The Economics of a Sports Recession

The global economic recession has spared no one, not even one of the most consistently profitable industries in the world: sports. The US unemployment rate stands in double digits, its second highest since 1983. Credit is tight, making paying for housing, food and healthcare very difficult. Yet in such dire times, professional athletes always seem to be living well. With their fame, multi-million dollar salaries, and long-term contracts, it’s never a bad time to be a professional athlete. You might not suspect it, but despite the millions of dollars athletes make every year, the sports industry has been hit hard by the global economic recession.

The NFL does not allow games to air on the home team's local television when all tickets have not been sold

An underlying issue with a number of NFL teams is ticket sales. Last season, the Oakland Raiders, Detroit Lions and St. Louis Rams had a total of nine games blacked out (their game wasn’t shown on local television), because the teams couldn’t sell out all their tickets 72 hours before kickoff. The Minnesota Vikings and Arizona Cardinals almost had blackouts in their playoff games last year because they failed to sell out. The NFL had extended the blackout deadline in each case, and ticket prices were slashed. For lowly teams in small markets to not sell out is understandable, but for good teams to nearly fail to sell out a playoff game is an embarrassment.

The trend of failing to sell out games continues into the 2009-2010 season. The Jacksonville Jaguars announced that they expect all 10 games played at Jacksonville Municipal Stadium, their home field, will be blacked out. The Cincinnati Bengals would have had a blackout on October 18th, but the team’s diva and star wide receiver, Chad Ochocinco, along with the cellphone company Motorola, bought the remaining tickets to prevent it. Even television revenue isn’t looking so bright for the NFL. The league just signed new TV rights deals with FOX, CBS, and NBC through 2013, yet only at a 2% increase over the previous deal. That’s barely more than half the rate of inflation in 2008. Although to some an increase is an increase, that 2% is the lowest bump in annual fees for an NFL TV deal ever.

The biggest issue for the NFL could come after the season when a new Collective Bargaining Agreement with the Player’s Union needs to be negotiated. Under the current deal, owners pay about 60% of the team’s revenue to the players, but teams are taking on major expenses which will eventually increase revenues (such as stadium construction) that are hurting the current bottom line. Players are likely going to want a bigger piece of the ever-increasing revenue pie, especially with many supposed new, moneymaking stadiums on the way. NFL commissioner Roger Goodell has acknowledged this grave problem. “There’s a lot of risk out there,” Goodell said. “And that risk is falling on the owners. I think there’s got to be a recognition of the costs that are associated with operating NFL franchises. That includes operating stadiums and building stadiums.”

The new Yankee Stadium cost about $1.5 billion to construct. Photo by Ed Yourdon - http://flic.kr/p/6J5XgW

Opening new stadiums doesn’t always mean a sold-out crowd each game. The New York Yankees christened their new, $1.3 billion stadium this past season with a World Series victory. The New York Mets also opened a new stadium this past year. Yet in each case, average attendance fell; the Yankees saw average attendance per game fall 7,000, and the Mets saw a decrease of nearly 13,000–after each team saw attendance steadily rise the past decade. Outlandish ticket prices didn’t help (the average price for a family of four to go to a Yankees game this season was $410, at roughly $73 a ticket), but in the world’s biggest sports market, such a drop was unprecedented.

The recession has even hindered the ambitions of NBA franchises. The summer of 2010 is set to have the greatest NBA free agent class ever. Headlined by Lebron James, along with fellow superstars like Dwayne Wade, Chris Bosh, Amarie Stoudemire, Shaquille O’Neal and Carlos Boozer, the pool of players set to enter free agency is the best basketball has seen. The salary cap for the 2010-2011 season was set to be $63 million. But due to the recession, it’s being lowered to about $50 million. This means that franchises could only feasibly sign one of these superstars to a maximum value contract of $19 million. This especially hurts a team like the New York Knicks who planned to issue two max player deals in 2010 in order to lure LeBron James. Now it’s unlikely any superstar-free agent-to-be would want to go to a team like the Knicks; without the ability to sign stars in pairs, low caliber teams can’t compete in the free agent market.

In this global economic downturn European sports franchises have been affected as well. English soccer club Liverpool has faced dire financial straights. American owners George Gillet and Tom Hicks have seen their fortunes shrink and have had trouble paying off the loan they took out to buy the club back in 2007. The pair had an outstanding debt of £60 million ($100 million) on the £350 million loan ($580 million) and had to refinance the deal this past summer. The pair have driven the club into a £359 million debt and without the funds to sign needed players, the team has suffered. This season it has already lost more games (5) than all of last season (2).

Fellow English Premier League clubs Portsmouth and Hull City are facing financial difficulties as well. Liverpool, Hull City and Portsmouth have been searching for new owners and Arab oil tycoons have shown great interest in each club. Well-off Manchester United was forced not to spend on new players the past off-season, despite taking in £80 million from selling star winger Christiano Ronaldo. Italian clubs Roma and AC Milan were forced to sell their beloved franchise players and talismans Alberto Aquilani and Kaka to help cover expenses. Even Real Madrid, the richest professional sports team in the world, had to cap their £200 million spending spree this off-season because of financial concerns.

In the sports industry, a couple million dollars used to be a relatively small figure to owners. To everyday people, a couple million dollars means retirement and stress-free living. But franchise owners and titans of the sports industry currently live with the stress of losing millions of dollars in revenue and value or failing to drag teams out of debt. Now it seems like owners are counting their precious millions, as every dollar counts in an industry engaged in an uphill battle against the stagnant global economy.

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