Vicious cycle

Courtesy of Joesph P. at River Ave. Blues is everything you ever wanted to know about the cratering of corporate sponsorships but were afraid to ask:

The risk for the sports industry and those who follow it is that a collapse in sports sponsorships could cause a downward spiral similar to the housing and credit bubbles. For example, television broadcasters who rely heavily on advertising may be forced to stop bidding so aggressively for the rights to broadcast sporting events. These broadcast fees, together with sponsorships, make up a significant source of revenue for sports teams and leagues, so a substantial decline in these amounts would adversely affect the industry. Team owners are also feeling the squeeze personally, as the financial crisis has put a dent in their portfolios, and in the case of the owner of the New York Mets, Fred Wilpon, who invested a large portion of his wealth with his childhood friend, Bernard Madoff, such investments have been lost. In addition, media groups such as the Tribune Company, owner of the Chicago Cubs, have recently filed for bankruptcy. Teams that are unable to offer the highest salaries will be unable to attract the best players and without the best players, teams will have difficulty winning. Losing teams will have a more difficult time attracting sponsors. It is a vicious cycle that is bound to have a lasting effect on how the sports industry has been operating during this sports bubble, which could be the next bubble to burst.

The kicker to all of this — and the thing that pro sports and big media should really worry about — is that an economic rebound is no guarantee of a sponsorship rebound. Why? Well, I’m no expert, but I have always suspected that such sponsorships weren’t worth the money spent on them. I feel this way about most advertising, really, and suspect that if the numbers were really scrutinized, it would become apparent to most would-be advertisers. Such scrutiny hasn’t come, however, because business has been more or less good and well, such sponsorships have been around so long that they are part of the corporate culture with executives just assuming that they are valuable.

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  1. Leo said...

    I agree with this.  MLB players will always make far more money than you and I, but contract are clearly going to come back down to earth a little. 

    There will always be outliers – Sabathia, Texeira this year, etc.  But the days of your right-handed setup guy making $12 million over three years are coming to an end.

  2. geraldy said...

    I agree with you about advertising.  Personally, I’m immune to advertising and hence not the best judge, but, for example, how many people are going to use Citibank because the Mets play on Citi Field? I can’t imagine the thought process behind someone letting that affect his judgment. 

    Are there independent studies done on the effectiveness of advertising?

  3. Tom said...

    I don’t know about you guys, but watching a clydesdale run after a circus horse makes me want a beer.

    Wait a minute…no it doesn’t.

  4. JakeSuds said...

    My take on this topic is that the sponsorship market is due for a correction just like the world economy.  I don’t think that it will be disastrous for pro sports in general, though.  I think the industry will go through a cost/benefit analysis period, and then you’ll see ads in trains and buses rather than pricey TV spots.  The Japanese economic bubble burst almost 20 years ago and they haven’t lost their pro sports presence.  Granted their baseball economy is fundamentally different, so that might be a moot argument, but I don’t see the wheels coming off pro baseball anytime soon.  Devaluation will definitely happen, but pro sports franchises will always need advertising.

    All this being said, I still agree with the notion that it’s all tremendously overvalued, and that the correction might be huge indeed.  However, the silver lining is that there are new opportunities for revenue generation and the economic pressure will force franchises to get creative.

  5. Antelope said...

    This only makes sense if not every team is subject to the economic crisis.  If one or two teams ignore the drop in their ad revenue and spend like it’s 2007, then the other teams will suffer, yes.  But this seems unlikely, particularly as we’ve already seen big name players have a hard time signing at what they hoped.  As long as every team has the same impact on their bottom line, then salaries should drop in correlation with revenue, and we’ll still see the same distribution of players we’ve seen all along, they’ll just be making less than we might have predicted. 

    Baseball is a different industry than most; it’s not like they can lay off a bunch of players and “work smarter” with a 15-man roster.  It’s also not like they’re going to just not hire the priciest guys, and Manny will be home on his couch next year.  At some point, Manny will have to take a contract that’s less than he thought he was “worth,” and our baseball lives will go on.

  6. Pete Toms said...

    The stupidly big money that has flowed in to pro sports this past decade or so comes from the corporate world; sponsorships, suites, club seats, catering, yada, yada.  But when the good times return will the coporate dollars flow to the same degree again?  I think not.  I think it will be a long, long time before corporations will want to be associated with this sort of opulence again.  There is a big backlash against it. A bit off topic, but what’s the word on BofA’s sponsorhip of the new Yankee Stadium?  Kinda quiet, no?

    And Craig, the lawyer who wrote the piece also questions if these sponsorships are worth the big bucks.

    “One of the factors in the decline in sports sponsorships is that the benefits of such sponsorships are difficult to quantify for the sponsor, even in good financial times. When times are good, sports sponsorship is an opportunity for building a reputation (i.e., brand), as well as generating high-level corporate entertainment, such as a sponsor’s hospitality tent at a golf tournament. A company’s name and logo displayed on signage at sports arenas, on uniforms and during TV broadcasts provides tremendous exposure of the company’s brand. Free tickets and other access to sports teams and players that often accompany a sponsorship can be used as an incentive to employees or as an inducement to clients, governmental officials and suppliers. However, the benefit to a company’s bottom line is difficult to measure, and these incentives are even harder to justify during a recession when the company is cutting jobs and losing business.”

  7. Mark R said...

    I don’t know about “a downward spiral similar to the housing and credit bubbles.” Did teams make deals with companies whose existence needed only to be vouched for by a sponsorship broker? Did the teams then securitize these deals, package them in with more solid ones and sell them to investors as a AAA-quality product? Did a byzantine system of derivatives and credit default swaps then make it so a single sponsorship deal was owned by thousands of people with combined stakes amounting to several times its (already inflated) market value? I’m no economist, but I think the answer to all of these is: I hope so.

  8. kevin said...

    I don’t think it’s logical to assume that corporate sponsorships will not return to pro sports if they fall off during the recession. The sponsorships weren’t bought in the first place because they make economic sense; they were bought because some corporate execs like sports. Then they would backfill with a justification about marketing, PR, visibility, branding, etc. The people who make the decisions to buy those sponsorships aren’t spending their money. They are spending their shareholders’ money or money that could go to their employees; therefore, they don’t have any reason to spend it carefully. They are just getting free perks. You spend your own money carefully (I hope), but you spend someone else’s money much more aggressively.

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