Wednesday, August 19, 2009

Is Brett Favre Worth $25 million over 2 Years? 

If you live in a hole or do not follow American sports whatsoever, then you may have missed the big news of the day: Brett Favre, formerly of the Green Bay Packers and formerly retired, unretired for the second time in the past two years. Not only did the former Face of Green Bay unretire, he unretired to join the Packers' hated rival, the Minnesota Vikings. At least last year he had the common decency to play in New York for the Jets when he unretired.

In Wisconsin, someone, somewhere is making a purple-wearing #4 Brett Favre doll and green and yellow push pins - with barbs that have barbs, probably rusty ones.

But I digress. Favre has reportedly signed a one year contract with a club-option for a second year that would pay him $25 million over the two years. Is he worth it?

In economics, the gross worth of a resource in a profit-maximizing world, depends on that resource's marginal contribution to revenue.

  • Favre's signing won't impact league-wide media revenues, which are set by contract and account for somewhere around 60% or so of league-wide (and thus per-team) revenues. His signing should have little impact on local radio revenues for the Vikes as well.
  • Favre should have a positive influence on ticket revenue earned by the Vikes this year and next. Keep in mind that ticket revenues are shared 60-40 between the home and visiting teams. The home team gets 60%.
    • Favre is a star. Even if his marginal contribution to team wins is 0 over the next two years, he'll still have drawing power this year. If you go to vikings.com (at least as of today), you are greeted by a smiling Favre, not by a smiling Sage Rosenfels.

    Favre1
    • Most NFL games are sellouts because of the blackout rule. Favre's signing should have little if any impact on attendance at Vikings games, home or away, per-se.
    • Ticket prices are set before the season begins, so Favre's signing won't affect them this year.
    • According to the Vikings website, as of this morning there were season tickets still available for Viking home games (see the picture above). Favre's signing should drive more of these sales. Teams like season ticket sales because they guarantee that a seat will be filled.
    • Favre's signing should help the Vikings avoid any price discounting required to sell remaining tickets to games that would otherwise be blacked out.
    • Likewise, when the Vikes travel, Favre's signing should help Vikes' opponents sell more tickets to their game against the Vikes at face value.
    • If Favre is successful in leading the Vikes to the playoffs, Viking home ticket prices will be higher next year.
    • If Favre is successful in helping lead the Vikings to the playoffs, season and single game ticket sales should be higher next year.

  • Merchandising sales will be up for Vikes apparel. Merchandising revenue is shared equally among the teams, so while more Vikes apparel will be sold this year, the Vikes will only get 1/32nd of the revenue. Still, he'll drive more revenue into the Vikes' coffers although the amount will be relatively negligible.
  • Luxury revenue is not subject to sharing in the NFL. The Vikings' luxury revenue situation is one of the worst in the NFL, and a big reason why they were dead last in overall revenue, according to the most recent data generated by Forbes. Even so, Favre's signing should help the sales of luxury tickets this year and, especially if the Vikes make the playoffs, next year.

So Favre is likely to generate more revenue for the Vikes. According to Forbes, the Vikings generated $195 million in revenue in 2008 from all sources combined. Did I mention that was dead last in the NFL? Yes, I did.

Anyways, if you take that $195 million figure as a spot-on estimate and if you hold all else equal for the 2009 season, the signing of Favre for $12.5 million per year tells you that the Vikes expect Favre to generate at least 6.4% more in revenue this year than if he did not sign (did I bother to mention the overall economy???). That seems a stretch for a 39 year-old injured QB, albeit a star.

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Tuesday, February 24, 2009

Bonus-Skimming in MLB 

Don Coffin sends along two Chicago Trib links on the recent bonus-skimming scandal in MLB.

Here's one that describes some of the alleged skimming involving Dominican players.

Here's one on fired White Sox executive David Wilder who is alleged to have pocketed some bonus cash.

These sorts of stories seem almost routine in the entertainment industry. Young athletes, musicians, and other performers often underestimate their potential worth to the industry and end up signing bad deals.

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Thursday, October 16, 2008

The Value of Recruiting 

Echoing Skip's post below, I link to this article about Kansas State assistant basketball coach Dalonte Hill, about whose salary a recent stink was raised:
Michael Beasley made Kansas State basketball relevant for the first time in more than a decade last season, and his presence put a few extra dollars in the pocket of the man responsible for luring him to Manhattan, Kan.
Kansas State had been a perennial also-ran in the Big 12 during the 90's and the early part of this decade. It was in large part due to Michael Beasley - with all due respect to Bill Walker - that KSU had the run they did last year. In a typical competitive labor market, Beasley would be able to capture his value through a salary. The same can be said of other top recruits throughout the nation.

But the labor market for college basketball talent, although very competitive, is anything but typical because the top players cannot receive payment anywhere close to their value. So their value gets captured somewhere down the line, most likely by the coaches with the ability to recruit them.

Cross-posted at Market Power

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Thursday, August 14, 2008

The Production Value of Brett Favre 

Former students Andy Weinbach (now teaching at Coastal Carolina) and Mark Wilson (St. Bonaventure) were discussing this with me. Their assessment, derived from market prices: pretty small. Here's their take:
How valuable is Brett Favre to the New York Jets?

The Jets acquired Brett Favre, believing their team would be improved, but what do the markets reveal about this move? For proposition bettors wagering on the number of regular season wins by the Jets, the move seems to be an improvement.

Betting markets can provide insight into how much the Jets have improved, but the answer is unfortunately not straightforward. Many books temporarily took the Jets regular season wins proposition off the board in reaction to the Favre acquisition. Bodog sports currently offers the Jets at 8 wins (-155o),(+125u). If this is assumed to be an unbiased forecast, (which is a reasonable, but not necessarily accurate assumption), using some statistical wrangling, and ignoring pushes, assuming all money will be refunded in the case of a tie, this translates to a roughly 57.8% chance that the Jets will win more than 8 games and a 42.2% chance that they will win fewer (Again, this assumes ties are not possible. While ties are indeed possible, they should be revenue neutral for bettors).

Unfortunately, we don’t have the Bodog price from July. However, a reliable source tells me that a local shop had the Jets priced at 7 wins (-150o),(+120u) on July 22nd, when Pennington was still the expected starter. As of August 10, that same shop offered the Jets at 8 ½ wins (-115o),(-115u). If we ignore the possibility of a tie, the July 22 price at this shop would suggest a 56.9% chance of winning more than 7 wins, and a 43.1% chance of winning fewer. The current price suggests a 50% chance of 9 or more wins, and 50% chance of 8 or fewer.

While these figures are not directly comparable, a loose and perhaps fair interpretation might be that the acquisition of Brett Favre is expected to return one additional win for the Jets this season.

Meanwhile, in the NFL.com fantasy league, www.nfl.com/fantasy/rankings/wr current rankings indicate a recent increase in value for Jets receivers Laveranues Coles and Jerricho Cotchery, suggesting fantasy players believe Favre will have a positive impact on the two wide receivers.

The same reliable source reports that the local shop has priced in slightly lowered expectations for Miami (Pennington’s new team) since July. In July, the price was 5.5 wins (-125u) and (-105o), but has now moved to 5.5 wins (-130u) and even.
Obviously, one additional expected win at this stage might represent a significant boost to a team's playoff chances. That would be another calculation worth making. If you know or can quickly determine the answer, do leave it in the comments.

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Wednesday, June 18, 2008

How much is Tiger's knee worth? 

Unless you are a competitor, Tiger Woods' impending season-ending knee surgery is a major blow to the sport of golf. Reader Shane Lorimer asks: "In your estimation, what is the economic impact that the PGA and all other invested parties will suffer in regards to Tiger Woods being out for the rest of the season?"

Here's my wild guess: Tiger represents a significant chunk of TV ratings, that is for sure. But most of those contracts are already set. Late sales of ads by networks carrying the Open Championship, PGA, the Tour Championship, & Ryder Cup will require price adjustment. Losses to advertisers that have "overpaid" must also be included.

Tiger earns an estimated $100m a year from endorsements. If what he generates for television itself is about equal to that, then missing 1/2 the season would result in a $50m loss to TV & "non-Tiger" advertisers who benefit from his presence on the course (and our eyes on the tube). The consumer surplus of fans who attend the tournaments will fall appreciably too. That value is also quite large & relevant. So $50m in economic impact might not be enough.

Tiger's knee could thus be worth a couple hundred million bucks in present value. Doc had better do a good job!

Update: CNBC's Darren Rovell asks a sports marketing pro the question. The answer focuses on the loss of exposure while out on the course. Nike loses "$65 to $75 million." Add a few million more from Buick & Gatorade. I wonder how those contracts read?

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Thursday, March 08, 2007

Are Stadiums and Players Complements in Production? 

Teams seeking public subsidies commonly claim that building a new stadium will improve the team's revenue flow, allowing it to acquire more talent and improve the quality of the team. No doubt building a new stadium improves team cash flow, but the important question is "what is this cash being spent on?"

If fans are spending the extra cash on amenities at new stadiums, then there is no reason for teams to invest more in team quality. In other words, players have no claims to these revenues. The critical question is whether capital augments labor: do new stadiums improve the marginal product of players and, thus, improve their contribution to team revenue? If so, then teams have an incentive to increase spending on players.

Quinn, Bursik, Borick, and Raethz (2003) find that a new stadium may be complementary to on-field production, but only for baseball. But a recent Wall Street Journal article (reproduced here) provides an example how capital augments labor in sports in general:

In a separate study published this past summer, a Ph.D. candidate in Canada took saliva samples from 14 players on a minor-league hockey team before and after games. The key finding: Levels of testosterone, which have been found to facilitate assertive and aggressive behavior, were 25% to 30% higher before home games, suggesting the home arena triggered players' elemental instinct to protect their territory. "It has the potential to go a long way in developing techniques to create the ideal physiological profile prior to playing," says Justin Carre, the doctoral candidate at Brock University in St. Catharines, Ontario, who co-authored the study.

...Mr. Poulson made his name in the 1990s, overseeing construction of the Portland Trail Blazers' arena for owner and Microsoft co-founder Paul Allen. Mr. Allen, an avid fan of both music and sports, wanted the new venue to draw top bands for concerts but not if that meant using materials that would deaden crowd noise during basketball games. Ellerbe Becket came up with a novel although expensive solution: rotating ceiling panels with a soft, absorptive side for concerts and a hard side that reflects crowd noise back to the court during games.

...At other schools, it's more than just musical chairs that's going on. When Oklahoma State University expanded its Gallagher-Iba Arena -- already one of the loudest venues around -- it went overboard to make sure that those deafening noise levels didn't drop. After taking sound readings and measuring reverberation times throughout the building, architect Gary Sparks came up with a strategy: Instead of building the extra 7,300 seats outward, he stacked them on top of the existing seats on a steep slope. He also added a flat ceiling stripped of almost all absorptive materials. The goal was to give every sound wave a direct path to a hard surface that would send it ping-ponging around for as long as four seconds.

The author of the article also notes that visiting teams and referees are adversely affected by home team crowd noise. He also notes that in the interest of fairness, some leagues are looking at ways to control noise.

The push for fan power is ratcheting up a cat-and-mouse game between teams looking for an edge and league officials charged with keeping things fair. A number of college-basketball conferences, including the ACC and the Big East, are cracking down on the practice of seating pep bands directly behind visitors' benches to make it harder for coaches to talk to their teams during timeouts. Last year, Major League Baseball instituted new rules governing stadiums with retractable roofs, which can be closed to keep out the elements -- but also to keep in the noise. Teams now have to tell the league by May their criteria for deciding when to open or close their roofs during the season, and in the postseason the final decision is up to MLB.

Seemingly this is another way that leagues standardize the effect of capital across teams. Leagues do this with standardization of playing field dimensions and equipment. While they may try to legislate against some ways to distract players, let's hope they don't go too far. We wouldn't want to be deprived of wonderful scenes like this.

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