SBJ/Aug. 25-31, 2014/In Depth

Grand plan for tennis

Believe it or not, this $500 million makeover is about more than money

The current overhaul of the USTA Billie Jean King National Tennis Center will help propel U.S. Open revenue to roughly $320 million when the work is fully complete in 2018, up from $260 million for this year’s event, tennis sources said.

While $60 million more is substantial, unlike typical sports construction the $500 million National Tennis Center redevelopment is not projected to greatly pad the bottom line. A decent share of the modest 23 percent rise in projected revenue over the next four years would derive from factors independent of the renovation, like rising ticket prices and television fees.

This rendering shows the roof on Arthur Ashe Stadium that will highlight the project, but there’s much more in store.
Photo by: Rosetti / USTA

“A lot of this is being done because we need to upgrade the facility without regard to how much more money it brings in,” said Gordon Smith, executive director of the U.S. Tennis Association, the owner and operator of the U.S. Open, which commences today. “We are doing this to have the best tennis facility in the world.

“Let me put it this way,” he added, pressed further about the financial return, “it’s a long payback.” Smith declined to offer precise figures on revenue, or the return on investment.

The USTA’s return is hemmed in from at least three sides. First, the organization borrowed $450 million (the remainder came from reserves), with annual interest costs approaching $30 million. The longest maturing debt is 25 years.

Secondly, and perhaps more importantly, the group committed, in its words, “not to finance the construction on the backs of our fans.” So no dramatic price increases, or seat licenses, a common measure in sports to afford expensive new venues, are in the works.

And even as the USTA plans to demolish in 2016 its decrepit No. 2 stadium, Louis Armstrong Stadium, and build anew, it promised New York City not to sell venue naming rights. Instead the name of the jazz musician, who resided near the tennis site but has no ostensible connection to the sport, is so sacrosanct to the USTA that Danny Zausner, the National Tennis Center managing director, is on the board of directors of the Louis Armstrong House Museum.

Low-margin renovation

“This is unusual, from a project standpoint; from a business standpoint, it is very unusual,” said Mitchell Ziets, a sports finance consultant, of the Open’s expected modest revenue growth. “Usually you have a team move into a new facility and get a huge revenue uptick.”

That occurred for the USTA in 1997, when the group opened Arthur Ashe Stadium at the National Tennis Center, home to the U.S. Open since 1978. The USTA controls the lease to the National Tennis Center, which New York owns.

With the new Arthur Ashe, the Open in the 2000s quickly became one of the top financial organizations in sports, with revenue approaching $200 million by the end of the decade, and a profit more than half that amount. Tickets, sponsorships and TV income soared.

And the money train, much like the nearby Long Island Railroad and subways, rumbled on. The two-week Open is on par revenue-wise to a middle-of-the-pack NFL team, with the tournament’s nine-figure annual income making it likely the most profitable sports entity in the United States. (The proceeds are invested in the nonprofit USTA’s mission to grow the sport of tennis in this country.)

So why even renovate if the returns are meager and the event is already financially robust? Any financial planner advises that low rate of returns don’t justify large investments and debt loads.

Several factors forced the redevelopment, which includes a roof over Ashe; the new Armstrong; a new No. 3 court; and the construction of a wide pedestrian thoroughfare to accommodate the extra 100,000 fans the Open expects (see illustration).

Rain plagued the Open in recent years, bringing the call for a roof over Ashe to a fevered pitch. That call came as two other Grand Slams, Wimbledon and the Australian Open, erected roofs over their main courts.

Those events, and others in tennis, were upgrading while the Open seemed to stand still. Meanwhile, within New York City, sports facility development exploded, making the U.S. Open, once the premier sports hospitality destination in the Big Apple, just part of the crowd.

“We are competing for New York dollars against some premier sporting construction,” said Chris Widmaier, USTA managing director of corporate communications. “And yet unlike the Yankees or the Nets or the Giants, we are competing for international money because 15 percent to 20 percent of our patrons are coming from overseas, and they are used to what happens at the other Slams and around the world.”

There were other factors, too. Built in 1964, Armstrong, the main court before Ashe, is in such poor shape that the escalating maintenance costs will soon exceed the cost of just tearing the stadium down and building again.

The sports consultant, Ziets, said he has seen a handful of cases like this where buildings were so outdated, owners were content with low profit margins on a new venue. But they are not the norm, he said.

Technology, centralized replay

The project will allow sponsors to reimagine activation plans. Here fans enjoy an American Express experience at last year’s event.
Photo by: Getty Images

The USTA also wants to rewire the tennis center. Currently, five of the 17 courts are equipped for TV, and seven are wired for instant replay. When the renovation is completed, while all 17 won’t be wired, they’ll have the conduits ready underground to accept further investment in TV, digital and replay.

“Our goal, not to sound too grandiose, is every ball that bounces you will be able to see,” Widmaier said.

ESPN, which next year is broadcasting the entire tournament (Tennis Channel retains some inventory) has communicated to the USTA, Smith said, that it wishes to have a digital signal on every court. That would mean no matter the action occurring, a junior, wheelchair or regular match, it would get streamed.

And it’s not just streaming and TV; the USTA wants instant replay on every court, Smith said. It is somewhat embarrassing for the Open that the BNP Paribas Open, a lesser tournament in California, has instant replay on all of its courts (funded by billionaire owner Larry Ellison).

To minimize that investment, the USTA is considering centralizing the replay reviews. As it stands now, the company that provides the technology, Hawkeye, outfits the seven courts, and each one needs three to four employees to work the technology. When a player challenges, they quickly go to work, and the result is shown on a video board.

Under centralized replay, just one replay command center would handle all challenges. Fans would still get to see the animated replay on video boards.

Why the math works

Most teams and leagues would blanch at the low return the USTA is getting on the redevelopment project. During labor strife in 2011, the NFL was ready to shut down the sport over what it claimed were low team returns.

The USTA, though, has luxuries that other sporting events do not have. It already has a huge profit, and the USTA itself boasted $255 million of assets at the end of 2012, according to its most recently available tax return.

The USTA is also a not-for-profit whose mission is to grow the game of tennis, not necessarily to squeeze every last cent out of capital spending.

And unlike sports teams, the USTA’s labor costs are low. The organization will pay $38.3 million in prize money this year, or 14 percent of the $260 million in revenue. While a higher percent than in past years, it is far beneath what team sports pay players, which typically is in the 40 percent to 50 range.

The Open has a goal of $50 million of prize money by 2017. That would bump the percent for the player by only a few points.

“We are satisfied with the current financial terms of our Grand Slam prize money situation,” Justin Gimelstob, an ATP player representative on the board of directors, wrote in an email. “We have understandings in place for the next few years.”

While the Open will see low margins from the renovation, there is revenue upside to the new facility, not the least of which are the 100,000 extra fans the event believes it can handle. This year the tournament is on pace to again top 700,000 tickets. If all goes as planned, it will top 800,000 in attendance by 2018. A new, wider walkway and increased seating in Armstrong will help accommodate the extra visitors.

“We still have to actually sell the tickets,” Zausner said.

The average ticket price this year is $150, so tabulated across 100,000, that is $15 million, and before food and beverage spending. However, the figure is likely lower because the average includes finals weekend, which distorts the ticket price higher. Most of the 100,000 fans would come in during the first eight days, well before the finals.

The new thoroughfare will be 40 feet wide and have modern sponsor activation areas, which, Smith said, should let the USTA reimagine the sponsor experience. What that means is not clear, though the USTA expects more dollars from the category after the renovation. Currently, a short, 7-foot-wide walkway squeezes between side courts, with nearby sponsor booths decidedly unimpressive.

For the USTA, Smith concluded, the issue is not revenue, it is maintaining what he boldly calls the globe’s greatest tennis event.

“We are the biggest and best tennis tournament in the world, and we have to have the best tennis facility in the world,” he proclaimed. “And if it costs us money to do it right, and not necessarily give us a gigantic return, then we are going to do it, because we have to maintain that presence.”

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