making contracts.

The NFL has established equal grounds for all the teams by stadium, sponsors and broadcasting deals. The tickets of the games are not the constituents of the shared revenues. The broadcasting of these games has been the main factor for the soaring popularity of the game. The televised games of the National Football league are one of the most watched shows in the American television history.  The broadcasting rights of these games have been the major source of earning for both the television networks as well as the National Football league.

 There have been questions raised about the network coverage of these football games. At Present, three broadcasters i.e. CBS ($3.73B), NBC ($3.6B) and FOX ($4.27B) along with ESPN ($8.8B) pay a total of $20.4 billion for the broadcasting of various NFL games. The leagues offer their support to the broadcasters so that they can earn maximum revenues (“NFL Runs Up the Score”).

Research Question

             This research would explore the economic model adopted by the NFL for the broadcasting right. It would look at various aspects of this model adopted by NFL. The research question is “Is the economic model adopted by NFL for the broadcasting appropriate or not?”

             The research would study the model in detail. It would look at this revenue model from both the broadcasters as well as from the outlook of the NFL. It would also look at the revenue sharing of the teams. In the past, various questions have been raised for the broadcasting rights and the revenue sharing model. This sports business is one of the fastest growing industries in the US. These researches would also study various controversies attached with this model. It would also look at the economic value of this game.

             This research would also look at sports business industry and its operations. In addition, it would also look at the distribution of money in this industry. The research would also be giving insights of the broadcasting revenue rights distribution. It would also bring up the issue of various losses. Overall it would be judging the whole system adopted by the National Football League.

Hypothesis

             The hypothesis for this particular research is that “this economic model adopted by the National football league for the broadcasting rights is not at all appropriate”. This is the hypothesis formed for this particular research. This hypothesis would be studied by the literature review and analyzing various data. In addition, it would also be compared with other models adopted by other sports.

Literature Review

In the article Economics Insights: The National Football League (NFL), analyst Tony Barilla shed some light over this model. According to the author, this sports has gain prominence in the US sports industry due to its soaring popularity on the television. Although the games were broadcasted as early as in 1940’s but the popularity on the television actually came after the early 1980’s. At this moment, the sports started earning the big bucks. The advent of cable television resulted in the increase of the bids by the broadcaster. Initially, the three main broadcasters i.e. NBC, CBS and ABC coaxed $420 million per year to secure these rights for different games (Barilla).

The advertisement on the cable television became the money spinning machine for the NFL. Sunday Night Football transformed the entire face of this broadcasting industry it changed small cable networks into marketing giants. CBS lost their rights to FOX Network in 1993.  FOX paid $1.58 billion to the NFL to secure rights for the broadcasts for four years.  These rights made a non player like FOX who had previously no experience in sports, a major force in the sports business industry.  It provided them with the platform to showcase many more of their shows.

            Today, many of the present NFL broadcasters have laid claim to annual losses suffered by them. According to them, these losses were incurred as their advertising revenues were less than the cost spent for the purchases of these broadcasting rights. Even then the costs of these contracts were continuously rising as the contract with Fox was close to $8 billion in 2006. The author in the end advices NFL to go through a cost benefit analysis to evaluate possible revenues earned by these advertising and cable subscription fees versus the revenue earned by the contracts, in future the NFL can perhaps become the sole broadcaster of these matches and perhaps earn more profits.

David Jacobson in his article The Revenue Model: Why Baseball Is Booming provides various reasons why Major League Baseball is gaining stronghold in the traditional turf of the NFL. The earnings of the Major League Baseball were around $6.1 billion in 2007 as compared to $6.3 billion revenue of NFL.  The television rating records were also broken by the base ball as The Super Bowl in 2008 was watched by 100 million viewers when the NFL’s super series just managed to get around 17 million  viewers.  The baseball success is due to its continuous improvement of revenue model. It has taken a number of steps like reduction of the number of seats in the stadium, selling the online streaming of the games which has resulted in providing it with a number of record online hits (Jacobson).

Baseball success is also due to the fact that it is not solely dependent on the television broadcasting like the model adopted by NFL. The economic model adopted by the NFL is dependant on the television broadcasting from where it generates nearly two third of its revenue. The sales percentage earned by the broadcast by the baseball league account only for 20 percent. The major source of its income is earned through revenue from the stadiums and the local broadcasts.

The high sale of higher-priced tickets, concessions and advertising in various theme-park style stadiums has resulted in providing it with these high revenue figures. The theme park type stadiums are in constructions which are expected to provide the game with more revenues. These stadiums allow people to do other works besides watching the game which is why they are gaining popularity. The MLB success is due to the combination of the game’s appeal and their monopoly position.  The average price of the tickets has seen undergoing a major rise which has contributed to the revenues. The reduction of seats has also a major reason that there is rise in popularity as the seats are scarce. This model’s adoption has provided the game with a competitive edge over NFL (Fortunato).

In the article NFL’s Economic Model Shows Signs of Strain by Mark Maske and Thomas Heath have pointed out the growing problems of the franchise owners with the revenue sharing model of the NFL.  In 2006, the total revenue earned by the National Football League was $5.2 billion. The NFL also has signed of the richest television deals in the history of professional sports. Despite of these facts, this economic model adopted by the NFL has been drawing irk for the franchise owners (Mark Maske & Thomas Heath).

Under this sharing model, the revenue earned by NFL mainly through selling of the broadcasting rights is shared among franchises equally. A number of owners like of teams like Washington Redskins and Dallas Cowboys have been questioning this equality ownership. Under this system, when the leagues start, every franchise owners have level field i.e. all of them have around $100 million in the beginning earned by the selling of NFL broadcast rights, NFL sponsorships and a part of ticket sales. This model has provided the NFL with a lot of success in the past as it provides the team with equal chance to win the title.

            But now a number of owners are raising questions about the amount of sharing in this revenue.  According to these owners, this model is reducing the incentives of the owners who could have more potential revenue earned by the local marketing, promotional and broadcast deals. This model which they want to adopt is based on the Major League Baseball, where few teams like Yankees have transformed them into big financial entities. If this happens that it would strip of the NFL with the primary advantage, it would be due to the equal footing of all the teams. This has made the team to step out of the traditional areas of revenue and develop little other areas for revenues.

In the article Sports League Economic Structure and Fiscal Focus by Sarah Adams, the various economic values of the sports are discussed. The sports business is the fastest growing industry in the United States of America. . This fact can be estimated from the fact that thesize of this industry is around $213 billion which is twice as compared to the auto industry of the US while seven times as compared to the movie industry.

The revenue earned is divided among the team in the NFL in varying percentages. In the NFL, the tickets sales are shared on the basis of 2:3 bases. This implies sixty percent goes to the home team while the visiting team takes forty percent. In the sports industry, revenue is generated through various sources. It involves advertising, endorsements, sporting goods, facility construction and internet; travel licensing, media broadcasting multimedia, spectator spending, rights, professional services, gambling, sponsorships, medical spending and operating expenses. Advertising amounts to nearly $27.43 billion which is equal to 14.1 percent of the revenue. The advertisement includes revenue earned through billboards, sports magazines, national network TV, radio, national cable TV, regional TV and national syndicated TV (Sarah).

The spectator spending is around $26.17 billion which amounts to 13.4 percent of the revenue generated in the sports business industry. Spectator spending involves spending on ticket sales, concessions, parking, on-site merchandise sales and premium seating revenue. Sale of Sporting goods constitutes a whopping 13.2 percent of the revenue generated by the industry. Its value is estimated to be $25.62 billion. This includes spending on equipment, sportswear and footwear used by the players and fans. Operating expense constitutes around 11.8 percent, which is equivalent to $22.98 billion. These expenses are the payrolls of player and teams payments, payments to leagues and other governing bodies in the sports. Media broadcasting rights is just 3.6 percent of the industry which generates around $6.99 billion.

Data Description

The data collected for this research was through secondary sources. The secondary sources have interpreted and analyzed data from various primary sources. The main secondary sources used in the research are given below:

·         Publications

Data given in various books were analyzed for this research.

·         Sports Magazine

Data in various sports as well as business magazines were also taken for this research.

·         Journal articles

Data published in various journal articles was also taken for this.

·         Previous Researches

Data from various previous researches was also considered for this research.

Data Analysis

Sports Industry Overview

Amount
Units
Year
Source
Estimated Size of the Entire Sports Industry, US
441.1
Bil. US$
2008
PRE
Annual Company Spending for Sports Advertising, US
32
Bil. US$
2008
PRE
National Football League (NFL)
NFL League Revenue
6.54
Bil. US$
2007
PRE
Overall Operating Income
568
Mil. US$
2007
Forbes
Number of NFL Teams
32
Teams
2008
NFL
Average NFL Game Attendance
68,661
Spectators
2007
ESPN
Average NFL Team Value
957
Mil. US$
2007
Forbes
Major League Baseball (MLB)
MLB League Revenue
6.08
Bil. US$
2007
MLB
Overall Operating Income
492
Mil. US$
2007
Forbes
Number of MLB Teams
30
Teams
2008
MLB
Average MLB Game Attendance
32,767
Spectators
2007
ESPN
Average MLB Team Value
472
Mil. US$
2007
Forbes

(Source: Sports Industry Overview, 2008)

The Data Analysis of the sports industry brings out the following facts which are discussed below:

·         The estimated size of sports industry in the US is $ 441.1billion.

·         The revenue earned by NFL is around $6.54 billion.

·         The revenue earned by the MLB is around $6.08 billion.

·         NFL is the top earner in this segment.

(Source: Fortunato, 2008)

·         If the data of television viewer ship  is compared, then it can be clearly seen that although the average viewers are increasing but still they are less than the viewers who tuned to the super bowl broadcast in 2008, which was equal to 100 million.

·         Though the NFL is the top revenue earner, but still MLB is fast catching up.

( Source: Robert, F, Reilly & Robert P. Schweihs)

·         The major source of revenue of the NFL comes through these broadcasting rights.

·         The broadcasting rights of other sports are much lower as compared to the NFL. Other sports earn their revenues through other sources.

Results and Discussion

The data analysis brings up various facts regarding the NFL. The current model adopted by the NFL has generated a lot of revenue for them. There have been various record deals between broadcasters. However, they have not exploited other revenue sources and are largely dependent on television rating. The broadcasters are also stating that they are losing money. The viewer ship of these games is nor increasing dynamically. While the other sports like MBL are fast catching up with the adoption of new methods and technology. Hence, there is a need to adopt a new model so that the viewer ship as well as their revenue increases.

Hence, the hypothesis for this research is that “this economic model adopted by the National Football League for the broadcasting rights is not at all appropriate” stands true.

Conclusion

The research was into the area of sports economics. It studied an aspect related to the sports in the USA. The sports industry is one of the most growing industries in the USA. The sports broadcasting rights earn million of revenues to the sports bodies. A research into broadcasting revenues of the NFL, which are the highest, brings out the fact that the current model is not appropriate. The league must take appropriate measures to improve it.

Work Cited

Robert, F, Reilly & Robert P. Schweihs. The Handbook of Business Valuation and Intellectual Property Analysis. 2004. McGraw-Hill Professional.

“NFL Runs Up the Score”. April 4, 2009 <http://www.cfo.com/article.cfm/10600845/2/c_2984367?f=related >.

Adams, Sarah. “Sports League Economic Structure And Fiscal Focus”.2006 April 21, 2009 <http://www.sportsbusinesssims.com/sports.league.economic.structure.fiscal.focus.sarah.adams.htm >.

Barilla, Tony. “Economic Insights: The National Football League (NFL)”. 2006.21 April 2009 <http://coba.georgiasouthern.edu/depts/sed/inthenews/2006_10_30_Tony.pdf >.

Jacobson, David. “The Revenue Model: Why Baseball Is Booming”.2009. 21 April 2009 <http://www.bnet.com/2403-13502_23-210671.html >.

“The Business of Professional Football”. 2005 April 2009 <http://www.loc.gov/rr/business/BERA/issue3/football.html >.

“Sports Industry Overview”. Plunkett Research, Ltd.. 2008.April 21 2009 <http://www.plunkettresearch.com/Industries/Sports/SportsStatistics/tabid/273/Default.aspx >.

Maske, Mark. “NFL’s Economic Model Shows Signs of Strain “. 2006.April 21 2009 <http://www.washingtonpost.com/ac2/wp-dyn/A57668-2005Jan7?language=printer >.

Fortunato, John A. ” The NFL Programming Schedule: A Study of Agenda-setting “. 2008. April 21 2009 <http://muse.jhu.edu/journals/journal_of_sports_media/v003/3.1fortunato.html>