On any given Sunday in the fall about 880,000 of us cram into 13 stadiums for the opportunity to scream our heads off for our favorite NFL team. On any given Sunday in the fall a little more than $30 million are legally bet across the state of Nevada on NFL football. We have no way of knowing how much money is illegally bet, but we do know it’s more than what’s legally bet. On any given Sunday in the fall approximately 18 million people watch NFL football on TV. NFL football provides us with one of the clearest insights available into the concept of consumption value—a key concept for any business. Take a look at the chart below.
I define consumption value as the amount of profit the consuming party will allow the providing party in any given transaction. Mathematically, it is: (total expenses + operating income) / total expenses – 1. We, the NFL consumers, will allow all 32 NFL teams together a profit of 18% above total expenses for the entire NFL experience: apparel, betting, fantasy football, television, parking, concessions, and, of course, the game itself. Interestingly, 15 teams produce 80% of the operating income, and we will allow them consumption value of 30%. We’re saying, “We value the experience you produce at 30% more than the total costs it takes for you to produce it.” We’ll permit the remaining teams a consumption value of but 6%.
Notice I use the words “allow” and “permit,” and that’s because, as the consumer, it’s our choice. The NFL may capture the economic value, but it’s our choice as to how much the experience is worth. Let’s take a quick look at the consumption value of the NFL experience by team.
In the entire time I’ve been researching the concept of consumption value, the consumption value permitted by Dallas Cowboy fans is the highest value I have seen. As a point of reference it’s almost twice the 45% consumption value the consumers of Apple’s products will permit. The Cowboy fans are saying, “I get almost twice as much pleasure from my Cowboy consuming experience as I do from using my iPhone.
I have a couple of more charts to show you that are truly enlightening. This next chart shows labor cost as a percentage of revenues in various industries.
The first bar represents PricewaterhouseCoopers data from its US Human Capital Effectiveness Report. It includes data from more than 300 organizations representing 12 industry sectors. The average company in the report has annual revenue of $5.7 billion and more than 17,000 employees. The 22% number represents the median result of labor costs as a percentage of revenue.
NFL players are at the head of the class. In fact at 47% of revenue totaling $4.1 billion, they are capturing more than three times the value owners are capturing in operating income totaling $1.3 billion. Let’s put this information on the Value Grid.
The Value Grid suggests that the players are capturing most of the economic value that is being created in the NFL. Put another way, their supplier power is immense. The threat of entry is almost non-existent, as well it should be; it’s a monopoly. The only way another owner gets in is if the existing owners vote her/him in. There is no competitor rivalry, as there are no competitors in a local market. Remember it’s a monopoly.
The threat of substitutes is there, but it’s moderate. Why do you think the referee strike was settled so quickly after the calamity in Seattle? It was somewhere between a $3 million and $5 million decision for the owners. The single botched call, itself, is said to have resulted in a $9.2 million swing from bettors to sports books in Nevada alone. Place these numbers against the billions of dollars of economic value the NFL creates for players and owners, and you can easily understand why no one wanted to give fans an excuse to find an alternative source of entertainment.
Here’s the most intriguing aspect of the NFL experience for me. In a capitalistic system the owners of capital generally capture the bulk of the wealth created in the system. In the NFL world it would appear that the providers of talent are capturing the bulk of the wealth. How does this compare to your business?
