Common Issues with Revenue Generated from Broadcasting Right
February 12, 2025
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In the previous article, we have already witnessed what replacement cost theory is and how it can be used to value sporting franchises. We now know the theoretical aspects of this type of valuation.
We also know that the replacement cost approach is not used very widely when it comes to the valuation of sports franchises. This is because there are more downsides to using this approach than there are upsides.
In this article, we will have a closer look at both the downsides as well as the upsides of using replacement costs in order to value sporting franchises. The main points have been mentioned below:
The main benefits of using the replacement cost approach in order to calculate the valuation of any sports franchise are as follows:
Estimates are made to understand how much money would be required to build a similar brand name at current prices. Hence, all assets including intangible ones are fairly valued without any consideration to cash flows which they may or may not provide.
There are more disadvantages of using the replacement cost approach vis-a-vis the advantages. Some of the main pain points have been mentioned below:
It needs to be understood that building a sporting franchise that has a loyal fan following and a brand name cannot easily be done in a very short span of time.
Brand names related to sporting franchises are built over many years as a result of the performance of the firm. This cannot be built instantly even if a lot of money is spent. Hence, it can be said that the basic premise of the valuation method is flawed.
Hence, only a certain number of franchises are permitted to operate. Therefore, supply is generally controlled and if a new buyer wants to own a team, they need to buy one since there is no option of creating a new team.
The replacement cost theory might be effective in other industries where entry barriers are not present. However, it cannot be used to value a sporting franchise since its supply is controlled.
There are many experts who believe that the replacement cost method is not genuinely applicable when it comes to the valuation of sports franchises. It is being used to provide an academic cover to reverse engineer and make sense of the sky-high valuations that are provided to sporting franchises.
For example, it may not be possible to build the same assets since the same material is no longer used or the government no longer provides permits to build some assets. Similarly, information about brand equity and other intangible assets is not very easily available. As a result, it is not possible to come up with an accurate estimate.
It does not pay much attention to the future and the possibilities available there. Obviously, investors are more concerned with the future prospects and hence find this method to be unsuitable.
The fact of the matter is that the replacement cost method is not suitable for valuing sporting franchises. Since the supply is tightly controlled, it is not really possible to replicate the creation of a sporting franchise. However, it provides a good approximation of the overall value of the firm and can be used in conjunction with other methods even though it cannot be used directly.
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