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By Irving Rein and Adam Grossman

Stunning upsets. Dramatic finishes. Individual brilliance. Goals galore. The 2014 World Cup has started off with a bang. Yet, not as many people as expected are on hand to hear and see the excitement in venues throughout Brazil. Outside of the home country’s matches, there have been thousands of empty seats in stadiums throughout the tournament. Even marquee matchups, such as the Netherlands-Spain game, have failed to fill their venues. The Italian and English football associations each had 2,500 tickets allocated for their recent game. While England sold their entire allotment, Italy was reported to have returned hundreds of tickets back to FIFA.

So why is the world’s most popular sporting event playing to empty seats? Hosting the event in Brazil does create unique structural challenges that likely have and will prevent more sellouts. Because of the billions of dollars of public funds spent on the World Cup by Brazil, FIFA allocated a large number of tickets for exclusive purchase by fans from the host nation that are paying the bill. In a country where a 10-cent price increase in bus fare caused a nation-wide protest last year, paying $135-$188 dollars per match is likely too expensive for many Brazilian soccer fans.

However, the World Cup is not alone in having difficulty filling empty seats for major sporting events. For example, the National Football League (NFL) and the Southeastern Conference (SEC) are two of the most popular sports leagues in the United States. Yet, both organizations have seen declines in attendance over the past years and are spending significant resources in addressing this venue challenge. With ticket prices continually increasing and technology making it easing than ever to watch games on your television, laptop, or phone, how do sports organizations get people to come to venues?

Arena da Amazônia – Amazon Arena (Quando ainda em construçao – When still under construction.) Photo by Gabriel Smith. CC BY 2.0 via gabriel_srsmith Flickr.

The 2014 World Cup in Brazil demonstrates many of these issues. One of the biggest place marketing challenges is the location of the stadiums. Both FIFA and Brazil essentially used the Field of Dreams “if you build it they will come” strategy. Brazil decided to build or renovate 12 stadiums in many different parts of the country, including venues in remote locations throughout the country. For example, the United States’ second game will be held in Manaus in the Amazonian jungle. The city can only be reached by boat or plane as no highways connect the city to the rest of Brazil.

Brazil could have focused on eight venues — the minimum required by FIFA to host a World Cup — in locations closer to metropolitan areas. We have found that many of the most successful venues already take advantage of existing infrastructure rather than depending on new development. It is likely that more people would attend World Cup matches if they did not have to rely on new roads, bridges, and rail lines to get there.

Brazil and FIFA have also suffered from the lack of an integrated place marketing strategy. The most forward thinking sports organizations have extended their footprints beyond their venues. FIFA deserves significant credit for extending the World Cup’s footprint beyond the stadiums. For example, FIFA Fan Fests in Brazil are often held on gorgeous beaches in cities where games take place. They are filled with music, television, food, and drink to celebrate the 32 days of the World Cup. This encourages fans from both inside and outside of Brazil to have a World Cup experience without having to attend the games. Millions of people are expected to attend these Fan Fests as they have done in every World Cup since 2002.

However, these place extensions work best when they also encourage people to actually attend the games. In Brazil, the Fan Fests can provide a better overall experience than going to the stadiums. Because many of the stadiums were completed only days before the World Cup started, they lack many of the amenities that are found at the Fan Fest. For example, Arena Amazonia in Manuas will only feature “restaurants and underground parking.” That hardly compares to the festive experience at a Fan Fest. Attending a Fan Fest also does not require buying a ticket or dealing with the traffic problems that occur when traveling to stadiums, and people can still see the game on large television monitors with thousands of other fans. Why attend a game when you can have a better and cheaper experience at a Fan Fest?

The World Cup in Brazil shows that thrilling competitions alone do not fill empty seats. Creating an integrated strategy requires a complete analysis of all factors that would prevent a fan from coming to a venue. This includes examining transportation, accessibility, and technology issues – and making certain that game attendance is not negatively impacted by efforts to engage fans through place extensions.

Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. Irving Rein is Professor of Communication Studies at Northwestern University. He is the author of many books, including The Elusive Fan, High Visibility, and Marketing Places. He has consulted for Major League Baseball, the United States Olympic Committee, the National Aeronautics and Space Administration, and numerous corporations. They are the co-authors of The Sports Strategist: Developing Leaders for a High-Performance Industry with Ben Shields. Read previous blog posts on the sports business.

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By Adam Grossman

On Sunday, the NBA approved the sale of the Los Angeles Clippers to former Microsoft CEO Steve Ballmer for $2 billion. From a brand management and crisis perspective, it is easy to see why the NBA wanted to approve this sale as quickly as possible. I, among many others, have written about the damage that current owner Donald Sterling has done to both the team and the league.

From an economic perspective, it becomes clearer why the NBA wanted to approve the sale as well. Using virtually any standard valuation metric that exists today, Ballmer has agreed to vastly overpay for the Los Angeles Clippers.

Finance industry professionals (investment bankers, venture capitalists, and private equity firms) primarily use three valuation approaches: inherent valuation, relative valuation, and comparable valuation. Using any of these approaches, it is virtually impossible to see how the Clippers are worth $2 billion.

To complete a valuation of a sports team, you need to start with understanding an organization’s revenue streams. Six revenue streams account for virtually all money earned by a sports organization. Like many new owners buying sports franchises, Ballmer is betting that two revenue streams will increase significantly to make his investment profitable: media rights and subsidy. Media revenue refers to the television, mobile, and digital distribution agreements signed by an individual organization. Subsidy revenue includes all revenue shared by a sports league with individual franchises.

The Los Angeles Clippers revenue will increase significantly in both areas after the 2015-16 season. Both the team’s local media rights deal and the NBA’s league wide revenue deals expire after that season. According to Forbes, the Clippers’ local television rights deal can increase to as high as $75 million per year from its current $18 million per year value. In addition, the NBA’s league wide media rights deal is expected to double from its current $930 million per year value. This means the Clippers will receive double its current media rights subsidy from a new deal – about $30 million per year.

Minnesota Timberwolves-LA Clippers game at Staples Center. Photo by David Jones, 2012. CC BY 2.0 via davidcjones Flickr.

While this is all great news for the Clippers, it does not make the team worth $2 billion. An inherent valuation approach uses a discounted cash flow model to evaluate an asset’s worth. This essentially means looking at how much profit is generated by an organization and discounting the profits based on the potential risk factors. Factor in both idiosyncratic (risk associated with owning the Clippers specifically) and systemic risk (risk associated with any financial asset). In our analysis, the Clippers generated an estimated $11 million in annual operating profit from now through 2015-16 season. Starting in the 2016-17 season when the new media rights and subsidy revenue streams start, the Clippers would generate $54 million in annual operating profit in perpetuity. Using this approach, we found the Clippers to be worth $1.05 billion.

We don’t want, however, to rely on a single technique for our assessment of the Clippers’ value. Therefore, employ a relative valuation approach that compares a company’s value using a standard valuation metric. The most common metric used is a price to earnings (P/E) ratio. This means that you compare the price of an asset compared to the amount of annual profit that asset is generating. For example, the average P/E ratio on the S & P 500 is currently at 18.3. The Clippers would have an estimated 36.8 P/E ratio given our estimated operating profits after the 2016-17 season after Ballmer purchases the team. Using the average P / E Ratio of the S & P 500 would produce a value of $990 million.

The only real argument that could be made for the Clippers being worth $2 billion would be by using a comparable valuation. With this approach, an investor looks at what other similar assets have been sold for to determine a value. You only have to look at the Clippers’ baseball neighbors to see a team that recently sold for a similar amount. The Los Angeles Dodgers were recently sold for $2.15 billion to a group led by Guggenheim Partners. While both are sports organizations, the Clippers and the Dodgers are actually very different types of properties. Because it has a bigger venue and plays many more games, the Dodgers currently make as much or more in annual ticket sales revenue than the Clippers make from all revenue streams. The Dodgers also recently signed a $7 billion 25-year local media rights agreement that will pay it far more in average annual dollars than any new media rights deal the Clippers could negotiate. A more appropriate comparison would be to examine the Clippers compared to other NBA franchises. The Milwaukee Bucks recently sold for a league record of $550 million. Ballmer is now paying 3.6 times more than the record amount paid for an NBA franchise.

To be fair to Ballmer, both the media rights and subsidy deals could far exceed expert expectations. The Los Angeles Lakers recently signed two new media rights deals for their English and Spanish broadcasts for $4 billion over 20 years, an average of $200 million per year. The NFL has recently signed new media rights deals that pay the league $7.25 billion in annual revenue, an average of $227 million per team. If the Clippers end up receiving $150 million per year in media rights revenue and the NBA contract triples from its current value then we would estimate the team being worth $2.05 billion. It is also likely that ticket sales and sponsorship revenue will increase significantly with a new owner.

ESPN’s Bill Simmons recently stated that the sale of the Clippers resembled the purchase of a home without the buyer being able to complete a home inspection. The sale of the Clippers was happening so quickly that it was impossible for Ballmer to know what exactly he was buying. However, Ballmer can (and likely has) completed an inspection of the Clippers similar to the one we just described — and he will discover there is no way to generate a $2 billion valuation for the Clippers.

Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. He is the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry with Irving Rein and Ben Shields. Read his previous blog posts.

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By Adam Grossman

It is rare for a seventh round National Football League (NFL) draft pick to be at the center of the sports world. Then again, Michael Sam is not an average draft pick. Sam is trying to become the first openly gay player to compete for a NFL team.

While it is not clear that Sam will make the St. Louis Rams’ final roster, what is certain is the impact that Sam has already had without playing a down in the NFL. Sam’s story and the conversation it has sparked on sexuality in the NFL has been well documented. What has received less attention is the economic impact Sam could have in helping the NFL reach out to an often non-targeted customer demographic.

Organizations should more heavily seek out lesbian, gay, bisexual and transgender (LGBT) sports audiences as customers. Not only do LGBT demographics have estimated annual buying power of $790 billion, but they are often highly engaged sports fans who are looking to become more involved with leagues and teams. Yet, sports organizations rarely target LGBT audiences in effort to grow revenues. Even as leagues and teams increasingly target new demographics such as women, Latin, African American, and international audiences among other groups, LGBT fans often do not receive the same amount of attention.

Fans flock senior defensive end Michael Sam as he carries his souvenir (a rock from the rock ‘M’ at Memorial Stadium) after the win vs Texas A&M, 30 November 2013. Photo by Mark Schierbecker (Marcus Qwertyus). CC BY-SA 3.0 via Wikimedia Commons

Sam’s jersey sales are one example of why this could be a mistake. As Outsports’ Cyd Zeigler first reported, Sam’s jerseys sales were the second highest among the NFL’s most recent draft class. His jersey has outsold number one overall pick Jadeveon Clowney and number three pick Blake Bortles, the first quarterback taken in the draft. Only Cleveland Browns quarterback Johnny Manziel has more jersey sales than Sam.

Sam’s jersey success is similar to that of NBA Brooklyn Nets center Jason Collins. When he announced he was gay after completing his season playing for the Washington Wizards, Collins jersey became the highest selling jersey for the team. In addition, thousands of orders were placed for Collins jersey when he signed his first 10-day contract with the Nets.

We recognize that not every jersey sale for Sam and Collins was purchased by an LGBT audience member nor is it required to have an openly gay player to target these fans. Yet, Sam and Collins show there is an appetite for products marketed to and by LGBT audiences. For example, sports sponsors have already made significant efforts to pursue the LGBT demographic. During the 2014 Sochi Olympics, Chevrolet produced two commercials featuring gay couples. In addition, Nike has launched the Be True Campaign with products, advertising, and events specifically targeting LGBT demographics throughout the United States.

To the credit many sports organization across the world, there have been significant efforts to encourage equality and tolerance for LGBT athletes, fans, media, and sponsors. The NHL’s combined efforts with the You Can Play Project are a particularly notable example of how sports leagues are trying to take a leadership role in ending homophobia with internal and external audiences.

However, Sam and others demonstrate that sports organizations now have an opportunity to include LGBT audiences as their customers. By targeting LGBT fans, media, sponsors, and supporters now, sports organizations can grow their customer base and gain a competitive advantage.

Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. He is the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry with Irving Rein and Ben Shields.

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By Adam Grossman

Donald Sterling’s lifetime National Basketball Association (NBA) ban, $2.5 million dollar fine, and potentially forced sale of the Clippers may seem to fit in the category of previous owners who received a comparable punishment. Marge Schott was forced to sell the Cincinnati Reds for her anti-Semitic and racist comments while owner of the team. George Steinbrenner was suspended twice as owner of the New York Yankees, with the last occurrence spurred by his allegedly hiring a private investigator to examine the history of his team’s star slugger Dave Winfield.

However, Sterling’s comments and the reaction they provoked is an example of the evolution of the modern crisis. This includes:

• Convergence of Sports and Entertainment — Sterling’s comments were first reported on TMZ.com, a site known for celebrity gossip more than sports coverage. This made sense, as TMZ created TMZ Sports because of the convergence of sports and entertainment. More specifically, players, coaches, and even owners are some of the most well-known celebrities in entertainment.
• Influence of Technology on Sports Crisis — Ten or even five years ago, there would have been less of a chance that a crisis would have emerged because of Sterling’s comments. The only reason the Clippers’ owner’s statements were made public is that someone recorded a private conversation on a mobile phone. The comments were then posted on TMZ.com and quickly spread throughout social media. While Sterling’s comments were abhorrent, it was unlikely he thought they would ever be made public. Rather than relying on hearsay of a fan sitting near the Clippers owner at the game, the league, media, and public could directly hear what Sterling had to say in his own words. This is a reminder that every sports fan can become a citizen journalist by turning on their smart phone.
• Pre-crisis Preparation — Sterling’s racial views have been well known and well documented. On his ESPN 980 radio show in Washington D.C., Tony Kornheiser and his Pardon The Interruption co-host Michael Wilbon recently discussed that they had conversations about Sterling’s views ten years ago. In addition, the Department of Justice had filed suit against Sterling alleging that his housing practices violated anti-racial discrimination laws. The NBA could have recognized this as a potential crisis and moved earlier to oust him before these events forced the league’s hand.

Los Angeles Clippers players stand up for the national anthem before the 31 December 2007 game against the Minnesota Timberwolves at Staples Center. Photo by Paul de los Reyes. CC BY 2.0 via Wikimedia Commons.

Virtually every one from players, coaches, and owners to media critics, pundits, and morning newscasters have analyzed the impact that Sterling’s comments had on his team’s and the NBA’s brand. What has received less coverage is why the NBA needed to take this type of action to try to resolve this crisis from an economic perspective. Sterling’s crisis potentially impacts three key revenue streams that demonstrate why his immediate ban makes sense for the NBA.

• Subsidy / Revenue Sharing — Like most major professional sports leagues, the NBA shares revenue among all 30 teams. In fact, the NBA rules dictate that teams keep 50% of their revenue with teams sharing the remaining 50% with the entire league minus expenses for items such as arena operating costs. Therefore, any revenue lost by the Clippers impacts every NBA team. Sterling has taken steps in the past to ensure that the Clippers have remained profitable even when the team is losing. His team’s recent success combined with the Lakers relative decline has made the Clippers a more important franchise for the NBA in the large Los Angeles market.
• Sponsorship – Corporate partners spend millions of dollars with the league and its teams to increase their brand awareness and enhance their brand perception. In particular, the NBA can help companies target young, male, and often African-American audiences. It would be extremely difficult to sell or with current corporate partnerships and sign future corporate partners when their brands could be associated with Sterling. The immediate exit of State Farm and Kia illustrates the possible crisis consequences. While some sponsors have already returned, Sterling’s comments and the uncertainty of whether he will sell the team still threatens their brand.
• In Game – In Game revenue consists of money a sports organization generates through competition. Most in game revenue comes from tickets, concessions, and parking that occurs on game days. The question here is whether fans would stop attending Clippers’ games because of Sterling’s comments. Unfortunately for Los Angeles sports fans, there is an example of another owner who had a similar impact on his organization. When Frank McCourt owned the Dodgers, he was embroiled in a bitter divorce and also took steps that forced the team into bankruptcy. During McCourt’s final year owning the team in 2011, average game attendance declined to 36,173 as compared to 46,172 in 2013. One could have expected a similar 22% decline for the Clippers with Sterling continuing to be the team’s owner.

Sterling’s past actions and recent comments deserved the harsh punishment. Understanding the relationship between crisis and revenue, however, can outline and forecast the possible financial questions of crisis responses. If Sterling fights the ban or refuses to sell the team, the above analysis will play an important role in the future of the club and revenue for the league.

Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. He is the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry with Irving Rein and Ben Shields.

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The post Banning Sterling makes a lot of cents for the NBA appeared first on OUPblog.

        

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