The Global Economics of Professional Sports
by Elliott R. Morss
In earlier pieces, I have written on the global economics of entertainment – how much people spend on different activities to relax and enjoy life. I found that sports ranks 7th after alcohol, illicit drugs, sex, dining out, movies, and gambling. In this article, I look in more detail at sports. What sports have the highest payrolls? What are the most profitable? And what do the players get paid?
Soccer (the US term for what is called Football elsewhere) has the largest payrolls with a global total of over $5 billion. Britain pays the most for its soccer players and the US the least. For a single sport in a single country, the NFL pays the most at $3.6 billion.
Table 1. – Professional Sport Payrolls, 2011-2012
prize money; golf – PGA for PGA, WPGA, European Tour, Champions’ Tour; tennis – WTA, ATP
Table 2 presents data on average salaries by sport and country. US basketball (NBA) tops the list, with Indian Cricket in second place. The National Football League is in a very strong position relative to its players. Not only is the average salary relatively low, but salaries are not guaranteed. That means if you can’t play because of an injury, the team does not have to pay you.
Highest Paid Athletes (?)
The ESPN magazine recently presented data on the highest paid “players” in a number of different activities. The top 20 on the list are presented in Table 3.
Source: ESPN Magazine
Most would agree that sports are more entertaining if the teams are closely matched. If two teams dominate a league of ten, the only real excitement occurs when they play each other. One can gauge the potential competitiveness of a league in at least two ways: payroll differences, and final standing spreads.
In recognition of the need for competition, a number of leagues have imposed salary caps that limit the size of a team’s payroll. US baseball (MLB) does not have a salary cap but does impose a luxury tax if the payrolls exceed a certain figure. How do league payrolls differ? A useful measure of this is the standard deviation in the percent difference in payrolls from the mean. These data are presented in Table 4 for selected sports and leagues.
Table 4. – Payroll Spreads
Data Source: ESPN Magazine
A low spread means team payrolls are quite close. For example, in Australian soccer (spread = .034), the Gold Coast has the highest payroll at $9.2 million; the Western Bulldogs have the smallest at $7.8 million. In contrast, the highest payroll in Scotland (spread = 1.205) is Celtic at $43.9 million; the lowest is Inverness Caledonian Thistle at only $2.6 million. How can a team paying its players only $2.6 million compete with a team with a payroll of $43.9 million? Not well.
To get a sense of how the spread of the salaries influenced the competitiveness of the leagues, I looked at the spread (standard deviation) for each league in the percent of games won. It turns out that the spread in payrolls explained about 20% of the competitiveness of the leagues.
Payrolls as a Predictor of Final Team Standings
How important are total payrolls as a predictor of how well teams do. Table 5 answers this question. The R2 indicates how much of team standings are explained by the size of their payrolls. As one might expect, payrolls explain very little of league outcomes where salary caps and other factors keep team payrolls similar, as in US hockey (NHL) and football (NFL). In leagues with large payroll spreads, such as many of the European soccer leagues, payrolls explain far more of team success.
Table 5. – Team Standings Explained by Payrolls
The Most Valuable Team Franchises
Forbes regularly estimates the value of different team franchises. As Table 6 indicates, the vast majority of the most valuable franchises are in US football (NFL). Teams in the top fifty franchises range in estimated value from $1.86 billion for Manchester United to $609 million for the Philadelphia Phillies.
Source: Forbes Magazine
A significant portion of the difference in team valuations can be explained by whether the team owns the stadium it plays in and media rights. It appears to have very little to do with team success inasmuch as the Dallas Cowboys (ranked 2nd valued at $1.8 billion) and the Washington Redskins (ranked 4th at $1.6 billion have not performed well in recent years.
While the Forbes data are probably indicative of relative values among leagues, valuations among individual teams are more problematic. For example, the Los Angeles Dodgers (ranked 38th valued at $800 million) just sold for more than $1 billion. Sports teams are “playthings” for many wealthy owners and valuations reflect what they are willing to pay.