Today is Super Bowl Sunday, and no matter what team wins, we’re all in it for the commercials, Bruce Springsteen, and the obscene gluttony that accompanies this annual sporting event. John Madden and crew will analyze offensive vs defensive strategies, and provide other great commentary. However, today we briefly examine the BUSINESS of the NFL and other pro sports, in the context of Strategy and Porter’s Five Forces.
Strategy is one of the capstone courses of the Villanova EMBA, and requires mastery of the skills learned in the previous four modules. Economics, Marketing, Valuation, hedging strategies, risk, and leadership all come into play as we examine various companies and scenarios. While some succeed, and others fail, the nature of inquiry into the how and why methodologies is where the real learning takes place.
Michael Porter of HBS is world famous for his “Porter’s Five Forces” framework, examining suppliers, customers, substitutes, new competitors, and rivals within an industry. While this initially seems obvious, the subtleties are most distinctive once a more detailed examination of the strategy and context take place. This past weekend in the WSJ, there is great article below examining the current state of Pro sports, and I invite you to consider it within the context of Porter’s Five Forces.
Now, if you’ll excuse me, I have to go execute on my personal Super Bowl strategy for the day, which is to consume so much beer so that I too, become too big to fail (hat tip JB).
WSJ: Are Pro Sports Too Big To Fail?
In an economic crisis, the weak die first. So it was no real surprise that the first sports casualties of the current recession came from minor professional leagues: Last month the WNBA shuttered its premier franchise, the Houston Comets, and the Arena Football League, which had been scratching out a living since 1987, canceled its 2009 season. (The LPGA is cutting three tour stops and $5 million in prize money from the 2009 tour, so they’re feeling the pinch, too.) The question is, were these failures part of a normal, recessionary, thinning of the herd? Or were they the early warning signs of a pro-sports bubble that may be about to burst?
Viewed from a certain angle, the major sports leagues (the National Football League, Major League Baseball, and the National Basketball Association) look healthy. On Sunday, the Super Bowl will become the highest-rated TV broadcast since last year’s Super Bowl, continuing the big game’s hyperdominance. Television ratings for regular-season NFL games remain solid, even though broadcasts have expanded to five networks. This winter, baseball’s top three free agents signed contracts totaling $423 million; up from the $395 million that the top three free agents received in 2007. Total attendance at MLB games in 2008 was off just slightly from the all-time high of 79.5 million. Last year’s NBA finals drew their highest TV audience in four years. However, there also have been troubling signs since the fall of Lehman Brothers last September. The Washington Redskins, which have the highest payroll costs in the NFL, laid off 20 front-office employees. The NFL cut ticket prices 10% toward the end of the season. Commissioner Roger Goodell let go 150 of the 1,100 workers at the league office. The Minnesota Vikings needed help selling out their first home playoff game in eight years — as did the Arizona Cardinals when they hosted their first-ever playoff game en route to the Super Bowl.
For its part, baseball is witnessing a serious erosion of TV ratings, which have been declining for over a decade. This year’s World Series was the lowest-rated contest ever. The New York Yankees are building one of the most expensive stadiums ever made — but have yet to sell out their luxury boxes.
TV ratings are down markedly for the National Basketball Association. Although last year’s NBA Finals ticked upward from 2007’s worst-ever mark, the Nielsen numbers are a fraction of what they were in the early 1980s. NBA attendance figures are flat, but teams at the bottom of the league are losing ground and falling below even professional hockey levels.
Yet teams keep building new stadiums. They’re charging bigger premiums — such as personal seat licenses — for high-end and luxury seats. Parking, concessions and player salaries keep going up, too. Is it all sustainable?
Perhaps. America’s obsession with sports has created a nearly continuous 90-year boom. There have been down moments, but neither the NFL nor MLB has ever contracted, i.e., eliminated, a team — the ultimate sign of failure. The National Basketball Association hasn’t eliminated a franchise either, since it took on its modern form in 1976.
During the Great Depression, baseball did take a significant hit: Attendance dropped 40% from 1930 to 1933 and didn’t return to pre-Depression levels until 1945. Player salaries declined 25%. But no teams went belly-up.
Matters might be different this time.
First, franchises have become accustomed to the public financing of stadiums and arenas. During the construction boom of the 1990s, some 50 ballparks, stadiums and arenas were built in the U.S., according to BusinessWeek. On average, taxpayers footed 70% of the bill — even though team owners reaped the benefits. In baseball, for example, Forbes calculates that the median ballpark is worth $100 million to a team, or a quarter of a franchise’s total value. In the ’90s, teams argued that new stadiums added to a city’s economic vibrancy. Yet studies now show that subsidies for sports stadiums actually create a slight drag on the local economy. And even if cities wanted to believe the boosters, the bad times should now make the current crop of publicly financed stadiums the last. The Vikings, for instance, have started asking Minnesota lawmakers about building a new facility for their team. The response has been laughter.
In recent years, teams have also become reliant on revenue from corporate clients, in the form of naming rights and luxury-box purchases. Nationwide, corporations spend roughly $10 billion a year on sports sponsorships. Those should be the first expenditures ditched by any company looking to save money. There’s some evidence that these cutbacks have already begun: No one has stepped up to buy the naming rights to the Giants’ or Jets’ new stadiums, which were projected to fetch $30 million each.
For the sports lucky enough to have national television contracts, TV revenues are safe — for now. The NFL’s current deals run through 2011. MLB has TV deals in place through 2013. The NBA is signed on through 2016. In the meantime, TV networks may find it hard to recoup their investments. Advertising money is always tight during a recession. If the Detroit auto makers don’t survive, there will be a lot of open air time on Sunday afternoons that truck ads used to fill. This week, just days before the Super Bowl, NBC was still in active negotiations to sell ad time that usually is snapped up far in advance.
If all of the above were not enough, major-league sports now face an existential threat to their business model: cheap, big-screen, high-definition televisions. Professional sports have been threatened by technology before — for years, MLB refused to allow radio broadcasts of games because team owners were afraid they would cut into ticket sales. Yet in the end, these “threats” — radio, television, color TV — wound up feeding demand for the product.
So why might HDTV be different? First, the cost analysis has changed. It’s now more expensive to attend, say, eight NFL or 20 MLB games than it is to buy a large, high-def flat-panel set. And unlike prior technologies, which offered low-resolution approximations of sporting events, high definition offers better fidelity than you get in person. Which may be why the NFL experimented this season with broadcasting games at movie theaters in 3-D.
Adding an extra layer of danger for pro sports is the fact that big-time college sports now represent a plausible alternative product. The collegiate levels have made great strides in the quality of play and, unlike the pros, they have relatively fixed costs.
Not everyone believes there’s a sports bubble. Smith College sports economist Andrew Zimbalist says that the success of pro sports “has been linked to the underlying success of the economy. As the economy falters, that will tend to drag down pro sports.” But Mr. Zimbalist doesn’t see any of the Big Three franchises going under, although he allows that the National Hockey League could be in danger of losing a team or two.
Steve Czaban disagrees. A nationally syndicated host on Fox Sports Radio, Mr. Czaban believes that demand for high-end tickets, both lucrative season packages and corporate luxury seats, will shrink. “The worst-case scenario, for example, for the NFL,” he says, “is there’s a dozen teams that can no longer sell out their home games.” That would cause TV problems, he adds, since the NFL restricts broadcasts on games that aren’t sold out. And pools of unsold tickets would create further downward pressure on ticket prices as consumers realized they don’t need to pay a premium for season packages to get seats. Problems could accelerate from there, particularly for teams in weaker markets.
“The U.S. government is buying banks, major retailers are going under, and a half-a-dozen newspapers are folding up shop,” Mr. Czaban says. “Why is it we think this could never happen to sports?”
Mr. Last is a staff writer at the Weekly Standard
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