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Sport Management Financial Principles

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Presentation on theme: "Sport Management Financial Principles"— Presentation transcript:

1 Sport Management Financial Principles
Before starting the chapter…Have students read the article, Fair Play, Title IX, so they understand what Title IX is when we discuss it as an “increasing cost”

2 Financial Health of Sports
Serious Financial Challenges Face Managers of Sport Organizations! Increasing Costs Stable/Declining Revenue Revenue – Costs = Profit $100M - $70M = $30M $100M - $80M = $20M (increased costs) $90M - $80M = $10M (increased costs & reduced revenue) Before reviewing slide, mention… Businesses are in business to make a profit. Chapter one management definition – Working with people to get the job done in an efficient and cost-effective manner ultimately maximizing profits! Management wants profits to increase every year! It is hard to make that happen, b/c there are two serious financial challenges facing ……. As I review the Revenue – Costs = Profit line… Revenue…things like ticket sales, concession sales, sales of licensed sport mdse., sales of signage Costs…all costs of running the franchise…things like coaches salaries, cleaning supplies, janitorial staff, hotdog rolls, anything After reviewing slide, mention… In the face of increasing costs and stable/declining revenue, it is hard enough to sustain profits let alone increase them each year. Sport managers are challenged! Double Whammy!

3 Increasing Costs - Professional
Equipment Debt of financing new venues Player Salaries Add the following as I review slide: Debt is Huge! – Cincinnati spent $44 million to build Riverfront stadium in 1970 for the Reds (MLB) and Bengals (NFL) In 1996, Cincinnati decided to replace it with two venues: Paul Brown Stadium (football) and Great American Ballpark (baseball) These two cost over $720 million. It is possible that the debt service (cost of paying back principle and interest) in any given year could be as high as $40 million – almost what it cost to build Riverfront stadium just over 25 years ago. Salaries Have Skyrocketed! – In 2002, the average MLB player salary was $2.3 million, an increase of 123% from the $1.03 million average salary 10 years earlier in 1992. NHL states 68% of the total team revenues are spent on salaries. NBA states that player salaries consume 64% of total revenues annually.

4 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. Add the following as I review slide: Tuition Costs – Because tuition is rapidly increasing at all colleges, athletic departments are forced to spend much more on athletic scholarships. Title IX – Because Title IX only effects educational institutions receiving federal funding, it does not effect professional sports (interscholastic and intercollegiate athletics only)

5 Increasing Costs – High School
Equipment Title IX Compliance

6 Stable/Declining Revenue
While rising costs are a concern, sport managers also face declining revenue as a result of increased competition. 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. Corporate Sponsorship Competition for sponsorship dollars is intense. Corporations have limited sponsorship budgets, and an increasing number of sporting options for spending it. After the red heading, state the following before moving through the rest of the slide… Big four sport leagues (MLB, NHL, NBA and NFL) grew from 73 teams in 1975 to 123 in 2003 WNBA and MLS are both growing NASCAR and PGA are also growing in popularity Minor league ice hockey and basketball have grown fast over last decade Arena Football League (AFL) has grown Extreme sports  X-Games and Great Outdoor Games College Sports High School Sports The Industry is Staggering in Scope and Size!

7 Addressing the Double Whammy…
Increasing costs coupled with stable/declining revenue! How are sport managers handling it? High School Sports Booster Clubs; Participation Fees; Soliciting Corporate Sponsors (like PHS and Coca Cola) College Sports Institutional Support; Soliciting Corporate Sponsors Professional Sports Successful sport managers recognize that future financial success will depend on their ability to aggressively secure new sources of revenue. Regarding Institutional Support under College Sports heading…this refers to more financial support from the university After reviewing the slide, mention the following: At this point, we will discuss the Traditional Sources of Revenue for sports, then discuss some of the Newer Sources of Revenue that have sustained profits over the last 10 years in the face of increasing costs and declining revenue.

8 Traditional Sources of Revenue
These income generating options have provided the financial foundation for sport organizations for many decades. Ticket Sales Concessions

9 Traditional Sources of Revenue
Ticket Sales The most prominent revenue source for professional sport franchises (except NFL) Revenue is based upon two factors: Number of tickets sold Price of each ticket Teams have increased prices over the years to increase profit. Regarding the NFL’s most prominent source of revenue… 1960’s owners of NFL agreed to equally share the revenue from the national broadcast contract. Over half of the total revenue generated by NFL teams comes from this broadcast revenue sharing arrangement. This equal share revenue distribution agreement assures financial equality among NFL franchises. Teams in the smallest markets…like Green Bay Packers receive the same common share ($74.5 million in 2001) as teams in the largest markets, such as the New York Giants and Jets. Baseball…sharing does not occur…a huge difference exists in broadcasting revenue due to the difference in local TV revenues paid to teams in large metro areas vs. those in smaller cities.

10 Traditional Revenue Sources
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.

11 Traditional Sources of Revenue
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

12 Traditional Sources of Revenue
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

13 Traditional Sources of Revenue
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: Designated “family sections” where alcohol is prohibited Stop Selling practices Alcohol will continue to be a serious concern in the future! Stop selling practices: Baseball – 7th inning Football – 3rd quarter Hockey – 2nd period

14 Traditional Sources of Revenue
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: Expanded menus Upscale menus Food courts Wait staff Has it worked? Yes, spending has increased!

15 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. Luxury Seating Permanent Seat Licenses Naming Rights Corporate Sponsorship Licensing

16 New Sources of Revenue 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.

17 New Sources of Revenue 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.

18 New Sources of Revenue 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. Regarding the Palace at Auburn Hills… This $70 million arena was built for the Detroit Pistons…it has 180 suites that generate $12 million/yr in suite rentals…paid off the venue debt in 6 years! That $12 million income stream now flows directly to the Pistons! Charlotte Coliseum was built in the same year…had only 12 suites compared to the Piston’s 180…Coliseum realizes $15 million less in yearly revenue even though the overall seating capacity of the Coliseum is greater! Less revenue is the main reason the Charlotte Hornets relocated to New Orleans in 2002 Guess What? Eventually Charlotte built a new facility for their new team that began to play in Charlotte in 2004…Bobcats, right? After reviewing the slide, mention… Example of favorable lease agreement  Orioles retain 90% of luxury suite and 93% of club seat revenue at Camden Yards  yielding $12 million in yearly revenue. Thus, Luxury Seating is the fastest growing source of income for professional teams, and it is starting to be used at the college level, too!

19 New Sources of Revenue 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. Example of an area saturated with luxury suites… Baltimore/Washington area is saturated with over 6000 luxury suites in Orioles ballpark Redskins and Ravens stadiums Bullets and Capitals new arena

20 New Sources of Revenue 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

21 New Sources of Revenue Permanent Seat Licenses (PSL’s) (cont.)
3 Features of Successful PSL Program Must be sold on a permanent basis (for the life of the stadium) Owners must have the right to sell or transfer the license to any other family member 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. Add the following: Regarding permanent basis…A previous program from the Oakland Raiders failed because it lacked the permanent feature

22 New Sources of Revenue 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.

23 New Sources of Revenue 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. Add the first bullet… Lincoln Financial Group paid $139.6 million over 20 years, an annual average of $6.7 million, to obtain the naming rights to the Eagles new stadium Add the “college” bullet… University of Maryland…made a 25-year, $20 million naming rights deal with Comcast Corporation…Comcast Center opened in Nov for the Terrapins’ men’s and women’s basketball teams. Add to the “Overall” bullet… M&T Bank paid $75 million over 15 years in 2003 for the naming rights to the Baltimore Raven’s stadium. Here’s what they got for their money…prominent placement of the M&T Bank name inside and outside the stadium, a luxury suite for all stadium events, in- stadium M&T Bank ATMs, a mini-bank branch near the ticket counters, highway signs, and the renaming of the team’s band to “M&T Bank Marching Ravens” Now that is extensive public exposure!

24 New Sources of Revenue 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 Corporation Heightened Visibility Image Enhancement Product Trial or Sale Opportunities Hospitality Opportunities Heightened Visibility – opportunity to increase awareness of a new or existing brand or product Image Enhancement – Ability to create or reinforce an image for a product or to counter a negative public perception by aligning the company’s name with a team or event that has great prestige or fan appeal. Product Trial or Sale Opportunities – Opportunity to showcase product benefits (think of tire manufacturer’s sponsorship of auto racing); or to induce sales through promotional giveaways, coupon tie-ins or point of purchase displays Hospitality Opportunities – companies can entertain key clients at sporting events. For example, golf tournament sponsors offer prime customers a chance to be hosted in VIP tents for the event – a great setting for solidifying business relationships

25 New Sources of Revenue 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. After reviewing the slide, mention… Recently, sponsors of Georgia Tech football games got the following in return for their sponsorship fee: 100 regional TV spots during the game Full-page ad on game day in Atlanta’s leading newspapers Corporate hospitality tent on game day Fully catered luxury suite Priority seating for 250 Corporate logo posted at the stadium and on all season football posters

26 New Sources of Revenue 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. Also mention… Royalty fee revenue received by the 4 major professional leagues (NFL, NBA, MLS NHL) each year exceed $850 million

27 New Sources of Revenue 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.

28 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.

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