IT'S WHERE YOU PLAY THAT COUNTS THE REAL MONEY IN PRO SPORTS FLOWS FROM GLEAMING NEW STADIUMS AND ARENAS THAT ATTRACT CORPORATE PARTNERS AND FREE-SPENDING FANS.
(FORTUNE Magazine) – It's still hard to believe, but when the National Football League starts its season this fall it will not field a team in the second-largest city in the U.S.--Los Angeles. Both the Rams and the Raiders have abandoned Southern California in recent years, heading off for St. Louis and Oakland, respectively. The twin departures have mightily angered and bewildered Southern California football fans; many of them simply cannot fathom why their champions would leave such a huge market and head for smaller, less glamorous outposts.
Well, says Rams President John Shaw, the answer is clear enough if you bother to take a look at his club's ledger: Venue-related revenues have jumped by 25% since the team moved into the new Trans World Dome in St. Louis and began earning more from luxury box leases and a variety of corporate sponsorship deals. "The stadiums in L.A. are economically obsolete," Shaw says. "The last year we were in Anaheim we were the lowest-revenue-generating club in the league. Now we are the second highest, and that is directly a factor of stadium economics."
The new economic realities of stadiums, or more precisely, all the revenue streams generated by stadiums and arenas, have become a key factor in the new corporate ownership game. Stadiums have become a prime asset, the vehicle through which smart managers can build brand loyalty and enhance the value of the franchise. The drive for new stadiums has swept through each of the four main pro leagues--football, baseball, basketball, and hockey--with 44 teams either constructing or planning splashy new venues. Most of the projects have an obvious aim: jacking up team profits with corporate sponsorships, luxury suites, souvenir shops, elaborate restaurants, and the like.
Long gone are the days when team owners were satisfied to lease a stadium or arena from a city during the season and merely pocket a percentage of the gate receipts. "We operate in a highly competitive entertainment environment," says Roger Goodell, the NFL's point man on stadium issues. "Our teams have to be in high-quality stadiums because that's half the sports experience. It's not just about the play on the field anymore." That's why, for example, Oregon billionaire Paul Allen waited to exercise his option to buy the Seattle Seahawks football franchise until after voters approved the $425 million stadium-finance package on June 17. Without the new stadium as the core of the franchise, the money-losing Seahawks just didn't measure up as a property worth owning.
Baseball clubs have pursued a strategy of breaking their teams out of ballparks they shared with football teams and moving into intimate, highly stylized stadiums like Jacobs Field in Cleveland, Oriole Park at Camden Yards in Baltimore, and the Ballpark in Arlington, located between Dallas and Fort Worth. These ballparks have become tremendously successful because they have seats closer to the action and provide better sightlines and more women's restrooms (by no means a minor issue these days). The Ballpark in Arlington even contains a TGI Friday's restaurant, office space, and a full-scale baseball museum. There's talk at some stadiums of installing "smart seats" that would be equipped, much like some airplane seats, with interactive television monitors that could provide statistics and scenes of what's happening at games elsewhere.
All these features translate into more ticket sales and better sponsorship deals. In San Francisco, for example, the Giants baseball club said goodbye to the 49ers, with which it currently shares 3Com Park, and is building its own privately financed waterfront ballpark. The new downtown stadium will have built-in eccentricities: Batters will literally be able to hit home runs into San Francisco Bay, and passersby outside the park will be able to watch the game, free, through the right-field fence. This evocation of a Norman Rockwell illustration is not being installed simply to be cute. These design features add a uniqueness that enhances the $255 million stadium's brand value, much as Camden Yards has added value to the Orioles. The Orioles provide perhaps the most vivid example of how a new stadium can turn around a baseball team's economic prospects. Once a lackluster performer at the box office, the club now has the second-highest attendance record in the majors, right after the Colorado Rockies.
An enhanced brand can lure sponsors at a premium. SBC's Pacific Bell division will pay $50 million to put its name on the Giants' new stadium for 24 years. By comparison, 3Com Corp., a local computer-network company, paid approximately $1 million per year for the right to put its name on Candlestick Park, a windy, 37-year-old stadium loathed by generations of Bay Area baseball fans. "This is one of the most photographed waterfronts in the world," says Giants COO Larry Beer, "so we think this will be a showcase facility for corporate sponsors."
In the NFL, stadium revenue is rewiring economics at a fundamental level. The league operates under a revenue-sharing plan in which all television, logo-oriented merchandise, and ticket revenues are split among the league's 30 clubs. (Television rights are the NFL's cash cow, comprising more than half of each team's overall revenues on average.) The plan is designed to support those teams that play in small markets, like the Green Bay Packers or the Pittsburgh Steelers. But it also means that the New York Giants, which plays in the country's largest media market, get the same cut of TV revenue the Packers and Steelers receive. It's no wonder the Rams and the Raiders didn't care about the size of L.A.'s media market--given revenue sharing, it's irrelevant.
But stadiums are not. Teams are entitled to keep all the proceeds from luxury suites, stadium-based sponsorships, naming rights, and food and parking concessions. That's why owners are willing to pull up stakes, alienate devoted fans, and move clear across the country for a new stadium. "Owners now see that their profitability lies in the revenue streams they don't have to share," says Robert Baade, an economics professor at Lake Forest College in Illinois and an authority on stadium finance issues.
To get in on the action, some NFL teams plan to ratchet up revenues with ambitious projects that use stadiums as anchor tenants in entertainment-retail complexes. In Dallas, for example, Cowboys owner Jerry Jones, in partnership with Nike, plans to spend $300 million to renovate Texas Stadium and embroider it with a mammoth football-theme shopping mall. In addition to a Niketown and other "destination stores," the complex will also feature a football museum. Says Jones: "In the NFL, everything works back from the stadium now. And this project will maximize the stadium's potential and enhance interest in the team." Not to be outdone, his archrival, San Francisco 49ers owner Edward DeBartolo, recently won voter approval to push forward with a $525 million stadium-mall project that is expected to host a Super Bowl by 2003.
Under the new economic rules, big stadium revenues are also essential if an NFL franchise is to sign big-ticket players and stay competitive. A large part of the reason why the three-year-old Carolina Panthers football team almost reached the Super Bowl last year is because it owns Ericsson Stadium in Charlotte, N.C., and can use venue-based revenues to sign great players. By the same token, the Washington Redskins, which have suffered through some lackluster seasons in recent years, are a great bet to go to the playoffs this coming season--and quite possibly the Super Bowl in the 1998-99 season. Why? This fall the team will play in a brand-new, club-owned $250 million stadium loaded with 208 luxury suites. The $30 million in additional revenue those suites are expected to generate will enable the club to sign more top-ranked players.
All this constitutes a big change from the NFL's recent past. There used to be a time when assembling a championship team actually turned a club's balance sheet red. Between 1980 and 1990, for example, the 49ers ruled the league with the best record in football and four Super Bowl titles. But it's a good thing owner DeBartolo is a multimillionaire real estate magnate, because his team lost $45 million during those years. In contrast, the Tampa Bay Buccaneers, the worst team of the decade, earned $47 million in operating income. Not even Hollywood's economics are that upside down. "Winning on the field did not transfer into revenues," says Paul Much, an investment banker with Houlihan Lokey Howard & Zukin in Chicago who works closely with many pro teams. "If you went to the Super Bowl, you lost money." How could that be? Simple: To reach the championship, the 49ers spared no expense in taking care of its players and dished out big money for superstars like Joe Montana and Jerry Rice; its costs surpassed its income.
Stadium economics and the Dallas Cowboys have changed all that. When Jones bought the Cowboys in 1988 the club was losing $1 million a month. But he also runs 26-year-old Texas Stadium, the prototype for the new generation of football stadiums. Texas Stadium pioneered the use of luxury suites, and today it has 379 of them--by far the most in the league. By using all that extra revenue, Jones has continually signed pricey free agents--most notably all-purpose playmaker Deion Sanders--who have helped the Cowboys win three Super Bowls since 1993. In the wake of the team's resurgence on the field, Jones has been able to command premium lease rates for the suites, ranging from $250,000 to $1.5 million per term of lease. This coming season the boxes are projected to draw between $30 million and $40 million, which, according to investment bank Houlihan Lokey, by itself covers most of Jones' entire player payroll. Even better, in 1996, the last year the Cowboys won the title, the team earned $39 million in operating income on gross revenues of $130 million.
If there's a downside to this new system of stadium economics in the NFL, it's the increasing polarization of the league into haves and have-nots. Take the Cincinnati Bengals, which plays in a 27-year-old stadium with a meager 20 suites expected to generate less than $1 million in revenue this coming season. Says Bengals owner Michael Brown: "Without stadium revenues we won't produce enough to stay viable, let alone competitive on the field. And in our business, all the teams have to be healthy enough economically, or the whole league will be hurt." Brown won't stay a have-not forever. He'll have his new stadium in 2000, complete with 104 luxury boxes. Seven other new NFL stadiums will also be open for play by 2000, and plans are in the works for ten more to be erected in the next decade. In the NFL, as in other pro sports, an edifice complex has clearly--and necessarily--become an essential part of team ownership.
Still, you shouldn't forget that sports results sometimes defy logic, even the unassailable logic that big stadium revenues translate into superior teams these days. The New Jersey Devils, a team that plays in an outdated, relatively low-yield arena, won the National Hockey League's Stanley Cup in 1995. In baseball, the Atlanta Braves managed to get to four World Series in the 1990s while laboring in funky old Fulton County Stadium.
Then there are the NFL's Green Bay Packers, who last year seized the Super Bowl. At first glance it might appear that the Pack, owned by frugal public shareholders and based in a small, blue-collar Wisconsin town, might be another trend buster. After all, the team plays in frigid, 40-year-old Lambeau Field, a stadium that generates a mere $5 million in annual luxury-box revenue. But Packers President Robert Harlan says the team may someday allow a corporation to put its name on Lambeau--the very place where the legendary Vince Lombardi once patrolled the sidelines. In the new world of corporate involvement in sports, it seems, nothing at all is sacred.