The Boston Red Sox are one of the most iconic teams in baseball. Yet, what about the business side of the game? What kind of business model do the Red Sox use to be profitable? What revenues does the team actually generate? And what does the future of the game, the future of baseball, and even professional sports in general look like? Listen to Jenny Rae, ex-Bain consultant, as she dives into all of these questions and breaks down the business strategy behind the baseball business.
Boston Red Sox: YouTube Transcription
The Boston 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 in 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:
- The Red Sox business model and of a professional sports team in general
- The actual numbers for the Boston Red Sox
- What makes them successful or not successful now
- What we think the future will hold for professional sports and baseball in general
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The Red Sox Overview
Let’s jump right in. First of all, the Boston 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, 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.
The Business of the Game
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. 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, $246 million off of revenue of $519 million. So by nature, we can see that that 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.
Sports Team Expenses
Now we have to understand whether player expenses in a professional sports team are variable or fixed. And 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 COVID, 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. 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 on 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.
The Benefit of Winning
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. 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 equation.
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. Will 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 business model. 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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- Variable Cost: Examples, Definition, & Formula
- The Pyramid Principle