Sunday, November 8th, 2009
Over at Columbus Underground they are discussing a report commissioned by the Columbus Blue Jackets NHL team claiming the team and its arena had a $2 billion economic impact in the region. I’ve no doubt that a lot of money was spent around the team, but if anyone believes that this resulted in net $2 billion in benefits to Columbus, I’ve got a bridge to sell you.
Every independent study I’ve seen suggests that pro sports and stadiums are a bad deal. But city after city invests in them. If this is so seemingly irrational, why? Some of the arguments include ego, corruption from the influence of rich team owners, the fact that local fat cats will get to enjoy the boxes, etc.
It strikes me, however, that we really ought to take a very different view of pro sports. Rather than seeing this as a direct economic investment with a direct ROI in the way a company models investing in a new plant, we should look at it as a marketing and branding expense. In effect, when cities pay hundreds of millions of dollars to team owners to put a franchise in their town, what they are really buying is naming rights to the team.
Is this rational? I haven’t seen a study that attempts to model it this way, but I think we could evaluate it by comparing what cities pay for naming rights on a team versus what non-public sector actors might pay and comparing the prices on some type of normalized CPM basis. CPM, cost per mille, that is, the cost per thousand impressions, is the way advertising is typically sold in the United States. (Other countries use slightly different albeit conceptually similar models such as cost per gross ratings point). If a city is getting as good a CPM rate as private advertisers or naming rights sponsors, then it could be in at least some sense justified.
Is that standard met? Again, I haven’t run the numbers and don’t have the resources to conduct such a study, but my hypothesis is that cities are getting a very good deal indeed.
Consider the Indianapolis Colts. The city initially paid about $80 million to build the Hoosier Dome, which it used to lure the Colts from Baltimore. But that was in 1984, a different era. To keep the Colts, the city had to build them a new stadium at a cost of $725 million. Plus, the city is foregoing a large chunk of the revenues from the stadium. Let’s assume that when you add up all the lost revenues, factor in interest, etc, you are looking at $1.5 billion over time. That’s just a rough, finger in the wind measure.
Lucas Oil Products, desirous of building a brand for itself, purchased the naming rights on the stadium for $120 million. This is far from the high water mark, by the way. Reliant Energy signed a $300 million deal in Houston.
So Indianapolis paid 12.5x to put its name on the team versus what Lucas Oil paid to put its name on the stadium. This means it needs to draw 12.5 times as many impressions to have paid the same effective rate as a private business that is presumably purely profit motivated. I don’t think it is hard to imagine that the name “Indianapolis” appears or is mentioned on TV with regards to the Colts way more than 12.5 times more than “Lucas Oil Stadium” does.
That puts it in perspective. How much money do advertisers pay to get their names on TV? A 30 second Super Bowl ad is $2.7 million or so. That’s what Budweiser pays to get 30 seconds of air time. But when the Colts were in the Super Bowl, the name “Indianapolis” appeared for a heckuva lot longer than 30 seconds. Think about what you would have to pay the TV networks to put your name on the screen and on the lips of the commentators (even that jerk Chris Collinsworth, who has always hated the Colts) as often as “Indianapolis” appears. The price tag would be staggering.
Beyond just having distinctive names versus a generic one, sports teams and major events are likely the main reason everybody in America knows where you are talking about when you say Indianapolis, Cincinnati, or Cleveland, but “Columbus” does not have the same resonance.
This also helps explain why small cities subsidize sports so much more than big ones. It’s not just about big market vs. small market revenues. Bigger cities aren’t as dependent on pro sports to get their brand message out. That’s why Mayor Daley could afford to take a comparatively tough line with the Bears these things go. There are lots of ways he can market Chicago.
Of course, we can still debate whether or not the investment is wise. Just because the cost is market competitive doesn’t mean you should purchase something. But again, I think about the way companies brand themselves and wonder about the ROI for them too. Think about it. Everyone in America already knows Budweiser and their brand promise intimately. But they still advertise heavily to build the brand, not just for specific promotions. They know they need to stay top of mind with their customer.
My previous employer, which was a business to business concern whose buyers are high end executives, nevertheless spends money on television and outdoor ads. I can’t disclose the amount obviously, but let’s just say it is a lot. Why do this if there is no value? Clearly, when tracking various independent measures of brand equity value, there was a payoff. Also, we built sophisticated modeling tools and utilized a team of math Ph.D’s. to help our clients’ marketing organizations calculate the response curves for various advertising types to help identify the marginal value and optimize outlays for various variables. So while there is still an art to it, there’s a lot of science that could be brought to bear to study this, if indeed someone wanted to do the research.
Now, if you contrast the brand recognition of Indianapolis and Columbus, Indy is far higher. On the other hand, if you compare their demographic and economic performance, they are virtually identical twins despite Indy’s far greater investment in sports. That’s a bit of a cautionary tale. Of course there are a lot of variables involved. That’s why we also shouldn’t be so quick to use some sort of “but for” modeling to claim too many benefits for pro sports – and it is why we needed so many math Ph.D.’s!
From what I’ve seen, a lot of chief marketing officers think they are over-spending on advertising. But clearly there is real value in marketing budgets or highly profit-motivated firms wouldn’t spend so much on it. It strikes me that if you look at pro sports investments and stadiums in this light, there’s a stronger possible rationale for doing them than traditional economic impact analysis would suggest.
If there is a study out there that has modeled pro sports in this way, I’d love to see it.