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the boss in red sox
my grandparents would say they're the
best team in baseball
but as a yankees fan i have to disagree
however aside from the debate about the
dynasty
that the boston red sox is and baseball
and
how cool it is to go to fenway i know
because i've been there
and it's a very very fun venue still
what we're talking about today is
nothing
related to baseball or that event we're
talking about the business model
of professional sports and specifically
what makes the boston red sox who they
are
and what makes a baseball team or a
professional sports team successful
in general we're going to talk about
first of all
the business model of a professional
sports team second of all the actual
numbers
for the boston red sox third what makes
them successful or not successful now
and fourth what we think the future will
hold for professional sports and
baseball in general let's jump right in
first of all the boss in red sox and a
baseball team are a great example of a
professional sports franchise
just a few fun facts about the team they
were purchased in 2002
by two owners john henry and thomas
werner when the two gentlemen bought
the red sox they bought it for 380
million dollars which
might have seemed like a lot of money in
2002 but definitely is nowhere near what
they're worth today
the team is estimated to be worth over
three billion dollars today
the overall business has no debt
so that's only interesting because
sometimes debt can inflate or deflate
how the actual metrics look but our big
question is
what is professional baseball as a
strategy
and how do we simplify it to understand
what you need to do if someday
you find yourself just kind of you know
customarily owning a professional sports
team
so here's what you need to think about
first of all is it a variable cost or is
it a
fixed cost business and when you take a
look at the way that the business
operates just take a second think about
it what is it a variable cost or a fixed
cost business for those of you who
answered a fixed cost business
you were right and it's not necessarily
because of stadiums which
are expensive but are often built for
the city or from the city and then
leased back to the team
um and it's not because of the fact that
they have
really big marketing expenses no no
there's one big big expense
and that one is the predominant one for
professional sports it's player salaries
so player expenses in 2020
uh 246 million dollars off of revenue
of 519 million so by nature we can see
that that
um is the biggest cost bucket for 246
million is just
under 50 of total revenue and so unless
they're losing money
we're looking at a huge line item that's
probably going to give us a clue into
how this operates now
we have to understand whether player
expenses in a professional sports team
are variable or fixed
the question is if the team wins do we
pay them more
maybe a little bit if the team loses do
we pay them less
not necessarily if the team doesn't play
in a time
like covet what happens then well
there are a lot of things that we're
discovering for the first time
professional sports is certainly
no exception to that rule but in this
case player expenses
are not dependent on how many people
come to the games
how many viewers there are on television
or how many games are won
player expenses are a line item that are
negotiated in contracts from the
beginning
sometimes there are activated clauses
inside the contract but still doesn't
make them
variable in terms of the actual buyers
the users
so the player expenses being so high is
one of the key
pieces of this expense ratio now if you
go down to some of the other stats it's
pretty interesting actually
the gate receipts so the amount they
make just on the stadium
is 199 million dollars that alone
doesn't pay back the player expenses so
again
pretty sure that this is not a variable
cost business because you would expect
that the operating
of the stadiums of what's at the gate
would be the main
variable expense you can see that it's
lower than this fixed cost of the player
expense
so now that we know that it's a fixed
cost business and
that's going to be one of the most
important things that we have to
understand we need to understand how
fixed cost businesses
get revenue revenue in professional
sports comes from a couple of different
sources
one is from sponsorships and from
advertising
so advertising on your media channels
advertising
inside your stadiums advertising on
programs
there are a lot of different ways where
advertising plays in
ticket receipts gate receipts definitely
one of the key ways
and finally there is merchandise and
food and beverage depending on how the
operating agreements are set up within
stadiums so you have these different
organizations that are benefiting
and the overall franchise is going to
benefit the most
but what are they really looking for
well if you look at the gate receipts is
only 200 million but the revenue is 500
million you can see
that there are bigger deals here in the
works rather than just the operating
of the stadium so what does an
organization like this need to
do they need to have a sufficient amount
of
players in the roster where they can win
because if the majority of the
tickets are not from the gate from
a winning team even then where they're
coming from
are from more valuable places from media
contracts and from
advertising or sponsors so knowing that
we need to understand that the way that
they're managing is
for a winning team in order to
improve the value of the business uh
what does that mean well it means we
have a fixed capacity business here
a business that will play a certain
number of games
with a certain number of players and we
don't need more than that we don't want
to hold too many players on the roster
but at the same time maximizing the wins
gives us
the greatest leverage and the greatest
viewership on
the other side of the equation on the
revenue side of the mission so
all goals of all fixed cost businesses
are to take the capacity that they have
and with it to maximize revenue and
arguably the red sox are one of the best
organizations
in the world at doing that what's going
to happen in the future though with the
red sox and with professional sports in
general
well we expect to see the same kind of
payoff
will players just get more and more
expensive
as the pool for them diminishes and the
demand
for winning increases
it's a little hard to say but ultimately
we do know that there are some potential
disruptions coming forth
inside professional sports in the u.s at
least models that have been adopted in
other places
like licensing a spot on a jersey for
an advertiser so there are still
opportunities to continue to
leverage the capacity of the
organization with upside on the revenue
side
if companies and largely the
professional sports network do that
really effectively
we're going to see a major benefit in
the future
for how these organizations work on the
revenue side in particular
thanks so much for joining us for this
episode of strategy simplified on
professional sports and specifically on
the boston red sox
i'd make my grandparents proud but my
yankees side of me needs to go put on
some yankee blue
i hope that you enjoyed it and if you
have more questions about
businesses that are like this please
send us which ones you'd like for us to
cover
in future episodes on youtube or on our
podcast strategy simplified
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