Friday, August 16, 2013

Major League Team Revenues

As I was doing research for my previous posts I compiled some interesting data on professional team values, revenues and expenses. This chart shows revenue by sport from 1998-2012:

All data is taken from the Forbes annual valuations of the professional teams. The slopes of the trend lines are just as important, showing solid growth for the NFL, decent growth for baseball and less growth for both the NBA and NHL. This chart shows the percent increase in revenues for the four sports:

Before this chart is taken out of context, take a moment to break the revenue lines into two pieces--one from the 1998-2007 period and then 2008-2012. Every sport except football shows a flattening of revenues in the latter period, which may be based on the economy, shifting trends in sports consumption or something else. There is growth, but that growth has slowed. The question is whether this 5-year period is an aberration or a harbinger of a new trend.

This rather busy chart shows both payrolls by sport as well as the percent of revenue that payroll comprises:

If the payroll values had been left as lines they would have mirrored very closely the slope of the revenue line, easily explained when the payroll as a percent of revenues (the lines measured by the right axis) are taken into account--almost every sport now pays out on the order of 50-55% of revenue as payroll. A primary element in the labor strife experienced by the NFL, NBA and NHL was the precise definition of "revenue," and I won't even begin to try to explain how Forbes defines revenue, because I don't know. What I'm trying to show is the steady increase in payroll that marched in  lockstep with the increase in revenues.

But are the leagues profitable? Profit is just as difficult to define as revenue, so this chart shows operating profit as a percentage of total revenues. Operating profit typically is revenues from operations (ticket sales, concessions, parking, etc.) less operating expenses (payroll, stadium expense, cost of goods sold, etc.):

The NFL is profitable because it has no excess capacity--it essentially sells out every game, but even that is showing some cracks as smarller market teams are experiencing unsold seats. NFL attendance data is spotty--in the good old days, it was simply a matter of adding up stadium seating capacity since every team sold out every game, but that is changing. ESPN has data which suggests that the percent of stadium capacity is down from essentially 100% in 2006 to 95.5% in 2012. This is a loss of around 2,000 fans a game and why the NFL is making efforts to make the stadium experience unique and special.

The other leagues will have capacity issues as long as they have seasons of their length--in simple economic terms, they have excess capacity, although it must be stated that their excess capacity is far less than in days gone by. One of the most popular posts I've written in this blog examined MLB attendance trends over the past 50 years. Attendance may be at historical highs but the operating profit for baseball has been declining since even before the recession. It would be very interesting to view baseball profits on a scale longer than this one, but I work with the data I have. I suspect the profits for baseball will slowly begin rising for one simple reason--the days of long, expensive (and stupid) free agent contracts could very well be coming to a close.

The Forbes list also places values on the professional teams. I'll show those in groups of 30 and mixed by sport to illustrate where the value is--this is the top 30:

All data are from the 2012 season. Most of the columns are self explanatory, but I'll specifically explain six:
Rnk--this is the rank of the given team within its sport. The Patriots are the 3rd-most valuable professional team and the 2nd-most valuable in the NFL
The four middle columns are components of the Value column:
Sport--the inherent value of each sport
Market--the value of the market, with multi-team markets being split up
Stadium--the value of the stadium, which may (or may not--I'm not sure) include naming rights, signage, parking or other items
Brand--the value team itself delivers
The last column is Gate, which is the ticket revenue (and luxury suite revenue).

One thing should be immediately obvious, which is that the 23rd-most valuable NFL franchise is the 27th-most valuable professional team in North America. Another way of stating this is that 7 of the 30 most valuable franchises are in baseball (4), basketball (2) or hockey (1)--the rest are in football. Smarter people than me will have to explain how the Toronto Maple Leafs, who made the playoffs in 2013 for the first time in NINE YEARS are the most valuable NHL team, but it's been that way since 2006--yet another in a long list of hockey aspects I don't understand.

The next 30:
The first teams that show operating losses pop up with the Detroit Lions and several baseball teams. The Oakland Raiders have several problems:
1. They're bad
2. They're not filling their stadium
3. When they do fill their stadium, it's with Oakland fans
Despite all this and at least a decade (or more) of mismanagement and neglect by Al Davis they're still worth over $800 million dollars, although it would be an interesting test were they to come on the market. They're profitable, but certainly not due to anything they do, as the $37 million they receive in gate revenue is among the lowest of any of the teams listed so far. The contrast between the San Francisco and Oakland teams in both baseball and football is stunning in the contrasts of cities separated by a bay. Location, location, location is true after all.

Here's the next 30, and some cracks begin to appear:

The most storied franchise in the NHL is 61st on the list of most valuable franchises. Montreal is clearly profitable but they haven't had the success of the past, and it's put some pressure on the franchise value. By now it's pretty clear that except for the teams at the very top, the rank of franchises goes from NFL to MLB to NBA to NHL--no shock to anyone who even remotely follows sport, but rarely are issues laid out this starkly.

These are the franchises I wouldn't recommend purchasing anytime soon:

Hockey is at a critical juncture--the Blackhawks winning the 2013 Stanley Cup may give their franchise a boost, but the inherent value of the sport is a fraction of the other sports. Until they get some kind of national TV contract they'll be poised on the precipice of insolvency. When that sea of red ink is properly understood to be the INCOMPLETE picture of the losses teams are incurring it becomes clear that there are about 8-10 teams too many, and how long the NHL will continue to operate at its current size is a good question.

Forbes data is rightly questioned as to its accuracy, since most professional teams are private enterprises with no compunction to make their internal finances public. However, it serves as a basis for comparison and helps provide a snapshot of where leagues and teams are from a financial standpoint. Whether the NFL can continue to not only increase revenue but increase the rate of growth remains to be seen, as natural constraints to growth are on the horizon--stagnant population growth, declining (slightly, but declining nonetheless) attendance and unknown new revenue streams. This doesn't even take into account the impact that concussion awareness may have since it's far too early to make anything but guesses in that regard. Every sport is cyclical, and the overall economy drives sport revenue as much as anything else--it's not a coincidence that the concurrent growth that baseball, football and basketball (hockey not as much) experienced going back 30 years coincides with the general 25-year run of economic growth from 1982-2007. I did this some time back, but this graph tracks increase in attendance growth for baseball and basketball with the Dow Jones Industrial Average:
The three lines measure percentage growth in the DJIA and baseball and basketball attendance. I'm sure there have been dozens of PhD dissertations investigating this very phenomenon, but three very distinct events occurred in the 1980s-1990s that had direct impact on sports revenue:
1. The Baby Boom generation came of adult age
2. The economic expansion
3. A wave of new stadiums that swept through all sports
How much this was a perfect storm that can't be duplicated, only time will tell.

Think about the White Sox and their threat to relocate to the Tampa Bay area in the late 1980s--that turned directly into the new Comiskey (now US Cellular Field). They would have left the #3 market in America for one that currently doesn't support a very good team. The Sox have been far better off being the second banana in a large market than they ever would have been in Tampa Bay, proving two points:
1. It's good to be in a big market
2. It's REALLY good to be in the NFL
Who knows how long this run of professional team revenue will be? A shakeout may be looming for basketball and hockey, and baseball might not be immune. People have been talking about contraction for years, but the time might be nigh, and that would be interesting. Too few dollars chasing too many goods is never a good thing, and for professional teams, at least in the smaller markets, it might be wise to not ask for whom the bell tolls.

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