The revenue numbers below provided good food for thought and discussion. I’ll say from the outset that it was not surprising that NFL and MLB revenue/operating income dominate NBA and NHL revenue/operating income, although I cannot articulate why in simple substantive terms. However, some interesting things I noticed: (1) individual franchise valuation corresponds to the operating profit of the league in question; (2) NCAA Revenue totals only $700 million; (3) average NFL teams are worth twice and three times their MLB and NBA counterparts, which just viscerally seems large.
I focus here on two numbers, revenue and operating expenses, in two leagues, the NFL and the MLB. Particularly striking is how the NFL’s and MLB’s revenue differ by only 13% of the NFL’s revenue or about $1 billion, but the NFL’s operating income is almost exactly double that of the MLB’s. Why the pronounced discrepancy? How is the NFL able to convert only $1 billion dollars more of revenue into twice as much operating profit? Does the NFL operate at a significantly lower margin? Are they managed better? Do they simply have fewer operating expenses? Or is the answer (as many say) simply “Roger Goodell”? This article is an effort to explain why this is the case, using some elementary accounting principles and generalizations on the NFL and the MLB. I should state that I was a Political Science major, so please, please bear with me. And feel free to castigate my arithmetic and accounting failures in the comments section.
If I remember correctly:
Operating Income = Gross Income – Operating Expenses – Depreciation; where
Gross Income = Revenue – Cost of Goods Sold; and
Operating Expenses = Expenditures that occur during normal business operations.
Working with these definitions, some mathematical observations can be made. With only $1 billion more in revenue, the NFL has managed to limit either its COGS or its OpEx in a much more effective fashion than the MLB. Let’s take each in turn.
The NFL’s ability to generate more revenue seems fairly intuitive. They are able to generate more lucrative TV contracts because their viewership is vaster; the advertising revenue they generate from these TV broadcasts is necessarily greater; and some argue that the NFL appeals to a wider audience. The greater revenue figure ought to come as no surprise, but nevertheless, the other variables in the equation need be examined to determine why the NFL is able to operate at a better profit margin than the MLB.
Cost of Goods Sold (COGS)
Costs of Goods Sold include all the direct costs that go into the firm’s production of its goods for sale. In general, that includes costs of labor, materials, etc., but the NFL and the MLB don’t produce hard goods in the same way as GM for example, so I’ll wing it a bit. In my opinion though, I can’t think of a single cost that would factor into COGS and not SG&A.
It seems like the MLB would have a higher COGS than the NFL with regard to TV broadcasts because they broadcast so many more games, but if that’s true, it should point to more revenue, because the MLB retains a certain amount of advertisement revenue from the local stations that broadcast these games (or ESPN/TBS for that matter). Even if it is true that they forfeit some revenue as a result of licensing agreements, games with low viewership, or high transaction costs, I find it strange that the MLB – armed with its own attorneys in addition to those from renowned firms like Bingham McCutchen and Proskauer Rose – would fail to negotiate these agreements properly.
Maybe the MLB has a higher COGS than the NFL because the live games cost the MLB more to conduct than the NFL games. This is where the extent of my accounting knowledge ends. I can’t quite picture what COGS for a sports league is – it’s this roadblock that has me thinking that perhaps my accounting intuitions with regard to sports leagues are fundamentally flawed.
This is where I think the heart of the matter lies. For one thing, the MLB plays 162 regular season games compared to the NFL’s 16. This means that many of the operating expenses, such as payment of officials and umpires, payment of network employees and NFL employees, payment of audio/visual crews and other technicians is necessarily higher for the MLB than the NFL. Consider for example, the discrepancy in pay for NFL referees and MLB umpires: where refs make on average $47,500 yearly, the average umpire makes a whopping $141,000 yearly.
Additionally consider that all other expenses such as after-game cleanup, utilities, ushers, often times insurance, and capital expenditures are sometimes delegated to the league in a lease agreement with a particular franchise. As such, all the operating expenses become magnified for the MLB as compared to the NFL.
I imagine that, despite what is typically said about the NFL being a money-making machine, the absence of some of these operating expenses does contribute heavily to its ability to turn a more successful margin than its MLB counterpart. I should also say, however, that there is something to be said about Roger Goodell’s decision-making ability. He managed (largely) to avoid steroids from becoming an issue in his sports, he kept the sport interesting despite changing the tackling rules, and he even changed the rules and has yet to run into difficulty. All while continuing to generate billions of dollars in revenue in a relatively uninterrupted fashion. Granted he faces his largest challenge yet – looming labor issues – and it is yet to be determined whether the NFL will be locked out or shortened in the same way that the MLB was; consequently the jury may still be out on Goodell’s overall performance.
Taken together, from an accounting perspective, it seems like fewer operating expenses would be the explanation for the better margins the NFL turns as compared to the MLB. If this is the case and my intuition is correct, maybe there is not much the MLB can do to operate at better profit margins, unless they choose to cut the length of the season.
I am unsure how to calculate or even envision COGS for sports leagues; if anyone with experience in that field can offer some insight, I’d love to have a conversation about it. I should also say that I may be completely off base – while my experience with sports is extensive, my experience with accounting is not.
Just some thoughts from a political science major.
 See, for the NFL: http://www.sportsbusinessjournal.com/article/65348; for the NBA: http://www.nba.com/2009/news/07/14/stern.profit.ap/index.html; for the MLB: http://www.forbes.com/2008/04/16/baseball-team-values-biz-sports-baseball08-cx_mo_kb_0416baseballintro.html (a bit dated, but contemporaneous with the data in the table). The NHL has historic revenue problems, but now things may be changing, as the league had its most profitable season “smack in the middle of a recession.” http://www.sportsbusinessdaily.com/article/134844
 See, http://www.businessweek.com/bwdaily/dnflash/content/sep2007/db20070926_077949.htm. Even if he isn’t revered, he certainly has his hands on the wheel steering the NFL’s ship of profitability.
 I would normally cite a textbook, but as you would imagine, I got rid of mine with the quickness. Investopedia confirms these definitions: http://www.investopedia.com/terms/o/operatingincome.asp, http://www.investopedia.com/terms/o/operating_expense.asp
 Depreciation will be put to one side for the purposes of this article, because depreciation of assets and inventory (do sports leagues have inventory?) likely are the same for both leagues.
 After much hunting, unfortunately I can’t locate public records of the MLB’s or the NFL’s books. This follows, because neither are publicly traded, and therefore are not required to file 10-K’s or 10-Q’s as US Securities Regulation laws require. It’s too bad – it would have made this article much less boring.
 Compare http://www.smartbrief.com/news/CTAM/storyDetails.jsp?issueid=0FDA66CD-F7AE-4EFF-B390-5ECEC08CEF26©id=541F666F-AFBA-4AA6-995C-55187AA530CB with http://webcache.googleusercontent.com/search?q=cache:XEhDiXMjhjkJ:www.sportsbusinessjournal.com/article/65376+MLB+advertising+revenue&cd=10&hl=en&ct=clnk&gl=us&client=firefox-a
 Not my contention, just argued by some in my circle of friends.
 Bruce S. Meyer and Aaron N. Wise, International Sports Law and Business, 343 (Kluwer Law International, 1st ed. 1997). I’d read all of this book if I could afford the hardcopy. http://www.amazon.com/International-Sports-Law-Business-1/dp/9041109773/ref=sr_1_1_title_0_main?s=books&ie=UTF8&qid=1295549608&sr=1-1
 Shawne Merriman aside.
 Maybe just my opinion.