Structure of Sports Business Lesson 3.2 – The Financial Structure of Sports Business Copyright © 2015 by Sports Career Consulting, LLC

The Financial Structure of Sports Business LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business Professional team sports are finding it increasingly difficult to achieve financial success and turn a profit Copyright © 2015 by Sports Career Consulting, LLC

The Financial Structure of Sports Business LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business Copyright © 2015 by Sports Career Consulting, LLC

The Financial Structure of Sports Business LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business Despite selling out every home game and winning a NBA championship (including 13 home sellout playoff games), Miami Heat owner Mickey Arison told CNBC that the franchise lost money in 2012 Copyright © 2015 by Sports Career Consulting, LLC 4

The Financial Structure of Sports Business LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business After the 2014-15 season, NBA commissioner Adam Silver was quoted as saying a “significant” number of teams were losing money, leading many to speculate the league could be headed for another lockout when the existing collective bargaining agreement expires in 2017 Copyright © 2015 by Sports Career Consulting, LLC 5

The Financial Structure of Sports Business LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business A large gap exists in revenues between NHL franchises, something the league hoped to address in negotiations with the NHL Players Association in 2012 in an effort to help more teams achieve profitability (for an in-depth look at the NHL’s revenue model, click here Copyright © 2015 by Sports Career Consulting, LLC 6

The Financial Structure of Sports Business LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business Last season, Doug Cifu, owner of the NHL’s Florida Panthers, claimed in an interview with CBC Sports to be losing $114,000 per day !! Copyright © 2015 by Sports Career Consulting, LLC 7

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure As a result of increasing revenue streams, inflated media rights fees and new means for generating revenues in professional sports, overall franchise values have risen exponentially in the past decade, a trend that is expected to continue Revenue Stream: The means for an organization’s cash inflow, typically as a result of the sale of company products or services Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Discussion Topic What revenue streams do you think sports organizations rely on to achieve profitability? Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Revenue Streams For Sports Teams Ticket Sales Sponsorship Licensing and Merchandise Concessions Parking Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Additional Revenue Streams For Sports Teams For most major league professional sports teams, television money is now a primary source of revenue, now even more lucrative than ticket sales which had always been the financial backbone for the majority of franchises Copyright © 2015 by Sports Career Consulting, LLC 11

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Additional Revenue Streams For Sports Teams It isn’t just the national television deals that are generating an influx of revenue for some teams; in many cases local television deals can be extremely lucrative as well. Local Major League Baseball deals reportedly average more than $60 million in annual revenue per team. Copyright © 2015 by Sports Career Consulting, LLC 12

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Additional Revenue Streams For Sports Teams Luxury Suites Club / VIP / Premium Seating Copyright © 2015 by Sports Career Consulting, LLC

Luxury Suites & Premium Seating LESSON 3.2 Intro to Basic SEM Principles Luxury Suites & Premium Seating Often times the lack of suites or premium seating options within a venue or facility will prompt a sports franchise to lobby for a new stadium Copyright © 2015 by Sports Career Consulting, LLC

Why would a franchise do that? LESSON 3.2 Intro to Basic SEM Principles Discussion Topic Can you think of an instance where a pro sports team has threatened to move the franchise if it didn’t receive funding for a new stadium or arena? Why would a franchise do that? Copyright © 2015 by Sports Career Consulting, LLC

Why do you think they were lobbying for a new arena? LESSON 3.2 Intro to Basic SEM Principles Discussion Topic The NBA’s Seattle Sonics made an aggressive bid to gain funding for a new arena from 2007 to 2008. Why do you think they were lobbying for a new arena? Copyright © 2008 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Discussion Topic Key Arena lacked the modern day amenities that help to generate additional revenue for a team, such as luxury suites and club seating, putting the Sonics in a position where it was difficult to achieve profitability Copyright © 2008 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Discussion Topic Eventually, the Sonics, unable to reach an agreement for a new arena, were relocated by its new ownership group to Oklahoma City where they are now known as the “Oklahoma City Thunder” Copyright © 2008 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Tom Chuckas, president of the Maryland Jockey Club, said in an interview with The Associated Press: "I believe there's an opportunity for the Preakness to generate additional income, which in turn would flow through the rest of the year and improve the condition of the Maryland Jockey Club. To do that, there has to be additional amenities at Pimlico. Churchill Downs has 65 skyboxes that they sell to corporate partners and corporate sponsors. At Pimlico, I don't have any amenity like that." Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Teams today strive to create value wherever possible and the addition of premium seating options provides a lucrative revenue stream. AEG (owners and operators of the Staples Center which plays home to the LA Lakers, Clippers and Kings as well as concerts and other events) told Hollywood Reporter that the venue’s various premium seating areas generated over $100 million in revenue last year. Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Many teams are now taking seating areas that had been less desirable in the past and converting them to premium seating areas. In 2015, the New England Patriots and Pittsburgh Steelers turned end-zone seating sections into luxurious new “club” seating areas. Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure According to the Boston Globe, the new indoor space behind the south end zone at Gillette Stadium (home of the Patriots) will be a “members-only” club with annual fees of $1,500 and a requirement to purchase a minimum of two memberships (fees are in addition to the cost of buying season tickets every year) Copyright © 2015 by Sports Career Consulting, LLC 22

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Additional Revenue Streams For Sports Teams Television Contracts Additional media contracts (satellite, radio, internet) Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Television Contracts TV contracts provide big money for franchises in the game of sports business, now accounting for a major portion of a team’s overall annual revenue Copyright © 2015 by Sports Career Consulting, LLC

Television Contracts Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Television Contracts In 1973, the NBA signed a contract with CBS, yielding $27 million in revenue over three years In 2006, the NBA inked a deal with ABC/ESPN worth $2.4 billion through 2008 (the contract was extended in 2007 to run through the 2015-16 season but terms were not disclosed) Copyright © 2015 by Sports Career Consulting, LLC

Television Contracts Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Television Contracts The Pac-12 conference agreed to a 12-year television contract with Fox and ESPN worth about $3 billion, allowing the conference to quadruple its media rights fees and start its own network The contract, which will begin with the 2012-13 season, will be worth about $250 million per year, guaranteeing each of the 12 schools in the conference about $21 million each per season (in 2010 the entire conference generated just $60 million in rights fees) Copyright © 2015 by Sports Career Consulting, LLC

Television Contracts Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Television Contracts Although the terms were not disclosed, the Sports Business Journal revealed the Los Angeles Dodgers’ plans to launch their own regional sports network worth an estimated $7 billion over 25 years. Copyright © 2015 by Sports Career Consulting, LLC

Television Contracts Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Television Contracts According to the book The Cartel: Inside the Rise and Imminent Fall of the NCAA by Taylor Branch: “In 2010, despite the faltering economy, a single college athletic league, the football-crazed Southeastern Conference (SEC), became the first to crack the billion-dollar barrier in athletic receipts. The Big Ten pursued closely at $905 million. That money comes from a combination of ticket sales, concession sales, merchandise, licensing fees, and other sources—but the great bulk of it comes from television contracts.” Copyright © 2015 by Sports Career Consulting, LLC

Television Contracts Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Television Contracts As competition for rights deals for live sports increases (NBC, CBS and Fox have all created sports networks to challenge ESPN), rights deals will likely continue to increase exponentially. According to businessinsider.com, last year ESPN paid $15.2 billion over 10 years for the rights to Monday Night football, a 73% annual increase over the previous deal. Copyright © 2015 by Sports Career Consulting, LLC 29

Additional Media Contracts LESSON 3.2 Intro to Basic SEM Principles Additional Media Contracts In 2007, Sirius Satellite Radio reached an agreement to broadcast NASCAR races and related events over a five-year period for $107.5 million (the deal was extended in 2012 through 2016 but terms were not disclosed) Copyright © 2015 by Sports Career Consulting, LLC

Additional Media Contracts LESSON 3.2 Intro to Basic SEM Principles Additional Media Contracts CBS paid $6 billion for the rights to broadcast the NCAA Tournament (March Madness) over an 11 year period, a deal that ends in 2013 that also included the right to stream games over the Internet (the online broadcasts generated an estimated $60 million in ad revenue with its March Madness on Demand package in 2012) Copyright © 2015 by Sports Career Consulting, LLC

Additional Media Contracts LESSON 3.2 Intro to Basic SEM Principles Additional Media Contracts The Yankee’s YES Network struck an agreement with Major League Baseball to make their games available on the Internet within the New York area. The franchise now gains a significant new revenue stream, from the millions of broadband users in the market who are not sitting in front of their televisions but are in offices and other locations with a laptop or a wireless device Copyright © 2015 by Sports Career Consulting, LLC

Additional Revenues Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Additional Revenues The Green Bay Packers renovated Lambeau Field in 2003 with the goal of creating an added revenue stream by building an atrium that could host events (from corporate outings to weddings) year round. Thanks in large part to the number of events hosted in the atrium, Lambeau is enjoying its busiest years ever and the franchise is generating record profits. Thanks to record profits, the team was able to invest $140 million in atrium expansion and renovations in 2013 (work is expected to be completed in 2015) without turning to taxpayers to help with funding the project. Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Additional Revenues The Boston Red Sox created Fenway Sports Group, a marketing firm that develops publicity campaigns for such organizations as Boston College, NASCAR, online ads, and many more areas (and owns equity in other properties like Red Sox Destinations and Roush Fenway Racing) They were profitable in their first year, and brought in more that $200 million. Copyright © 2015 by Sports Career Consulting, LLC

Additional Revenues Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Additional Revenues In 2014, the Kansas City Chiefs allowed fans to use the suites in Arrowhead Stadium as draft central for fantasy football leagues by charging $85 per person (minimum 8 people) Copyright © 2015 by Sports Career Consulting, LLC 35

LESSON 3.2 Intro to Basic SEM Principles Additional Revenues According to a Forbes report, the money that all MLB teams made from the $450 million sale of the Montreal Expos in 2006 was invested in hedge funds that are now worth more than $1 billion Copyright © 2015 by Sports Career Consulting, LLC

Additional Revenues Intro to Basic SEM Principles LESSON 3.2 Intro to Basic SEM Principles Additional Revenues Chadd Scott reported that, in 2015, Mississippi State unveiled projections to build residential lofts with views overlooking the Bulldogs’ baseball field available for year-round occupation Copyright © 2015 by Sports Career Consulting, LLC 37

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Sports Team Expenditures Facility Rental / leasing arrangements Staff / Player Salaries (Payroll) Marketing Investment in the Customer Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Television Contracts The driving issue for NHL owners as it related to the last lockout wasn't revenues but expenses as many small market teams were unable to achieve profitability thanks in large part to high player salaries Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure Sports Team Expenditures General Operating Expense Stadium/venue/facility financing Information management/research Team expenses (travel etc.) Maintenance and security Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles To gain a better understanding of the financial structure of sports business, let’s review the NFL’s Green Bay Packers’ financials Copyright © 2015 by Sports Career Consulting, LLC

Packers’ total revenue in the 2014-2015 season: $375.7 million LESSON 3.2 Intro to Basic SEM Principles Revenue Packers’ total revenue in the 2014-2015 season: $375.7 million Key revenue streams: National revenue from the NFL: $226 million Which increased from last season thanks in large part to the NFL's new apparel contract with Nike and an increase in fees generated from additional carriage of the NFL Network (television revenues are shared with all teams in the league) Local revenue: $149 million (Includes ticket sales, suite sales, premium seating sales, sponsorship etc. and enjoyed an increase from the previous season in large part because of the addition of 7,000 seats which boosted ticket and concession revenues) Copyright © 2015 by Sports Career Consulting, LLC

(An 12.7% increase from the previous season) Primary expense (cost): LESSON 3.2 Intro to Basic SEM Principles Expenses Green Bay Packers total expenses for 2014-2015: $336.3 million (An 12.7% increase from the previous season) Primary expense (cost): Player Payroll expense: (includes team expenses): $150 million Net Income / Profit Packers’ net income: $29.2 million Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles PROFIT Green Bay Packers’ profit for the 2014-15 NFL season: $39.4 million, up 53.9 percent from last season Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure In 2004, Frank McCourt purchased the LA Dodgers for $430 million In 2012, he sold the franchise to an ownership group that included former Lakers star Magic Johnson for a reported $2 billion Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure In 2013, the San Diego Padres were sold for $800 million in a deal that ranked as the third largest in the history of Major League Baseball despite having appeared in the post-season just twice since 1999 Copyright © 2015 by Sports Career Consulting, LLC

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure In 1981, former LA Clippers owner Donald Sterling paid $12.5 million for the team. After his involvement in a very public racism scandal, the NBA forced him to sell the team. At the time, it was valued by Forbes at $575 million, yet the sale price for the franchise fetched a whopping $2 billion (former Microsoft executive Steve Ballmer purchased the team). Copyright © 2015 by Sports Career Consulting, LLC 47

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure In 2015, Bruce Levenson sold the Atlanta Hawks for $850 million; ten years ago he acquired the franchise for $189 million Copyright © 2015 by Sports Career Consulting, LLC 48

Sports Business Financial Structure LESSON 3.2 Intro to Basic SEM Principles Sports Business Financial Structure From 2014 to 2015, the average value of a NBA franchise (according to Forbes) skyrocketed from $634 million to $1.1 billion, a 74% increase in just one year. It is the biggest one-year gain since Forbes began valuing teams in the four major U.S. sports leagues in 1998. Copyright © 2015 by Sports Career Consulting, LLC 49

Blank Slide Available for Teacher Edits LESSON 3.2 Intro to Basic SEM Principles Blank Slide Available for Teacher Edits Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 REVIEW (ANSWERS) Intro to SEM Business Principles 1) Explain the concept of revenue streams and why they are important to an organization Revenue streams are the means for an organization’s cash inflow, typically as a result of the sale of company products or services. Without revenue, an organization cannot achieve profitability. Copyright © 2015 by Sports Career Consulting, LLC

LESSON 3.2 REVIEW (ANSWERS) Intro to SEM Business Principles 2) Understand the general financial structure of a sports franchise Sports teams could rely on a number of avenues for generating revenue: Ticket sales, sponsorship, licensing and merchandise, concessions, parking, fan clubs, kid’s clubs, luxury suite sales, premium and club seating sales, television contracts and additional media contracts (satellite, radio, Internet) Copyright © 2015 by Sports Career Consulting, LLC