Today’s post is an excerpt from an interview with Ken Stefanov, CFO for the Indians, conducted by Peter Alpern from BusinessFinance (businessfinancemag.com).

Anguish isn’t just part of the Cleveland sports fan’s culture; it becomes part of its very identity, seemingly embedded in the city’s very DNA. It is this tidal force that franchises such as the Cleveland Indians, Browns and Cavaliers come up against each season.

Ken Stefanov, CFO for the Indians, has to combat this on two ends: providing the financial and organizational foundation to build a winning team on the field while addressing the sober economic reality of competing in a market that draws roughly a fifth of the annual revenue of the New York Yankees.

As the calendar turned to June in this, the Indians 111th season in the American League, the Indians have become baseball’s biggest secret, racing to the top of the Central Division. But that success hasn’t equated to the turnstiles: Less than half of the seats at Cleveland’s Progressive Field are full and season-ticket sales are at their lowest since the Indians moved into their current stadium in 1994.

Stefanov discussed with Business Finance how the Indians, with all the organization’s small-market challenges, is really not unlike any other corporation: financial rigor and strategic insight need to be tightly linked; uncertainty demands flexible strategies and the development of alternatives for growth.

Business Finance: From a financial perspective, tell me a little bit about the economic landscape you’re working with and how that translates on the field and running the business?

Ken Stefanov: The local economy, obviously, is quite different from the one we were operating in during the 1990s and it’s quite different from even five to 10 years ago. The competition isn’t just with the local sports teams, like the Cavs and Browns. We’re an entertainment business and people have options.

We work based off where the team is in relation to the business cycle. You ramp up, develop players and hopefully make a charge on top of the business cycle for competitiveness on the field. Then, the way the economics of baseball work is that you’ve got to be fiscally responsible and maybe take it down because players leave for bigger contracts you can’t afford. So you learn to deal with the business cycle, and you learn to budget accordingly.

BF: Where is the team within that business cycle right now?

KS: The state of the [Indians] franchise is good. I say that in light of the whole Dodgers situation. We have to be very realistic about where the team is at and what the market will bear. While it appears we may be in the midst of a recovery economically, we have some very serious concerns about the Northeast Ohio economy and where it’s going. Statistically, we’ve seen unemployment is down. It’s dropped to 9.3% in Northeast Ohio. Last year, it was up 1.5%. So there are some glimmers of hope. But it’s my job to be realistic and take the emotion out of the baseball side of things.

BF: Where do you see the role of finance contributing to the success of a ballclub?

KS: Well, for us, the big picture here is, as an organization, to win a World Series. We’re also here to make the fans—the focus of our attention—entertained. We want to reinvest in our ballpark, and we want to have a positive impact on our community. Those are our four goals.

To do that, though, we have to be creative, especially in finance. There may be very little difference between the finance departments at the Indians and the Yankees and a Fortune 500 company. But I think it’s my charge to make sure that the little difference that there is counts for a significant influence on the operations of the company.

BF: Within the confines of the finance department, how do you overcome that competitive disadvantage?

KS: We have to be that much sharper in our decision-making process day to day. We have to spend wisely. And it’s that pressure to be smarter that I think will make a smaller-market team successful or not successful.

One of the things we have made an investment in as a small-market team is in my IT department—which I oversee—we have developed our own proprietary software applications. We do not share these with other teams. One [application] focuses on scouting, another identifies metrics and trends and then another is a video coaching system for adjusting mechanics for the players.

This is where small-market teams really have to separate themselves. Maybe the Yankees have a comparable system, and maybe they don’t. But because our margin is so thin, we have to excel in other areas because we’ll never win the outbidding game.

To continue reading the full interview, visit www.businessfinancemag.com. Thanks again to Peter Alpern for sharing this interview with us!

Today’s post is from guest blogger Travis Yost, an Arizona State University graduate with his B.S. in Business Management. In the past, Travis has covered the World Series of Poker for BLUFF Magazine and acted as a contributor to the likes of Deadspin, KuklasKorner, and MSN FoxSports. Currently, he covers the Ottawa Senators for HockeyBuzz.com.

Just last week, NBC was able to extent its partnership with the Olympic Games through the year 2020, forking over a hefty $4.4B sum in exchange for broadcasting exclusivity.

Exact terms of the contract are not yet known, but one certainty is that the Olympics will remain on NBC for the next four games, starting with the 2014 Winter Games in Sochi, and ending with the 2020 Summer Games in a locale still to be determined.

Obviously, NBC’s been pretty forthright and open about making the Olympics their proverbial bread and butter, but it does beg the question of whether or not spending such massive amounts of money for a competition that’s waned in popularity over the past couple of decades is truly a smart business decision.

When Dick Ebersol decided to step down as Chairman of NBC Universal Sports & Olympics, many expected the business plan for the network to change. As a sports entity, NBC’s primarily targeted two fronts – the National Hockey League and the Olympics – in an attempt to stay ahead of the curve and build on the potential for growth in unsaturated markets.

For that reason alone, it wasn’t entirely surprising to hear that NBC and Comcast managed to strike a deal with the National Hockey League a month ago. NBC’s been fairly adamant that the National Hockey League, by and large, will continue to grow over the next decade.

The success the league’s had since the devastating lockout in 2004-2005 is quantifiable, so when NBC handed the NHL $2B for exclusivity and broadcasting rights over the next ten years, many praised the network for it’s focus on building in both the short and long-term. With the deal, NBC and the soon-to-be renamed Versus will offer a much more enviable product line, one that’s going to deliver the game of hockey on a daily(as opposed to weekly) basis.

Dick Ebersol – now Mark Lazarus – and NBC’s other business venture in the Olympic Games has been far more treacherous. When reports surfaced back in 2010 that NBC Universal would lose almost $200M on the Vancouver Games alone and continue their hemorrhaging in the 2012 London Games, many expected the network to shy away from a massive overpayment at the very least, and in all probability, back out of a bidding war with other network conglomerates.

That wasn’t the case.

The $4.4B bid NBC put forward crushed the opposition. For a benchmark, ESPN had offered just $1.4B for the 2014 and 2016 games, putting an average at $700M per. NBC’s deal is 1.5 times that. Said ESPN in a public statement:  ”To go any further would not have made good business sense for us,” ESPN said in a statement. “We put our best foot forward with a compelling offer that included the enthusiastic participation of all of The Walt Disney Co.’s considerable assets.”

For whatever reason(s), it’s pretty apparent that NBC thinks the American public will begin to buy figurative stock of the Olympic Games and tune in with regularity, but considering recent trends, I’m not sure the general public is as confident.

Again, the deal makes fiscal sense if the Peacock Network can change how they deliver their product and make it once again appeal to men and women of all ages. NBC took a royal beating from media types for their ‘tape delay’ broadcasts of the 2010 Olympic Games, but that now seems like a thing of the past. In this day and age, there’s really no excuse for tape delay in the first place, especially when you consider how readily available information is through the internet. After the merger with Comcast,  NBC is changing its tune and remains confident that they’ll be able to broadcast all events live, meaning an almost certain ratings jump across the board.

One problem, though – the United States is approximately 14 hours behind Russia(host of the 2014 Summer Games), meaning that the appeal of ‘live events’ rapidly diminishes. Aside from a very select few sports – basketball, soccer, and hockey come to mind – there aren’t a whole lot of events that will have Americans staying up during all hours of the night.

Another problem includes general availability when it comes to broadcasting. As per USA Today, NBC is strongly considering using internet web streams as one of their primary ways of delivering live content. Again, there seems to be a certain disconnect between NBC’s aspirations and the reality amongst the general public. For many, if it’s not on television, it’s not worth tuning into, period. And, that’s without even mentioning the fact that many still do not have consistent high-speed internet access to follow the Olympic Games online.

There’s no question that NBC and the Olympic Games remain optimistic about creating and sustaining a profitable relationship, but the reality is this deal – coined ‘egregiously large’ by some – is of the high-risk, high-reward nature. You have to admire NBC’s courage and faith in their forecasting, but another contract that sees the hemorrhaging of funds for years to come could mean the downfall of one of America’s largest commercial broadcasting television network.

This is an excerpt from an interview with Carol Sawdye, CFO of the NBA, conducted by Peter Alpern from BusinessFinance (businessfinancemag.com).

From the pure power of LeBron James, to the artistry of Dwayne Wade and understated stardom of Dirk Nowitzki, the NBA Finals represents a climactic two weeks of fan interest to celebrate a staggeringly successful year.

With viewership of all four rounds of the playoffs up double digits, along with sharp upswings in attendance and merchandise sales, the NBA is enjoying a cultural boom not seen since its Golden Age of Michael, Magic and Larry.

But Carol Sawdye, who was hired as the new CFO for the NBA a year ago, recognizes the harsh realities facing the $4 billion industry. There is a rapidly approaching labor war between players and owners on tap this summer, along with alarming growth in the percentage of expenses. According to league commissioner David Stern, 22 of 30 clubs are losing money.

In an exclusive interview with Business Finance, Sawdye shared the fiscal perspective of the NBA as a business, the managing of risk amid bustling gate receipts and the role finance plays in creating a winning product.

Business Finance: As the 65th season of the NBA wraps up, how does the landscape from a financial perspective compare to what you saw earlier in the decade?

Carol Sawdye: Despite the state of the economy, the 2010/11 season has been very successful in terms of fan response to our teams, players and the game.

Overall revenues are at the highest they have ever been with gate receipts up significantly and team sponsorship sales at an all time high. We are on pace to have our most-watched season ever on TV. Subscriber growth has increased dramatically on NBA TV to 55 million homes in the U.S. We are experiencing double-digit revenue growth this year both in the digital business and internationally.

However, in order to achieve the revenue growth that we have experienced over the last decade, we have had to spend much more to generate the same $1 of revenue than we had to in decades past. As a result, the league overall has been experiencing significant net losses now, which wasn’t the case back in the mid 1990s.

BF: What does the office of finance do to contribute to the success of the league as a product?

CS: Finance is responsible to the commissioner and the owners for assisting business units in maximizing the financial results of the league and managing the financial risks associated with running this business.

The Finance department is involved in the financial aspects of all transactions, including ensuring league-wide financing is available at competitive rates and supporting financial analysis for significant business agreements and team sales transactions. Although much of these activities are invisible to the fans, they are all critical to delivering a consistently successful product for them.

BF: What were some of the steps you’ve initiated since you came onboard as CFO?

CS: My principal area of focus has been on expanding our capabilities in connection with financial reporting on and analysis of the results of our teams and the league as a whole.

We also have a growing business to support. Much of that growth is coming internationally and has required a lot of my focus on planning for profitable growth and managing the financial risks of operating in so many different tax, regulatory and labor environments.

BF: When you stepped into this role as CFO, what have been some of the organizational changes that you made to help finance become more effective?

CS: The single biggest change I have made is to expand our resources and interaction with the teams. This allows us to provide better combined financial information for use in all aspects of our business, ensuring that we are running a more effective and efficient business in general.

BF: What is your philosophy of finance and what kind of job have you wanted to create?

CS: The CFO should be a trusted adviser to the CEO and all business leaders and a critical member of the senior management team of any business enterprise.

In the NBA’s case, this extends to the owners and team management as well. The entire finance department should view itself as a critical service provider to all departments throughout the organization and, in our case, to all of the teams as well. The league office and our 30 teams are only as strong as our weakest link so we always have to serve with a view that support to any one team or department will raise the bar for all of us.

To continue reading the full interview, visit www.businessfinancemag.com. Thanks again to Peter Alpern for sharing this interview with us!

Today’s post is courtesy of guest blogger Brian Connolly.

Over the past several years, I’ve worked on numerous football stadium planning projects for NFL franchises and BCS athletic departments.  In most cases, team supporters who were interviewed via survey or focus group ranked Personal Seat Licenses (“PSLs”) relatively low as a potential stadium funding mechanism, compared to other potential funding sources such as corporate sponsorship and naming rights, long-term premium seating leases, and surcharges on tickets or parking.  In some recent cases, NFL franchises have even created different brand names for the PSL product, such as “Stadium Builder Licenses” or “Membership Equity”, due to worries over the potential public/media reaction to the use of PSLs for project funding.

However, from my perspective as a sports business consultant, I have seen firsthand many of the positive features of a successful PSL program.  Here are a couple of the frequently overlooked positive aspects of PSLs that I have identified in recent years:

1) PSLs have enabled new football stadiums to be built with less public funding.

As municipal budgets have gotten tighter in recent years, the availability of public funding for new sports stadiums has also decreased.  More than 20 new NFL stadiums have opened since 1995, however the public contributions to those stadium projects have generally decreased. For example,, from 1995 to 2000, 75 percent of NFL stadium development costs were funded from public sources, however that public percentage decreased to 48 percent for stadiums opened from 2001 to 2005, and then to 35 percent for new NFL stadiums opened from 2006 to 2010.  In fact, New Meadowlands Stadium (“NMS”) opened in 2010 as the first modern NFL stadium financed entirely through private revenue streams, and NMS did so by relying heavily on the upfront sale of PSLs to obtain private financing.

2) PSLs generate funding from stadium consumers, rather than spreading the cost over the general public.

A number of the traditional public funding sources that have been utilized for stadium projects over the years, such as sales tax increases, property tax increment and visitor tax increases (i.e. for hotel nights or rental cars), tax the general public rather than the specific users of the venue.  Through the use of PSLs, the people who actually consume the product are the ones paying for it, which can be viewed as more fair to the general public.  Granted, a number of taxing sources can also be venue-specific, such as ticket/parking surcharges or in-stadium taxes on concessions or merchandise, however this ignores the reality that…

3) Without PSLs, fans will typically end up paying more anyway.

With public contributions decreasing, teams have privately financed more and more of their stadium development costs, which means they need to generate significant incremental revenues to cover their debt service. To do so, they have had to increase prices throughout the stadium, not just in the corporate sponsorship and premium seating categories.  Without the significant upfront funding that can be generated by a PSL program, fans would see much greater increases in areas such as ticket prices, concessions, parking, etc. At least with a PSL program, fans are seeing much of those cost increases in a form where…

4) PSLs have significant long-term value to the owner.

Many media reports paint a picture of PSLs as a one-time expense that simply takes more money out of the fans’ pockets, however most accountants would note that a PSL should not be viewed as an expense… but rather as an appreciating asset.  For a recent CSL project for an NFL franchise, I researched the long-term value for PSL owners of the nine NFL seat license programs that were launched between 1998 and 2003.  By comparing the average original PSL price for each stadium to the current market prices on team or third-party resale sites, it was determined that the market value of these nine NFL stadium PSLs increased by a compound annual growth rate anywhere from 7.5 percent (in Nashville) to 28 percent (in Pittsburgh and Chicago). In fact, the secondary market prices for many of the PSLs in Pittsburgh and Chicago have increased by more than 10-15 times the original purchase price.

Of course, many fans intend to purchase tickets in their personal seat for the rest of their lives, and thus may not be overly concerned with the value of the PSL asset on their personal balance sheet.  However, it never hurts to be able to sell your seat rights for a significant return if your personal finances take a downward turn that prevent you from purchasing season tickets any longer.

Brian Connolly is a sports business consultant with CSL International (www.cslintl.com), specializing in market research and financial advisory for professional and collegiate teams, arenas, stadiums and ballparks. You can follow him on Twitter @BrianHConnolly or e-mail him at bconnolly@cslintl.com.

Jon Kander, Valuation Analyst at IEG, and I decided to have a little back and forth discussion of the idea of integrating guarantees and team performance into sponsorships and sports business in general. Jon’s comments are in black and mine are in blue. Hope you enjoy our conversation!

Jon: I really enjoyed your latest blog post on guarantees in sports, especially the part where you made the distinction between “guarantees as a sales/marketing tactic” and “guarantees as a result of passion/emotion.” Emotional guarantees by players and fans have been around since people began playing and watching sports. However, sales-based guarantees appear to be a recent trend. While both can have a drastic impact on a team and its fan base, I was hoping we could delve further into the sales-based category. Is this purely a result of the economic downturn, an ever-increasing amount of available entertainment options, or something entirely different?

Also, the examples you brought up in your blog post were ticket sales-based. What are your thoughts on variable compensation as it relates to sponsorship fees? Are their instances where you would recommend incorporating a pay-for-performance model?

Russell: Thanks Jonathan. I don’t think the idea of using guarantees can be entirely attributed to the economic downturn, although there’s probably some relationship. From the ticket sales perspective, the guarantee is designed to overcome two objectives: the risk of team failure, since fans are less willing to financially support a losing team, and the financial reassurance, to try and make customers feel more comfortable with the value of their purchase. Even without the economic downturn, if a fan becomes too frustrated with the team’s on-field performance, they will still walk away, and if the team doesn’t live up to the “guarantee,” they risk potentially reinforcing the fan’s choice.

Connecting guarantees to sponsorships can have similar issues. Hopefully, the team sells the sponsor on the long-term relationship with the brand, and that brand needs to have value even if the team isn’t winning. There’s no question that winning always helps, but the more you tie a significant revenue source, such as season tickets or sponsorships, to the on-field performance, the more you risk potentially devaluing your brand. This is not to say there’s no place for pay-for-performance, but I believe it needs to be selectively and strategically applied. For example, I like the idea of escalator clauses with additional sponsor benefits when the team is performing well. Another option would be to offer additional “complimentary” benefits if a team under-performs – in this situation, you aren’t decreasing your revenue potential, but still try to compensate the sponsor with additional value to ensure they get the results they’re hoping for.

Finally, as a last resort, I think you can consider using a pay-for-performance style deal for a new customer or even a renewal if they absolutely insist and you believe there is no other option that can close the deal. However, when you open this door to one sponsor, others will find out and want the same type of opportunity, and I don’t think that’s a road you want to head down. Jonathan – what pay-for-performance structure do you feel can help mitigate the team risk but still drive sponsor value? Also, from the sponsor perspective, what are the biggest reasons why they would benefit from that approach? Are there reasons why that model could actually hurt the sponsor?

Jon: Great question. I would endorse a variable compensation model tied to delivery of benefits and a property ensuring its sponsors are achieving their ROO and ROI benchmarks. This can include establishing minimum performance milestones around attendance and an out clause if a property is not meeting expectations. Negotiating this type of sponsorship model would be a completely justifiable and prudent move on the part of the sponsor. Ideally, this would ensure that properties would work with its sponsors to better meet their objectives as well as force sponsors to think through what they are hoping to accomplish with a sponsorship investment on the front end of a negotiation/partnership.

On the other hand, I do not believe sponsorship fees should be tied to on-field performance. First, on-field success is no guarantee of fan loyalty – look at the Cleveland Browns vs. the Tampa Bay Rays. The former has one of the most loyal fan bases in country (coming from a biased Ohio boy) and the latter had to give away 20,000 tickets late in the season for a team in a pennant race. Second, I worry that this model enters the territory of sponsors unduly influencing a property’s decision-making. This has happened in college athletics by alumni promising large donations if the school fires its athletic director or coach. I wouldn’t want team execs firing or hiring a coach based on the potential loss of sponsorship revenue.

A sponsor could also be hurt by this type of model. If a sponsor requires a refund because it is unhappy with the on-field product, the organization could come across as disloyal and/or a fair-weather fan. That reputation would make it very difficult for the company to market itself to a team’s die-hard fans who have stuck by their favorite team through thick & thin. Their fan loyalty is unlikely to extend to the sponsor in this instance.

Despite my concerns detailed above, sponsorship fees linked to on-field performance appear to be more commonplace than in years past. Within the past month the French National soccer team paid a significant refund to many of its sponsors after its dismal World Cup performance. A few days later, England’s soccer governing body said that it believe it needs to link payouts more directly to performance if it hopes to secure new major partners for the national team. I also was in attendance at a conference where Bank of America’s former corporate sponsorship manager, Ray Bednar, argued that winning teams should get paid more in sponsorship than losing franchises. Do you think this is the next sponsorship trend? What impact do you see guaranteed on-field performance having on the both the sponsorship industry as well as the sports business landscape as a whole?

Russell: You brought up some great examples. I completely agree that winning does not guarantee fan loyalty, which for a sponsor is probably the biggest factor to identify in a property they should connect with. And in the right (or wrong) situation, I can see your analogy between athletic donors and performance-related sponsors becoming reality – you cannot put your organization in a position where business relationships can have undue influences on your on-field decision making.

There does seems to be a small trend developing, but I don’t see it becoming common practice because of the various risks we’ve discussed. Let’s take the French national team example. There was nothing specifically designed into their sponsor deals that I’m aware of. However, the team didn’t just under-perform – in many eyes, they embarrassed themselves and their country with how they handled the conflict between the players and their coach, leading to their quick World Cup exit. I imagine that the national team was at risk of losing several sponsors because of this. So as a proactive measure, they decided to refund several sponsors. To me, this was a relationship-saving decision more than a direct tie to performance. The goodwill generated by the refund can hopefully ensure their continued support of the national team in future years – you can almost think of it as a renewal discount more than a refund if things work out well.

In principle, I agree with Bednar’s statement that winning teams should get paid more. But even without direct pay-for-performance style contracts, isn’t this already happening? Winning teams almost always have the ability to generate more revenue than losing teams (additional short-term deals during a good season, better chance for long-term renewals, escalator clauses, maximizing all inventory, etc). And if they make the most of the good times, that can help carry them if team performance swings the other way. If organizations take the next step and directly integrate on-field performance guarantees into their sponsorships, I feel like all they’ll be doing is leaving revenue on the table during the downtimes. So I guess my position is that guarantees are still a bit to “gimicky” to be a significant aspect of sponsorships and sports business in general. Sponsorship, season tickets, premium sales and most significant revenue streams are ultimately based on long-term relationships, affinity and brand value. Guarantees shift the focus from the long-term relationship to the short-term transaction, and I think that’s bad for business.

The leaking of multiple MLB team financial documents to Deadspin this week has been a big story in the industry. In case you haven’t seen it yet, here are some quick links to catch up to speed:

• Deadspin Part 1 – Financial statements from the Pittsburgh Pirates, Tampa Bay Rays, Florida Marlins and Los Angeles Angels
• Deadspin Part 2 – Financial statements from the Seattle Mariners
• Deadspin Part 3 – Financial statements from the Texas Rangers
• Darren Rovell’s post – “Why MLB Financial Leak Matters”
• Analysis from Maury Brown at BizOfBaseball.com

I wish I had time right now to dig into the details of the statements (brush off those MBA accounting and finance brain cells), but Maury Brown is doing an excellent job of that over on BizOfBaseball.com. I highly suggest reading up on the multiple posts he’s written (and is continuing to write) over there.

My quick focus in this post is on the choice to run a successful business vs. running a successful team. One of the biggest takeaways from these leaks is demonstrating how a small market team that is not very competitive (yes, I’m talking about the Pirates) can be very successful financially without creating a quality product because of the revenue sharing money provided by teams that are spending money and resources to provide a top-tier baseball team. From a purely business perspective, there isn’t anything actually wrong with this. The team owners have a business to run and are entitled to generate a profit for their work. They have identified a system that works for them and does not violate any agreements that the team has with Major League Baseball. Any customers/fans that have a problem with this approach can demonstrate their displeasure by simply ending their relationship with the team (stop buying tickets or merchandise, stop watching games on TV, etc.). However, if this doesn’t significantly alter the team’s current revenue streams (the majority of which are league-generated), it might not change anything.

The biggest problem with this approach is that there are making their business overdependent on a source of revenue that could change. One of the red flags I was taught to look for when analyzing a company’s financial well-being was generating revenue from a single item or service. If anything in the business environment changes that impacts the company’s ability to show a profit via that single item or service, their entire business model can collapse.  While the Pirates do generate revenue via multiple channels, you can argue that their profitability is very dependent on the current revenue sharing model. In light of these leaks, if MLB changes the “business environment” surrounding revenue sharing in a future CBA, the Pirates and other small-market teams that aren’t successful “on-the-field” could easily be in trouble.

The question now is, will anything change because of these leaks? Will MLB want to add a salary floor (a minimum amount of money a team has to spend on player salaries)? Will higher-revenue teams make a push to adjust the revenue sharing system, knowing that their funds could be going into other owners’ pockets instead of supporting the best interests of the game itself? Will fans stop supporting a team that they know isn’t spending money to create a successful on-field product? These documents definitely open up a lot of possibilities.

On a quick personal note, I just got married over the past weekend, which was the most incredible day of my life! With everything going on, I do not have time to blog this week, so here are two of posts “from the vault” that I really liked and wanted to share with you all again. Thanks, and I’ll see you all next week.

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BASIC ECONOMICS IN SPORTS TODAY (originally published on 11/17/2008)

I was thinking more about the economy of sports, so I decided to write about some of the basic concepts and apply them to the current situation. I know I am oversimplifying some of this, but I think its an interesting exercise nonetheless.

Law of Demand: As price increases, demand decreases.

• Result: Ticket prices have increased significantly over the past decade. This increase had been consistent with and driven by the demand, as seen in the high degree of sellouts across the major sports. However, price increases over the last two years have been met with a drop in attendance, meaning that sports has passed the equilibrium point.

Law of Supply: As price increases, supply increases.

• Result: Over the past decade, the actual number of sports and sporting events have increased along with prices (the only ways to increase supply are expand stadiums or host more events). This increase included extreme sports (X Games), niche sports (PBR), and international exhibitions (Olympic sports & soccer). Now with the drop in demand and ticket prices, we are seeing signs of the supply dropping (e.g. my previous post mentioned the cancellation of the Tour of Georgia).

Price Elasticity of Demand: Demand is “inelastic” when the quantity demanded decreases slowly relative to a price increase. Demand is “elastic” when the quantity demanded decreases faster relative to a price increase.

• Result: We have seen price elasticity in sports shift from fairly inelastic to more elastic over the past two years. There are several things that impact this shift, including substitute products (more sports and entertainment alternatives mean people will choose other options when prices increase), % of income (as ticket prices equate to a larger % of income, people become more resistant to price increases), and necessity (tickets are not a need while other needs have also increased in price, thus there is higher resistance to ticket price increases).

Again, I’m just looking at some very basic concepts, without considering the multitude of other important factors. While there are a lot of “negative” news items related to the economy, it really is not surprising when you drill down to the basics. Sports has overshot its economic equilibrium. Adjustments will have to be made across all of the different sports, starting with a basic reduction in price, supply, or both, until we get back to a more stable equilibrium.

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THE REAL ROI (originally published on 9/11/2008)

So your company just paid $1 million to become a sponsor of Team X for the calendar year. At the end of the year, you tally up the value of all the exposure you got from being a sponsor. The guaranteed television advertising, the press releases and news coverage, the radio spots, the website impressions, the signage viewers, etc. At the end of all your adding, you find out that you got $3 million worth of exposure for your $1 million sponsorship. Wow, that’s a 3 to 1 return on your investment, otherwise known as ROI.

Well, actually it isn’t. What you just calculated is the media value of your sponsorship. All this is telling you is that you got a great value on your purchase. You essentially saved 67% off the regular price – not bad at all. This value is easily confused with and mislabeled as ROI. The question is, how can you determine what your ROI actually is?

Without going into all the details, your ROI is your actual bottom-line, dollar return divided by your costs. So lets say that you can accurately determine that, because of your $1 million sponsorship, your sales increased by $5 million, compared to the previous year when you were not a sponsor. Does that mean your ROI is actually 5 to 1? No, but we’re getting closer. Your sales increased by $5 million – a substantial increase. But your profit margin is only 50%. The results is that your ACTUAL return on your investment is $2.5 million – an ROI of 2.5 to 1.

So what does all of this mean? Here are the key takeaways:

1. Do not be fooled by measurement labeled as ROI that are not ROI. ROI comes down to bottom-line impact on profits (not sales, profits!)
2. Calculating ROI can be difficult. You need to put systems in place that will accurately measure what profits can be directly attributed to a sponsorship. This is a challenge, but its not impossible.
3. With corporate budgets tightening every day, companies need to really focus on metrics like ROI. If your team or agency can help get to those numbers and demonstrate a real return on a company’s investment, you will keep them as a partner and a client.

First off, I need to congratulate the New York Yankees on their 27th World Series championship (I will admit, I am a Yankees fan, but I always try to keep my views here neutral and unbiased). Anyway, with their victory, I was thinking about what type of economic impact there will be from their 27th title. Then low-and-behold, I see this video on my daily Wall Street Journal email:

Now in all seriousness, this “statistic” about a 5% growth in GDP during the year after a Yankees victory is just a correlation. And as any statistician will tell you, a correlation does not tell you anything about causation (another famous example of this is the statistical correlation between the results of the final Washington Redskins game of the year and the U.S. presidential election). Thus, even if this growth has been seen in the past after Yankees’ championships, there’s no evidence to say the victory itself has a direct impact on economic improvement.

This isn’t to say there will not be some impact from the victory – it just won’t be on the scale of the national GDP. Here are some results that you can expect to see:

• Merchandise Sales: The Yankees are still the most prominent and popular brand in baseball, and New York is the largest market in the country. Combine this with nearly a decade between titles, and you can probably expect the largest World Series merchandise sales numbers since the first Boston Red Sox title in 2004.
• 2010 Ticket Sales and Prices: The Yankees had to overcome some bad publicity and poor initial sales with their original premium seat ticket prices, leading to an early-season price cut. Even with this victory, I’d be surprised to see anything beyond a basic 3-5% annual increase to the adjusted prices, and in turn, I think the team will see a nice uptick in these premium locations next year (especially if the economy does improve by 5%!)
• Postseason Secondary Market: The secondary market started off a little slow this postseason, with several weather-related issues keeping prices on the low side. However, having the World Series in New York and Philadelphia ended up being a big boon to StubHub and other ticket resellers, with tickets being sold for 5x to 20x the face value. In fact, since less tickets were available for resale in Philadelphia than New York, prices for games 3-5 were driven even higher than games 1-2.
• Team Spending: After a few years of “relative” struggle, the Yankees have proven that a large payroll can lead to the title. Will other teams try to up the ante next year to compete with the Yankees? Baseball experts have written that this year’s free agent list is one of the weakest in a while. In addition, the Yankees themselves have a few key players that could test the market. If the economy really is on the upswing, maybe team payroll could increase again next year.

Again, congratulations to the Yankees. I already can’t wait for the 2010 season to get here!

Update: I also just saw this article on Bloomberg.com that reports the Yankees postseason run generated almost $60 million of economic impact for the city of New York, primarily based on increased spending at local business by out-of-town residents.

Forbes recently released their annual list of NFL franchise valuations. Here is the list in order from most (Dallas at $1.7B) to least (Oakland at $797M) valuable:

Not too much of a surprise to see the Cowboys, Redskins, Patriots and the New York teams in the top five. Here are a few other interesting observations from the Forbes report:

• Houston Texans:  The youngest team in the league is all the way up at #6. They do have the most valuable naming rights deal in sports and the Houston economy is holding pretty strong, allowing the team to raise ticket prices without losing fans.
• Losing Value: The Raiders and Lions experience the two largest dropoffs in value relative to last year, which is consistent with the turmoil those franchises have gone through in the past 12 months. However, the 3rd biggest dropoff was the Colts! (5% drop in value). The reason behind this isn’t very clear.
• Minnesota Vikings:  The Vikings have tremendous brand value within the NFL, but the Metrodome is one of the oldest stadiums and really hurts the team’s ability to drive new revenue streams.
• Debt:  The bottom three teams in terms of debt/value ratio are the Jets, Giants and Lions, which makes sense because of the new stadiums (and in the case of the Lions, the lower team value). Surprisingly, the Dolphins are next on the list, maybe because of lower operating revenue in two of the past three years.

The Forbes article offers more detailed looks at each team, discussion on the impact of the recession and previous years valuations. This is great information and I’d recommend digging through all of it!

It looks like even New York isn’t immune to the current economy.  News came out yesterday that the Yankees have decided to cut the prices of their premium field-level seats (New York Times, 4/28/09).  Front row tickets that had cost $2,500 each have been cut in half to $1,250, and tickets along the first and third base lines have been cut from $1,000 to $650.  Anyone who had paid full price previously will be compensated with free tickets to future games, and additional complimentary tickets are being distributed to premium season and partial plan ticket holders.

In the days leading up to this decision, there had been some heated comments going back and forth between Don Garber, the Commissioner of MLS, and Randy Levine, the Yankees team president.  Garber criticized the Yankees for having so many empty seats behind home plate, which did not look particularly good on television.  Initially the team defended their pricing, but after reevaluating they admitted that some seats “might be overpriced.”  Even with cutting these prices in half, the Yankees will still have far and away the most expensive ticket prices in baseball, and they’ll still be the league leader in ticket revenue.

I’d be curious to know what type of price sensitivity analysis the Yankees did before setting their new stadium prices. I’d have the same question for all New York teams that are opening new facilities and substantially raising their prices. A lot of teams still set their ticket prices by feel, which cannot be a very effective method.  If the team’s did run some sensitivity analysis, when did they do it?  The Yankees and the other New York teams announced their price increases quite a while ago, before we knew the extent of the current recession.  If they do the same analysis today, their results would no doubt be quite different.  Some type of advanced dynamic pricing models might help the teams handle this type of situation more efficiently.

I recently wrote a post about how companies that have large sports sponsorship deals, particularly those that have received government funds, are unfairly criticized for these deals.  My logic is that, even though these deals seems excessive, when you calculate their actual marketing value and ROI, they can be very justifiable and effective as part of a company’s marketing mix.

Well a few days ago, Kenneth Lewis, the CEO for Bank of America, publicly defended their sports marketing spend, stating how valuable their sponsorships are to the company (Reuters, 3/12/09).  Here is a great quote from Lewis: “I was never inclined to pump big sums of money into sports marketing until I saw the facts and the numbers…in general terms, for every dollar we spend on sports marketing, we get $10 in revenue and $3 in earnings. This is not wasted money.”

Bank of America sponsors a wide variety of sports properties, including the NFL, MLB, NASCAR, and individual teams.  From Lewis’ statement, they not only recognize the value of these deals, but they are making a dedicated effort to measure them to ensure they are getting the right return.  What they aren’t telling us is how exactly they are measuring them, but there are many established ways of doing this that can be quite accurate (this topic will actually come up again in a future guest post).  I am making a bit of an assumption that the data Lewis is sharing comes from actual measurements and not general estimates, but I would be surprised if this is not the case.

I’m glad to see a company step up and defend their decisions in this area, and hopefully others companies that put in the effort to measure the effectiveness of their sports marketing initiatives will do the same.

Imagine that you work for a multi-billion dollar corporation with a massive marketing budget.  You spend money on all different forms of advertising in order to reach your target audiences.  Now I approach you with a deal that will cost you between $10 and $20 million a year and will generate well over $50 million worth of media exposure, not to mention a direct impact on your bottom line of somwhere between $10-20 million (I’m am making up these rough numbers to make a point).  This seems like a pretty solid deal.  You are getting a bargain on the media value alone, along with a direct positive ROI.  Most companies are going to sign that deal.

Now, what if this company has been recently “bailed out?”  Even though there was an influx of government money to help their operations, the company still has to spend a lot on marketing and advertising to generate revenue.  So if one of those companies gets a hypothetical opportunity like this, with the same type of media value and ROI, they should still be expected to take it.  It makes good business sense.

Unless of course, that opportunity is a sports sponsorship!  Companies like Citi and AIG have received a great deal of public pressure regarding their major sports sponsorships.  There are constant rumors that Citi is being “forced” to back out of the CitiField naming rights deal, and after enough pressure, AIG ended their relationship as the jersey sponsor for Manchester United.  This pressure is unfortunate for both the companies and teams involved, as these deals can still make perfect business sense for both sides.  However, because the deals “look” excessive to the public, they receive backlash and are deemed to be “wasting” public funds.  The problem is that the public only hears about the costs and not about the value, and this only occurs with sports sponsorships.  You don’t hear outcry about how much Citi is spending on their latest direct mail campaign or the cost of AIG’s latest media buy.  I feel that there is a PR need to educate the public on the positive side of these deals, otherwise more and more companies will have to walk away from valuable sponsorships and teams will lose out on a critical revenue source.

(Credit to ABCNews for the AIG/Citi image)

It’s been a busy week in sports business, which is a little unexpected since things tend to die down a bit after the Super Bowl.  I’ve already written about the potential Ticketmaster/Live Nation merger, but here are some quick thoughts on other news items from the past few days:

- Michael Phelps:  So the golden one was caught on film with a bong, not exactly a good PR move.  If this was his first “offense,” then I think it would be less of a story, but he also had a DUI incident a couple of years back.  Some people are sticking by him, most notably the USOC and Speedo, while others like Kellogg are ending their relationship with Phelps.  USA Swimming is withholding their training money, which for some Olympic athletes would be significant, but this will have little impact on Phelps. 

To me, this story is pretty straight-forward.  Some brands are much more sensitive about any potential negative PR, so they will decide to stray away from Phelps.  He’ll still make plenty of money from other partnerships.  The best thing for him to do is simply stay out of the news for a while and concentrate on a strong performance in July’s world championships.  Nothing helps blow away bad PR like championship performances.

- Spurs Sit Their Stars:  Imagine being a Spurs fan living in Colorado, and buying tickets to see your team when they come to town to face the Nuggets.  The game starts without Duncan, Ginobli, Parker or Finley in the lineup.  No big deal at first, maybe Popovich is trying something out.  But then the quarter, half, and entire game ends without them ever stepping on the floor.  I know this was a strategic decision by the team, but those fans have to be ticked off.  This is an example of a unique conflict between the business side and the team side.  Since the game took place away from San Antonio, the implications are not as significant, but what if “Pop” wanted to do this at a home game against a weak opponent?  What do you tell your fans that expect to see the stars play?  I don’t have the answer to this, but it is an interesting dilemma. 

Also, a friend of mine asked me about the gambling implications of this event.  Think about how much money was wagered on this game in advance, and then the best players for one team just don’t play.  Clearly Popovich is a well-respected and ethical coach, so no one is questioning him along these lines  But imagine if this was a Pete Rose type of character making this decision.  Then what would you think?

- Who Needs $25M?  Apparently Manny doesn’t need it, or at least feels he’s worth more.  For the public, it is hard to imagine someone turning down $20-25 million per year in this economy.  I believe that Boras is overestimating what the teams are willing to commit to, considering the teams don’t know how the recession is really going to impact ticket sales and other revenue streams.  I would not be surprised for Manny to come back to the original two years, $45M offer that the Dodgers started with (or something close to it).  Boras has caved before when deadlines get close (Matsuzaka’s negotiation comes to mind).

- How About $18M?  Bud Selig might not hit like Manny, but he gets paid almost as well.  News came out about Bud’s salary from last year, which I don’t feel is inappropriate considering he’s the senior leader for a company that generated over $6 billion in revenue last year.  The unfortunate thing is the timing – it looks bad for MLB for this salary to come out when others are losing their jobs.  I think this story blows over pretty quickly, and maybe Bud could generate some good PR by donating a part of his salary next year to charity.  Maybe he could start a league-wide initiative that other owners and players could support.  That would make for some positive PR.

Jason Peck also has a good weekly recap on his sports business and social media blog.  His site is a great resource for social media content in sports.

Today’s post is courtesy of Gail Sideman (www.publiside.com)

“Sports sponsorship is an emotional topic prior to Super activities”

“Now in for General Motors Corporation…Audi and Hyundai… Replacing FedEx in the lineup, and just in time for Valentine’s Day, Teleflora!”

While this reads like fantasy sports corporate style, these companies represent some of the roster changes in the Super Bowl ad lineup. As we approach the National Football League’s title contest February 1, an estimated 100 million NBC Sports viewers will watch more than the game that will pit the Arizona Cardinals and Pittsburgh Steelers. They may also pay closer attention to the commercials than usual. Super Bowl XLII in Tampa, Fla., will be the first played since the U.S. government announced what many thought for months – that we’re in a recession.

NBC’s Super Bowl advertising rate card for 30 seconds of airtime was listed at $3 million, headed into this year’s game, although industry experts suspect that returning customers and the faltering economy have forced that number closer to $2.8 or $2.9 million.  It’s still no bargain for the average business that’s looking to get itself recognized by the masses.

What remains as the Super Bowl begins its countdown to kickoff is a debate about finances that began with the 2008 college bowl season. While corporations stand on proverbial boulevards asking for handouts and are laying off personnel, are they justified in spending millions of dollars for sports sponsorships?

According to most people informally polled for this post, the answer is yes. The consensus is that these companies still have to reach out to consumers and work to attract business and dollar for dollar, sports sponsorships are the most effective ways to do that.

However, the queries and emotions grow from there. Financial management companies and automakers, just to name two frequent big event sponsors, are asking for money from the U.S. Treasury’s Asset Relief Program (TARP). The 2008 college bowl season featured 34 games, many which boasted top billing as a result of big bucks sponsorships. Among them, Citigroup which presented the Rose Bowl; Capital One Financial Corporation whose company name replaced the former Citrus Bowl; Bank of America Corporation, which requested $15 billion from TARP and sponsored the 2008 Pioneer Las Vegas Bowl and Eagle Bancorp, Inc., which asked for $38.2 billion in TARP funds yet saw itself sound enough several months ago to make its resources available for a first-time bowl game in Washington, D.C.

College bowl games are evaluated annually so the 2009 lineup is yet to be announced.

Patrick Ryan Lewis of Winchester, Va., said that allocation of sports sponsorship dollars is not an easy debate. A dissenter of the government’s bailout program, he said one has to look at the intent of the money provided. In hopes that it’s to help companies improve and sustain their businesses, he said that enterprises have to advertise to maintain current clientele and attract new customers. On the other hand, Rep. Scott Garret (R., N.J.) said in The Wall Street Journal that he questions why banks – which reportedly aren’t using federal funds as intended – need to sponsor nationally televised sporting events.

Sports sponsorships have not been immune to the economic slowdown. While it’s far from creating a hardship on network partners – NBC’s “lower” fees are still 5-7 percent higher than FOX Sports’ 2008 numbers – sales have slowed from flood levels to trickles. For the 2008 Super Bowl, FOX sold its entire inventory by Thanksgiving 2007. Approximately 10 percent of NBC’s spots for this year’s game remained vacant as of this writing.

The bottom line is not always the bottom line. In events such as the Super Bowl or college bowl games, companies can reach more eyes at one time than other means of traditional advertising. Throw in a tie-in to a website promotion or produce a spot that creates word-of-mouth buzz, and the publicity alone will double or triple the investment as people talk about the spot(s) and hopefully react at the cash register for weeks to come.

As with any promotional tools, quality production typically reflects value received. If businesses that have suffered during the last year create targeted, meaningful, creative and emotionally charged spots, chances are that its consumers will react in kind.

A friend of mine passed along an interesting article from AZCentral.com titled “Tickets to NFC title game pouring into resale sites.”  The article talks about how this year’s NFC title game between the Arizona Cardinals and Philadelphia Eagles is setting records for most ticket resales on the secondary market.  Also, because of the large supply of tickets being resold, the average price is just $320 for the NFC game and $380 for the AFC game.  This is less than half of the $710 average price from last year’s Giants/Packers NFC title game.

On a positive note, at least people are buying the tickets.  The Cardinals had a difficult time selling out their inventory for their first round playoff game, while this game sold out almost immediately.  From the team’s perspective, this is a positive economic indicator.  However, the fact that such a large percentage of local fans have no intent on actually attending the games shows problems with fan loyalty and a lack of perceived value (Note: according to the article, only Arizona residents were able to purchase tickets). The next thing to monitor is how long the ticket stay available on the secondary market, and if prices climb or fall as we approach this weekend’s game.  That will be the strongest indicator of what the actual market demand is.

Here are some recent sports business articles that you should check out, and as is the trend, they are mostly related to the economy!

• “Denver’s Bonham Group shuts doors” (Denver Business Journal) – The Bonham Group had been the top stadium naming rights agency in the business, and now they are another economic victim.
• “Bowl economics explained” (Atlanta Journal-Constitution)- An economic review of this year’s Chick-fil-A Bowl.
• Jazz execs plan to ride out auto industry slump (Salt Lake Tribune) – The team’s owner primary business is running an extensive network of car dealerships, so this is a case of examining how an owner’s other businesses may affect a franchise.
• Future of Rampage, AFL still uncertain for 2010 (MLive.com) – Will the AFL return next season?  The teams are trying to figure it out, and there is a March 1 deadline for a new league business plan.
• Economy slows 49ers’ stadium plans (San Jose Mercury News) – This is a bad time to plan for a new stadium, and that’s what the 49ers are currently dealing with.  One idea is to combine efforts with the Oakland Raiders, as the Jets and Giants have done.

Thanks to The Sports Economist for the first two news items.

With 2008 winding to a close, I want to countdown the top sports business stories of the year.

#1 – The Economic Recession

There is one “event” that has had an impact on every part of the industry this year, and that is the economy.  The idea that sports are recession-proof seems to have been thoroughly dismissed.  Let’s take a quick look at some of the economic stories of the year:

• Many major financial companies collapse, leaving millions of dollars of sponsorship money in jeopardy.
• Several automobile companies severely struggle and must cut their sponsorship dollars, most notably GM’s decision to end their relationship with Tiger Woods (arguably the most marketable athlete there is).
• The Houston Comets WNBA franchise folds become of financial trouble and a lack of interested buyers.
• The Arena Football League shuts their doors for at least one season, and possibly longer.
• Ticket sales are down across the board across almost every sport, including football which historically has had the most consistent level of ticket sales.
• League and teams slash their budgets across the board, including staffing cuts ranging anywhere from 5 to 20%.  This also includes NASCAR race teams, who are hit very hard because of their dependence on sponsor dollars and the automobile industry.
• Some smaller sporting events (cycling, golf, racing) are scaled back or cancelled entirely.

Sports is a business, and ultimately every business comes down to their financial stability.  Right now, this might be the most unstable economic time that this industry has seen.  The declines in ticket and sponsorship revenue are having wide-ranging effects, and as long as sponsors and consumers cut their spending, things are going to be difficult. However, there is always hope because of the unique aspects of our industry.  No other business has customers that are as passionate and connected to their product as in sports.  There will always be a passion and desire to be a part of sporting events, and when the economic situation improves, the customers (corporate and individual) will return.  Let’s hope that improvement begins right away in 2009!

I’ve written about how the economy is impacting some of the major and minor professional sports leagues, but what about sport at a participation level?  I don’t think the economy is keeping kids and adults from playing basketball, football, or baseball/softball.  However, the one participation sport that seems most vulnerable is golf.  Let’s think about some of the attributes that fit with golf:

• The demographics are primarily middle-aged, white, middle-to-upper class males.  Of course, this is also one of the demographic segments that has been hit hardest by the crashing markets.
• Golf is an expensive sport to play, with the costs of equipment, clothing, and greens fees.  As personal entertainment budgets get reduced, it is hard to justify the cost of the game.  It will also be hard to justify the expense of equipment for young players that want to learn the game, which could have a longer-time impact on the sport.
• Golf is also a time-consuming sport.  With a down economy, people are less willing to set aside a large chunk of time, particularly during the work day, to play a round.
• The golf course is “where business happens.” Well, there’s not much new business happening, which means fewer “meetings” on the links.

Chris from Arizona State passed along a great MSNBC article from earlier this month that goes into much more detail on the troubles for the golf industry.  In particular, there are more course closings and fewer new courses being developed, which ties directly back to problems in the real estate world.  The article talks about how the housing market has reduced new development, since many courses are tied to new housing development. 

I think its reasonable to conclude that of all the different sports to take part in, golf is the one that will fluctuate very tightly with market conditions.  But are there others that you also expect to suffer?  Let me know your thoughts in the comments!

Football Hits the Economic Wall – The NFL announced a 10-15% reduction in their staffing earlier this week, showing that even the most powerful league in sports is vulnerable to the economy.  They’ve also implemented salary/hiring freezes and are trying to slash expenses. Meanwhile, the AFL announced they may suspend operations for the 2009 season, although now it looks like they may be able to avoid this.

I’ve written several times about how the economy is hurting sports, but most of the time, I’ve referred to specific events or smaller organizations.  While the AFL is still a smaller league, the NFL seemed to be the league most likely to stave off these types of cuts.  Ultimately, it comes back to the drop in corporate dollars.  The automotive and financial industries have always been two of the biggest players in the sponsorship arena, and they are all making significant cuts, which is finally trickling back to the NFL.  But the NFL is still arguably the number one sports brand in the U.S., so they should have the ability to identify new categories that can benefit from aligning themselves with the league, even if they’re not as high-value as cars and banks.

Lots of sports business news over the last week that I haven’t had a chance to comment on yet, so here it goes:

C.C. Sabathia signs with the Yankees for $161M – You can argue back and forth over whether the Yankees should spend so much on him, but there is little question that the Yankees are the only team who could afford to do this considering the economy.  However, I have one other take on this signing.

Everything that Sabathia said and did before signing pointed him away from New York – he wanted to hit, he wanted to live on the west coast, he liked small markets. Yet when the Yankees upped their offer from $140M to $161M, I wonder if Sabathia felt he had to accept on behalf of his fellow players. Traditionally, the first marquis free agent signing sets the market for the rest of the players that follow, especially since agents like to use comparable players and contract values to set their own demands. If he had left a significant amount of money on the table (as much as $40-60M if he stayed in Milwaukee), that could have significantly impacted what other players could earn this off-season. I almost wonder if the MLBPA encouraged him to accept the deal (I am completely hypothesizing – I have not seen any actual news to suggest this).

I know a lot of my recent posts have been related to the economy, but there is no arguing that it’s a hot topic in sports right now.  How leagues and teams handle the economic issues today could have a significant long-term effect on their stability and financial performance down the road.  Because of that, Bud Seling and MLB invited Paul Volcker (former chairman of the Federal Reserve) to talk with MLB owners and executives this week (NYT, 11/20/08).

We would all presume that these wealthy owners know how to handle an economic downturn, but that might not be the case.  Team owners and execs have varying degrees of experience and knowledge about the national economy (some are self-made, some have “family money”, etc.) so this was a great idea from Selig.  As the New York Times articles points out, the timing is perfect since baseball is about to enter the free agency period, when some teams will throw around millions of dollars without always understanding the ramifications of those contracts.  We don’t know any of the details of Volcker’s talk, other than it wasn’t very optimistic.  If I was in that meeting, here would be some of my suggestions:

• Set a more restrictive personnel budget and stick to it.
• Do not spend more than 15% of your personnel budget on any one player.
• Avoid any contracts that are longer than four years, particularly to players over 30.
• Move towards incentive-laden contracts over guaranteed money wherever possible.
• Freeze or even drop ticket prices, particularly premium inventory where the market is the toughest right now.
• Keep marketing costs down by focusing more on alternative (social) media.
• Find new ways to leverage facilities (concerts, conventions, corporate events) to reduce the impact of these massive fixed costs.
• Consider looking for short-term (5-15 year) loans to help get through the next couple of seasons, especially in small-markets.  Teams should be able to obtain great rates because their large asset values.

What would your economic advice to MLB owners be?  Leave a comment!

Normally when the SEC comes up in a sports conversation, it’s in reference to the Southeastern Conference.  Not so this week, as Mark Cuban has gotten himself into some potential trouble with the U.S. Securities and Exchange Commission.  You can hit Google News to find all the formal details, but in summary, it seems that back in 2004, Cuban sold off his shares in the search engine company Mamma.com the day before the company was going to offer a public sale of low-price shares.  This decision saved him about $750,000, as the stock value dropped the next day with the public sale announcement.  This would appear to be a case of insider-trading, but Cuban is denying it.  Here are some of my thoughts on the situation:

• Some people are not believing the story is true because, after all, it’s only $750L, which is nothing for Cuban.  However, history tells us that people in positions of power and authority get overconfident in determination of what they can and cannot get away with (e.g. Martha Stewart).  Cuban strikes me (and everyone else) as the type of person who does not like to lose at anything, so the story seems very believable to me.  The truth will ultimately come out in the investigation.
• I’ve been asked how similar this is to the Martha Stewart case, where she did end up in jail.  The stories start out similar, but the key difference as of now is that Martha lied and falsified information, which pushed it over the top.  If she had been honest about everything, she would have simply been fined by the SEC.  If Cuban is wrong and doesn’t do anything else to complicate the situation, he’ll just be facing a steep fine without jail time.  Of course, if he didn’t do anything wrong, this will eventually become a non-issue.
• There is no way that Cuban will be able to purchase the Cubs.  Baseball did not want to see him as an owner, but the league didn’t necessarily have a good reason to reject his bid.  Now they have a very good reason.

The most interesting situation from a sports perspective is, what happens with his ownership of and involvement with the Mavericks?  There is precedent for an owner to be suspended from his own team in situations like this.  George Steinbrenner was suspended for 15 months for illegal campaign contributions, and even more recently, Ducks co-owner Henry Samueli was suspended indefinitely after pleading guilty to lying to the SEC in an options backdating investigation.  Stern has never been hesitant to take quick, decisive actions regarding any negative issues, so he might not wait for the investigations to get resolved.  On the other hand, if he does suspend Cuban now and he’s innocent, I wouldn’t be surprised to see a counter-suit of some kind.  Stern’s best bet is to wait-and-see for now, and if Cuban is guilty, I think we’ll ultimately see something along the lines of a 12-18 month suspension.

I was thinking more about the economy of sports, so I decided to write about some of the basic concepts and apply them to the current situation.  I know I am oversimplifying some of this, but I think its an interesting exercise nonetheless.

Law of Demand:  As price increases, demand decreases.

• Result:  Ticket prices have increased significantly over the past decade.  This increase had been consistent with and driven by the demand, as seen in the high degree of sellouts across the major sports.  However, price increases over the last two years have been met with a drop in attendance, meaning that sports has passed the equilibrium point.

Law of Supply:  As price increases, supply increases.

• Result:  Over the past decade, the actual number of sports and sporting events have increased along with prices (the only ways to increase supply are expand stadiums or host more events).  This increase included extreme sports (X Games), niche sports (PBR), and international exhibitions (Olympic sports & soccer).  Now with the drop in demand and ticket prices, we are seeing signs of the supply dropping (e.g. my previous post mentioned the cancellation of the Tour of Georgia).

Price Elasticity of Demand:  Demand is “inelastic” when the quantity demanded decreases slowly relative to a price increase.  Demand is “elastic” when the quantity demanded decreases faster relative to a price increase.

• Result:  We have seen price elasticity in sports shift from fairly inelastic to more elastic over the past two years.  There are several things that impact this shift, including substitute products (more sports and entertainment alternatives mean people will choose other options when prices increase), % of income (as ticket prices equate to a larger % of income, people become more resistant to price increases), and necessity (tickets are not a need while other needs have also increased in price, thus there is higher resistance to ticket price increases).

Again, I’m just looking at some very basic concepts, without considering the multitude of other important factors.  While there are a lot of “negative” news items related to the economy, it really is not surprising when you drill down to the basics.  Sports has overshot its economic equilibrium.  Adjustments will have to be made across all of the different sports, starting with a basic reduction in price, supply, or both, until we get back to a more stable equilibrium.

The news articles just keep on coming!  Here are a few more recent ones:

• Poor Economy Starting to Shape Sports Landscape (New York Times, 11/14/08) – another smalled sporting event gets cancelled (Tour of Georgia cycling race) and NASCAR loses revenue while trying to cut their costs.
• Are the New Jersey Devils Stalling Their Creditors? (NJ.com, 11/16/08) – An NHL team is actually behind on their bills and may face actions from the city.
• NASCAR is about to face some tough times(FoxSports.com, 11/16/08) – Multiple race teams are making layoffs, including Chip Ganassi and Hendrick.
• Amid downturn in US, GM and other sports sponsors rethink their gameplans (IHT, 11/16/08) – Major sponsors are withdrawing their sponsorship dollars, and teams are going to pay the price.

Not a lot of good news out there right now.  I’ve also heard about other teams in the four major sports making staffing cuts.  I don’t expect a rebound anytime soon, but I do think we’ll hit a leveling-off point in the next 4-6 months.

Earlier today, I wrote about the economy’s impact on sports, and noted that the impact really hurts on the ticket side more than anything (so some teams/leagues are trying to offset that via media revenue).  Well, the New Jersey Nets have come up with a creative way to try and help their fans get through this tough time, while also helping drive ticket sales (reported by ESPN.com, 11/12/08).

Right now, if you are unemployed and submit your resume to the Nets’ job bank, you can get two complimentary tickets to an upcoming game (click here for the actual promotion details on the Nets website).  The Nets will distribute the resumes to their corporate partners as well as participating season ticket holders’ businesses.  They are also hosting a career fair at the Izod Center, and anyone attending will get tickets to that night’s game.  This is a great promotion for multiple reasons.  They are going to generate tremendous good will from their fans and partners.  They found a good way to leverage their open inventory.  they are offering a new benefit to their season ticket holders and corporate partners.  And of course, if they do help some of their fans find jobs, you can believe that those fans will be ticket buyers for life!  Nice job all around by the Nets!

The country’s current economic conditions have definitely had an effect on the sports industry.  Even though sports are often consider “recession-proof,” ticket sales and sponsorship revenue has declined this year and several teams have even had to make budget cuts and reduce staff.  There is a good article on MSNBC.com (11/11/08) discussing the recession’s impact on sports, paying particular attention to the effect on “second-tier” sports that don’t have the level of guaranteed corporate and media revenue that the major sports have. 

Speaking of media revenue, a news item just came out today from SportsBusiness Daily reporting that the BCS may move their games to ESPN.  They’ve received a large bid from ESPN (don’t know the details), while Fox has offered a 25% increase over their current contract.  That seems reasonable especially considering the economy, but the BCS wants a 50% increase!  I assume that the ESPN offer has to be around this amount, so maybe the economy for sports (at least some of them) isn’t in such bad shape.  Maybe teams will try to weather the storm on the ticket side by trying to make up the revenue on the media side.  People are still watching the games – they just can’t afford to attend them!

Last week I received my “Selling It” newsletter from the National Sports Forum which talked about a program created by the Memphis Redbirds called the “9-Inning Vacation.”  This is a great campaign to sell fans on spending their entertainment dollars on the local team.  The Redbirds realized that with the sluggish economy, fans are less likely to have the money for a true vacation.  However, they still have a need for family entertainment, preferably of the low-cost variety, which is just want the team has to offer.

The team successfully integrated the idea of the “9-Inning Vacation” into all of their marketing elements, from billboards to television spots.  They were also able to use the campaign to reposition their product to a specific audience, namely the fans that felt the drive to downtown Memphis was too far.  Even if it is a bit of a drive, it is actually a very convenient “vacation” destination.  The program helped contribute to a 15% increase in ticket sales over the previous year.

If you are interested in receiving the free ”Selling It” Newsletter (which I recommend), simply click here and fill out your contact information.

We all know that last night’s horrendous weather caused the suspension of Game Five of the World Series.  The potential impact of this is tremendous, with many business implications:

• At the most basic level, the Rays get an extra inning or two of NOT facing Cole Hamels, who has been the most dominant pitcher this postseason.  There is a lot of advertising money riding on whether or not the series goes back to Tampa Bay for 1-2 more games, so avoiding Hamels could be the difference!
• Beyond advertising money, there is also the potential gain/loss of ticket, concessions, and merchandise revenue that is dependent on the Rays winning the suspended game.
• While the World Series doesn’t have nearly the same economic impact as the Super Bowl, there is definitely a spike in the local economy, most notably for hotels and restaurants.  An extra day (or two) in Philadelphia is quite valuable for local businesses.  The opposite side of this is also important, with Tampa Bay hoping to get this additional economic impact if the Rays force another game.
• Other sports are now affected.  If the game is pushed back another day because of weather, which is a distinct possibility, it would overlap with the home opener for the Philadelphia 76ers and hurt their ticket sales and per-caps.

I’m sure there are many other fallouts from this delay, but these are the ones that immediately come to mind.  If you think of others, please leave a comment!

Here are my recommendations and quick picks for this week:

Book: The Business of Sports by Scott Rosner and Kenneth Shropshire - I used this book as part of a class at Arizona State, and it’s a great reference for anyone looking to learn more about sports business.  The book covers a wide range of topics, including league structures, finance, sports media, franchise valuation, Olympic and collegiate sports, stadiums, licensing, and much more.

Website: ESPN Outside the Lines – Sports and the Economy - ESPN usually stays away from the business aspects of the industry, but here they did a great job talking about the ways that troubled economy is having an impact on sports. 

Teams: BYU (#9) / Utah (#14) / Boise State (#15) / Ball State (#25) – These four non-BCS schools are all undefeated and well positioned to break into a top-tier Bowl game, maybe even the BCS Championship if things fall in place.  The pressure on these schools has to be huge, and you have to believe each school’s athletic department is excited at the potential financial windfall they would receive for breaking into the BCS party.

Other: 14th Annual Mike Haynes Golf Classic - This is an annual fundraising event that the W.P. Carey Sports Business MBA Program at Arizona State puts on every year.  It’s a great event and helps raise money for Haynes Scholarship, which is awarded every year to two students from under-represented groups.  If you are in the Tempe area, I would encourage you to attend!

Do you have a good “pick of the week?” Use the Contact Us link at the top of the page and send me your picks!

Tickets to sporting events are considered a luxury item by most consumers, so in a time of economic downturn like we are experiencing now, convincing consumers to buy can definitely be a challenge.  So what are some ideas you have to combat this?  Here are some of my thoughts:

• Increase the “relative” value of the ticket – This is a time to really push tickets that include free food, merchandise, parking, etc.  If the buyer feels that they are getting more than just the game ticket, and therefore don’t need to spend money on all the additional items, it should be an easier sell.
• Offer gas-related promotions - Many teams have already done a great job of connecting ticket discounts to the cost of gas (the Twins and Braves come to mind first).  This is turning an economic negative into a positive with the fan and shows that you understand the difficulty they are having.  This connection will lead to more sales.
• Provide top-tier customer service – When you do get the fan in the arena, you must go above and beyond to make sure they have a positive experience.  The poor economy is already giving them enough reason not to buy the ticket – any additional negative elements will drive them away for much longer!
• Retention, retention, retention -  It costs between 6 and 10 times as much to create a new customer than keep an existing one.  Really focus on existing relationships for your sales efforts and you will see better results.  This is also a good time to reconsider some of your franchise’s fan loyalty initiatives.  What can you offer your fans, in and out of the arena, to continuously connect them with your brand?
• Use your partners- This is a great time to get your partners more involved.  Come up with some creative contests or unique giveaways to make the game more than just a game.  Give your fans a chance to win a vacation or a car (hopefully a Hybrid), or give out some giftcards.  If you can go beyond the traditional bat day or keychain, it can give the buyers that last little push they need to splurge on the tickets.

What are some of your ideas?  Share your comments, and good luck with your sales efforts!

So your company just paid $1 million to become a sponsor of Team X for the calendar year.  At the end of the year, you tally up the value of all the exposure you got from being a sponsor.  The guaranteed television advertising, the press releases and news coverage, the radio spots, the website impressions, the signage viewers, etc.  At the end of all your adding, you find out that you got $3 million worth of exposure for your $1 million sponsorship.  Wow, that’s a 3 to 1 return on your investment, otherwise known as ROI. 

Well, actually it isn’t.  What you just calculated is the media value of your sponsorship.  All this is telling you is that you got a great value on your purchase.  You essentially saved 67% off the regular price – not bad at all. This value is easily confused with and mislabeled as ROI.  The question is, how can you determine what your ROI actually is?

Without going into all the details, your ROI is your actual bottom-line, dollar return divided by your costs.  So lets say that you can accurately determine that, because of your $1 million sponsorship, your sales increased by $5 million, compared to the previous year when you were not a sponsor.  Does that mean your ROI is actually 5 to 1?  No, but we’re getting closer.  Your sales increased by $5 million – a substantial increase.  But your profit margin is only 50%.  The results is that your ACTUAL return on your investment is $2.5 million – an ROI of 2.5 to 1.

So what does all of this mean?  Here are the key takeaways:

1. Do not be fooled by measurement labeled as ROI that are not ROI.  ROI comes down to bottom-line impact on profits (not sales, profits!)
2. Calculating ROI can be difficult.  You need to put systems in place that will accurately measure what profits can be directly attributed to a sponsorship.  This is a challenge, but its not impossible.
3. With corporate budgets tightening every day, companies need to really focus on metrics like ROI.  If your team or agency can help get to those numbers and demonstrate a real return on a company’s investment, you will keep them as a partner and a client.

The Arizona Super Bowl Host Committee recently released the results of their Super Bowl Economic Impact Study, and the numbers are, well, super.  Having the Super Bowl in Arizona generated a record $500.6 million in spending by both visiting fans and companies.  You can read many of the details about the study and the results through the Knowledge@WPCarey blog, since the host committee worked with the W.P. Carey Sports Business MBA program to conduct the study.

Since the study was released, there has been a lot of negative reaction, claiming that the number were artificially inflated for various reasons.  As someone that did a lot of the on-site surveying and who knows the people that did the calculations, I can confidently say that these results are completely accurate and justifiable.  I’d like to address some of the questions that have been raised:

“That figure includes the regular amount of spending that would have occurred anyway.”

Not true – the survey participants were only out-of-state residents.  In addition, one of the first questions was whether or not the Super Bowl was a primary or secondary reason for their visit, so that the numbers would include only spending that occurred because of the Super Bowl.

“They only asked people that they know were spending a lot of money.”

Not true- I can say first hand that this is not the case.  The surveyors attended different types of events all over the Valley during Super Bowl week, as well as a large effort at the Super Bowl Experience, which is attended by fans of all income levels.  No one was filtered out for low spending, and no one was targeted for high spending.

“If a company spent money to send someone, and that person was surveyed, then they counted that spending twice.”

Not true - the survey also made sure to ask about who was footing the bill for different types of spending (hotel, airfare, entertainment), so that the individual spending could be calculated separately from the corporate spending.

“It probably cost so much to host it, that we didn’t make that much.”

Not true – It cost about $17 million to host the Super Bowl, and only 20% of that number came out of public funds.  The rest came from private donations, thanks to the great work of the host committee.

Personally, it was a great experience to help collect the data for this type of study.  I got to interact with a lot of great fans and get a very unique Super Bowl experience.  I am confident that the results of this study are accurate, and I hope others will view them as such.