A Sports Economy Bubble?

Look around today and you see common themes in the world of sports - rising ticket prices and soaring player salaries. Whether if its greed from players, owners or both, its the fan that has to reach into his pocketbook to compensate. Is it time for fans to say "enough"? Or will market forces in the sports economy dictate a reason for deflation in sports teams of the future?

Deflation In America

As I look at current price charts of the various commodity futures on the Chicago Mercantile Exchange (CME), I see prices dropping everywhere. Wheat, milk, orange juice, oil, soy beans, silver, and gold are at multi-year lows some more than 30% off their highs. Unless you have been living under a rock the past few years, home valuations are falling as well. Unemployment continues to rise and consumer discretionary spending has slowed.

One could say that we are in a deflationary period and prices will continue to be kept down. How long this continues will depend on consumer beliefs and their tendency to maintain a self-fufilling prophecy of willing prices down. You can see this effect when it comes to home sales today. Buyers simply are not stepping in to purchase new homes because they believe prices will continue to go lower. As long as there are more buyers on the sidelines believing prices are going to fall, deflation will continue.

A Bubble In The Sports Economy?

Let's assume that the US economy undergoes a multi-year recession and the effects continue to lead to long term deflation. One economy that is due to pop is the sports economy.

Common sense says that sports are not recession proof. Signs of that come in recently announced layoffs in major sports leagues including the NBA, MLB, and NFL.

Watch The Balance Sheet

Most sports teams derive their income from the following sources:

• Ticket sales
• Media broadcast (tv, radio)
• Revenue share
• Merchandising
• Luxury suites
• Playoff ticket sales
• Corporate sponsorships

The NBA, MLB, NHL, and NFL have all been richly rewarded over the years as tv contracts in local, domestic, and international markets became available. For example, NBC, CBS, ESPN, ABC and cable tv networks have helped owners and players become very wealthy.

But on the flipside of the revenue stream are the expenses:

• Player salary
• Administration Salary
• Marketing and sales
• Arena lease
• Cost of merchandise

Over the years, payrolls have been growing as player unions demanded more compensation tied to league revenues. Owners got their hands tied and were forced to revenue share with players.

Get The Best Personnel But At What Price?

Risk lies from owners who overextend themselves hiring rich talent to build a winning ball club. In a stagnant economy, ticket sales and merchandising can take a nose dive as fans spend less on entertainment expenses. Advertisers on tv broadcasts may pull ads or even request cheaper rates. Corporations can scale back as well not wanting to sponsor or buy up expensive luxury suites.

If that happens, owners have to be careful that the fall in revenue does not counter balance the steep salaries expenditures paid to their players.

NBA team payrolls have grown as player unions fight to dip into media revenues. Some NBA teams have gone on a spending spree attempting to buy success. The New York Knicks lead the 2008 team payroll at $97,685,075 followed by the Dallas Mavericks at $92,320,541. One cannot but help that players, their agents and unions should recognize the risk owners take in running their businesses and factor in the case where long term contracts can default. If a team goes bust, their long term contracts do too.

Its a catch 22 signing talent for long term contracts. For example, in July 2004 the Golden State Warriors signed center Adonal Foyle to a six year $42 million contract. As Foyle's play deteriorated as did his contribution to the team, the Warriors let him go. However, it did not come cheap. The Warriors agreed to buy out Adonal Foyle's $13M of the remaining $19.7M contract. I don't know about you, but that is like taking a match and lighting it all up and screaming "poof!".

Steer Clear Of Long Term Contracts

Its anybody's guess to how many long term contracts exist like that. If a team gets into trouble financially and has to honor those contracts, things could spiral downhill very quickly. With so much money out there for the taking, owners want to attract the best talent for their investment. But with salaries on the increase and no pause in sight, it will be up to owners, players, agents, and unions to keep in touch with their own sporting economy to make sure it doesn't burst.

Soaring Salaries Must Come To An End

To see how out of control player salaries have become, according to ESPN writer Chad Ford, the 2006-2007 average NBA player salary was $5.21 million dollars. Twenty years prior, the average salary was a little over $430,000. I decided to plot this data on a chart as you can see below:

The absurdity of all of this can be compared to the wages of a typical US worker. Consider that in 2006 the average annual salary was $26,527 according to the U.S. Census. Plotting the Census data looks as follows:

Some key points to take from this are:

1. NBA salaries are growing exponentially while your typical US workers' salary is growing linearly. Exponential growth eventually slows and bubbles occur.
2. An average NBA player's salary from 1984 to 2006 has grown over 1480%
3. The average US worker salary from 1984 to 2006 has grown only 34%

No doubt there will be at some point in the future a ceiling that gets hit when the expense to see a professional sporting event becomes impractical for the fan. One could say that it is becoming something of a luxury to see live sporting events - most of us will be stuck watching it on cable tv.

$454 To See A Los Angeles Laker Game? Please!

To me, there is something seriously wrong when society puts so much emphasis on sporting events and paying high ticket prices. Yes its a form of entertainment but at some point, one has to realize that it becomes ridiculous. For example, the Fan Index Cost to watch a Los Angeles Laker game is $454.

The FCI consists of the cost for a family of four to go to a sporting event. It includes four average priced tickets, 2 beers, 4 sodas, cost of parking, 2 programs and 2 sporting caps.

Greed Has Its Limits

Since 2002, the average NBA player's salary has started to slow. However, this to me signals a sign of a potential bubble that will have to be countered by reducing player salaries over the next decade. Owners and league execs need to explain to player unions, players, and agents the economics that are coming into play. Greed has its limits and that shouldn't be passed onto fans.

What would cause the bubble to crater over? The Internet will continue to increases download content at greater speed (18mbps+)offering more digital streaming content to your desktop. It will continue to grab more viewership than television. As such, sports tv media contracts will dry up. Advertisers will move away from tv shifting their dollars to Internet social media outlets that are more targeted and less expensive. That will put a crimp in league deals with television companies who will find less advertising dollars going their way and would carry over into the league, players, and owners.

About Kerry Kobashi

Kerry is the founder of KerryOnWorld. He lives in Silicon Valley and has worked as an engineer and project manager. He owns Kobashi Computing a consulting company.