Economic Values of Professional Sport Franchises in the United States

Abstract

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 football, baseball, basketball, and hockey 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 Franchises in the United States

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 (Ozanian, 1994). 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 (John, 1998). 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 televisionprovides 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 (Sage, 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 (Sage, 1998).

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 (MLB), 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 (Shropshire, 1995). 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 (Barnett, 1990). 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 (Sage, 1998).

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 (Hoffman & Greenberg, 1989). For most stadium construction projects, luxury seating has become a critical strategy to maximize cash flow per seat (Howard & Crompton, 1995). 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.

Pay-Per-View Networks

In addition, professional sport franchises are adding to their revenues through contracts with local pay-per-view television networks. Current trends show increasing revenues for pay-per-view over the next few years. The $435 million pay-per-view revenues of 1991 grew to total revenues of $1.1 billion in 1996 and of nearly $3 billion in 2000. The National Basketball Association’s Dallas Mavericks, Houston Rockets, Portland Trail Blazers, and San Antonio Spurs are involved in pay-per-view (Worsnop, 1991). It is possible that in the near future the World Series and Super Bowl may be televised in a pay-per-view format. Professional sport franchises see pay-per-view as a new source of revenue, beyond what they take in from the broadcast networks. It may help them to keep pace with escalating players’ salaries (see Table 1).

Table 1. Average Salary Climbs of MLB Players

Table 2. 1999–2000 Season Values and Revenues of Top Five NBA and NHL Teams (in Millions), with League Averages

Media Revenues in Professional Sport

Television contributed to the nationalization of sport by making the prosperity of professional sport dependent on the creation of a broad-based national constituency. When NBC provided the first live network coverage of the World Series in 1949, fewer than 12% of U.S. households had television sets. By 1953, 15 of the 16 baseball clubs had local television contracts, and ABC introduced the first network game-of-the-week format. The share of U.S. households with televisions grew rapidly through the 1950s, reaching 67% of households (34.9 million homes) in 1955 and 87% of households (45.8 million homes) in 1960 (Zimbalist, 1992; Gorman, Calhoun, & Rozen, 1994). During the 1950s, none of the networks considered sport programming critical to their overall success. They put far more of their resources and effort into comedies, Westerns, and popular dramas.

But in the early 1960s, ABC broke with this pattern. ABC gambled that increased sport programming would give its network greater visibility, bring in new local television stations as affiliates, and improve the audience ratings for all shows. Sport telecasts contributed substantively to ABC’s rise from third place in prime-time audience ratings in the 1950s to the top in the 1970s (Rader, 1999). Today, up to 40 hours of professional team sport are beamed to home television sets each week by the major networks, and hundreds of additional hours are provided by cable networks spread across the country.

According to Zimbalist (1992), when the Yankees signed their first media contract, in 1946, radio and television together contributed only 3% of MLB’s revenues. That figure rose to 16.8% by 1956 and continued to increase through the years until, in the 1990s, television money represented more than half of baseball’s yearly earnings. In the case of football and basketball, broadcasting monies also amount to about one half of overall revenues; only hockey, whose history with national television can only be described as spotty, has thus far been left out of the formula. For example, MLB was in the middle of four-year pacts with ESPN and CBS that earned $400 million and $1.06 billion, respectively. Four-year NBA contracts with NBC and Turner, expiring in 1994, totaled $875 million. Hockey was not left out completely, however; the NHL’s five-year contract with ABC and ESPN, signed in 1992, was worth nearly $80 million (Gorman et al., 1994).

In addition to revenue from national broadcasting contracts, the leagues negotiated with over-the-air and cable networks to further increase their revenues. Deals cut between individual teams and local stations are crucial in sport and weigh heavily in a team’s financial success or failure. In the case of MLB, local television, radio, and cable generated more than $350 million for the 28 teams in 1993. For the NBA, revenues from local radio, cable, and over-the-air television come to over $100 million each year.

Table 3. Values and Revenues of MLB Teams (in Millions), 1998–2001

Sport and television coexist in a high-priced equation. The leagues in the major sports sell the rights to broadcast their games, making millions of dollars each season. The networks in turn sell advertising by the half-minute to sponsors on national, regional, and local levels. The sponsors, confident that sport reaches the right customers for their products, pay hundreds of thousands of dollars for their flashes of exposure.

The Baseball Network (TBN) is an example of creativity in advertising. TBN, in partnership with MLB, NBC, and ABC, was scheduled to run for six years beginning in 1994. As a media entity, TBN was charged with generating revenue for MLB by selling advertising time and promotional rights. Rather than take a projected 55% cut in rights fees and receive a typical rights fee from the networks, MLB agreed to accept 88% of the net revenue generated by TBN from sale of advertising and corporate sponsorship. Consequently, MLB shared the financial risk with the networks. It was thought that, if its advertising rates were reasonable, TBN would help the networks, MLB, corporate sponsors, and players market in sport. The networks stood to benefit because they reduced the risk associated with purchasing broadcast rights outright. (For example, in 1993, the year before the TBN deal, CBS had lost approximately $500 million on its four-year, $1.06 billion contract, due to its high bid and a shortfall in advertising revenue.) MLB and its players liked the new arrangement because the recently expanded play-off format would further line their already bulging pockets. Finally, the advertisers were excited about the arrangement with TBN because the new package included several changes intended to boost ratings, especially among younger viewers. Since this type of partnership appeared to please all parties involved, many thought other major sport leagues and their affiliated networks would eventually adopt it, thus furthering the growth of sport sponsorship and advertising (Carter, 1996).

Table 4. TV Sports: Broadcast Rights Fees

Sport Venues’ Golden Seats

Revenues from luxury suites—alternatively called sky boxes, luxury boxes, or executive suites—have become important to the professional franchises for maximizing cash flow per seat (Howard & Crompton, 1995; Funk, 1997). Luxury boxes are fancy rooms inside stadiums and arenas, in which corporations and some private individuals entertain clients and friends while also watching sport events. They are always up high, often near press-box level, and they are usually equipped with closed-circuit television for close-ups of the action. Every facility built within the last 20 years has luxury suites, and most of the older ones have been retooled to include them (Gorman & Calhoun, 1994). Wrigley Field in Chicago, for example, added 67 sky boxes for the 1989 season, each accommodating 12–15 people. Most of them rent for $45,000 to $65,000 a year. The revenue-generating potential of these luxury boxes would go untapped through the late 1980s. However, by the early 1990s, luxury suites had emerged as the most coveted and profitable of the venue-based revenue sources, contributing to unprecedented growth in sport venue construction. Club seats, sometimes called premium seats, are another source of increased revenue. Even when club seats lack a private entertainment or reception area adjoining the seats, they are usually more comfortable than seats found elsewhere in the stadium or arena (Rosentraub, 1997).

Luxury suites in stadiums hosting NFL franchises range in number from 47 in Seattle’s Kingdome to 370 in Irving’s Texas Stadium. MLB facilities have suites numbering from 19 in New York’s Yankee Stadium up to 161 in Toronto’s Sky Dome. The number of luxury suites in arenas used by the NBA range from 12 in Charlotte’s Coliseum to 360 in Detroit’s Palace at Auburn Hills. NHL teams play in facilities that have suites numbering from 16 in Florida’s Miami Arena to 135 in Montreal’s Molson Center. Table 5 shows the number of luxury suites and club seats in professional sport venues.

Table 5. Luxury Suites and Club Seats in Professional Sport Venues

The revenue-generating capability of luxury suites and premium seats is enormous. Luxury suites at Jack Murphy Stadium in San Diego rented for $29,000 to $49,000 a season; at Candlestick Park in San Francisco, for $24,000 to $60,000 for the baseball season and $40,000 to $80,000 for the football season; and at Houston’s Astrodome, for $25,000 per baseball season and $15,000 to $45,000 per football season (Gorman & Calhoun, 1994). Taking the Dallas Cowboys as a specific example, use of luxury suites is the primary reason stadium revenue is such a significant portion of a franchise’s total revenue. The Cowboys have approximately 360 luxury suites that represent more than $23 million annually in potential revenue. Table 6 indicates the economic value of the Cowboys’ luxury suites.

Table 6. Economic Values of the Cowboys’ Luxury Suites

The economic power of sales of luxury boxes and sales of club seats contributing to gross revenue has the potential to reach over $625.8 million and $329.9 million, respectively. As these dollar figures indicate, luxury seats and premium seats illustrate how a number of factors affect the amount of revenue a team realizes from sales of special seating. Currently, there are 8,090 luxury suites and 151,451 club seats for sale in professional sport venues, at a total amount of $955.7 million (as detailed in Table 5 and Table 7). The potential revenue from the sale of luxury suites and club seats by professional leagues is seen in Table 7.

Table 7. Potential Gross Revenue from Luxury Boxes and Premium Seats

Conclusion

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 (Worsnop, 1995). 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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