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.


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.

Basketball Local Streaming Launches, Still Missing Key Target

Earlier this year the NBA became the first league to officially hand over local digital rights to its teams and local media providers, contrary to the tight control that MLBAM has kept over local rights. After no movement last season, and a trial run by the Yankees and Padres during baseball, the Sixers and Blazers both went to market with local streaming offers at the start of this season.

The Blazers plan to charge a la carte or flat rate for the full package of 15 games, but thats where the problem starts – 15 games. Portland plans to stream the 15 games scheduled for over-the-air broadcasts, none of the remaining games to which Comcast Northwest hold the rights. Portland is one of the markets with carriage problems preventing fans from watching the team. CSN Northwest does not have carriage deals with Charter, Dish, or DirecTV.

This is where live streaming is most valuable, the fans who can’t receive the broadcast on television. Those fans likely have a higher willingness to pay for live streaming, a higher likelihood of using advanced online features and becoming the type of engaged user that advertisers covet. Yet, Comcast excludes them, just as the Yankees and Padres did during the season.

We understand offering it to subscribers that also receive the cable network to prevent cannibalization and prevent free riding from undermining the cable business. But its still hard to convince those customers to pay incremental fees to watch on a laptop the same game they can watch in HD on the big screen, though the number of people interested continues to grow.

However, fans that are not cable subscribers – or not subscribers to a provider with carriage of the local rights holder – arguably have more overall value. If CSN has a functional authentication process in place, it could still offer the package for non-subscribers, possibly using price discrimination and charging a higher fee since they don’t technically pay affiliate fees for your cable channel. The team benefits by extending its digital marketing platform and adding value to the advertising inventory, the right holder benefits by luring in valuable new customers. Customers from Comcast competitors, and customers from the same MSO’s that CSN is negotiating carriage deals with. And everyone earns additional revenue.

Why would CSN not want to make money off customers from the same companies that won’t carry its channel. It could help provide leverage in the carriage negotiations. If not, at the very least, it increases revenue and may help add a premium price component to the product if they can charge non-subscribers a higher rate.

The team and rights owner both maintain control and it’s paid content, so I’m not sure why none of the local streaming deals has gone this route yet. It’s possible the authentication schemes are not as advanced as providers would lead us to believe, its possible they want to take baby steps for now, but for streaming to move the needle it needs to be accessible to the entire local market using a well-thought, profitable pricing scheme.

NBA Cinches Critical Cable Carriage Deals

Rumors surfaced last year, following the NBA partnership with Turner about a compromise of lower affiliate fees for expanded coverage on Time Warner Cable. It made sense given the Turner relationship, and as I continue to harp on, is critical as league-owned networks near a make or break tipping point.

In advance of last week’s Opening Night, NBA TV closed carriage deals with Time Warner, Cablevision, and Dish, adding to its distribution roster of Comcast, Cox, DirecTV, and Verizon. The latest additions put NBA TV at 45m homes, a 3x increase from last year’s opening night, and a clear signal the network plans to become a major player.

What the NBA has going for it that none of the other league networks have are the Turner partnership and a strong digital offering that aligns with the on-air product. No, I’m not forgetting the power of MLBAM, but I am accounting for the fact that MLBAM operates in a silo and appears to clash more than integrate with MLB Network – and the league for that matter. However, taking a page from MLBAM’s playbook, NBA Digital recently released a mobile application for its streaming video package and it continues to market and improve the online version. They have done well to leverage TNT talent and production capabilities to create a quality mix of online and broadcast programming.

Thinking bigger picture for a second, while the NFL may command the most demand, the NBA and MLB have the longest season and the most content, two ingredients that work well for media. The demand for the NFL may actually work against NFL Network, since it increases the competition it faces and the event driven nature of football concentrates the competition into certain days and times. Meanwhile, though they have less absolute number of fans, NBA TV has an opportunity to capture a bigger share of the market, and partnering with its top television partner for production and marketing only adds to the possibility.

Long term, if the network can entrench itself with fans, slowly build a stable of exclusive games, grab rights to ancillary basketball events (Olympics, college, overseas, maybe NBA games played overseas), it has a chance to continue to expand that 45m subscriber base and boost its subscriber fees. It’s pulling the right strings hiring solid talent (adding McHale to a cast that include C-Webb) and proliferating digital distribution channels. Within a few years, NBA TV can become a meaningful revenue stream for the league and a serious competitor in the sports television landscape.

Success in media continues to get more difficult with lower barriers driving increased competition and fragmentation. However, NBA TV, and the other league networks have one significant advantage – they own the content. MLBAM has proven on the digital side that managing content correctly can lead to big business, while on the other side the NFL Network shows that just putting games on will not bring customers and providers to their knees.

Similar to my criticism of the NHL Network for not committing to wider carriage and making a strong push, let’s commend the NBA for getting the deals done and putting the resources behind what can become a big future revenue stream for the league that will offset some of the decreases it expects in other business lines.

Should Sports Change Revenue Sharing to TARP-like Program?

Last week’s SBJ cover story on the state of Detroit’s sports teams battling through the recession further illuminates how hard the recession has hit that part of the country. Sports teams are the least of Detroit’s problems, yet they remain one of the few refuges for an area fraught with unemployment and failing businesses.

Three key points I took away from the story: 1) Detroit has phenomenal sports fans, it’s aggregate per-cap attendance across all four major sports as a testament; 2) for the most part, the city is blessed with top ownership (we know about the Lions), Davidson and Ilitch have put wining teams on the field, done right by the fans, and tried to do right by local business; 3) the recession is stronger than both #1 and #2, which will make it difficult to sustain these teams over the next decade.

Ticket sales and sponsorship revenue are the most critical and most volatile revenue streams for teams. The economy has put both under significant pressure in the Detroit market. Teams face a steeper trade-off in ticket sales vs. price reductions than most markets and its key sponsors lost significant marketing budget. Lions aside, since the NFL shares revenue in a more equitable manner across the league, each team expects a significant revenue drop this year, which immediately makes it more difficult to field a championship-caliber team.

Looking further down the line, the auto industry will never look the same, and the future of these key sponsors and a critical regional source of employment is in jeopardy for the long-term. That said, will Detroit teams require, and should they receive a boost from the league’s central pool, similar to the government backing its local companies.

From a pure market size perspective it’s a border line top 10 DMA (11 to be exact), but the unemployment numbers, per capita income, and discretionary income numbers make it a candidate for help. Should leagues focus more on helping these owners, who have proven they invest in the team, have loyal fan bases, and can be a key market for leagues than the low-income owners that reap the benefits of revenue-sharing, yet do not add much value to the league.

Putting absolute numbers aside, using forward-looking marginal revenue metrics, leagues should consider if adding each dollar they subsidize Detroit with adds more value to the league and other teams than each dollar MLB subsidizes Pittsburgh or Florida, for example. Market size, ownership wealth, and absolute revenue numbers don’t encapsulate who most needs revenue sharing. Leagues should visit which teams need it at the margin, and how much value the investment (and it is investment by the other teams) can add to the league at large. Detroit – along with other traditional sports cities in struggling regions, are good candidates to consider in the short-term.

Can Fans Handle More Fantasy? Teams Should Find Out

Nobody can debate the power of fantasy sports and the value of the marketplace, currently dominated by football. Following typical economics, as customers showed their appetite for more fantasy, competitors have flooded the market with countless products, each claiming a different fantasy experience, or unique prizes. In the end, most of the products are similar and ESPN and Yahoo continue to dominate because of their established brand and unmatched scale.

However, one area I’m surprised content producers have not yet fully exploited is team-based fantasy games or contests linked to in-venue or in-game viewing. Football aside, other major sports have room for growth. In fact, basketball and baseball participation remains flat or down the past few years, so each could use some innovation to invigorate it. Further, the local nature of these sports lends themselves more to team-based games involving their home team and maybe specific opponents or rivals.

The concept aligns with the current movement for teams to nurture a community. Nothing stimulates engagement more than fantasy, so if teams can steer that engagement to their own websites, broadcasts, and live games, it could lead to indirect benefits in key revenue streams, in addition to creating a new branding platform. Further, teams control the assets (players), the arena, at least have a significant say in television, and have a complementary web presence. With this combination of assets teams could activate fantasy in a compelling manner through multiple distribution channels and have real, coveted prizes (locker room visits, luxury suite, road trip) with access that other fantasy outlets can’t offer.

Thus far, most teams and leagues have taken a backseat, allowing media and retail operations to claim much of the value they create. It’s time for teams to become more progressive, be willing to step out and be innovative. We can think of any number of ways to implement the game, that’s not the hard part. Making the decision to do it, marketing it the right way, and executing well are the keys.

Conversely, if teams don’t act soon, media outlets with focus shifting toward local will jump on it. ESPN <Fill in the City> already possesses the know-how and operations to extend fantasy to city and team levels. CBS can leverage its local radio stations to do so as well. It’s only a matter of time for RSNs finally to move on this opportunity they have sat on for years, especially with the ESPN putting the competitive pressure on.

Maybe the fantasy market truly is saturated, and fans simply can’t handle more. But, if I’m running team marketing or business operations, I’d rather find that out rather than let someone else cash in on my assets once again. A few small shops have started to poke around with Facebook apps (Watercooler), and a rogue game or two has emerged here or there, but when the teams or major media entities make the move, then it becomes serious.

What to Make of the NHL Network

Earlier this decade starting 24-hour cable networks became the cool thing to do for major sports leagues – NBA TV, NFL Network, more recently MLB Network, and of course the NHL Network. The first three have sustained notable successes and failures, nonetheless most people are aware of the three networks and what their position in the market is. The NHL, on the other hand, is an afterthought.

Few people know about the network, let alone watch it. That begs the question if your brand wants to use television as a marketing tool and revenue-generating utility, how do you plan to succeed with relatively little penetration. Last check the NHL Network is only in about 12mm households (though the number may increase with the Comcast deal), and despite league management saying the goal is wider distribution, I have not heard much of a fight from their camp to achieve this.

Conversely, they don’t have much leverage with cable operators. MLB, NFL, and the NBA each have major national television deals and broadcast and cable that earn substantial ratings, plus MLB and NBA ratings on regional networks often exceed NHL ratings in similar markets. Clearly, the other three sports have much more demand in the US. MLB boasts more content than any sport because of its long season, the NFL has made ancillary events such as the draft and combine into annual media frenzies, and the NBA’s work with Turner have given its network a boost. The NHL has none of that going for them.

The league tried to leverage cable operators by tying its Center Ice out-of-market package to network distribution, but again the package does not have the demand or popularity to force the hand of cable operators. Given the low subscriber penetration rate, and the difficult battle it faces to move the needle on that, plus the minimal subscriber fees it earns from the cable providers, I’d argue the NHL is failing to achieve both goals – marketing to a broader audience and revenue generation. That said, the league should reconsider its network strategy, rather than pursue a losing proposition.

If the league wants to stay in the content business, they should focus on developing shows and licensing them out to regional networks and international providers, rather than striving to program a 24-hour network. This could help reduce costs, while maintaining a revenue stream, and bolster distribution by leveraging with more availability – i.e. RSN’s, other niche sports networks.

Further, NHL’s online presence is well-designed and provides a great fan experience. It can try to shift the network completely online, have free and premium components, still license content out to television networks and web portals, use iTunes and other mobile distribution platforms, and shift the cable provider strategy to more VOD, which they have pursued with Comcast.

As the red-headed step child of major US sports, the NHL needs to stay ahead on the innovation curve and be willing to take more risk. Following the same network model that other leagues use is a doomed strategy for the NHL at this point. The league needs to develop something unique that extracts value from the current fan base (without gouging them), and achieves the reach and relevance needed to expand its fan base.