Professional sports are a multimillion dollar industry -- an industry that is increasingly playing by rules that don't apply to other businesses. Ray Artigue, executive director of the W. P. Carey MBA Sports Business Program and former senior vice president of marketing for the NBA's Phoenix Suns, discusses the curious business of sports with Knowledge@W. P. Carey. Joining the conversation is Robert Stearns, professor of practice in the finance department at the W. P. Carey School of Business and chairman and chief executive officer of Quepasa Corporation.

 

26:32

 

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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.

Knowledge: And Ray, you've mentioned that with these NFL teams, it's TV revenues, so in some ways these teams are profitable even before they begin playing.

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.

Knowledge: Now Ray, is this something that we see only in the NFL or are we seeing this also among other sports teams, the NBA, the MLB?

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.

Knowledge: Ray, what do you think about that?

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 Seattle, he's played for Arizona and now he's with New York. Wherever he goes he's going to bring eyeballs with him, if you will, because he's an icon. 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 Nashville is as much to see the Dallas Cowboys as it is to see the Tennessee Titans, I assure you. And if that were not the case, then there would not be municipal assistance of building stadiums.

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.'  There's not a whole lot of interest sometimes in the games.

I've been there and I've seen people just chatting away and not even paying attention. Is that also part of what the NFL is selling, the experience?

Artigue: Well, quite honestly I'm not sure how the NFL has achieved the level of popularity that they have. They reign supreme; the next closest competitor is a distant second. It is the strongest brand in sport. It's curious, because fewer people growing up have played football than they have played little league baseball or basketball, which requires very little to create a neighborhood game. You need a driveway, backboard, hoop and a ball.

So kids are growing up playing baseball and basketball and soccer, and yet football has become the sport of choice whether you are attending or you're watching on television. It's pretty much always been that way, but I think in the last two or three decades it's just crescendoed and has gotten to a point where it can do no wrong.

Stearns: Yeah, I would agree with Ray. Football is an interesting sport. It's funny, you know less about what the football players look like individually because in fact the league has rules as to whether they can take their helmets off or not. So basically you see a team functioning in a very violent way against another team in a very violent way, and the anonymity of it plus the violence of it may be the lure. Football was also much scarcer than baseball -- 162 games versus 14 or 15 games in a season -- so it's a different dynamic for the fan.

But getting back to your point about the spectacle, I think that generationally the baton has been passed as to why people go to these games and this also affects the economics of the games. When the earth was cooling and I was a boy, you went to a game basically to watch the game. There was no dancing girls, there was no pyrotechnics, the field was played on grass, and if it rained you would play two the next day. It was a very, very different experience, not to say it was better or worse, it was just very different, and the fans paid their tickets to see the game. And if you talked with the person you're with that was certainly a part of the conviviality of it all, but you were going for the contest.

Now, I think, regardless of the sport that, certainly the NBA and the NFL would be examples of this, you're going for the spectacle. The Diamondbacks field today, the music is so loud that you really can't hear the people talking next to you. It's just loud. The motorcycle and the monkey and the dancing cheerleaders as part of the Suns' games are a continuation of the spectacle. The game is almost an afterthought.

So I think there's a different reason why people are going in person to see the games and the reason for that of course, amongst other things, is there are so many other competing entertainment spectacles. It's not that you can just go to one basketball game now on any Thursday night, you can go to 12 if you have the correct cable television package, and you can see college football on the same night as well, and you might even go out and see the circus or watch a movie, so there's so many other entertainment choices that the leagues themselves have to offer up a product that's more multi-featured than just the game, I think.

Artigue: Well, and as we talk about the so called "side show," it in fact is part of the reason why the winning and losing is not as important as it perhaps once was. In other words, it's about the entertainment experience and added value for that ticket that you're purchasing. And so if your team goes down in defeat, the kids are talking all the way home about how much fun they had in the gorilla's jungle at US Airways Center in downtown Phoenix because of all the games they got to play and the things they got to do and the high fives they gave to that monkey that Rob refers to -- probably the most well known mascot in the NBA, the Phoenix Suns gorilla -- well then all is good and mom and dad are probably going to take the kids back again and, as the affinity grows, the kids get a little bit older, perhaps even to full season ticket holders, which is what the franchise is after first and foremost.

Stearns: This spectacle incidentally that you're seeing, the increased circus aspect at sporting events, I believe is a direct result of free agency, because when you were able to root for a consistent line up year after year after year, the allegiance was to the roster, maybe to a couple of players, and that ultimately drove you to the allegiance to the brand, the Cubs or the Suns or the Sox, wherever.

But now, you as a fan cannot count any longer on a particular player being on your squad for any lengthy period of time. You may have multi years but you don't have a career, you have several years. And so as a result, the owners quite properly sell from an economic standpoint are trying to develop additional ways to attract allegiances to their entertainment experience, which is a much broader definition of what they're doing than simply providing a baseball or football game. And so, Ray is right, if they create a super loyalty-inducing mascot, or the music is really cool, or the dancing cheerleaders are very hot, it attracts various segments of the fan base and creates a loyalty in the way a particular team might not.

Knowledge: But the fact of the matter is that these games are getting much more expensive, so it would cost a family a lot of money to go to one of these games yet they still do it. What drives that?

Artigue: Well, it costs more to go to the games as a family today than it did when our parents took us. But so do the movies and so many other things that we choose to have entertain us. I think what's happening in sport is families are going to fewer games because of the cost of the tickets and the food and the overall experience, but they haven't necessarily stopped going. The teams have become very creative in packaging the tickets with a food menu and a little gift or tchotchke of some kind and creating these "family packs," "family value packs." And they go further to create "family nights" where they have entertainment that's skewed particularly to families. So the franchises are sensitive to the families, they need the families to come, these young people again are going to grow up and become the next generation of season ticket holders. Some have perhaps been priced out of the equation and they though have choices now to spectate from home unlike we ever had when we were children because, again, there's just so much available over free television or basic cable, and that too is driving a different kind of revenue stream for the leagues and for the teams.

Stearns: Although there are many reasons for why what you observed is true, I believe the single largest reason why sports tickets have become more expensive relative to other forms of entertainment over the past decades is the fact that the athletes themselves are getting a larger proportion of the revenues from all sources than in any other form of the entertainment industry. And it's a credit to their unions and organizations to have enabled them to do that. If you were to take a look at any form of the entertainment industry other than sports -- major league sports -- you would see that the actual participants, the athletes on the field or the talent per se, get a much smaller percentage of the total pot than do athletes in major league sports. And because those athletes themselves are rising in price, you're seeing an increased price in the overall operations of these teams.

Now you ask, well why are those athletes rising in price? And it's not because they can charge $11 more for a nosebleed seed at the US Airway Center. It's because if they can get the right superstar athlete or superstar team, they can command higher media revenues and that's what's driving the overall economic pie.

Again, in making these comments back and forth, I'm not particularly arguing that this is better or worse for the sport, I'm just noting that it is a change in dynamic of the economics and it affects how owners operate their teams from a win and loss perspective. It has nothing to do with how hard the players play or how much they want to win. You can go into any major league locker room in any sport and you can see grown men and women cry if they lose, and the athletes are unquestionably giving their all for the most part, but the economic pie is very differently divided today than it was ten or twenty years ago for sure.

Knowledge: In the next installment of Knowledge@W. P. Carey, Ray Artigue and Robert Stearns continue our discussion on the business of professional sports and look at its impact on local economies.