01 Feb 1998

Running Up the Score

Growth and Turmoil in the Business of Sports
by Garry Emmons


Sports in America have always had a magical, transcendent allure. Life may be ambiguous but slam dunks and touchdown passes create their own heroic reality and final truth at game's end. Sports are a bond that brings entire communities and families together, to live and die for the home team. All this seemed timeless and unchanging - until recently.

A Whole New Ball Game

At first glance, the scene suggests classic Americana, straight out of a Norman Rockwell painting: a football star, larger than life, visiting a classroom of rapt and awestruck schoolchildren. NFL standout Terrell Davis, modest and unassuming, is speaking, as he often does to young people, about the virtues of hard work, perseverance, and other old-fashioned values.

When the Denver Broncos All-Pro running back finishes his talk, it's time to turn the floor over to the kids. The hands shoot up, the questions tumble out - and suddenly, there's no doubt it's the 1990s: "Mr. Davis, how much money do you make? What kind of car do you drive? How many houses do you own?"

It's a fact of life these days that when kids, or fans of any age, look upon a professional athlete like Terrell Davis (a notably frugal individual, as it happens), they often see dollar signs first and foremost. Salaries are soaring - even a journeyman player can earn in a few seasons what the average fan makes in a lifetime - and ever-increasing revenues are required to fund expanding payrolls. Huge player salaries, however, may be only the most visible component of a business with increasingly explosive, multifaceted economic aspects. Yet despite these turbulent conditions, there's no shortage of new ownership wanting to jump into the game. For example, two new baseball franchises, set to debut in Phoenix and Tampa Bay this spring, paid some $130 million each to join the major-league fraternity. Since these teams will largely consist of players existing clubs deemed expendable, backers can have few illusions that their investment will be rewarded - on the field or at the bottom line - anytime soon. Nonetheless, competition for franchises remains fierce.

As in any business, the sports industry's mounting costs are eventually passed on to the consumer - at the stadium, via television, or through the sale of sports-related merchandise. The advent of big money in the world of sports seems to have aggravated public disenchantment with many aspects of the professional game, from high ticket prices to athletes' personal behavior. That does not bode well long term for an industry that must attract and maintain customer loyalty in the form of rabid fan support.

Nobody puts out a more exciting product or showcases more talented and skilled athletes than the major American professional leagues. But have the beauty, fun, and thrills of games - which once far outdistanced the commercial aspect of sports - become inextricably identified with, or even been overtaken by, market forces and finance? How big and how pervasive is the business of sports?

Swinging for the Seats

A recent Georgia Tech study put the value of the sports industry at $152 billion annually. But HBS professor Stephen A. Greyser, who teaches the second-year elective The Business of Sports (see sidebar), demurs. "I'm not sure there's any reliable estimate as to how big the sports business is," he says. "Suffice it to say, it's huge and much more encompassing than most people would think. Often defined as being about teams, leagues, players, and their agents, it's also about broadcasting rights, the licensing of merchandise, sports apparel and equipment, product endorsements, and sponsorships of sports, teams, and sports-related events."

It is only in recent decades that pro-fessional sports have reached the lofty heights of corporate enterprise. Jonathan D. Mariner (MBA '78), CFO of the 1997 World Series champion Florida Marlins, traces baseball's major turning point to the mid-1970s when several players, supported by a Supreme Court ruling, established their legal claim to "free agency" and the right to sell their services to the highest bidder. "As a result," says Mariner, "today in every professional league, every team must scramble to increase revenues because the best players command the highest salaries. Without sufficient revenues to pay top players, it's more difficult to assemble a winning team."

Free agency began to spread through the industry as another catalyst was gathering critical mass: the dynamic pairing of television and sports. Neil R. Austrian (MBA '68), president of the National Football League, explains: "The 1958 Colts-Giants overtime game was the NFL's first nationally televised championship game. It established the game as a TV sport and, from the fans' perspective, made it a national game. Before that, teams had only sold TV rights separately in their local markets." Television revenues remained rather modest, however, until recent years; today, the total NFL take from TV is $1.1 billion annually, with each team's share amounting to $39 million a year.

Television, of course, has been great for fans, giving them access to innumerable games that they otherwise would not see. (In recent years, it has also made possible the marketing and expansion of American leagues into the international arena.) Sports and television have always been mutually beneficial - sports provide television with a source of programming and content and a way of attracting viewers for other, nonsports program offerings. And for the four principal sports leagues, the National Basketball Association (NBA), the National Football League (NFL), Major League Baseball (MLB), and the National Hockey League (NHL), television, both national and local, has been a boon as well. Television provides significant direct revenue as well as the added exposure that stimulates other marketing partnership opportunities for the leagues, teams, and players.

Significantly for the sports industry's economics, TV revenues helped fuel the explosion in player salaries. Like everyone else, athletes gaped at the size of TV contracts and - assisted by an emerging group of player agents - demanded larger salaries. For their part, the TV networks, battling among themselves, were willing to pay ever-increasing sums for the rights to broadcast sports.

Charles G. "Chase" Carey (MBA '81), chairman and CEO of Fox Television, was the driving force behind Fox's broadcast agreements with the NFL, NHL, and MLB. "In a competitive world," he says, "acquiring the rights to big events becomes more and more important as a way to distinguish yourself. For us, live broadcasting of major sports events such as NFL games or the World Series provides a high-profile identity, both for viewers and potential advertisers. Advertisers value network sports programming because of the size and makeup of the audience it attracts." Of Fox's television contract with the NFL, Steve Greyser notes, "While many people thought Fox overpaid for its NFL rights, in reality it was a coup - with one stroke, the deal established Fox's credibility and presence as a network capable of competing with the big guys: NBC, CBS, and ABC."

Underscoring its belief in the value of sports programming, Fox recently purchased (pending Major League Baseball's approval) the Los Angeles Dodgers, another example of a trend toward media ownership of sports franchises. "Ownership of the Dodgers will give us the capability and flexibility to build related businesses and programming," Carey says. The sports franchise, he elaborates, will furnish the stimulus and content for derivative ventures such as TV stations, a cable TV channel, sports bars, and retail outlets, to name a few possibilities, to be developed under the aegis of Fox and its parent, News Corporation.

Going, Going, Gone

In the quest to boost revenues, stadiums and arenas have become increasingly important as revenue producers. "The significance of stadium/arena revenues - particularly the revenue stream generated by luxury boxes and other premium seating - is driven by the exponential growth in players' salaries," explains Dennis R. Robinson (MBA '90), who as COO of the New Jersey Sports and Exposition Authority, oversees the operation of Giants Stadium, where the NFL New York Jets and New York Giants play, as well as the Continental Airlines Arena that houses the NHL New Jersey Devils and the NBA New Jersey Nets. "Many teams argue that their survival depends on whether or not they get a new venue," says Robinson, "not so much to have greater seating capacity per se but to benefit from the more lucrative seating programs. They see this as an essential revenue stream if the salary demands of top players are to be met and if a franchise is really going to be competitive."

Thus franchises - many with roots in their cities dating back decades - have themselves begun to shop around like free agent players. And cities without franchises seek to gain the coveted "major-league" status that they perceive goes along with landing a big-league sports team. Such cities - often bidding against each other - will typically offer publicly financed stadiums and all manner of other inducements to tempt a team to relocate.

"There are big risks involved in moving out of an established market," notes Robinson, who in 1995 successfully negotiated to keep the NHL champion Devils in New Jersey after the team had been courted by Nashville, Tennessee. "But some of the offers made to entice teams to move are so huge that the economic benefits to a franchise far outweigh the risks of relocation, at least in the short term."

Pitching and Catching

Another lucrative revenue stream for the professional leagues and their teams stems from licensing. William Daugherty (MBA '91), the NBA's vice president for business development, reports that "the league earns significant royalties on the sale [1997 retail sales exceeded $3.1 billion] of NBA-licensed apparel, souvenirs and games, equipment, and miscellaneous products, with the money divided evenly among the league's teams." (The NBA, Daugherty notes, will open this year in midtown Manhattan its first retail theme store, a concept that it will likely repeat in other cities around the world.)

In licensing, as in other areas, the NBA has particularly rosy long-term prospects in terms of expansion and growth. "There are many U.S. cities that are clamoring for franchises," says Daugherty, "and then there's the overseas market. We're fortunate to have a game - simple, inexpensive, fast-paced, and played in a compact area - that translates well into countries and cultures all over the world. With the NBA on television in some 190 countries around the globe, the league's teams, players, and licensed merchandise are all in great demand. In many ways, the challenge for us is to avoid getting swept up in the fever and to develop at a deliberate, sensible pace."

"Important revenues are also derived from corporate partnerships and sponsorship of professional sports leagues, tournaments, and big-time events," notes Steve Greyser. "Companies are willing to pay top dollar for the visibility and prestige they gain from their association with sports." Other companies, of course, pay huge fees to athletes for endorsing products, and some back both individuals and organizations. For example, while footwear-and-apparel giant Nike is famous for its multimillion-dollar endorsement contracts with individual athletes such as Michael Jordan and Tiger Woods, the company also recently made a big investment in the U.S. Soccer Federation (USSF), the governing body for the men's and women's national teams and for youth soccer. Nike bankrolled the USSF with $120 million over the next eight years. Clinten W. Hendricks (MBA '87) is in charge of the marketing, planning, and overall execution of several Nike equipment lines, including soccer and basketball. He notes that Nike is making bold moves to sustain growth in what he terms a "maturing" market in the United States for running and basketball footwear. "Along with Nike's expansion internationally and its greater involvement in women's sports, the company views soccer as one of its key areas of focus," says Hendricks. "Our support will help expand soccer in America, where we believe there are tremendous growth opportunities. In fact, we look to the long-term investment benefits of helping to develop grassroots soccer as much as to getting Ôthe Swoosh' on the players' uniforms today." Hendricks adds that Nike's soccer equipment sales, while soaring, still represent a relatively small percentage of the company's nearly $9 billion in total sales. Nike is working to change this by moving aggressively into the $5 billion international market for soccer equipment and apparel - it has signed a $200-million, ten-year commitment to sponsor the Brazilian team, the world's soccer leader.

Bronx Cheers

If a principal challenge for pro sports is managing the high level of player salaries while keeping the onfield product affordable and accessible to the public, the case of the Florida Marlins is instructive. Despite their 1997 World Series success, the Marlins are being sold because the team's owner lost in excess of $30 million meeting his star-studded payroll, and because the Marlins' current stadium cannot produce the necessary state-of-the-art seating, signage, and concessions revenues.

The four professional leagues have varying systems involving collective bargaining agreements, free agency rules, and financial penalties that, to different degrees, set, or act as a "drag" on, upper-level payroll limits and player salaries without necessarily putting a formal cap on them. But with those arrangements vulnerable to mounting player discontent, Marlins CFO Mariner's comments on baseball's situation are sobering for the other leagues as well: "The economics of baseball are fundamentally tenuous because there is no cap on payrolls to keep the richer teams from substantially outspending smaller-market clubs. These days, an MLB team has to spend at least $45 million in player payroll to have a chance to win; average team revenues are only $50 million." Indeed, as Steve Greyser observes of the Marlins and other successful 1997 post-season teams, "Money can buy happiness, for the fans if not necessarily the owners; of the five teams with the highest payrolls in baseball, four made it to the final playoff round of four."

As for the public, it seems cranky and less inclined to go the extra mile to support a multibillion-dollar industry. Proposals for publicly funded stadiums are being met with resistance; attendance and TV ratings for many teams are disappointing; and competition from other sources for fans' attention and discretionary spending is steadily intensifying.

Some of the customers upon whom the entire industry is dependent are dismayed, in the argot of sports talk shows, with trash-talking, sub- stance-abusing, spouse-beating, strike-threatening, crybaby, overpaid multimillionaire athletes. Fans are disturbed that tickets are too often unavailable or unaffordable (factoring in concession and souvenir purchases in addition to the expense of parking and tickets, it now costs a family of four $250 to attend a Boston Bruins hockey game). They are distressed by instability and eroding tradition: teams no longer seem loyal to their cities nor players to their teams.

For their part, the professional leagues face further problems: the dilution of onfield talent and player quality as a result of expansion; the threat of player unrest over salaries; and over- saturation of the consumer with both live and televised sports product and programming.

Wait 'til Next Year

Will things get better? Jonathan Mariner says, "The biggest challenge for baseball is getting a handle on the rapid escalation of salaries. Baseball missed its best chance for a correction in this area when the 1994 strike occurred. Had there not been an adverse court ruling against the owners, had the players stayed out and replacement players been brought in, that would have reset the marketplace and changed the economics of the game."

Fortunately for the business of sports, sports themselves enjoy a truly unique competitive advantage: despite innumerable affronts to their devotion and their gripes notwithstanding, fans seem unshakably wedded to the product. While the sports business is often considered just a branch of the entertainment industry, clearly it is much more than that. Sports are part of the fabric of society, with components of deep emotional attachment, civic pride, and familial and community bonding.

The good news is that executives in all professional sports seem acutely aware of the industry's problems and seem anxious that something be done about them. And it's true that, regardless of their travails over the years, the games themselves have had a knack for emerging triumphant just when things look darkest. But like a baseball game going into extra innings, nobody can say with certainty how it will all turn out. When the climactic moment finally comes, will the crowd go home happy or heartbroken?

As Yogi Berra, the sports world's preeminent sage, once observed: "It's hard to make predictions, especially about the future." But for all those involved in the sports business today, another Yogi-ism seems especially pertinent and timely: "When you come to a crossroads, take it."


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