How Team Performance Affects Valuation?

Sporting franchises are often said to be confused about what their objectives should be. One chain of thought believes that since they are businesses, their objectives should also be financial in nature. This means that their objectives should also be about profit maximization or wealth maximization.

On the other hand, there is a different chain of thought that believes that sporting franchises must not worry about finances and must work towards maximizing their wins. As a result, clubs across the world face the dilemma of whether they must maximize their profits or their wins.

However, there is a third chain of thought which believes that there is no dichotomy at all! The belief is that it is only the good performance of any sporting team that can help it generate wealth in the long term.

Hence, profit maximization and win maximization are not at loggerheads. Instead, they have the same objective.

In the rest of this article, we will see how the performance of a team affects its valuation in the long run.

1. Broadcast Rights: Firstly, it is important to note that the share of broadcast rights is a very important contributor of revenue to any sporting franchise. This share of revenue depends upon the number of times a team’s matches are televised.

   Now, it is obvious that if a team plays well, it will progress to the higher stages of the league. As a result, more of their matches will be televised and hence they will earn more revenue. It is for this reason that teams that consistently play well are able to earn more in the form of broadcasting revenue.

2. Higher Ticket Sales: Just like broadcasting revenue, teams also make a big chunk of their money from ticket sales at the venue. Once again, the same logic applies. This means that if a team plays better than its competition, then it is likely to play more matches.

   More matches mean more tickets can be sold. As a result, the share of revenue that the team derives from ticket sales becomes larger.

   Also, it needs to be taken into account that when a sporting franchise consistently does well, it gains a more loyal fan following. This gives them the pricing power required to raise the prices of their tickets. Hence, over time, the revenue derived from ticket sales steadily increases because of better performance by the team.

   

3. Higher Merchandise Sales: As mentioned in the above points, when a team plays well over a sustained period of time, it gets more time to engage with its fans. Also, there is a higher probability that a player will come up with a memorable performance if a large number of games are played.

   All these factors viz. higher engagement as well as memorable performances are factors that influence higher sales of merchandise. Hence, it can be said that the performance of the team indirectly impacts the sales of merchandise. The end result once again is that win maximization automatically leads to revenue maximization.

4. Higher Advertising Revenue: The advertising revenue that an individual player is able to generate is directly dependent upon their popularity with the fans. At the same time, the popularity of a player is heavily influenced by their recent performance.

   It is true that there are die-hard fans who believe in their favorite players and persist with them. However, the vast majority of fans end up supporting players who are playing well currently.

   Hence, it can be said that the advertising revenue that can potentially be generated by a player depends upon their recent performance. Since sporting franchises also receive some part of advertising revenue, it can be said that this part of the revenue is directly influenced by the recent performance of the team.

5. Higher Player Retention: If the recent performance of the team is good, then they will be able to generate more revenue. As a result, the team will be able to better reward its players.

   The higher rewards increase the chance of retention of the players. This retention further creates a higher probability that the team will function as a cohesive unit. This increases their chances of winning again and the entire cycle gets repeated.

6. Additional Revenue: Last but not least, sporting leagues across the world create a system to incentivize better performance. As a result, the amount of revenue which is generated centrally by the league is distributed disproportionately amongst the franchises.

   The franchises that perform well on several occasions are entitled to a higher share of the league’s revenues. This is fair since such franchises are the ones which are generating the higher revenue and they should be entitled to a larger share as compared to the others.

   Different leagues have different types of performance-based payments which provide additional revenue to the team.

Hence, it can be said that there is no dichotomy between win maximization and wealth maximization as far as sporting leagues are concerned. In the long run, franchises that can continue to win sustainably are the ones that are likely to generate the most wealth.