The assignment is attached! Please keep in mind this is a Financial Perspectives in Sports class :)

Dealing with financial mismanagement

Excerpt from Sport Funding and Finance 2nd Edition, by Bob Stewart

INTRODUCTION

Paradoxes abound in the world of sport. As we have already noted, as sport becomes popular and

more commercialized, and as it takes on a more business-like approach to its operations, it can

lose the support of those people who place a high value on sport’s traditions and its links to local

communities. A good example from Australian sport is the redevelopment of the Adelaide

cricket ground. The Adelaide Oval, as it is more commonly known, was regarded as one of the

most picturesque sporting venues in the world. This was because of its 150-year-old grandstands,

its heavily grassed and perfectly sloped viewing spaces, its heritage scoreboard and the views

spectators had of the superb surrounding parkland. It was an aesthetic masterpiece. This all

changed with its refurbishment as a major international-standard stadium. It opened in 2014

complete with three multi-tiered, ‘state of the art’ stands with sight lines that were unimaginable

under the old model. The old members’ pavilion had been subsumed into a hypermodern facility,

a large proportion of the grassy slopes had been removed, and the views of the surrounding

parklands had been erased. But the changes had also increased the seating capacity, and actually

made the seating comfortable as well. It delivered spectacular viewing positions, it provided

civilized hospitality services, and it provided the sort of toilet facilities that are now just taken for

granted in any modern entertainment venue.

The other paradox is a financial one. As noted above many times over, sport has gone through a

commercial revolution. It has secured a funding base that could only have been dreamed about

fifty years ago. The earlier chapters have provided example upon example of how and why this

has occurred, but suffice to say it has delivered spectators not only highly accessible experiences,

but also memorable ones as well. The scale of international sport’s commercial impact is

exemplified in a 2012 Forbes magazine study of the ten richest sporting events in the world. In

constructing the list, Forbes’ feature writer, Monte Burke, focused solely on the prize money (in

USD) paid out to the winner of the event or tournament. Using this simple indicator, he compiled

the following list:

•UEFA Champions League – $77 million;

•UEFA European Football Championship – $33 million;

•FIFA World Cup – $31 million;

•NFL Super Bowl – $16 million;

•MLB World Series – $15 million;

•Dubai Horse Racing World Cup Night – $10 million;

•UEFA Europa League – $9 million;

•ICC Cricket World Cup – $4 million.

Monte also included the World Series of Poker, with prize money of USD 9 million. However,

from this book’s perspective it fails to meet the conditions for being designated as a sport. It

might be high on strategy and bluff, but it has always been low on physical prowess.

All of this prize money represents income to a sport enterprise somewhere in the world. And,

moreover, these funds are just a small sample of what is on offer. As Chapter 2 highlights, there

is now a multitude of sources from which sport enterprises can extract the revenue to fund their

operations. But, in a world where sport has never been so flush with funds, there are hundreds of

cases every year where sport enterprises have not only been unable to balance their books, but

have also increased their debt to absurdly risky levels. This is the other paradox of contemporary

sport.

The cases discussed below showcase this paradox. However, over and above the paradox, there

is a serious management issue to address here. How is it, in an age where so many university

programmes are educating students about what it is to be a prudent accountant, and when so

many sport enterprise managers are building up their financial management expertise, that this

state of affairs can be allowed to happen so often, and can be allowed to deliver so much damage

to stakeholders? The following cases show what can cause these financial disasters. They also

hint at what can be done not only to minimize the fallout, but also, even better, to ensure it does

not happen in the first place.

Case Study: American Women’s National Basketball Association

The place

The Women’s National Basketball Association, or WNBA as it is more colloquially known, is a

national competition situated in the home of professional sport leagues, the United States of

America. The USA is the cultural home of women’s basketball, and the national team regularly

wins the world and Olympics titles.

The league

During the latter part of the twentieth century there was constant chatter among the American

basketball fraternity that a national women’s league should be introduced. There were good

reasons for this initiative. Not only was women’s basketball played across the nation, but it was

also especially popular among college students. There were many national advertisers and

sponsors waiting in the wings, so to speak, and there was an optimistic belief that a professional

women’s basketball competition would attract both viable attendances and a solid television

audience.

So, in early 1996, after a lot of deliberation and careful planning, the National Basketball

Association (NBA) Board of Governors approved the concept of a women’s professional

basketball league, the WNBA. There had been some earlier abortive attempts to get a women’s

league off the ground, but they had failed due to poor organization and a lack of a strong cash

flow. This initiative was different because it had the support of the NBA and its huge resource

base, and it therefore followed that the WNBA had a good chance of paying its way to a

successful future.

Things got off to a flying start when, even before any players had signed playing contracts, the

league established its broadcast partnerships with three major television networks, NBC, ESPN

and Lifetime. This not only meant a guaranteed stream of revenue, but it also meant that games

could be televised live. The league was also given an interesting twist when it was decided that

the WNBA season would be played during the summer. Additionally, it secured the Spalding

sport equipment supplier as national advertiser, who designed the orange and oatmeal-coloured

WNBA signature ball. The league also heavily marketed its catchy slogan, ‘We Got Next’, prior

to the season commencing.

Eight teams were announced for the inaugural season, and were organized into two conferences

or divisions. The Eastern Conference consisted of the Charlotte Sting, Cleveland Rockers,

Houston Comets and New York Liberty, while the Western Conference was comprised of the

Los Angeles Sparks, Phoenix Mercury, Sacramento Monarchs and Utah Starzz. Teams were

allocated designated players, and a so-called ‘elite draft’ was used to recruit foreign players.

The problem

The season commenced in the summer of 1997. In the early part of the league’s development

there were few problems and many successes. As noted above, the league was backed, both

symbolically and financially, by the NBA. It also had a unique organizational and legal structure,

since every team was effectively owned by the league. In this ‘single entity’ competition, clubs

were not franchises, but rather operating divisions of the league. This meant the central body had

control over wage levels and recruitment, and therefore substantial control over costs, which in

the first instance seemed a very good thing.

The league also captured the imagination of television viewers in the first instance. During a

successful inaugural season, more than 50 million viewers watched WNBA games on the three

networks. The WNBA also delivered a unique audience profile for an elite sporting competition.

In the case of at-arena attendance, the gender breakdown was about 70 per cent female and 30

per cent male. The TV audience was around 50 per cent female and 50 per cent male, with a

stronger percentage of non-adult viewers than is normally the case. In short, a lot of young,

mostly middle-class women supported the league.

Following on from the successful inaugural season, the WNBA expanded from eight teams to

sixteen. The Detroit Shock and Washington Mystics joined the league in 1998, the Minnesota

Lynx and Orlando Miracle in 1999, and the Indiana Fever, Miami Sol, Portland Fire and Seattle

Storm in 2000. The 2002 season was highly successful, and signalled to the sports-going public

that professional sport leagues for women were not only viable, but were also destined to become

an integral part of the north-American sporting landscape. There were 176 women playing

professional basketball in 256 regular-season WNBA games. In the inaugural 1997 season only

twenty-eight games were played. The future of the league looked assured.

However, the gloss faded, and the optimism was blunted over the following ten years.

The WNBA went through difficult times, and by 2013 – the seventeenth year of the competition

– there were only twelve teams in the league. So what went wrong, both strategically and

financially? Strategically, it appears that the league may have expanded too rapidly, and exposed

itself to a build-up of costs. Financially, the evidence now indicates that, despite its initial

progress, and despite the committed support from millions of women who desperately wanted

the competition to succeed, it was never going to be financially viable. Looking back it becomes

clear that operating revenues rarely covered operating costs, and most clubs were running losses.

As one commentator claimed, the WNBA had, over the course of its first seventeen years, ‘never

made a dime’, which in accounting parlance means it could never deliver an operating profit for

its owners, the NBA. In other words, the WNBA has survived – from a financial perspective –

only because of the subsidies provided by the NBA. This may be a harsh and even an unfair

thing to say, and additionally plays into the hands of sporting traditionalists who see real

professional sports as a ‘men only’ affair. But it may also be the only reasonable conclusion to be

drawn from the facts. However, what are the so-called facts, and who do we believe anyway? To

assist in the analysis of this case, the following points are made:

•The WNBA started out with eight teams, and grew to sixteen before several franchises folded. It

now fields twelve teams. Six teams – Indiana, New York, Minnesota, Phoenix, San Antonio and

Washington – are owned by NBA franchises. The WNBA teams share training facilities and

arenas.

•Just how bad, then, are the WNBA’s finances? Apparently the league’s first-ever ‘cash flow

positive’ team was the Connecticut Sun in 2010. NBA commissioner David Stern regularly

conceded that the NBA has subsidized the WNBA in recent years by up to USD 4 million a

season.

•Sponsorships have been an important revenue stream for the league, boosted by the league’s

successful marketing campaign geared towards branding the league showcase for healthy values.

Team sponsorship revenue increased by around 10 per cent from 2005 to 2010. The WNBA also

secured a strong commercial relationship with Boost Mobile (BM), and the BM logo was placed

on eleven of the league’s twelve shirts. The league recently added Anheuser-Busch as a major

sponsor.

•Average attendance over recent years has fallen by more than 4 per cent. Average game

attendance for the league is now around 7,700.

•In 2011, the WNBA signed new partnerships with Jamba Juice, Coca-Cola and Pirate’s Booty

snack food.

•The WNBA often averages a 0.2 cable rating (around 263,000) on ESPN2. By any measure this

is a minuscule audience for a nationally telecast American television programme.

The above information provides some insight into the structural and financial problems facing

the WNBA, but does not provide any significant financial data that can illuminate the overall

problem, or identify or even expose the key cost burdens and revenue shortfalls. We can only

imagine what is going on, but it is clear that the problem is not a cost one. To put it more

precisely, the problem is not an inflated player salary one. According to the league’s collective

bargaining agreement (CBA), the 2012 team salary cap was just under USD 900,000. When

allocated over the player roster it comes in at around USD 70,000 per player per season. This, by

any professional sport league measure, is meagre. In contrast, the salary cap for the men’s league

is USD 25 million. Most male basketball players claim an annual salary of USD 3–4 million. The

gap is obscene from a gender equality perspective, but this is the reality of professional sport. It

is all about capacity to pay, which suggests that the revenue base of the WNBA has been

frighteningly low for the entirety of its existence. This is a serious problem, and it appears that,

unless there are dramatic changes ahead, the league may not be around, at least in its present

form, in 2020.

This case has many facets to it. It is about women’s sport, it is about the role played by subsidies,

and it is also about the lack of transparency that operates in many sports around the world. In this

instance we just do not know what is going on from a financial perspective, and this is not a good

thing. The other interesting thing about this case is that it has been played out in a setting that, at

first glance, lends itself to accommodating a women’s professional sport league. The USA has a

population of more than 330 million, it is one of the world’s wealthiest nations, women are for

the most part liberated from the oppression of hyper-masculine men with hyper-masculine belief

systems, and, additionally, sport is a national obsession. It should, by any account, be the perfect

setting for a sport league of this type to flourish, both culturally and financially. But something

has gone horribly wrong somewhere.