Getting Clubbed

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Nobody played the business of golf better than Ely Callaway. He bought a fledgling four-person start-up in 1982 and turned it into the most successful purveyor of golf clubs in the sport's 300-year history. Callaway's innovation was to design clubs with oversize heads (remember your first Big Bertha?), which made a difficult, frustrating game immediately more satisfying to the weekend duffer.

Callaway Golf's success spawned a fiercely competitive $4 billion industry that has lately been showcased by a pro named Tiger and the marketing magic of a company called Nike. Yet if anything troubled Ely Callaway in his final days (he succumbed to cancer on July 5 at 82) it was that despite a decade of entrepreneurial zest, his beloved game had landed in the rough. For all its apparent popularity, golf is not attracting new players, and those who do play are not playing as much. The wave of aging baby boomers the industry counted on to hit the links never materialized, and the economic downturn has further stalled any rush to the thousands of underused courses built in recent years.

The result is that golf-course owners and equipment makers are spending millions of dollars battling each other for the same 26.7 million customers. Small, independent start-ups that seemed so promising just three years ago have folded or been folded into a few big companies like TaylorMade (owned by Adidas-Salomon), Fortune Brands and Nike. Earnings at Callaway (2000 sales: $837.6 million) failed to meet expectations, and the stock is down 40% from its 52-week high. "The industry is flat, and rounds played declined for the 10th straight month in a row," bemoans Callaway spokesman Larry Dornan. "This is unprecedented."

Ely Callaway revolutionized golf with the simple idea that if he made a demonstrably better club, people would pay big bucks for it. Over the past decade, Callaway's formula became the conventional wisdom for growing almost any game: combine new technology, savvy marketing and a stable of mediagenic, talented pros, and then watch new equipment fly out of shops everywhere.

It worked in tennis. Participation in the sport plunged in the mid-1980s, only to bounce back with the advent of lighter, more powerful, wide-body racquets made of composite materials. According to the Sporting Goods Manufacturers Association, tennis players' numbers are increasing, and equipment sales are expected to rise 4% annually. "If you want the consumer's dollars, you have to bring real innovation to the game," says Johann Eliasch, CEO of Head--who exited golf because he didn't think his company could do so there. Tennis was another matter; last summer Head launched the Intelligence line, which uses piezoelectric fibers in the frame. The fibers convert the energy produced when the ball strikes the strings to electrical impulses and then redistribute that energy optimally to maximize power. (Goran Ivanisevic used one to win Wimbledon.)

Golf remains its own biggest enemy. The game is time consuming and expensive--and still excruciatingly difficult. A single driver can cost as much as $600. In the past two years, competition has become so stiff and club improvements so minimal and costly that only the most deep-pocketed companies have been able to keep turning out cutting-edge products. Callaway and TaylorMade each spend as much as $35 million on research and development yearly. "I don't know how successful you can be without investing heavily in your own technology," says Mark King, president of TaylorMade, whose 300-series drivers are ranked No. 1 on the PGA tour.

Last year the U.S. Golf Association threw a new hazard at the industry. When Callaway introduced a revolutionary, ultra-powerful driver called the ERC II, the USGA decreed that the club had a rule-violating "springlike effect" on the ball. The attendant publicity has put a devastating backspin on sales of the ERC II, but it also raises the disturbing prospect of a curb on further technological enhancements to clubs.

Many disagree with the USGA's stance, from Wall Street analysts to Scotland's Royal and Ancient Golf Club of St. Andrews, the governing body for the sport throughout the world, which okayed the club. Says A.G. Edwards analyst Tim Conder to the USGA: "Hey, guys, wake up and focus on growing the game."

If there's any progress on that front, it has come thanks to Tiger Woods and his sponsor, Nike. The Swoosh got into the golf-ball business on the cheap three years ago and, remarkably, has already pulled down 5% of the market. Part of Nike's secret is a simple technological shift to a solid-core rubber ball, which travels considerably farther than the conventional ball, made of wound rubber bands. Other companies have moved to similar balls. Titleist's Pro V1 solid-core balls are now so popular that they are being rationed to retailers.

Still, a boost in the ball market will not sustain a rebound in the industry. Hayley Kissel, an analyst at Merrill Lynch, points out that companies such as Callaway and Nike will have to keep expanding into other products. That's why the industry is eagerly awaiting Nike's new line of clubs, endorsed by pro David Duval. Kissel and others question Nike's ability to deliver game-enhancing products. But Nike Golf marketing director Mike Kelly insists the business is not only about product but about expanding the game. "Ely Callaway revolutionized the business in terms of market and product appeal in the 1990s," says Kelly. "Now we are revolutionizing the game by giving it the credibility it deserves." The question is whether that will translate into real money.