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.


RSN’s Should Take Lead From Big Nets On Fantasy Front

CBS Sports announced Fantasy Football Today, a live 90-minute online show, will debut the first Sunday of the NFL season. CBS adds to its digital fantasy offerings, joining ESPN with pre-game fantasy football analysis that competes with the national pre-game shows during that all important few hours in fantasy football when owners set lineups for the week.

CBS and ESPN already broadcast a slew of live “traditional” NFL programming, which relegates fantasy to the digital-only world. Without local TV in the NFL, RSN’s are left holding a weekly studio show or game recap with little fan interest since everyone watches highlights all day on the major networks and online. While fantasy has crept into traditional football programming and game coverage, one thing we’ve learned is fantasy players always want more. Anything to get that edge.

Networks have tip-toed around fantasy for years now, almost afraid to dedicate a prominent weekly slot for coverage. If ESPN can televise a fantasy football special, any sports network can. Speaking mostly for NYC, my home, the RSN’s miss the boat in fantasy. Forget Jets and Giants weekly, promote fantasy football, turn the network into “the place” for fantasy football news. YES, SNY, and MSG have access to enough big names to generate interest. They can have leagues among analysts, between analysts and fans, or possibly even get players from another sport involved. I’m sure a few Yankees and Mets play fantasy football.

Take it to another level, make a reality series out of fantasy sports. Maybe it’s football and baseball to generate enough content. Fantasy owners in competitive leagues border lunacy with their dedication, it would certainly make for an interesting half hour show. RSN’s have an opportunity to capitalize on that lunacy, that constant need for information. Big name athletes and broadcasters with a big promotional push and good information can generate fan interest.

On the whole, this continues my theory that RSN’s (and some national’s) need to move away from repeat programming as much as possible. Radio simulcasts are one method, fantasy sports are another, especially during that down time after baseball before basketball and hockey hit full stride. Sponsors and advertisers will certainly pay a higher premium for original programming than another installment of fishing or harness racing. RSN’s have not fully capitalized on the potential of the NFL. SNY provided good Jets post-game coverage last season, but the NFL is so popular there is room to expand the pie.

MSG Continues Move Toward Sports Irrelevancy

Regional college sports don’t draw earth-shattering ratings because the networks typically scoop up the best games, however MSG losing Big East basketball and football to SNY is the continuation of a trend towards obsolesence for MSG.

Long considered the go-to place for college sports in the metropolitan region, SNY snapped up market share last season with an in-studio Big East basketball show and a Game of the Week. Now the Wilpon-owned network has snagged almost exclusive coverage of the two biggest sports in the conference. While ratings are not comprable to the Mets and Yankees, with Rutgers football surging, and power-house basketball conference that boasts many players from the NYC area, Big East games should score significantly higher ratings than any substitute programming.

It’s another sign that MSG is heading toward a pure entertainment network with sports on the side. The Yankees and Mets not only started their own networks, but have also invaded MSG’s programming chest. The team-owned RSN’s have weekly shows for the two professional football teams, each now has college sports, and the YES has the Nets. SNY with the Mets and Jets, YES with the Giants and Yankees, have cornered the market on the two most popular professional sports. Plus, YES holds an ace up its sleeve if the Nets move to Brooklyn and can lure Lebron James ratings will skyrocket.

Meanwhile, MSG now has more airtime for subway musicians and wrestling classics. On the sports side, its Knicks, Rangers, and the high school circuit, with the Islanders and Devils on its sister unit, MSG Plus. If Cablevision ever sold or lost either Garden team, rest assured YES and SNY would be all over the TV rights. MSG holds it sports hopes on hockey, by far the lowest rated pro sport, though Ranger ratings did increase this season. The Knicks have ratings potential because of their large fan base and storied history, but its hard to put it any other way – they stink.

MSG may enjoy higher ratings for its entertainment based MSG, NY show, but without major sports the RSN is moving toward irrelevancy. Across town, YES is generating the highest viewing audience in RSN history for Yankee games, while SNY rides high with the Mets and a lineup of creative, opionated sports news content. Next time MSG goes to negotiate with non-Cablevision providers, don’t count on a per-subscriber increase.