Can Sports Weather the Storm?

It was only 9 months ago that pundits, investors and government officials argued that the U.S. subprime mortgage crisis had been contained. They were wrong. The ripple effect of the imploding subprime mortgage market has spread rampantly throughout the economy, slamming consumers, banks, investors and even state and local governments to a degree unforeseen by most pundits, analysts and U.S. Federal Reserve officials At the heart of today's subprime crisis is the unfortunate interaction of financial innovation gone awry, inept market regulation and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor. To date, major banks and other financial institutions around the world have reported losses of over $170 billion.

Despite the fact that all signs point to an economic recession, top property, sponsorship and marketing executives believe that the sports business industry remains impervious to an economic recession. The NFL has more than $9 billion of debt, including all team borrowing and the league’s G-3 stadium funding plan, which has granted nearly $1.4 billion to 11 stadium projects since 1999, and might include the league’s lending pool, or credit facility. Major league baseball clubs owe $3.1 billion, which does not include the roughly $2 billion in financing for the two pending New York ballparks because that debt is not technically carried by the teams. No debt total is available for the NBA, but league policies limit all team borrowings to $175 million per club.

With so much debt on the books, how can the so-called experts say with a straight face that sport is recession-proof? The recession-proof attitude of teams is rooted in the sports industry’s resiliency during past economic downturns. There have been 5 bear market periods since 1097, and studies have shown attendance increases in the 4 major sports throughout each of them, unless a labor disruption occurs. Strong ticket sales reinforce the commonly held belief that consumers turn to sports in hard times as a distraction. As a result, brands see sports as an area of opportunity in a tightening economy. Because of fans’ strong affinity for their teams and the escape that those teams offer, sports are traditionally the last form of entertainment that consumers will sacrifice.

When you consider the fact that this is the start, not the end of the economic/credit crisis, it seems certain that the revenue streams in sports will feel the same pressures as are being felt in economy generally because fans/corporations will feel a need to cut spending as gas prices and commodity prices continue to rise. While the two key sports revenue drivers outside of the gate – sponsorship and advertising spending – may not slow down either due to economic weakness, the economy is suffering in a way that is going to last for some time and it will ultimately hit sports. Strains on the credit market have challenged financing for deals such as those for the purchase of Liverpool FC and the Tampa Bay Lightning. Other areas that require large financial commitments may follow, and ad sales for some local TV and radio stations have begun to show weakness, even as national TV and digital buys continue to grow. The Washington Nationals and the New York Jets and Giants continue to seek high-dollar naming rights deals for their new stadiums many months after starting sales efforts. The Real Salt Lake of the MLS still hasn’t sold the rights to its new stadium, and pro teams in mid-tier markets have begun to struggle in their attempts to renew contracts for luxury seating.

Like mortgage lenders passed along the credit risk to others, look for sports teams to do the same. In the face of tightening credit across the board, the NFL recently passed a resolution to reduce team debt caps from $150 million to $120 million by 2010, and to reduce overall debt by $1 billion in that same period. Since signing the collective bargaining agreement in 2006, owners have decried it as too player-friendly and the economic realities of today will undoubtedly figure in the new agreement when the owners opt-out of the current agreement in 2010.

If you have questions or require additional information, please contact Everett L. Glenn, Esq. at eglenn@espsportslawpro.com or call 562.619.8460.