Question

In: Economics

Please read the below article then answer these questions. (a) Who has more monopoly power---WalMart or...

Please read the below article then answer these questions.

(a) Who has more monopoly power---WalMart or the concessionaire who has acquired the franchise to sell beer, hot dogs, colas, candy, etc., at FedEx Field where the Washington Redskins play home football games? Explain.

(b) Does the valuation of sports teams make sense to you? Why or why not?

(c) Dc) Which market structure we have discussed do you feel best describes professional sports? Explain why.

Article

NFL commissioner Roger Goodell earned $145 million over the past four years, or $65 million more than the highest-paid player in the league during that time, Drew Brees. Critics have called for Goodell’s scalp for the way he has handled recent scandals involving Tom Brady, Adrian Peterson and Ray Rice. But Goodell has delivered tremendously for the constituency that signs his checks: NFL owners.

NFL franchises make up 27 of the 50 most valuable sports teams in the world, including the Dallas Cowboys, who rank first with a value of $4 billion, up 25%. It is the first time a non-soccer club has reigned as the most valuable team since 2010 (the first year Forbes compiled a top 50 list). Manchester United held the crown from 2010 to 2012 and Real Madrid the last three years.

Goodell heads the most powerful and lucrative sports league in the world, and he’s leveraged that power with broadcast TV contracts that are the envy of every other league. Take the NFL’s Thursday night TV package: CBS and NBC agreed in February to pay a total of $900 million for the rights to ten games apiece over the next two years. The networks didn’t even get exclusive rights as the games will be simulcast on the NFL Network—owned by the league’s owners—and digitally streamed over Twitter in an attempt to reach cord-cutters. The “tri-cast” system means the NFL will generate revenue from rights fees, affiliate fees and advertising for every game.

The Cowboys are the poster child for the NFL’s ability to make bank, with a sports-team record $270 million in operating profit during the 2014 season, $75 million more than any other franchise. Rich broadcast deals help raise the value of all NFL teams, but owner Jerry Jones separates the Cowboys from the pack by controlling and maximizing the revenue streams from his $1.2 billion home, AT&T Stadium. The team’s premium seat revenue ($125 million) and sponsorship revenue ($120 million) are both tops in the NFL, despite the Cowboys’ failure to make it to the Super Bowl over the past two decades. The Cowboys are also the only team to opt out of the NFL’s licensed merchandise arrangement, which further swells Jones’ coffers.

The NFL’s 32 teams generated $2.4 billion in operating profit during the 2014 season, which was the first of the league’s new network TV deals worth more than $5 billion annually. The average NFL franchise is worth nearly $2 billion, up 160% from $732 million a decade ago. The most valuable NFL teams after the Cowboys are the New England Patriots at No. 6 overall, worth $3.2 billion, and the Washington Redskins at No. 8, with Dan Snyder’s squad worth $2.85 billion.

Real Madrid falls one spot to No. 2 overall at a value of $3.65 billion, up 12%. Real won its 11th Champions League title in May when it defeated Atletico Madrid on penalty kicks. The Spanish powerhouse, stocked with a pantheon of stars led by the world’s highest-paid athlete Cristiano Ronaldo, tops a group of eight soccer clubs on our list. Real had the highest revenue of any sports team in the world at $694 million during the 2014-15 season. The club will get a boost from an extension to its Adidas kit deal signed earlier in the year. The pact is worth $1.6 billion over 10 years, or four times more than their previous agreement.

Nipping on Real’s heels is its La Liga rival, Barcelona, which ranks third at $3.55 billion. Barcelona, home to five-time FIFA Player of the Year Lionel Messi, signed its own monster kit deal in 2016. The agreement with Nike is expected to set a record and be worth as much as $175 million a year, according to reports. Barcelona will kick off a $650 million renovation of its Camp Nou stadium next year. The project will modernize the stadium, expand capacity to 105,000 and help Barca challenge Real for the highest revenues in sports.

The New York Yankees rank fourth, worth $3.4 billion, up 6%. The Bronx Bombers head seven MLB teams in the top 50, down from 12 the previous year. Attendance fell 5.5% last year in the Bronx in the first season without Derek Jeter at short in two decades. The 3.2 million fans were still tops in the American League.

Rounding out the top five is Manchester United at $3.32 billion. United kicked off a 10-year, $1.1 billion kit deal with Adidas for the 2015-16 season, which softened the blow of missing the Champions League. United has the highest debt load of any of the top 25 most valuable teams.

The biggest mover in the top 50 is Stan Kroenke’s Arsenal squad, which rose 13 spots to No. 23 with a value of $2.02 billion. The Gunners had the most expensive season tickets in the sport this year at $1,500-$3,000 for adults. Arsenal also received the biggest cut of Premier League TV money this season at $148 million, or $7 million more than Manchester City.

The biggest drop was the Ferrari Formula One team, which ranked 32nd in 2015, but fell out of the top 50. F1’s richest team is worth $1.35 billion, flat from the previous year, but couldn’t keep up with the exploding franchise values in team sports.

The average franchise in the top 50 is worth $2.2 billion versus $1.75 billion a year ago. The breakdown by sport is 27 NFL teams (versus 20 last year), seven MLB (versus 12), eight NBA (versus 10) and eight European soccer (versus seven). The New York Knicks are the most valuable NBA team at $3 billion and rank No. 7 overall. No F1, Nascar or hockey teams made the grade. The minimum to make the cut is up 20% to $1.48 billion (Jacksonville Jaguars). There are 76 franchises worth at least $1 billion by our count.

Our franchise values are based on the Forbes valuations done over the past year for NFL, NHL, NBA, MLB, F1, soccer and Nascar. Some team values have shifted since our last published reports, but they are not reflected here. Most notably, the former St. Louis Rams relocated to Los Angeles, increasing the team’s value from our September estimate of $1.46 billion. Forbes’ team values are enterprise values (equity plus debt) based on current stadium deals (unless a new stadium is pending).

Solutions

Expert Solution

Answer (a): Considering the financial lump that goes in to the sports and games that are being played as tournaments across the world, we can fairly describe them as an alternate movable economy market. The various tournaments and games that are played across various venues attract a huge amount of capital investment. In a venue, where a game is being played, if we consider the difference in the market power between the providers of goods and services (e.g.: Walmart which supplies beers, hot dogs, colas, candy’s etc.) with that of the market power of the concessionaire who has acquired the franchise or rights of distribution to sell those beer, hot dogs, colas, candy etc., then we can safely conclude that the concessionaire has an absolute monopoly over this business. This is because, it is the concessionaire who decides from whom the products would be bought at what wholesale price, who would be used to distribute the goods or services to the consumers and with how much of a price variance would those goods be made available to the consumers inside the stadiums or at the venue of the game. Therefore, they hold absolute rights over the complete purchase, distribution and profits from the sale of the goods or services, and hence they have the monopoly power.

Answer (b): From the perspective of economic functionality and the way in which capital is being mobilized in the valuation of these sporting teams, it totally violates any economic principle. The teams use the popularity of the players to garner more capital or investment for their respective franchises. The lovers of the game are also so addicted to the outcome of the games or to some extent with the performance of the individual teams or in most of the cases, with the performance of the individual players that they are ready to usher any amount of investment in to the teams or bet on their players or team performance. This makes the total valuation process absolutely uneconomic and more fame based.

Answer (c): Oligopolistic market structure can be explained to be the market structure that best describes the current situation of professional sports. This is because, out of the huge number of teams which participate any tournament or all over the world, some of the teams enjoy absolute popularity and preference among the people as compared to other teams. This increases their value and they become financially much richer and more popular. Their games attract more and more attention as compared to the games of other less popular teams. Therefore, this type of a professional environment can be best explained in the terms of the Oligopoly market structure.


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