Lessons about Business Economics from Professional Sports

I haven’t told anyone before what made me light the fire on this blog.  It’s a weird and wacky story and, like all things, starts rather innocuously.

I’ve been considering for many years the idea of starting a blog.  Perhaps that’s a story for another post, but the short version is, I’d kicked around a ton of different ideas for blogs I was interested in.  I also had these overarching financial dreams that were kicked into high gear once I saw just how in debt we really were in my family.

Right after I decided I was super serious about this debt recovery thing, the Coronavirus pandemic found its way to the United States.  California was one of the first states to initiate a state of emergency and to issue lock-downs for all businesses except essential businesses.  There was a bit of nastiness that resulted from this “essential business” order, resulting in a slew of memes online poking fun at “non-essentials” and praising all the “essential” people.

It was during this mess that a friend of mine posted the meme that would change everything for me and help me decide that the kind of blog that was right for me was a finance blog.

I can no longer remember the exact phrasing of the meme, but it essentially said, Since we now know who all the essential people are, tell me again why we pay professional athletes so much?

I’m ashamed to admit that I was completely triggered by this and went on a tirade about it.  The sum of my argument was that professional athletes’ high rate of pay is not a reflection of the value we place on them over, say, doctors or teachers or other “essential” workers.  There is a completely impersonal reason why professional athletes are paid so much.

I went on to explain the basic business models of both doctors and pro athletes to demonstrate why one makes so much more than the other.  I don’t work in either industry, so I know there’s a lot I’m missing from the full equation, but the below is for demonstrative purposes.

A Look at a Doctor’s Business Model

Let’s look at how a doctor earns money first.

Let’s assume that a doctor can see 16 patients a day (2 per hour).  And let’s also assume that that doctor charges $250 per patient per hour and runs a private practice.

At this rate, the doctor’s earnings are capped at $4,000 per day.  That is the absolute most the doctor can earn based on this basic business model, because the doctor is limited by the number of patients he can help in a day.  If that doctor is open 5 days per week and all 52 weeks per year and never takes a vacation, he earns $20,000 per week and $1,040,000 per year.

This is his total annual revenue, and the only way he’s earning more is by upping his rates or maybe partnering with a pharmaceutical brand (I don’t even know if doctors are allowed to do this last thing).  If the doctor wants to partner with insurance, his rates are capped at his contracted rates with each insurance company.

That’s just revenue.  Now the doctor has to pay for the office space he rents, the reception staff, the nurses, gauze pads, office furniture, stethoscopes, the paper that lines the office chair, manila folders for patient files, license renewal, and anything else it takes to keep a practice running.

Doctors can perhaps save on costs if they share a space with other doctors in a practice, which means they share the rent and utilities costs, only have to buy one set of chairs for exam rooms, and so on.

Doctors in private practices will usually send their patients off to a referral company to have certain things done, such as imaging, to avoid having to buy this expensive equipment.  Equipment may be purchased and shared in a shared space, but again, whatever they can save of that million dollars a year doesn’t increase their revenues.

Doctors, weigh in here:  what are other ways you increase your revenues?

Either way, the problem is the doctor’s reach.  The industry is, by its nature, a one-on-one service, which means the doctor is limited by the number of patients he can provide services to and is absolutely hitched to the limitation of his time and availability.  If that doctor earns a quarter of a million dollars a year, the rest of that money has gone to supporting the business.

Now, for comparison’s sake, let’s look at the business model for professional sports.

Let’s Now Look at the Business Model for MLB

For our purposes today, I’m going to look at Major League Baseball, because it’s a sport I actually attend from time to time and so I understand its pricing better.  I can therefore get a better ballpark figure (see what I did there?) on what they might earn in some areas.

A quick Google search shows that the average baseball stadium in the U.S. seats about 42,000 fans.  Let’s say that on an average day, the stadium sells about 30,000 tickets for a game and that the average ticket price is about $50.

This means that in ticket sales alone, a single game nets $1,500,000 ($1.5 million).  That’s already more than the doctor earned all year, but let’s keep going.

In addition to ticket sales, if the average concession sale per visitor is $20, this gets us an additional $600k.  Let’s also say the average spent on souvenirs is $40 per person, which comes to $800k in merchandise.  So if we’re totaling, we’re at $2.9 million dollars in direct sales.  I have no idea if they make money off parking or if that money goes to someone else, so I won’t include it for our numbers here.

What I will mention is ad revenue.  All those little logos that go around the stadium are paid advertisements that the MLB benefits from, and, if the game is aired on TV, the MLB is gaining a cut of the revenue generated from TV commercials.  I don’t even have a clue what that astronomical number must be, especially when we’re talking about the world series.

So let’s just use our $2.9 million figure per game because I can only guess at the rest.  If those two teams play four times in a week, they are earning $11.6 million that week.  If they only play three games, perhaps they only make $8.7 million.  Remember this is before ad revenue.

How many weeks are in a baseball season?  I’m not sure exactly, but do happen to know the season runs from April to October and includes 162 games, which means that the MLB has raked in a whopping $469.8 million dollars just in ticket sales, merchandise, and concessions.  That’s for each two teams that play, so you can multiply that number by the total number of teams in the league and then divide by two to get a real look at how much the entire industry makes, or you can keep it on the team level.

That doesn’t even begin to cover the merch sales when you see a Dodgers shirt at Target or visit the MLB shop to buy your hubs a Kershaw jersey for his birthday (ahem, speaking from experience).

But the average person?  They’ve spent only $110 per game attended, which is less than half that spent at that doctor’s office for a 20-minute consult and referral.  In some cases, people who don’t even pay for merch or go to live games because they watch at home help to pad players’ earnings because the more people watching a game on TV, the more the TV networks and teams earn from ad revenue.

Companies are charged for ads based on the number of viewers, and movies earn money by placing ads for other companies’ upcoming movies and by ticket sales in theaters.  The cost is relatively inexpensive, and people attend as often as they can afford.  By contrast, people go to the doctor for an annual checkup or when they’re sick (or, if you’re like me, you avoid going at all unless it’s absolutely necessary).

Obviously the numbers change depending on the doctor specialization, missed streams of revenue generated by pro sports that I haven’t considered here, and a lot more.  I didn’t even look at the costs to run a game, but I think it’s safe to say they’re still pulling in a ton more that they can pay the individual players that put the butts in the seats.   In the end, I’m just doing this to illustrate the absolute money making power of having an audience and the vast difference that these two business models have.

A Side-by-Side View Lets us Contrast the Two Industries

When I first started writing this out, I did it to illustrate the reasons why an athlete (or any other entertainer) is able to earn so much when they aren’t considered “essential,” because I found the meme mean spirited and frustrating.

The truth is, entertainment industries are able to earn what they do because they are comparatively inexpensive (we can debate about that, but you get the idea) and because they reach a large number of people at once.  On top of this, people can enjoy entertainment at any time and multiple times, often for free, while companies pay a ton of money to get in front of that audience for advertising purposes.

On the other hand, a doctor has a limited reach for people they can help.  That’s just the nature of the profession.  Some doctors, like Doctor Mike on YouTube, have been able to develop an audience and do better for themselves, but the traditional model of one-on-one service, the stuff that really helps people, doesn’t allow for the same income experience as pro sports or any profession involving a large audience.

Lessons Learned from the MLB Model:  Takeaways

Once my frustration over this died down, I realized that the contrast between these two industries is a very strong lesson for those of us who would like to go into business for ourselves.

I was on the fence about perhaps offering my personal services as a Human Resources consultant.  It’s what I know, and I’m very good at it and have a lot of insights that could help businesses.  After looking at these two models side-by-side, though, it became quite clear to me that the best money is made by obtaining an audience, and that’s best done by either being educational or entertaining.  (Spoiler alert: I am not a very entertaining person except when I screw up and people laugh at me.)

This was when I let go of the idea of ever being an independent consultant, because I realized that instead of having a job, I would simply shift to owning a job. That would mean I’d have all the expenses but I’d still have clients to please, and my income would be limited by the time I had available to give the job.  I’d rather take a different path.

I know this post has been quite lengthy, so without further ado, here are the ways MLB (and other professional sports leagues) gets it right:

  • As primarily entertainers using technology, they are capable of reaching large audiences.  There is no limit to the number of people that can watch a game, which means companies are willing to pay many dollars for ads.  Their reach is effectively limitless.
  • They’ve developed a sense of community by using team locations as a way to represent parts of the sports enthusiast community.  We live in Los Angeles, and my husband is a die-hard Dodgers fan.  Community means more people are talking about the sport, and it encourages people to buy team merchandise to show their support for “their” team.  This is absolutely brilliant.  Not many brands instill pride in the wearers or supports a sense of community, but pro sports do it beautifully.
  • They’ve developed multiple income streams:
    • Their audience brings in revenue via ticket sales, merchandise, concessions, and parking.
    • They obtain revenue from businesses primarily by allowing businesses to advertise to the audience they have amassed.  This is powerful.
    • Probably a hundred more things I haven’t even considered.

Ultimately, writing these lessons down, in conjunction with the discovery of the amount of debt we were in, helped give me the push I needed to understand that if I was going to generate new income streams, I was going to do it using audiences. Because the reach is only limited by your ability to market and the quality of the entertainment, information, or community you provide.

Leave a Reply

Your email address will not be published. Required fields are marked *