Saturday, January 17, 2009

Footballs and Bubbles

Dot-com bubble. Check. Housing bubble. Check. Commodity bubble. Check. What could be next, hmmm, let's look into the ol' crystal ball here... getting something, yeah, definitely getting clearer, but, no, it can't be, it just looks like a bunch of men chasing some kind of ball, not profit, this can't be the next financial bubble surely. Sadly, it could be sports fans, as the value of professional sports teams has grown exponentially in the last decade it has become a prime candidate for the next bubble to burst.

With the countdown to the NFL's Super Bowl (yeah that football, the American kind) down to just two weeks, there's a chance the opposing teams combined value will be under $2 billion - like the Arizona Cardinals a bit of a long shot in a league where 19 of the 30 teams are valued over a billion bucks. I'm picking the Eagles to end the Cardinals improbable run, but it'll be great watching the NFC Conference final in the desert on Sunday. If that happens along with the Steelers taking the Ravens in the AFC, the combined worth of the finalist will be almost exactly 2 bil, $1.92 billion.

There are 24 professional franchises worldwide valued in the ten digits; in 2004 there weren't any. Top spot worldwide goes to Manchester United. It's hard to put an exact figure on their worth, in many a Premiership fans' hearts as well as hard currency, but it's about $1.8 billion. Bubble buying in their league is exemplified by Manchester City's Sheikh Mansour bin Zayed. Spending boatloads on Robinho and now looking to land Kaka, he may wind up with a team relegated from the Premiership (note to US readers, the lowest and highest teams fall and jump to the next league each year). The sheik's family's only worth a trillion so I guess he can afford to do what he wants. Almost makes Chelsea's Roman Abramovich look poor. The professional sports teams perhaps hit the hardest by the crisis also plays in the Premiership, West Ham. Icelandic owner Bjorgolfur Gudmundsson lost hundreds of millions of pounds last fall due to the collapse of the banking industry, forcing the team to sell players to keep afloat. Malcolm Glazer's bold maneuverings to take control of Man U were so successful that he now fully owns the team. When he reached the 98% threshold of outstanding shares (causing a compulsory buyout of remaining shares in June of 2005 the final valuation made them worth 800 million pounds, or $1.5 billion at the time. Glazer also owns the Tampa Bay Buccaneers in the NFL so you know, he only owns a couple billion dollars worth of professional sports teams.

His Bucs won a Super Bowl a few years back, the Cowboys have won five, helping Dallas, along with a new stadium for next year (and the all important new stadium deal!) to be worth $1.6 billion, the second highest valued sports franchise. The Steelers would be one win away from six rings with a win Sunday. I'm taking Pittsburgh to beat the Baltimore Ravens as the Steelers D shows who was number one this year and the Ravens will be tired and holes will appear in the league's number two defence. Think the Steelers may even run it up a bit, dare I say 30-10 provided steady rookie sensation Joe Flacco throws up a couple picks. Philadelphia takes care of the Cardinals 39-35 in a wild finish. Kurt Warner will put up 5 TDs in a losing cause: 2 to Anquan Boldin whose back this week to join fellow 1000 yard receivers Steve Breaston, who'll snag a touch, and Larry Fitzgerald, who looked like the best in the NFL last week, getting a couple.

Arizona plays their home games at the silly-ly named Sportsman's Park at Cardinal Stadium, sure to be renamed soon as there is huge money to be made. An unlikely number 10 on the world's richest list are the most recent NFL expansion team, the Texas Texans (another awful name) helped by the fact that their home field's name, Reliant Stadium, brought in $300 million. FedEx stadium, er, the Washington Redskins come in 3rd on the list at $1.5 billion, Gillette adds to the Patriots 3 recent Super Bowls, boosting New England's value to fourth at $1.32 billion. Next are the only baseball team in the top 10, unsurprisingly the New York Yankees - being worth $1.3 billion somehow allows them to throw over $400 million at 3 free agents this winter, um hello, crisis, what crisis? Real Madrid's $500 million in revenue, string of signings (remember Figo, Ronaldo, Beckham, Owen, Van Nistelrooy) and Santiago Bernabeu, the only stadium in this list I've seen a game at, despite shrinking from 120,000 to 80,000 max attendance in the past few year, make them 7th at $1.29. Emirates push Arsenal to 8th and $1.2 billion.

Rounding out the top ten are the two New York NFL teams, the Jets and last year's Super Bowl victors the Giants. If you've made it this far and don't like sports you may wonder how these kind of valuations are possible. Speculators thrive in environments where logic and value stop co-existing. Perhaps the first recorded speculative bubble was Tulip mania. Back in the 16th century the market for tulip bulbs exploded, you can't make this stuff up. A future's market in the bulbs was opened in 1636 and the price of bulbs skyrocketed amidst a bubonic plague outbreak. And you thought buying people mortgage's on future's markets wasn't a good idea. Talk about toxic assets, the flower's vivid colours and therefore value jumped partially because of a virus that many carried. In tulips, the virus caused flame like colouration to occur on the petals, while the financial system has suffered from the contagion of unbridled banker and investor greed causing it to crash, a la Phoenix.

So, could professional sports be another bubble? We've got oil wealth, real estate and the Russian mafia all bidding up prices for players and signing TV contracts to extreme prices, all in the irrational chase for paper profit. The last sports bubble was in trading cards of all things, where a Honus Wagner card is worth $2.8 million. Coincidentally Wayne Gretzky once owned this card along with Bruce McNall. His sale (I mean of the actual player Wayne Gretzky) to McNall's LA Kings from my hometown's Edmonton Oilers marked a new phase of growth in player salaries, league expansion and franchise values in 1988. The greatest player in the history of a sport was deemed worthy of sale for profit. The numbers don't shock today as they did then, but the deal involved a couple other players (with more talent coming the Oilers way) the Kings number one draft pick plus $15 million, putting his price tag near $20 million. Nowadays, a Kaka turns down 100 million pounds, the Yankees drop $400 million on 3 players and somehow value ratios are way out of whack. Value, yeah that's the kicker, many blame today's crisis on the loss of perspective of what constitutes value, the price is going up, so it must have value! I love sports but sadly see that the beginning of the end came the day they sold Gretzky.


Nelson said...

Sports generally is a fairly resilient form of entertainment. Except for Hollywood, I don't think there's an entertainment industry that matches it. So I'm not surprised where the valuations are.

I would add a couple of caveats to that though. First, it seems that more and more their models depend on corporate sponsorship, and things like skybox seats. If there's a true economic downfall, it seems those valuations could fall if everything else is falling.

I also wonder about specific sports, namely baseball and american football. Those are two sports which don't have the global reach of, say, the Premiership or even of the NBA. They seem vulnerable to me because their market is pretty much limited to the United States. (ManU can sell Cristiano Ronaldo jerseys in China, but the Cowboys probably can't sell T.O. jerseys there.)

Troy said...

Good observation Nelson, but that's just the point, isn't it? How is it possible that 2 sports that are virtually non-existent outside of the USA (granted baseball does enjoy a following in certain latin American countries) can still hold some of the biggest (richest) teams.

It does say something for the sheer weight of the US and the money that is there.

Shane said...

Thanks for the input guys, specifically thanks for bringing the skybox/luxury suite issue up Nelson, seems that eventually they'll run out of new stadiums and new suites, that revenue stream can't keep up the growth. Good point on the resiliency of demand for entertainment in general, people still need to have fun and those two games yesterday in the Conference finals were great fun.
Finally, the international appeal of football (soccer) does seem to give that sport a better chance of continued growth, but the NFL has been working hard on expanding the appeal of its game beyond the States, even playing a regular season game in England every year now. Furthermore, the Buffalo Bills will be in Toronto in a couple years (yeah, i know, they already have the Canadian TV market).