The Economics of a Franchise

Ask a fan why anyone would pay billions for a sports team and you'll get some blend of ego and love of the game, with the dream of lifting a trophy somewhere in there. Ask an investor who has actually owned one and the answer comes back different, and more interesting. A franchise has been one of the best-performing assets of the last several decades, and its returns have almost nothing to do with what happens on the field.

That gap is the whole subject here. This isn't a piece about where a team's revenue comes from; that's a story of media contracts and shared national money, and it's told elsewhere. This is about the franchise as an asset. Why it has compounded like one of the best holdings of the past thirty years. Why the tax code makes it worth more to a wealthy owner than the operating profit would suggest. Where the risks that actually move the price are hiding. The games are close to incidental to that math.

Where The Money Actually Comes From

Gate receipts, the tickets and hot dogs a fan pictures first, are a modest and shrinking slice of a big franchise's revenue. Media is the engine. National television deals, negotiated by the league and shared out among all its teams, pay each franchise enormous sums whether it wins or loses, whether the building is packed or half empty. In the biggest leagues a team could play a whole season to empty stands and still collect its share of the national contract.

Because that money gets shared roughly equally, and the largest cost, player salaries, is held in check by a cap in most leagues or a luxury tax in baseball, the economics of a franchise come out unusually predictable and oddly detached from how the team plays. The league is really a media business running a set of local operating units, and each unit is guaranteed its cut of the whole. That's why a team's value tracks the league's media power far more closely than its own spot in the standings.