What is making folks so bullish on Facebook? After all, with an estimated 840 million users (if Facebook were a country, it would have the third largest population in the world), there doesn’t seem to be much room for improvement. One possible explanation is expansion into China (an actual country with the world’s largest population), where the site is ostensibly blocked by the Chinese government. But that seems like an improbable move, despite Mark Zuckerberg’s goal of learning to speak Mandarin.

The other reason to remain optimistic about Facebook’s future value is that it has a firm grasp on its own corner of the social networking empire, due in part to the benefits of the network effect. This phenomenon exists when the benefits of using a product or service increase as the number of other users increases (some would call that a positive externality). A huge benefit of using Facebook, as opposed to a competing social networking site, is that everyone else you know uses Facebook. Just like owning a telephone becomes more valuable as more people own telephones, using Facebook is better when your friends do as well.

And the network benefits don’t end with you as the consumer; it’s also better for the companies who choose to advertise on Facebook. With hundreds of millions of users and a self-furnished list of their tastes and preferences, there is no alternative social networking site that can offer a better target audience for launching ads. It’s these network effects that create a huge barrier to entry for competing social networking sites (like Google+) to challenge Facebook, even if they offer a better service. Why has Google+ not succeeded thus far in threatening Facebook’s social networking dominance? Because everyone and their mother uses Facebook and advertisers can reach a much larger audience.

So while there are reasons to think Facebook isn’t worth $100 billion, the network effect gives the company a firm hold on the industry. And that is something that will make investors “Like” Facebook’s value. 

Indian Rupee

The Indian rupee started the week at U.S. $1/INR 51.925 Rs. and made significant gains, closing at U.S. $1/INR 50.969 Rs. On Monday, the Indian rupee reversed early losses to close higher against the U.S. dollar. This was due to large dollar inflows from Indian firms and helped offset the negative sentiment arising from Standard & Poor's downgrade of euro-zone nations’ bond ratings. The Indian rupee appreciated in value after data released showed India's trade deficit in December narrowed to $12.8 billion from November's $13.6 billion. The rupee was at U.S. $1/INR 51.360 Rs. late Monday.

The rupee gained more than 3% against the dollar this year as a result of measures taken by Indian authorities to curb speculation and boost dollar inflows, aside from direct Reserve Bank of India’s (RBI) intervention in the currency markets. Buying back local currency in the international currency market at the expense of U.S. dollars decreases the supply of the respective currency and leads to an increase in its value. However, economists believe that the problems in the euro zone are likely to weigh on the rupee and predict the rupee to depreciate in value to U.S. $1/INR 53.00 Rs. by March. One of their main concerns is that even though India’s trade deficit has narrowed it remains still very high and there will be no support for the rupee unless there is sustained dollar inflow.

On Tuesday, the Indian rupee surged to its highest level against the U.S. dollar in two months, driven by capital inflows and firm local stocks. The dollar was at U.S. $1/INR 50.73 Rs. late Tuesday, after touching an intraday low of INR50.72, a level last seen Nov. 17, 2011. The Bombay Stock Exchange's Sensitive Index climbed 1.7% to 16,466.05. Although the dollar had rose about 19% against the Indian currency in 2011, it lost over 4% against the rupee since the beginning of 2012 as a result of strong inflows into local equity and debt markets.

Foreign investors have pured Rs. 179.65 billion in Indian bonds and equities so far in 2012; compared with Rs. 4.986 billion during the same period in 2011.This has been possible due to the investors’ expectations that the central bank will ease rates to boost growth. This has increased government’s holding of foreign currency reserves, which can be used to intervene in the foreign exchange markets in order to support the rupee.

The Indian rupee appreciated towards the end of the week to a nine-week high against the U.S. dollar, aided by dollar inflows and the news that China would ease monetary policy. Risk-sensitive currencies including the Indian rupee were supported after China's Economic Information newspaper stated that the Chinese authorities planned on cutting banks' reserve requirement ratio by 50 basis points by the end of January. This will lead to an increased liquidity in the financial markets and will have a positive impact on growth sensitive currencies, including the rupee. This helped improve investor sentiment.

So what does the appreciation of the Indian rupee against the greenback imply for U.S. consumers and investors? A weaker U.S. dollar would entail Indian exports becoming more expensive, due to a decrease in the purchasing power of U.S. consumers. On the flip side, a weaker U.S. dollar would increase the purchasing power of Indian consumers and would lead to an increase in demand for U.S. products. This will boost the U.S. exports sector. U.S. investors will have to invest more U.S. dollars in the Indian markets than before.

Verdict: Exchange safe-haven U.S. dollar with Indian rupee. 

Prince Fielder has thus far had an equally impressive career. He swatted 230 home runs in a little more than six seasons with the Milwaukee Brewers, including 50 long balls in the 2007 season. He has a career on-base percentage of .390 and a slugging percentage of .540, a rare ability to both reach base and hit the ball hard. Though Fielder remains unsigned (as of December 29, 2011) and his trophy case is not quite as full as that of Pujols (Fielder has a pair of Silver Slugger awards), he figures to receive a contract nearly as lucrative.

It hardly seems that either of these ballplayers could be over-valued, but they each have opportunities to deliver a winner’s curse.

The winner’s curse is a tendency for an auction’s winning bid to be greater than the intrinsic value of the item being auctioned. It’s a term from economic theory pertaining to auctions where the value of the item is unknown and the amount of each bid is known only to the one who places it. This condition clearly applies to the market for free agent baseball players; at best, teams can only estimate the value of a player based on his historic performance, and free agent contract negotiations are frequently done in private, such that one team does not know what another is bidding for a player. It is for this reason that teams can suffer from the winner’s curse when signing free agents.

When a player is a free agent, any of the 30 MLB teams can bid for his services. Each team independently evaluates the player’s value and thereby assigns a dollar amount they would be willing to pay for his services. Assuming the player’s production is worth roughly the same to all teams, each team will arrive at an estimate of the player’s value that is close to the player’s intrinsic value. Since teams do not know the player’s intrinsic value (who could predict how many home runs Fielder will hit in the next eight years?) each team’s estimate will be slightly different. On average, the estimates of the player’s value will likely accurately represent his actual value. But the winner of the auction is not the one who places an average bid, it’s the one who places the highest bid – and the one who places the highest bid will have thereby overpaid for the player’s services.

In fact, you sometimes hear players talk about this phenomenon when discussing free agent negotiations or vying for a high draft selection in a new player draft: You don’t need to convince every team that you are an outstanding player who deserves a huge contract; you only need to convince one team. Even if nearly every team accurately assesses the value of a player’s production at $18 million per year, the one team that inaccurately thinks the player is worth $20 million per year will be the one who wins the contract, and will pay too much. Though they likely aren’t aware of it, the players are describing the winner’s curse.

While one could find a long list of players who have been given fat contracts only to underperform, I’ll leave you with one of my favorites. In 2007, the Chicago Cubs signed outfielder Alfonso Soriano to an eight-year contract worth about $136 million. Soriano was coming off a career year in 2006, and had a great first year with the Cubs (batted .299 with 33 home runs). However, his production regressed significantly thereafter; in 2009 he batted just .241 with only 20 home runs and hasn’t improved much since. The Cubs badly overestimated the value of having Soriano on their team, got a bad case of winner’s curse and are consequently paying him much more than his numbers would dictate. The real kicker is that Soriano has a no-trade clause in his contract, which means the Cubs are effectively stuck with him through the 2014 season.

Will Pujols’ and Fielder’s future performance not stack up with their enormous contracts? I suppose that remains to be seen.

---

If you made it this far and are still interested, this website has an excellent applet you can tinker with demonstrating how the winner’s curse works. The example is that you are a CFO deciding what to bid on a takeover of a small privately-held company whose value is unknown. It lets you plug in potential values of the company and then submit a bid; it then generates 20 random scenarios and tells you if your bid won and how much your profit/loss is.

 The popular adage, “There’s no such thing as a free lunch,” is a catchy way of describing an important concept of economics: opportunity cost. It is impossible to get something for nothing; everything has a cost, even if it does not have an explicit price. The saying originally referred to the practice of bars and casinos offering “free” food to customers, knowing that they would stay and buy drinks or gamble, offsetting the cost of the meal. In economics, opportunity cost is the value of the next best alternative that is foregone when making a decision. If you spend $30 on lottery tickets, you obviously can’t use that $30 to fill your car with gas.

In general, however, the concept applies to any decision people make. If you choose to take a nap, you are giving up the next best alternative to taking a nap, whether that is watching a movie, cleaning your house, or not getting fired from your job. If you take a nap (something that is seemingly free), you can’t do these other things. Similarly, if you enjoy a holiday feast prepared by relatives, you have to put up with them as a payment.

If you are hosting dinner this holiday season, you might be thinking to yourself, “Of course there is no such thing as a free lunch; I’m the one paying for and preparing this meal.” But don’t forget, it’s not free for your guests either. They have to put up with you.

Happy Holidays and a Joyous New Year from everyone at Misix!

Well, an investor from Texas decided to do just the opposite. Kyle Bass, founder of the hedge fund Hayman Capital, recently purchased $1 million worth of nickels. That’s 20,000,000 nickels, for the math-averse. What would compel somebody to make that exchange, when a briefcase of $100 bills would be much more sophisticated? It certainly isn’t because they are easy to store -- can you imagine how big a vault you would need to keep that many nickels? Perhaps Mr. Bass plans on diving into his pile of coins, Scrooge McDuck style.

An alternative answer has to do with Gresham’s Law, which says that when two types of money are in circulation and one is undervalued, the undervalued money will be hoarded and disappear from circulation while the overvalued money will flood into circulation. Gresham’s Law is named after Sir Thomas Gresham, a 16^th Century financier who recognized the phenomenon (though he wasn’t the first to do so). The concept is also known by the expression “Bad money drives out good.”

The different types of U.S. money include: coins, which are composed of various commodities (copper, zinc, nickel, etc.); and bills, which are paper. Each has two “values”: its face value (what the U.S. government says the money is worth for economic transactions) and its commodity value (the value of the material from which it is made). Furthermore, U.S. legal-tender laws say that money must be accepted at its face value (in other words, the exchange rate between a quarter and a one-dollar bill is fixed at four quarters per one-dollar bill).

This essentially artificially overvalues paper bills (whose commodity value is very low, since the paper it is printed on is not intrinsically worth much), while artificially undervaluing coins, whose relative commodity values are much higher. In some cases, the commodity value of one type of money exceeds its face value. Until 1982, the U.S. one cent piece (you might know it as a “penny”) was predominately composed of copper. However, as the price of copper increased to the point where a penny contained more than one-cent’s worth of copper, it was necessary for the U.S. Mint to change the penny’s composition to the present 97.5% zinc, 2.5% copper arrangement. Similarly, the Coinage Act of 1965 eliminated silver from dimes and quarters since they were beginning to disappear from circulation due to rising silver prices.

Mr. Bass’s purchase of 20,000,000 nickels might be an indication that he expects nickels to be the next in line to get a make-over (currently 25% nickel, 75% copper). In fact, he believes that the metals in each nickel are currently worth about 6.8 cents. What he plans to do with his hoard of nickels, however, remains somewhat unclear. In April 2007, the U.S. Mint made it illegal to melt or export pennies and nickels in order to sell them as scrap.

I suppose, in the words of Yogi Berra, “A nickel ain’t worth a dime anymore”.

Arguably, the chief reason for the impasse between Democrats and Republicans on reining in the debt relates to whether or not the exceptionally wealthy should pay more in taxes. Most Republicans are unwilling to impose tax hikes, even on the wealthiest Americans, while Democrats feel the very rich should pay a larger share of the tax burden. The Economist puts it nicely: “(the democrats) can't walk away from the supercommittee negotiations without a significant tax hike on the very rich. Similarly, it doesn't look like the Republicans can walk away from the supercommittee negotiations having allowed that to happen…”

The fact that we’re approaching an election year isn’t helping either, as neither party is willing to cede anything for fear of the political ramifications. Although most economists would agree some tax increases are going to be necessary to rein in our massive debt burden, previous contracts made by Republicans with certain people of influence may make this difficult to achieve.

Doomsday?

So Washington is at a standstill in terms of developing a solution to our nation’s debt problems. Well, it’s a good thing they imposed a “doomsday device” of sorts to force themselves into enacting a plan. The Budget Control Act that was passed last summer stipulated that if the supercommittee failed to reach an agreement on reducing the budget deficit, so called “automatic spending cuts” of $1.2 trillion would be initiated in 2013.

These cuts would affect a number of areas, but would impact the U.S. armed forces considerably; the Defense Department is looking at shouldering roughly one fifth of the burden during the 10 years following 2013. According to Barack Obama’s Secretary of Defense, Leon Panetta, this would result in the smallest ground force since 1940, the fewest number of naval ships since 1915, and the smallest air force in its history. (The U.S. does, however, spend about 5 percent of GDP on defense, considerably more than most countries.)

Though many agree that these automatic spending cuts may be drastic and somewhat problematic, at least they would constitute significant steps towards reducing our long-term debt issues, right? Not so fast. This doomsday device of spending cuts is already being reconsidered by many of the very people who signed it into law. Although Republicans have been a bit more vocal about modifying or eliminating some of the automatic cuts, members of both parties are looking to make changes.

Government in Action

So let’s go through, step-by-step, what congress has done to tackle our long-term fiscal problems:

1. After being unable to come up with solutions beyond raising the debt ceiling, congress created the supercommittee
2. The supercommittee, supposedly removed from partisan politics, failed to come up with a solution due to partisan issues
3. Pending a lack of resolution to help control our debt situation, automatic spending cuts are set to take hold
4. The automatic spending cuts are now being reconsidered

At this point, there isn’t much else that this blogger can say, other than I’m glad I chose to skip politics for a career in economics instead. You could say I’m supercommitted.

The Canadian dollar started the week at US $1/CAD $1.0465 and made significant gains, closing at US $1/CAD $1.0189. On Monday, after news broke that Euro-zone policy makers will take decisive action to tackle the debt crisis, talks of the European Central Bank (ECB) lending money to Italy via the IMF lifted market sentiment and raised demand for higher-yielding currencies. A new agreement, which would include measures to curb excessive debt by making budget discipline legally binding, could persuade the ECB to take more action to halt the selloff in debt markets. The U.S. dollar fell to C$1.0306 from C$1.0343.

The Canadian dollar rallied to a two-week high against the U.S. dollar Wednesday, after six central banks took coordinated action to shore up the global financial system. The U.S. Fed, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points. The move reduces the cost of swapping dollars in the global financial system, which has been racked by the ongoing European debt crisis. This will lead to an increased liquidity in the financial markets and will have a positive impact on growth sensitive currencies, including the Canadian dollar. The Canadian dollar also gained after French President Nicolas Sarkozy said France and Germany would push for European Union treaty changes to preserve the region's monetary union and to protect the euro.

Investors ignored Canada's current account deficit, which narrowed less than expected in the third quarter, and were encouraged by a strong Canadian consumer confidence index. The Canadian dollar also rallied on stronger-than-forecasted economic data. Canadian third-quarter gross domestic product (GDP) rose by 3.5% on surging exports, while strong private jobs data from payroll provider Automatic Data Processing Inc. (ADP) also raised risk appetite. The Canadian dollar was further boosted by an increase in the prices of crude oil, its biggest export.

The Canadian dollar surged in value after US macroeconomic data showed private jobs increased by 206,000, significantly beating estimates. The Manufacturing Purchasing Managers’ Index from the Institute for Supply Management rose strongly in November, underlining the small and steady growth trend in the U.S. economy. The Canadian economy’s performance is heavily dependent on the economic recovery in the U.S., as both countries are major trading partners (NAFTA agreement). 

The Great Famine in Ireland during the mid-19^th century was one of the worst in history, with an estimated one million succumbing to starvation and another million leaving the country. The cause was a massive shortage of potatoes (a staple for much of the population), the result of a blight that caused annual production to fall from nearly 15 million tons in 1844 to less than 3 million tons in 1846. The shortage of spuds during this time caused their price to rise greatly. While you would expect the number of potatoes demanded by Irish families to fall in response to rising prices, it has been suggested that those families whose diets consisted heavily of potatoes ended up demanding more potatoes than before, even as the price was increasing.

The law of demand says that as the price of a good increases, the amount of that good demanded by the consumer decreases. That’s intuitive, as everyone can recall instances where they decided to buy less of something after it became more expensive: as the price of Segways rises, people buy fewer Segways. A Giffen good, on the other hand, is defined as a good that is paradoxically purchased more as its price rises, and less as its price falls. In other words, the more expensive a Giffen good becomes, the more it is consumed. How could such a good possibly exist, seemingly violating the law demand?

The answer lies in the two different economic factors that influence purchasing decisions in the face of changing prices. The first is the substitution effect: when a good’s price rises, people will tend to substitute out of it for a similar good. For example, when the price of Chicken McNuggets rises, some people will substitute out of McNuggets and eat Junior Bacon Cheeseburgers instead. The number of Chicken McNuggets demanded decreases, while the number of Junior Bacon Cheeseburgers demanded increases.

The other, less intuitive, factor is the income effect. When the price of a good rises, the purchasing power of those who buy that good decreases. Since a person’s income is only as useful as the products it can purchase, the real value of their income is tied to the price of the products purchased. For all intents and purposes, an increase in the price of a good is the same as a decrease in a person’s income. In most cases this decrease is quite small, since the good represents only a small fraction of the income expenditure. Therefore, the substitution effect typically overpowers the income effect and the latter’s impact on demand is often negligible.

But for Giffen goods, the opposite holds true: Suppose a good represents a rather significant proportion of one’s income, such as the purchase of bread for someone who is very poor. And suppose bread is relatively cheap compared to other available foods that provide similar sustenance, making it a food that is purchased more as one’s income falls. This means that an exceedingly poor person would spend much of their income on bread, while some of the remainder would be spent on a variety of comparably expensive foods, such as meat or dairy products.

Now suppose the price of bread rises. It suddenly accounts for a greater proportion of the person’s income, and there isn’t any comparative substitute. This means the person’s income has, in effect, fallen. And since bread is a food that is purchased more when income is down, the consumption of bread rises. The income effect dominates the substitution effect.  The result is an increase in the quantity demanded of a good whose price has risen. The increase in the price of bread so heavily accounts for a person’s income that they can no longer afford the other “luxury” foods in their diet, and they end up switching to more bread despite its increased price. 

The example of potatoes as a Giffen good during the Irish famine, though compelling when offered by Paul Samuelson in 1964, has since been refuted; econometric analysis shows that potatoes do indeed follow the law of demand. In fact, economists don’t even agree there is a clear-cut, real-world example of a Giffen good (which is comforting, since it would defy the law of demand). Kerosene was once suggested as a possible Giffen good due to its inferior nature and lack of substitutability. Another suggestion is U.S. Treasury debt as a Giffen good, where increased prices of Treasuries reflect an investor’s need for safer assets, which increases demand for Treasuries despite their increased price. Regardless, a concrete example of a Giffen good remains elusive to economists -- just a pursuit of a theoretical phenomenon that doesn’t seem to exist.*

But if you think you have one, leave a comment!

* Giffen goods are not to be confused with certain luxury goods that are consumed more as their price increases. Consumption for these goods, often referred to as Veblen goods, increases due to some change in the good’s perceived worth or social benefits as its price increases (luxury vehicles, e.g.). It is important to distinguish between the two, since the increase in quantity demanded for Giffen goods is in response only to its increase in price, not to changes in the intrinsic value of the good itself.   

On December 12, 2010, the roof on the Hubert H. Humphrey Metrodome (now referred to as Mall of America Field – perhaps the worst name of any professional sports venue) collapsed, along with the Minnesota Vikings’ season and its starting quarterback, Old Man River (this blogger is a cynical Vikings fan). Although the roof has since been repaired, much of the talk in the Twin Cities sports news revolves around the possibility of the Minnesota Vikings moving to Los Angeles if a new stadium is not built in the near future.

Dome Depot

The Vikings’ current lease on The Dome is set to expire at the end of this season, and there is significant concern among devout Vikes fans that owner Zygi Wilf would move the team if an agreement is not finalized soon. The current argument unsurprisingly centers on what share (if any) of the cost of the stadium should be picked up by the tax payer. Those in favor of the stadium’s construction tout the economic benefits to the surrounding community of having a stadium built and maintaining the presence of an NFL team in the metro. Is this argument valid or unfounded? We’ll take a look at economic research on the subject to answer the question: Do professional sports franchises and building new stadiums benefit the surrounding community?

What do economists have to say?

The economic research for this blog was provided by my boss, Sir Andy Martinelli III, in the form of his master’s thesis, which was written on the subject. No, this is not a quick way to get a pay increase, he’s a pretty smart dude and his thesis outlines previous work on the subject as well attempts to break ground with new research (and I’m hoping for that pay increase).

So let’s first take a look at what some of the previous economic research on the subject uncovered. There has been a significant amount of work devoted to how new stadiums impact the surrounding area with many using the following as measures of benefits:

• Growth in employment
• Increases in per capita income for area residents
• Attraction of new business to the area
• Overall growth of the economy of the neighborhood surrounding the stadium
• The productivity of workers in the area

Studies that find evidence sports arenas/franchises do not add value to the city:

• Baade (1996)
  • Suggests that the services provided by state-of-the-art sports facilities such as food, souvenirs and childcare, are simply substitutes for what local small business could provide and do not create new business or promote economic growth.
  • Finds that in order for sports stadiums to “create” jobs in an area they would need to cause an increase in spending on area goods and services in industries that are highly labor intensive
  • Finds no evidence that professional sports franchises and the building of new stadiums positively influence area job growth
• Zimbalist (2000)
  • Suggests that building a new stadium will create a few new jobs for the area, but not a substantial amount
    1. Sports teams employ roughly 50-120 full time employees
    2. Several hundred low skill, part time employees
       • However, these jobs are only seasonal
• Baade and Dye (1988)
  • Look at whether stadiums have the ability to attract new business to the area
  • Statistical model allows them to measure the amount of new business (non-stadium related) attracted to the metro area simply from building a new stadium
  • Found no statistically discernable increase in the economic activity of metro areas that can be attributed to a new stadium or sports franchise
• Baade (2000)
  • Looks specifically at the impact that a new stadium and sports franchise has on the surrounding neighborhood
  • Two main findings
    1. Stadium may “crowd out” local business activity (make gains at the expense of local business)
       • People spend their money on the sports team and not other areas of business
    2. Player and executive salaries are spent outside of the metro area because most do not permanently reside there
  • These two effects negate any benefit a professional sports franchise may provide
  • Found that new stadiums do not impact the metropolitan area or the surrounding neighborhood

Studies that find evidence that sports arenas/franchises add value to the city:

• Coates and Humphreys (2002)
  • Find that income per person was greater in a city that was home to the Superbowl Champions than the year before the local team won
• Berument and Yucel
  • Find a positive relationship between the number of wins of a Turkish soccer team and the industrial production within which the team is located
  • Results indicate the productivity of an area can be impacted by having a winning team
• Martinelli (2004)
  • Finds mixed evidence on the effect of sports franchises on metropolitan areas
  • Finds that individuals are willing to pay more to live in an area where a sports franchise exists  

So what does all this tell us?

This research is mixed at best, with a lot of evidence pointing towards there being no benefit to the local economy of having a pro sports franchise and building a new stadium. So for fellow Minnesotans attempting to decide whether or not to vote for a tax hike to pay for the stadium, know that there is no clear cut benefit to the Twin Cities’ economy by building Zygi Wilf a palace for his team. Now there is certainly something to be said about being able to have a team to call your own. Watching the big game on Sunday with a bunch of friends and rooting for your team is certainly worth something to a lot of people.

The question Minnesotans need to ask, is how much is it worth to me to have a pro football team as glorious as the Vikings stay in Minnesota? While reflecting upon this, some of the greatest Vikings moments of my memory come to mind that exemplify how the team has shown us true class and a championship spirit over the years:

• The magnificent 1998 NFC championship game when Gary Anderson (AKA Ray Finkle) botched a 38 yard chip shot (his first miss of the year)
• The infamous “Love Boat Incident” of 2005 – enough said
• The way the 2009 NFC championship game ended – enough said

So how much would this blogger be willing to pay to keep such a celebrated NFL team in Minnesota? All I can say is It’s a good thing I’m a fan of hockey and baseball.

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The National Football League is a very successful business in America, pulling down approximately $9 billion revenue in 2010. It avoided a nasty lockout of its players that jeopardized the 2011 season without missing a single regular season game (good try, NBA). It has a strong base of devoted followers built on team loyalty and unmatched parity.

And, oh yeah -- it has fantasy football.

The fantasy football concept is quite simple. At the beginning of the season, a group of eight to 12 league participants take turns selecting or “drafting” a team comprised of real-life NFL players. Points are awarded to each fantasy team during each week of the season based on the actual performance of the players on one’s team (e.g. scoring touchdowns, accumulating rushing yards, recovering fumbles, etc.). Fantasy participants compete with one another each week to determine winners and losers (decided by the number of points awarded to the participant’s players). Participants can add and remove players from his/her team, designate which players will “start” each week, and make trades with other participants, which adds to the feeling of being a “team owner.”

In the early 2000s, fantasy football made strong gains in popularity when sports media websites started offering fans the opportunity to play for free online. This combination of easy access to player statistics and automatic scoring made it simple for fans to set up and manage leagues, giving fantasy football the opportunity to grow into the phenomenon it is today. It is estimated that more than 32 million people play at least one fantasy sport in the U.S. and Canada (including 1 of every 5 males), an increase of more than 60 percent in the last four years. Its rise in popularity has also suddenly made fans even more aware of the performances of all the best players in the league. In fact, successful participation in a fantasy football league nearly necessitates fans to follow the performances of good players since they are the basis for their managerial decisions. 

This increase in fan knowledge has been a boon to the NFL. Instead of fans following only their favorite local NFL team, they are now interested in the performances of a number of individual players as well, often members of teams that the fan would otherwise not care about. According to a 2006 study, 55 percent of fantasy sports participants say they watch more sports on TV than they would otherwise because of their involvement in a fantasy league.

Fantasy participants are also more likely to attend a professional sports event than the average American. This study examines the relationship between NFL game attendance and participation in fantasy football. Using an annual survey of approximately 25,000 interviewees, the authors find that those who play fantasy were much more likely to attend NFL games than those who did not (holding constant a variety of other factors that would affect an individual’s attendance). Additionally, playing fantasy football and being an “avid fan” of the NFL were found to be complementary characteristics of attendance, as the existence of both characteristics increased the probability of a fan attending a game more than just sum of their individual impacts.

A 2011 study in the Journal of Sport Administration & Supervision found something similar, pointing toward “…evidence that there is a relationship between NFL players starting in a high percentage of fantasy leagues for that particular week and the television rating for that particular game.” The author examined the Nielsen ratings of NBC’s Sunday Night Football and ESPN’s Monday Night Football games and noticed that viewership of those games was highly correlated with the percentage of leagues starting the players that played in those games.

While the method of examining correlations is somewhat coarse – one could easily argue that games with high Nielsen ratings often feature good teams, which tend to have the best fantasy performers – it does lend support to the idea that fans watch more football to see their fantasy players perform. The author also makes an intriguing suggestion that the NFL should design future schedules of prime-time games with top fantasy performers in mind: While it is difficult to know at the beginning of the season which teams will still be relevant in December, it is nearly a guarantee that some players will be started in almost all fantasy leagues (barring injury). This makes even the poorly performing teams an attractive choice for these games if they have one or two sure-fire fantasy starters.

How does the popularity of fantasy football translate into dollars and cents for the NFL and other organizations? That question is difficult to answer, since defining spending due to fantasy football is open to interpretation. One estimate is that the fantasy sports market is worth nearly $2 billion, with the average participant spending about $500 per year. Another report  estimates that the total market for fantasy sports is at $4.48 billion, with $800 million being spent directly on fantasy sports products. Regardless of the exact number, the benefit to the NFL is even harder to quantify because it is mostly indirect. Fantasy football prompts people to watch more football on television, which benefits the NFL through their contracts with broadcasters and their advertisers. There is also the benefit of increased use of cable channels that cater to fantasy football participants, such as DirecTV’s NFL Sunday Ticket (which offers real-time fantasy tracking for up to 18 players) and the NFL’s own NFL Network (which airs Thursday Night Football).

For all the concern that players and coaches have expressed in the past about fantasy football ruining the sport, and turning fans into crazed fantasy team managers that care less about the fate of their favorite (real) team and more about their fantasy players, it looks like fantasy football is here to stay. With all its benefits to the NFL, that’s a fantasy becoming reality.