Friday, April 30, 2010

A common question all sports fans hear (and ask) is, "why are athletes paid so much"? Along with this there is the related question of "why is it so expensive to go to a MLB/NFL/NBA/NHL game?"

This came up again last night when my friend Clinton linked to an article about the mega-mansion Tom Brady and Gisele Bundchen are building in California. (By the way, if you are not listening to Clinton's terrific Comedy 4cast podcast, you should be.) I answered briefly, first, that Gisele probably makes more than Tom, but that Brady is paid his enormous salary by the Patriots because he puts fannies in the seats and eyeballs on the television. I also promised a more complete answer here on my blog.

The answer to both questions is pretty simple, really. It's all about the most basic law of economics, that of supply and demand.

Sports teams generate revenue in one of two ways. Fans buy tickets to the stadium, where they also buy beer, hot dogs, popcorn, parking and souvenirs. Fans also watch the games on TV, where the teams either sell advertising on their own networks, or sell the rights to broadcast the games to others.

There are other revenue streams like sponsorships, Internet subscriptions, radio rights and others, but these pale in comparison to ticket sales and TV.

The Red Sox are a good example of how this works. The team is on a consecutive games sellout streak of well over 500 games, stretching back to May, 2003. It is not a coincidence that the Red Sox have been to the playoffs in six of those seven seasons, won two World Series and been to the ALCS two other times. People come out to see winning teams. The Red Sox, through their 80% owned subsidiary NESN, have the highest TV ratings of any team in baseball (the Bruins own the other 20% of NESN).

In order to keep winning and keep people coming through the turnstiles and watching NESN, the Red Sox have to sign good players (John Lackey is a recent example), and sign players they have developed in their farm system (Dustin Pedroia, Kevin Youkilis) to competitive contracts. There are other teams who are also trying to sign what is a limited number of good players. The limited supply drives the salaries of the good players up, with the best players receiving annual salaries in the $15-25 million range.

Why do the teams bid up player salaries to these incredible levels? Because they believe that by making their team better, they can generate more revenue at the gate and through TV rights than the amount they are paying in salary. It's no more complicated than that. The Twins signed Joe Mauer to a $184 million contract for eight years because they believe his presence on the team will help to generate more than $184 million in revenue for the team over that period.

So, are high player salaries what makes tickets so expensive? Well, not really. Teams will charge what the market will bear. The Red Sox are able to have the second highest average ticket price in baseball (the Cubs are first), because they can charge the prices you see and still sell every seat every night. In fact, it could be argued that the Red Sox are charging less than the market value of tickets - check out StubHub, eBay or Ace Ticket and you will see hundreds of tickets for Red Sox games selling for more than face value.

This isn't true everywhere. If you watch games on MLB Network, you often get the local announcers for one of the teams playing the game. You also get the local ticket promotions. Watch a game from someplace that has plenty of empty seats (Houston, Baltimore, Kansas City, among others) and you will regularly see promotions to get people to come out to the ballpark. A deal that offers tickets, hot dogs, drinks and souvenirs for a family of four that costs less than $75 is very common.

Again, it's supply and demand. The Red Sox have no need to offer these deals because they can sell out the ballpark at higher prices. The Astros are trying to generate some incremental revenue by offering inexpensive tickets to entice people out to the ballpark who won't pay higher prices. An empty seat generates no revenue, so even getting a small amount of money is preferable.

So, that's my take on it. Comments on my thesis welcome!


At 11:32 AM, Blogger gojohn said...

Well done... doesn't make me any happier when I am only able to afford to go to Fenway once a year, but that's a great explanation Capn



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