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Entertainment and Media: Markets and Economics


Title: Economic Foundations for Entertainment, Media, and Technology Author: William Greene Last modified by: Bill Created Date: 10/15/2000 8:02:50 PM – PowerPoint PPT presentation

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Title: Entertainment and Media: Markets and Economics

Entertainment and Media Markets and Economics
  • Sports

What is the Market?
  • Major U.S. Leagues
  • Hockey
  • Baseball
  • Football
  • Basketball
  • Major U.S. League NCAA Basketball and Football
  • Smaller
  • Golf
  • Tennis
  • Others?
  • International World football
  • At least 200 billion in the US
  • Subsidiary Industries?
  • Gambling
  • Local Affiliated Externalities

  • Revenue Models
  • Team vs. League Profits and Valuation
  • Competitive Balance
  • Labor Markets and Contracting Conflicting
    Economic Forces
  • Antitrust and Public Policy
  • Trends
  • Existing Businesses
  • Markets

Revenue Models
  • Spectator Sports vs. Studio Sports
  • Exhibition (TV and Radio)
  • The fan in the stands. Yankees. 4.5M seats sold
    at 50/seat. Gate is shared with the visiting
  • Player payroll 250M. The fan in the stands is
    not adequate to determine team profitability
  • Sources of Revenue for Teams and Leagues
  • Fans in the stadium
  • Merchandising, licensing, etc.
  • TV and Radio, Internet
  • Revenue sharing and gate sharing as visitors

National Basketball Association
National Hockey League
  • 2002-2003 Combined revenue approx. 2.3 billion
  • Average player salary approx 1.9 million
  • 75 of gross revenue paid out in salaries
  • Aggregate loss, 300 million (on revenue of 2.3
    billion!) and getting worse
  • 2004 No season lockout
  • 2009 Combined revenue approx 2.3B.
  • 2012-2013 half season. Lockout from October to
    January. Issue Players 57 revenue share.

National Football League
  • 2009 revenue 6 billion
  • Long term TV contracts 8 years, Fox, CBS, NBC,
    ESPN, total approx 17.6 billion
  • TV Pool approx. 80 million / team
  • Gate distributed 40 to teams, 60 to the
  • Extremely successful.

Amateurs? The NCAA
  • Notre Dame Football rights purchased for 7 years
    by NBC, 45 million
  • NCAA football, 8 years, 1.725 billion
  • Final Four (March Madness) ? 100 million in
    local revenues and business. (Claimed)

Value in a Sports League
  • Source of value in major sports leagues
  • Major sports leagues, 2008 operating income
  • NHL 140M
  • NBA 310M
  • MLB 500M
  • NFL 790M
  • British Soccer
  • Australian Rugby
  • How is the value captured?

What Creates Value in a League?
  • What Creates Value in a League?
  • Interdependence within and among teams
  • Cooperation and competition
  • Rent creation by star players
  • Independent ownership and management the
    impression of competition
  • Collaborative business arrangements
  • (Continuing our minicase Which among these did
    the XFL produce?)
  • If every team maximizes its value, does this
    maximize the value of the league?
  • Does it matter?
  • What are the sources of inequality in team values

MLB vs. NFL Result of Collective Optimization
Incentive Incompatibility
  • Winning is everything (Vince Lombardi)
  • Winning isnt everything (Bud Selig)
  • The New York Yankees player acquisition model
    what do we learn from this about the distribution
    of talent?
  • The leagues seek competitive balance
  • Devices
  • Salary caps on players
  • Salary taxes on large payrolls
  • Revenue sharing (football, not baseball or
  • Promotion and relegation (UK football)
  • Player draft rankings (US football)

Incentive Incompatibility The NBA Draft
  • Promotion by giving early draft picks to low
    ranked teams.
  • Teams want to lose games this year so they can
    win games next year (a dynamic programming
  • NBA wants teams to want to win games
  • A solution to align incentives?

Achieving Competitive Balance
  • Salary Cap
  • Revenue Sharing
  • Promotion and relegation
  • Ownership structures

Competitive Balance?
  • MLB 1980 2013, 19 different teams won the
    world series
  • NFL 1980 2014, 17 different teams won the
    Lombardy trophy (won the Super Bowl)
  • NHL 1980 - 2013, 16 different teams won the
    Stanley cup
  • NBA 1980 - 2013, 8 different teams won the
    Stanley cup
  • The result of a business model to achieve
    competitive balance?

Labor Problems
  • Claims to the rent Players and Owners
  • Division of the Rent
  • Unstable equilibrium the effect of free agency
  • Examine salary outcomes
  • Strikes and lockouts why?

Capturing the Rent Seeking Equilibrium
Player costs as of total league revenue
League 1990 1991 1992 1993 1994 1995 1996
MLB 33.4 45.3 49.0 56.3 71.1 61.7 53.5
NFL 52.4 47.2 60.0 64.3 67.5 67.9 67.4
NBA 39.6 40.7 43.7 48.5 41.4 46.2 46.9
NHL 29.8 32.5 37.5 41.0 41.2 38.2 51.1
2008 52 60 50 46
New York Yankees 1996 payroll, 68M, 2004
payroll, 190M In 2003 NFL, 65 of revenues
went to players. 2012 NFL lockout. The
players also won 55 percent of national media
revenue, 45 percent of all NFL
Ventures revenue, and 40 percent
of local club revenue In 2003 NHL, 75,
In 2011, NHL players 57. Led to 2012
lockout. Players strike led to cancellation of
the World Series
Salary Cap Problems
  • Kevin Garnett, Minnesota, 1997. 126M, 6 years
    (1) All of team TV revenues from NBC or (2)
    25/seat of every seat of every game for 6 years
    or(3) The entire franchise purchase of 88M in
    1995 38M
  • 1996 Chicago Bulls team salary cap 24.3M.
    Michael Jordans salary, 33M
  • Beckham rule in Major League Soccer
  • Baseball salaries, average, almost 100 fold
    increase in 25 years. Several 200M deals for
    MLB players
  • Five 100M quarterback deals in the NFL in
  • What is going on here?
  • Rise of the role of media
  • Players asserting bargaining strength and
    capturing the new surplus

Antitrust and Public Policy
  • Congress interest in sports
  • Cartel Behavior
  • The antitrust exemption
  • The intersection of sports and the public

Monopsony and the Reserve Clause/Studio System
  • Movie stars, shortstops, late night talk show
    hosts, perky morning news personalities

Marginal expense on players
Supply of players
Marginal value of players
The source of the Yankees 220M payroll A-Rod
? Jeter, Teixera, etc.
Number hired
Market Power and Equilibrium
  • How to maintain the monopsony equilibrium
  • Collude on salaries the salary cap
  • Agree not to hire each others players (the
    Reserve Clause)
  • Finding balance free agency
  • Is this legal?
  • Baseball Supreme Court
  • Other sports de facto

The American Needle Case
  • American Needle Hat maker vs. National Football
  • Narrow issue purchasing by the league vs. the
    individual teams
  • Broader issue
  • Economies of a league
  • Anticompetitive mechanism provided by the league
    monopsony power

  • MLB The Antitrust Exemption. Baseball is a
    game. Enshrined the reserve clause a monopsony
    in the market for players
  • NFL 1962 Sports Broadcasting Act. Produced a
    monopsony for broadcasting services (or a
    monopoly for the signal)

American Needle v. NFL Background
In 2000, NFL authorized NFL Properties to solicit
bids from companies who wished to obtain an
exclusive headwear license Reebok won the bid
and won a 10-year exclusive license to make hats
and other headwear featuring NFL team logos
Because of this exclusive license, NFLP refused
to renew American Needles (and all other
headwear vendors) licenses
American Needle v. NFL Background
  • American Needle filed a lawsuit against the NFL,
    NFLP, the 32 NFL teams separately, and Reebok,
    claiming that such an exclusive license violated
    Section 1 of the Sherman Antitrust Act
  • Section 1 prohibits any contract, combinationor
    conspiracy, in restraint of trade.
  • NFL and other respondents argued that the NFL was
    immune from antitrust liability because it is a
    single entity not a cartel.

American Needle v. NFL Single Entity Argument
  • Economists argue that a group of competitors
    (whether football teams or tennis players) can
    add value if they collaborate to adopt standards
    of play
  • Standardization function of NFL adds to value of
    products of 32 member clubs in same way that
    other standards organizations add to value of
    products that make use of them
  • But it would seem foolish to expose NFL team
    members to antitrust liability for meeting to
    develop playing rules or to select the date and
    location of the Super Bowl
  • Many issues argued in favor of the NFL. Others
    suggest the cartel can stifle competition. (Hence
    the appearance before the Supreme Court.)
  • SCOTUS rejected the single entity argument for
    the commodity markets American Needle won the
    right to a trial on the case.

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