How Will Sports be Impacted by a Recession?

This post was originally created as my college thesis at the University of South Carolina. The data included was as of 2009.


In my first class of college, one of the first things mentioned by my professor was that dating back to the Great Depression sports has demonstrated its importance through the fact that it was never impacted by recessions; people still came to games. Since some of the economic indicators currently are pointing towards another recession, I wanted to revisit my college thesis around whether that theory stands up to scrutiny.


This is a long read, and the data dates back to 2009; in upcoming posts I'll create a high-level summary of this data, and also take an updated look at each section.


Summary


Since the relative success of the sport of baseball during the Great Depression, the sports industry has widely been perceived to have immunity from the effects of a recession. In a time where the majority of professional sports revenues came from ticket sales, the industry did manage to fare much better than the majority of industries in the country. However, the sports business is now much more reliant on revenues generated from corporate consumers; this has included a vast increase in general sponsorship and broadcasting rights, as well as the creation of entirely new revenue sources. With these growing and new revenue sources, the performance of the industry during a recession warrants a re-examination. It can not be concluded that the industry would thrive during a recession just because it was able to in the past.


Professional sports organizations have found themselves becoming increasingly reliant on corporate and high income customers, even through traditional revenue sources. The growth of the cost of attending a professional sports game has far outpaced the rate of inflation since 1991, making leagues dependent on corporate customers and households making at least $80,000. While these consumers are capable of bringing in much larger amounts of revenue to an organization, they are more likely to cut their spending during a recession. This has been seen during the most recent recession, as Major League Baseball has seen a 6.7% decrease in attendance.


Much of the revenue generated by sports organization in a modern economy has come from corporate sources. In 2008, over $11 billion dollars was spent on sports sponsorship in North America. Much of this was generated by industries that have been drastically affected by the recession, such as the banking and auto industries. Given the large amount of money generated by sponsorship, a cut in these funds could have a very large impact on the sports business. Meanwhile, broadcasting rights have seen explosive growth, both in monetary terms and as a percentage of total revenues generated by professional sports organizations. Since these rights are driven by advertising of outside industries, a cutback in advertising could directly affect the sports industry.


Meanwhile, several new revenue sources have been created in the sports industry that are also reliant on corporate customers. Luxury suites and hospitality spending were created to allow team owners to privately fund stadiums, and were capable of spending tens of millions of dollars in revenue annually. However, they are also some of the easiest costs for companies to cut; because of this, organizations have seen struggles in an area that is capable of generating these large amounts of money. Stadium naming rights can generate large amounts as well, including recently signed agreements in New York that will generate $20 million per year for the teams that own the stadiums. However, during the recession even prominent teams such as the Dallas Cowboys and New York Jets and Giants have struggled to sell these rights. Personal seat licenses are the new source that is most closely related to traditional revenue, as it provides consumers with the opportunity to buy season tickets. However, an increasing amount of season tickets have been sold to corporate customers, making even this revenue source very susceptible to a recession.


Given all of this information, it is impossible to simply assume that the sport industry is “recession-proof” and go on with business as usual. Just like any other industry, sports organizations must learn from and adapt to the struggles seen during a recession. By offering customers new values, the industry will be able to see success.


Introduction


Given the economic realities for almost all industries during a recession, it would seem that every industry would be acknowledged as susceptible to an economic downturn. Despite this, the sports industry has enjoyed a perceived status as being “recession-proof”. During past recessions, particularly the Great Depression, sports teams and leagues have thrived as they served as an escape from every day life. However, these occurred during times in which these teams and leagues depended almost entirely on individual consumers and ticket sales. Sport’s increased dependence on outside industries due to revenue sources such as increased corporate sponsorship, luxury seating, stadium naming rights, personal seat licenses, and increasing broadcasting rights deals make it unlikely that immunity from a recession would exist today.


As the sports industry has evolved, it has become more dependent upon corporate revenue. Ticket sales have become a smaller proportion of the revenue that is brought in to sports organizations, while other revenue streams have been created or greatly increased in importance. Each of these new revenue streams is in some way dependent upon outside corporate interests; meanwhile, even a higher proportion of individual tickets have been sold to businesses and wealthy consumers with incomes of $80,000 and up.


All of these new revenue sources have proven to be affected by a downturn in the economy; because of this, the sports industry itself is now affected. Sports organizations have struggled during this recent recession, seeing large decreases in revenue coming from many areas. Meanwhile, the stock of publicly traded sport companies has performed below the Dow Jones Industrial Average. The American sport most dependent on corporate interests, NASCAR, has been drastically affected and demonstrated the potential future for all sports as they become more dependent on corporate revenue. All of this serves to show that the industry that must evolve and be ready to adapt to the challenges that the economy will force upon them.


Sports in Previous Recessions


The perception of sports as being immune to recessions is partially based in fact, as the industry has thrived during economic downturns in the past. By depending on individuals buying tickets, the industry was able to thrive as consumers spent money that they had saved, allowing them to escape the harsh realities of the time. The primary example of this is baseball’s performance during the first year of the Great Depression; baseball had its best year yet in 1930. Going into that season, baseball owners were already optimistic as they had learned during previous recessions that they could thrive while unemployed workers, many with savings to tide them over, had ample time and adequate funds to attend games (Tygiel, 2000, p. 87). They were proven right during that season; attendance topped ten million for the first time, and profits increased to $2 million (Tygiel, 2000, p. 87).


While the Great Depression is the most prominent example of sport and entertainment surviving an economic downfall, evidence can also be found in other recessions. In 1987, the stock market crashed and eliminated half a trillion dollars of the United States’ wealth. Despite this, members of the sports industry would say that the “impact on athletes and athletics was limited” and that the outlook for the industry remained bright (Thomas Jr., 1987). In fact, after that recession many experts reiterated the belief that the sports industry was “recession-proof”. Lee Isgur, who was a games and leisure analyst for Paine Webber, noted this belief as he said “Boom or bust, people go fishing” (Thomas Jr., 1987). This standard was applied to the sport industry as a whole; most involved believed that people were going to attend games and bring in revenue regardless of the status of the economy.


However, even these general perceptions may be misleading. During short recessions or the beginning of long recessions, the sports business has been successful. However, sports teams and leagues have struggled when a recession becomes prolonged. Once again, this is evident while examining the Great Depression. Over the course of the entire depression, baseball was not successful. In the decade of the 1920s, teams made an average annual profit of $863,100 when converted to 1990 dollars; in stark contrast, during the 1930s this number shrunk to $137,804 in 1990 dollars (Tygiel, 2000, p. 87). Meanwhile, several National Football League franchises folded during the 1930s (Thomas Jr., 1987). Despite these facts, it is also important to note outside factors that affected the economics of sport. Twice during the 1930s, in 1932 and 1936, drastic tax increases were made by the federal government; this in itself was capable of crippling sports franchises. In addition, Social Security tax was created in 1935 and represented a 1% tax paid directly by employers, including sports teams (“History,” 2007).


While the 1930s proved to be a difficult decade for the sports industry, this decline in prosperity actually happened fairly quickly during the depression; while baseball was successful in the first year of the depression, it was not during the next two years. In 1931, attendance fell 15% from its record amount the previous year, and most major league teams lost money (Tygiel, 2000, p. 87-88). However, baseball struggled much more in 1932, as it showed the full effects of the depression. In that year, Major League Baseball’s attendance fell below 7 million for the first time since 1919, all but four teams lost money, and the league had total losses of $1.2 million (Tygiel, 2000, p. 88).


This demonstrates that the sports business has always been somewhat susceptible to a prolonged downturn in the economy, due to indirect relationships with other corporate interests. However, the drastic increase in taxes during this time makes it difficult to distinguish where the affects of taxes end, and the susceptibility of sports to the economy as a whole begins. Because of this, the more prevalent issue becomes whether an increasing relationship with other industries has caused the sports industry to lose its immunity in the short-term, and be affected much sooner and before taxes can have a large affect.


Changes in Existing Revenue Streams


The sports industry has proven in the past that it can be successful for a short period of time during a recession while depending on its traditional revenue sources, primarily tickets. Therefore, in order to demonstrate that any change in the business’ success would take place, it is necessary to show that the industry does not depend as much on this traditional revenue source and that the portion it does rely on has become much more corporate.

Once again, the disparity as compared to previous years and depressions can most easily be seen in baseball. In 1950, 76% of baseball’s revenue came from tickets, with another 14% coming from concessions, stadium clubs, advertising, and parking. By 1975, the portion coming from tickets had been reduced to 61.5% of revenue, with the remaining stadium revenue then representing 12.8% of all revenue. By 1990, these numbers were 40.6% and 13% respectively (Zimbalist, 1992, p. 50-51). Clearly, the league was becoming less dependent on those revenues that are generated by fans at the stadium. In doing so, there must be other sources of revenue replacing these, which are in turn making the teams and leagues more dependent on corporate interests.


This is not a development that is unique to sports in the United States. Sport has also become continuously less dependent on tickets throughout the world. This can be shown through the percentage of revenue generated by tickets in French soccer. During the 1970-71 season, tickets represented 81% of revenue; by the 1985-86 season this percentage had shrunk to 50% of revenue, and by 2001-02 it had been reduced to just 15% of revenue (Andreff, 2006, p. 690). Clearly ticket sales have also become a less important portion of revenue in Europe as well, even more drastically than in the United States. This makes it a global issue of whether sports can maintain any immunity from a recession in the current economy, which is especially important given the mass globalization of many industries that has taken place in recent years.


It is also important to note that the sports industry has become increasingly reliant on a small, affluent group of consumers for individual ticket sales, primarily those with household incomes of $80,000 and up (Howard & Burton, 2002). This is demonstrated simply by comparing the industry during the recession of 1991, to the industry during the recession in 2001. Over that time period, ticket prices for professional sports more than doubled, which was over 4 times the rate of inflation over that time period. The most drastic increase was seen in Major League Baseball. In 1991, the average ticket to a Major League Baseball game was less than $5; by 2001, this had increased to $18.36 (Howard & Burton, 2002). Similar changes can be seen by examining the fan costs index of each of the four leagues in 1991, 2001, and 2008. This index includes the cost of four average price tickets, two small beers, four small soft drinks, four regular-sized hot dogs, parking for one car, two game programs, and two adjustable caps (“NBA Fan,” 2007).


Table 1

Fan Costs Indices – 1991 to 2008



(Howard & Burton, 2002)(“MLB Fan,” 2008) (“NFL Fan,” 2008) (“NBA Fan,” 2007) (“NHL Fan,” 2007)


From 2001 to 2008, both the NBA and NHL saw their Fan Cost Indexes stay relatively flat; however, the NFL and Major League Baseball both saw the increase in their indexes out grow the inflation over this time of 22% (“CPI Inflation Calculator,” 2009). Overall, these price increases have caused many lower and middle class consumers to be unable to attend games. Instead, the leagues and teams are relying upon upper class consumers; these same consumers are also often the ones who will cut their spending on sport or entertainment during a recession. These consumers are very different from the lower class that attended baseball during the Great Depression to escape their troubles; because of this, it is improper to project the industry’s performance during a modern recession based on its performance during the Great Depression.


In this recent recession, even major events have struggled to sell tickets. Even after cutting ticket prices, sales for the Daytona 500 were still well off pace as of mid-February; this was despite comparing the sales numbers to those from 2007 instead of 2008 (Spanberg, 2009, p. 16). Meanwhile, the four major sports leagues have all seen declines in ticket sales. The following figure shows statistics for ticket sales from the 2008 NFL season, the 2008-2009 NBA and NHL seasons, and the 2009 Major League Baseball season. All increases and decreases are compared to the league’s previous season.


Table 2

League-wide Attendance Figures





(“MLB Turnstile,” 2009, p. 35) (“NFL Turnstile,” 2009) (“NHL Turnstile,” 2009)

(“NBA Turnstile, 2009)


Overall, no league had more teams with an increase in attendance than those that had a decrease, and three out of the four had at least half of their teams suffering a decrease in attendance. Given the time frame of ticket sales and of the reporting of this data, the most relevant statistics come from Major League Baseball. The other three leagues each finished most of their ticket sales before the depths of the recession affected many businesses and individuals. This was not the case for baseball, which has been the first major American professional sports league to do the majority of its ticket sales during this recession. It has clearly seen an enormous impact upon its business, with almost three quarters of its team suffering a decrease in attendance. Meanwhile, the league as a whole has seen a large drop in attendance. Clearly there has been a major change even in the selling of traditional revenue sources; ticket sales can no longer be expected to increase in a recession, allowing sports to thrive.


All of this information provides the first evidence that the sports industry has clearly become susceptible to the effects of a recession much quicker than it was in the past. Despite the recession being either a short one, or still being in its early stages, the industry has already seen the effects. In their first seasons during the recession, each of the four major professional sports leagues has seen many of its teams struggle with attendance, unlike the thriving of these sales during the first year of the Great Depression.


Corporate Sponsorship


The general concept behind sport’s changing sources of revenue is drastic increases in corporate sponsorship. While sponsorship has always been a part of professional sports, the money represented by this sponsorship has increased drastically in recent years. In 2008, approximately $43.1 billion was spent globally on sponsorship; of this, 69% was spent on sports sponsorship. In North America, $11.40 billion was spent on sports sponsorship in that year. This shows no signs of leveling off or slowing, as the North American figure was an increase of nearly 15% over 2007 figures (Klayman, 2009). Meanwhile, corporate support other than broadcast revenues can account for over 25% of the revenue generated by many professional sports franchises (Howard & Burton, 2002).


While this demonstrates that sports leagues have seen sponsorship become a major revenue source, they have also seen struggles in this area during this recent recession. A primary example of this involves the Chicago White Sox, as they have seen many of their sponsorship contracts expire during the very early stages of the recession; it has been noted by one of the team’s executives that they have struggled to find replacements for these expiring deals and to maintain their sponsorship revenue (“All Eyes,” 2009, p. 16-17). Meanwhile, one of the most active sponsors of the WNBA had been Discover Financial Services. Discover was the first sponsor to have its name on WNBA courts and actively promoted this partnership; despite this prominent sponsorship and focus on the WNBA, it did not renew its deal with the WNBA after it expired in the spring of 2009 (Lombardo, 2009, p. 8). While ratings, attendance, the NBA, and other factors may have played a role in this decision, all of these factors have been in place throughout Discover’s partnership with the WNBA; because of that, it seems to be an indication of the effects of the economy. Sponsorship issues are likely to be seen in almost every team and league. In the case of the NBA, about 40% of a team’s sponsorship base comes up for renewal each year (Mickle & Lombardo, 2009, p. 29). Meanwhile, in February of 2009 the NFL’s data showed that contract for half of the league’s sponsorship revenue were expiring within the next 18 months, likely scheduled that way due to the expiration of the NFL collective bargaining agreement (Lefton & Ourand, 2009, p. 1). In both cases, this is a large portion of income that would be susceptible to a downturn in the economy very quickly, making it a primary area of concern for all sports organizations.


In addition to this, some of the most prominent sponsors of athletics are involved in industries that are drastically affected by recessions. Because of this, many of the sporting industry’s most prominent sponsorships can be heavily impacted by a recession. As Adam Silver, the deputy commissioner of the NBA, explained, “If a bank or home builder were the big sponsor in a market and they’ve been hit by subprime, or if people are buying fewer cars or flying less, we’ll see it” (Isidore, 2008). One of these prominent sponsorship areas is the banking industry. Banks have been supportive in many areas of sports sponsorship, and spend a great deal of their sponsorship money on sports; in some cases they spend over ten million dollars on sports advertising alone.


Table 3

Banks and Sports Ad Spending




(Lefton & Mickle, 2009, 28)


These are obviously large portions of the advertising budgets for these banking companies, and do not show any signs of shrinking. Citigroup has agreed to a naming rights deal with the New York Mets beginning in 2009 that is worth $400 million over 20 years, more per year than their entire advertising budget in 2008 (“Citi Field”, 2009). Given these large investments made by banks, there can be cutbacks expected in agreements that are up for renewal during a recession. Banking companies must cut back in areas while they are struggling, which has especially been the case in this recession; these, as well as many other organizations, are likely to see sports sponsorship as a luxury that will have to be reduced unless they can get more flexibility and greater value from their sponsorships.


Considering the large portions of the revenue generated by leagues and teams that are accounted for by corporate sponsorship and advertising, any drastic cut in these funds could be devastating to the overall financial well-being of the sports organizations. As has been shown during the early stages of the recession, even prominent sponsors have been forced to evaluate the success and worth of their sports sponsorships. This has left many organizations having to search for companies willing to replace outgoing sponsors, sometimes with reduced rates. While corporate sponsorship has had an affect on sports during this recession, the affect of corporate revenue on sports can more easily be seen through revenue streams that have been created or changed drastically to depend almost entirely on outside industries.


Luxury Seating and Hospitality


Of all the changes due to increased corporate relationships, the area that has caused the most drastic change in the structure of the sports industry has been the development of luxury seating. Twenty years ago, luxury suites were not seen as an important revenue source in sports. However, at that point most stadiums and arenas were also built using public funds. Under this structure, team owners were usually unable to secure all of the revenues generated by their stadia. If these owners were able to find methods to build their stadiums privately, they would then be able to retain all the ancillary revenues generated by their facility.


The practice of primarily public funded facilities changed in the late 1980s, primarily due to the construction of the Palace at Auburn Hills and Joe Robbie Stadium. Each of these were funded privately in large part due to luxury suites, which allowed the owners complete control over the revenue generated throughout their facilities. The Palace at Auburn Hills demonstrated just how successful these suites could be for a team. The Pistons were able to pay off the entire $70 million cost of the arena within six years due to $12 million per year in luxury suite revenue (Heistand, 1999, p. 3C). This started a significant shift in the prevalence of suites and luxury seating in sports facilities. As of 2000, the average NBA facility had 82 luxury suites and 2,152 club seats (“Bucking,” 2000). In correlation with this expansion of luxury seating in arenas, the revenue generated by these suites and club seats has increased dramatically as well. For example, the revenue generated by luxury seating at the Staples Center is greater than the average operating revenue of an NHL franchise (Howard, 2004, p. 266).


While the Palace at Auburn Hills began the explosion of luxury seating in the NBA, it has become equally as important in the other professional sports leagues and college athletics. This is especially true in the NFL; because of the league’s revenue sharing model, the revenue from luxury seating has become increasingly important because it is not shared. Meanwhile, the University of Texas generates $3.2 million per year from leasing luxury suites in their football stadium (Johnson, 1999). According to Bill Dorsey, the Executive Director of the Association of Luxury Suite Directors, in 2002, “Ten years ago, only about three percent of the seating in stadiums and arenas was designated as club/premium seating. That figure is now approaching 20 percent” (Howard & Burton, 2002).


With so much of a stadium or arena’s seating designated for consumers that are primarily corporate customers, these areas of the stadia will be of primary concern to organizations as they look for areas that could be affected by a recession. This is especially true because of the structure of most luxury seating deals; in most cases, the luxury suites or club seats are secured through long-term contracts such as 5, 7, or 10 years. This can allow for an organization to depend on revenue of deals that have not expired, providing a portion of revenue that will likely not be immediately affected by a recession. However, expiring deals do present a problem for organizations, as the current holders may not be willing to renew and other corporate customers may be hesitant to commit to a long-term contract in the face of an uncertain economy.