chapter
1
Financial Issues in
Sport
Lonni Steven Wilson, Medaille College
Key Chapter Objectives
• Understand how industry trends and economic
conditions affect sport.
• Understand public versus private ownership of
sport businesses.
• Understand stadium construction trends.
• Describe concerns associated with economic
impact analysis for planned stadiums and arenas.
Unique Issues
Sport Finance deals with unique issues:
• Valuation of sports teams
• Borrowing of money to finance sport ventures
• Issuance of stock by pro sports teams
• Mergers of sport businesses
• Sports apparel
• Sports sponsorship
• Stadium funding
Nevertheless, these issues mirror the financial
issues faced by all other businesses.
Managing Money
Money management is one of the most critical
issues in any business.
• Making and managing money provides the
framework for company growth.
• Financial planning becomes critical to corporate
success.
• Internal and external constraints must be
examined.
Key Terms
internal constraints—Include a company’s past
credit history, sales volume, product lines,
accounts receivable, inventory balances, and
management structure.
external constraints—Include inflationary
conditions, significant competition, high interest
rates, weak economic indicators, shrinking of the
money supply by the government, and the political
environment.
The Benefit of Big Payrolls
San Diego Padres (1998)
• Spent $53 million on salaries as compared with
$32.8 million in 1997.
• Won the 1998 National League Championship.
• Thus, gained public support (as a “winning team”)
and won the vote to build a new stadium using
public funds.
• Soon after the vote, the team was dismantled and
the payroll reduced.
• Nonetheless, the $20 million 1998 payroll
investment was returned several times over by the
revenues earned from the new stadium.
Key Terms
accounting—The process of calculating revenue
and expenses through receipts and other
information to determine the financial numbers for
a company or entity.
finance—The process of examining the numbers
and determining what they mean and what the
past was and future will be for a company or entity.
economics—Blends art and science to help explain
and chart the most effective and efficient use of
scarce resources.
Sport Industry Trends
• Big payrolls in professional sport
– Yankees, approaching $200 million in 2007
• Large budgets in collegiate athletics
– Ohio State, $100 million in 2006
• Team values break the $1 billion mark
– Manchester United, $1.47 billion
• Billion-dollar broadcasting deals
– NCAA, $2.8 billion from CBS for seven years
• Stocks for sale
– Boston Celtics and Orlando Predators were once publicly traded;
International Speedway Corporation, which owns 12 NASCAR
tracks
(continued)
Sport Industry Trends (continued)
• Mergers
– Nike purchased Converse in 2003
– adidas and Reebok merged in 2005
• Sports apparel endorsements reduced
– In the 1980s, almost all NBA players had a shoe deal; by 1998, only
half of the 400 NBA players did
• Sports sponsorship
– PepsiCo with the NFL through 2011 in $560 million deal
– PepsiCo’s Gatorade now with the NFL through 2011, bringing the
total of both to over $1 billion
• Financing new stadiums and arenas
– Through 2001, 102 of the 111 pro sports franchises recently moved
into new or renovated stadiums
Financing Stadiums
The cost to taxpayers
• From 1995 to 2000, the cost to taxpayers was
estimated at $9 billion (Kraker, 1998).
• Another estimate placed the amount between
1998 to 2006 at $7 billion (Noll & Zimbalist, 1998).
Colorado Rockies financed their new stadium via
the following:
• 1% six-county tax
• $53 million from the team
• $1.5 million annually from Coors for naming rights
(continued)
Financing Stadiums (continued)
Heartland Institute Study (1990)
• The study examined 14 stadiums from 1954
through 1986.
• Together, they had accumulated a net value of
$139.3 million.
• For example, Buffalo taxpayers lost the least
($836,021), while Louisiana lost $70.35 million.
Baade (1994)
• Of 30 facilities studied, 27 showed no significant
relationship between income growth and building
the facility.
• Three experienced reduced income.
(continued)
Financing Stadiums (continued)
University of Dayton Researchers (2004)
• The study concluded that public subsidies
for stadiums are not necessary.
• Teams recover all or almost all of their
construction costs within 12 years of
completing a facility.
Team contribution to building costs
The average level of team contribution to new
NFL stadiums built through 2001 was only
29%, or $82 million, of the typical
construction cost for a football stadium
(“NFL Stadium Financing,” 2001).
Argued Benefits of New or
Refurbished Stadiums
•
•
•
•
•
•
Become a “big-league” city
Increased economic activity
Increased sales in businesses
Increased income and job opportunities
Employment tax revenues
Promotion of community image (Baim,
1994)
Contradictions to the Claims of
Benefits
Inflated projections
• For example, the combined revenues of the five major
sports teams in Chicago account for 0.08% of the personal
income throughout the city (Kraker, 1998).
• Another study concluded that the departure of an NBA
team from a city results in no measurable impact on the
region’s per capita income (“Football Strike?” 2001).
Other problems
• Use of incorrect multipliers
• Assumption that facility attendees would not have spent
money elsewhere in the city
Questions for In-Class Discussion
1. If you had lots of money and wanted to invest in a sport,
which sports team or event would you buy or sponsor?
Why? If you did not have much money, would you make a
sport-related investment or take a more traditional
approach, such as banks or the stocks of large
corporations?
2. Do you think it is a wise investment to build new stadiums
or arenas? Back your answer with some analysis of the
economic justification as well as the financial justification.
3. Do you think there are too many sports teams or events?
Does a high number of teams and events hurt the
industry by diluting the market?