The Economics of a Franchise

Ask a fan why someone would pay billions for a sports team and the answer is usually some mix of ego, love of the game, and the dream of hoisting a trophy. Ask an investor who has actually owned one and the answer is different and more interesting. A franchise is 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 disconnect is the whole subject. The scoreboard is a distraction from where the money is, and understanding the real engine, media rights, scarcity, and a remarkable piece of tax treatment, tells you why valuations keep climbing regardless of records, and where the genuine risks actually sit. The jersey is the least important thing about the investment.

Where the Money Actually Comes From

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

Because that money is shared roughly equally and the largest cost, player salaries, is held in check by a cap in most leagues, or by a luxury tax in baseball, the economics of a franchise are unusually predictable and unusually disconnected from performance. The league is, in effect, a media business with a set of local operating units, and the units are guaranteed a cut of the whole. That structure is why the value of a team tracks the league's media power far more than its own place in the standings.