Chapter 15
Professional Sport
Chapter Overview
I. Introduction
II. League structures
a. Franchisee/franchisor structure
i. Role of the commissioner
ii. Role of the league owners
b. Single-entity structure
III. Ownership rules and policies and league finances
IV. Competitive balance
a. Player drafts
b. Salary slotting
c. Free agency
d. Player salary negotiations
i. Salary caps
ii. Salary arbitration
e. Luxury tax
f. Revenue sharing
iv. Sponsorship agreements
v. Revenue sharing methods
V. Emerging revenue sources
a. Luxury seating
b. Seat licenses
VI. Conclusion
Key Concepts
When reading this chapter, students should focus on the following key concepts:
1. Professional sport leagues operate differently from other businesses. Owners of
professional teams must consider the impact of their financial decisions on the
remaining owners in the league.
2. Professional sport leagues operate as quasi-socialists in the franchisee/franchisor league
model, the most popular in North American professional sport. Some leagues (e.g., MLS
and the WNBA) have operated in a single-entity structure, with one entity owning the
league and all of its teams.
Quiz Questions
Multiple Choice
1. In which league was Pete Rozelle commissioner and developer of the idea of “league
think”?
a. MLB
b. NBA
2. Which league once operated under a single-entity model?
d. NHL
e. NFL
3. In the late 1950s, which league failed to recognize that it should expand to emerging
markets, which allowed an upstart league to establish a presence in those markets?
a. NFL
b. NBA
4. Leagues have created rules and policies to improve competitive balance. What do these
rules and policies typically relate to?
d. All of the above
e. None of the above
5. Which league’s salary slotting system encouraged the Houston team to make their on-
field product particularly terrible from 2009–2013?
a. NFL
b. NBA
6. Which of the following is the responsibility of the commissioner’s office under the
franchisee/franchisor league structure?
a. Negotiate national television contracts
b. Establish relationships with vendors for league-wide licensed merchandise sales
7. This league began in a single-entity structure and switched to a franchisee/franchisor
model?
a. WNBA
b. MLS
8. In which league have franchises typically been owned by corporations?
d. Minor League Baseball
e. None of the above
9. Which iconic franchise nearly experienced financial disaster in 2011? ?
a. Los Angeles Dodgers
b. Chicago Cubs
10. Through 2015, the highest expansion fee paid by a new team entering a North American
professional league was in which league?
a. MLB
b. NBA
True/False
1. T or F Each of the professional sport leagues has established rules regarding who may
become an owner and join their “club.”
2. T or F The NHL has the most strict ownership requirements of all the North American
professional sport leagues, including a steep cash down-payment requirement.
5. T or F The four major North American sport leagues all share revenues from licensed
merchandise sales equally among their teams.
8. T or F In addition to “traditional” luxury suites and club seats, some facilities offer
luxury suites that do not have a direct view of the field of play.
9. T or F A personal seat license is typically valid for the life of the facility.
Answers to Quiz Questions
Numbers in parentheses represent where, in the text, you’ll find this discussed.
Multiple Choice
1. e (p. 410)
2. c (p. 412)
3. a (p. 421)
True/False
1. T (p. 410-411)
2. F (p. 414)
3. F (p. 416)
Responses
1. What is the difference between win maximization and profit maximization? How can
these different philosophies cause problems in professional sport leagues?
See page 409. Win maximization is the pursuit of wins and championships, whereas
profit maximization is the pursuit of profits. In most for-profit businesses, the pursuit of
profits is the primary goal. In professional sports, however, there may be owners who
have amassed significant wealth from other business ventures, and they are willing to
2. How does a commissioner interact with owners and players in a professional sport
league? What are a commissioner’s main responsibilities?
See pages 409 through 410. Despite popular belief, a commissioner is hired by the
3. How do professional sport leagues such as the NBA, NHL, NFL, and MLB differ in
structure from entities such as NASCAR, the PGA Tour, and the PBA Tour?
See pages 409 through 411. The “Big 4” leagues have individual franchises that
compete on the field and then cooperate on league matters such as media contracts,
4. Why do professional leagues establish rules governing the financial operation of
individual franchises?
See pages 410 through 420. Since leagues cannot effectively function and thrive
without “fair” competition, individual franchises must be financially solvent. Leagues
create rules to ensure that new owners have adequate financial resources to avoid
5. Explain the concept of pooled debt instruments.
See page 417. Pooled debt involves using multiple loan applicants rather than one
applicant. In the case of professional sports, leagues can typically procure loans at lower
6. Why have so many rival professional sport leagues failed in the United States?
See pages 421 through 422. Established professional sport leagues work to maintain a
monopoly over their sports. Leagues ensure that there are few viable “open cities” for
new leagues to use to attract fans. Leagues also sign contracts with media companies
that often leave little room for an emerging league to generate interest. Established
professional leagues also typically control access to limited sport facilities in markets,
necessitating an upstart league to play in smaller facilities.
7. Explain the concept of competitive balance. How have leagues attempted to achieve
competitive balance?
See pages 420 through 422. Since a professional league cannot effectively function if a
small fraction of teams win the championship each year, leagues implement rules to
attempt to create an opportunity for each franchise to win (if they make wise choices in
8. Discuss the differences between the salary caps in the NBA, NHL, NFL, and MLS.
See pages 426 through 431. The NFL uses a “hard” cap that can be “circumvented” by
the use of signing bonuses that are allocated over the life of a player’s contract. In many
cases, allocated signing bonuses later become “dead money” when players who no
longer play for the team still have some of their previous signing bonus allocated to
future seasons.
9. Explain how the NBA’s new luxury tax system operates. Research and explain an
example where the new tax rates affected (or may have affected) a team’s decision to
sign players for its roster.
See pages 432–436. The key component of the new NBA luxury tax is an escalating rate
of “punishment” for exceeding the tax limit. No longer is excessive spending taxed at a
10. What is WAR (in the context of sport finance)? Conduct research to determine the ten
most efficient players during the last MLB season. Then compare their contracts to
determine which player offered the best performance value for his salary.
11. List and describe the most important revenue sources for professional sport leagues. In
what ways do you think these revenue sources will change in importance in the future?
See pages 442 through 445. Students should discuss revenue from media, gate receipts,
luxury seating, licensed merchandise, and sponsorships. Other sources of revenue not
explicitly discussed in the book could also be explored (camp revenue, etc).
12. Do you feel that daily fantasy leagues are gambling or games of skill? How do you feel
the legislative and judicial branches of government will resolve this question in the
future?
See page 444. The issue has received considerable attention, as of 2015, and should be
easy for students to research. A variety of state and federal legislators have noted their
opinion regarding the legality and appropriateness of daily fantasy sports.
13. Explain why a relegation system would be difficult to implement in North American
professional sport leagues.
See page 441. North American professional sports leagues have more stringent media
and sponsorship contracts that would be difficult to maintain if teams were promoted
Responses
1. If the federal inheritance tax is set at 40% of all assets above $5 million at the time of
death, and a state’s inheritance tax is set at 5% of all assets above $1 million at the time
of death, what does an individual who dies owning a professional sport franchise that is
worth $420 million owe in total tax liability? (Assume no other assets at time of death.)
2. If a 30-team league is contemplating expanding by two teams, how much money should
it charge each new franchise to ensure that during the first year of the new 32-team
league, each of the existing 30 owners will receive the same amount of revenue as they
would have without the expansion? (Assume each owner makes $40 million per year
from media contracts and $10 million per year from licensed merchandise sales, that
the league will continue to share these revenues equally after the expansion, and that
the media contracts are not scheduled to be renegotiated until a year after the
expansion is completed.)
The established teams will lose $1,600,000,000 – $1,500,000,000 = $100,000,000 and
should charge each new franchise $50,000,000 to enter the league.
3. Last season, the top pick in a 30-team league’s amateur draft signed a contract for $2
million per year. In the upcoming season, the league will implement a salary slotting
system under which each pick will be compensated based upon his draft selection. If the
compensation plan will be based on a 5% increase of the top selection’s compensation
from last year and a 1% decreasing scale for every pick after the first selection (second
pick will earn 99% of what the first pick earns, and so forth), how much will the top
selection in next year’s draft earn? How much will the ninth pick earn?
Responses to Questions
You have been asked to consult for an entrepreneur who is assembling investors for a new
professional sport league. A critical decision for the league will be whether to organize
under a single-entity structure or a franchisor/franchisee model.
1. Briefly describe how each structure works and explain the financial advantages and
disadvantages of each structure.
Additional Classroom Activity/Assignment Ideas
1. Where would be the best cities for expansion in each of the following leagues: NBA,
NHL, NFL, and MLB. What factors should these leagues consider before expanding?
2. Research the franchise valuation figures found in the Forbes annual report covering
professional sports. Is there a relationship between unshared revenues and franchise
value? Is there a relationship between moving into a new stadium and franchise values?