Issues in Revenue Sharing in Sports Leagues

A sports league becomes profitable when it is successfully run over many years. This means that almost all the teams participating in the league must be competitive. Now, the amount of money that a team has deeply influences its competitive ability.

For instance, a team with more funds is likely to be able to afford better players, better coaches, and better infrastructure. This will ensure their continuing success in the league.

Hence, the main point here is that money can influence the competitive ability of a team. Hence, if one team is able to obtain significantly more money than the others, it is likely to become more competitive as compared to the others. If this continues over time, the league will become one-sided and viewers will lose interest.

It is for this reason that the revenue generated from the league must be split amongst various teams very carefully. This revenue split is not just a financial decision. In fact, it is a strategic decision that can influence the popularity and revenue-generating capacity of the league in the long run.

Unfortunately, revenue sharing is a very complicated topic. There are many issues that arise during a typical revenue-sharing agreement related to a sports league.

In this article, we will have a closer look at some of the issues which need to be managed by franchisors in order to ensure that the revenue-sharing arrangement works to increase the popularity of the league by ensuring that most teams stay competitive.

1. Finding the Optimum Revenue Split: The first issue that needs to be managed is the ratio in which revenue has to be split between the franchisor and the franchisees. In many parts of the world, this revenue is split equally between the two parties. However, this may not be the most optimum split.

   The franchisor needs to take into account that if they take a share that is too small, they will be leaving money on the table. On the other hand, if they take a share that is too large, the franchises will end up struggling financially. Hence, an optimum level needs to be found via trial and error.

2. Equitable Split of Revenues: Another important issue that the franchisors need to take into account is how the money needs to be split between different teams.

   In some parts of the world, franchisors just take a percentage of the revenue generated by individual franchises. This means that the franchises are in charge of generating their own revenue. In most cases, this revenue will be directly proportional to the performance of the team.

   A team that performs well will be able to sell more tickets at a higher price and the merchandise sales will also be higher.

   In some parts of the world, leagues have a certain fund that they use to incentivize teams that are performing poorly. This is done to ensure that almost all teams perform at the same level. However, there are many critics that believe that this amounts to taking money from teams that are performing well and giving it to teams that are not performing well.

3. Ensuring Money is not Removed from the League: The franchisors have to make sure that the revenue split is done in such a way that a large amount of money is not removed from the league. Of course, the investors who buy franchises may expect a certain rate of return. However, it should not be at the expense of growing the league.

   The franchises should have enough funds left over so that they can use their budget in order to improve their performance in the forthcoming year. However, they should have excessive funds which will end up being withdrawn in the form of dividends.

4. Profit-Minded Management Vs. Winning Focused Management: This point is a continuation of the issue mentioned above. The franchisors have to ensure that the revenue split is done in such a way that the winning team gets a significantly larger chunk of the pie. This will incentivize teams to work harder in order to win. There should be a large bonus for the winner and runner-up teams.

   If the league management fails to incentivize the winners, the franchise games may not be as competitive and thrilling. This is because, from a financial point of view, there will be a very small difference between winning and losing.

   It is the job of the franchisors to ensure alignment between the profit motive and the winning motive. If these motives are not aligned, then at least some of the franchises are likely to focus more on profits and less on winning.

5. Degree of Autonomy Given to Teams: The revenue-sharing agreement should also ensure that teams have a certain amount of autonomy when it relates to their costs such as player expenses and stadium leases. The autonomy has to be enough to provide some flexibility so that the teams can manage their expenses and hence their profits. However, too much autonomy also creates a risk that the league standards might fall down.

   For instance, a particular franchise may decide to use an unsuitable venue as their home ground in order to save costs. However, this might be unacceptable given the standards of the league in general and those being followed by other teams.

The bottom line is that revenue sharing decides the amount of money owed by the league to the franchises. Hence, it ends up deciding the return on investment for the investors which ends up influencing the economic future of the entire league.