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Dark Financial Clouds Over Professional Sports

- October 21, 2008


A couple of days ago I put up a tongue-in-cheek post about the increasingly dismal economics of of professional sports, here. Now I’m supplementing that with a for-real post on the same subject. All the following comes directly from a Reuters wire service item by Ben Klayman.

Smaller crowds are only the first domino to fall for U.S. sports leagues, which could see lower corporate spending, flat or declining revenue and stagnant team values in a global recession, analysts said. To cope with these problems, league executives have begun offering deals on tickets, cutting jobs and in the case of the National Football League, reopening its labor deal with players to reduce costs.

While revenue remains strong in many sports, officials no longer see the sector as recession proof. “We’ve taken an incredible leap with the pricing of tickets that is going to come back to haunt the major sports,” said Michael Cramer, professor of sports management at New York University. “It’s not just the people at the bottom end,” added Cramer, who is former president of Southwest Sports Group, which owns the Texas Rangers baseball and Dallas Stars hockey teams. “It’s the people at the top end that don’t have the money.”

Signs of a slowdown abound, including a decline in regular-season attendance for Major League Baseball, soft season-ticket sales for the National Basketball Association and an NFL memo citing revenue pressures. Throw in cutbacks by sponsors in such struggling industries as financial services and automotive, and the U.S. sports industry is facing more trouble. “We’ll cross our fingers like everyone else and hope that there’s some type of economic recovery and any negative impact on our business will be a minimal one,” National Hockey League Deputy Commissioner Bill Daly told Reuters this month.

Fan frustration is rising along with ticket prices.

Things could get worse for fans if a recession leads sports leagues to seek lower-cost deals with players, resulting in strikes, said Neal Pilson, head of his own New York sports consulting firm and former president of CBS Sports. In May, the NFL opted to reopen its deal with the players’ union early. NBA Commissioner David Stern, attending a pre-season game in London last week, said the league had cut 9 percent of its work force in a “belt-tightening” move due to the weak economy and later added that it may need to consider cutting ticket prices.

NBA executives said season ticket sales were trailing last year’s pace, but they hoped to make up the difference during the season. Despite the turmoil, however, the league is pushing ahead with plans to build at least 12 arenas in China.

Corporate sponsors also are tightening their belts.

U.S. automaker General Motors Corp, struggling to hoard cash amid weak sales, said last month it would not run TV ads during the NFL’s 2009 Super Bowl championship game after shelling out almost $46 million over the previous four years according to TNS Media Intelligence. That move came two months after GM said it would cut sponsorship spending in motorsports, including for the National Association for Stock Car Auto Racing.

NASCAR could also prove vulnerable next year as many of this season’s tickets were purchased before the recent turmoil, said Michael Pitts, associate professor of strategic management at Virginia Commonwealth University. “How many people are going to have NASCAR tickets as Christmas presents? They’re probably more likely to have gas cards,” he said. “We might look back (on 2008) and say these were the good ol’ days.”

Lower sponsorship spending is the likely result of mergers in the financial sector brought on by bad mortgages and tighter credit, analysts said. Advertising budgets also will suffer.

Merrill Lynch & Co Inc and Wachovia Corp have numerous sports sponsorships, but their new owners also have deals and may not want additional relationships. The U.S. government took an 80 percent stake in insurer American International Group Inc, another big sports backer.

“Some of these companies are trying to stay afloat and they’ve got much bigger concerns than whether they will continue to sponsor this pro sports team,” said William Chipps, senior editor with IEG Sponsorship Report.

In January, IEG estimated North American-based companies would spend $11.6 billion on sports sponsorships this year, up almost 17 percent from 2007. However, Chipps said the final number will likely be lower given the weak economy.

Concern should be high in sports like golf, where corporate partners spend $5 million to $10 million a tournament, analysts said.

Despite no loss of corporate sponsors and deals through 2010 and beyond, golf has seen its TV ratings dip this year as its most popular player, Tiger Woods, shut down his season in mid-June to have knee surgery.

“We’re hoping like hell for a turnaround because I don’t think a prolonged terrible economy leaves anybody untouched,” said Tom Wade, chief marketing officer for the PGA Tour, which has 15 of its 47 events this year supported by financial services companies.

Companies also are likely to cut spending on expensive seats and stadium naming rights deals that run as high as $20 million a year in the case of Citigroup Inc’s tie-up with the New York Mets baseball team, analysts said.

The timing is particularly poor for the Dallas Cowboys, and New York Jets and Giants, which will share a stadium, as the NFL teams hope to sign lucrative naming rights deals for stadiums opening over the next two years.

Even franchise values could suffer. The bidding for the iconic Chicago Cubs baseball team and related assets, which analysts had estimated could top $1 billion, has been delayed and potential buyers have said the economy could hurt bids.

“Ninety-nine percent of the world’s assets declined 20 to 25 percent in a month and the only asset that’s immune is the Chicago Cubs? I don’t think so,” said one person familiar with the sales process who asked not to be identified. “Nothing’s immune.”

Sports up to now have been a popular way for advertisers to reach consumers, but many analysts said that spending may drop in the near term due to the economy.

bq. –The credit crunch could have a silver lining for the hard-pressed organizers of the London 2012 Olympics who can now scale back their grand designs with the full blessing of the public and the IOC.

bq. –The slump in property prices, which could damage the chances of recouping money from the athletes’ village after the Games, has also resulted in the number of post-Olympics apartments being reduced from 4,200 to 3,000. The economic downturn could allow the government to play “hard-ball” with the IOC over the scale of the Games and the contractors over price.

bq. –The sale of the Chicago Cubs may be delayed by the crisis unless owner Tribune Co is willing to accept a lower price for the baseball team.

bq. –The NBA has been weathering the global financial crisis by cutting the number of pre-season games in Europe this year, Commissioner David Stern told reporters earlier this month. The league was playing only four games in four European cities in 2008, down from seven in six cities in 2007. Stern also announced the league would lay off about 80 employees, or 9 percent of its work force, media reports said.

bq. –The PGA said last month golf’s special bond with the corporate world and wide fan base put it in a strong position to ride out the current financial crisis.

bq. –The FIA, Formula One’s governing body, proposed last week radical cost-cutting measures, including the possible use of standard engines from 2010, to help teams survive the global financial storm.

bq. –The FFSA (French Motorsport Federation) said last week that it had decided to cancel the 2009 French Formula One Grand Prix for financial reasons. France, who invented the grand prix, was only absent in 1955 from the Formula One calendar.

bq. –European soccer clubs that are not bankrolled by wealthy owners are feeling the pinch from the economic downturn and could suffer further, at least in the medium term, as sponsorship and ticket sales fall.

bq. –David Triesman, the chairman of the English FA, has said that English soccer was collectively 3 billion pounds ($5.23 billion) in debt and that he could not rule out a top club collapsing.