Sport Management

Financial Principles

Financial Health of Sports

Serious Financial Challenges Face Managers of Sport Organizations!

1. Increasing Costs

2. Stable/Declining Revenue

Revenue – Costs = Profit

$100M - $70M = $30M$100M - $80M = $20M (increased costs)

$90M - $80M = $10M (increased costs & reduced revenue)

Increasing Costs - Professional

Equipment Debt of financing new venues Player Salaries

Increasing Costs - College

Equipment Increasing Coaches Salaries Tuition Costs (for athletic scholarships) Title IX Compliance

Statute aimed at eliminating gender discrimination in educational institutions that receive federal funding.

Increasing Costs – High School

Equipment Title IX Compliance

Stable/Declining Revenue

While rising costs are a concern, sport managers also face declining revenue as a result of increased

competition.1. Fan Support

Competition for fans is intense. With more variety of sporting options, consumers have never had so many options for spending their entertainment dollars.

2. Corporate Sponsorship Competition for sponsorship dollars is intense.

Corporations have limited sponsorship budgets, and an increasing number of sporting options for spending it.

Addressing the Double Whammy…

The Double Whammy!

Increasing costs coupled with stable/declining revenue!

How are sport managers handling it?

1. High School Sports Booster Clubs; Participation Fees; Soliciting

Corporate Sponsors (like PHS and Coca Cola)

2. College Sports Institutional Support; Soliciting Corporate Sponsors

3. Professional Sports Successful sport managers recognize that future

financial success will depend on their ability to aggressively secure new sources of revenue.

Traditional Sources of Revenue

These income generating options have provided the financial foundation for

sport organizations for many decades.

1. Ticket Sales

2. Concessions

Traditional Sources of Revenue

1. Ticket Sales The most prominent revenue source for

professional sport franchises (except NFL) Revenue is based upon two factors:

1. Number of tickets sold

2. Price of each ticket Teams have increased prices over the years

to increase profit.

Traditional Revenue Sources

1. Ticket Sales (continued) Future Challenge Determining optimal

ticket prices! Increasing prices discourage fan from attending There exists a price threshold; the price beyond

which fans will resist payment We identify customer’s expected price threshold

by conducting market research.

Traditional Sources of Revenue

2. Concessions Professional Sports

Concessions play a BIG Role Food service and souvenir merchandise

account for a large share of revenue. Minor Leagues

Concessions play a BIGGER Role Since ticket sales are low, concession sales are

very important – they may actually determine a teams profitability

Traditional Sources of Revenue

2. Concessions (continued) Amateur Sports

Concessions play a LITTLE Role Less of a financial role because of the lack of

beer sales. In professional sports, beer account for

approximately 35% to 55% of total concessions. Most colleges and high schools do not allow

beer sales

Traditional Sources of Revenue

2. Concessions (continued) Alcohol is a serious concern

From a revenue perspective, sales of alcohol make sense, however…

Heightened awareness of the negative consequences of drinking, including traffic deaths, underage drinking, and unruly fan behavior, have led sport organizations to re-evaluate their policies surrounding alcohol.

Policies include:1. Designated “family sections” where alcohol is prohibited

2. Stop Selling practices

Alcohol will continue to be a serious concern

in the future!

Traditional Sources of Revenue

2. Concessions (continued) Latest Trend in Concessions

Offering diverse and higher quality food and beverage options.

Based on the idea that fans will spend more if offered appealing choices like:1. Expanded menus

2. Upscale menus

3. Food courts

4. Wait staff Has it worked? Yes, spending has increased!

New Sources of Revenue

Ticket Sales and Concessions will continue to provide a foundation of revenue for sport

teams, however, increasing costs and competition force managers to seek out new

sources of revenue to maintain profits.

1. Luxury Seating

2. Permanent Seat Licenses

3. Naming Rights

4. Corporate Sponsorship

5. Licensing

New Sources of Revenue

1. Luxury Seating Fastest growing source of income for

professional teams. Luxury Suites

Wet bar, carpeting, TV, catered food, private bath, VIP parking pass, seating for 12 to 24

Purchased or leased by corporations for entertaining clients or rewarding employees.

Tax laws allow businesses to deduct 50% of the cost as a business entertainment expense. This has encouraged thousands of corporations to invest.

New Sources of Revenue

1. Luxury Seating (continued) Club Seats

Wide bottom, cushioned seats with chair backs, in-seat wait service, enclosed lounge area, wide screen TV

Less extravagant option for individual fans seeking premium seating.

New Sources of Revenue

1. Luxury Seating (continued) Income potential is huge!

Income potential was fully demonstrated when the Palace at Auburn Hills was built in 1988.

Realization of income potential associated with luxury seating has prompted many teams to threaten relocation to a newer venue with more suites.

To deter relocation, teams are often granted favorable lease agreements allowing them to retain the majority of luxury seating revenue.

New Sources of Revenue

1. Luxury Seating (continued) Future Challenge

It is possible that suite construction has exceeded demand.

Will there be enough corporations to support all the suites being built?

In every market there is a finite number of businesses with the financial capability and willingness to spend money on suites.

New Sources of Revenue

2. Permanent Seat Licenses (PSL’s) Give fans the right to purchase season

tickets, often for the life of the venue, in return for an up-front payment.

Prices vary based upon seat location Colleges have begun to adopt the concept Eagles PSL program at the Link

Offered 29,000 seat licenses Prices ranged from $1,760 to $3,617 Raised $60 million

New Sources of Revenue

2. Permanent Seat Licenses (PSL’s) (cont.) 3 Features of Successful PSL Program

1. Must be sold on a permanent basis (for the life of the stadium)

2. Owners must have the right to sell or transfer the license to any other family member

3. Money back guarantee – team agrees to buy back the license for current market value or no less than 70% to 85% of its original price.

New Sources of Revenue

3. Naming Rights A corporation purchases the right to put its

name on a stadium or arena. Started in the 1990’s, but halted a bit in early

2000 due to economic slowdown and technology industry stock crash, which forced many companies to prematurely end their naming rights deals (Enron; Adelphia).

Facility owners are now careful about attracting naming rights partners that are stable and reputable.

The naming rights market seems to have begun to reemerge since late 2002.

New Sources of Revenue

3. Naming Rights (continued) Going rate at a major venue is $2 to $6

million per year Colleges have begun to use naming rights

sponsors as a way to raise money to build new facilities.

Overall, corporations see naming rights as a cost-effective way for their company to receive extensive public exposure.

New Sources of Revenue

4. Corporate Sponsorship The acquisition of rights to affiliate or directly

associate with a product or event for the purpose of deriving benefits related to that affiliation. (remember this?)

Benefits for the Corporation1. Heightened Visibility

2. Image Enhancement

3. Product Trial or Sale Opportunities

4. Hospitality Opportunities

New Sources of Revenue

4. Corporate Sponsorship ( continued) Corporate sponsorship is a great way to

achieve extensive public exposure. Future Challenge

Large corporations will receive thousands of sponsorship proposals a year.

Marketing approach to solicit sponsors; proposals must be tailored to the needs of the business.

Key to identify what a company is willing to pay, and what they will want in return for investing as a sponsor.

New Sources of Revenue

5. Licensing Sale of licensed sport merchandise The more fans buy, the more revenue! Revenue comes from Royalty Fees

Paid by the manufacturer for the right to sell merchandise with a team name or logo

% of the wholesale price of the product Standard royalty fee is 8.5% for the 4 professional

leagues. In each league, royalty fee proceeds are pooled

and divided equally among all teams in the league.

New Sources of Revenue

5. Licensing (continued) Also used in minor leagues and at the

college level Not yet used with amateur and high school

sport programs Great way to protect and promote a team

name and logo while generating substantial revenues.

Conclusion

Sport entities are facing a Double Whammy; stable/declining revenue resulting from increased competition, and increasing costs.

Traditional revenue sources, like ticket sales and concessions are not enough to maintain profits.

To maintain profits, successful sport managers will continue to create and expand opportunities for their organizations to secure new sources of revenue.