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Finance and Economics in the Sport Industry

The current financial situation of US professional sport and sources of revenues and expenses for sport organizations.
by

Michael Hutcheon

on 25 October 2012

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Transcript of Finance and Economics in the Sport Industry

Professional sport has seen a massive growth over the last decade. Revenues in men's sports leagues have increased 10% annually. Economic Imbalance There is competition for the same players. Teams have the disadvantage of smaller stadia in small marketing areas. Solutions for Imbalance Revenue sharing was introduced where all revenue from television rights, for example, is divided equally among all teams. The Current Financial Situation of US Professional Sport The media is relied on heavily in professional sport. When you take NFL teams into consideration, more revenue is generated via media deals opposed to gate receipts. The NFL recently agreed to a nine-year broadcast rights extension with CBS, FOX and NBC that will generate over $3 billion in revenue for the league each year in addition to the $4 billion in annual revenues from its contract with ESPN and DirecTV. The NHL signed a ten-year deal with NBC worth $2 billion in 2011 and the 2012 Stanley Cup playoffs provided the highest television ratings in years, predominantly since the cancellation of the
2004-05 season. MLB have agreements with broadcasters such as FOX, ESPN and MLB Network to air games, however baseball teams mainly create huge individual broadcasting rights. The New York Yankees generate between $85-90 million annually from their agreement with YES Network, which, alongside their ability to charge premium prices for tickets and merchandise, have the highest payroll in the Major Leagues. The MLS has been televised live in the US since the league’s inception in 1996, initially by ESPN who signed a deal with the MLS in 1994, two years before the league’s debut. The league also currently has rights with NBC, NBC Sports Network and Univision’s Galavisión, a Spanish broadcaster in the US. The MLS currently makes $27 million annually from its American rights deals. For the 2012 season, NBC Sports signed a three-year deal with the MLS to nationally broadcast 40 live matches per year, including pre- and post-game coverage. The first radio broadcast of a baseball game occurred on 5th August 1921 over KDKA between the Pittsburgh Pirates and the Philadelphia Phillies from Pittsburgh’s Forbes Field. On August 26th 1939, the first televised Major League baseball game was broadcasted on station W2XBS, the station that was to become WNBC-TV. Announcer Red Barber called the game between the Cincinnati Reds and the Brooklyn Dodgers at Ebbets Field in Brooklyn, New York. Sources of Revenues and Expenses for Sport Organizations Sport revenues depend
on the type of sport organization. Professional sports and college sports focus on the sport spectator. A large amount of revenue is generated by sport spectators as well as the sport media who provide sport events to the consumer through television, radio, magazines and the Internet. Companies that sell products licensed by professional and college sport organizations provide large amounts of revenue. Sources of Revenues:
Game attendance, media rights, sponsorships, and licensed merchandise. Breaking Down Game Attendance There are different seating options at sport events such as concessions, personal seat licenses, luxury suite rentals and booster club donations. Fans are generally charged an additional parking fee during events and spend money on merchandise and refreshments as they are considering a vital part of the game experience, which requires large-sum contracts with suppliers. Personal seat licenses which give fans the right to buy any particular seat generate $5,000 for ten years licensing on top of a $500 yearly season ticket fee, totaling $10,000 for just one seat. Luxury suites are rented on top of regular ticket fees with annual prices ranging from $77,000 in an NHL-only arena to $199,000 in an NBA-NHL shared arena. Attendance at professional sport events is increasing in the US with Americans spending around $12 billion annually for sport tickets. Sources of Expenses:
The cost of sport facilities and the cost of salaries. Most organizations attempt to persuade
local communities to pay for stadia however most have to pay a sum themselves which leads to long-term debt payments. Stadia become obsolete extremely quickly which results in teams paying for facilities they don’t or can’t use after a period of time. Salaries of players and coaches make up more than 50% of expenses in professional sport. The average US men’s salaries exceed $1 million per year. It is believed that financial stability has decreased due to the desire to win which leads to unwise financial decisions. The average annual MLB salary in 1975 was $44,676. The largest sports contract in the US is held by Alex Rodriguez of the New York Yankees which is ten years in length, $275,000,000 in value giving Rodriguez a $27,500,000 annual salary as well as a $169,753.09 average salary per game. What Happens When A Sport Organization Doesn't Maintain Finances? The Death Of
Rangers Football Club Reasons the Scottish Premier League giants went bust. Previous owner Craig Whyte held back £9 million in tax revenues and VAT from HMRC.
David Murray, who preceded Craig Whyte as owner, reportedly ignored a £50 million tax bill due to HMRC.
David Murray granted the club £82 million towards buying players in the Dick Advocate era of the late '90s and early '00s while continuing to ignore outstanding tax fees.
Rangers biggest bill comes from the EBT - Employee Benefit Trust. HMRC claimed that Rangers' EBT was, essentially, a tax scam to cheat the authority out of a massive amount of money.
PAYE - Pay-as-you-earn - Rangers failed to pay nearly £90 million in unpaid tax and PAYE to HMRC for unknown reasons. Where Do
Rangers FC Stand Now? - 12-month transfer embargo on signing players as of April 23rd, 2012. - Demotion to Division Three of the Scottish Football League, the bottom tier of Scottish Professional Football. -Liquidated as 'The Rangers Football Club plc' to be renamed as 'The Rangers Football Club Ltd' with all of the oldco assets transferred over to the newco. - Loss of major players meaning they were forced to start the 2012-13 with a depleted squad. - End of the Old Firm era, one of the biggest rivalries in the world between Celtic and Rangers due to their Catholic and Protestant differences. What was the annual revenue from the NFL's television contract with ESPN and DirecTV? a) $4 billion
b) $40 trillion
c) $40 What is the average men's annual salary in the US? a) $100,000
b) $50 billion
c) $1 million How much is Alex Rodriguez's contract with the New York Yankees worth? a) $50
b) $275,000,000
c) A pack of skittles a) $4 billion c) $1 million b) $275,000,000 Take Home Points - There is plenty of opportunity to make money in sport, and for sport organizations to thrive especially through media deals.

-There are many other routes of revenue in the sport industry via ticket sales, sponsorship and licensed merchandise deals with major brands.

- Expenses can weigh sport organizations down and unless they are balanced and stabilized, organizations can find themselves in tough situations.
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