Revenues and Costs of Sporting Teams: Sources and Dynamics

Revenues of Sporting Teams

Revenues and Costs of
Sporting Teams
Sabrina Auci
University of Palermo
· Since the sources of revenues are multiple, and each component depends
on different factors, it is impossible to define a unique function for total
revenues.
· Total revenues are the sum of different components:
TR= RG + RB + R$ + RM + RT
Where
RG are the gate revenues from sporting competitions
RB are the revenues from broadcasting rights
Rs are the revenues from sponsorships
RM are the revenues from merchandising and others
RT are the revenues from transfer from other teams in the league
Sports Economics - Revenues and Costs

Gate Revenues

Gate Revenues
· Gate revenues come from the number of tickets sold times the
price of one ticket. So, they depend on ticket price.
. The relationship between ticket quantity (Qt) and price (Pt) is
decreasing and thus the demand curve has a negative slope.
· Other characteristics may influence RG such as consumer income,
the price of substitutes or complements, the number of fans, tastes
and preferences (the day of the week, the quality of home team,
etc.).
Sports Economics - Revenues and Costs

Increasing Gate Revenues

Gate Revenues
· To increase gate revenues, teams
should shift demand curve on
rightward (D2).
. This will result in an increase in the
demand for tickets at each price
level.
· To shift the demand:
· Short-run aspects: Uncertainty about
the result of the match. An old game
does not attract people to watch it on TV.
· Long-run aspects: success in building
a winning team.
Pt
Pt1
I
I
D2
D1
Qt1
Qt2
Qt
Sports Economics - Revenues and Costs

Gate Revenues: Ticket Pricing Strategies

Gate Revenues: Ticket Pricing
· Closed leagues do not have to worry about new entrants, but the
same ticket-selling behaviour can apply to open leagues.
. This gives them the market power to set the price of tickets without
regard for how other or potential supplier might react.
· Three ways to set the price:
· Constant ticket pricing: the same price for all the games
· Variable ticket pricing: the price varies from game to game according to the
expected demand for a future match.
· Dynamic ticket pricing: additional revenues are captured on individual
game characteristics, unknown at the start of the season.
Sports Economics - Revenues and Costs

Gate Revenues: Constant Ticket Pricing (I)

Gate Revenues: Constant Ticket Pricing (I)
· When promoting a match or sporting event,
the ticket price chosen should maximise
profit so that the MR=MC condition holds.
. Assuming that the demand curve is equal
to:
Pt = 1000 - 0.02Qt
· So, the graph represents the demand curve
besides the marginal revenues curve:
MR =
ATR
AQt
= 1000 - 0.04Qt
Where TR is equal to:
TR = Pt * Qt = (1000 -0.02Qt)Qt
= 1000Qt - 0.02Q2
P.
As the cost of bringing an extra
person to the sporting event is zero
up to the stadium capacity so that
MC = 0 up to 40000, the optimal
solution is the point E.
1000
E
500
Total costs are
composed only by
fixed costs related to
the structure, this
because they are
about the same no
matter how many fans
attend.
D1
‘MR
MC
25000
40000
Qt
Sports Economics - Revenues and Costs

Gate Revenues: Constant Ticket Pricing (II)

Gate Revenues: Constant Ticket Pricing (II)
· Algebraically, the optimal solution is found following these
steps:
MR = MC
1000 - 0.04Qt = 0
1000
Qt =
= 25000
0.04
Substituting into the demand curve, we get the optimal price of
tickets:
Pt = 1000 - 0.02(25000) = 500
Sports Economics - Revenues and Costs

Gate Revenues: Variable Ticket Pricing

Gate Revenues: Variable Ticket Pricing
· Ticket prices are set according to expected demand for a future
game.
· When a team believes that demand for a match will be lower,
it reduces the price, and vice versa, when the demand for a
match will be higher, it increases the price.
· Some factors such as the day of the week can be known
before the season begins, while other factors such as the
home team's and opponent's records, may be known only
shortly before the game.
Sports Economics - Revenues and Costs

Gate Revenues: Dynamic Ticket Pricing (I)

Gate Revenues: Dynamic Ticket Pricing (I)
. Many teams now change the prices in response to the
actual realized demand.
. This adjustment allows teams to increase revenues as
game day approaches.
· These additional revenues are based on individual game
characteristics that are unknown at the beginning of the
season which may produce exceptionally high demand or
the opposite (very low demand).
Sports Economics - Revenues and Costs

Gate Revenues: Dynamic Ticket Pricing

Gate Revenues:
Dynamic Ticket Pricing
· If we distinguish between popular games
(D1) and less popular games (D2), we
have two different demands and
therefore two optimal solutions (E) and
E1) with different optimal ticket prices.
· A team using variable or dynamic ticket
pricing sets MR equals to MC for each
game:
MRO = MC and MR1 = MC
With prices fixed at 60$ and 80$ and
selling 30,000 seats to the less popular and
sold out to the popular game. TR is equal
to 5 million$ (60*30,000 + 80*40,000).
Pt
MC
120
80
I
I
I
60
I
D1
MR0
MR)
Do
30000
40000
Qt
Sports Economics - Revenues and Costs
10

Variable/Dynamic vs Constant Ticket Pricing

E1Variable/Dynamic vs Constant Ticket Pricing
. If the team tried to sell tickets for the less
popular game at 80$ (point A), half of the
seats would go unfilled resulting in a loss of
200,000$ in TR (4,800,000=80*20,000 +
80*40,000).
. If the team charged only 60$ for the
popular game (point B), it would be sold out
resulting in a loss of 800,000$ in TR
(4,200,000=60*30,000 + 60*40,000)
· A team using constant ticket pricing sets a
single intermediate price, such as 70$, for
both games (points C and D). This strategy
is too high for the less popular game and too
low for the popular game. TR is equal to
4.55 million$ (70*25,000 + 70*40,000).
Pt
Comparing the impact of variable
or dynamic vs constant ticket
pricing
MC
120
A
E1
80
C
-
D
70
-
60
I
I
B
D1
'MRO
MR
Do
20000
30000
40000
25000
Qt
Sports Economics - Revenues and Costs
11

Broadcast Revenues

EBroadcast Revenues
· Few events have changed the finances of professional sports as
much as the advent of television.
. All leagues enjoy billions of dollars in annual revenue from
national broadcasting rights.
· Cable sport has both positive and negative effects on revenues:
· if fans prefer to watch a match on television, TV rights revenues increase,
but gate revenues decrease as demand for stadium tickets falls.
· Televised game are a substitute for live attendance, resulting in a shift of the
demand for attendance to the left.
Sports Economics - Revenues and Costs

Broadcast Revenues and Attendance

Broadcast Revenues
· The impact of TV on attendance was first documented in 1948, when
the Philadelphia Eagles saw attendance revenues drop by 50%
when they televised all their home games.
· The NFL decided to black-out (forbid networks from showing the
match in the local market) games that were not sold out.
. However, the positive effect is that television may stimulate fans'
interest in the game, and then broadcasts may increase
attendance.
Sports Economics - Revenues and Costs

Broadcast Revenues as Major Financing Source

Broadcast Revenues
· Data show that TR from broadcasting rights (RB) are
greater than gate revenues (RG), representing the major
source of financing for all the professional sports.
· The broadcast of sporting programme presents two
characteristics:
· Cable sport can be considered as a public good.
· Cable sport is protected by copyrights.
Sports Economics - Revenues and Costs

Broadcast Revenues: Public Good Characteristics

Broadcast Revenues
IV)
· Treating cable sports as a public good means that once the sports
programme has been produced, the marginal cost of additional
viewers is zero.
. Apart from pay-per-view broadcasting, where the technology
makes it possible to exclude non-paying viewers, the broadcasting
of sports programmes has the characteristics of non-rivalry and
non-excludability.
. In addition, the sports broadcasting sector was characterised by the
existence of barriers to entry, as there were only a few national TV
channels that were authorised to broadcast sports programmes.
Sports Economics - Revenues and Costs

Broadcast Revenues: Copyright Protection

Broadcast Revenues
· Sports programmes are protected by copyright and cannot be broadcast in
whole or in part without authorisation.
. Thus, all the leagues try to sell the exclusivity of the TV rights to the best
bidder at a fixed price.
. For example, FIFA sold the exclusive TV rights to the 2002 and 2006 World
Cups to a German company, Kirch, for $2.5 billion, to be sold to each
individual nation.
· Kirch provided FIFA with a marketing service by avoiding the need for FIFA to negotiate TV
rights with broadcasters in dozens of countries around the world.
· Kirch, however, assumed the risk of any losses as the price paid to FIFA was fixed and
independent of negotiations with individual countries (flat fee).
Sports Economics - Revenues and Costs

Sponsorships Revenues (I)

Sponsorships Revenues (I)
· Sponsorships are another important source of revenue
(Rs) in professional sports.
· When watching a match, fans can see how much effort
companies put into associating their brands with a team,
player or event.
· In general, corporate names and logos adorn uniforms
and equipment of teams as well as the stadium.
Sports Economics - Revenues and Costs

Sponsorship Agreements and Advertising

Sponsorship Revenues
· Sponsorship agreements occur at both league and team level.
· Sponsoring firms pay fees to teams and leagues in exchange for
advertising.
. There are several reasons why sport is such a powerful vehicle for
advertising:
· Sport is a universal language.
· Sport appeals to the emotions of the audience and their attachment to the
team.
Sports Economics - Revenues and Costs

Merchandising Revenues

Merchandizing
Revenues
· Merchandising revenues (Rs) are generated through the
management and marketing of the team brand.
· The primary merchandising activity is the sale of official team
jerseys.
· Nike and Adidas compete for exclusive rights to the most
prominent professional clubs in various sports.
. These results in teams collecting substantial sums of money through
what was previously considered a cost item: technical supplies.
Sports Economics - Revenues and Costs

Merchandising Revenues: Distribution Channels

Merchandizing
Revenues
· Selling goods and services using a team's brand and
colours depends mainly on distribution channels.
. These can be broadly divided into two main types:
. Team stores selling directly to the public
· Online sales via the Internet.
Sports Economics - Revenues and Costs
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