sport in the new millenium[1]

sport in the new millenium[1] - Sport in the New Millennium...

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Unformatted text preview: Sport in the New Millennium There is no consensus on the economic magnitude of sport. Estimates vary widely. This is because sportis not recognized as an official industry in the Census Bureau’s North American Industrial Classification System. This classification di- vides the economy into 20 seetors or major economic acrivities. Sport is not des— ignated as one of these major economic activities and sport-related activities are scattered across 8 of the 20 sectors.‘ Each of these 8 sectors has multiple subsec— tions into which economic activities are classified. Thus, there is no official “sports industry.” Rather there are multiple industries that engage in activities that, to a greater or lesser extent, pertain to sport. Adding or reconciling sales or financial data from each of these multiple, separate classifications is difficult because of the overlap from one category to the next. In some cases, simply adding numbers across categories may lead to double counting, whereas in others the true economic magnitude may be underrepresented. The lack of a single, official, aggregate figure provided by a government agency leaves a void that several analysts have sought to fill. Inevitably, they use different assump— tions and, thus, produce very different estimates. At the end of the 19903, estimates of total spending related to the production and consumption of sports goods and services ranged from $213 to $560 billion} The authors believe that the estimate provided by the Sports Business journal’s an- alysts at the beginning of the new century provides a solid starting point.3 This es- timate of the total economic activity related to the production and consumption of organized sport was $213 billion. Their analysis divided sports expenditures into the 15 discrete categories shown in Table 1-1. Care was taken to conservatively prescribe each of the categories. For example, Spectator Sports was limited to on—site spectator expenditures (e.g., tickets, con- cessions) in contrast to most previous studies, which included vague estimates of money spent by radio listeners and television viewers. The analysts used actual hospital billing records in conjunction with appropriate insurance injury codes in determining the $4.1 billion Sports Medical Treatment category. SPORT [N THE NEW MILLENNIUM O 1 . . . . 8:3 3% .. . . . . . . .:o___.wE mmmw .Emzsmmww , . . . . .. v .. . ....msow. .. 353..., £25 .. .. . , , . . ... .8.__Emmm . . .. . .. .. . .. ., ... H. ,. . “mama. ..E___maom§ . Sean; . .. . . . . . . . . .. . . . .. . .. ; 93:83... .....finfimF . $3.8... , .. . .vs____s.8§ .. . .. . . . . . =2.___§m$ 5:59; ,. ......555 8%.... . “38m. ....S.____fi_8.5..... raw: mg... . . . 5545935522 . uwmwcmaxm. , .umEmej .1. , .. :2 _E ~me .. . . “$26.9. .. , .8 m. . . . .. .gmcemmmocog gagging 9m... . .555 $.me ., .. .mmEmm. . . 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Eufiaetaufiofi ..maEfiowga—m . . .. «roamhsflumam . €55 8.5. . .H . .. . . . . . . . .. ..H . ..coEB mmdw 5:5 Ema . . “.022. . , . .. . . , . . . . . 96mm... .mmsamwhmnmmms. . 3%___m.%wg .. 5:5 8.3 . . .. . .. . . . . . . .. , , .523 8.0; E: . .u_. .. . .u m. . flaming . . . . . .. ., 5.5.53.3 . . . . .. ..mamgafiaa SEE Ema . =o____E Ema, ..mzofimxoon..o_w:E . .. . . . , . .. “:oEEQEB E . .. . mcohfiezfiflm. “flcsmzmcou .hflmmum._mtm£o_. . .mpouzématomp ,. . .. ., . . .. .uowsEmEn._=cm_.. . E55385 .. . . 22:3 a; 235% acme. . .S_=_E Sow mquEmEmsmE... . . BEE 8.8. __Eom§£-oE. .....MEE. a___omu_. . 55822 .=o____E.ommwxzm_ . . . .. . . 52:538. ..chmmaa_m§w._£¢: . . W 5:553 . .. €58... .. Asmdageg H. ., s____e. mi S__._._E 8a ,.=_Bm=.§§e assaoawmagm . . €____.s%§. N 486ch 853 5.3 . ...EéEEdEw; a . "wwflmmmoom. "EEEEEQNEEQ. 2E£m§fi<o ...ausucgcm 8m... .. . ._.m..=a_..mm.. Sagas... .. 3.2% . ..mgoameoz... . 5335.5? .. .. 553 ha... ,. ..E___52.$. :E____Ew§ .. E____a.mm.a . SEE. 3% $822332 .. 5:5 3w. . .H ..E.____sm.m§ .. .. .n.=.§a§8...“.saéesstmg . “$582.5... .....efisgfiz. “W .. . .. :EEE... .. ESE 9m....HEESEENET. .. asytgumh; gumifafim. .mesflamég ..., $5.3m 83%. . 8.. b 8% .553 8.2a .....§_.B Baa... ...s____m,wm5,.. .. .......__.a__.,_._n.%.~.a.. . E.____._....3..¢~aa gaisammfifi. Emmom._wv_koémz....y . nausea . . N. .H,._.,wE.mE , .. ....Efieé. . .. Easing. . 2.3... . 6353.. SEES . ..a_._.___..mu.m~m . .m:..m_tu%<. . . «Egg—fin...“ , 0 CHAPTER ONE 2 The same kind of precision was used in estimating spending related to sport—related travel. Rather than using the traditional broad category label of Sports Tourism, analysts purposely chose the more restrictive label of Sports Travel. Previous stud— ies commonly used straight—line estimates that assumed that sports accounted for 25% of all tourism expenditures. This unsubstantiated assumption has led to greatly exaggerated sport tourism figures. The Sports Business journal researchers narrowed their consideration of travel to that done exclusively for the purposes of attending and competing in organized sporting events. In the case of major league sports, tourism visitors account for no more than 5% of attendance.4 Travel expenditure estimates were based on data furnished by the Travel Industry Asso- ciation, U.S. Travel Data Survey, and from league and team travel spending reports. Although the definition of sports business used by the journal was fairly inclusive, it did not include the fastest growing segment of the industry, nonorgnnized recre- ational sports. These more informal, participatory sports include a broad range of outdoor pursuits such as camping, hunting, fishing, and cycling, as well as a vari- cry of popular fitness and exercise activities such as aerobic exercising and running and jogging. According to the National Sporting Goods Association,S in 2001, Americans spent almost $16 billion on equipment for just six activities. Bicycling led the way at $4.72 billion, followed in order by aerobic exercise ($3.84 billion), hunting ($2.20 billion), fishing ($2.07 billion), jogging and running shoes ($1.67 billion ), and camping ($1.37 billion). By 2001, pleasure boating enthusiasts were spending $13.5 billion a year on acquiring and equipping new boats from skidoos to yachts. Table 1-2 shows considerable variation in expenditures across activities in the 5—year period between 1997 and 2001. Mainstream participation sports such as basketball (+61.3%), aerobic exercise (+2.94%), tennis (+ 16.3%), and soccer (+21.4%) registered impressive gains. Those activities trending downward included cross-country skiing (53.6%), alpine or downhill skiing (-65.7%), and racquetball (—57%). The Alternative Sports Boom The fastest growing segment of sport spending at the beginning of the new mil— lennium appears to be in the newly emergent “alternative,” “extreme,” or “lifestyle” sports, which are highly individualistic, free—spirited, adrenaline—rush activities. They include sports such as skateboarding, snowboarding, in—line skata ing, BMX biking, windsurfing, downhill mountain biking, whitewater kayaking, and the more extreme activities like bungee jumping, street luge, and sky surfing. Until the late 19903, these activities existed on the fringe. For the most part, they were shunned by mainsrream media, characterized as “pseudosports” or even den— igrated as “parlor—room stunts” performed by antiestablishment teens.6 By 2000, however, these so—called extreme sports had become mainstream. According to the National Sporting Goods Association,s over 80 million Americans, predomi— nantly young males between 12 and 24 years of age, were spending billions of dollars annually on equipment and apparel to ineline skate ($251 million), snowboard ($235 million), and skateboard ($105 million). Even one of the most recent in— novations in water sport, wakeboarding, which is water-siding on what amounts to a snowboard, had sales close to $80 million.6 SPORT IN THE NEW MILLENNIUM O 3 -- (in: inillions .' Aerolaie' arias;- 5 ‘» '- ' .. Baseballifsoft‘ball'i Anastasia ' " " iBiCYd'in'g ' Chi-inning Hang-awe _. .,Fdotball ' I .‘ice":'skates ii¢§éihéfifirihmg rhea 1: I Sfiifiig-aiélpiii '-,'.Ps‘1'<i_ijg'ig;fezdss; Alternative sports have had a particularly strong appeal to “Generation Y,” 12- to 24-year—olds who increasingly have turned away from team “jock” sports to em— brace the more free—spirited individualism of extreme sports. Many of these young participants appear to adopt a lifestyle that connects music and fashion to the alternative sports in which they engage.6 Despite the hip, edgy, or antiestab— lishment image of these sports, corporations have been drawn to the increasing consumer strength of alternative sport participants. The annual spending power of 10- to 24-year-olds was estimated at $91.5 billion? In addition, the spending 4 0 CHAPTER ONE fl , grigiiissiir- ~ ~ . ,, Grbwins’Carporare' 7 ' 5:.1'sgaaaea-a ; g _- 2' J'Alter'natiye Sports 7 '7 potential of this youth market is expected to grow significantly over the next sev- eral decades. The 12—24 age cohort is currently growing at twice the rate of other age groups and is unlikely to level off until 2030.5 Many companies see alternative sports as a conduit for reaching the hard—to—pen- etrare youth market. For example, Mountain Dew attributes its carefully culti— vated “edgy brand image" as a sponsor of extreme sports as the primary reason for its being the fastest—growing soft drink in America in the early 2000s. Perhaps the most prominent example of how mainstream extreme sports have be— come is the success of the annual SummerX Games. Originated by ESPN in 1996, the X Games are the premier event for alternative sports, the "Olympics of extreme sports.” ESPN, in concert with ESPN2 and ABC, provides almost 20 hours of prime—time coverage, including competition in such activities as aggreSSive in—line skating, street luge racing, bicyclestunt riding, and sky surfing. Among youth aged 617, the X Games have become the second most appealing sporting event, ex— ceeded only by the Summer Olympics.8 In 2000, the event drew 270,000 specta— tors on site and over 5 million television viewers, including 37% of all male teenagers in the United States.9 As might be expected, given the Games’ popular- ity, corporations are investing substantially—311 estimated $22 million in 2000— to align with the games as corporate sponsors. “Gold sponsors,” such as Mountain Dew, Taco Bell, and Starburst Fruit Chews, have paid upwards of $2 million each to promote their association with the event to young consumers. When consumer spending on mainstream and alternative participatory sports is added to the Sports Businessfoumali' $213 billion valuation of organized sport, the sum of annual expenditures exceeds $250 billion. At $250 billion, sport in its many manifestations, from organized to alternative, is a significant and growing segment of North America's economy. W The ‘905 Boom The sports industry was a major beneficiary of the longest sustained period of growth in US. history—it provided the necessary condition for the impressive growth of many sports organizations. The most notable features of that decade in- cluded the following: Sports Facility Construction Boom Construction spending on new arenas and stadiums for major league professional sports teams was almost $16 billion in 2003 dollars during the 1995-2003 period. During the 19903, over 160 new major and minor league ballparks, arenas, and racetracks were built in the United States and Canada (Howard, 1999). Proliferation of Professional Sports Leagues and Rams In the 19905, almost 180 new professional sport teams came into existence, to— gether with 13 new leagues (e.g., the XFL, National Rookie League, West Coast Hockey League). The total inventory of professional teams at all levels now exceeds 800. Unanticipated by analysts was the spectacular expansion of minor league SPORT IN THE NEW MILLENNIUM O 5 hockey in the Sun Belt states and the emergence of women’s sports leagues (i.e., Women’s National Basketball Association, Women’s United Soccer Association). i i .i i i Increased Corporate Investment in Sport Corporate investment in sport more than tripled from 1990 to $8 billion in 2000. The three most common ways in which companies align with sports properties are as follows: Corporate sponsor-351p. Over 5,000 companies in the United States and Canada spent $5.92 billion sponsoring sporting events and teams in 2000, a jump of 14% from the preceding year.” The most common form of sponsorship occurs when a company pays a fee-to have its company name or logo associated with a sports property, such as the PGA’s Buick Open or Gatorade} sponsorship of the NFL’s Punt, Pass 85 Kick program. Through sponsorships, companies attempt to capital— ize on the appeal of the event to enhance the visibility and image of their brands or producrs. Naming nights. One of the most prominent manifestations of corporate America’s alignment with sport has been the number of naming—rights deals since the mid—19905. In 1990, only a handful of professional teams played in corporately named venues. By 2001, 82 major league teams played in arenas or stadiums named for a company brand or product.‘2 When the growing number of collegiate venues and minor league ball— parks and arenas with corporate names is added to this list, the total exceeds 125. Early in 2001 the $300 million barrier was broken when Reliant Energy Company paid $300 million to name the home of the NFL’S Houston Texans Reliant Stadium. In the 19805, the biggest naming-rights deal was the $18.75 million entitlement of the Target Center in Minneapolis. Premium seating. A few years ago, it was calculated that 114 teams in the Four major leagues realized close to $1 billion from luxury suite revenues.13 The great majority (over 75%) of these suite tenants are corporations with earnings that exceed $100 million annually. In ad- dition, when the substantial number of season tickets purchased by companies for clients and employees is includedH—reputedly as high as 50 to 60% of the season tickets sold in NHL and NBA arenas—over— all corporate investment in sport properties at all levels is substantial. Annual Sporting Goods Sales Near $75 Billion At the start of the new millennium, total expenditures for all sporting goods (footwear, apparel, equipment) and recreational transport (e.g., pleasure boats, bi— cycles, recreational vehicles, snowmobiles) approached $75 billion, an increase of almost 50% from the start of the previous decade.5 5 0 CHAPTER ONE W The Challenges Ahead Ostensibly, the ‘90s boom suggested that substantial benefits are accruing to the owners and managers of sport organizations, as well to the fans and consumers of these establishments. As we enter the new decade, there are many more modern and sophisticated venues, much more sport producrs than ever before, and un- precedented levels of corporate support. However, at the same time, there are a number of serious challenges confronting managers. These include the increasingly competitive marketplace, emerging technology, and the need to do more with less. Saturated Marketplace Ironically, the prosperity that undergirded the unprecedented growth of the sports industry over the past decade has been the major contributor to one of the mosr serious challenges confronting sport managers: a-satumtm’ marketplace. Con- sumers now have more entertainment options available than ever before. Indeed, a respected national business publication proclaimed that the long-term robust economy that characterized the 19905 had stimulated the creation of so many new sport and entertainment alternatives that the United States now faced an “entertainment glut.”H Although new sports teams and properties (e.g., NASCAR, WWE, WNBA) expanded substantially, so did other entertainment options. Major entertainment and media companies like Disney, Time—Warner, and Viacom invested heavily in movie studios, broadcast and cable networks, online ventures, new record labels, and theme parks. It is projected that the total number of channels available to TV viewers will increase from about 75 in 2000 (mostly cable channels) to 1,000 by 2010, “when digital compression of TV signals makes room for hundreds of chan— nels, and the linkage ofTVs and computers becomes a reality.“ At the same time, the exponential growth of websites is creating further choices for consumers. Some industry analysts are worried that there may already be too many choices, and con- sumers may be overwhelmed. As Business Were proclaimed, “It’s a brutal battle, es— pecially as audiences fragment amid the flurry of competing choices.” As entertainment providers, sport managers are part of this highly competitive en- vironment. Major investments made by entertainment conglomerates in the last decade are indicative of the positioning of sport as entertainment. For example, it was the entertainment value of the Atlanta Braves and Hawks on his television su- perstation that persuaded Ted Turner to acquire them, not his interest in baseball or hockey. Similarly, the Chicago Tribune Company purchased the Chicago Cubs to be the principal attraction of the Tribune’s supersration.” A spokesperson for Comsat Enterprises, one of the largest cable suppliers in the United States stated, “We own the Nuggets because we’re an entertainment company... We distribute entertainment. We package entertainment. We create entertainment.”15 Thus, when Comsat bought the Quebec Nordiques and moved the NHL franchise to Denver, and purchased a major interest in the Philadelphia Flyers and 76ers, the company had more entertainment to distribute, package, and create.15 Sport managers are competing for the scarce time and disposable dollars of the same consumers that all other entertainment companies are seeking to attract. The challenge of competing in such a cluttered marketplace is exacerbated be— cause consumer spending on entertainment in the early 20003 slowed to around SPORT IN THE NEW MILLENNIUM I 7 6% annually." This rate of entertainment spending was much smaller than the annual growth in investment in sport and entertainment properties. The problem is particularly acute in the spectator sports, a sector that is receiving a shrinking share of the amount of disposable income being spent on entertainment. During the 19905, spending on spectator sports grew at a modest rate of around 2% per year, while personal investment in video, audio, and computer equipment in- creased at an annual rate of over 10%.16 It is evident that sport managers face more competition from both within and outside the sports industry than ever before. Finding ways to attracr new, and re- tain exisring, cuStomers in an increasingly cluttered marketplace is a formidable challenge. Effective managers will take full advantage of technology to establish distinctive communication and service links with current and prospecrive cus— tomers by adopting a range of Internet initiatives likely to include electronic ticket sales and exchanges, chat rooms, and opportunities for fans to interact with players and coaches. They will implement powerful customer loyalty programs to reward and encourage repeat patronage and will demonsrrate commitment to quality and customer service through the creation of satisfaction guarantee pro— grams that eliminate a consumer’s purchase risk. ThkingAdvanmge of Emerging Technology The sports industry is only beginning to take advantage of the promise the Internet and other technology offers with respect to revenue generation and fan development. The early initiative by sports properties to adopt the technology was limited to get- ting online. Establishing an Internet presence usually involved creating a communi— cation vehicle containing fan—friendly information (i.e., scores, player bios, schedules), "eye—popping graphics,” and some interactivity.17 It was not until the end of the 1990's that major sport entities began to develop coherent, long—term web strategies. Now almost all leagues and teams have established Internet marketing di- visions, dedicated to capitalizing on the potential of the web to sell licensed mer— chandise, engender fan loyalty, increase ticket sales, and reach disaffected fans. The President of AOL’s Interactive Properties Group, who was also managing owner of the NHEs Washington Capitals, may provide the closeSt vision of how sports organizations will take fiill advantage of the Internet over the next decade. His team is using email (reputedly, he personally answered 10,000 email messages during his first year of ownership), AOL's Instant Messaging, Hotmail, live chats with players and coaches, chat rooms, and fan clubs in order to build a strong sense of community among fans. He expects the web to become a subsrantial rev— enue source. Even by the year 2000, the Internet had generated more income from ticket, merchandise, and sponsorship sales than the $8 million per year the club received from local television.” Other sports organizations also are taking advantage of the Internet’s ability to ac— cess their fans in a personalized manner. For example, the New York Yankees have induced more than 150,000 website visitors to register for their listserver. The San Francisco Giants established an innovative electronic ticket exchange program that is likely to become a model for other sports organizations.” Season ticket holders are able to use the Giants’ website to sell tickets they cannot use at face value or higher. The exchange program is designed to reduce no—shows by at least 8 I CHAPTER ONE ‘4‘". 50% and to encourage high ticket-renewal rates by ensuring season ticket holders will not hold large numbers of unused tickets. The key technological development of the near future is likely to be the conver- gence ofInrerner technology with television. Television and the Internet will con— verge into one delivery system in one of two contrasting ways: either as WebTV or webcasting. With WebTV (ABC dubs their version “Enhanced TV”), infor— mation accessed via the Internet is displayed on the television screen, whereas with webcasting (or netcasring), video imagery and audio are accessed directly from a personal computer. The first option brings the Internet to the television; the latter delivers live broadcasts, called streaming video or livecasting, directly to the PC user via the Internet. In either case, sport consumers will have the oppor- tunity to instantly access game statistics (i.e., pitch count, third-down conver- sions), injury reports, and customized editorial comments while viewing digital-quality video. The interactive aspect of the viewing experience eventually will allow a consumer to select a particular camera angle from which to view the action—for example, from the goalie’s perspective. Quokka Sports provided early cutting—edge, “im- mersive” (user-active) live—event coverage on the Internet that allowed viewers to manipulate action sequences, such as America's Cup yacht races or to monitor Michael Johnson’s biometrics during his Olympic sprint performances.” The in- tegration of immersive coverage with the rapid grOWth of net-enabled cell phones (60 million people in the United States are likely to have access to Net livecasting by phone by 2003) is likely to transform the distribution and consumption of sport over the next decade.20 Irrespective of the form of convergence or the extent to which it may occur, the integration of television and the computer will require managers to consider a range of critical issues, from how to both protect and en— hance broadcast rights to how to fully leverage the considerable revenue opportu— nities related to virtual advertising, sponsorship, and merchandising. It is conceivable that advances in technology will make papertickers and ticket sellers all but disappear by the end of the decade, to be replaced by electronic tick— ets and electronic turnstiles. Fancard technology suggests that at some point fans will not have to bring money to the ballpark. The card—swipe technology will allow fans to purchase concessions and team merchandise while collecting points for prizes provided by the team. Fan cards allow teams to reward their most loyal fans while providing the organization with the ability to develop sophisticated databases on fan purchase behaviors (who buys what, how often, at what point in a game, etc.). Other exciting technological advancements that offer substantial potential for revenue growth include “smart” seats (small computer screens on in- dividual seats that provide replays from different angles, game statistics, and the ability to place in-seat concession orders; Role, 1998), and virtual signage (com- puter imaging technology that allows television advertisers to superimpose mes— sages on a playing field or in the stands that are seen only by television viewers"). The revenue enhancement potential of the Internet for sports organizations is enormous. The New York Yankees became the “first pro sports team to turn cy— berspace into a major seven-figure revenue source.23 In a move similar to tradi— tional broadcast deals, the Yankees sold their Internet rights to American City Studios (AC3), a website producer, for an estimated $3 million. ACS agreed to SPORT IN THE NEW MILLENNIUM O 9 pay the entire rights fee in advance to produce and market the team’s website. AC5, in return, kept 100% of the site—produced revenue from advertising, spon- sorships, and subscriptions. Although it might be expected that one of America’s most storied franchises could sell its Internet rights for a premium, the NFL, as a league entity, expects to raise the revenue bar much higher. The NFL Commis— sioner announced that he expected total league Internet revenues to hit $5 billion by 2004.“ Finally, from an international perspective, consider the revenue potential of the web for a renowned sports property like Manchester United, a perennial soccer powerhouse in the English Premier League. “Man U’s" website attraCts traffic from millions of avid soccer fans around the globe. As an illustration of its wide— spread support base, the team has 25,000 subscribers to its monthly fan magazine in Malaysia! Consider the financial windfall the club will realize when it is able to digitally stream live netcasts for its 60 games a year to all its supporters from Sheffield to Sydney. Even at a modest subscription fee of $ 10, the Internet telecast revenues will be gigantic. Doing More ‘Witb Less Never before have sport managers faced as many complex challenges as those that confront them today. They face the daunting challenge of coping with declines in traditional revenue sources—tax support, media revenues, and in many cases, gate receiptsfl—at the same time that costs are rapidly escalating. Maintaining programs even at current levels requires that sport managers learn to do more with less. At the beginning of the new millennium, only a handful of major league teams and only 48 of the 900—plus NCAA programs25 operated without a deficit. As will be seen in the next chapter, a majority of herb professional and amateur sports teams struggle to break even financially. The fiscal challenge has caused managers to look beyond traditional financing concepts and strategies and to supplement them with new imaginative ap— proaches. It is the basic theme of this text that managers of sport organizations are required to seek out scarce resources from a wide range of possible sources and to use their marketing and financing skills to ensure that the scarce resources ac— quired are allocated in such a way that they yield optimum social and economic benefits. These are exactly the requirements of an entrepreneur. Indeed, we view the contemporary sport manager as an entrepreneur. Increasingly, effectiveness in professional, collegiate, and Other forms of amateur sport will be dependent upon managers’ ability to aggressively seek out resources for their organizations. A major emphasis of this book is on providing readers with an in—depth under— standing of the many traditional and innovative revenue acquisition methods available to sports organizations. It is the authors’ belief that managers who are confident in their understanding of when and how to use a combination of these financing options will be in the best position to sustain and enhance the viability of their sports organizations. The following quotation caught the authors’ attention. It is extracted from a piece written in a national newspaper by a well—known commentator:26 10 0 CHAPTER ONE Organization of the Book Out of the clubs which form the League, it would probably be over the mark to say that onersixth are beginning this season with a balance on the right side of their accounts. One result is that they are anxious to offer lower wages to their players. In spite of that some players are keeping up the prices happily. My point is that football is being ruined by being a commercial specula- tion. Local team spirit is being shattered by the purchases of players from outside, and is being replaced by merely mercenary ambitions on the part of the players. A large proportion of the clubs are so hard up that they can never hope to buy good enough players to rise to the top... We have developed, on the one hand, into a ring of financiers, who have captured sport for its value in the market, and, on the other hand, into a raucous, grasping multitude, who are good enough at pushing through the turnstiles, or bellowing at a player, or even battering a referee, but who have no notion of taking any decent exercise for themselves at any time?‘5 There are many in North America who would concur with the sentiments ex- pressed by the writer and advocate that such flimsy foundations make the con- traction of professional sports inevitable and perhaps desirable. However, the article appeared in The Daily Telegraph, an English national newspaper; its context was the English Premier League; and it was published in September 1900! The writer was bemoaning the transfer of a player from one club to another for $500; and a team spending $6,000 on a new ground. In 2002, an English Premier League player was transferred for a fee of over $50 million, and the new Wembley soccer stadium is projected to cost $1 billion. A large proportion of the clubs in 1900 were “so hard up that they could never hope to buy good enough players,” but 90% of them are still in business 102 years later.26 Clearly, sports managers have responded to the challenge to find new revenues in the past, and the authors are confident they will do so in the future. The golden era of unparalleled growth and optimism that characterized the 19903 has given way to a future that is less certain. Successful managers will have to find ways to deal with greater competition in the marketplace than ever before, con— tentious player-management relations over distribution of revenues, and ticket prices that exceed the price-tolerance levels of many consumers. Helping man— agers to effectively cope with the reality of plateauing revenues and rising costs is the essential thrust of this book. Although the focus of the book is on the two most visible segments of the sport industry, intercollegiate and professional sports, the methods and strategies of rev» enue acquisition discussed in its chapters can be adapted to a wide range of pub— lic and private sport organizations. Throughout the book, numerous references and examples are drawn from a variety of sport settings. SPORT IN THE NEW MILLENNIUM l 11 Sport organizations are likely to acquire financial resources from three generic sources, which are shown in Figure 1—2: the public sector, the private sector, and the sport enterprise. Figure 1-2 Sources of Revenue for Sports Organizations Private Sector Sources Public Sources Sports Enterprise Sources ' Investment capital _ ' “Hard” taxes ' Tickets, concessions ' Corporate sponsorships " “Soft” taxes 0 P815 - Donations 0 Grants, subsidies ' Naming rights ' Tax abatements ' Luxury seating ‘ Licensed merchandise ° Media fees The public sector has traditionally assumed a significant role in the financing of sport organizations. Although government support may be axiomatic in the pub- lic recreation agency and collegiate contexts, some are surprised to find it is so per- vasive in the professional sports arena. Consider the following: Modern professional sport in the United States exists as we know it as a re- sult of the public policies of federal, state, and loCal governments. With- out favorable tax treatment of the professional sports industry, antitrust exemptions for the NFL—AFL merger and Major League Baseball, and the broad antitrust exemption for the packaging of telecast and broadcast rights to league games, the economics and business operations of profes- sional sports leagues would be dramatically different. Similarly, without the public financing of playing facilities, below-market rents for the facil- ities, tax exemptions, and other forms of subsidies provided by local and state governments, the economics and business operations of professional sports would be significantly different. This is just as true of those sports organizations and events that are not considered to be major league (i.e., the secondary sports market) as it is for the major league sports and pre- mier sporting events.27 At the local government level, cities and counties have a long tradition of commita ting substantial tax monies in support of sport from youth programs to the con— struction and operation of stadiums and arenas for professional teams. However, in the past decade the sports landscape has been transformed by the commercial alignment of private companies with sports organizations in the form of event sponsorships (e. g., the Nokia Sugar Bowl) and stadium naming agreements (e. g., Reliant Stadium) that were valued at $8 billion per year by 2000. Finally, sports properties can generate substantial revenue directly from their own operations through the sale of admission tickets, concessions, licensed merchandise, and media rights. Since the mid-19905, prices for attending sports events have risen at un- precedented rates. Ticket prices to major league sporting events doubled in the latter half of the 19903. High—revenue—yielding premium seating options (club seats, lux- ury suites) displaced less expensive seating in all stadiums and arenas built in the 19908. PSLs (permanent seat licenses), COls (contractually obligated income streams), and a number of other revenue-enhancing innovations have become stan- dard features throughout professional and collegiate sport in North America. 12 I CHAPTER ONE Before examining the major sources of revenue available to sport managers, chap- ter 2 provides a comprehensive overview of the two most visible segments of or- ganized sport, professional sports and intercollegiate athletics. The intent of this introductory chapter is to furnish readers with insights into the many financial challenges and opportunities facing the thousands of sports leagues and teams op— erating in the United States and Canada at the major, minor, and collegiate levels. The economic status and prospects of professional and collegiate sports are ana- lyzed, and recommendations for sustaining the financial viability of each sector are provided. Section II of the book focuses on obtaining capital resources from the public sec~ tor and from investors. It describes the many public and private sources of capital for constructing and/or renovating sports venues. Chapter 3 examines trends in the cost and number of professional and collegiate facilities and discusses “who should pay” for the development of new sports facilities. Should sport facilities be financed primarily from public tax sources, or should teams and/or private own- ers pay their own way? The sources of momentum undergirding the large public investment in sport facilities are analyzed, and the contentious issues of opportu- nity costs and equity that invariably accompany public subsidy decisions are dis- cussed. Invariably, economic impact analyses are undertaken to measure the magnitude of economic benefits purported to accrue from facilities, and these are central to debates on the public subsidy issue. For this reason, chapter 4 presents the principles of economic impact analysis and highlights the common errors that are made in applying this technique. The chapter provides a clear explanation of the steps involved in conducting legitimate economic analyses. Alternative justifi— cations for public subsidy are explored in chapter 5, where it is suggested that the most powerful of these may be the "psychic income” residents receive from their association with a team or event. When managers seek public sector funding, it is important that they have some understanding of the alternative options available for acquiring these tax dollars. Thus, chapter 6 provides an overview of the basic sources of taxation. Content in— cludes a discussion of how various property and sales taxes are administered by governments and the manner in which they have been used to finance sport facil— ity development. The chapter concludes with a review of the various kinds of tax— exempt and taxable bonds used to underwrite stadium and arena construction projects. Chapter 7 shifts the focus from public to private sources of capital de- velopment financing. The chapter identifies income generated by sport facilities from the sale of naming rights, luxury suites, and permanent seat licenses. Chap— ter 8 concludes the second section of the text by describing how government agencies and sports organizations can creatively combine public and private sources of capital to produce opportunities that neither could achieve alone. The chapter examines the principles that underlie funding partnerships between sports properties and public sector authorities. Numerous examples of successful joint venture arrangements are provided to illustrate how managers can leverage partnerships with other entities. Section III of the book focuses on the financial resources that accrue directly from the operation of sport enterprises. Sports properties have historically relied on charged admissions, the sale of concessions, and the sale of radio and TV rights to finance their annual budget requirements. These traditional revenue sources are SPORT lIN THE NEW MILLENNIUM C 13 discussed in chapter 9 (“Revenues From Ticket Admissions”), chapter 10 (“Sale of Broadcast Rights”) and chapter 11 (“Sale of Food Service and Souvenir Conces— ‘ n SIDES . Section IV is concerned with the solicitation of external resources. An increasingly prominent source of revenue for amateur and professional sports organizations is the sale of corporate sponsorships. Given the growing importance and sophistica- tion of sponsorship sales and execution, four chapters are devoted to the topic. Chapter 12 prevides an overview of the factors that have stimulated sponsorship growth and a detailed discussion of the benefits and risks associated with spon- sorship agreements. The importance of matching the products and target markets of corporate sponsors, with those of the sports organization is the topic of chap‘ ter 13. The strategies and tactics involved in successfully soliciting sponsorships from corporations are covered in chapter 14. The sponsorship section concludes with a discussion in chapter 15 of the methods that corporations use to measure the impacts accruing from their sponsorship of sporting events. For many youth—serving and collegiate sports organizations, fundraising consti- tutes an integral part of their annual operating budgets. Thus, the book concludes with a description of how sport managers can effectiver organize and implement both annual donor and major gift programs from support groups. Forms of major giving, including endowments and trusts, are covered. 1. Li, M., Hofacre, 5., 86 Mahony, D. (2001). Economics ofrporr. Morgantown, WV: Fitness In- References formation Technology. 7 2. Broughton, 13., Lee, }., 8c Netheny, R. (1999, December 204.6). The question: How big is the US sports industry? SportrBwinesrfournoL 23—29. 3. The making of the $213 billion Sports business industry. (1999, December 20—26). Sports- Business journal, 24—25. 4. Noll, R., 8c Zimbaiist, A. (1997). Sports, jobs, taxes: The real connection. In R. Noll 66 A. Zimbalist (Eds), Sports, jobs 6' mxer: The economic impact ofsport teams and stadium: (pp. 494-508). Washington, DC: The Brookings Institution. 5. National Sporting Goods Association. (2002). The Sporting Goods Market in 2002. Mt. Prospect, IL: Author. 6. Spanberg, E. (1998, November 9—15). Advertisers target teen trendsetters 1998. SportrBwiners journal, 24. 7. Stouffer, J. (1998, November 9-15). X faithful may be young, but they’re smart and savvy about their sports. SporrrBusinerrjournai’, 29. 8. Ruibal, S. (2000, August [7). Trying to stay hip. USA Today. 3C. 9. Brown, P. (2000). This is extremer sporting. New York Times Section 4, 2. 10. Howard, D. (1999). The changing fanscape for big-league sports: Implications for sport man- agers. journal grSportMnnagement, 13(1), 78-91. II. LEG Sponsors/oily Report. (2000, December 20). l. 12. 17mm Marketing Report. (2000, May). 7—8. 13. Funk, D. (june, 1997). Economics ofprofisriomzi sportfianebires: The role ofluxwy mites and clue seat: in the construction ofrrodium: and arenas. Paper presented at the 12th Annual North American Society for Sport Managers Conference, San Antonio, TX. 14. Stevens, E., &: Grover, R. (1998, February 16). The entertainment glut. Business WE’ek, 88-95. 15. Danielson, M.N. (1997). Home team: Professional sport: and the American metropolis. Princev ton, NJ: Princeton University Press. 16. Sports Business Research Network: (rid). Market research database. Retrieved September 30, 2001, from htth/“nvwsbnetcom. 17. Duncan, M., 65 Campbell, R. (1999). Internet users: How to reach them and integrate the Internet into the marketing strategy of a sports business. Sports Mar/eating Quarterly, 8(2), 35- 42. 14 0 CHAPTER ONE ...
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