In these uncertain economic times, investors are looking for stability and predictability. So consider this investment proposition: You have the opportunity to invest in a business that has been around since the 1920s and has grown in popularity. These companies have a very loyal consumer base. In some parts of the U.S., the wait time to purchase a product can be years. Most rational investors would consider this a compelling problem value proposition.
The industry I’m referring to is professional sports, especially franchising and ancillary businesses. This looks like an investment-themed slam dunk; however, to quote ESPN football analyst Lee Corso: “Don’t be so quick, my friend! & Indeed, professional sports leagues and their spin-off businesses such as sports apparel and media conglomerates, have become a multi-billion dollar industry, but these businesses are not without risk and may be riskier in many ways than traditional businesses. Today, we take a look at the pros and cons of investing in major sports.
In economics, demand (or “final demand”) refers to the ability and desire to buy goods and services. Professional and college sports programming resonate strongly with audiences. Not many companies have higher brand loyalty than major sports companies. Usually, that means their money follows their heart. The NFL tends to market to a more affluent or “ability” customer base, and a wealthy family of four can easily spend upwards of $1,000 on a single sporting event. If the family attends 10 events a year, well, you get the idea.
Likewise, people spend huge sums of money renovating entire rooms in their homes to show their support for their favorite teams and players. Professional and collegiate sports have also successfully adapted to the changing technological environment of our daily lives. Live streaming of sporting events on mobile devices, satellite radio, and pay-TV is growing rapidly. All of these sales channels are revenue drivers for these businesses.
The NFL started its TV network, where more ad revenue could be realized than it was shared with traditional networks (Fox, CBS, NBC, ESPN, etc.). These networks charge a premium that their loyal customers and sponsors are willing and able to pay. How many people thought there would be a 24/7 golf or tennis channel?
Another huge advantage of these major sports leagues is the lack of competition. It’s a hard problem to solve, or as economists say, there are too many problems; barriers to entry & competing with MLB, European football, or the National Football League. There have been attempts to challenge these leagues, but they have all failed. Some sports leagues are also protected by anti-competitive legislation.
The NFL in the US has a special antitrust exemption. How many businesses can make a similar claim? One would suspect that this is a concise list. Finally, these businesses enjoy repeat business. Most people don’t just own a t-shirt from their favorite team. There are several of them. Many families pass on season tickets to their children, further instilling brand loyalty for future generations.
Sports teams and leagues are not immune to this economic shock. Demand for sports entertainment depends on the overall economic environment. More recently, prolonged economic weakness has affected attendance at many sporting events. But most ordinary Americans see sports as good entertainment to enjoy when there is extra income to spend.
From an economist’s point of view, the demand to attend a sporting event is enormously elastic. In other words, a change in someone’s income (downwards) or a change in the cost of a product (tickets up) will affect the final demand (tickets), merchandise, and pay-per-view sales) have a material impact. These are solid economic facts about why sports investing is risky, but perhaps less obvious is that the exogenous or human factors that investors should adapt to are at least the current business risk.
It seems like every day we hear more sensational or incredible sports scandals than the day before. These scandals have damaged businesses and sometimes irreparably damaged their reputations. Tiger Woods’ affair took a major hit on NBC’s golf ratings. Sex abuse allegations at Penn State University have not only damaged the school’s reputation, but clothing sales have plummeted as a result. Incidents like NBA players jumping into crowds to quarrel with fans (or “customers”) damage the reputation of the NBA brand.
Plus, greed is ubiquitous in these industries: The stars in these leagues earn far more annually than the average consumer. The point here is that these businesses present investors with risks that are not traditionally part of the business. If employees of a major company go on strike, the company’s stock is likely to take a hit in the short term. If the CEO’s blue-chip companies decide he won’t go to work for a few months or insist on more money, those companies will face serious repercussions from investors.
Investing in sports franchises and related ancillary companies that benefit from multi-billion-dollar sports businesses can be an attractive and profitable proposition. High consumer demand, pricing power, and lack of competition are key advantages to the success and survival of major sports leagues and sports teams. It’s also important to recognize that these businesses have unique risks. So, next time you’re at a sporting event, take a look at the ancillary businesses that support your favorite team and see if they make sense in your financial plan.
At the same time, be aware that sports entertainment is often considered a “luxury” and is subject to the laws of economics elasticity. The same human or emotional factors that attract us to spend money on their products may be due to unforeseen events And quickly deteriorated.