lesson 3.2 – the financial structure of sports business

Lesson 3.2 – The Financial Structure of Sports Business

LESSON 3.2

Intro to Basic SEM Principles

The Financial Structure of Sports Business

Professional team sports are finding

it increasingly difficult to achieve financial successand turn a profit

LESSON 3.2


The Financial Structure of Sports Business

LESSON 3.2


Sports Business Financial Structure

Revenue Stream:

The means for an organization’s cash inflow, typically as a result of the sale of company products or services

As a result of increasing revenue streams, inflated media rights fees and new means for generating revenues in professional sports, overall franchise values have risen exponentially in the past decade, a trend that is expected to continue

LESSON 3.2


Discussion Topic

What revenue streams do you think sports organizations rely on to achieve profitability?

Revenue Streams For Sports Teams

Ticket Sales Sponsorship Licensing and Merchandise Concessions Parking

LESSON 3.2



Additional Revenue Streams For Sports Teams

1. Luxury Suites

2. Club / VIP / Premium Seating

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Luxury Suites & Premium Seating

Often times the lack of suites or premium seating options within a venue or facility will prompt a sports franchise to lobby for a new

stadium

LESSON 3.2


Discussion Topic

Can you think of an instance where a pro sports team has

threatened to move the franchise if it didn’t receive funding for a

new stadium or arena?

Why would a franchise do that?

http://www.forbes.com/video/3738648975001/

LESSON 3.2


Discussion Topic

The NBA’s Seattle Sonics made an aggressive bid to gain funding for a

new arena from 2007 to 2008.

Why do you think they were lobbying for a new arena?

LESSON 3.2


Discussion Topic

Key Arena lacked the modern day amenities that help to generate additional revenue for

a team, such as luxury suites and club seating, putting the Sonics in a position

where it was difficult to achieve profitability

LESSON 3.2


Discussion Topic

Eventually, the Sonics, unable to reach an agreement for a new arena, were relocated by its new ownership group to Oklahoma

City where they are now known as the “Oklahoma City Thunder”

LESSON 3.2


Sports Business Financial StructureIn Chicago, the relationship between the Chicago Cubs ownership and their neighbors (affectionately known as “Wrigleyville”) soured when the team announced in 2013 plans to renovate the stadium. Proposed renovations would include a 6,000-square-foot video board in left field, a 1,000-foot advertising sign in right, a new hotel and more night games, an “open-air plaza” and an office building with retail space, all in an effort to create new revenue streams for the franchise. According to a report in the San Jose Mercury News, the San Francisco 49ers sold $138 million worth of luxury suites in the their new Santa Clara football stadium

LESSON 3.2



An artist rendering of the club area for the new 49ers stadium

Additional Revenue Streams For Sports Teams

3. Television Contracts

4. Additional media contracts (satellite, radio, internet)

5. Additional Revenue(investments, stadium rentals for weddings)

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LESSON 3.2


Television Contracts

TV contracts provide big money

for franchises in the game of sports

business, now accounting for a

major portion of a team’s overall

annual revenue

LESSON 3.2


Television ContractsIn 1973, the NBA signed a contract with CBS, yielding $27 million in revenue over three years

In 2006, the NBA inked a deal with ABC/ESPN worth $2.4 billion through 2008 (the contract was extended in 2007 to run through the 2015-16 season but terms were not disclosed)

LESSON 3.2


Television Contracts The Pac-12 conference agreed to a 12-year television contract with Fox and ESPN worth about $3 billion, allowing the conference to quadruple its media rights fees and start its own network

The contract, which will begin with the 2012-13 season, will be worth about $250 million per year, guaranteeing each of the 12 schools in the conference about $21 million each per season (in 2010 the entire conference generated just $60 million in rights fees)

LESSON 3.2


Television ContractsAlthough the terms were not disclosed, the Sports Business Journal revealed the Los Angeles Dodgers’ plans to launch their own regional sports network worth an estimated $7 billion over 25 years.

LESSON 3.2


Television ContractsAccording to the book The Cartel: Inside the Rise and Imminent Fall of the NCAA by Taylor Branch: “In 2010, despite the faltering economy, a single college athletic league, the football-crazed Southeastern Conference (SEC), became the first to crack the billion-dollar barrier in athletic receipts. The Big Ten pursued closely at $905 million. That money comes from a combination of ticket sales, concession sales, merchandise, licensing fees, and other sources—but the great bulk of it comes from television contracts.”

LESSON 3.2


Additional Media Contracts In 2007, Sirius Satellite Radio reached an

agreement to broadcast NASCAR races and related events over a five-year period for $107.5 million (the deal was extended in 2012 through 2016 but terms were not disclosed)

LESSON 3.2


Additional Media Contracts CBS paid $6 billion for the rights to broadcast the

NCAA Tournament (March Madness) over an 11 year period, a deal that ends in 2013 that also included the right to stream games over the Internet (the online broadcasts generated an estimated $60 million in ad revenue with its March Madness on Demand package in 2012)

LESSON 3.2


Additional Media Contracts The Yankee’s YES Network struck an agreement with

Major League Baseball to make their games available on the Internet within the New York area. The franchise now gains a significant new revenue stream, from the millions of broadband users in the market who are not sitting in front of their televisions but are in offices and other locations with a laptop or a wireless device

LESSON 3.2


Additional Revenues

Additional Revenues

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Additional Revenues The Boston Red Sox created Fenway Sports Group, a marketing firm that develops publicity

campaigns for such organizations as Boston College, NASCAR, online ads, and many more areas (and owns equity in other properties like

Red Sox Destinations and Roush Fenway Racing)

They were profitable in their first year, and brought in more that $200 million.

LESSON 3.2


Additional RevenuesAccording to a Forbes report, the money that

all MLB teams made from the $450 million sale of the Montreal Expos in 2006 was

invested in hedge funds that are now worth more than $1 billion

Sports Team Expenditures

1. Facility Rental /Leasing arrangements

2. Staff /Player Salaries(Payroll)

3. Marketing

4. Investment in the Customer

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LESSON 3.2


Television ContractsThe driving issue for NHL owners as it

related to last season’s lockout wasn't revenues but expenses as many small market teams were unable to achieve profitability thanks in large part to high player salaries

Last year, the NHL paid $1.87 billion to its players at an average player salary of around $2.4 million. Meanwhile, only 13 teams earned over $100 million in 2010-11 in a year where the average player payroll was nearly $60 million.

Sports Team Expenditures

5. General Operating Expense

6. Stadium/venue/facility financing

7. Information management/research

8. Team expenses (travel etc.)

9. Maintenance and security

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LESSON 3.2


Key revenue streams: National revenue from the NFL: $179.9 millionwhich increased from last season thanks in large part to the

NFL's new apparel contract with Nike and an increase in fees generated from additional carriage of the NFL Network (television revenues are shared with all teams in the league)

Local revenue: $128.1 million (Includes ticket sales, suite sales, premium seating sales,

sponsorship etc.)

RevenuePackers’ total revenue in the 2012-2013 season: $308 million

LESSON 3.2


Packers’ net income: $43.1 million

Expenses

Green Bay Packers total expenses for 2012-2013:$253.8 million

(A $5.2 million drop from the previous season)Primary expense (cost):

Player Payroll expense: (includes team expenses): $136 million

Net Income / Profit

LESSON 3.2


Green Bay Packers’ profit for the 2012-13 NFL

season: $54.3 million, a new record for the

franchise!

PROFIT


Franchise Valuation

Unlike industrial or financial business, which is generally valued on cash flow and assets, sport franchises are valued on their revenues for two reasons:

Franchise Valuation

1. For the long term, the operating expenses within each league are about the same for every team

2. Franchise revenues most closely measure the quality of a team's venue and track athletic performance, ultimately the two most critical elements in the evaluation of team’s overall value

LESSON 3.2


Sports Business Financial StructureProfessional sport team values have risen over the past decade and are expected to rise to unpredictable levels for the next few years

LESSON 3.2



In 2004, Frank McCourt purchased the LA Dodgers for $430 million

In 2012, he sold the franchise to an ownership group that included former Lakers star Magic Johnson for a reported $2 billion

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In 2013, the San Diego Padres were sold for $800 million in a deal that ranked as the third largest in the history of Major League Baseball despite having appeared in the post-season just twice since 1999

LESSON 3.2 REVIEW (ANSWERS)

1) Explain the concept of revenue streams and why they are important to an

organization Revenue streams are the means for an

organization’s cash inflow, typically as a result of the sale of company products or services. Without revenue, an

organization cannot achieve profitability.

LESSON 3.2 REVIEW (ANSWERS)

2) Explain the general financial structure of a sports franchise

Sports teams could rely on a number of avenues for generating revenue:

Ticket sales, sponsorship, licensing and merchandise, concessions, parking, fan clubs, kid’s clubs, luxury suite sales, premium and club seating sales, television contracts and additional media contracts (satellite, radio, Internet)

lesson 3.2 – the financial structure of sports business

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