Chapter 15
Professional Sport
Chapter Overview
I. Introduction
II. League structures
a. Franchisee/franchisor structure
III. Ownership rules and policies and league finances
a. New ownership
b. Debt
IV. Competitive balance
a. Player drafts
b. Salary slotting
c. Free agency
e. Luxury tax
f. Revenue sharing
i. Media revenue
ii. Gate receipts
iii. Merchandise sales
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.
4. Leagues and teams are always looking for new sources of revenue and have used ticket
reselling and variable ticket pricing to generate additional revenue.
Concept Check Responses
1. What is the difference between win maximization and profit maximization? How can
these different philosophies cause problems in professional sport leagues?
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
2. How does a commissioner interact with owners and players in a professional sport
league? What are a commissioner’s main responsibilities?
Despite popular belief, a commissioner is hired by the owners. Most commissioners are
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?
The “Big 4” leagues have individual franchises that compete on the field and then
4. Why do professional leagues establish rules governing the financial operation of
individual franchises?
Since leagues cannot effectively function and thrive without “fair” competition,
individual franchises must be financially solvent. Leagues create rules to ensure that
5. Explain the concept of pooled debt instruments.
Pooled debt involves using multiple loan applicants rather than one applicant. In the
6. Why have so many rival professional sport leagues failed in the United States?
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
7. How do you see traditional sport organizations becoming involved with esports in the
future? How can established traditional sports leagues create new fans through esports
ventures?
See Sidebar 15.D. The second wave of esports in the past decade has seen increased
interest from traditional sports ownership groups and individuals. Domestic leagues like
8. Explain the concept of competitive balance. How have leagues attempted to achieve
competitive balance?
Since a professional league cannot effectively function if a small fraction of teams win
9. Discuss the differences between the salary caps in the NBA, NHL, NFL, and MLS.
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.
10. 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.
The key component of the new NBA luxury tax is an escalating rate of “punishment” for
11. What is WAR and VORP (in the context of sport finance)? Conduct research to determine
the ten most efficient players during the last MLB season. Then compare their salaries to
determine which player offered the best performance value for his salary.
A variety of MLB-oriented websites keep track of Wins Above Replacement statistics for
12. What will be the impact of cord-cutting on the overall sport industry and professional
sports in general? What concerns should league and team administrators evaluate for
the future?
Cord cutting is already impacting the sports industry, with ESPN laying off 2% of its
workforce in 2017 as more consumers cut cable. New sport streaming services such as
13. How do you feel the new gambling environment will benefit North American professional
sport leagues and individual teams? Are there any considerations organizations should
consider in the future? How do other professional sport leagues operate in other
countries in which sport gambling has been legal?
A variety of answers are acceptable, such as the additional revenue streams accessible
14. Explain why a relegation system would be difficult to implement in North American
professional sport leagues.
North American professional sports leagues have more stringent media and sponsorship
Responses to Practice Problems
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.)
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
Responses to Case Analysis 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?
