Sports Franchise

Sports Franchise as an Investment Opportunity: Colts Completed by: University of Table of Contents Introduction ………………………………………………………………………………………………………………………………2 Investing in Sports franchise: advantages and challenges……………3 Colt’s Analysis ………………………………………………………………………………………………………………………4 Return on Investment …………………………………………………………………………………………………………7 The value of franchises for investors and community ………………………8 Conclusion …………………………………………………………………………………………………………………………………10 Works Cited ………………………………………………………………………………………………………………………………12 Introduction This paper discuses the possibility of investing in a sports franchise, mainly that of Colts. This work provides a detailed review of investing in a sports franchise and concludes that Colts is a good investment opportunity. To begin with, it is important to analyze all sides of the story in order to create the most comprehensive picture possible. Before investing in a sports franchise, one should understand the matter of relocation and its significance in this type of business. The guidelines for successful relocation of a sports franchise are not the same as those of a privately owned dry cleaning business, where the sole proprietor may choose to move to a site where customers may more fully appreciate the business. Sports franchises belong to a bigger entity, a professional sports league. The National Football League, National Basketball Association, Major League Baseball, and National Hockey League operate in much the same way as does a partnership (Harris 23-26). The individual teams within a league share profits but usually not individual franchise financial losses. Several key parties affect the sports franchise business, and to varying degrees, each party looks out for his or her own self-interest. Apart from the owner and the league, the sports franchise business involves fellow owners, the athletes, the competing cities, politicians, and the fans (who primarily are voting, tax-paying residents of the involved cities) (Harris 23-26). The situation with taxpayers who may or may not decide on particular policies affecting the team located in their city is twofold. Voters have refused to spend on sports in such diverse communities as Phoenix, San Francisco, Santa Clara, and San Jose (Zimbalist 63-64). But this trend is not absolute. The voters in Denver, for example, said yes to a tax increase to finance stadium construction. They wanted a Major League Baseball expansion franchise and thought that building a stadium was the only way to get one (Zimbalist 63-64). Partly as a result of that tax increase Denver hosted the Colorado Rockies. Investing in Sports franchise: advantages and challenges Although money constitutes the main reason investors fight over sports franchises, many investors also admit that their civic image is almost as important a factor. Today, sports pages constantly mention incidents of cities (thus some investors) trying to entice a team or of a team trying to move to a new area. Direct and indirect economic benefits such as increased tourism, arena or stadium rental income, sports franchise expenditures in the city, taxes, and employment are often mythically thought to be guaranteed by the acquisition of a professional sports franchise.

Such is the proverbial carrot at the end of a stick that cities chase. In reality, the only reward a city that successfully attracts a sports franchise may receive is the public perception that their metropolis has been thrust into that class of cities nebulously described as "big-league." (Williamson 121-123) To illustrate the great attractiveness, of sports franchises, one should consider the following case. Sports franchises and American cities are not alone in their pursuit of sports. Nagano, Japan, spent between $11 million and $14.3 million on public relations alone in its successful efforts to host the 1998 Winter Olympics. And planners estimated that the cost of constructing facilities for the Winter Olympics in Nagano would exceed $2 billion (Williamson 121-123). In an unsuccessful effort to land these same Olympics, the Utah state legislature approved expenditures of $56 million for the development of a site in Salt Lake City. In its bid to host the 2000 Summer Olympics, the Berlin bid committee announced that tickets to all events would be free. This policy represented the forfeiture of $68 million in potential ticket revenue. Colts analysis There are two events in the history of Baltimore that are significant to this discussion of the investment in sports franchise. The first is the departure of the Baltimore Colts to Indianapolis in 1984, and the second is the construction of Oriole Park at Camden Yards for the 1992 Major League Baseball season. The city of Baltimore suffered due to the initial success of the Raiders in court against the City of Oakland and the NFL. Precedent did not support forcing a team to stay in its present location. Further, the zealous pursuit of Indianapolis for acknowledgment as "America's sports capital" did not help Baltimore either. The civic leaders of Indianapolis, realizing that there were no nearby lakes, mountains, or sandy beaches, chose sport as the resource to serve as a tourist attraction and an image improving vehicle to spur development. This conscious effort began with the formation of the Indiana Sports Corporation, followed by increased investment in amateur sports. A survey conducted in the 1970s did not find that Indianapolis had a negative image, just that it had no image at all (New York Times, Dec. 1, 1993, B-13). The success of the Raiders in court essentially neutralized a seemingly rigid rule from Seals barring unilateral franchise relocations. Some commentators referred to the Raiders' court decision as creating an atmosphere of free agency among franchises.Colts owner Robert Irsay had been maneuvering to move the franchise from Baltimore to a new city for some time. Irsay had voiced the usual complaints, primarily regarding the need for stadium improvements. He reportedly was negotiating with Baltimore, Memphis, Phoenix, Jacksonville, and Indianapolis for several weeks before he made his move. But Irsay had not received league approval to move.

Irsay appeared to be betting that the monetary judgment against the league of $49 million in Raiders tied the hands of the NFL. The question Irsay obviously asked himself was whether the league would risk another multimillion dollar judgment by attempting to bar a move by Baltimore. Irsay's view was "apparently not" -- but with some degree of caution. On March 29, 1984, fifteen Mayflower moving vans loaded with all of the Colts' equipment rolled from Baltimore to Indianapolis. Press reports mention snowy, foggy weather conditions that appeared during a time of year when it rarely snowed in Baltimore. In response to the relocation, the league took no legal action. As the late columnist Pete Axthelm phrased the NFL's reaction to the flight, "It [the NFL ] had no stomach for a fight with an owner who wanted to sneak out of town." (Axthelm 105-110) In retrospect, as legal scholars have analyzed the move, this was probably a relocation scenario that the league could have been successful in stopping without suffering antitrust damages. A key to the Raiders decision was the competition that their move to Los Angeles provided to the metropolitan Los Angeles-based Rams, not just in terms of on-the-field rivalry but in economic rivalry for fans in the metropolitan Los Angeles area. By not allowing this competition to occur, the NFL was acting anti-competitively. In contrast, when the Colts sneaked into Indianapolis, there was no neighboring franchise, and so the same anti-competition argument could not have been made against the NFL. The best explanation of why the NFL did not challenge the Colts in court is that the league was nervous and the legal dust from their losing encounter with the Raiders had not settled sufficiently. Indianapolis had made an offer that Baltimore, in the eyes of Irsay, did not seem willing to match. The Colts were playing in an old and outdated stadium when Irsay purchased the team in 1972 from Carroll Rosenbloom. Rosenbloom was not endeared to Baltimore's Memorial Stadium, and that is one reason why he entered into a complex transaction with Irsay in order to obtain the Los Angeles Rams. In that transaction, Irsay first purchased the Rams and then traded them to Rosenbloom in exchange for the Colts. Return on Investment When the expansion franchise fee is added to expenditures needed in advance of opening day, the investment sum jumps to $130-140 million. In addition, an owner has to match the central fund deposit of $4-5 million (a pool of revenues and expenses shared by each major league team). Operating expenses run approximately another $50 million or so per year. What a prospective owner of a new baseball team faced, then, was an expenditure that could easily exceed $200 million for the first year. Major League also prefers that its owners not borrow any of this money. Former Baseball Commissioner Fay Vincent at one point said, "I think it's a mistake to look at this in terms of sites and cities and demographics. It involves people. It involves ownership. It involves financial capacity to operate a team and support baseball for a period of time.

" (New York Times, Dec. 1, 1993, B-13) The concept of building a facility to attract sport is not unique to the United States. In 1929, Barcelona, Spain, constructed a stadium with hopes of attracting the 1936 Olympics. That effort failed, at least in the short term. It took fifty-six years for the Olympics to finally come to Barcelona, and at that point, the arena had to be renovated and expanded by over 30,000 seats. Jeffrey Kluger, in an article written for the New York Times Magazine, outlined the desires and demands that Irsay conveyed to Indianapolis: a low stadium rental rate; a guarantee of a minimum of 40,000 ticket sales per game; a new training facility, practice fields, and administrative offices; and, finally, a $15-million low-interest loan so that Irsay could pay off the debt that he still retained from his Rams-for-Colts swap with Rosenbloom. The interests of Indianapolis were simple. The city wanted guarantees that once the team arrived it would stay put. Its two requests were for a long-term lease and an option on the part of local business persons to purchase the Colts in the event Irsay should get itchy and have the desire to pack up moving vans in the middle of the night again. The value of franchises for investors and community Much debate has taken place on the value of professional sports. The beneficiaries of this value range widely, from local communities, cities, and states, to entire nations. Discussions of the social value of sports also tend to focus on intangible benefits such as the impact on America's youth, with athletes serving as role models and sports providing life's lessons in a regimented microcosm of human competition, victory, and defeat. Along with the cumulative activity -- franchises relocating, leagues expanding, competition among host cities growing -there has been a growing debate regarding the value of sports franchises and events to various communities. These debates spawned a number of claims of actual monetary value of a franchise or major sporting event to a particular geographic region. Many of these studies have been used as the basis for an aspiring or incumbent politician's position on a "soon to depart" or "desirous of moving" franchise. Some politicians have acknowledged that the true value is not merely monetary. If a city does not have a major sports franchise, it is not considered big-league and will be perceived in many ways as second-class (Axthelm 105-110). The presence of a sports franchise probably does invigorate the interest of a community's citizens, including the city's youth, in participation in a sport. Even though today, more often than not, inner-city kids and the children of suburban blue-collar workers cannot afford to attend games, television allows them to be fans. One of the classic arguments is that sports is the key vehicle for minority youth to escape the poverty and other ills of the city. Philadelphia as the point of Comparison: conclusion Would Philadelphia's teams have moved to Camden? Would the White Sox have moved to St. Petersburg? The "bluff" is a difficult one to call, particularly for a politician.

Elected officials do not want to lose a franchise during their watch. In the end, after a few more false beginnings, which included the decision to substitute arabic numerals for roman numerals in the name of the new arena and finally naming the two facilities the CoreStates Complex, the two teams renewed their leases in Philadelphia. And the deal cost the city. The plan negotiated by the parties mandates a new $200million sports arena to be built adjacent to the original Spectrum on land provided by the city at the site of the old JFK Stadium, which had previously been condemned and was already slated for demolition. The state paid for the demolition of JFK Stadium. The original Spectrum will stay in place for various uses to be determined, with the one noted in the epigraph a genuine possibility, as are political conventions and sports championships. For Philadelphia, there was at least a perceived positive result of economic benefit beyond just retaining the teams. Emma C. Chappell, the chief executive officer of the United Bank of Philadelphia, the city's only black-owned bank, voiced a general belief that building a new stadium will lead to jobs and contracts for the people of Philadelphia.The Philadelphia franchise retention plan calls for the city, on the brink of default when negotiations began, to provide Spectacor -- Snider's entity, which owns the Flyers and which will construct the new facility -- with a low-interest loan of $6.5 million. This outcome was actually a victory for Philadelphia, which originally was to make an apparent grant of the $6.5 million. The final positive aspect of the plan was the long-term commitment of both franchises to Philadelphia. The facility will include one hundred luxury boxes, compared with only fourteen in the old Spectrum. Each of these will lease for an estimated $125,000-135,000 per year. There will also be twenty six balcony suites leased at $75,000 per year and super boxes at $12,500 per seat per year. In general, the Philadelphia is used as the point of comparison to illustrate that investing in sports franchises is a god opportunity for investors, even though it has a few challenges that should be carefully considered.