Friday, October 31, 2008

Impact of the Economy on Sports

Teams and leagues are laying off employees. Sponsors are pulling back. Naming rights holders are going belly up. Where – and when – it will end is anyone’s guess.

Sports have traditionally been immune from downturns in the U.S. economy, but not this time. The meltdown in the financial markets has wreaked havoc across the sports business landscape. And, barring a sudden and miraculous economic turnaround, the worst is yet to come.

No sport seems to be immune, although not all teams in all sports have been affected. The Boston Red Sox, with the highest average ticket price in MLB, set an all time attendance record this year while extending their record streak of sellouts to 469. But MLB, despite record income of $6.4 billion this year, failed to set an attendance record for the first time in five years.

In the NFL, long considered the most successful U.S. sports property, Commissioner Roger Goodell took the unusual step of sending a memo to league employees warning of budget shortfalls. “We will all see and feel the effect in our travel, events, promotional spending and other areas,” said Goodell.

Not that the Dallas Cowboys and their fans will notice. The new stadium under construction in Arlington will generate obscene amounts of revenue for Jerry Jones and his ownership group. The Cowboys are selling Personal Seat Licenses for $2,000 to $150,000 per seat. If all the PSL’s are sold, the Cowboys will generate $735 million, according to the (Fort Worth) Star-Telegram. And that figure doesn’t include the price of game tickets. Although the Cowboys are privately funding the cost of their new facility, at a reported price tag of $1.1 billion, the financial risk appears to be minimal.

NBA Commissioner David Stern told the Associated Press, “Our revenue targets are still being met. But we know that there’s going to be enormous pressure on those targets in the next year or two, based on the country’s deteriorating economic circumstances.” At the same time, Stern said the league will eliminate 50 of the 800 jobs in the U.S. The league has already closed its Los Angeles office.

The NHL has been holding its own, with attendance and revenue increasing each of the past three years. But that may be a function of where the league started after a lockout wiped out the entire 2004-05 season. Despite the league’s rosy financial picture, it will still feel the effects of the economic downturn. A number of media outlets, beset by financial woes and layoffs, have announced cutbacks in coverage for the upcoming season.

Perhaps the sport that’s holding its collective breath is golf. Tournament sponsors have been dropping like flies at a pest control convention. Wachovia, sponsors of the PGA Tour Wachovia Championship, is being swallowed up. AIG, a major tour sponsor, may pull some of its advertising commitments in light of the federal government’s plans to take an 80% stake in the company. Merrill Lynch and Lehman Brothers, two financial services companies that have been heavily invested in golf, are gone. With ratings down an average of 36% since Tiger Woods last played a tournament, the sport is ill positioned to attract new sponsorships.

One of the biggest effects of the shaky economy on sports will be the availability of financing. Money for new stadiums and short-term capital needs alike may be difficult to come by. And anyone looking to purchase a team with OPM – other people’s money – as Sam Zell did when he took Tribune Co. and the Cubs private last year, will find the capital markets have all but dried up.

Despite all the negative financial news, sports are probably better positioned to weather the storm than virtually any other business. Most Americans would rather give up their first born than eliminate their sports fix. In response to the economic realities, costs will have to be reduced and prices may have to stabilize.

MLB Commissioner Bud Selig, speaking to the media prior to Game 3 of the NLDS in Milwaukee, sent a not so subtle message to baseball owners. In light of the uncertainty in the economy, said Selig, they shouldn’t “get too cocky” with ticket pricing. That’s a warning that should resonate throughout the sports world.

Jordan Kobritz is a former attorney, CPA, and Minor League Baseball team owner. He is an Assistant Professor of Sport Management at Eastern New Mexico University, teaches the Business of Sports at the University of Wyoming, and is a contributing author to the Business of Sports Network. Jordan can be reached at

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