Why are Professional Sports Franchises Increasing in Value?

The sports business has traditionally not been a very lucrative one. It was common for the valuation of sports franchises to stay stagnant for a large number of years or even drop down as the years progressed. However, all this has changed drastically now. It is now common for sports team franchises to drastically go up in value.

For the past decade or so, the rise in the value of the sports franchises has been so high that it has consistently beaten the S&P 500 which is considered to be the most reliable benchmark for measuring investment performance. There have been many cases of franchises going up five to six times in valuation in a matter of two decades.

This phenomenal and consistent rise in valuation has caught the eye of several financial analysts who have tried to analyze the reason behind the sudden rise in the valuation of sports franchises. Some of the common reasons behind this rise have been mentioned below:

1. Limited Supply: Firstly, it is important to realize that there is a limited supply of sporting league franchises across the world. This is largely because of the fact that most sporting leagues have a monopoly over the sport they play in a particular region.

   Also, almost every region in the developed world already has a sporting league. Hence, there is almost no chance of a lot more leagues being created and hence a lot more franchises coming up for sale.

   In the previous articles, we have already read that it is not advisable for sports leagues to have more than a certain number of franchises. As a result of all these factors, the supply side of the equation is deeply constrained. There are very few if any, new franchises that are coming up for sale. As per the basic law of economics, this constrained supply is bound to lead to an increase in the valuation of sports franchises.

2. Rise of Billionaires: The supply-side limitation is happening simultaneously with a demand-side boom. This is the reason that the increases in the valuation of professional sports franchises are taking place continuously.

   There are many new types of businesses that are helping create new billionaires. There are more billionaires that exist today as compared to any time in the history of the world. A lot of these billionaires are interested in buying professional sports franchises. This is the reason that the demand is going through the roof and causing the valuations of professional sports teams to increase rapidly.

3. Vanity Purchases: It is also important to note that most of the billionaires who purchase professional sports leagues do not make these purchases considering the cash flow and return on investment of these purchases.

   The ownership of a professional sports league is considered to be a status symbol. As a result, a lot of the prospective buyers are willing to pay a premium for being able to own these clubs. It is for this reason that the revenue multiple or the profit multiple received by these professional clubs is generally higher than those received by other similar businesses. Since the purchase is a vanity purchase, the economic laws related to luxury goods apply. Hence, there is almost no downward pressure on prices while at the same time, there is tremendous upward pressure.

4. Rise of Digital Media: The valuation being given to professional sports teams is increasing because of two main reasons. On the one hand, it is true that the revenue multiple being given to professional sports teams is increasing day by day.

   However, it is also true that the revenue being generated by professional sports teams is also increasing rapidly. This is because of the fact that earlier professional sports teams were only able to generate revenue from ticket sales. However, with the advent of television, the revenue-generating potential increased exponentially. The same is happening now again because of the rapid adoption of digital media.

   The advent of digital media is now opening more opportunities and changing the revenue-generating potential to a large extent. Hence, a higher revenue combined with a higher revenue multiple is leading to sky-high valuations.

Rise of Fantasy Gaming

Last but not least, fantasy gaming has emerged as an important source of revenue for professional sports leagues across the world. The amount of money being generated by sports leagues via fantasy gaming is increasing rapidly.

Now, it is important to note that sports franchises are getting an increasing share of the fantasy gaming pie. This additional source of revenue is significantly raising revenues. Also, it is likely to grow at a very high pace in the years to come as well. The end result is that both the revenue as well as the revenue multiples are being raised and the value of the sports franchise is going up.

From the above points, we can easily see why the valuation of almost every sports franchise is increasing at a rapid pace. However, we also need to understand that this may not necessarily be a good thing.

In many parts of the world, it has been observed that these rising valuations have resulted in poor management of sporting franchises. This is because the owners know that the value of their franchise can only increase over time and hence are not interested in managing the franchise in an effective and efficient manner.