I’m sifting through a number of studies and economic data regarding Sports finances in preparation for a case study comparing revenue contributions for sports and performing arts organizations and there are far too many interesting things to not mention, if not post a properly cited blog post on (that will come a bit later).
The received wisdom from the Chicken Little Think Tank (the “Classical Music is failing” camp) that with declining revenues from ticket sales (sometimes referred to as “performance income” or more erroneously, “earned income”) as a proportion of total revenue for classical music organizations and the [purportedly] declining audience (as well as the increasing median age of the audience) there’s this notion that the industry must get a bigger [and younger] audience to offset the performance income gap (the gap between performance revenue and operating costs).
The figures (depending on whom you ask and which studies you look at) show a steady decline from roughly 7o% or 90% of ticket revenue covering total expenses (back in 1937) to between 35% and 40% of ticket revenues covering expenses today (less for Opera and Ballet). In other words, the performance income gap is increasing showing us that there are structural deficits built into what is practically a service industry which cannot have an increase in production to offset rising costs due to inflation. This is known as the Baumol Cost Disease.
Lisa Hirsch and I have been having a conversation about the similarities of the Sports Industy with regards to the Cost Disease in my previous post and I foolishly tried to have a discussion with Greg Sandow regarding this issue in a previous post at his blog. The basic idea is that Sports Teams function no differently than Orchestras in so far as they are just as prone to the Cost Disease since it will still take as many players to play a game today as it did a hundred years ago.
But there’s really no reference to the cost disease in this industry which is a for-profit business. Why is that? One reason, and much of this is due to the revenue sharing amongst teams in a League, is precisely because on a whole the sports industry is profitable even if a number of individual teams aren’t profitable. An example, during the period of 1995-1999 only three out of thirty Major League Baseball (MLB) clubs made a profit. But due to revenue sharing (the highest earners will give a disproportionate amount of their gross to distribute amongst the lowest earners), the field as a whole remains profitable.
This is little different than the marketing issues I brought up in the previous post regarding putting big efforts into promoting the Blockbuster movie to offset the poorer performing movies–a studio (or record company, for this matter since this is how they used to operate) can prop up the big earners and still come out making a profit even if half a dozen movies lose money while the rest barely break even.
In John Vrooman’s article, “Theory of the Perfect Game: Competitive Balance in Monopoly Sports Leagues” (Review of Industrial Organization, 2008:31) he gives Gate revenue for three of the four major Sports Leagues for the year(s) preceeding the publication. The NFL, the most profitable of the Leagues, takes in 20% of its total revenue through Gate revenue while the MLB, the next in line in profitability, took in 35% in 2006 (down from 40% in 2001). The NBA gets roughly 33% of its total revenue from the gate.
These numbers aren’t very different than the ticket revenue in Classical Music. But is there the same kind of structural decline as has been described by Baumol and Flanagan? Well, it looks like it’s a big yes. The two years’ Gate revenue mentioned above for the MLB can be traced back further. For example, between 1969-1973, the Gate Revenue averaged 61% of total revenue (Source: 1969-73– House Select Committee on Professional Sports. Inquiry into Professional Sports. 94th Cong. 2d sess. Part 2, 1976, p. 372.). The data is relatively complete and shows a comparable, if not sharper, decline to Orchestra performance revenue as a proportion of total revenue. I’m still compiling databases on the other Sports League Gate revenue trends but this seems to be the norm.
So we have a performance income gap in the Sports Industry which is practically no different than the “structural deficits” found in Classical Music. But the former is considered “profitable” while the latter is increasingly being referred to as being in crisis. What has made up the shortfall in performance revenue for sports then? The most obvious revenue sources are through corporate sponsorship, merchandizing, and most importantly for the purposes of this post–Broadcast licenses (i.e. Television).
The way this works is that Television studios/stations (much like radio) sell ad space. The real customers of media broadcasting are corporations, not its viewers. A thirty second ad during the Super Bowl can coast upwards of hundreds of millions of dollars and in many cases ad revenue through media licensing can make Sports Leagues (proportionally) as much as Gate revenue if not significantly more.
The odd thing about Television licensing is that businesses look at the demographics of the viewership. The magic demographic in the Nielsen ratings is the 18-49 year one–this is the demographic which will determine that a Television Station can demand the highest prices for ad space. It wouldn’t matter if a show is the highest rated sindicated show currently on the air if the 18-49 year demographic doesn’t comprise a significant proportion of its viewership. Shows with high ratings have been cancelled simply because of this fact (such as the second highest rated show, “Harry’s Law,” and the popular “Jesse Stone” made for TV movies). In other words, the older demographic is demonized by Television because it doesn’t fit into the demographic that businesses [arguably] consider to be the best one to target (e.g. the 18-49).
The irony is, with an aging population, this is making less and less sense since the buying power of the older demographic is so much higher. But this bias against aging audiences is being seen replicated in talk about the demographic of audiences for classical music which is ironic since one could wonder what the actual demographic for Sports is (given that the recent NEA study has also show a decline in audiences for ‘benchmark’ Sports events).
Another interesting issue of Broadcast has to do with how that affects the audience attendance for the actual live event. The 72 hour sellout rule for media blackouts (within a 75 mile radius of the game) is currently being contested after 40 years due more to fan demand than the industry (which wants to keep it in place), and Peter Gelb has mentioned that he believes the Met Opera has lost some of its live audience in major nearby cities like Boston due to the HD Casts in movie theaters.
Add in the fact that Sports Stadiums rarely cover their start up costs and only half of them actually cover their operating costs and we have to wonder how much public contribution actually goes into propping up the profitability of the Sports Industry. Never mind how much taxpayers help to recoup loss of tax money due to corporate welfare for those companies that do pay for advertising during Sports broadcasts.
And that, folks, is what I hope to explore in the case study–how much public contribution actually goes into Sports and how that compares to non-prof Performing Arts Organizations non-performance income due to donations (which are tax-deductible) as well as the relative economic impact made by a local Sports team as opposed to a local Orchestra, Opera Company, or Ballet.