Pretty Good Sports

Team Owners: Profit-Maximizers or Win-Maximizers?

Albert Mattheis

Sports team owners are typically cast as greedy and rich old white guys. Sports franchises have sick return on investments. Seriously, check out any team on Forbes and look at their evaluations over the last few years. Most teams have doubled or tripled their worth in a matter of 30 months. This is a classic case of "Oh the rich get richer!" because it costs a ton of money to buy a sports team in the first place. But if you didn't have the money or foresight to buy one ten years ago, good luck because they are crazy expensive now.

These owners are not lucky people who happened to invest in Amazon in 1998 because someone told them it would blow up, nor are they savvy CEO's who built a business from the ground up. They just happened to jump into a market where people have increasingly more money and are increasingly more excited to spend it on sports entertainment. Think the difference between an angel investor just giving you money and saying "give me 2% of your profits" or someone like Mark Cuban on Shark Tank (who ironically owns a sports team) who buys equity in your business but also wants to help you build it. These owners are not passive financial-backers, but rather investors who face many decisions determining where the direction of their sports team is headed. Most pertinent to them though, is whether they want to maximize profits in the short run or maximize wins to increase team value for the long run?

Whether or not a team owner is focused on maximizing profits or wins can be somewhat evident in a teams transactions and behavior. Dan Snyder, owner of the Redskins, is a classic example of a profit maximize. He seems to genuinely not care about the teams longevity but rather he signs flashy big name free-agents who will sell tickets and create hype for the immediate season. Other team owners who allow long-term rebuilds to happen and are accused of "trusting a process" may be considered guys who are maximizing wins.

To determine the motives of an owner who is not transparent about being at either end of the spectrum, a possible indicator can be how they price tickets to their home games.

Conventional wisdom may say that if a team is selling out, than they could be charging too low of a price for tickets. Charging a ticket price below equilibrium could result in people buying out all of the tickets, and then scalping them at a higher price due to scarcity (leaving money on the table for the team.) A team that is knowingly selling out all of their seats may not be concerned with getting maximum profit from ticket sales, and perhaps they prioritize game-attendance over profit maximization. They could even underprice tickets on purpose if they believe that game attendance leads to deeper fan loyalty and home field advantage, which ultimately would mean they are more focused on win-maximizing than profit-maximizing. Also, if a team is selling out their cost-per-attendee may be even slightly higher than their revenue per-attendee, and to maximize profits they should raises prices and sell fewer tickets.

A team that does not sell out might not be a profit-maximizer because they are charging perhaps too much for tickets, and are not concerned with finding an equilibrium price that maximizes revenue and fills their stadium to capacity. Additionally, stadium revenues are not solely comprised of ticket sales, but also merchandise and concessions. If an event sells out, that means there is the maximum amount of people there which gives the team the highest likely hood of maxing out concession and merchandise sales. By not selling out, the team is not reaching their optimum sales in tickets, concessions, or merchandise which ultimately leads to them not maximizing their profit. It is possible that a team is not selling out on purpose, preferring to charge a higher ticket price and make tickets more of a private and excludable good that requires a certain amount of investment to enjoy. In this case, revenue-per-attendee might be greater than zero, and the team might even increase profit by lowering ticket prices.

Of course, both these evaluation may be wrong because all owners are seemingly profit-maximizers. Ticket prices are carefully researched and priced at equilibrium by team financial analyst, and in a billion-dollar industry it is unlikely that teams are doing anything that does not result in a profit maximization for the team. Regardless of how fans feel about it, or if an event sells out or not, team owners are always profit maximizers. Some teams just seem to prioritize short term over long term. Objectively as a sports fan, and Redskins fan, I think the win-maximization is the objectively right thing to do for an owner because it brings him/her (keeping it PC at PGS) the money eventually, but also maximizes the satisfaction from fans having a competent and competitive team to watch.