Flawed game plan?

For years, sports leagues have raked in big bucks by catering to the wealthiest fans. Could that strategy hurt them in these tough economic times?

For years, sports leagues have raked in big bucks by catering to the wealthiest fans. Could that strategy hurt them in these tough economic times?

The new Yankee Stadium in the Bronx is the latest sports palace built with the high-end customer in mind. ((Mike Ehrmann/Getty Images))

We are, as you may have heard, in a recession. The economy is shrinking along with Canadians' retirement savings accounts, while the unemployment rate is swelling.

This, of course, means bad news for businesses of all shapes and sizes. With consumers' investment portfolios in worse shape than Andruw Jones, and their confidence shakier than Tarvaris Jackson's, few are looking to spend money they don't have or that they're not sure they'll have if the stock market sinks further.

But are big-time professional team sports the exception? After all, thousands of fans have an emotional attachment to their favourite teams and players that most people don't have to, say, Ford automobiles or Royal Bank financial services. Even when times are tough, the thinking goes, people will dig deep to support their teams, which offer a warm escape from those chilling economic forecasts.

That may give some people the idea that the NHL, NFL, NBA and Major League Baseball are, if not recession-proof, then at least recession-resistant in a way that other businesses can only dream of. Is that true, though? Yes and no, says a leading sports economist.

Andrew Zimbalist, a professor of economics at Smith College in Northampton, Mass., and the author of Baseball and Billions and May the Best Team Win: Baseball Economics and Public Policy, acknowledges that the sports industry may be "insulated" in the immediate by handy assets like long-term network television contracts, advance ticket sales and multi-year sponsorship deals.

But the forecast may not be so sunny, due in part to a business strategy that often eschews the average fan in favour of high-end customers who have the means to buy — or at least sign off on — big-ticket items like luxury suites, season seats and arena/stadium advertising.

The rising cost of attending games is partly evident in the fact that fans spent a record $32.06 billion on tickets, parking, concessions, premium seats and on-site merchandise sales in 2007 — a 4.8% increase from the year before, according to Street & Smith's SportsBusiness Journal.

In addition, average ticket prices for the NFL, MLB and NHL all rose 5 per cent to 10 percent in 2008, according to Team Marketing Report.

The new revenue model

Zimbalist explains part of the reason for these rising costs.

"Around 1990, professional team sports really changed their revenue-generating model to rely much more heavily on high-income and business revenues — from relocating facilities away from the suburbs to the downtown business area, to selling more luxury boxes, club seats, other premium seats, catering, and signage at the ballpark," Zimbalist says.

Hugh Hefner has been known to shell out big bucks to entertain his friends in a luxury suite at Los Angeles Lakers games. ((Jed Jacobsohn/Allsport/Getty Images))
"All of those revenues are the fastest-growing revenues, but they're going to be more sensitive to the economy, because it's no longer the average Joe who says I'm not going to cut my sports spending because I need my distractions during the recession."

And that could now be the problem. Most high-income clients — and the companies they work for or own — probably aren't attached to teams the way die-hard fans are. It's much easier for them to pare something like sports tickets from their list of expenses, exposing franchises to the potential loss of many of their best customers.

Mike Carroll is the principal partner in a customs brokerage firm in Fort Erie, Ont. — just across the Peace Bridge from Buffalo, N.Y. For years he's bought season seats for both the NFL's Bills and the NHL's Sabres, primarily so he can offer tickets to customers, suppliers and employees.

But Carroll, who says he hasn't been to a Bills game in "three or four years" and has yet to use his company's Sabres seats this season, admits he wouldn't exactly cling to the tickets if his firm ran into tough times.

"If all of a sudden we start taking a hit in our business, I wouldn't struggle to hang on to them. In all honesty, I wouldn't even miss them. Sometimes it's a hassle giving them away.

"They wouldn't be the first thing to go, but I'll put it this way: I'll give them up before I cut my pay."

NHL team in Hamilton 'makes sense'

The fact that some high-end customers could turn their backs on sports teams might provide a little "you reap what you sow" satisfaction to embittered Joe Six-Packs who have complained for years — justifiably — that they've been priced out of the games they've loved all their lives. But don't expect things to shift back in favour of the average fan.

Zimbalist says that while the focus on big-spending clients makes for "a more sensitive and volatile revenue flow," most owners and league executives wouldn't change a thing.

"If you said to [baseball commissioner] Bud Selig, 'if you knew back in 1992 that this shifting to the downtown stadium model was going to make your revenue flow more sensitive to the recession, but by the same token, we can assure you that your average stadium will have $50 million more in yearly revenue, would you accept that trade-off?' he would say yes.

"So I don't think [the current business plan] turns out to be a mistake, though it does have some drawbacks, some negative repercussions."

Now what about hockey? Might the NHL be skating on firmer ice because of the relative strength of the Canadian economy in relation to that of the U.S.?

Would the NHL be better off in places with more fans like these guys? ((Mike Stobe/Getty Images))
In some ways, yes. As Zimbalist points out, in uncertain times people tend to cut their consumption in inverse order to how important the consumption item is to them. Hockey, it's safe to say, is held in high regard in this country, so for many Canadians spending on the NHL would be way down the list of entertainment items to eliminate.

The trouble, though, is that the league is also heavily dependent on revenues from the U.S., where 24 of the league's 30 teams are based. And American fans are more likely to put hockey on the chopping block before, say, the wildly popular NFL.

Zimbalist feels the NHL's brass would be wise to reconsider some of its policies, including its apparent aversion to allowing a franchise to relocate from a tepid southern fan base to a more hockey-mad town north of the border (see: Predators, Nashville and Balsillie, Jim).

"Moving a team from the U.S. south to Hamilton, Canada makes a lot of sense to me," Zimbalist says. "I think they're going to have to show some flexibility in those kinds of areas."

Bettman too optimistic?

But will they? NHL deputy commissioner Bill Daly insists the league hasn't thought about putting more teams in Canada.

"I don't believe the economy has factored in at all as to how we view franchise situations around the league," Daly wrote in an email.

Nor was Daly ready to concede that the NHL has tied its fortunes to high-end customers.

"I don't completely agree with the premise," he wrote. "Each market is different in that regard … Nor do I necessarily agree that the economic downturn will impact 'high-end customers' more than it might customers with average means.

"Having said that, we, like every sport, and every industry for that matter, are concerned generally about the state of the economy and the potential impact it might have on our business.

"Fortunately, to this point, we believe the impact has been minor."

Daly looks to be correct on the latter point. The NHL says it's headed for another year of record attendance and revenue, telling franchise owners in early December it expects income for the 2008-09 season to increase by two per cent to $2.65 billion US.

League officials have acknowledged that the economy could hurt revenues later this season - playoff tickets don't go on sale until the spring — but they say there's been little or no damage so far.

Still, Zimbalist says that next season will present some "unique challenges" to the NHL as it faces the task of having to renew some of its luxury box and season-ticket sales and advertising deals. For now, however, Gary Bettman is wearing perhaps the rosiest glasses of the four major league bosses.

"If anybody's being too optimistic, I think it's Bettman," Zimbalist says. "That's a lesson that he thinks he learned from David Stern when he was with the NBA, and he's been that way consistently, even in the worst of times.

"The notion that hockey is going to come out whole this year, or better off, is something that I feel very skeptical about."