Funding Sports

Those of us that remember when a $100,000 ball player was a big deal are accustomed to sports salaries and prices increasing at phenomenal rates.  Clay Travis has a thoughtful column on why it may end soon.

Sidebar: According to Travis every cable/satellite subscriber, like MWG, is paying $30 a year for the NBA.  Since we watch no basketball of any kind in the house ( we know it exists because we see it elsewhere) we are interested in a different pricing model.  If we could trade handball for basketball it would be a deal.  End Sidebar.

The cause of the shortfall is that ESPN has gone from 101 million to 89 million subscribers over the past five year.  Travis uses an idea from Sports TV Ratings that identifies the losses in three area: death (us old folk are likely to subscribe), cord cutters, and cord nevers.  The demographics make sense to us.  Therefore, the extrapolating the drop in ESPN revenues is not as unreasonable as most extrapolation is.  ESPN’s Monday Night Football contract expires in 2021 when they are estimated to be down to 73 million subscribers.  Something will have to give at that point.  We don’t have the price elasticity data on subscriptions but we are of the belief that a sharp increase in prices will lose lots of subscribers.  So the reckoning on sports revenue will could come in the next five years.  It will be ugly if it happens.  Nobody wants less.

We think Travis’ vision is pretty likely but there are a couple of reasons to think it won’t happen.  We could go to a world-wide model where the numbers in emerging countries like China and India allow for a cord solution. ESPN could have many channels if it had a billion subscribers.  Rational economic policies cannot be taken for granted (see USA).  Another alternative is that teams will find a new revenue source that is not tied to the cord.  It is not our area of expertise but it is certain the teams will find new sources of revenue.  One issue is the amount.  Will the additional revenue make up for losses to the cord?  The other issue is control.  If you have the cord you have seen the Real Madrid advertisement.  Will teams control the revenue or will leagues control the revenue.  We might end up with three or four real teams and a bunch of teams that provide competition.  Travis is right big changes are ahead.  They might be the ones he envisions or they might be very different.


Paying College Players

Earlier we discussed the issue of paying college players.  We were lukewarm supporters of such a scheme but noted that the large number of low (we said non) revenue sports, existing regulations from NCAA and Title IX, and the wide variety of colleges make the details extraordinarily difficult.  An article from Andrew Beaton in the WSJ that followed up last year’s valuation of college basketball franchises based on the work of Ryan Brewer, an assistant professor of Finance sheds more data on the problem.  So does the annual report of the Athletic Department at the University of Wisconsin.

Brewer reports adjusted basketball revenue (we don’t have the original source) for Wisconsin of about $30 million in 2014.  The Wisconsin Annual Report shows total sports revenue of about $112 million including almost $38 in gift revenue for 2013-2014.  So basketball players (well, at least the starters) are exploited.  They are making a big profit for Wisconsin while almost all of the other 23 sports are not.

On the other hand, the whole Wisconsin Athletic Department with 24 sports only shows a very small surplus so a few sports are subsidizing many.   We might argue that some of the expenses are soft but the net surplus for the Wisconsin Athletic Department is listed as about a quarter of a million one year and about an eighth in another year.  It is a trivial amount considering the athletic department budget never mind the whole university.

Wisconsin has 24 sports.  Let’s say that is 600 players (100 in football and an average of little over 20 in the rest of the sports).  To provide a $10,000 stipend to each would cost $6 million.  You might be able to find $6 million in the Wisconsin budget by reallocating funds from employees to players but remember that Wisconsin is a top ten revenue producer in basketball and does well in football.  There are, according to Beaton, 351 Division One basketball teams.  Paying players is a big problem for lots of the teams.  That’s why we think the payment should come from the NCAA.

Still it is a lukewarm argument for paying college players.  There will be fewer players and fewer sports if we pay players.  On the other hand, the exploitation of the players in basketball, football, and a few other sports (for example, a few hockey teams) is a bigger concern so working towards a solution is a good idea.


Bad accounting at Forbes

Forbes has estimated that the Astros will be the most profitable team ever despite having the worst record since 2005.  There are two issues: bad accounting and the baseball side of it.

The bad accounting has to do with CSN Houston, the sports cable network that broadcasts the Astros games and is 45% owned by the Astros. 

As the largest stakeholder in CSN Houston, the Astros absorbed the brunt of those losses. FORBES considers regional sports networks separate businesses and does not include their losses or gains in its operating income estimations. 

That’s nice that Forbes has an opinion but GAAP has a different one.  Significant influence (and since the Astro are the biggest shareholder that would be hard to deny) requires the equity method and accruing their share of the earnings.  Forbes said the purchase price was $610 million so the $73 million or so in earnings represents about a 12% return.  Nice but hardly like getting in on the Microsoft IPO.

The other issue is baseball strategy.  Players from the farm system are cheap while free agents are usually expensive and often overpriced.  You may remember when Deadspin released financial statements showing that the Pirates were doing well financially in 2007 and 2008 despite being an awful team.  In 2013 it looks like their strategy worked.  Besides the Pirates, the Rays, Twins, and As are examples of teams build this way.  If you look at beginning of the year payrolls, five of the top ten would be hopeless (over 12 games behind for the wildcard), one has a chance and four would qualify for the playoffs if the season ended today.   The Yankees may yet rise in 2013 but as of today their strategy for 2013 and beyond is not looking good.  MWG is looking into an Astros jersey  because a lack of big contracts makes a team nimble.  They have a chance to be successful.