Knowledge: Professional sports are a multimillion dollar industry -- an industry that is increasingly playing by rules that don't apply to other businesses. Joining us at Knowledge@W. P.
Carey to discuss the curious business of sports is Ray Artigue, executive director of the W. P. Carey MBA Sports Business Program and professor of practice at the W.
P. Carey School of Business. Before joining
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He is also professor of practice in the finance department of the W. P. Carey School of Business.
Rob, your thesis is that the economics of sports is changing, that it's no longer important to profitability that a team wins and this seems really counterintuitive to business in general, that if you put out a bad product people aren't going to buy it. Why is it so different in sports?
Robert Stearns: I think it's a couple of issues.
First, I should point out that it's very important to the athletes that they win. Part of it is a pride issue and part of it is an economic issue, so I'm not saying that the game is being played any less vigorously on the field. But what I am saying is that the economics of winning is very different for the athlete than it is for the owners of the team and given the onset of municipal assistance and building stadiums and large media contracts, the actual won-loss record of the team becomes less and less important in driving revenues to the owners.
Ray Artigue: Well, that's correct. The television rights, fees that are paid to the league and ultimately flow to the franchises insure, in most cases, that a team will be profitable regardless of who shows up to spectate the sport. Having said that, gate receipts are a very important revenue stream and owners, players, sponsors alike, want the building full.
Artigue: Media and the rights fees that the media pays to the leagues really is the straw that stirs the drink and without it, most leagues and individual teams would not exist. It varies from one league to another, to the extent that the media moneys are necessary to make the teams go. The NFL is the extreme example simply because it's in the billions of dollars that the combination of different networks pay in any given year.
It's less than that in other leagues, but again, without it, a league and its teams suffer and NHL is a prime example of that as they really are struggling now to even find a network that's interested in broadcasting their games, let alone paying the multimillion dollar package fees that most of the leagues ask for.
Stearns: Ray has a good point, but my point is slightly, I agree in part and dissent in part, in a sense. The NHL is a great example of proving both of our points.
Ray is correct, of course. But I would argue that, teams continue to win and lose in the NHL. Every game that's played, there's one team that wins and one team that loses, so it's not as if when you play a game, there's any fewer winners or losers collectively.
My point is that, I would argue that the league's problem in the NHL is not winning and losing, per se, but the overall nature of the sport and how's it's marketed to its fan base and potential fan base and in no small part, how poorly the sport is actually displayed on television through no fault of the game itself. It's a very exciting game. It's just that hockey doesn't do well on television screens.
My point is that, for the individual team, not for the liveliness of the sport itself, but for the individual team, such a large revenue stream is comprised of things unrelated to winning and losing, that the individual owners themselves are more interested in negotiating the more large, macro, branding type of agreements than actually, necessarily, putting a winning product on the field. The Cardinals, and Ray and I, I guess, could talk about this a bit, too, the Cardinals are a good example of a team that clearly makes money, yet has had difficulty filling the stadium for a decade because of a poor product.
Artigue: Well, I think Rob's right.
It's a shining example in our own backyard where mediocrity has had nothing to do with the financial success of the NFL Arizona Cardinals and again, this has to do with multiple revenue streams, beginning with the media, rights, moneys, propping up that franchise and whether or not people come to the games or watch them on TV has been irrelevant pertaining to their profitability. This year, their stadium is full, primarily because they're on this wonderful honeymoon of being in the NFL's newest facility and that will only continue if the team wins, otherwise they will suffer the lesser gate receipts, revenues from ticket sales. But again, win or lose, they will continue to be profitable.
Stearns: It's interesting also, how the lottery systems in the various sports affect the economics of winning and losing also. In a sense, if you build a losing team, the league helps you out and allows you to draft in an earlier pool of available players, thereby helping you in a sense, put together a winning product on the team for your home fans. Whether that's important or not, we're debating, but nonetheless, the leagues do help you out; reward you for mediocrity, in a sense, by giving you a chance to get even.
Now that's good for the owners really, as much as it is for the fans because the more evenhanded the league is, the more competitive the games are and the more people watch, but it's the more people watch from a broader audience, the television audience and to me, that's the economic driver rather than the individual product on the home team's field on that Sunday or in baseball it's the same thing.
Knowledge: That brings up a point that I know, when I first moved into town and the Arizona Cardinals were still pretty new and everybody went to them, but did the Cardinals moving to another division affect also gate receipts, because they were in a much stronger division for a while there. You had the Cowboys coming into town.
You had the Giants coming into town. The Eagles coming into town and there were a lot of people from those parts of the country who would go to the games to see them, not the Cardinals. Ray, has that affected these gate receipts?
Artigue: Well certainly, NFL fans want to see a variety of competitors come to town, so the movement of teams into different divisions is clearly about that. It's about trying to strike the balance that Rob mentioned. Call it parity, a more positive reference would be just competitiveness.
Fans want to see good games. That's what drives television ratings and television ratings drive sponsorships and we haven't really touched on that yet, but the networks are not paying these incredibly high rights fees unless they think people are tuning in and allowing for the equally high advertising rates that are only going to be paid if the cell phone companies and the banks and the beer companies are selling more of their products. So it's a trickle down effect and the winning and the losing does matter, relative to people being interested in the contest and actually turning on their television sets to watch it.
Stearns: Ray is absolutely right. The point that he's made is that winning or losing for any two teams that happen to be playing, as long as those two teams are even, and someone feels like watching a basketball or football game they're more likely to turn on and watch that game. So Ray is right.
What the leagues have done is figured out that parity is very important amongst the teams because that creates a more competitive game, whatever the game is. And so the national television audience in general will pay to see that game. And that really makes my earlier point that the individual team, and putting the absolute most, best individual team on the field becomes less important as long as the overall mix of games are competitive.
There's an additional issue that is sort of raised in here also. Suddenly individual star power, individual players I think become an increasingly lively part of this economic discussion of what drives the economics of the overall league. People come to see Shaq.
People come to see Barry Bonds. People come to see Eli Manning.
If you can get a star on your team, which you may actually be able to get by losing, as we did via getting Matt Leinart.
Suddenly the economics may look rosier for you and your ratings. It's a curious dichotomy. It may pay to lose.
Knowledge: I think it's also interesting that with basketball, baseball, you still have the dynasties. That has pretty much gone to the wayside with the NFL. A team will be good for about three years and then the team is just broken up by free agency.
So are people following players or are they still following the teams? Whether or not there are now these powerhouses like the Chicago Bears used to be and the way the Cowboys used to just dominate.
Artigue: I think the card carrying, bona-fide sports fan, whether it be in the NFL or Major League Baseball, they're following the team.
They're following the brand, the logo on the cap, whether or not they still live in that city or via television should they move to another market. They've grown up with that team. There are strong emotional loyalties and allegiance.
Having said that, I think that the fans also follow the so-called superstars, the megastars, regardless of what team they play on. Randy Johnson has played for
Shaq would be another example in the NBA.
So people love a winner. They love a superstar.
Tiger Woods would be the example in terms of how he's brought so many fringe viewers and fans to the PGA Tour who could have cared less before. He's a phenom, and everybody responds to that.
But I think at the end of the day you follow a team.
You realize going into it that the rosters are going to change, but that's still your team. You have a cap or a jersey that bears that logo, and that's your connection to that particular organization.
Stearns: I think Ray is right, and it carries through as you begin again to look at the economics of the way the leagues are driven.
Take a look at the huge drawing power of the megabrand of the Chicago Cubs or the Boston Red Sox, where jerseys for these teams and caps for these teams are seen in every city in every country.
If there's a remote corner, there is a Boston Red Sox fan somewhere. And this is very important because it extends the reach of the economics of that particular team and it does drive the overall profitability of the league up.
But again, recognize that that's a very different argument than "Are the Red Sox or Cubs winning?"
If winning was really the most important thing in the economic equation, the Cubs would have a very different roster than they have over the past 30 years. They would have to.
So there must be something else.
Knowledge: So Rob, expansion teams. The NFL has expanded a lot over the last 10 years compared to how long it would take to get an expansion team going before.
Does that dilute the value of the game or does that enhance its popularity and benefit all the teams?
Stearns: It enhances, I believe, the economics of the game and also the draw of the game. Why?
Because when you put an NFL franchise in Nashville, not only does Nashville get interested in the NFL and their own team for reasons that are curious to discuss, but also now a Nashville audience can be exposed to the Dallas Cowboys and the Oakland Raiders and some of the other high draw NFL franchises.
So this is basically like launching a product in a new market. Whether the product is football or the product is peanuts, it's the same drill.
Let's get the product to as broad an audience as possible and then market the heck out of the product.
The draw of football in
Artigue: Rob's right. The more product that's out there the more reach that the NFL has in their effort to cultivate fans. At the same time it provides more product and more television programming.
When you look at the array of television partners that the NFL has assembled, I don't think anybody, and I'm making an extreme point here, but there may be a network or two in the world that is not broadcasting some NFL contest.
So it's a combination of ABC and ESPN, which of course are Disney properties, NBC has gotten back into the game with their Sunday night only games, TNT, so they've carved up the pie. There are enough games now to be able to give everyone a piece.
They're selling milk by the quart now instead of the gallon.
Of course when you do that, you pay more for it. The networks, as they compete against one another, are glad to just have their piece at that premium price.
It maximizes revenues for the league and exposure for the league and the franchises, and ultimately revenues for the individual owners.
Knowledge: It seems to me now that in these sports, particularly, for some reason more football, probably because there are fewer games, it's not so much the winning and losing as the spectacle. It's a place where people go so they can say 'hey, I saw a pro game.
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