Lonni Steven Wilson, Medaille College chapter 1 Financial Issues in Sport

Key Chapter Objectives Understand how industry trends and economic conditions affect sport. Understand public versus private ownership of sport businesses. Understand stadium construction trends. Describe concerns associated with economic impact analysis for planned stadiums and arenas.

Unique Issues Sport Finance deals with unique issues: Valuation of sports teams Borrowing of money to finance sport ventures Issuance of stock by pro sports teams Mergers of sport businesses Sports apparel Sports sponsorship Stadium funding Nevertheless, these issues mirror the financial issues faced by all other businesses.

Managing Money Money management is one of the most critical issues in any business. Making and managing money provides the framework for company growth. Financial planning becomes critical to corporate success. Internal and external constraints must be examined.

Key Terms internal constraints—Include a company’s past credit history, sales volume, product lines, accounts receivable, inventory balances, and management structure. external constraints—Include inflationary conditions, significant competition, high interest rates, weak economic indicators, shrinking of the money supply by the government, and the political environment.

The Benefit of Big Payrolls San Diego Padres (1998) Spent $53 million on salaries as compared with $32.8 million in Won the 1998 National League Championship. Thus, gained public support (as a “winning team”) and won the vote to build a new stadium using public funds. Soon after the vote, the team was dismantled and the payroll reduced. Nonetheless, the $20 million 1998 payroll investment was returned several times over by the revenues earned from the new stadium.

Key Terms accounting—The process of calculating revenue and expenses through receipts and other information to determine the financial numbers for a company or entity. finance—The process of examining the numbers and determining what they mean and what the past was and future will be for a company or entity. economics—Blends art and science to help explain and chart the most effective and efficient use of scarce resources.

Sport Industry Trends Big payrolls in professional sport –Yankees, approaching $200 million in 2007 Large budgets in collegiate athletics –Ohio State, $100 million in 2006 Team values break the $1 billion mark –Manchester United, $1.47 billion Billion-dollar broadcasting deals –NCAA, $2.8 billion from CBS for seven years Stocks for sale –Boston Celtics and Orlando Predators were once publicly traded; International Speedway Corporation, which owns 12 NASCAR tracks (continued)

Sport Industry Trends (continued) Mergers –Nike purchased Converse in 2003 –adidas and Reebok merged in 2005 Sports apparel endorsements reduced –In the 1980s, almost all NBA players had a shoe deal; by 1998, only half of the 400 NBA players did Sports sponsorship –PepsiCo with the NFL through 2011 in $560 million deal –PepsiCo’s Gatorade now with the NFL through 2011, bringing the total of both to over $1 billion Financing new stadiums and arenas –Through 2001, 102 of the 111 pro sports franchises recently moved into new or renovated stadiums

Financing Stadiums The cost to taxpayers From 1995 to 2000, the cost to taxpayers was estimated at $9 billion (Kraker, 1998). Another estimate placed the amount between 1998 to 2006 at $7 billion (Noll & Zimbalist, 1998). Colorado Rockies financed their new stadium via the following: 1% six-county tax $53 million from the team $1.5 million annually from Coors for naming rights (continued)

Financing Stadiums (continued) Heartland Institute Study (1990) The study examined 14 stadiums from 1954 through Together, they had accumulated a net value of $139.3 million. For example, Buffalo taxpayers lost the least ($836,021), while Louisiana lost $70.35 million. Baade (1994) Of 30 facilities studied, 27 showed no significant relationship between income growth and building the facility. Three experienced reduced income. (continued)

Financing Stadiums (continued) University of Dayton Researchers (2004) The study concluded that public subsidies for stadiums are not necessary. Teams recover all or almost all of their construction costs within 12 years of completing a facility. Team contribution to building costs The average level of team contribution to new NFL stadiums built through 2001 was only 29%, or $82 million, of the typical construction cost for a football stadium (“NFL Stadium Financing,” 2001).

Argued Benefits of New or Refurbished Stadiums Become a “big-league” city Increased economic activity Increased sales in businesses Increased income and job opportunities Employment tax revenues Promotion of community image (Baim, 1994)

Contradictions to the Claims of Benefits Inflated projections For example, the combined revenues of the five major sports teams in Chicago account for 0.08% of the personal income throughout the city (Kraker, 1998). Another study concluded that the departure of an NBA team from a city results in no measurable impact on the region’s per capita income (“Football Strike?” 2001). Other problems Use of incorrect multipliers Assumption that facility attendees would not have spent money elsewhere in the city

Questions for In-Class Discussion 1.If you had lots of money and wanted to invest in a sport, which sports team or event would you buy or sponsor? Why? If you did not have much money, would you make a sport-related investment or take a more traditional approach, such as banks or the stocks of large corporations? 2.Do you think it is a wise investment to build new stadiums or arenas? Back your answer with some analysis of the economic justification as well as the financial justification. 3.Do you think there are too many sports teams or events? Does a high number of teams and events hurt the industry by diluting the market?