The Explosion of the Business of Sports in the United States

Hunter Howard
Nike Seminar: Draft
Spring 1998

The Business of Sports is a multi-billion dollar global industry propelled by enormous consumer demand. In the U.S., it is the 14th largest grossing industry sector; larger than the steel and railroad industries.1 The growth in sports closely follows entertainment's explosion, in terms of their importance to our culture and economic implications. Sports role in our entertainment driven culture presents a skewed view to many as the dollars, attention, and conflicts of interest appear to spin out of control. Nike's recent sponsorship of the University of North Carolina athletic department has generated significant controversy on campus and around the world. This paper hopes to put the explosion of the business of spo rts in better perspective to help us better understand one important aspect of this intricate relationship.

My views on the escalation of the economic impact in sports are fairly capitalistic as I have spent the past five years negotiating sponsorships and developing marketing programs leveraging these relationships for McDonald's, FedEx, Kodak, Visa, United , True Value and other corporations. From my perspective, the properties, both amateur and professional, approach corporations, or their agents, on a daily basis to help fund their efforts. These relationships must be mutually agreeable before they are completed with signed contracts, whereby both parties see the relationship as important and valuable. There is very little opportunity to take advantage of the other party.

I have worked on many cause-related marketing programs, however the end goal, whether through public relations efforts or incremental sales of goods and services, was to generate a return on investment (ROI) of at least 4 or 5 to 1, with the betterment of society as a tertiary goal. If these returns were not possible, we would look for other opportunities to maximize our limited marketing budgets. As Charlie Adams stated, these relationships are negotiated in advance with every contractual detail spe lled out. Contracts often take months to finalize, and while there are frequent amendments or concessions, the University or Property knows in advance how far they are willing to bend and are thus responsible once the names are signed on the dotted lines. The sponsor has no more opportunity to take advantage of the University than the University has to take advantage of the sponsor. This is only possible if you believe that those negotiating on your behalf are not equal to those across the table from th em.

 

Historical Context (also see History of Corporate Sponsorship appendix)

For centuries, man's search to answer the unknown has spurred the erection of marvelous architectural feats. These churches, synagogues and temples have been built as monuments to the almighty and to provide a place of worship. Taxpayers and church m embers funded these constructions that now help define cities (Notre Dame/Paris, St Paul's/Rome, Taj Mahal/India, Blue Mosque/Istanbul, Pyramids/Cairo). These religious monuments are being replaced by stadiums/arenas, where essentially, we "worship" the "deified" members of our community (i.e., Michael Jordan, Madonna, Dean Smith and Garth Brooks). In fact, the most distinguishing feature of many cities' skylines are their stadiums. The only past civilization that might compare is the decadent Roman Em pire, where thousands would pack the Coliseum to watch gladiators or chariot races.

Centuries from now, when archaeologists analyze the late 20th century, they may uncover the United Center in Chicago and find a luxurious 20,000+ seat arena where only the wealthiest citizens were able to enter. They may discover this stadiu m was a prestigious place of social gathering where attendees paid excessive sums to "worship" the unworldly talents of the gods of this society. They will uncover a statue of "man" that appears to reflect his ability to fly through the air. Further res earch may show that tens of millions would view this "god's" performance in their homes and that corporations would pay up to $700,000 to advertise messages to these people for :30 seconds of commercial time.

 

Passion of Sports

To many, sports harkens the pure competition of their youth. Many people vividly remember their emotions when Bobby Thompson hit his famous home run, Kerri Strug landed her miraculous vault or when the top seeded Tar Heels lost to Utah in the 1998 Fin al Four. This incredible emotional tie to the success of people we have never met is the impetus behind the surge in sports and entertainment.

Whether you are a sports fan or not, and whether or not you agree with the incredible cost/price in entertainment you must recognize that our culture is the driving force both demanding and funding the economic boom in the business of sports. In our c apitalistic society, entertainment demand curves are continually shifting up (evidenced by larger stadiums, greater television viewership, higher ticket prices and greater demand for seats), and consequently supply also shifts up and out driving prices hi gher. With significant barriers to entry (start-up costs, television contracts/partners, intangibles such as historic allegiances) it is difficult to create rivals to the existing sports leagues, evidenced by many defunct start-up leagues including the U SFL, ABA, AFL, etc. Because of these monopolistic situations (Baseball has even been granted an exemption from anti-trust regulation) the leagues and team owners are able to set prices and margins at their discretion.

Since 1970, with the historic Curt Flood ruling2, free agency has altered the playing field between player contract negotiations. Flood sued Major League Baseball (officially suing Commissioner Bowie Kuhn) in federal court, claiming that by trading him to the Philadelphia Phillies, without his knowledge or approval, the St Louis Cardinals, a team with which he starred for over 10 seasons, had violated the antitrust law.

The Supreme Court had already ruled in 1922 and 1959 that baseball was exempt from anti-trust laws.3 While the anti-trust laws were not overturned, the Players Union established the first chink in the armor of professional team owners by r eceiving rights to free agency (offer their services to each team in am open market with the option to sign with the highest bidder) and soon thereafter the rights to have their contracts arbitrated by independent council.

Owners no longer hold all of the cards, as more options are available for players seeking reasonable compensation for their services. As a result, player salaries have skyrocketed. Don't go crying for the owners because they seem more than willing to meet these rising costs. Consequently, the cost curve shifts up again as the owners respond by driving their cost curve higher.

The cost curve shift resulting from free agency has had the big impact on the sports business. Owners and leagues have since been forced to find creative ways to squeeze more dollars out of fans and now more than ever . . . . . corporate sponsors.

 

Creative Loopholes - Squeezing dollars out of Media and Sponsorships

While the NBA and NFL divide their enormous television contracts equally among each team, MLB takes a different approach. Baseball games are primarily broadcast on a local level with each team retaining the revenues from their contract. Local televis ion contracts are negotiated by estimating advertising revenues from the 162 game schedule. Obviously this creates a tremendous disparity between small market cities (Milwaukee, Minnesota) and bigger market cities (New York, LA, Chicago). Because the la rge market teams gain so much more money from their television contracts, they are able to allocate significantly more money to their roster, therefore outbidding smaller market teams for the most desirable talent.

The recent trend in developing new stadiums has been a direct effect of owners seeking new ways to generate money. While the NFL and NBA adds the gate (ticket) receipts for each team together and then distributes this money evenly, ticket sales from l uxury suites are the sole possession of each team. Therefore, new stadiums are being built to generate additional luxury box revenues for owners. Art Modell claimed the Cleveland Browns could not compete without additional luxury boxes. When the city wo uld not approve a new stadium he moved the team to Baltimore. The next NFL expansion will place a team in Cleveland, however, the city will now build a new football stadium with additional luxury boxes. When Jerry Reinsdorf built the new Chicago Stadium , he actually reduced the number of regular tickets and increased the number of luxury boxes from 4 to 228. 4

An additional revenue generator, at the expense of fans, is the Personal Seat License (PSL). Team owners basically had three ways to fund the building of stadiums: ask the local government for money, borrow money, or use their own money. Now, the own ers have created a fourth option by using their fan's money to help build their stadium. The owners offer fans the "opportunity" to purchase a PSL where basically the fans has only paid for the right to purchase a season ticket at a later time. This sea son ticket is saved for the fan, however, this ticket must still be paid for at full cost. This PSL money will not even buy a snow cone at a ball game let alone a nose bleed seat.

 

The Role/Growth of Television

When NBC provided the first live network coverage of the World Series in 1949, fewer than 12 percent of U.S. households had television sets. By 1953, fifteen of the sixteen MLB teams had local contracts, and ABC introduced their Game of the Week forma t. The share of U.S. households (a Nielsen point equals 990,000 households/HH, reached) with televisions grew rapidly throughout the 1950s, reaching 67 percent (34.9 million HH) in 1955 and 87 percent (45.8 HH) in 1960. Today over 98 percent of U.S. HH, or 92 million, own at least one television set. 5

When the New York Yankees signed the first local television contract for $75,000 in 1946, radio and television revenues contributed only 3 percent of MLB's revenues. 6 This figure rose t o16.8 percent by 1956, and continues to increase to day where the television contract represents over half of all revenues. In 1993, local television, radio and cable deals generated $350 million for MLB. The New York Yankees deal alone brings in over $40 million annually in their 12 year deal with the M adison Square Garden Network and WPIX. 7

Follow the Money

There are six primary focuses within the sports marketing business:

Each of these areas represents significant slices of the sports revenue pie and they are all intertwined. In fact, the first five areas have a significant impact on the Nike example discussed in class (the sixth area, agencies, are primarily used by t he other five areas to help them better use sports as a marketing tool).

Let's use the collegiate sports as our example to illustrate each area's influence. The following constituencies represent some of the players in this business.

 

Examples:

Properties

NCAA, ACC, University of North Carolina, Orange Bowl, Bill Guthridge

Corporations

Sprint, RCA, Compaq, Oldsmobile, FedEx, Nike

Venues

Alamo Dome, Dean Smith Center

Media

CBS, ESPN, ABC, WCBS

Merchandising

Starter, Logo One, Nike

Agencies

Host Communications, Tar Heel Network, IMG

Properties are represented by any entity that can sell their rights, name, likeness or indicia for commercial purposes. Primary examples are teams (team owners) and leagues but athletes and personalities are also included in this category.

Corporations are the sponsors that use sports as a marketing tool to reach targeted demographic and psychographic groups. Corporations will sponsor properties, venues and media while using agencies to help them in these areas. You can consider Corporations and fans the universal donors in this equation and the properties the universal receivers.

Venues are the arenas/playing fields for games. Jerry Jones, owner of the Dallas Cowboys, has creatively used his venue, Texas Stadium, in his personal war with the NFL. While teams are restricted against signing sponsorships with non-league s ponsors, the venues do not have the same restrictions and Texas Stadium now has major relationships with American Express and Nike instead of NFL sponsors Visa and Reebok.

Media and Corporations, along with fans, are the primary money generators in this equation.

Merchandising/licensing is the fastest growing component of this equation. A company that produces a $1.50 t-shirt in Vietnam receives a licensing agreement from a property (UNC, NFL, etc) and now their $1.50 t-shirt sells for $18.00 because it has a logo on it.

Agencies are becoming larger and larger players as the money pot gets larger. Much like the power brokers in Hollywood, Mark McCormack and David Falk on the player side, Jim Millman on the corporate side, and Dick Ebersol on the media side are the men that control the flow of dollars in this business. Their advice, expertise and relationships allow them important seats at the negotiating tables as they advice their clients on how to generate/or save money in the business of sports.

Corporate Sponsor Objectives - "Corporations use of Sports as a Marketing Tool"

Corporations typically use sponsorship for three reasons: reach consumers (generate awareness/sales), reach the trade (incentivize middlemen) and reach their own employees/sales force (motivation/"feel good"). For this paper we will focus on corporati ons use of sports to reach consumers to sell incremental product.

Today, sports and television coexist in a high-priced equation. The leagues sell the right to broadcast games for millions of dollars each season. The network in turn sells advertising in :30 second increments to sponsors/advertisers on a national, r egional and local level. A driving force behind the advertising spending of these sponsors is their ability to reach the extremely desirable 18-49 male demographic segment. This demographic segment is considered important because of their spending power as well as the fact that these men are the most difficult demographic group for advertisers to reach. This predominantly working class male, with a high disposable income, traditionally has more time constraints than other demographic segments. However , sports offer the one channel to consistently reach him. Advertisers pay for Cost Per Thousand (CPM) reached among their target audience. While the price to advertise on NFL games is expensive, it is the best way to reach these men, and if your product is Gillette, Budweiser or GM, these ads are worth the price because of the relatively low CPM.

In fact, sponsors are willing to pay excessive amounts for billboards that might be seen on the sidelines during sporting events. Media companies will watch sporting events with a stop watch and time the amount of in-focus exposure that a corporate lo go receives. This time is then divided into :30 second increments and equated to advertising dollars.

If an ad during the Indy 500 costs $400,000, and the FedEx logo is shown for a total of 3 minutes 15 seconds during the event, FedEx will be considered to have received $1,300,000 worth of exposure. Companies typically discount this by as much as 75% as commercial's strategic messages are more effective in selling/discussing product/services attributes.

With the increased clutter in today's society many believe lifestyle advertising is the best way to reach consumers. This is another reason for the increased flow of dollars into sports marketing. Marketers believe that they can more effectively rea ch consumers in their lifestyle when their guards are down and they do not realize they are being marketed to. This is the reason for the increasing sponsorship of events and stadiums, i.e. Ericsson Stadium, 3COM Park, Bud Light Beach Volleyball tour, Nu veen Senior Tennis Tour, Discover Card Smithsonian Institute National Tour, etc. Here Sponsors have an opportunity to integrate themselves into the lexicon of the event/arena as well as subtly integrate their product benefits and messaging into the event communications/look/feel.

Under different time constraints, I believe it would be worthwhile to undertake a cost-benefit analysis of the UNC / Nike deal. What are the actual costs being defrayed by the contract? What opportunities does the University now have with a significa ntly less burdened athletic department budget? Should we be upset with Dick Baddour and Michael Hooker for sacrificing up the "integrity" of the school? What are we really giving up? Is this relationship any less egregious than the McColl building, Kenan Stadium or the Friday Center or should I assume that this money was given with only the best interest of all parties in mind and no selfish motives? Or maybe the ends actually justify the means, does the richest sponsorship in the history of collegiate athletics, merely for the cost a wearing a swoosh on their uniforms allow the Universiy unprecedented opportunities? Chancellor Hooker did state that only Reebok and Nike were capable of meeting the demands of the entire UNC sports program from a uniform and sneaker standpoint and the Nike proposal was not even the most lucrative opportunity. The Athletic Department and Dean Smith chose to select the relationship that was best for the school.

I do not have any question that the relationship is good for the school. My only question is whether or not we got appropriate value. We definitely got market value, as the contract represents the largest in the history of collegiate sports. On the other hand, I believe the relationship is worth far more to Nike than what they are currently paying. To understand this we must understand how Nike values the relationship, primarily from exposure, licensing, image building and relationship building.

Nike's exposure in the deal can be quantified by analyzing swoosh exposure. How much time is the swoosh exposed on television and to attendees. Licensing is the golden goose of the relationship. Nike/UNC jerseys, hats, t-shirts and shorts alone may pay for the cost of the sponsorship. Image building, an important factor in the sneaker wars. Nike pays pro athletes millions of dollars to wear their shoes. If one player is worth a few million dollars, what are 12 basketball players and the rest of U NC athletes worth to Nike? And relationship building. If Nike, Reebok and Adidas are attempting to develop relationships with high school athletes with professional potential that might be the next professional stars, than collegiate players who are clo ser to realizing these dreams are even more valuable. I believe that under careful analysis, we would find this relationships is worth for more to Nike than they are currently paying.

History of Corporate Sponsorships

Early 60's - Mid 60's

Athlete Visibility/popularity via television

Utilizing athletes as overall corporate image building program (e.g., Mark McCormack/Arnold Palmer/Jack Nicklaus)

Late 60's - Early 70's

FCC ruling disallowed cigarettes and most alcohol from advertising on TV

Tobacco and liquor companies forced to find other, less traditional ways to reach consumers (sponsorship of races, rodeos, etc.)

1984 LA Olympics

Beginning of the modern era of sports marketing. Sponsorships became an integral part of marketing mix for many companies to reach overall marketing objectives, not just traditional industries

Recognition that impacting consumers "within their lifestyle" versus advertising will help reach objectives

1990's - Ambush Marketing in Atlanta

With the rising costs of sponsorship ($40 million + for an Olympic sponsorship) many companies feel these price tags are out of line. Instead, companies will ambush the games by making consumers believe that they are the sponsor when they are not. Ex: McDonald's was an Olympic sponsor, but every time you turned the television on you saw Dave Thomas discussing "Go for the Gold" with a famous Olympian touting Wendy's. Wendy's was not legally allowed to use the 5 rings logo or terms Olympics, Atla nta Summer Games, etc., however they cleverly drew a correlation with games and saw a sales spike during the Olympic fortnight. McDonald's prefers to call this parasitic marketing and increased curbs are being put in place by event media partners to avoi d similar situations in the future.

1990's - Complete Integration/Ownership

Sponsors now attempt to create more significant presence at events to maximize consumer impressions. This includes naming rights to stadiums, naming rights sponsorships to events, sponsorships of Universities, logos on uniforms, advertisements dur ing event commercials, consumer promotions to create in-store linkage to sponsorships, in-store appearances, etc.

Because of the increasing clutter in advertising, specifically in professional sports, sponsors seek more "bang for their buck" through sponsorship of entities with fewer sponsors. Additionally, the NBA and NFL are becoming global brands by their own right and the leagues will only allow sponsors so much exposure at their events. Consequently, sponsors are turning to grass roots sports, extreme sports and collegiate sports in increasing rates to reach more targeted audiences in less cluttered environ ments.

 

BIBLIOGRAPHY

Flood v. Kuhn, U.S. 258, 92 S. Ct. 2099 (1972)

Gorman, Jerry. The Name of the Game, The Business of Sports. New York, John Wiley & Sons. 1994

Klatell, David, Sports for Sale, Television, Money and the Fans. New York. Oxford University Press. 1988

Quirk, James, Pay Dirt, The Business of Professional Team Sports, Princeton, Princeton University Press. 1992

Whitford, David, Playing Hardball. New York, Doubleday Publishing. 1993


Copyright, 1998
Howard Hunter, INTS 092
UNC - Chapel Hill