Expansion Fees Are the New Media Rights

Admission fees for new franchises in the major closed North American leagues have risen to levels that require explanation. A fee is paid once, by an incoming ownership group, for the right to operate a franchise that does not yet exist, in exchange for a share of central revenue that all existing members must dilute to provide.

For incumbent owners this is close to an ideal transaction. The fee is distributed among existing franchises, typically in equal shares. It is not, under most collective bargaining agreements, treated as football-related or basketball-related revenue, which means it is not shared with players. It requires no capital outlay and no operational change. It is, in effect, a large one-off distribution to ownership in exchange for a permanent reduction in each owner’s proportional claim on future central income.

The trade is explicit

Whether that trade is sensible depends entirely on whether the new franchise grows the central revenue pool by more than its own share of it. The case that it does rests on genuine arguments: a new market adds audience, adds a local media territory, adds sponsorship inventory, and in the best cases adds a rivalry that increases the value of the schedule for existing members.

The case against is simpler. National media agreements are priced principally on aggregate audience and inventory, and an additional franchise adds inventory in a market that, if it were substantially valuable, would likely already have a franchise. The marginal expansion market is by definition less attractive than the markets already served.

Every expansion is a bet that the new member grows the pool by more than the slice it takes. That bet has been made increasingly aggressively.

Fees have outrun revenue

The diagnostic question is whether expansion fees have risen in line with the central revenue they buy a claim on. Broadly, they have risen considerably faster.

That gap can be read two ways. The optimistic reading is that incoming owners are pricing future media growth that is not yet contracted, and are therefore better informed or more confident than the historical relationship implies. The sceptical reading is that expansion fees are being set by reference to recent franchise transaction values rather than to the cash flows those franchises generate — and that franchise transaction values are themselves being set by a buyer pool with characteristics much closer to the trophy-asset market than to a conventional cash-flow buyer.

If the second reading is correct, expansion fees are a derivative of an asset-price series rather than of an earnings series, and they carry all the risk that implies.

The player question

The exclusion of expansion fees from shared revenue is the provision most likely to be contested in the next bargaining cycle, and the player argument is straightforward.

A franchise’s value derives from the competition, and the competition is the product the players produce. An owner realising a substantial capital distribution from the sale of a new membership in that competition is monetising an asset that the players’ labour created and sustained. That revenue is currently structured to fall entirely outside the definitions that trigger sharing.

The ownership counterargument is that expansion fees are a capital transaction rather than operating revenue, and that players share in the operating revenue the expansion generates thereafter. That distinction is technically coherent and, to a player association watching several hundred million dollars per franchise distributed to owners without any of it entering the revenue pool, not persuasive.

Where this ends

There is a natural limit. Each admission dilutes incumbents further, and the marginal available market is progressively weaker. At some point the fee required to compensate incumbents for dilution exceeds what any credible ownership group will pay for a franchise in the remaining markets.

Leagues are approaching that boundary at different speeds, and the responses under discussion — international expansion, additional franchises in existing large markets, and in one case a second franchise sharing a venue — all suggest that the domestic runway is shorter than the current pace of fee growth implies.