With the National Football League (NFL) holding its annual draft this spring, franchises will be stacking their rosters with elite talent in hopes of building a playoff-caliber team. Jeff Phillips, a Managing Director in Stout's Valuation Advisory group and co-author of the book The Evolving Economics of the National Football League and Franchise Value, discussed the benefits of an NFL championship and what drives franchise value.
How many professional sports teams have you worked with in your career?
I have addressed valuation and stadium-related questions involving more than 100 professional teams and sports-related businesses, including (either directly or indirectly) more than half of the NFL teams.
What are some of the factors that you look at when you value an NFL team?
The NFL is unique in that the league has a wide-reaching revenue-sharing policy and a player salary cap. Shared revenue streams represent a majority of most teams’ total revenue. For example, each team has equal share of broadcasting rights revenue, which is quite sizable – often representing two-thirds of the team's overall revenue. For the 2017 season, the NFL teams shared nearly $7 billion in revenue from broadcasting rights, which represented more than $200 million per team. Another great example of revenue sharing is with the revenue generated from the sale of tickets. Each team keeps approximately two-thirds of its revenue from home ticket sales and the remaining third goes into a pool that gets split evenly between all the teams at the end of the season.
In addition, there is a salary cap on what players can be paid, which limits the expense side of the equation, so any incremental revenue goes straight to the bottom line. As a result, each team is focused on generating revenue at the margins, which can be done through the sale of suite tickets (predominately considered real estate revenue), concessions, naming rights, or sponsorships.
The philosophy behind this approach is to create a level playing field between small market and larger market franchises that allows all teams to compete for championships, thereby enhancing overall interest in the sport. This is one factor that has allowed the NFL to command large fees for their broadcast rights.
The NFL continues to comprise the majority of the highest-valued franchises in all of professional sports (as determined by Forbes), representing 29 of the 50 highest-valued franchises for 2017. The Dallas Cowboys continue to top that list at approximately $4.2 billion and haven’t been to a Super Bowl in over 20 years. Given everything that we've talked about, why do you think that is?
At the end of the day, the scarcity of professional sports teams is a big driver in determining the value of a team, but franchises at the top of list are also able to generate significant cash flow. The Cowboys are a premier brand that is able to leverage the NFL model to create substantial value. Variances in NFL team values are largely driven by differences in levels of nonshared revenues. The Cowboys play in a stadium that's designed to drive nonshared revenue – specifically, a stadium with a large number of seats, suites, and other amenities. And, they're able to fill those seats through a large fan base that has grown over the years. To give some perspective, the Cowboys consistently sell out their games and have a maximum stadium capacity of over 100,000 seats, yet the majority of teams have capacities between 60,000 and 70,000. The Cowboys’ naming-rights deal with AT&T is also one of the largest such agreements in professional sports. These advantages, coupled with a controlled salary structure, allow the Cowboys to generate significant cash flow.
You mentioned broadcast rights earlier. The Super Bowl is generally the most watched show on TV every year, but we keep hearing about declining TV ratings in the NFL. Is this starting to have an impact on the valuation of NFL teams?
More than 80% of the top 100 programs on television in the last year were sports-related. Sports has significant value and represents one of few types of content that viewers continue watch “live.” While the long-term effect of the declining ratings may have a different impact, the NFL’s recently announced five-year, Thursday Night rights package with Fox for over $3 billion seems to suggest that broadcasters still put a significant premium on sports programming. At an average of over $600 million per season, the deal represents over a 30% increase in the rights fee versus the prior season.
Does a Super Bowl victory (like with the Philadelphia Eagles in February) result in a big increase in franchise value?
It's really difficult to illustrate that the value of an NFL team is materially impacted by a Super Bowl win. That being said, a championship may provide teams with the ability to command higher ticket prices, consistently fill more stadium seats and suites, sell more concessions, and charge more for sponsorships.
The purchase of an NFL team is not like buying a house or investing in the stock market – it's not necessarily a rational decision. Teams rarely go up for sale, and potential owners often pay a premium to become a "member of the club." An NFL team still receives a significant portion of its revenue whether it's winning or losing, creating a bit of a floor as it relates to value. But similar to all assets, the ultimate value is driven by the laws of supply and demand.