I’ve always found it interesting how economists assign value to sports teams. What dictates one sports team being worth $4 billion while another is worth $2 billion? You’d think it would be the abilities of the players, right? How many games they’ve won? Feats they’ve accomplished? While I’m interested in the economy of sports, I take a bit of nuanced view on the subject because it find it pretty arbitrary how an economist decides how much a team is worth, to an extend sealing the team’s fate. Because there is some kind of system they follow though, and I’m interested in both finance and sports, I thought I’d try to shed some light on the subject.
Let’s take a look at the most valuable sports team from 2016: the Dallas Cowboys. Now wait a minute, you may be thinking. The Broncos won the Super Bowl in 2016, and the Patriots in 2015 and 2017...what makes the Dallas Cowboys so valuable? At $4 billion, the Dallas Cowboys are the world’s most valuable sports team, even though they haven’t won an NFL championship in 20 years. Instead, we should consider the team’s $1.2 billion home stadium built in 2009, which they sold the naming rights to AT&T in 2013.
According to financial firm Mercer Capital, “Sports business mandates constitute an amalgam of traditional valuation approaches applied to a specialized industry niche possessing its own distinct value drivers and considerations.” Various factors, both internal and external value drivers, play into the value of a sports team. For the sake of time and space, I’ll explain it in simple terms. A sports franchise’s value is often determined from its future benefits, and sentimental value often plays a larger role in determining a team’s value than factors that would seem to be of more importance, such as the win-loss record of the team and the skills of individual players.
The valuation of sports teams is complicated and has its own set of rules, with there often being significant differences between fair market value and price. Sometimes a team’s worth is influenced by a wealthy investor who has some kind of sentimental connection to the team, and in that case the team’s ability has nothing to do with their value. A sports team’s value can also be incredibly difficult to define, because it is derived mostly from future benefits looking at projected factors such as the management team, trademarks, brands and logos, customer “fan base” relations, player relations and contracts, customer contracts, broadcasting contracts, arena ownership and lease agreements, and local demographics.
In short, the economy of sports is complicated and often arbitrary. It follows its own set of rules. From the words of economists at Mercer Capital, “...sports properties encompass a highly specialized segment of our profession that is subject to its own distinct challenges.”
Originally published on nicholasfainlight.net
