SBJ/March 19-25, 2012/Opinion

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  • Team’s new reality: Being the messenger

    Michael Wilbon, the longtime, award-winning columnist for The Washington Post and now with ESPN, was recently lamenting to me how shocked he was when he came to Atlanta for the 2011 second-round playoff series between the Chicago Bulls and the Hawks and picked up the local paper. How could a market about the same size as Washington, D.C., have such a thin sports section devoid of quality content and commentary?

    To see what Wilbon means, pick any day, and compare The Atlanta Journal-Constitution and The Washington Post sports sections: one still rich in content and columnists, the other looking like an overachiever in a 30-day weight-loss program.

    While the Post’s circulation has dipped (along with virtually every other daily newspaper), the once-venerable Journal-Constitution’s circulation has plummeted, despite population growth in Atlanta. The AJC ranked 19th in circulation among America’s newspapers in 2008, according to the Audit Bureau of Circulations. Four years later, it’s 38th, with less than 160,000 daily readers (and falling fast) compared with the Post’s 551,000 daily readers. (The Post climbed to sixth from seventh during the same period). In those same four years, the Atlanta market has grown by 500,000, to more than 5.7 million people.

    Since 2008, the best sports reporters and columnists at the AJC have fled — and not just to the dot-coms, but to fine print publications. They’ve been replaced at the AJC by lower-cost reporters, wire service reports or not at all. The reporters are gone. The columnists are gone. And worst of all, the readers are gone.

    The Post, meanwhile, continues to invest in its sports section, replacing Wilbon and others with distinguished journalists, and now counts nine columnists among its sports staff, the most it has ever had.

    Doesn’t investing in quality sports content pay off in Atlanta? You bet. Case in point is the Hawks, the NBA team of which I am an owner.

    In the same four years, the Hawks have reinvented themselves, investing in quality content by adding free agents, keeping core players, changing management and coaches, and improving facilities. Last year, player payroll was seventh in the NBA — and the money was spent wisely. Over the period, the Hawks rank in the top quartile in terms of games won per dollar spent on payroll.

    The Hawks’ investments are paying off with ticket revenue more than doubling (and up an additional 24 percent a game this year despite the lockout-shortened season), local TV ratings quadrupling and the team making four straight playoff appearances, including a raucous seven-game series with the team that went on to win the championship in 2008 (Boston), and a tantalizing six-game series last season with a team that had the league’s best record and its MVP.

    In 2011, the Hawks were one of three teams, along with the Celtics and Los Angeles Lakers, to make the second round of the playoffs three straight years. The results on the court and at the box office are proof Atlanta is not a bad sports town.

    For the owner of a local sports team, there looms an ominous challenge. How do I reach my fans?

    We have pivoted to other media to get out our message. We invested heavily in our website, significantly beefing up the quantity and quality of news and videos on the site. We are buying quality content from freelance sportswriters and broadcasters to deliver exclusive sports news and interviews. It’s paying off. We are tracking to exceed 400,000 video views on the site this season, up 50 percent from last year. And we’ve built an opt-in database of more than 500,000.
    Our media spend with Facebook, LinkedIn, Atlanta Business Chronicle and billboards far exceeds our now-modest AJC spend.

    We’ve created a “Tweet Suite,” inviting influential Atlantans and their guests to key games and having them tweet during the game.

    We’ve taken over toll plazas during rush hours, providing free tolls and ticket offers to commuters.

    I don’t profess to fully appreciate the challenges facing the AJC, but whatever they are doing to address those challenges isn’t working.

    Atlanta teams are desperate for the kind of quality reporting and commentary accorded their brethren in other markets. Wilbon says ESPN is looking at Atlanta for the launch of another of its local editions. I hope they will run through that door because it is wide open.

    Bruce Levenson (Bruce.Levenson@hawks.com) is co-owner of the Atlanta Hawks.

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  • Cartoon: Buyer's market

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  • Putting the NBA lockout in context for awards

    The announcement of the nominees for our fifth annual Sports Business Awards is a refreshing reminder to me that there are plenty of companies and individuals still innovating and accomplishing great things.

    The list comes just a week after we revealed our 2012 Forty Under 40 class and a week before our 2012 Champions, both representing inspirational bookends. But that doesn’t mean we don’t expect criticisms from those who feel snubbed. That’s fair, and we’re happy to discuss.

    The Sports Business Awards list includes 77 nominees across 15 categories, with some familiar names along with other new companies and individuals cited for excellence. I want to thank and credit members of the SBJ/SBD editorial staff who met continually over a six-week period to pore through files and research while debating who stood out and why. It’s a difficult task, and now the decision-making moves to a panel of sports industry executives who will decide the winners in 13 of the 15 categories by a private vote.

    I want to address how our committees handled the NBA, considering its 161-day lockout that affected the 2011-12 season. While we all acknowledge and respect the fact that the NBA has rebounded very well, the committees couldn’t overlook the fact that the league lost two months out of its season due to labor turmoil. That significantly affected the committees’ view on the League and Team of the Year categories, where the NBA is absent. The committees felt that any league that shut down its game to fans and their business partners couldn’t be honored for “best in class.” We certainly understand the outcome may make the league stronger and better positioned, but we’ll wait to judge that in future years. The committees felt that having a sport and teams that fans invest in taken away ­— even for only two months — was nothing that could be honored.

    On the flip side, the NFL and MLB are nominated in the League of the Year category with recognition that no regular-season games were lost during labor negotiations. So that was our line of thinking.

    Watch for this year’s winners to be announced on Wednesday, May 23, at the New York Marriott Marquis at Times Square.

    Abraham D. Madkour can be reached at amadkour@sportsbusinessjournal.com.

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  • Athletes find changing rules, tax burdens difficult to assess

    Amid this tax season, it is important to remember that Uncle Sam is paying close attention to foreign athletes competing on U.S. soil. Depending on the extent of the athlete’s endorsements and activities in this country, the additional tax burden can be several hundred thousand dollars.

    Just ask professional golfer Retief Goosen after his battle with the IRS last year over the characterization and source of his endorsement income. His case, which is under appeal, illustrates the tax difficulties facing global athletes. Although the court did not provide strict guidelines for determining the tax treatment of endorsement income, the decision gives some indication as to how the IRS may treat these cases in the future.

    It is important to note Goosen was not trying to evade taxes or hide income. This case dealt with the characterization of his endorsement income as royalties or personal-service income and how much of it was earned in the U.S. The IRS assessed a tax deficiency for 2003 and 2004 totaling $164,698 — Sergio Garcia has a similar case pending, for $1.7 million — claiming Goosen excessively classified his income as royalties and sourced too little of it to the U.S. Both parties appealed the tax court’s decision but have since reached a private settlement, and the case was dismissed on Feb. 28.

    Retief Goosen recently settled a U.S. tax dispute stemming from how his income was characterized.
    Photo by: GETTY IMAGES
    Nonresidents pay taxes when they are engaged in a U.S. trade or business or if they receive U.S. sourced income (i.e., earned from activities conducted in the United States). U.S. golf tournament winnings are easily sourced domestically. Payments from sponsors, however, get a bit tricky.

    Sponsoring companies sign athletes to obtain certain rights to their name and likeness for promotional use in exchange for agreed-upon compensation. This sounds simple enough, but how much of this compensation is tied to personal services performed by the athlete versus the mere use of the athlete’s name and likeness?

    The IRS argued Goosen’s golf endorsements were all personal service and any associated royalties were nominal. The court, looking closely at the contracts, noted there was value to sponsors by associating with Goosen’s image. It eventually split the difference and classified his on-course endorsements (TaylorMade, Acushnet and Izod) as 50 percent royalty and 50 percent personal-services income. His off-course endorsements (Rolex, Upper Deck and Electronic Arts) were ruled 100 percent royalty income.

    As for the source of this income, Goosen claimed no more than 9 percent of it as U.S. sourced. The court disagreed, allocating between 50 percent and 92 percent as U.S. sourced, depending on the contract. Furthermore, 50 percent of his on-course royalty income and all the off-course endorsement income sourced to the U.S. was not “effectively connected” to a United States trade or business. As a result, a flat tax of 30 percent applied to this income versus the normal graduated rates.

    All this talk of U.S. sourced and effectively connected income is enough to make one’s head spin. It’s important, however, because many professional athletes create sophisticated business structures to address these issues. Goosen, a resident of the United Kingdom, wisely uses business entities created in tax-favorable jurisdictions to reduce his overall tax burden.

    Allocating income with great precision is virtually impossible in this case, and the court appeared to classify the on-course endorsements as 50 percent royalty income and 50 percent personal-services income as a matter of convenience. Still, the decision provides some helpful guidance and highlights issues to consider when consulting clients.

    1. Understand a client’s endorsement market and where the company whose product is being endorsed plans to use his or her likeness.

    Sourcing cannot be determined with real certainty, but a tax consultant should not ignore this issue and leave the entire process to the taxing agency. Without some reasonable justification to the contrary, the IRS will try to source all royalty income to the U.S. Outlining a preliminary understanding of allocation, based on the client’s competition schedule or the sponsoring company’s target markets, will better serve a client when determining the tax implications.

    2. Define what the athlete is being paid for.

    Is the payment tied directly to athletic performance or merely for use of his or her likeness? Nonresidents typically pay less in taxes on royalty income under tax treaties, which explains Goosen’s aggressive allocation in this case. But the expressed terms of the contracts (e.g., personal appearance days, minimum tournament requirements, etc.) influenced the court’s classification of personal-services income versus royalty income. Therefore, the contract terms negotiated on behalf of the client can have significant tax implications.

    3. How do you advise your clients on where to participate in competition?

    Although this case involved a foreign athlete in the United States, American athletes face a similar dilemma overseas. The United Kingdom aggressively allocates global endorsements even if the athlete and endorser have no tax presence. Andre Agassi challenged this notion and lost in 2006, leading several high-profile athletes, including Usain Bolt and Roger Federer, to limit their appearances in the U.K.

    This policy also created controversy prior to the 2010 Ryder Cup in Wales before a compromise could be worked out. Because the competition does not involve prize money, players would actually lose money as a result of a U.K. tax on their endorsement income. Considering the applicable tax rate is roughly 50 percent, American players would have faced significant tax liabilities on endorsement deals having no connection to the competition.

    The global marketplace for athletes continues to expand. Golf is no exception as it looks to increase its presence in the Far East and beyond. In light of this expansion, the Goosen decision is a reminder of the complex financial issues athletes can expect to encounter.

    Mark Iacono (mark@hyperionsportsusa.com) is owner and president of Hyperion Sports Management, which focuses on individual athlete representation, and is of counsel at the law firm of Salter McGowan Sylvia & Leonard.



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