Revenue Sharing in Sports Leagues
The economics of sports leagues is quite complicated. This is because of various factors. However, two of the most important factors are:
- The revenue is generated at the central level i.e., by the franchisor, and at the franchise level as well i.e. local revenue. For instance, broadcasting rights are monetized at the central level. However, other revenues such as ticket sales and merchandising may have to be done at the local level.
- Also, there are multiple sources of revenue that deliver funds to the sports leagues. It is important to realize that there is some sort of correlation between these various sources of revenue. Also, it is possible that the growth in one revenue stream may inadvertently lead to cannibalism of another source of revenue.
It is for this reason that it is important for the management of the sports league to be aware of the fact that all revenues are not the same. There are some types of revenues that are more beneficial to the economic activity of the entire league. In this article, we will try to understand the different characteristics of the different types of revenue generated.
- Certainty: The basic principle of finance is that a stable source of revenue is considered to be more valuable than an unstable source. This is because the variation makes it difficult to plan any kind of expenses. The same can also be said about the revenue from sports leagues.
There are certain types of revenues such as ticket sales and merchandise which are variable in nature. The revenue derived from these sources is highly uncertain. On the other hand, there are other sources such as revenue from the sale of broadcast rights.
Generally, sports leagues enter into long-term contracts with broadcast partners. Hence, the cash flows from the sales of these rights are quite predictable and allow the league to plan its expenses in a better manner.
- Variability: In the previous point, we mentioned variability as a negative phenomenon. This is because it creates problems related to planning. However, variability can also have a positive impact. This is because if the league is at a cliffhanger stage, audience interest is likely to increase. However, this increased interest does not translate to increased broadcast revenue since those rights have already been sold! However, it does translate into the sale of more tickets or merchandise at a higher price. Hence, in some situations, variable sources of revenue can be beneficial to the finances of the league.
- Scalability: Scalability means the ability to increase the revenue without a proportional increase in the price or the related costs. Once again, it needs to be understood that there are certain types of revenues that are more scalable as compared to others.
Revenues generated from the sale of digital rights or sponsorships can be scaled up easily if the league becomes more popular. This can be done by allowing broadcast in newer markets or by adding new types of sponsors to the list. However, when it comes to ticket sales and merchandising, there is a supply constraint. Hence, even if the price is increased substantially, there is a limit to which the supply can be scaled up.
- Effort Required to Earn the Revenue: The different types of revenues earned by a sports league can also be differentiated based on the effort which is required to earn that revenue. There are some types of revenues that are completely passive in nature.
Broadcast rights are a good example of such revenues. In the case of broadcast rights, the sports league does not need to conduct any event management activities. The entire activity is managed by the media company and the league is able to generate revenues passively.
However, when it comes to the sale of tickets, the management of the league needs to be actively involved in managing the sale of these tickets. Sometimes, the task of selling tickets and managing the event is outsourced to a third party. However, the responsibility still lies with the league.
- Synergy for other Revenue Models: The different types of revenues do have a correlation between them.
For instance, the sponsorship revenue which a firm is able to generate depends upon the number of eyeballs that will watch the event. This in turn depends upon how the matches will be telecasted i.e., upon the media partner of the event.
Hence, good media partners also increased the probability of being able to negotiate better with sponsors. On the other hand, some types of revenue end up cannibalizing other sources of revenue. For example, broadcast rights exert downward pressure on ticket sales in the ticket prices.
- Maximizing Profits for All Stakeholders: It is important to realize that the fact that revenue is generated at two different levels can complicate matters.
For instance, it is possible for the franchisor to draw up contracts that lead to higher collection of revenue at the central level at the expense of loss of revenue at the local level. The opposite of this is also a possibility wherein local teams gain at the expense of the league or at the expense of each other. In all cases, it is important to ensure that the system is created in such a way that the overall revenue is maximized.
The fact of the matter is that revenue generation from sports leagues can be a very complex activity. Several points need to be taken into account before deciding on the exact revenue mix of the sports league.
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