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.


Once again, it becomes important to establish that this would cause the sports industry to become more susceptible to recessions. In this case, this can be shown through both the current recession, as well as another recent one. In the recession during 2001 and 2002, an NHL executive noted that luxury seating revenues were lacking, as corporations were hesitant to commit large amounts of money during troubling economic times (Howard & Burton, 2002). Meanwhile, as an early indicator of the success of luxury seating revenues during this most recent recession, almost every Major League Baseball team saw a decline in hospitality suite rentals in 2009 (Broughton, 2009, p. 9).


Luxury seating can have an impact on the ability to withstand a recession even if the leasing of the suites and club seats are unaffected, as their revenue generating ability extends much further than this. Much of the money generated from luxury seating can actually come from the hospitality costs that are associated with these seats; this an area that has been cut by many companies who own luxury seats. For example, catering within suites at the American Airlines Arena in Dallas has been down 15 percent during the recent recession (Muret, 2009, p. 30). Hospitality has also been affected elsewhere. Despite sponsoring the Buick Invitational golf tournament, the company completely eliminated its spending on hospitality and entertainment during the tournament (Show, 2009a, p. 4). While the automotive industry has been hit hard, such a drastic scaling back of such a prominent sponsor clearly demonstrates the struggles that sports will see with corporate sponsorship during a recession.


Issues with selling hospitality have extended to even the most prestigious sporting events in the country, such as the PGA Championship. According to Todd Alfred, the director of championship sales and marketing at PGA America, sales for the 2009 PGA Championship were on pace with previous years until the economy began its downfall. However, after the economy’s decline in the fall, sales fell 10 percent behind previous years. The reaction of the PGA to this is one that has demonstrated the approach that many teams and league will have to take moving forward in recessions. The PGA has become much more flexible with options and pricing, including offering the opportunity to share hospitality options with other companies (Show, 2009b, p. 26). Lessons from this could make the PGA and other organizations more successful in the future, as they look to create more attractive options for their corporate customers instead of simply adjusting prices for inflation.


Naming Rights


Of all the ways in which corporate sponsorship has become a part of the sports industry, the most visible of these is stadium naming rights; these deals between stadia and a corporate interest provide the company with large-scale exposure for the companies, as they are able to put their company’s name on a stadium or arena. While these deals have been present for a substantial amount of time, they did not become popular or see their values increase to near their current levels until the late 1990s. By 2003, there were 70 naming rights deals in the United States, generating approximately $169 million per year (Jeanrenaud, 2006, p. 53).


These deals have become prominent in all areas of the sports business, and can play a central role in the financing of arenas. In the case of the Houston Texans, naming rights became part of a diversified plan to fund their stadium. As part of this plan, which also included many facets of corporate sponsorship, Reliant paid the Texans $10 million per year for the naming rights to their stadium (“Naming-rights,” 2003, p. 36). The vast majority of stadiums built recently have involved corporate naming rights as part of their funding, while many older stadiums have also sold the rights to their names.


Table 4

Examples of Prominent Naming Rights Agreements



(“Xcel Energy,” 2009) (“Reliant,” 2009) (“Citi Field,” 2009) (“Sponsorships,” 2009)


Recently, naming rights have proven to be very subject to economic conditions. The primary example of this has been the inability of the Dallas Cowboys to find a partner for the naming rights of their new stadium. Despite being one of the most popular sports franchises in the country, and building what will likely open as the most expensive and impressive stadium to date, the Cowboys have been unable to find a company willing to purchase the naming rights. Instead, it will open simply as Cowboys Stadium (“News,” 2009b, p. 8). While any naming rights agreement for the stadium would have been for a record price, the prominence and visibility of the stadium makes it likely that a suitable sponsor would have been found in a strong economy. The impact has even extended to naming rights that were already agreed upon; RBC has postponed a potential $20 million naming rights deal with Florida Atlantic University (McClung, 2009, p. 33).


To most easily see the affect of a recession on naming rights deals, it is important to examine the selling of these rights in New York recently. The New York Mets and New Jersey Nets have been able to secure very large naming rights deals for their new stadiums with CitiGroup and Barclays, respectively. However, even though the Mets opened the stadium in 2009 and the Nets have yet to open theirs, it is important to note that both of these deals were agreed upon before the recession had hit. Because of this, the signing of the agreements was not affected by the recession. In opposition to this, the New York Giants and Jets have not been able to secure a naming rights partner for the new stadium that they are currently building. While the two teams have sold each of their four sponsorships of their entrances to the stadium, each for approximately $8 million per year, they have not been able to find a company to pay the much larger sum to have naming rights (Ware, 2009). Similarly to the Cowboys’ situation, this is an agreement that would likely be for a record sum, but would still be expected to sell in a healthy economy.


A lapse in the market for naming rights would present a challenge for organizations looking to secure large amounts of corporate revenue. For a team or university, naming rights provide the single biggest opportunity to gain revenue from a single corporate interest. This is most important for those organizations that are in the process of building new stadia. However, there is the possibility of this problem extending to other organizations. There have been examples in the past of company’s going bankrupt or having legal issues while they owned naming rights. Once this happens, the teams whose naming rights they owned are forced to once again look for a naming rights partner. If a prolonged recession was able to severely affect many of the companies involved in sports sponsorship, this could become a widespread issue. While this has not been shown to be the case or to be a likely scenario so far, it has certainly been shown that a recession will make it far more difficult to find partners for naming rights agreements.


Personal Seat Licenses


Of the ways in which corporate interests have become involved in the sports business, the newest is the personal seat license. It is also the area that is least intended to directly target companies. With a personal seat license, a company or individual pays a one time fee that allows them the right to buy a season ticket in their seat or seats for a given period of time. While season tickets can be bought by anyone, personal seat licenses become corporate support because the majority of season ticket purchases are made by businesses. In 2000, 60% of season tickets in the NBA and NFL were corporate purchases (Crompton & Howard & Var, 2003, p. 167).


PSLs are a relatively new innovation, with the first major use of them being by the Carolina Panthers to fund their stadium; the Panthers were able to generate $125 million from the sales of personal seat licenses in their stadium (Howard, 2004, p. 289). Following the success of this program, many other teams followed the Panthers’ lead and began offering personal seat licenses to help them fund their new stadiums. The following figure demonstrates how prevalent these programs have become, as well as how much revenue they are capable of generating for teams.


Table 5

Success of PSL Programs




(“Carolina Panthers,” 2009) (“Seattle Mariners,” 2009) (“San Francisco Giants,” 2009) (“Reliant Stadium,” 2009) (“Seattle Seahawks,” 2009) (“Philadelphia Eagles,” 2009)


As the figure shows, PSLs have been able to generate large amounts of revenue even for teams that have chosen to limit the selling of them. It is important to note that existing franchises will have a more difficult time selling PSLs than new franchises; however, the Seattle Mariners and Seattle Seahawks were both able to raise over $15 million through PSLs. Given these numbers, it is easy to see that a lapse in the sale of PSLs could affect franchises.

Despite the large revenue generated from PSLs, on the surface the lack of these would generally only affect teams who are currently in the process of building a new stadium or arena. This alone would affect many teams looking to open, build, or secure financing for new stadia. However, there is a secondary affect caused by the presence of PSLs. Most personal seat licenses are either one time fees, or long-term contracts; however, the holders of these must then by tickets in order for the team to gain additional revenue each season. If a company that holds a PSL can no longer afford to purchase tickets, then an organization is likely to lose out on revenue that it has been expecting to come in on an annual basis. Because of these issues, the inability of teams to renew their season ticket holders can possibly be a problem associated with corporate interests as well as PSLs if they are present in that organizations stadium or arena.


PSLs have appeared to be vulnerable to the recession. In the largest market in the nation, New York, the Giants had not sold out their inventory of PSLs as of June 2009; while this is an existing team that would be expected to sell fewer PSLs, this was despite the fact that they had already contacted many of the 140,000 names on their season ticket waiting list (“Coast,” 2009, p. 23). In addition, many teams have struggled to maintain their season ticket bases. As this occurs, teams lose out on revenue that they expect to have on a yearly basis. While ticket sales have thrived during recessions in the past, the increased dependence on wealthy and corporate ticket buyers has resulted in another revenue stream that can not be depended upon during a recession.


Broadcasting Rights


The most traditional revenue source that is directly related to outside industries and companies is broadcast rights. Unlike the other revenue sources discussed, broadcast rights are not new; instead, the factor that makes them relevant to the discussion of susceptibility to a recession is the drastic increases in the values of these rights in recent years. As these values have expanded, they have become an increasingly important portion of the revenue that teams and leagues generate. It has been said that television is destined to become the main source of pro sports finance (Andreff, 2006, p. 691).


Of the major professional sports leagues in North America, the NFL depends the most on broadcasting revenues. The league’s most recent broadcasting contracts generate approximately $100 million each year per team, which averages to be more than half of the team’s revenue (Leeds, 2006). While the NFL is the most dependent on broadcasting revenues, it has certainly been an important revenue source in other sports as well. NASCAR’s contract that began in 2007 brought in $4.8 billion from ABC/ESPN, Fox, and TNT (Yost, 2007, p. 123).


The growth of these broadcasting revenues can most easily be seen through Major League Baseball. The following figures demonstrate how revenues from broadcasting contracts and overall revenue have grown.


Table 6

National Broadcasting Revenues

(Zimbalist, 1992, p. 49)


Table 7

Growth of Average Team Revenues

(Dollar Amounts in Millions)

(Zimbalist, 1992, 58)


Using these figures, it is easy to see that media and broadcasting revenues have become much more important sources of revenue to Major League Baseball. Using the figures from 1970 and 1991, broadcast revenues have become a much higher percentage of total team revenues. In 1970, the $700,000 in national broadcast revenues per team would amount to 12.3% of total revenues. In contrast with this, the $14 million per team in 1991 would represent 24% of total revenues. This percentage had doubled in just over 20 years, and there is no reason to believe it hasn’t grown even further in the 18 years since. In 2006, Major League Baseball signed an agreement with Fox and TBS through 2013, which is worth $3 billion over the length of the deal (“Baseball Owners,” 2006). In addition, the league had a deal with ESPN that paid $2.4 billion over eight years beginning in 2004 (Lowry & Hyman, 2005). These three deals alone, which don’t include radio or regional contracts, would amount to approximately $24.3 million per year for each team. Regional broadcast rights can increase this much further; for example, the Washington Nationals’ broadcast deal with MASN pays the team at least $25 million per year (Fisher, 2005). The Nationals ranked 14thout of 30 teams in Major League Baseball in revenue during the 2008 season; using the rights from the national broadcast deal and their regional deal, broadcasting rights would constitute 26.8% of revenues (“Business of Baseball,” 2009). This still does not include radio or foreign broadcast rights. Since baseball is considered the major sports league that depends most on traditional revenue sources as opposed to greater corporate involvement, this clearly demonstrates that broadcast revenues have become a very large revenue source across sports.


Given the basis for increased broadcasting rights, it is easy to see how these would be influenced by a recession. The networks paying these rights depend on advertising to fund their operations. If companies are unable to keep paying advertising costs during games and events, then the network will no longer be able to pay increased broadcasting rights. Since teams and leagues have been shown to have become dependent on these rights, this would be a large area of vulnerability.


Already in early 2009, advertising during televised sporting events was shown to be lagging. In the case of Fox’s coverage of NASCAR, the network’s revenue projections for the first two quarters of 2009 were 25 percent behind 2008 (Smith & Ourand, 2009, p. 1). Similarly, the Tennis Channel was only able to sell out its inventory for the French Open after it cuts its rates by 25 to 30 percent (“Rate Cut,” 2009, p. 6).


A slowing of broadcasting rights would be especially relevant to teams and leagues because in the past these rights fees have largely offset a quickly growing expense: player salaries. For a time, broadcasting rights grew at a rate similar to player costs, which allowed teams to handle these increased expenses (Andreff, 2006, p. 695). In recent years, salaries have already begun to outpace the growth of broadcasting rights. If rights were to stop growing or shrink due to a recession, the increasing salaries of athletes could conceivable become unsustainable. Even if this does not happen, a decrease in broadcasting rights would present organizations with an unexpected problem; it could certainly result in a decrease in revenue instead of the expected annual increase.


Overall Economic Struggles


While it has been shown that the sport business has become increasingly reliant on outside corporate interests, and that each of these new revenue sources can be affected by a recession, it is still vital to show that all of these changes have caused sports businesses as a whole to struggle. Proof of this can be seen in the most recent recession, which began in the second half of 2008. In the past, leagues and teams would not have been impacted immediately; however, struggles have been seen among many of these businesses during their first seasons since this recession began. During the 2008-2009 season, the New Jersey Nets saw their revenue fall over $7.5 million, and operating losses increase by over $5 million (Kaplan, 2009, p. 3). While the Nets struggled during the season and this could have had an affect on their economic troubles, the team finished 34-48 in both 2007-2008 and 2008-2009 (Canavan, 2009).


Leagues have struggled as well. In October of 2008, the NBA announced it was eliminating 80 jobs in the United States in response to the recession (McClung, 2009, p. 33). Meanwhile, in February of 2009 the league had to secure $200 million in loans for its teams (Kaplan & Lombardo, 2009, p. 1). The NFL was forced to follow that example in December and February, as they eliminated 150 of their employees by laying off 45 employees, deciding not to fill 48 open jobs, and providing 76 employees with voluntary severance packages (McClung, 2009, p. 33). Considering reported figures, this represents a total of approximately 15% of their workforce (Lefton, 2009). Given these struggles of what is widely considered the most popular and successful sport in the United States, it seems impossible to believe that sports could still be considered immune from a recession.


Perhaps the greatest insight into how the recession will affect sports will be the 2010 Winter Olympics. Given its prestige, if any event would be able to be immune from the challenges of the recession it would be the Olympics; despite this, there have been struggles seen with the 2010 games. The organizing committee has had to cut back on plans for medal ceremonies, reduce the number of employees it planned to hire by 100, and take over the construction of the athlete village after the recession hit and the price increased. Meanwhile, the IOC is short $21 million of the $160 million it has committed to giving Vancouver from its sponsorship program. To go along with these struggles, while an economic impact study found the benefit of the Olympics to be a maximum of $3.3 billion, recent projections show that the impact will instead fall to about $1.6 billion (Mickle, 2009, p. 17). In the United States, Home Depot ended its partnership with the U.S. Olympic Committee in 2009, which had existed since 1992 (“News,” 2009b, p. 7). While the Olympics will likely show just how much a recession can or can not affect major sports events, it is likely that this won’t be seen until very near the opening of the games; while many commitments were made before the downturn of the economy, this is not the case for hospitality spending. Because of this, the spending that companies decide to do on hospitality of the games could be a very telling sign of how drastically sports has been affected. In contrast, sports could serve as an indicator of the economy’s turn if companies are able to spend as much as they have in previous years.

The recession has extended to organizations in all parts of the sporting industry, including sporting goods. In May of 2009, Nike cut 1,750 of the company’s 35,000 jobs worldwide. This included at least 500 employees in the United States which were laid off from the company’s headquarters in Oregon (Dentch, 2009).


In order to see just how much the industry as a whole has suffered, and how susceptible to a recession it is, the easiest method is to examine the performance of stock in the sports industry. The Dow Jones US Recreational Services Index measures stocks associated with all forms of recreation in the United States. While this includes stock that is not associated with the sports or entertainment industries, it does include stock for companies such as Dover Motorsports Inc., the International Fight League, and Speedway Motorsports (DJ US Recreational Services, 2009). Because of this, it is still the best option to examine the performance of the industry as a whole. From November 2007 to November 2009, the stock in this industry was down approximately 35%, compared to a less than 20% decrease over that time for the DJIA as a whole. This shows that the industry has struggled during the recession, as would be expected, even more than the economy as a whole.


Figure 1

Performance of Recreational Services Stock

(DJ US Recreational Services Index, 2009)


As the figure shows, the sports and entertainment industries that are involved in public trading have performed worse than the stock market as a whole. While this does not give an entirely proper image of how the industry has fared, most successful sports organizations are private while successful organizations in other industries are public, it does show enough to conclude that the industry certainly can not consider itself to be immune from a recession. However, it is worth noting that the industry has also shown a remarkable ability to respond to the economic crisis. From November 2008 to November 2009, the Recreational Services Index saw its stock increase by slightly less than 60%; this is compared to an overall increase of the Dow Jones Industrial Average of approximately 25%.


Figure 2

Recovery of Recreational Services Index

(DJ US Recreational Services Index, 2009


While the sport industry has been shown to be susceptible to a recession, it is important to see that the industry is also able to rebound as any other industry would. No longer having immunity from a recession does not mean that the industry as a whole will be driven to failure; instead, by adapting to economic troubles companies in the industry have been able to succeed as the economy improves.


NASCAR As A Preview


Of all sports businesses, perhaps none is more reliant on outside companies and corporate revenue than NASCAR. The sport is almost entirely dependent on outside industries; it relies on auto manufacturers to provide their cars, and other businesses to sponsor these cars. While there is a large amount of revenue derived from ticket sales, NASCAR has also been criticized by its traditional fan base for catering to corporate interests with innovations like luxury seating. Because of all these factors, the status of NASCAR during this recession can provide an indicator for how all other sports businesses will fare as they become increasingly dependent on corporate revenue.


The first area that NASCAR is completely dependent upon is auto manufacturers. If these manufacturers struggle, as they have during this recession, it can be a huge blow to NASCAR. This has been the case in this recession; as the companies have struggled, they have cut the budgets set aside for racing. Chrysler, which struggled and then declared for bankruptcy, cut its racing budget by 30% prior to the 2009 season (Bauerline, 2009). This is especially important because Chrysler operates Dodge, a prominent brand in NASCAR racing. NASCAR is dependent upon auto manufacturers even further than simply the providing of cars. In 2008, three of the top five NASCAR advertisers were Ford (No. 2), Toyota (No. 4), and General Motors (No. 5) (Smith & Ourand, 2009, p. 26). As these companies have struggled to show profits, NASCAR has served as one of the many areas in which the organizations have been forced to cut budgets, especially in advertising.


Cuts extended to the other sponsors of NASCAR as well. DuPont, which was considered the leader in hospitality among NASCAR sponsors, drastically decreased its hospitality spending in 2009. As opposed to entertaining 17,000 guests at 37 races, as the company did in 2008, DuPont purchased hospitality packages to entertain only 2,000 guests at six races in 2009 (Smith, 2009b, p. 1). Meanwhile, the struggles of other sponsors will make NASCAR an even greater example of what can come with reliance on corporate interests. The top NASCAR advertiser in 2008, Sprint, announced 8,000 layoffs in early 2009 and posted $1.18 billion in losses through the first three quarters of 2008 (Smith & Ourand, 2009, p. 26). With struggles like these among sponsors, particularly the top advertiser and namesake of NASCAR’s top division, it is impossible to expect NASCAR to continue to be successful in a down economy without making economic adjustments.


All of this has contributed to NASCAR having issues during the recession, and having to make drastic changes to combat these. In November of 2008, NASCAR implemented a no-testing policy in order to save millions of dollars for teams (McClung, 2009, p. 33). This eliminated what was a primary focus of all teams in NASCAR, fundamentally changing the way teams were run. Following the 2008 season, many of these teams merged in order to be able to survive at all. This included teams with strong traditions; Petty Enterprises merged into Gillette Evernham Motorsports, while Dale Earnhardt Inc. combined with Chip Ganassi Racing to form Earnhardt-Ganassi Racing. Many of these were do to teams not being able to secure sponsorship, which they generate 75 to 80 percent of their revenue from (Smith, 2009a, p. 1). Due to this situation, NASCAR’s vice president of corporate communications, Jim Hunter, made a statement that could be very indicative of all of the sporting industry’s status if increased reliance on corporations continues; Hunter said, “If your entire business model is built on sponsorship and then you don’t have it, the business model will go through a correction” (Smith, 2009a, p. 26). This could certainly be the case in modern recessions for all organizations involved in sports.


While it is difficult to gauge completely how NASCAR has fared since it is a private company, it is possible to go much deeper into the finances of its public arm, International Speedway Corporation. The easiest way to examine this is through examining the performance of ISC stock. However, it can be examined in much more depth through the company’s annual reports and quarterly filings.


As expected, ISC stock has performed poorly in the past year. The stock’s high price during 2008 was $44.75 (“ISC,” 2009, p. 12). However, the stock fell drastically after the recession began to hit; it has hit a 52 week low of $15.96 (“ISCA Stock,” 2009). Perhaps most importantly, and most relevant to showing how increased dependence on corporate interests can impact an organization, the stock of the International Speedway Corporation has performed even more poorly than the industry as a whole.


Figure 3

ISC Stock Compared to Recreational Services

(DJ US Recreational Services Index, 2009)


The stock of ISCA has declined approximately 5% more in the past two years than the average stock in the Recreational Services Index. This decline is most likely not do to any dividend payment, as the ISC continued its typical pattern of increasing its dividend by two cents yearly, resulting in a payment of $.12 per share in 2008 (“ISC,” 2009, p. 13). While this is the sample of only one company, it does seem to indicate that increased dependence on corporate interests is capable of making an organization increasingly susceptible to a recession. Moving forward, this can serve as an example for organizations in other sports of what they can expect as a higher proportion of their revenue comes from corporate interests.


Can Corporate Relationships Help?


There is one are where this relationship may actually help. All businesses will experience issues obtaining credit in an economic downfall; however, it is possible that the sports industry may have an advantage in this area because of the large-scale relationship between sports and the sponsorship of banks. In 2008, the banking industry spent $900 million on sports sponsorship rights, which was about 9% of all money spent on sports rights. It also spent $123 million on sports advertising, for a total investment in sports of over $1 billion (Lefton & Mickle, 2009, p. 26).


Because of this relationship, the sporting industry has been able to borrow money when the credit market has been very difficult. This is perfectly seen in the NBA’s borrowing of $200 million for clubs in February of 2009. While this money was borrowed at a high interest rate of over 8% (Jones, 2009), it was still done so in an extremely illiquid credit market (Kaplan & Lombardo, 2009, p. 1). Due to the relationships between many of these teams, the NBA, and banks, it makes sense for the money to be loaned in order to ensure the long-term viability of teams.


Conclusion


Many in the sports industry have held a belief that sports organizations, teams, and leagues would be immune from the effects of any recession. However, evidence has shown that this is certainly not the case in the current structure of the sports business. An increased dependence on corporate interests has made the industry as susceptible to a recession as any other industry. Because of this, it is imperative that sports businesses do not continue to carry on with business as usual while the economy is in a downturn.


In the past, there was some truth to the sports industry being “recession-proof”. Teams and leagues were primarily dependent on individual ticket purchases, and therefore were sheltered from many immediate issues that would impact other businesses. Because of this, teams were actually able to thrive in the early parts of a recession as attendees used sports as an escape from every day issues. However, even then the sports industry found itself affected by a prolonged recession. Sport was never fully “recession-proof”; therefore, the issue is whether corporate interests will cause the industry to be affected by a recession immediately.


Several major changes in the revenue generating processes of sports have caused this increased reliance on corporations. In general, corporate sponsorship has increased dramatically in sports as time has progressed. Over $11 billion in corporate sponsorship was spent on North American sports in 2008. Considering the large increase of that number over 2007, this figure will likely to continue to grow. With such a large amount of money invested in sport, it is impossible to expect the sporting industry not to be affected by troubles in other industries.


In addition to general sponsorship, several specific trends have come up that have changed the face of the industry. The first of these is luxury seating and hospitality, which has become a major part of the financing of stadia and the generation of revenue for organizations. Luxury seating is approaching 20% of all seating in stadiums and arenas, and is capable of generating millions of dollars each year for organizations. However, this seating has proven to be difficult to sell during recessions; in addition, even those that do sell have seen cuts in their hospitality spending associated with suites, as this is the easiest cost for sponsors to cut quickly. Stadium naming rights have also changed the revenue generating capabilities of sports teams. These rights have provided teams with millions of dollars each year in exchange for a corporate sponsor putting their name on the stadium or arena; however, even very prominent stadiums have struggled to sell their rights during this recession. Personal seat licenses also generate millions for teams that sell them, while also helping to shift the ticket base to being a larger percentage of corporate customers. Because of this, teams have struggled to sell PSLs, as well as to keep their season ticket base during the economic downturn; both of these leave teams lacking revenue that they were expecting to have. Broadcasting rights have grown exponentially in recent years; as such, they have become a much larger percentage of the revenue generated by major sports teams. However, these rights are dependent upon the selling of advertising during events; if a prolonged recession affected advertising while negotiations for broadcasting rights took place, leagues would certainly see an effect.


Each of the major new revenue sources have proven to be vulnerable to the pressures placed on corporations by an economic downturn. Meanwhile, the sports industry as a whole has struggled during this most recent recession, and NASCAR has shown the potential affects on a sport almost entirely dependent upon outside sources. In addition, the stock of publicly traded companies in the recreation industry has performed even worse than the Dow Jones Industrial Average. Despite this, increased corporate involvement in sports is not a bad thing; it simply means that sport is as vulnerable to a recession as any other industry.


By realizing that the sports industry is not immune from the recession, organizations involved in it must then make moves to be able to retain as much of their revenue as possible. This must be different from how the companies proceed during economic booms; teams and leagues must move to make their organizations an effective use of the limited funds that corporate sponsors have. Organizations must be flexible with options, and willing to cut some prices; organizations that have done so already have proven to be able to sell their inventory well. The sports industry must adapt to the fluctuations of the economy, just as any other industry does; it can no longer expect to be immune from any downturns. They can continue to be successful during a recession, but they can not hold on to the old philosophy of being “recession-proof”.


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