We Built This Stadium With The Government’s Bank Roll

            There are two main takeaways that emerged after the 2012 Republican National Convention ended last night. The first is that reporters and commentators seemed to be really surprised that Tampa Bay is really hot and humid in late August. The second is that Republicans are not going to let President Obama escape from a comment, which he is unlikely to have actually said, stating that business owners could not have built their companies without the help of the government. Virtually every speaker at the Republican Convention used some form of the line of “we built it” or  “you built it” to highlight partys support for the notion that entrepreneurs created their own businesses.

            One can question the extent of the government’s role has in helping new business become successful. Yet, there is no question that the Republican National Convention took place in a building that only exists because of public financing. The Tampa Bay Times Forum is owned by Hillsborough County, which then leases the building back to the Tampa Bay Sports Authority (a public entity). In addition, The St. Petersburg Times reported in 1998 that, “Financing for the arena was completed in August with the closing in New York on seven bond issues. Sales taxes, tourist development taxes, and ticket surcharges will be used to repay the bonds. Permanent financing includes $84 million in bonds backed by the city of Tampa and Hillsborough County.” 

            This post is not necessarily to criticize the communication strategy of the Republican Party that centered around championing the independence of the private sector in a building primarily paid for by public financing. It is more to highlight that the stance of many Republicans is similar to the position of many sports decision makers. Sports organizations want the government to subsidize the building or renovation of new stadiums. Yet, these teams and leagues only want to receive these subsidies on their terms and claim they are the taking on much of the risk. For example, the Minnesota Vikings originally wanted to build a new stadium in Arden Hills, MN. Owner Ziggy Wolf stated the Vikings were going to “We are putting significant private investments at risk.” For Wilf, that meant Vikings would put up 39 percent of the $1.04 billion stadium with the public financing accounting for the rest of the cost. Would the government receive any of the revenue that came from ticket, suite, concession, or merchandise sales for the stadium? No. Instead, the government would receive money, “derived from pro-sports memorabilia tax, sports-themes lottery games, other sources.” This plan received so much criticism that Vikings ended up abandoning the Arden Hills location for a new stadium in Minneapolis near their current venue that was largely subsidized by public funds. 

            The Cowboys Stadium is often called “The House That Jerry Built” or “Jerryworld” referring to owner Jerry Jones ability to open a venue that costs $1.2 billion. Yet, the city of Arlington has contributed over $482 million to the construction and retiring of debt for Cowboys Stadium. Perhaps a better nickname for the Stadium is “Jerryworld Made Possible by the City of Arlington”.  Yet, Jones does not believe that the NFL should be subsidizing teams in other markets. When discussing the Minnesota stadium debate in 2011, Jones said, “"Right now we are subsidizing this market…That will stop. That's going to stop. That's called revenue sharing. That's on its way out." Apparently, it was OK for the government to provide money for the building Cowboys Stadium but not OK for the NFL to help the Vikings with any subsidies for their stadium. 

Again, we are not criticizing sports organizations for trying to obtain public subsidies for their venues. In an environment where state, county, and municipal governments are making drastic budget cuts, sports managers and decision makers should question their public posture when it comes to public financing and subsidies. While the government may not have built the sports industry, it has played a large role in building its infrastructure both in a literal and metaphorical sense. Sports organizations can help ensure they are doing everything possible to obtain and retain financing from public sources by not going out of their way to criticizing the government or public officials.   

Professional Amateur Athletes

            It is hard to think of a sporting event that has been more monetized than the Olympics. Corporate partners spend upwards of tens of millions dollars to become an official Olympic sponsor. Host countries and cities spend billions of dollars on building new stadiums, venues, stores, and roads for the two-week event. That does not count the millions of dollars that goes into other countries making a bid to host the games. Fans from around the world also spend large sums of money to on travel, tickets, hotel, food, and other accommodations during the Olympics.

            The only part of the Olympics where money is not supposed to be involved is with the athletes. CNN’s Bob Green colorfully described what made the Olympics special as compared to most other sporting events when he said, “The one firm rule that always governed the Olympic Games was that amateur athletes were permitted to compete. Professional athletes were not.” Starting with the 1972 Olympics, however, that began to change. While professional athletes became more commonplace at the Olympics after the games in Munich, the real sea change occurred with the “Dream Team” of NBA basketball players from America in 1992. Since then, swimmers, gymnasts, and track & field stars have earned millions of dollars in endorsements deals and prize money while still competing as Olympic athletes.

            The perception still largely exists, however, that most Olympic athletes are still “amateurs”. One of the biggest draws of the Olympics is that most competitors in the games toil in obscurity for four-years for one (or a few chances) to compete on an international stage.  Whether it comes to obscure sports such as the modern pentathlon or biathlon to more well known sports such as wrestling or rowing, the ultimate reward is being able to win a medal and bring honor to one’s country.

            While that may be the case, all Olympic athletes have an opportunity to also make a lot of money. In the ultimate pay-for-performance compensation structure, countries reward their athletes for winning medals. In the United States, athletes receive $25,000 for a gold medal, $15,000 for a silver medal, and $10,000 for a bronze medal. While that may seem like a nice chunk of change, athletes in other countries make significantly more money. In Russia, athletes win $135,000 per gold medal, $82,000 per silver medal, and $54,000 per bronze medal. In Uganda, the gold-medalist in the men’s marathon received $80,000 and a pledge by President Yoweri Museveni that his parents would be built a new home by the national government.

            While the United States Olympic Committee (USOC) receives most of its money through corporate sponsorship / donations, many other nations’ government directly subsidize and pay prize money to athletes. In addition, some nations have used the promise of large cash rewards to encourage athletes from other countries to become citizens of that nation. For example, Feng Tianwei was born in China and became a successful table tennis player. Despite being ranked eighth in the world, Feng would not be good enough to make the Chinese table tennis team. Instead of trying to compete for China, Tianwei was one of three players who “were spotted by Singaporean scouts and enticed to emigrate under the country’s Foreign Sports Talent Scheme.” Feng received fast tracked Singaporean citizenship (which is not available to non-athletes) and ultimately earned over $400,000 for her two bronze medals at the games.

            To be clear, we are not criticizing athletes for trying to make money nor countries trying to enticing athletes to become citizens and compete for a nation in Olympics. These are literally and metaphorically the rules of the game and both athletes and countries should take advantage of these rules. These practices, however, appear to counter the ethos of the Olympic Games as they were originally created - especially in the minds of fans, media, and sponsors. Athletic tourism, as with Tianwei, calls into question the idea that amateur athletes are competing for their country or if they are professionals using the guise of nationalism to make money.

            These payment schemes for Olympic also bring up a myriad of other questions that cannot be contained in a single blog post. For example, should countries spend millions of dollars on athletes who usually only gain an international spotlight once every four years? If the “amateur” athletes in Olympics are being paid so much money, shouldn’t the “amateur” athletes at the collegiate level in the United States get paid as well? These are all interesting questions that can and should be examined in more detail. However, there is little question that there no longer any “amateur” athletes competing in the Olympics.    

Reaching For Revenues

           What do red wine and a hydropower plant have in common? These are two of the latest examples of sports organizations trying to diversify revenue streams outside of traditional channels. For the Washington Redskins, the Alexander Valley Cabernet Sauvignon is the team’s attempt to “honor [fan] loyalty” by providing them with the “perfect wine to be savored every time the Burgundy and Gold take the field.” For the Trabzonspor football club in Turkey, the team needs “a guaranteed source of income, and we have the ideal conditions for hydro power”.

            It is easy to dismiss these attempts as another instance of sports organizations trying to monetize every possible aspect of their brand. In the Redskins case, it is it difficult to argue this point. Having an official wine to become a symbol of the football team’s success of over the past 80 years is questionable. In addition, one frequent Block Six Analytics Blog reader pointed out that perhaps should have gone with the a Burgundy wine to celebrate the “Burgundy and Gold” as supposed to a cabernet.

            Trabzonspor efforts, however, make much more sense. UEFA, soccer’s European governing body, is implementing new rules for the 2014 season that attempt to prevent owners from using money outside of their soccer teams’ revenues and profits for team operations. This is to prevent teams with billionaire owners, like Manchester City and Chelsea, from acquiring players regardless of costs because the owners’ outside financial holdings can compensate for any team losses.

But why does Trabzonspor want to invest in hydropower plants? According to The Financial Times, Turkey has been long dependent on importing natural gas from neighboring countries like Iran and Russia to fulfill its energy needs. Therefore, the country has been actively looking for alternative energy sources like hydropower (which power that comes from energy that is given off from falling water). Trabzonspor is situated in area of the country with heavy rainfalls. In addition, Trabzonspor’s club chairman has a civil engineering background and has worked on numerous infrastructure projects. Since the owners cannot use their personal funds to continue Trabzonspor success (the team has won six Turkish cups), investing the team’s financial assets in a growing industry allows Trabzonspor to pursue a new revenue source.

While most sports organizations will not be able to invest in hydropower plans, they do face a similar strategic problem that the Turkish soccer club faces. They need their business operations to finance team’s ongoing operational activities. Sports organization can no longer rely on owners, shareholders, or governments as significant funding sources. Instead, these organizations are constantly searching for new ways to generate revenue especially after the most recent economic downturn.

It can still make sense organizations to pursue new projects to maximize revenue in ticket sales, media distribution, corporate partnership agreements, merchandise, and events While it is not clear whether Trabzonspor was willing or able to invest more money in enhancing traditional revenue streams, it is clear that the owners took the initiative to take advantage of an opportunity to invest in new channels. Other sports organizations should also to alternative areas to find greater returns and generate new revenue.

We want to note that not every type of brand extension or alternative investment should be pursued even if it can bring in much needed money to an organization. The Redskins may want to think about sticking the wine idea back in the model. However, looking at new sources of revenue outside of traditional channels should be a consideration for sports managers at all levels.

Mo Sponsor Money Mo Fan Support

             In a recent post on the Harvard Business Review Blog Network, Alastair Macdonald declared that “Olympic Sponsorship Can Work.” Macdonald then described how his company is completing a study that looks at brand awareness, customer acquisition, and brand perception metrics. Since Havas Sports & Entertainment is a company that operates in the sponsorship space, it may not be surprising that its metrics found that companies that were official sponsors of the 2012 Olympic Games were seeing significant return on investment on their key metrics (more of which can be found here).

            What’s more surprising is a finding that was buried towards the end of the post. Macdonald said his firm’s study found that, “Despite the media's best efforts, people feel remarkably warmly towards the sponsors: three times as many agree as disagree with the statement ‘The Olympic Games are better as a result of the money received from sponsors’; and twice as many disagree as agree that ‘The Olympic Games shouldn't have any sponsors.’”

            There is a popular perception that sponsorship is a necessary evil – that audiences tolerate sponsorship at games and competitions. Sports organizations having corporate partners is just another way for teams and leagues to generate as much money as possible even as they receive millions of dollars or billions of dollars in ticket sales, media rights, and event revenue. Former U.S. Representative Barney Frank articulated this seemingly popular belief when he said, “I don’t think anybody has ever opened a bank account or decided to buy a CD because a bank’s name is on the stadium.”

            Yet Havas’s study directly addresses these issues. In fact, fans understand the impact that sponsorship has on their favorite organizations, teams, and leagues. In addition, the sponsorship activation does not detract from the overall fan experience. In fact, the study shows that fans may actually want sponsors to be a part of these events.

            Highlighting that sponsorship either enhances (or at least does not negatively impact) the overall fan experience can be a critical element of sales pitches that rights holders can make to potential partners. It is true that an increasing number of marketing managers, media buying agencies, and company owners are requiring sports organizations to provide a tangible return of investment (ROI). Even after receiving ROI data, however, many corporate partners need to be convinced that their target demographics will view their sponsorships in a positive light. Havas’s finding is a good first step for making this case.    

Royals Reserve Taxpayer Money for The Monarchy

           One of the biggest problems for sports organizations at all levels is the declining amount of public support for athletics from state, county, city, and local governments. Huge deficits and laws requiring balanced budgets make funding of athletic programs or organizations an easy target for budget cuts. This has caused colleges, high schools, and professional organizations to scale back or eliminate entire programs.

            In this tough economic environment, it would appear that sports organizations would be grateful to receive any type of public funding or subsidies. Certainly no sports organization would seemingly misappropriate funds or do something like using taxpayer funds to help pay their own taxes, right?

            Unfortunately, Sports Radio 810 WHB and the non-profit ThinkProgress organization are reporting that the Kansas City Royals are stealing from the poor to give to the rich – in a manner of speaking. According to Kevin Kietzman at 810 WHB, “The Royals have received at least $12.7 million from taxpayers that was approved by the Jackson County Sports Complex Authority as part of the RMMO provision of the team's lease with the county… By using the money for payroll taxes, the team literally collected taxpayer money to pay their own taxes.”

            The Royals have done nothing illegal in this situation. The team’s deal with Jackson County requires “reasonable written approval” by the Sports Complex Authority, which the team has secured before distributing its funds. Yet, the original intent of receiving this money starting in 2006 was to make improvements to Kaufman Stadium – particularly in the case of using the All-Star Game as showcase for the city and county in 2012. Yet, the team has only used 9% of the funds it has received on stadium improvements. The rest of the money has gone to pay for salaries, telephones, and taxes.

            In this blog, we have often argued that sports organizations should take steps necessary to enhance cash flow in non-traditional ways. This is one instance, however, where taking a different approach could be “penny wise and pound foolish.” Economic decisions cannot be made in a vacuum where sports decision makers only look at the best financial interest of their organization. By using taxpayer money in efforts to pay down the team’s tax obligations, the Royals have certainly engendered ill will from one of their target demographics – fans who live in Jackson County. More importantly, this type of action will certainly jeopardize the team’s ability to receive any type of public funding in the future, eliminating a source of cash flow critical to the organization.   

            Taking a more macro perspective, the Royals decision will likely jeopardize many other sports organizations’ chances for public funding. The team’s actions provide tangible evidence for what critics of public financing of sports organizations have argued for years is the main problem with this type of spending. The Royals actions show that at least some sports teams and owners have no interest in their communities or making improvements to infrastructure / stadiums that would benefit the public good. Rather, sports owners and teams are only looking after their own best interests in their bottom line.

            Block Six Analytics does believe that sports organizations as a whole do provide significant benefits to states, counties, cities, and towns. In addition, public financing of sports organizations does make sense in the right circumstances – even in the current tough economic environment. Yet, actions like those taken by the Royals organization will make it increasingly difficult to secure and justify future public funding for sports organizations.