Why Pro Sports Teams Should Not Be Publicly Owned

Lebron did not only tantalize the public and his suitors by withholding his “Decision” for a TV special last Thursday night. Wall Street was in for the ride as well, in particular shareholders of publicly traded MSG, owner of the Knicks, one of the finalists in the sweepstakes. The unusual trading activity and price fluctuations the stock underwent the second half of the week, purely on Lebron speculation and the eventual decision, show one of the reasons why most sports teams are not publicly traded.

For those unfamiliar, Cablevision spun-off MSG to shareholders in Q1 this year, and after its initial trading days in February presumably marked with some institutional buying, traded at an average volume of 342k shares/day prior to last Wednesday. Volume spiked 4-fold on Wednesday when rumors that Lebron would hold the TV special in Greenwich, CT, near the Knicks practice facility. As the soap opera played out the rest of the week MSG recorded 3 of its top 9 volume days since trading started in February, and 3 of the top 4 since the initial February trading period.

Along with the unusual volume, shares jumped 6.41% as the Knicks hopes surged Wednesday, then dropped 5.52% as the Heat rumors intensified Thursday, and dropped another 4.61% on Friday following the announcement. Those are 3 of the 5 biggest price changes since trading started. Average option volume is around 400 contracts, but one trade involving 2000 contracts executed on Wednesday, and the July 22.50 calls has over 20,000 open contracts – a short-term bet on Lebron signing – which have zero trade value this week.

This is all well and good, stocks move all the time on announcements, the better question is if Lebron would actually have that much impact on the intrinsic value. The answer is likely no. The teams (Knicks and Rangers) currently break even or operate a small loss. Lebron would have his biggest impact if he helps the team reach the playoffs, which could add up to $2.5m per home playoff game, according to CNBC. However, during the regular season the Knicks already operate near a sell-out (though clearly many of them go unoccupied) and it’s a little late to raise prices at this point, so his addition would add a minimal amount to tickets. Similarly, most sponsorships are category exclusives locked in on multi-year contracts. MSG would certainly gain some new sponsors, possibly benefit from some escalator clauses with current sponsors by signing the star (assuming they negotiated that in advance), but estimates place the benefit at only $5-10m per year in the near term. The CNBC and Forbes estimates, which are reasonable given these assumptions, estimate a roughly $35m windfall for MSG had they signed Lebron.

Most followers caught by the glitz of the teams don’t realize the biggest asset to MSG’s bottom line is the network, specifically the subscriber fees it charges cable providers. In the near-term Lebron would not likely impact these fees because they are typically locked in on long-term contracts, but when those contracts did come up for renewal, having that chip to leverage would certainly help garner a nice increase (though not as much as having baseball coverage would, but that’s a different story). The other revenue generators for the network are TV and online advertising. Local cable advertising is not a big market in the scope of things, and local online advertising is still not a significant revenue generator. He would probably add less than $10m total in advertising. In the longer run, if he is worth a 10-20 cent per subscriber fee hike, MSG could add 10-20m in profit per year as the contracts come up, but again, that depends on when the contracts are due.

Clearly, he would have had an impact, but do the numbers justify the 97.5m in market cap the stock gained Wednesday, or the close to $160m it gave back the next two days? By time, the stock started trading the Knicks season was already in the tank. If they improve though, fast forward to March and April when each win or loss could determine a playoff berth, and that extra revenue, or even to the trading deadline as acquisitions could impact ticket sales, playoff chances, and cost structure. Though most of the value sits in the network, sports illicit lots of emotion, and it appears that emotion would impact stock volatility, especially given the teams play in Wall Streets backyard.

In the end, if free agency elicits this type of volatility, its likely that wins and losses for a contending team would, and even more so that playoff performance would. If that turns out to be the case, is buying this stock any different then sports gambling? You can make a case that stock picking in general is not much more than gambling, based on some efficient market theories and studies on behavioral finance that show the impact of sentiment. But putting sports teams in the market would likely take that to a new level and dampen other financial benefits of public listing, such as access to credit and cost of capital. Thankfully, the Cavs are privately owned.

Basic Economics Driving Super Bowl Ad Buys

This year the focus of Super Bowl advertising has been more on who is not in the game, then who is. Annual stalwarts Pepsi and FedEx are out, and major US car companies will obviously take a back seat. It’s easy to point to the economic recession causing major companies to reassess internal spending, but a better reason is that $3m for 30-seconds only makes fiscal sense in specific situations.

What the recession has forced companies to do is assess ROI (or some measure of impact) of its marketing spend. In doing so, some major brands have come to the realization that all the theatrics and hoopla surrounding the Super Bowl don’t necessarily add up to sales increases. In fact, if a brand drops the ball during the big game, it may actually hurt sales, while a good commercial may find itself into the highlight reels for all of the following week but not necessarily into the next 10-Q. It raises the age old question if someone is going to pick Coke vs. Pepsi based on which commercial they like better.

The Super Bowl is great for smaller or start-up brands looking to emerge into the mainstream and announce themselves. It also benefits more established brands launching a new product line, attempting to reposition within the marketplace, or putting out a specific call to action with the goal of capturing market share. E-Trade and Monster successfully pulled off the former, while Denny’s was hit using the latter strategy with its popular offering last year. Denny’s returns with a similar spot this year, which they can easily measure the success of by counting customers who use the offer, and is a smart ploy since once you have customers in the restaurant you have a greater chance of retaining that customer.

While E-Trade and Monster continue to use the Super Bowl to build their brands, many first-timers will attempt to catapult themselves into the public eye, including Qualcomm’s FloTV, Boost Mobile, and tru TV (a Turner network). The Super Bowl makes sense for all of them as they are announcing themselves and their products to a broad audience, or in the case of truTV, introducing a show related to football that will attempt to capture new viewership for the channel.

On the other hand, does it really help AB-InBev to continue putting up Bud and Bud Light ads every year, or Coke to come up with a new creative and spend close to $6m for one-minute? That’s why Pepsi and FedEx made smart decisions not buying time. They have nothing new to say, no new products to launch, they are already well-established brands that everyone watching the game is familiar with, and to be honest, they may actually receive more hype leading up to the game by deciding NOT to advertise than some competitors who do decide to advertise, an interesting reverse psychology.

In the end, it should not be a big story that FedEx and Pepsi are out, and the likes of kgb and Motorola (desperate to push its new phone) are in. It marks the natural evolution of Super Bowl ad economics. Established brands buying simply to showcase a new creative and be the talk of Ad Week is not worth $3m+, while new brands and new products can use the game as their introduction to the world since it’s the broadest reach it can achieve in one spot all year. However, given the cost relative to the marketing spend and revenue for some smaller, growth companies, a Super Bowl ad buy can be make or break – as many found it during the dot come era.

What Hockey Needs, What Soccer is Getting, and Why Sports Cable Ratings Thrive – ESPN

Monday Night Football on ESPN is up over 20% from last season. College football on ESPN had its best year in over a decade, including its most watched game since the 1990’s. The Heisman Trophy presentation reached new high water marks. Last season’s NBA playoffs finished up. During football season ESPN is consistently the highest rated cable network each week, often by substantial margins.

Yes, sports in general and football in particular, are carrying TV ratings across the board, but much of ESPN’s success should be attributed to the marketing machine it’s created. A daily listener to their morning radio show, a few weeks ago I realized all they day on Monday morning is review Sunday’s games and hype Monday nights game, then on Tuesday they spend most of the show recapping Monday night’s game, bringing in a cavalcade of guests. This is not just a recap, its four hours of national radio smacking you in the face. I noticed it because I got sick of listening to it. Then when you turn on ESPN they are live from the sight of the game, it leads Sportscenter for a full 12-hour cycle at a minimum. Go online, same thing. As a more well-rounded sports fan, I was searching for a crumb of baseball coverage from the winter meetings, but nothing – all football, all the time. Even when the MNF game stinks, they still smack you upside the head with it.

Same thing with the Heisman. Cover stories all week, interviews, enough promotions so that you have the time, date, and tag line memorized. However, given how big the NFL is, maybe this would happen anyway, so its last night that really magnifies what ESPN can do. Broadcaster of roughly 90% of the college bowl games, last night ESPN had the less than illustrious Las Vegas Bowl, pitting BYU and Oregon State in what on paper was a decent matchup, but turned out to be a blowout. They moved the top two teams in college basketball to ESPN2 to put the game on the mother ship, then led Sportscenter with Las Vegas Bowl highlights and full coverage from the sight. The Las Vegas Bowl, a 24-point blowout, the lead on a night with NBA action, almost the entire Top 10 in college basketball on the court, and a significant MLB trade? When you have the control to dictate what people watch like they do, its amazing what is possible. If that game was on Versus, you would get a 30-60 second highlight no earlier than two segments into Sportscenter.

Don’t criticize ESPN for it, they are maximizing value of their assets, and the ratings show that people don’t mind. It shows that any sports property not bigger than ESPN, needs to partner with ESPN, notably hockey. ESPN is planning the white glove treatment for World Cup soccer in 2010, and its almost a guarantee that the ratings will set new records for soccer in the US. In the midst of their coverage, its also a guarantee that the NHL playoffs will get buried as ESPN goes double-barreled with World Cup and NBA playoffs.

It’s not the first time I’ve brought up this subject, but I think its worth noting now as ESPN’s tailored programming and the resulting ratings reached new heights this fall, at a time where hockey is more lost in the media landscape than ever before. They need to get on ESPN, they need to get on now, and they need to let ESPN show them how to market superstar athletes to the public.

College Athletics Pipedream: Revenue Sharing

In the past month two D1-AA football programs from the Colonial Athletic Conference closed operations, citing costs – Hofstra and Northeastern. Both schools have a long gridiron history, and in Hofstra’s case, at least three fairly successful NFL players in the past 15 years. Within the same few weeks, Notre Dame paid more to fire its coach than the $4.5 million Hofstra says it costs to run the football program annually. The Irish also hired a coach, UConn extended basketball Coach Jim Calhoun’s contract to an annual salary above that $4.5m, and countless bowl games will make payouts to each school more than enough to cover those same expenses. Something is truly wrong with this picture.

It’s no secret that escalating costs related to facilities, coaches salaries, and general operations for each team combined with a growing chasm in revenue have created a well-defined class system in college athletics. The Knight Commission continues to study the topic and publish insightful research and editorials, but the problem is not going away. The impact on non-revenue sports has been seen or the past decade or so. Now the epidemic is spreading to major sports at low revenue schools. The next step is mid-major programs.

Hmm, increasing disparity in wealth leading to an increasing disparity in performance, and then feeding itself into a vicious, destructive cycle. Is this starting to sound familiar? Professional sports ring a bell, notably the uncapped world of baseball. One significant difference, colleges are supposedly not for profit organizations, and the goal of college athletics is to promote competition and academics, not improve the bottom line, yet the exact opposite is taking place.

I’m not naïve enough to think universities or athletic departments view themselves as not for profit, but if the NCAA and the conferences truly have a mission to serve student athletes they will create a more equitable distribution of finances. They mandate that athletes cannot benefit from money the school earns, similarly the school should only benefit to a certain extent from the athletes. The NCAA should centrally pool a portion of television contracts, sponsorships, bowl payouts, and other non-ticket revenue sources and reallocate to help fund the Hofstra’s of the world. Maybe small schools don’t receive the full cost of operations as a “stimulus package” and perhaps we have reached a time when students have to pay an annual fee to play, similar to youth athletics, rather than receive free tuition.

Big schools and big conferences would clearly never agree to this because they correctly argue they generate the money. However, if the NCAA truly supports its mission it will start to force its hand. Sponsorships and donations should go toward NCAA sports or NCAA football, not to Ohio State, the Big East, or the Orange Bowl winner. The NCAA should also seek funding from its professional counterparts, the NFL, NBA, and various Olympic governing bodies. These leagues already support youth initiatives, so it’s not a significant leap to seek contributions to keep small programs alive.

If the NCAA deincentivizes big schools by taking away the potential windfall paydays that come from winning, it may implicitly put a cap on coaches salaries and absurd capital expenditures to add more luxury suites every year. In essence, it may help make college sports continue to look like college sports, rather than a younger version of the professionals.

Forget Salary Cap, Baseball Needs a Profit Cap

Scott Boras set off a firestorm – like only Scott Boras – when he issued a doctrine about team spending and use of revenue sharing funding. It’s not a new debate, but more pertinent given the timing, at the start of a free agent period when teams may start to reign in payroll, thus cutting into Mr. Boras’ commission checks.

That aside, Jayson Stark wrote an interesting editorial outlining the facts and calling for a salary basement as a resolution, pointing the problem at the lower spending teams, similar to Boras. They both are right, but understanding the problem is one thing, solving it a completely separate story.

The Yankees, Red Sox, Mets, and Cubs are not the problem here. They play in big markets, maximize revenue to the best of their ability, then reinvest in the product on the field. They also play by the rules, paying a substantial tax on their earnings, similar to the US government taxing the rich more than they tax the poor (or at least that is how its supposed to work). Most people agree it’s the Pirates, Royals, Marlins, et al, who cash the “stimulus” checks, but stash the money in savings that hurt the baseball economy.

Ending revenue sharing is not the answer. Smaller market teams need some of the big market revenue to stay in the game. Its not feasible to think a team in Pittsburgh will earn the same local media revenue, sell as much merchandise, or get the same level of sponsorship as any team in a market with a substantially larger population and healthier economy. It’s just not possible. So some sharing is necessary.

As an aside, the fact the Florida is considered small market is a joke. Look at Miami-Dade County in terms of size, spending power, per capita income, television market, and almost any other statistic relative to Milwaukee, Pittsburgh, Cleveland, and others, and explain how Miami is small market. The Marlins problem is management, and the fact that the city will not support a baseball team, and that responsibility falls to MLB to fix or change.

Back on topic. The deeper problem is not that team salaries are low relative to the amount collected from revenue sharing, its that these teams are among the most profitable in baseball. MLB VP of Labor Relations Rob Manfred is correct that player development and team operations is a major expense that the public does not consider when looking at the face value numbers, but those expenses should still go into the P&L, so how do these teams end with a profit?

Salary minimum’s are tough since teams do not to rebuild, may flush money into player development (i.e. future investments), or it could force teams to make poor spending decisions because they are forced to spend. An alternative method is a profit minimum. First, teams need to submit to more transparency with the league office (not necessarily the public). Use projected revenue numbers for the season, including MLB central fund contributions, and do not allocate any revenue sharing money until a small market team exceeds that forecasted number – whether its on player development, team payroll, or organization spending. At that time, teams eligible for revenue sharing can only collect when they have incur an expense. For example, Pittsburgh needs to sign a free agent, then it will receive the revenue sharing money to cover that players salary. Each team can continue to draw from this revolving credit line up to the amount they would receive under the current system.

Anything above that amount, the owners need to fund, similar to today. If they don’t exhaust the funds, then the money goes back into the central fund for redistribution to all teams – NOT into the owners pocket. Sports ownership is not a profitable business annually, owners know that coming in, the big profit comes when you sell a team whose value appreciates.

It’s not perfect, but another idea to put on the table. In the end, the only way to truly satisfy the public and the ancillary stakeholders is with full transparency, which I would not hold my breath waiting for. In this scenario, at least it takes the profit out of the hands of the owners and forces some transparency.

Where does Jordan Brand success leave Nike in basketball?

Ad Age did a brief case study on the Jordan Brand last week, revealing that it has eclipsed the sneaker sales of Reebok and addidas. That surprised me for a minute, but not when you look deeper at the roster of athletes it has assembled. Dwayne Wade, Carmelo Anthony, and Chris Paul are arguably the next three most marketable players behind Lebron and Kobe, so add all of their sneaker sales with the line of Air Jordan’s and you can see why the sales numbers are where they are.

My question is what does Nike plan to do moving forward. Jordan Brand has limited distribution, premium pricing and positions itself as the Mercedes (or fill in the luxury brand) of the industry. One look at their website indicates what the brand strives to be – the lineup of athletes dressed in fine suits lounging in a room no sign of sneakers, basketballs, or uniforms. Jordan Brand also poached Derek Jeter and CC Sabathia, a few prominent football players, and boxer Roy Jones. Again, all top of the line public figures in their respective sports.

Will Nike take Jordan Brand to other sports and continue to carry it as the premium play it is now, or will extend vertically in basketball, expand distribution, and offer products at various price points? From there, what is the end game for brand Nike? If they allow Jordan Brand to expand within basketball, which I don’t feel is the strategy, does Nike shift its focus away from basketball all together. If it horizontally expands Jordan over to baseball, football, and beyond as the premium brand, does it start to target lower price points or will it compete directly with Jordan risking some cannibalization to house maximum market share under the same Beaverton, Oregon roof?

I don’t have any answers, but it’s a testament to the power of MJ on how fast this entity grew and the lineup of stars it immediately attracted. At a time when Under Armour is trying to enter the sneaker business, Nike continues to get stronger, and with Jordan Brand now successful on its own, brand Nike can shift its efforts to other sports and other products to cut into the strengths of Under Armour, Reebok, and addidas.

ESPN Should Apply Mid-Major B-Ball Approach to Football

Spurred by increased media coverage, some talent dilution at top programs from players leaving school, and a run of NCAA tournament upsets mid-major hype hit new levels in college basketball the past decade. It led to an increased national platform, more money, improved recruiting, and overall, a more level playing field with the big boys. Mid-majors will never be on equal standing with BCS conferences, but we have reached the point where it’s not unheard of for mid-majors to get 1, 2, or 3 seeds in the tournament, and never mind surprise, its sometimes expected to see them knock of middle tier teams from big conferences.

These leagues fought an uphill battle and come tournament time always faced with defending what amounts to an easier schedule relative to big conference teams. Never one to miss a made-for-TV opportunity during a lull in the annual sports schedule, in stepped ESPN earlier this decade with Bracket Buster weekend. The premise – match up the best mid-majors across the country to help them boost their profile with a strong non-conference game. ESPN clears out the schedule and showcases these games the entire weekend, brands them, posts attention on the website, dedicates the studio and road show to these games, and gives it the 360-degree ESPN white-glove treatment. It guarantees that as a group the mid-majors get an RPI boost to combat a weak conference schedule and a bunch of them get wins.

College football needs this same event now. Mid-majors have followed a similar trajectory the past five years or so, a few teams paving the way into national prominence, not only breaking through to major but winning. Critics continue to point at the weak schedule these teams play and the current BCS system is biased against these teams playing for the national championship and against having multiple non-BCS teams play in major bowls.

ESPN should pick a weekend around this time of year, preceding the conference championship games, and call it BCS Buster. Schedule 3-5 neutral sites (or at least pick the sites in advance of the season) in different regions and create match-ups among the top non-BCS teams. If only TCU or Boise legitimately has a chance, let them play each other to help the winner get a better shot at a top two spot. Besides the wins and losses, it raises the profile of the leagues and adds legitimacy to both teams. If ESPN applies its hype machine – Gameday crew, primetime audience, top story on Sportscenter, commercials and teasers on radio and TV all week, web integration, the whole nine yards, Boise would not need to hire a PR firm. If it’s better for the two best not to play, the likes of Houston, BYU, and Utah still create a formidable lineup. Outside of the primary matchup, it gives each team a chance to improve its bowl standing, helps recruiting, and starts to create momentum for the following season.

Clearly, the college basketball and football postseasons are two completely different animals, and the nature of scheduling a football differs from a basketball game. That said, the key point here is that football is at the point they need to apply this concept and who better than ESPN to make it happen. I can’t tolerate too many more Indiana-Iowa, Florida-Mississippi State Saturday doubleheaders now that baseball is over.

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