The Economics of Sports - 6TH Edition - PDF

The Economics of Sports 6TH EDITION Michael E. Leeds, Peter Von Allman, and Victor A. Matheson CHAPTER 7 Teams, Stadiums...

The Economics of Sports 6TH EDITION Michael E. Leeds, Peter Von Allman, and Victor A. Matheson CHAPTER 7 Teams, Stadiums and Municipalities 1 7.1 How Teams Benefit from New Facilities Facilities, Attendance, and Profits New stadiums and arenas lead to increases in attendance in the years following their construction. Over time the novelty of a new stadium fades. The “honeymoon effect” of a new facility on attendance has received a great deal of attention. All else equal, attendance usually falls back to around original levels in about ten years. For hockey and basketball, effect is smaller and fades away sooner than in baseball. In European football, the honeymoon effect fades after two seasons on average. 2 7.1 How Teams Benefit from New Facilities Facilities, Attendance, and Profits New stadiums affect all ticket prices, but the biggest impact is typically on the number, size, and cost of luxury boxes and other special seating. Until the Astrodome in Houston opened in 1965, no modern stadium had luxury boxes. Since that time, luxury boxes and other premium seating have become an indispensable part of the contemporary sports facility. While NFL teams share much of their revenue with other teams in the league, they retain most of their revenue from luxury boxes. Thus number of luxury boxes increases with each new stadium construction. 3 7.1 How Teams Benefit from New Facilities Facilities, Attendance, and Profits Studies show a 20-30% increase in ticket prices in the first year of a new stadium (depending on sport). The impact of luxury seating on a team’s market value According to Forbes, the Cowboys were worth $5.7 billion in 2020, $1.3 billion more than the New England Patriots, the NFL’s second-most-valuable team. The team that was worth $1.3 billion less than the Patriots was the Las Vegas Raiders, who stood in 12th place. The Cowboys are worth so much more than any other team because they have by far the most luxury boxes in the NFL. Their 342 luxury boxes are 82 more than the second-place Los Angeles Rams, the primary tenants of SoFi Stadium, have. 4 7.1 How Teams Benefit from New Facilities Do New Facilities Mean More Wins? Team owners invariably claim that the increased attendance and revenue will allow them to field better teams. However, research suggests that the link between new stadiums and better teams is tenuous at best. Quinn et al.: stadium age has no impact on winning percentage in any sport except baseball, where it has only a small effect. Rockerbie and Easton: no evidence that teams in new stadiums invest their added revenue into hiring better players 5 7.1 How Teams Benefit from New Facilities How does a city or club owner decide how much a team, stadium, or event is worth? Objectively, it could calculate the item’s net present value, the difference between the present value of the stream of revenues generated by the project and the present value of its costs. The present value of the stream of revenue to the city/owner is: 𝑅1 𝑅2 𝑅3 𝑅𝑇 𝑉= + + + … + (1 + 𝑟) (1 + 𝑟)2 (1 + 𝑟)3 1+𝑟 𝑇 1 − (1 + 𝑟)−𝑇 𝑉=𝑅∗ 𝑟 If the city receives revenue of 𝑅𝑡 for each of T years after it builds the stadium, it is willing to pay the price V, where V is the value of the future stream of returns. Because one can save the dollar that one receives today and earn the market rate of interest, r, a dollar today equals (1 + r) dollars a year from today, (1 + 𝑟)2 dollars two years from today, and so on. 7.1 How Teams Benefit from New Facilities The future value that $1 today will have in t years is thus (1 + 𝑟)𝑡 while the present value of $1 that one will receive t years from today equals 1 𝑡. (1+𝑟) The project is profitable if V>C and is not profitable if C>V, where C is the cost of building a stadium/organizing a mega-event, etc. When team owners decide whether to replace an existing facility, they must compare the net present value of continuing to occupy the existing stadium with the net present value of a hypothetical new stadium. Revenue stream of a new stadium is likely to be higher, as it will attract more fans and will likely attract wealthier fans who are willing to pay more for more luxurious accommodations. However, a new stadium will also bring additional costs in the form of new construction. The team will build itself a new stadium only when the higher revenue stream causes the net present value of a new stadium to surpass the net present of the existing stadium. 7.2 How Fans Benefit from New Facilities The Size and Shape of Stadiums and Arenas Fans benefit from better seating arrangements. During the wave of stadium construction in the US in the 1960s, 1970s, and early 1980s, numerous cities constructed large, circular, multi-purpose stadiums designed to be able to host both football and baseball. The average capacity of these facilities for baseball was 52,659 fans, average of 60,380 for football. “Cookie-cutter” stadiums. http://football.ballparks.com/NFL/GreenBayPackers/oldindex2.htm Starting in the 1990s, a new era began in which baseball and football teams occupied separate facilities. New baseball-only stadiums that replaced the multi-purpose stadiums shrank by over 10,000 seats, and football-only stadium grew by about 10,000 seats. The size of the multi-purpose stadiums was thus a compromise, too large for baseball and too small for football. The cookie cutter stadiums’ circular shape was an attempt to meet the needs of both sports but did not work well for either. 8 Football Stadiums with athletics track were very popular for the most of stadiums in 20th century, now are very rarely built Europe 9  7.2 How Fans Benefit from New Facilities The Size and Shape of Stadiums and Arenas The move back to single-use stadiums that began in the 1980s allowed each sport to find its optimal size and shape. The figure shows a stadium built specifically for football (or soccer). Sections in the middle of the field are brought much closer to the players, and the number of seats in the upper end zones are minimized. Even the upper deck seats provide good sightlines for the action. While a typical round stadium only has about one-third of its seating between the football goal lines and two-thirds of the total seating in the end zone and the corners, these percentages are essentially reversed for stadiums built specifically for football. 10 11 7.2 How Fans Benefit from New Facilities The Size and Shape of Stadiums and Arenas This figure shows a stadium built specifically for baseball. Most of its seats are near home plate and the infield, and relatively few fans sit far from the action in the outfield. 12 13 14 15 7.2 How Fans Benefit from New Facilities The Size and Shape of Basketball and Hockey Arenas Hockey and basketball teams often share facilities. Because basketball courts and hockey rinks are similar in size and shape, multipurpose arenas can serve hockey and basketball teams with fewer constraints than stadiums that host both baseball and football teams. 10 pairs of NHL/NBA teams share an arena. No MLB/NFL teams share an arena. The main conflict between basketball and hockey teams has been financial. In recent years, NBA teams have typically been the primary tenants of the arenas that they share with NHL teams, and hence have benefited much more from their facilities. Hockey team that is a secondary tenant generally faces worse financial arrangements than the basketball team with which it shares the arena. The four most profitable teams in the NHL—the Toronto Maple Leafs, New York Rangers, Montreal Canadiens, and Detroit Red Wings—are all primary tenants in their facilities. 16 7.2 How Fans Benefit from New Facilities The Size and Shape of Football and Soccer Stadiums The most recent stadium building boom in the United States has involved Major League Soccer. It would seem that soccer could co-exist with football, since playing surfaces are extremely similar in shape and size, so the ideal seats for soccer and football are nearly identical. But smaller crowds for soccer makes the atmosphere less vibrant in a large football stadium. Status as secondary tenants. Many soccer fans disliked the presence of football markings on a soccer field. Damage done to the playing surface by football teams often made the grass surface uneven or necessitated the use of artificial turf, an outrage to most soccer purists. https://www.youtube.com/watch?v=o9kDe1eOn64 In European football teams often build smaller stadiums (Juventus, plan for new stadium in Milano, etc.) 17 18 Delle Alpi (69,000) and Allianz Stadium (41,500) in Turin 19 7.3 Why do Cities Subsidize Facilities? Unlike team owners who focus on profitability, governments must take a larger view of the value of a facility. Even if a stadium or arena fails to turn a profit, the city might benefit if the stadium or team causes incomes or employment to rise elsewhere in the community or if it makes the city a more attractive place to work and live. This broader view is an important consideration because stadiums are rarely profit centers for cities. Further complicating matters is the fact that some of the benefits are indirect. People who are not directly employed by the facility can benefit from the added spending by the people who are employed there. Many of the benefits conferred by teams are intangible, affecting the overall quality of life in a city. 20 7.3 Why do Cities Subsidize Facilities? Direct Benefits From Facilities Three parts: benefits of constructing a new facility increase in benefits from replacing the old facility with a new one overall financial gains from having a team at all. In all three cases, the key is the new spending that the project (or team) generates. The word “new” is very important here. The money that fans spend at a basketball arena or at a nearby sports bar prior to the game adds to the local economy only if they would not have spent that money locally otherwise. If they would have spent that money at a local restaurant had they not gone to the game, then their spending simply changes the distribution of income in the city, not the overall level of income. Much of the spending associated with sports facilities is not new spending. Instead, it substitutes for spending that would have been made on other activities. In addition, spending by some people at sporting events may crowd out spending that other people would have made but are prevented from making by the sporting event. 21 7.3 Why do Cities Subsidize Facilities? Facility Construction The benefits of building a new facility seem obvious, as it creates hundreds of construction jobs. However, the project creates new jobs only if the local economy is operating below full employment. If the economy is already at full employment then it can construct the new facility only by sacrificing other projects. In this case, the stadium crowds out other construction. Moreover, to finance the construction project, cities must raise current or future taxes. Higher taxes reduce private spending and at least partly offset the gains from the added spending. Benefits from building the facility may be temporary. Construction jobs and incomes will disappear once the project has been completed. 22 7.3 Why do Cities Subsidize Facilities? Direct Benefits of a New Facility A longer-term direct impact comes from the new spending by fans at the facility and its surroundings. New spending takes one of two forms: First, residents might spend more than they otherwise would. Second, and more importantly, the facility stimulates spending by out-of-towners. We say that such spending adds to the host city’s net exports. Cities export the services of their sports teams to residents of surrounding cities by attracting fans to games in town. The Bucks reduce Milwaukee’s imports from other cities by inducing Milwaukeeans to spend their money at Bucks games rather than in other cities. Net exports are likely to be small, as sports franchises are rather small businesses. Bucks generated roughly $72 million in spending by their fans in 2019 ($100 per fan), this is