Economy in crisis means troubled playing fields ahead for sports
You've probably seen curious things in recent days. Despairing traders with their heads in their hands on the floor of the New York Stock Exchange. Charter members of the Wall Street elite carrying their belongings in boxes as they walk out the doors of what used to be investment banks. House leaders strategizing across the aisle in an attempt to marshal the rank and file into action.
All very strange.
But none of that is more curious than the scene at Old Trafford a couple of Saturdays ago. As Manchester United, possibly the world's most valuable sports franchise and arguably the most famous one worldwide, took to its hallowed pitch, its home red shirts (an appropriate color, as it turns out) were emblazoned across the chests with the logo of American International Group, previously the largest insurance company in the U.S. and now a ward of the state. At the time of its collapse and public rescue, AIG was just midway through a four-year sponsorship deal with Man U that will pay the club upward of $100 million. Not that U.S. taxpayers' money is really going offshore, mind you, since Man U's owner is Malcolm Glazer, a Rochester-born businessman who also happens to own the Tampa Bay Buccaneers.
For the record, Man U declined ESPN.com's requests for an interview with Glazer and also declined to take any questions about its sponsorship.
"The Club is not commenting on AIG, other than to say that relations continue as they always have. It is business as usual, " director of communications Philip Townsend wrote in an e-mail, with the casual calm that comes with the knowledge that the last check has cleared.
"Business as usual" was also the line out of AIG.
Yup, the government has stepped in to keep AIG afloat, and the FBI is rooting around the offices of the insurer and other financial institutions that melted down in September, but nothing has changed. Just like it was "business as usual" and "nothing has changed" at Enron Field in Houston when Ken Lay and associates were perp-walked back in 2004.
AIG's continued presence on the front of Man U's shirts, when its own continued existence was still an open question, is just one of the weird scenes in the gold mine that used to be pro sports. You don't have to cross the ocean to find a disgraced Wall Street outfit intersecting with sports. Just look around. They're everywhere.
Right now, for example, they're trying to figure out what to do with the name of the 76ers' and Flyers' crib, the Arena Formerly Known As Wachovia Center. Do the naming rights Wachovia purchased go to Wells Fargo, which stepped in to try to take over the failing bank late this week, or to Citigroup, which thought it had a deal earlier in the week and so is contesting the Wells Fargo transaction? The same goes for Wachovia's piece of the Charlotte Bobcats. For now, presumably, nothing has changed. And if you committed to memory every last sentimental moment you witnessed at the last game at Yankee Stadium a couple of weeks back, you might recall a straight-faced sign beyond the outfield that reads in retrospect like some fan's idea of a topical joke written on a bedsheet:
That's just stuff in plain sight. Never mind the loans out to leagues, franchises and owners, or the books that aren't opened to the media but might contain records the FBI could stumble upon in its search for evidence of criminal activity in New York's financial district.
Whether the House of Representatives signed off on the bailout of Wall Street (it did, early Friday afternoon), whether the Dow Jones Index stabilizes or crashes right down to the Mendoza line, whether the $1.2 trillion in investors' losses in Monday's trading at the NYSE are recovered in whole or in part or will only be compounded, something will change, almost certainly many things.
It won't be business as usual anywhere, sports included.
It stands to reason. Sports, like banking and investing, is a business about confidence. For athletes, it's confidence in their games. For league executives and franchise owners, it's confidence in the economy and their own ability to manage businesses that most MBAs would say aren't that complicated, certainly no more than the spread offense.
His reply in an e-mail was terse and defiant: "None."
He even turned the question around. "I'd be more worried about your job [at ESPN] surviving a downturn than I am the Mavs and the NBA," he wrote.
Cuban's is a charmed life. It's probably easier to voice such confidence when you could afford to lose half your net worth in a day and still be a billionaire, when the value of your franchise could take a significant hit and still be a good investment on your original outlay. It might be hard for him to empathize with fans worried less about the home team's losses than the loss of their own homes. Or fans not caring about their team's 4-0 start because their 401(k) savings have been wiped out.
No doubt Cuban's confidence, self- or otherwise, is real, even visceral. Elsewhere, the confidence is less abundant and more practiced. If you sound out league executives, you enter a spin cycle replete with attendance numbers that have never been better, escalating revenues and ratings, and, in the case of the NHL anyway, the Canadian dollar's climb in its exchange rate with the U.S. buck. A spokesman for the NFL will deny the existence of empty seats at some of the opening-weekend games last month, but some of those games would have been less than sellouts if many tickets hadn't been sold online at well below face value in the last few days before kickoff and the final hundreds hadn't been snapped up by broadcasters to avoid local blackouts.
Executives with the New Jersey Nets will talk up their renewal rates on season tickets (without citing figures), but they call a timeout on any question about their embattled stadium development in Brooklyn. The same modus operandi plays out in Major League Baseball, the NHL, NASCAR and any venue where customers pay good money to watch others sweat. As a rule, executives expressing doubt would be bad for business. Still, theirs is a confidence diluted with the knowledge that this might be a period of adjustment, change, even if the industry's fundamentals are strong. Don't stop me if you heard this before.
It sounds like just more of Cuban's chest-thumping when he says the swoon on Wall Street will have no immediate impact on the NBA. "The trickle-down effect doesn't happen that quickly," Cuban wrote in his e-mail. But it isn't denial. Rather, it's the consensus of economists who study the sports industry.
Sports and the economyIf the troubled economy isn't already touching your favorite sport, it will soon. ESPN.com takes a comprehensive look at the future financial state of our games. And for more, watch archived video of "Outside the Lines" for a discussion of today's economy and how it will directly affect the business of sports franchises and sports fans across the country. • Joyce: Worst is yet to come for sports
• Tennis: Uncertainty amid market volatility
• Bodo: Tennis players underpaid?
• Golf: PGA Tour keeping close tabs
• Boxing: Boxing economy on the ropes
• Community: Share your story
• Chat wrap with Gare Joyce
"We're unique as a league in that our largest single source of revenue comes from lengthy television deals, which represent half our revenue," NFL spokesman Brian McCarthy says.
Well, the NFL may be unique in the degree to which television offers a safety net, but it isn't alone in the sense that league executives and team owners across almost every pro sport look to those revenue streams to insulate them against heavy economic weather.
"Most of our national television deals and most of the local ones run through 2013," says MLB president and chief operating officer Bob DuPuy. "[That's] a significant tail on what is fixed, guaranteed income."
Likewise, season tickets have been locked in for weeks or months for NFL, NBA and NHL franchises. For the latter, that's a key point. The NHL relies more on gate receipts than the other leagues, and it has the highest average ticket prices.
"We're in a soft and changing economy," says NHL vice president Ed Horne. "Based on season-ticket renewals, new season tickets taken out, and buys of smaller packages and individual games, our sales [for the 2008-2009 season] are up 4 percent from where they we were last year."
The NBA's Silver adds: "The clubs' season-ticket selling period is early spring. We're not seeing any impact yet, even though there's softness in the market."
This might give leagues and owners a false sense of security. NASCAR is something like the canary in the coal mine -- it can serve as pro sports' warning system simply because it will be hit first and it will be hit hardest. According to Lee White of Toyota Racing, it first started hitting home a while ago, partly a function of the rising cost of gas making it more expensive to get racing teams from venue to venue and fans out to races. It doubles back to hard times for auto manufacturers and sponsors with cold feet.
"Our budgets are being reviewed and certainly are not being increased," White says. " A lot of our special racing projects are year to year, and those are under review. They are being evaluated for their benefit to the company. The down economy presents us challenges every single day, in our company and every company in the car business. That is a huge hit for everyone."
When the hit will be felt in other areas of pro sports is impossible to predict. But how pro sports will be affected by the hits likely to keep on coming is easier to forecast.
"There has been a model that has emerged in professional team sports to bring the ballparks and arenas back into the city centers and to build and take advantage of the connection to the business community," Zimbalist says. "If you lure higher-income clientele into the facility, your gate receipts get a boost, you make the advertising market richer and you get more money for signage and sponsorship. When the finance sector takes the kind of hit it's taking right now, it seems the old relations and the old insulation has to go by the wayside."
In Detroit, where hard times have been a fact of life for a few years now, luxury boxes are already in retreat, or at least redevelopment. The Tigers and Red Wings have pulled out some luxury boxes and retrofitted master suites, something like Gold Club premium seating that can be purchased as a one-time ticket or in blocks.
"These are much more saleable to the average fan," says Jim Devellano, a vice president of the Tigers and the Red Wings. "They allow the guy who can spend 150 bucks on a special occasion a chance to have the luxury-box experience."
MLB's DuPuy says the same strategy has had success in Colorado, San Diego and Milwaukee. "The party suites are opportunities for smaller businesses," DuPuy says. "They require more selling on the part of the ballclubs, but that's the state of the business right now."
"The Giants and Jets stadium's luxury loges are largely sold," Baade says. "But it might turn out that the PSL [personal seat licenses] and luxury loges might not be able to be renewed or resold. Just as people will be walking away from home investments, they might be walking away from stadium investments. [They'll take] the attitude of, 'We have bit off more than we can chew and now we're going to have to pay for it or cut our losses.' Increasingly, they'll be harder for franchises to sell. The premium seating and luxury loges have been fungible assets, but how are you going to encourage people to buy in when the prospects for resale are pretty grim?"
If the luxury-box culture winds down, it could spell hard times for New York-area franchises.
"[A recession or hard economic downturn] will be felt more strongly by New York City teams than the other teams only because it's the financial capital of the country," Zimbalist says. "They're talking about the possibility of 60,000 jobs being lost in the finance sector. That's high-income clientele."
Or, rather, previously high-income clientele who now become scalpers in Brooks Brothers suits.
"With the other franchises' PSLs and rising ticket costs, we're seeing fans who had season tickets to a couple of teams paring down to one," Nets vice president of ticket sales Paul Mangione says.
Selling blocks of seats might be tough for the Nets, but that's only a fraction of the challenge they could be facing in developing their planned new home in Brooklyn.
"Right now, the immediate hold-up is an appellate proceeding in an eminent-domain lawsuit, but the Nets are confident that they'll get financing in place because of the viability of the project," the NBA's Adam Silver says. Or is that more confidence spin? A Newark Star-Ledger story this week indicated that the club's $950 million in Goldman Sachs financing might now be in jeopardy, which in turn could jeopardize a $400 million naming rights deal with Barclays Bank.
While some of the economists suggest that the new New York baseball stadiums to open for the Yankees and Mets next spring have been built at exactly the wrong time -- at the top of the market -- MLB's DuPuy believes they'll give the franchises some immediate protection from a financial hit in a bad economy.
"I don't know a fan who isn't going to want to see both new ballparks next year," DuPuy says. "In every instance of a new ballpark opening, there has been enormous demand. In Pittsburgh, there was unprecedented demand for tickets. Cleveland was sold out for four seasons. It might actually buy the New York teams time needed through to a recovery."
Increasingly, corporations will wonder what's in a name. Naming rights for stadiums and arenas, along with franchise sponsorships and signage, will be reassessed. This folds back to No. 1: Fewer elite paying customers coupled with corporations' getting leaner, meaner and, for some, less profitable set naming rights and signage up to be the next dominoes to fall.
According to the NHL's Horne, it isn't just dollar values that are in play.
"Corporations are moving more cautiously," Horne says. "What we're seeing is that the deals that used to be three years are now one year."
OK, it won't be that bad for professional athletes. They won't be hawking furniture at yard sales between the Super Bowl and training camp. But if streams of revenue from luxury boxes, naming rights, sponsorship and in-arena advertising don't flow like they used to, it will hit the players where it hurts: a rollback of salaries, team payrolls and prize money.
"If it lasts long enough, the ripple effect will reach the players," says Sal Galatioto, president of GSP, a New York-based sports-investment consulting firm. "The major expense component is not running your building. It's your payroll. As the players contracts run off, they're going to get less. That has an equalization effect, especially when there's a hard salary cap in place. There are some controlling mechanisms and they just take time to take effect."
In an economy in which all major assets will lose value, sports franchises will not be an exception. The price tags on teams will shrink. This, in turn, will have a chilling effect on any potential sales of franchises. For those stable tycoons who might look at that trend and think they see an opportunity to jump in and take advantage of lower prices, there's this sobering thought: Financing for franchise acquisitions will be harder to come by.
This news is probably worst for the NHL, where a third of the franchises were in squeezed positions even before every investment banker on Wall Street got the flu. The NHL's Horne says he's "not aware of any franchise being for sale," but that awareness glosses over the fact that Anaheim's owner, Henry Samueli, has pleaded guilty to lying to federal investigators and might yet see prison time after his plea agreement (a $12.5 million fine and five years of probation) was turned down by a U.S. District judge. And then there's the laughingstock of the NHL, Boots Del Biaggio, a minority owner of the Nashville Predators, once considered a white knight for the struggling franchise and now the butt of jokes after he filed for bankruptcy and federal authorities began investigating him for perjuring himself. A report Friday morning indicates that the Predators have defaulted on a $40 million loan. Either of those two teams might be ripe for a sale.
Other franchises around the NHL lack those colorful backstories, but the bottom line is this: One-third of the league's teams are written up in ink as red as a Detroit home sweater, and they're presumed dump-able. The likeliest candidates are Phoenix and the Islanders.
Even the rock-solid NFL might be in for a humbling time.
"It's probably bad news for the Rooneys, if they're seriously looking to sell the Steelers," Pittsburgh-based NFL agent Ralph Cindrich says. "It's not the most economically vibrant market at the best of times; and when hard times hit, they hit Pittsburgh the hardest."
Over the past couple of decades, any self-respecting team owner who lusted after a freshly minted stadium or arena and wanted to roll out the blueprint for a palatial playbox had at his disposal the leverage game. Here's how it's played: If the public won't pony up for new digs, the owner threatens to take his team and find somewhere else to call home.
Now, if financing for franchise acquisitions gets tough, financing for new stadiums becomes near impossible. Not that owners with big plans will need the added degree of difficulty; but in a tougher economy, the public will to invest in new sports facilities will vanish.
Baade suggests that the cycle of tough financing will be hard to break.
"Even if there is a recovery, it's likely that people, borrowers and lenders, will move ahead cautiously until they have confidence that the recovery is real," he says.
Investment consultant Sal Galatioto says the teams that are near completion or well down the road with their new stadium developments are probably safe.
"If you've already done your financing and you've done it on a reasonable basis before the credit market fell out of bed," he says, "you're OK."
Twenty-three of 30 Major League Baseball franchises are in new or recently renovated ballparks; and as MLB's Bob DuPuy paints it, the Yankees, Mets and Twins are safely in under the wire even if they aren't using their new digs yet.
"MLB's bank relationships are very solid," DuPuy says. "Those teams have their long-term financing in place and will not be impacted. The three not yet under construction -- the Marlins, Tampa Bay and Oakland -- are in different stages of financial consideration. And Florida's deal basically has been completed with the public sector."
According to DuPuy and the NBA's Silver, none of their teams has any financing in place with the embattled financial institutions, though Silver suggests that at least a couple of those companies have commitments for seats or boxes at NBA arenas.
If it makes you feel better to think that professional athletes really are just like you and me, you might now have common ground. Some highly paid superstars could be seriously hurt and others cleaned out altogether in an economic downturn. Just like you and me.
"We've tried to keep our [players] in fixed-rate investments and out of equity positions," Simon says.
Still, Ralph Cindrich says he's heard from his clients that some of their teammates came out of Monday's market plunge bruised and even broken.
"The thing with athletes," Cindrich says, "is they're gamblers and risk-takers by nature -- what they do on the field and how they live their lives."
Not everybody who gets cut by his or her team will be showing up in the morning paper's transactions list. It's inevitable. Just as the league and its teams laid off (and never rehired) office staff during the NHL lockout season, so other sports outfits will look to slash and burn the rank and file of street-clothed employees. It's already happening. Recently, the NBA's league offices laid off 50 employees. And this week, Silver was in Charlotte when the Bobcats stroked 30 names off their payroll.
It's a predictable management strategy; but in sports, a job with the local team hasn't generally come with obvious risks attached. Earlier this year, the Denver Broncos laid off several staffers and -- thanks to the popular fan blog "Let Plummer Play! The Almost Official On-Line Tribute To Jake The Snake Plummer" -- their public noticed.
Here's an entry from the blog.
In another brilliant personnel move that could save owner Pat Bowlen thousands, maybe even tens of thousands of dollars, Andrew Mason--the webmaster and essentially head online cheerleader of the popular blog pages at the Denver Broncos official Web site -- was let go along with several members of the Broncos public relations staff ... The money saved could be used to buy at least six or seven ball-warmers ... Mase was a direct link between the fans and the team in a way that felt--to the thousands of NFL fans who frequented his blog on a daily basis, whether for news, rare insight on team operations, or simply because they enjoyed his easygoing, friendly take on what he saw happening with his favorite team--like they had a friend in the front office ... The first excuse given for letting Mase and the PR staff go will be a quick and snappy retort about how bad the economy is doing, and how the Broncos are tightening their belts for tough times.
The blog duly noted that Forbes ranked the Broncos as the sixth-most valuable NFL franchise, and that the team owns the Denver market. Of course, the franchise owns the market because of its fan base. But will fans continue to feel warm and fuzzy about a team that's cold and cruel in its handling of folks whose lives and work look an awful lot like their own?
It's a dark picture painted here. The only way it could possibly be darker would be if Bruce Wayne brought a couple of franchises to Gotham City. Still, none of the economists or sports insiders consulted By ESPN.com is predicting The End of Sports as We Know It. In fact, overall, those economists and insiders are on the record with predictions that any trouble sports encounters will pass. The financial crisis won't bring down the sports industry like, say, the way toxic assets and fumbles on derivatives basically ruined three investment banks, AIG and some smaller financial outfits.
"Historically, sport has been pretty insulated from the business cycle," Zimbalist says. "I don't think anything short of an all-out depression -- which is still a possibility -- I don't think anything will prevent sports from leveling off rather than dropping. Baseball has been growing at 11 percent a year. That's not going to continue, but that doesn't mean that MLB won't be able to level off -- perhaps growth in the neighborhood of 0 to 5 percent or maybe a small drop in revenue."
That leveling process? Already started. A Bloomberg report on Friday quotes Mariners president Chuck Armstrong this way: "We are anticipating some economic problems in the future. We have great trepidation for next season."Washington Mutual, whose assets were just sold to JPMorgan Chase & Co., had been one of the Mariners' main sponsors.
"Sports leagues have a hold on their markets, and their base will look for other ways to cut back in tough times," Baade says. "If this is a short-term blip, the professional leagues might not feel much pain."
According to the experts, new stadiums filled with luxury boxes won't be white elephants or monuments to the way sports used to be. In the end, the cautious, bearish sports economists validate the relentlessly bullish Cuban's determination to buy the Cubs, and Silver's characterization of sports as "recession-resistant."
On that count, maybe nothing really will change. Maybe business will remain as usual.
And what of AIG's logo on Man U's shirts? Well, apparently it seemed like a good idea at the time.
"This year was the first year ever in the Premiership that the total for [rights for shirt sponsorships] dropped," says Nigel Currie, an analyst with Surrey-based sports marketing consultant brandRapport. "They fell from 75 million pounds to 68 million. Manchester United's deal was considered the best in all of football."
But it brought with it some bad luck. In the first game after AIG's failure, Man U had a bit of failure of its own. It took a home loss to lowly Hull, the worst result in recent memory. In fact, AIG's place on the team's shirts was the source of only a few jokes, just footnotes in newspaper coverage of the loss to Hull.
A sign of the times: Man U isn't the first team sponsored by an outfit that went under during a season. Just days before AIG hit the iceberg, West Ham played a game with its usual logo covered up. XL, a discount airlines, defaulted on its deal with the club. West Ham received only 2.5 million pounds out of a contracted 7.5 million. In fact, among Premiership sponsors, AIG is not the only financial institution to be bailed out by government. Newcastle's sponsor, Northern Rock, a bank and mortgage company closely tied to Lehman Brothers, was rescued by British taxpayers a while back.
Funny thing is, there had been a bidding war between AIG and Mansion, a gambling service, for Man U's rights.
"Mansion might have won, but Man U was not totally happy with the association with gaming," Currie says. "Image was a part of it. So they opted for what looked like a conservatively run, respectable business."
Man U was worried about the association with an outfit that sought to profit through reckless behavior.
As it turns out, that's exactly what the franchise got with AIG.
Gare Joyce is a regular contributor to ESPN The Magazine and ESPN.com. ESPN.com NASCAR writer Terry Blount contributed to this story.
ESPN TOP HEADLINES
- Browns suspend WR Gordon for season finale
- Police question Cubs' Castro about shooting
- No. 1 Wildcats use D to fend off No. 4 L'ville
- PSU edges BC in OT to claim Pinstripe Bowl