A Thesis entitled The Financial Futures of the NFL, NBA, and MLB A projection on these enterprises future values and a look at the context that goes behind it By Cole Patty as partial fulfillment of the requirements for the Bachelor of Business Administration with Honors In Accounting and Finance Adviser:________________________ Dr. Thomas Sharkey Honors College Director:________________________ Robert Yonker Dean Honors College:____________________________ Dr. Lakeesha Ransom University of Toledo December 2014 Abstract While professional sports are highly ingrained in modern day culture, the business aspect is still largely ignored. These enterprises worth hundreds of millions of dollars keep finding new ways to grow expansively, yet that largely comes second place to what happens on game day. This thesis intends to shed some light on those happenings, through extensive examination on research done by third parties. And will look to compare the major sports in America from a financial perspective. In hopes to show which game is the most powerful behind the scenes. ii Acknowledgment This thesis is dedicated to my family. Their support from the very beginning has been instrumental in me not only completing this project, but becoming the man I am today iii Table of Contents Abstract ………………...…………………………………………………………………ii Acknowledgement……..…………………………………………………………………iii Table of Contents ……..………………………………………………………………….iv List of Figures and Tables ..……...……………………………………………………….v Introduction ………………………………………………………………………............1 Review of Literature...………………………………………………………………….....7 Methodology……………………………………………………………………………..15 Analysis of Presentations or Findings………...……………….…………………………17 Summary, Conclusions, And Recommendations ……………..…………………………33 References ……………………………………………………………………………….35 iv List of Figures and Tables Table Set One: Team Revenue Over The Years ………………………………………...17 Table Set Two: Sum of Team Revenues ……………………………………...…………20 Figure Set One: Regression Analysis …...………………………………………………22 Table Set Three: Projected Revenues ….………………………………………………..26 Figure Set Two: Projected Revenues in Line Graph Form ……………………………...27 Figure Set Three: Revenue Pie Chart for 2013, 2018, 2023, and 2028 …...…………….29 v Chapter I. Introduction Introduction to the thesis subject Professional sports engross society. Thousands of fans shuffe in on game day, entire network television channels dedicate to following sports around the clock, and thousands upon thousands of websites commit to sporting events. Yet with all that coverage, the business aspect to these enterprises aren’t covered to nearly the same degree as other issues. Yet that business angle is a quickly growing field of interest, with Forbes giving out annual team valuations and ESPN turning some online coverage towards the issues of endorsements, collective bargaining agreements between players union and their owners, and even as something as simple as the evolution of ticket prices. Business runs American professional sports associations. Without the potential to make money on the world’s greatest athletes, these highly televised events wouldn’t be ingrained into our culture; yet, we’re just scratching the surface of knowledge pertaining to the financial side of things. Furthermore, with more of a focus on the past, there is seemingly no place one can find projected revenues of the sports league. This study is dedicated to examining the future revenues these sports can reasonably make and the reasons why they could surpass or fall short of these projected numbers. Background of the problem 1 The concept of viewing the NBA through a business scope arose while taking in the current events involving the National Basketball Association. The league and it’s respective teams seem to be growing at an exponential rate, seeing figures like former Microsoft CEO Steve Ballmer’s attempt to buy the Clippers from Donald Sterling for a whopping $2 billion catches the eye. A franchise that was valued by Forbes at $575 million just in January, that $2 billion seems to be a mighty overpay at face value. Yet, there are stories written by ESPN’s Darren Rovell stating that the Golden State Warriors, who were valued at $450 million when purchased in November of 2010, were then valued at $800 million on August 16, 2013. Any company doubling their value in less than three years is outstanding no matter what the industry, which trickles into the thought that perhaps the Warriors and Clippers aren’t the only franchises appreciating at that rate in NBA, or the only teams in all of professional sports. There seems to be a fast growing business here, and the outstanding numbers it’s growing at makes one wonder what partners and competitors alike are doing in response to this growth. Statement of the problem If the NBA is growing this quickly, then are their major competitors growing as well? The NFL and MLB have always been stronger leagues in terms of finances, yet is the NBA potentially catching up to them? Are all three major sports leagues growing at the same rapid rate as the NBA? If so, what is the major cause in these leagues growing at a rapid rate? Are they positively benefited by the same events? And if they aren’t growing at that rapid rate, what could the NBA potentially be doing differently that could be making the difference financially. Furthermore, if there is something causing the NBA to grow at a faster rate than their competitors, how long could it last? Is there potential for 2 the NBA to keep growing at this rate long enough to surpass the MLB? The NFL? As stated earlier, there doesn’t seem to be much information on these types of financial issues in this particular landscape, leaving potential holes to be examined. Purpose of the study and questions to be answered Since professional sports reveals these information shortfalls, this project aims to project the future values of these professional leagues and the reasons why they could grow at different rates into the future. The hope is that with regression analysis run on the different financial inputs on the team and the general economy, the regression can project future revenues and paint a picture of what the future may hold for this multi-billion dollar industry. In turn, it can enlighten readers on the forecasted future revenue and give any potential context as to why these forecasts could be incorrect. The data will show the rate the organizations will grow at if continuing their current paths will fall short in predicting events that may steer the NFL, NBA, or MLB off track. Assumptions This study holds two major assumptions. In the regression analysis run, the future forecasted values of the major general economy projections were taken from an outside source. The author believes that these forecasts were done using a reasonable method, and could be used in other projections. The second major assumption is that some of the outside factors that could affect future revenues and values in meaningful ways could not be quantified. A great example of this that will be further explored is the National Football League and concussions. Concussions are a brutal part of the game and, according to many opinions, are turning many fans and future footballer players away. 3 While there are examples where you exact dollar amount of concussion damages the NFL may suffer and apply it, like the recent lawsuit, the impact of loss of fans can’t be quantified despite being potentially substantial. Rationale One of the best features this project exudes is that it’s unique. Throughout the research process, there wasn’t much information found elsewhere that attempted to project financial revenues of major sporting enterprises. It’s impossible to say there is nothing like it with the vast amount of resources in the world, but the seemingly existent void of available knowledge gives it a one of a kind identity. The benefit that can be attained through this study is educating the customers of these businesses on the current social issues, the potential future social issues, and the financial potential these organizations they follow so closely hold. Importance of the study There are various factors in play to these enterprises, and there are select people spending large amounts of money to own these franchises. Will their investments be strong ones in the coming years, or are these valuations and sums being paid out going to be looked at as overpayment? Also, if one league surpasses the other in a financial way, is there any way we could have predicted it. These businesses are ingrained and prevalent our culture and so prevalent, yet most onlookers have no understanding of the financial side of the business. Definition of Terms 4 NFL - National Football League, the major professional football league in the United States NBA - National Basketball Association, the major professional basketball league in the United States MLB - Major League Baseball, the major professional baseball league in the United States CBA - Collective Bargaining Agreement, and agreement reached between the player unions in their respective sports and the owners of the teams that employ them Steroid Era - An era in the MLB where many major stars we’re accused of or indicted for using steroids or HGH, both banned substances by the MLB. Steroid and HGH both have a negative connotation around them for being an unfair advantage and a type of cheating. Lockout - When the owners and player unions fail to reach a CBA agreement, a lockout occurs. None of the scheduled games between teams are played until an agreement is reached. This can be financially harmful to the league that is in lockout and the teams that reside in said league. Scope and limitations of the study 5 This study will focus on only the NFL, MLB, and NBA. The National Hockey League’s recent run-ins with two major lockouts has placed it clearly behind the three leagues, despite a recent showing of strong numbers. This paper will not focus on individual athletes despite their power influencing the league is powerful.