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Sports teams fear hit from economic crisis

The Baltimore Sun

With major sponsors facing economic collapse and fans worrying about fuel costs and retirement funds, sports executives are worried that their business - normally immune to economic downturns - might feel serious effects from the current financial crisis.

Baseball just experienced its first attendance drop in four years. NFL commissioner Roger Goodell has warned of possible budget shortfalls. In Baltimore, the Orioles saw season attendance fall below 2 million for the first time since they moved to Camden Yards. Analysts are warning that a proposed new city arena might be a tough sell until better economic times arrive. Even the Ravens have had to scramble after struggling companies bailed out on contracts for luxury suites.

"Sports is big business in this country," said Anirban Basu, chairman of the Baltimore-based Sage Policy Group, an economic consulting firm. "And what's happening to big business right now? They're taking it on the chin."

But don't worry too much about the nation's teams and leagues, other financial analysts said. The business of sports has proved remarkably resilient during times of economic crisis.

"It's kind of like booze and movies," said John Moag, founder of Moag & Co., a Baltimore-based investment banking firm that specializes in sports. "Psychologically, people do not want to give it up."

A recent study by Moag's firm found attendance and franchise values went up during the bear markets that have occurred between 1970 and this year.

Though Major League Baseball and Orioles officials blamed the economy for the smaller crowds this season, experts suspect that losing corporate sponsors and suite holders poses more of a threat to the Orioles and Ravens. With the financial sector taking huge hits, many banks and other companies are cutting costs, and luxuries such as suites might seem like easy targets.

"I don't know that we've ever been through a deep depression when so many of the team's local revenues are dependent on sponsorships," Ravens president Dick Cass said. "We've already seen some pressure from it, though we've been able to scramble around and fill holes."

Baltimore is attempting to get a new arena project off the ground, and that might be difficult in the current climate, with credit tight and potential developers and investors reluctant to take risks.

"State governments might be nervous about making a big investment in a sports facility when they're facing budget crunches," said Alison Asti, chairwoman of Asti Strategic Advisors, a sports and economic development division of the Baltimore law firm of Gordon, Feinblatt, Rothman, Hoffberger & Hollander. "On the private side, nobody wants to do a deal. This could have a profound effect on building. It sort of puts a hold on everything."

Basu agreed, saying he wouldn't be surprised if the arena were delayed.

City officials said it's too early to say whether tough economic times will stall the project. "We're so early on in the arena process that I think it's premature to predict how what's going on in the market now will impact financing that could be years down the line," said Sterling Clifford, a spokesman for Mayor Sheila Dixon.

Asked whether a bond issue would be a tough sell to the legislature in the current climate, Clifford said: "An improved arena would also be an economic engine, so you have to view it as an investment as much as an expense."

The financial crisis has already produced some ripples in the sporting world.

NASCAR has been among the hardest hit as it struggles to fill tracks where empty seats had been rare for most of the decade. The year ahead looks grimmer still, with the nation's leading automakers trimming their investments in racing and successful teams scrambling to find corporate sponsors. Petty Enterprises Inc. sold a stake in its racing operations to a private equity firm, and other teams might consider similar options.

The NBA is planning to cut its work force by 6 percent.

Despite widespread fears, many sports business analysts can't imagine the financial chaos having a devastating effect on their industry.

"In the last market fall in 2001 and 2002, we saw the largest loss of wealth in American history," Moag said. "But the fundamentals of sports business never changed. I don't know anyone who lost a job in the sports industry because of it."

Athletic spectacles have long served as pick-me-ups in times of crisis. During the Depression, a boxer such as Joe Louis or an underdog horse such as Seabiscuit could pull together a dispirited populace with unmatched force. In the aftermath of the Sept. 11 attacks in 2001, the World Series at Yankee Stadium offered the nation a form of catharsis.

In times of confusion and anxiety, people yearn to come together in blissful familiarity, Asti said. "That's why sports is so resilient."

It's an idea supported by hard data.

In anticipation of this year's economic woes, Moag & Co. prepared a report on the performance of professional sports during bear markets between 1970 and 2008.

"Businesses in most industries can experience dramatic declines in value during bear markets and periods of market instability," the report notes. "During these same periods of uncertainty, however, the sports industry has experienced either no decline or less of a decline than the broader markets."

Attendance across the four major sports - baseball, football, basketball and hockey - has grown more often than not during the five bear markets since 1970. Franchises have sold at profits far beyond the average return offered by the S&P; 500.

But officials for the Ravens and Orioles said they are uncertain whether this downturn will hit them harder than past bear markets.

The Orioles just had their worst attendance year since moving to Camden Yards in 1992 (the club's total dropped 9.9 percent from the previous year, to 1,950,075, compared with a 1.1 percent dip for all of baseball). But economic analysts said it is hard to know how much the financial climate affected crowds, given that attendance has plummeted for years in direct correlation with the club's on-field performance.

"We may have seen some of the economy's impact during the tail end of the season, when attendance was even lower than we might have anticipated," Basu said.

Team spokesman Greg Bader said the economy played "a major role."

"Any time you're talking about $4 gas and some of the predicaments families are going through right now, it's going to have an impact on entertainment spending," he said.

Basu and others predicted that the Ravens will not take an attendance hit because NFL teams play so few games and there is typically far more demand than supply for tickets. Cass agreed, saying the team has sold its tickets for the 2008 season, and the permanent seat licenses required for season tickets protect the club against year-to-year volatility. Cass said he has seen no evidence of slackening demand for PSLs.

As for corporate suites, Cass said a few companies have pulled out of multiyear agreements because of economic woes. But others have been waiting to step in. The same could happen with sponsorships.

"The blow gets lessened to some degree because we have long-term deals," Cass said, adding that the club won't know the true impact of the economy for a while because sales for 2008 have been completed.

The NFL's health is robust in general, with franchise values at all-time highs and television revenues serving as a hedge against smaller hits. That doesn't mean the league is unconcerned.

SportsBusiness Journal reported that a recent memo from Goodell warned of potential revenue shortfalls in the 2008-2009 league budget. The memo (which Cass declined to discuss) urged prudent spending. Though the memo did not specify the sources of revenue troubles, the NFL has extensive sponsorship ties to the automotive and financial industries.

"I think most Americans are probably not aware of how badly corporate profits have been hit and will be hit," Basu said. "They will likely respond by tightening expenses significantly. This will reverberate in discretionary spending, and few things are more discretionary than sporting events."

In a best-case scenario, Basu expects the effects of the current crisis to linger for three or four economic quarters.

Asti is concerned about the shrinking number of corporations based in or around Baltimore (the pending sale of Constellation Energy represents another blow). Fewer headquarters mean fewer candidates for major sponsorships.

"That'd be a big hit," she said, noting that the state receives 25 percent of the revenue from advertisements at Camden Yards and M&T; Bank Stadium.

Others are less focused on that concern.

"Everybody's worried about Constellation, but that's not what matters," said Bob Leffler, a former Colts exeecutive who runs the Leffler Agency, a Baltimore-based sports advertising firm. "What matters is the value in the town. Companies know they're buying an instant connection to a deeply loyal base of thousands of fans. Just look at M&T.; They're from out of town."

Moag noted that most sponsorship deals are multiyear and thus unlikely to go away. As for corporate suites, he said that he predicted a loss of demand during the 2001 recession, but the dip never materialized. "This is just an incredibly resilient industry," he said.

ORIOLES AVERAGE HOME ATTENDANCE

2004: 34,300, 12th in baseball

2005: 32,404, 14th in baseball

2006: 26,583, 20th in baseball

2007: 27,060, 23rd in baseball

2008: 25,000, 24th in baseball

Orioles home attendance in 2008 fell below 2 million for the first time since the club moved to Camden Yards in 1992

HOW THE DOWNTURN HAS HURT SPORTS

* The NBA announced that it would lay off 80 workers and close its Los Angeles office.

* Olympic organizers have struggled to find sponsors for the 2012 Summer Games in London.

* NFL commissioner Roger Goodell has warned of possible budget shortfalls and is considering reducing the amount each franchise can borrow.

* Major League Baseball attendance dipped for the first time in four years in 2008.

* NASCAR has seen the nation's leading automakers trimming their investments in racing, and even its most successful teams are scrambling to find corporate sponsors.

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