Structure of Sports Business

Structure of Sports Business
Lesson 3.2 – The Financial Structure of Sports Business Copyright © 2016 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 © 2016 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business In 2012, Forbes reported that more than 50% of NHL franchises suffered financial losses the previous year (18 of the 30 franchises operated at a loss). Because so many franchises were reportedly losing money, the owners chose to lockout the players in an effort to create a new financial plan that would create a healthier economic situation for each NHL franchise, ultimately resulting in the league canceling half of the season. Copyright © 2016 by Sports Career Consulting, LLC 4

LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business Though soccer's popularity is growing in the U.S., Major League Soccer players' average salary is just $310,000. Average player salaries for basketball, baseball, and hockey are about $4.6 million, $4.2 million, and $2.6 million, respectively. Yet, reports indicate just half the MLS clubs are currently profitable. Copyright © 2016 by Sports Career Consulting, LLC 5

LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business After the 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 © 2016 by Sports Career Consulting, LLC 6

LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business According to a Forbes report, the NBA salary cap is expected to jump to $108 million for the season which will push average player salaries above $8 million. With the unprecedented growth in salary cap numbers (and explosive increase in player salaries), commissioner Silver announced optimism that a lockout would be avoided. Copyright © 2016 by Sports Career Consulting, LLC 7

LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business The Royals Review reported the only way the MLB's Kansas City Royals will make profit in 2016 is if the team makes another deep playoff run as they will need to beat ticket revenue projections of $88 million in hopes of off-setting their largest cost of $130 million for player salaries. Copyright © 2016 by Sports Career Consulting, LLC 8

LESSON 3.2 Intro to Basic SEM Principles The Financial Structure of Sports Business The ECHL's South Carolina Stingrays have reportedly been losing between $400,000 and $700,000 annually since the team first took the ice in Current ownership is seeking assistance from the city of North Charleston to help cover half of their operating losses (estimated at $500,000), suggesting the franchise lost money when they averaged 9,000+ fans per game whilethis season they are averaging a paltry 3,300 per game. Copyright © 2016 by Sports Career Consulting, LLC 9

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC 14

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 © 2016 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 season but terms were not disclosed) Copyright © 2016 by Sports Career Consulting, LLC

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 is 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 © 2016 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Television Contracts Last season, the Dallas Mavericks signed a contract extension with Fox Sports Southwest in a deal that the Dallas Business Journal estimated to be worth $50 million per year. Copyright © 2016 by Sports Career Consulting, LLC

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 ESPN paid $15.2 billion over 10 years for the rights to Monday Night football, a 73% annual increase over the previous deal. Copyright © 2016 by Sports Career Consulting, LLC 19

LESSON 3.2 Intro to Basic SEM Principles Television Contracts In 2016, ESPN signed a six-year deal with the Big Ten conference worth an estimated $2.64 billion, three times the value of the previous deal. Copyright © 2016 by Sports Career Consulting, LLC 20

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC 22

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 © 2016 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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC 28

Premium and Club Seating
LESSON 3.2 Intro to Basic SEM Principles Premium and Club Seating In 2016, Minor League Baseball’ s Reading Fightin Phils invested $200,000 in the construction of their “ Savage61 Dugout Suite,” creating the most upscale seating area in the stadium. Copyright © 2016 by Sports Career Consulting, LLC 29

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 © 2016 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

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 © 2016 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Additional Media Contracts Last year, Sports Business Daily reported that SiriusXM extended its media-rights deal with the NHL to broadcast games across through the season (exact terms of the deal were not disclosed). Copyright © 2016 by Sports Career Consulting, LLC 35

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Additional Media Contracts Collegiate and amateur athletic programs rely heavily on fundraising and donations, primarily through boosters and alumni, for budget support. In 2016, Rutgers University announced a $100 million fundraising initiative called "R Big Ten Build.” Copyright © 2016 by Sports Career Consulting, LLC 38

LESSON 3.2 Intro to Basic SEM Principles Additional Media Contracts According to nj.com, it took the university just a few months to raise over $50 million, an amount that included 10 donations of $1 million or more and three of the largest donations the school had ever received. People that donate to university sports programs will typically receive preferential treatment from the athletic department –perks can include better seats for games and higher priority to attend in-demand events. Copyright © 2016 by Sports Career Consulting, LLC 39

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 the franchise is generating record profits. Copyright © 2016 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Additional Revenues The franchise has also committed $65 million to another expansion project that will result in the development of “ Titletown District” , a 10-acre plaza that will host year-round community events. Copyright © 2016 by Sports Career Consulting, LLC 41

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 © 2016 by Sports Career Consulting, LLC

LESSON 3.2 Intro to Basic SEM Principles Additional Revenues Many teams host viewing parties at their home arenas for fans during away games (or other venues when home games are sold out) to drive additional concession, merchandise and parking revenues. Copyright © 2016 by Sports Career Consulting, LLC 43

LESSON 3.2 Intro to Basic SEM Principles Additional Revenues In some cases, viewing parties create opportunities for the organization to generate goodwill by donating portions of the proceeds to local charities. The Cleveland Cavaliers hosted a watch party for game 7 of the 2016 NBA Finals with proceeds from the ticket sales benefiting local charities. Copyright © 2016 by Sports Career Consulting, LLC 44

LESSON 3.2 Intro to Basic SEM Principles Additional Revenues The Seattle Seahawks allow fans to use the suites at CenturyLink Field as draft central for fantasy football leagues, charging $85 per “ ticket” with a minimum of 8 people. Copyright © 2016 by Sports Career Consulting, LLC 45

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 © 2016 by Sports Career Consulting, LLC 46

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 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 © 2016 by Sports Career Consulting, LLC

Packers’ total revenue in the 2014-2016 season: $375.7 million
LESSON 3.2 Intro to Basic SEM Principles Revenue Packers’ total revenue in the 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 © 2016 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 : $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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC

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 © 2016 by Sports Career Consulting, LLC 55

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 © 2016 by Sports Career Consulting, LLC 56

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 © 2016 by Sports Career Consulting, LLC 57

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 © 2016 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 © 2016 by Sports Career Consulting, LLC

Structure of Sports Business

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