Sponsorship and driving social change Mythbusting college sports for sponsors Cartoon: Unpacking his challenges From the Field of Sponsorship College hiring practices suffering From The Executive Editor: Fan passion From the Field of Team Management Bringing common sense to Cooperstown Cartoon: March Madness Sutton Impact: Sponsor summits
Upcoming Conferences and Events
SBJ/April 16-22, 2012/Opinion
How the Dodgers’ $2 billion price tag could be a bargain
Published April 16, 2012, Page 31
Forbes’ recent valuation pegged the Dodgers’ value at $1.4 billion. Is that more accurate? The answer lies in what the new owners do with this iconic team, its majestic stadium and the attractive, 250-acre Chavez Ravine real estate. I would argue that under the right business model, it’s good deal.
The demise in Dodgers brand equity over the past two years has been startling. The blame has been placed on the nasty public divorce of current owner Frank McCourt, resulting in illiquidity that precluded general manager Ned Colletti from making major player acquisitions. It also led to customer service and security staff reductions that allegedly factored in a brutal beating of a visiting Giants fan. The broad-based fan (and media) disenchantment led to plummeting revenue and attendance. (Dodgers revenue declined from $280 million in 2009 to the low $200 million range in 2011 — a staggering $80 million, or 29 percent, drop; attendance declined by 800,000 fans, an 18 percent drop. This occurred while on-field performance declined from 95 wins in 2009 to barely above .500 thereafter).
|Despite a decline in baseball and business-side performance metrics in the past two years, when the sale is complete, the Dodgers’ asset value will have increased fivefold in eight years.
The size and nature of this transaction reveal both the good and bad sides of sports business. The good is that despite the prolonged economic downturn, major league sports franchises continue to retain broad-based appeal, command high purchase prices and produce well-above-average asset value growth. Major league team valuations are invariably pegged at five times revenue, but brands such as the Yankees, Dodgers, Cowboys, Lakers, Manchester United and Barcelona are sold around seven or eight times multiples because of their prestige and winning history.
So how is the Dodgers’ sale at more than 10 times revenue justified as a sound investment? Let’s start with the reasons why wealthy people buy professional teams:
• Increase in asset value: Major league teams typically appreciate well above regular businesses and the stock market. The McCourts purchased the Dodgers from Fox for a reported $430 million in 2004, the majority of which was financed. So the Dodgers’ value grew several times over during the last eight years. For the highly leveraged McCourts, the return is much higher.
• Operating profit/tax shelter: Most professional teams, with the exception of the NFL and large-market marquee teams, do not make an operating profit. But by depreciating the value of player assets, a significant “book loss” can be created and used to offset tax liability in other businesses. Additionally, the new Dodgers owners are likely to procure a new local broadcast rights agreement projected to be worth $4 billion over the next 20 years. That’s at least double the current rights fee and adds an estimated $100 million in incremental revenue annually. In 2009-10, using Aspire’s Fan Relationship Management Center principles, the Dodgers’ new outbound ticket-sales revenue grew by 280 percent year-on-year. (Overall MLB ticket revenue declined due to the economic downturn.) In the nine seasons I have worked in MLB, we discovered that a key to growing ticket sales was increasing average attendance frequency. In down years, baseball fans typically attend 2.5 games per season on average. When team performance improves, or when fans expect improvement, they generally attend one more game on average. With more than 1.25 million unique fans attending Dodgers games each season, the new owners’ honeymoon should generate an additional $37.5 million annually in incremental ticket revenue per season, without expanding the fan base.
• Passion for the team/sport: How can a value be placed on owning the team you love, in a sport you are passionate about? The Dodgers are the ultimate “reality-fantasy team” (oxymoron intended) for the mostly Southern Californian ownership group, who said it wants to keep the team for generations.
• Value to other businesses: The new owners will have the ability to leverage their other business income and value. How can you put a price on bringing your customers into the clubhouse to meet Andre Ethier, or visit with the likes of Alex Rodriguez and Derek Jeter before batting practice?
• Related business value: There is much speculation on the value of real estate development in the Chavez Ravine location, but the value pales in comparison to creating a year-round destination business run by the Dodgers. A “Dodger Baseball World,” which would include educational, entertainment and culturally diverse programming celebrating the Dodgers’ heritage, could engage the entire Southern California community, with the capital costs covered by sponsorships.
The good side for sports business is that the new Dodgers owners could double revenue within the next few years and prove the more than $2 billion price tag to be a bargain.
The bad side is that successful team performance on the field and on the business side is once again proved to be unnecessary in raising sports asset value in America. All of the Dodgers’ baseball and business-side performance metrics took a nosedive in the last two years, but when the sale is approved by MLB, the team’s asset value will have increased fivefold in eight years despite the brand being tarnished.
Who says sports teams are a bad investment — particularly when other people’s money is used to buy the team?
Bernie Mullin (firstname.lastname@example.org) is chairman and CEO of The Aspire Group and was a revenue enhancement consultant for the Los Angeles Dodgers during the 2009 and 2010 seasons. He has also served in senior executive positions with NBA, NHL and MLB teams and at the NBA league office.