Can Sports Avoid This Recession?

Chris Reynolds, a self-employed public-relations specialist, wasn't about to miss a playoff game for his beloved Philadelphia Phillies, who have won just a single World Series title in their 126-year existence. So Reynolds didn't hesitate to shell out $80 for his ticket earlier this month to watch his team pound the Los Angeles Dodgers on a perfect October afternoon at Citizens Bank Park.

But this winter, Reynolds may not be so willing to spend $400 to take his family to a couple of 76ers basketball games, as he did a year ago. After all, some of his clients have connections to the flailing real estate industry, so he anticipates a dip in his business. And he's got three boys, ages 17, 14 and 11, so scary college-tuition bills loom. "In general, we're not spending as much on that discretionary stuff," Reynolds says. "So no, I probably won't."

Across the country, people like Reynolds will face similar hard choices, and their decisions may be very different from what sports fans have done in previous economic downturns. In the past, sports have largely been recession-proof, a not-too-costly escape from reality that didn't have to be cut back on in the same way that travel or big purchases might be. "Historically, revenues in the sports industry don't dip along with the economy," says Andrew Zimbalist, a sports economist at Smith College and author of several books on sports business.

But those were the days of the $10 ticket, when professional sports was a very different business. Today, sports economics are inextricably tied to the fate of deep-pocketed corporations. Many sports facilities have been upgraded and located within gentrified business districts, and teams cater to high-end clientele through luxury suites, driving up prices for all fans. As workers see their savings erode, they will probably be less willing to pay stratospheric ticket prices, which fund the cartoonish salaries of sports stars. Likewise, companies that dish out millions for sponsorships won't be able to justify sports-marketing expenditures to their shareholders. "The new model that has emerged over the last two decades is not going to hold up," says Zimbalist. "It's not conceivable that sports will be impervious to a downturn."

Though it's far too early to measure the full impact of the financial turmoil, some distressing signs have already crept onto the field. Because of worries about the U.S. economy, the NBA is eliminating about 80 jobs, or 9% of the league's workforce, and it shuttered its Los Angeles office. Commissioner David Stern has predicted a "modest" decline in season-ticket sales, though sales in some markets, like Houston, are strong. "I will say that corporate sponsors are a bit later than usual coming to the party," says Houston Rockets CEO Tad Brown. "That's the one area where we've had to be more attentive and where we've seen delays in funding."

NFL commissioner Roger Goodell recently sent a memo to teams, warning them that league revenues would be "under pressure." He asked them to control costs and seek new revenue streams. This season, baseball attendance fell about 1%, the first drop in four years, and that demand is reflected in the market for playoff tickets. Last year, a ticket for a Boston Red Sox American League Championship Series game sold for an average of $448 on StubHub.com, the leading secondary-market ticket site. This year, that average price dipped like the Dow: it was $244, a decline of about 50%. In the Tampa area, World Series tickets are going for under $200, the lowest price StubHub has seen in the five years it has tracked the secondary market. Several teams have already taken measures to draw fans in a struggling economy. The Kansas City Royals offered gas-card promotions when prices soared this summer, and the Oakland A's will lower ticket prices 5% for 2009. Basketball's New Jersey Nets are allowing fans to grab season tickets now — and pay for them after the holidays.

The turmoil has already stalled the planned sale of the Chicago Cubs, and owner Sam Zell, CEO of the Tribune Company, should expect a less appealing bid. "This downturn makes deals harder to get done," says Sal Galatioto, president of Galatioto Sports Partners, a consulting firm. "It's more difficult to get debt to purchase a team, and that debt is more expensive."

The slowdown isn't limited to the big three sports. NASCAR has been mired in a slump all season. Attendance is down, and a recent race at Talladega Superspeedway drew 50,000 fewer fans than the same event a year ago. The NCAA is cutting travel costs to combat the economic downturn. The organization will reimburse schools for only two bags of luggage per traveler, which will produce an expected savings of $1.5 million per year. Golf agents have reported a rough endorsement market for players, as the financial-services companies that have supported the sport got hit hardest by this current collapse. In hockey, Boston Bruins owner Jeremy Jacobs has forecasted a slowdown in NHL corporate sponsorship.

Furthermore, a few naming-rights deals for facilities are up in the air. New football stadiums will open next season in Dallas and at the Meadowlands in New Jersey, where the New York Giants and Jets play. Will companies pay the same sweet premium they would have, say, a year ago for the right to attach their name to one of these new venues? Very doubtful. AIG, the embattled insurance giant, has sponsored the U.S. Davis Cup team since 1999, an agreement that ends this year: if the company hadn't floundered, odds are it would have renewed the deal. Now the United States Tennis Association has to fish for a new sponsor in a very soft market. The sports-facility boom could also take a hit: the economy will likely delay ground-breaking for the new Florida Marlins stadium in Miami.

Sports do benefit from a buffer against recession. Leagues are in the midst of long-term television-rights deals whose terms are already locked in (baseball, for example, has a contract with Fox, TBS and ESPN that expires in 2013). And there are some positive economic indicators. New York Mets vice president David Howard says the 49 luxury boxes for the team's new stadium, which are priced between $250,000 and $500,000, have already sold out. That's an impressive achievement, given the bad economy and the team's second straight horrific collapse down the stretch. The New York Yankees have also reported strong luxury-box sales for their new stadium. On Oct. 19, the first day of a public auction for personal-seat licenses that give you a right to buy season-ticket packages for future games, the Jets exceeded their benchmark target of $25,000 for the premier seats in their new stadium, according to CNBC. (Though prices have dropped since then.) Overall, baseball's 2008 revenues rose to $6.5 billion, from $6 billion last season, and NHL season-ticket sales are up almost 4%.

But the strong revenue growth that baseball, football and basketball have enjoyed throughout the decade is clearly in jeopardy. After baseball crowns either the Phillies or the Tampa Bay Rays as world champions this month, its offseason will test the resilience of the sports economy. Will ticket purchases for 2009 drop? And will free agents command the same salaries? Legends like Los Angeles Dodgers outfielder Manny Ramirez, the prime catch in the free-agent market, will always break the bank. But don't expect those left-handed middle relievers to score the same ludicrous contracts as in recent years. "Player salaries are extremely sensitive to market conditions," says Stanford University economist Roger Noll. "These players are going to get paid less next year." During the post-9/11, post-tech-bubble downturn earlier this decade, for instance, median baseball salaries dropped 10%.

Fans already sense the malaise. "You've got to cut back all around," says Jim Fryer, a marketing consultant who was also relishing that Phillies win over the Dodgers. Fryer, 52, has one child in graduate school and another in college. "You've got to cut corners. With two tuitions, you have to evaluate everything." At the game, almost 46,000 fans, a full house, create a frenzied sea of Phillie red. The team should enjoy this post-season windfall while they have it. Come next spring, customers like Fryer may refuse to play ball.