The Financial Crisis Reaches a New Arena: Professional SportsPublished: December 10, 2008 in Knowledge@Wharton
It seems nonsensical to believe that professional sports would be immune to the financial calamity that's crushing the rest of the world's economy. How could any business that depends on revenue from consumers and corporations be invulnerable to a recession?
Still, it's hard to imagine sports suffering in the same ways that more conventional industries are. The Detroit Tigers aren't going to lay off all their shortstops and head to Washington begging for a bailout. Sunday afternoons in the fall won't stop featuring National Football League games and beer commercials on TV. Superstar athletes seem likely to draw supersized salaries no matter how stressed the global credit markets are.
Wharton marketing professor Eric Bradlow, however, already sees the impact that the economy is having on sports. Consider the Yankees, he says, and their decision not to offer arbitration to Bobby Abreu and other players. "The bottom line [is that] revenue is going to be down. Advertising revenue is down. Corporate boxes and corporate sponsorships are going to be down. There's no question the [financial crisis] is going to affect the economics of the sports industry."
Indeed, recent headlines seem to support this. Ailing General Motors, the top sports TV advertiser and a big sponsor of golf and racing events, announced in November that it will not buy any Super Bowl commercials this season. GM also withdrew its Cadillac division's sponsorship of the Masters' golf tournament, scaled back NASCAR commitments and terminated an expensive endorsement deal with Tiger Woods. The National Basketball Association said in October it is laying off 9% of its staff. At Major League Baseball's November annual meeting, Commissioner Bud Selig warned teams to be careful with money, and later he asked former Federal Reserve chairman Paul Volcker to address the owners. The Toronto Blue Jays have already said they may not bid for free agents this off-season due to the economy, and at least 16 of the 30 teams are freezing or lowering season ticket prices for 2009.
The New York Mets and Citigroup face blistering criticism over the troubled bank's $400 million, 20-year commitment to put its name on the New York Mets ballpark that opens next April. This comes at a time when the bank is laying off more than 50,000 workers and receiving billions in federal bailout money. In the NFL, the Dallas Cowboys, New York Jets and New York Giants are still searching for corporations willing to pay to put their names on stadiums the teams are constructing.
For decades, sports have existed in a bubble all their own. But it was not the speculative type of bubble that led to spectacular busts in housing, Internet stocks and Dutch tulip bulbs. The growth in sports has been real -- driven by customers and sponsors lining up to pay, and as a result, sports have long been considered recession proof, insulated from the vagaries of the economy.
More recently, however, sports leagues have tied their fortunes more closely to corporations -- and now are living with the consequences. "Sports are not recession proof," says Mitchell Zeits, a sports finance consultant in Mount Laurel, N.J. "It's just that they may not feel it the same way other businesses feel it."
Operating as quasi-monopolies, the major sports leagues and teams have a defined set of revenue sources. Leagues receive big money from national TV and satellite radio contracts and distribute it to teams, which pursue their own local media deals. Big corporate advertisers -- selling beer, trucks, pharmaceuticals, and financial and phone services -- fund the television deals and often pay separately to put their names on stadiums. Attendance at games -- from luxury suites to cheap seats -- brings in money that, to varying percentages in different leagues, is shared among all teams. (NFL teams, for example, share 40% of gate receipts with the league.) Income from team merchandise and other licensing also is shared. Public money more often than private funds pays for new stadiums these days. Teams get other money to build and expand from corporate lenders such as Bank of America, which has a prolific sports finance unit. Virtually all of these revenue sources are squeezed (although, for now, locked-in national TV deals are relieving some of the pressure).
Sitting out the Super Bowl
Sponsorships are taking a big hit, too. Look at General Motors, says Wharton marketing professor David Reibstein. "Here's a company that all of a sudden said, 'Hey we need to be spending less.' And we see a major cutback there." FedEx, Garmin and Salesgenie.com are other past Super Bowl advertisers who are "sitting out" the country's premiere sports event on February 1, according to an Associated Press report.
"Even the appearance of buying the big Super Bowl ad this year, if you're an auto company or bank and you're getting bailout money, isn't good," notes Wharton legal studies and business ethics professor Ken Shropshire, who heads the Wharton Sports Business Initiative.
Shropshire says weaknesses in sports sponsorship commitments may become more evident when existing deals come up for renewal. A case in point is Johnson & Johnson, which has decided not to extend its sponsorship of the Olympics through 2012, leaving the International Olympic Committee with a $100 million gap to fill, "in part because of the economy and expiration of key patents," Sports Business Journal reported. Courier service DHL said it will honor its commitment to sponsor Major League Baseball's "DHL Delivery Man" award for relief pitchers through 2010, even though it recently cut 15,000 jobs and said it will withdraw from the U.S. express-delivery market, according to Bloomberg.
Overall, when corporate budgets are squeezed, marketing can be among the first areas cut, especially brand marketing. Reibstein adds, "Building brand awareness has a long-term effect, so maybe companies can afford to cut back on that advertising. It's not like people are suddenly going to forget about them."
This means the biggest recognition-building commitments -- stadium-name deals -- are harder to nail down. The Dallas Cowboys don't have a naming-rights partner for their new stadium; owner Jerry Jones told the Dallas Morning News that "it would be naive to think our economy isn't impacting commitments." In New Jersey, where the Giants and Jets will share a new stadium, the teams may be lowering earlier expectations of getting $30 million to $40 million a year in naming rights, according to a press report.
The Mets continue to defend their lucrative deal with Citigroup, even though two New York City Council members want the ballpark to be named "Citi/Taxpayers Field." Teams want to align themselves with quality, long-term partners, says Shropshire. "Remember, there used to be an Enron Field."
At the same time, getting big corporate dollars for luxury seats is becoming harder. The Jets in October held an auction for 2,000 personal seat licenses -- which give holders the "right" to buy a season ticket at additional cost -- in an exclusive "Coaches Club" section of the new stadium. They managed to sell only 620 of them at an average price of $26,000. The Jets "underestimated the supply of buyers out there for these high-volume licenses," says Bradlow. "They figured that people have been waiting 20 years to get Jets tickets. But with the uncertainty today, people are reluctant to make these long-term commitments." Sales, not surprisingly, have slowed for $600,000-a-year super-luxury boxes at the new Yankee Stadium that opens in April. "You don't have 10 people banging on the door. You have two," a Yankees executive told the AP in November.
It's not just at the high end where gate receipts will suffer. Bradlow says "the profitability of franchises is going to be down because people's disposable income is down. At the end of the day, sports have become an expensive form of entertainment. People have been willing to spend a larger portion of their disposable income -- but there has to be disposable income."
Devaluing Sports Franchises
What is the impact of all this? Could the values of sports teams -- which have risen steadily for decades -- now fall? "On a macro level, my general answer is no," says Zeits, "because you have a huge supply-and-demand imbalance." Major league teams don't come up for sale frequently, and there are enough billionaires out there to keep the bidding lively. If a glut of team owners were forced to sell due to the economy, you could see a price dampening, Zeits suggests, but "owners are not going to sell into this market, just like you wouldn't sell your house in this market unless you had to." (Team sale values are loosely based on revenue multiples and comparables, though there also is a prestige factor at play).
Sports executives are paying close attention to the effort by Sam Zell's Tribune Company to sell the Chicago Cubs and Wrigley Field to help pay down $11.8 billion in debt. Zell reportedly had been seeking $1 billion, without much success. The company may decide to keep a 50% stake in the team. Meanwhile, on Monday, the Tribune filed for bankruptcy protection, less than a year after Zell completed the $8.2 billion deal that gave him control of the company.
Although construction of big-league stadiums is proceeding in Texas, New Jersey, New York and Minnesota (for baseball), other projects are hitting roadblocks. The Oakland A's and San Francisco 49ers are wondering how to finance new stadium plans. Stadium deals these days, such as the A's plan, often are ambitious developments that involve retail space and housing -- and as real estate deals they are in a tough climate. In addition, stadium and arena projects have become more dependent on public subsidies, money that's less easily available.
Could player salaries take a hit? League salary caps (in football, hockey and basketball) are set up as percentages of prior league revenues, so the overall player compensation pool can be directly, if not immediately, affected. In baseball, which doesn't have a salary cap, Bradlow believes the current free-agent market will be affected. "Someone like [Dodgers star] Manny Ramirez is likely to still get very big money. But it's typically the tier right below [his] that is affected -- the $8 million player who becomes a $4-million-a-year player. Teams also may be less likely to go with long-term contracts. That's a fixed cost and they want to stay flexible." (There are exceptions: The Red Sox in December locked up MVP second baseman Dustin Pedroia with a six-year, $40.5 million contract extension.)
And, yes, there is opportunity and upside amid the distress.
An executive for Philadelphia's new Major League Soccer franchise told The Philadelphia Inquirer that the down economy has reduced the costs of labor and construction materials for the stadium the team is building.
And teams are being forced to innovate, catering more to fans and sponsors. Historians recall that it was during the Great Depression in the 1930s when baseball created the All-Star Game, college basketball created its first tournament, and college football created its bowl games and the Heisman Trophy -- to stoke fan interest. Today, Bradlow says, teams are trying desperately to retain "otherwise defaulting season ticket holders" with creative season ticket packages, partial plans and promotions. The New Jersey Nets, for example, are offering a "buy now, pay later" deal on season tickets. (The Nets also ran a promotion offering to distribute resumes of unemployed fans to the team's 120 sponsors). "I think next year will be the crucial year for many of these franchises, where people are being tapped in the next six months for [season-ticket] renewals," Bradlow predicts.
The NFL, which sets admission prices for the playoffs, says postseason ticket prices will be 10% lower this season than last. In Charlotte, N.C., the NBA's struggling Bobcats are discounting some seats by up to 50% during the holidays. The St. Louis Blues hockey team has lowered some ticket prices to $11.20 and launched a "Fan Bailout Plan," giving one fan $1,000 toward rent or mortgage payments at every Saturday night home game.
The bad times present opportunity for companies that engage in sports marketing, too.
"Whenever there's a downturn, the best firms see it as an opportunity to renegotiate, get better rates," notes Bradlow. "A company that sponsors a team may now say, 'We'll stay with you, but instead of one sign we want two, instead of a three-year deal we want five at this price.' Ad rates are down. You can get more for your money -- more exposure, maybe not more return."
Major league teams would be well advised to think the same way in this economy, he says. "Similar to what many companies are doing, smart teams will say, 'Yes, the economy is down, business is down, but it's hurting our competition more than us. This is an opportunity to grab talent. This is an opportunity to get good sponsors. This is an opportunity to really brand ourselves in a differentiated way [while] other people ... sit on the sidelines.'"