Friday, June 24, 2011

Diminishing Returns

Today's FT helps to put the economics of sports franchises into perspective:
The combined big five soccer leagues in Europe made €8bn in revenues last year, estimates Deloitte – less than Marks & Spencer.
That can be put into another context -- FIFA's annual revenues are about $1.3 billion.

Here is another calibrator:
The headline grabbing $400m Platinum Equity supposedly paid for the Detroit Pistons this month is equivalent in size to Stein Mart, 468th in the S&P 600 small cap index. (And the retailer makes 10 times the revenues.
Sports franchises are less profitable because of the high cost of player salaries:
Incredibly, the market cap of Juventus FC is only 30 times the annual salary of its best paid player. Goldman Sachs’s market cap is 5,000 times its boss’s last pay packet.
It kinda turns on its head the notion of bosses exploiting workers.

1 comment:

  1. Of course, in sports the players ARE the product. The better comparison would be to singers or bands. Pop singers at the highest levels become millionaires because, despite the need for production, promotion management and distribution, they are the product. You just can't compare them to a factory worker on an assembly line, or even a CEO.

    The analogy of star athlete to CEO of an unrelated business brings to mind the value of art sold at Sotheby's in a year and the CEO of that company. The art is the product. Should the amount of money spent by Sotheby's buying art be less than that of the CEO's annual salary?

    In the case of professional sports franchises, owners pay for more than bottom line value. They are willing to give away opportunity costs to be associated with the teams. Teams are not less profitable than other enterprises BECAUSE of high salaries - owners willingly forgo higher profit and pay the high salaries because they benefit in non-monetary ways.

    Then again, there's income and there's value. Here in New England, Robert Kraft bought the Patriots Football team in two parts for $200 million dollars in 1994. The team is now worth 1.4 Billion dollars, and has an associated shopping mall and team museum on site. Having taken the team from league-lowest value to third-highest in that time, I doubt Kraft minds paying his star player 30 million dollars per year. When it comes time to sell, income per year won't be an issue.