Goal comparison of team owners in professional sports

2.3 Goal comparison of team owners in professional sports

Why would one own a sport franchise? Because you love the game or maybe you are only in for the profits. In order to analyse value in professional sports we first need to see what goals owners have. Are they simply looking to add some pleasure to their lives or is it just plain profit. In the literature a choice is made in order to do further analysis. Sandy et al. (2004) conclude that utility maximisation appears to be the norm throughout Europe. Looking in retrospect clubs and teams have had negative operating income for many years, thus cannot objectively be labeled profit maximizing entities. The US is a totally different story, clubs do make a profit but it not clear if that is their premier goal. Cooke (1994) adds to this a somewhat different point of view: there are club owners who make an adequate return on their investment. In many cases this may be a payment in kind, reflecting enhanced personal prestige, rather than the prospect of any long-term financial gain. Leeds & von Allmen (2008) see profit maximization one of several possible motivations for a team owner in North America.

Differences between goals stem from tradition and from regulation implemented by public institutions. Leeds & von Allmen (2008) note: European soccer teams face a very different business climate than do North American sport teams. While some teams are highly profitable, most struggle financially. This is partly due to the fact that soccer has only recently been regarded as a business…. The question arising from this last part is why.

One thing that ought to be remembered is that not every professional sport team in these two continents strictly adheres to the division mentioned above. The US market has franchises which make losses because of owner desires’ to prolong other goals. On the other side football clubs like Manchester United have made considerable profits, perhaps due to American ownership.

When trying to make a clear division of ownerships goals the following quote from Lago et al (2006) is important: American commentators, however, also broadly agree that the owners of sporting franchises are driven primarily by commercial objectives. In Europe , by contrast, there is a broad consensus that profit motives have been more constrained, although cases vary according to country Reilly & Schweihs (2004) add to this the following: many sports teams are owned by entrepreneurs who have already made their fortunes … The sports teams allow their owners to compete in a very public forum either that are beloved by their local communities. In many cases, professional sports team ownership is as much of a hobby as it is a business for the extraordinarily wealthy team owners.

It is too easy to just divide the continents in profit and non profit maximisers. In reality each owner of a professional sports team has different views and goals when he buys and operates a certain club.

3. Focus on two particular leagues

In order to thoroughly analyse a sport in more detail an outline of its characteristics is helpful. Focus will, from this point onwards, be put on two sports being baseball and football. The most important details of European football will be investigated, while baseball will be covered by analysing MLB. Introducing these two sports now is essential for understanding the empirical work in Sections 8 & 9.

3.1 Major League Baseball

3.1.1 Structure

Professional baseball in the US is run by MLB. Two leagues consisting of 15 teams compete with each other, during a 162 game long season. Baseball is called ‘the national pasttime’ by many US citizens and its season runs form March till October. It concludes with the well known World Series, where the winners of the so called ‘American’ and ‘National’ league meet.

Parallel to the major leagues, with teams in the biggest US cities, the minor leagues also play a vital role. These teams located in the regional US function as a farm system for talent. Players which wind up with a major league club through a draft, are then sent to the minor league affiliates of the club to develop. Each major league club has about 6 to 7 minor league affiliates, which have their own management and ownership.

3.1.2 Financial overview

Yearly, Forbes magazine publishes a report with key financial data regarding Major League Baseball. The results of the most recent report, which compiled the data for the year 2007 can be seen in Table 2. A deeper analysis into how this value is derived will be presented in Section 9.

The New York Yankees are by far the most successful and well known baseball team winning a total of 26 championships⁶. However, as in many other sports, having the biggest payroll does not make you the obvious winner. In the last ten years the Florida Marlins have won twice making the case for the argument ‘money does not buy rings’⁷. When examining Table 2 one thing that strikes is the big difference in value between teams and the level of operating income. Earlier on it was stated that American team owners are interested in creating value by running profitable companies. From the Forbes report it is observed that in 2007 only 3 teams had negative operating income. Two of those teams were the ones having the highest payroll.

3.1.3 Ownership

According to Forbes’ Business of Baseball report certain MLB franchises are owned by wealthy individuals, others by listed companies. None of them are directly traded on a public exchange. However some listed media and communication companies have majority stakes in MLB teams like Liberty Media⁸, Tribune Company⁹, Rogers Communication¹⁰ and Nintendo¹¹. Leeds & von Allmen (2008) note that joint ownership of sports franchises (and media company) creates vertical integration, the combination of different stages of production, and cross subsidization, the movement of revenues and expenses from one part of a company to another. Due to the matter in which teams are owned and integrated, separation of revenue and profit from pure on-field activities is difficult. For example the Red Sox private parent company NESV¹² owns the team, the stadium and the TV station which airs its games. As can be seen in Table 2 the Red Sox had a negative operating margin last year. It is however very likely that its mother company NESV compensated this loss with revenue from the other businesses related to the Red Sox. No proof of this hypothesis can be provided because the company is privately owned and has very limited disclosure obligations.

Listed companies like Liberty Media and Tribune Company have their own TV stations and are the majority shareholders of the Atlanta Braves and Chicago Cubs. Leeds & von Allmen (2008) argue that: The Braves and Cubs may not have generated as much revenue this way as they could have by selling the rights on the open market, but their parent companies were less interested in which subsidiary made a profit than in their overall profits. This could very well be the case with the Red Sox and their parent company NESV.

Table 2: MLB Team value Forbes



Source: Forbes Magazine

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