Congratulations to the Pittsburgh Steelers for defeating the Phoenix Cardinals and becoming the champions of the world of American football! With President Barack Obama proudly backing the Steelers, and with Senator John McCain of Arizona undoubtedly supporting his hometown Cardinals, one might be tempted to declare a “repeat” victory for the Democrats.
The real victors, though, might be the folks at the NBC television network for managing to sell “a large number” of its advertising spots for $3 million per ad. With longtime sponsors like General Motors declining to purchase air time in the current economic environment, NBC’s accomplishment might have been the most impressive one of the day.
The contest for Best Super Bowl Ad, of course, has long challenged the game itself for the attention of television viewers. From a business perspective, one might ask the following question: is the Super Bowl primarily a sporting event that happens to be televised … or is it primarily a sequence of advertisements that happens to surround a sporting event?
The Role of Flexible Budgeting
Every professional sports league, of course, has its own unique approach to generating and sharing marketing revenues. Some, like Major League Baseball, allow each team to form its own cable television network, thereby allowing organizations like the New York Yankees to become revenue powerhouses.
Others, like the National Football League, prohibit individual teams from signing their own television deals. Instead, the NFL signs league-wide contracts with national networks like NBC and ESPN. Teams in major media markets like New York and Chicago are thus unable to gain a disproportionate revenue advantage over their smaller market rivals.
There is an additional complicating factor as well; namely, teams never know in advance how far they will advance in their league’s postseason playoff series. In other words, they have no way of knowing how much of their product will be available for sale, thereby making it extremely difficult to anticipate how much of their total revenue might be generated by ticket sales and ancillary game-day purchases.
Teams must therefore adopt very flexible approaches to developing their fiscal operating budgets. Fortunately, flexible budgeting techniques can be very useful in ascertaining the impact of advertising revenue on a team’s overall financial structure.
A Minor League Example
Let’s consider an example of a minor league sports team that plays 16 regular season games. If it advances into the league’s playoff round but fails to advance to the championship series, it will play 4 additional games. And if it advances to the championship series, it will (once again) play 4 additional games.
What about game revenues and expenses? Well, let’s assume that the team averages $420,000 per game from ticket sales and another $420,000 per game in food and souvenir sales. It spends $5,000 per game on athletic supplies. And, on an annual basis, it receives $8.4 million from the league as its share of television contract revenues. In addition, on an annual basis, it spends $12 million on player salaries, $10 million on stadium or arena rent, and $4 million on league adminstration and support services.
Now let’s assume that the league permits its teams to sign their own local advertising deals as long as they do not infringe on the league’s national television contract. So let’s say that our team launches two radio and billboard advertising campaigns during the regular season in its local market, and adds two more sharply focused campaigns if it advances into the postseason. Each ad campaign costs $1 million for production and placement services, and each generates earnings of $2.1 million from local businessmen who contract for the product placement of their brand names and logos in the ads.
At the beginning of the year, before the team knows how far it will advance during the playoff series, it creates the following flexible budget ($s in thousands):
At first glance, it appears that the key to financial success is a successful run into the postseason. But what about the role of the radio and billboard advertising campaigns?
The Ad Campaign Is The Game
Stop for a moment. Take a deep breath … and think. You just read my previous sentence and instinctively glanced at the Ad Production Expense line, didn’t you?
That was a mistake. If you did that, then you’re still thinking “inside the box.” An “outside the box” thinker would realize that the ad campaign isn’t just a part of the game. From a business perspective, it is the game.
Let’s go back to the budget and divide it into two sections. Let’s call one section our Marketing Division, consisting of the ad production expense and the product placement revenue that is generated by it. And let’s call the other section the Games Division, consisting of everything else.
Using this approach to bifurcate our financial structure, we can collapse our flexible budget into the following ($s in thousands):
This gives you a completely different image of the team’s financial profile, doesn’t it? Apparently, the marketing activities earn millions of dollars in profits regardless of the team’s success on the field or court. And the games themselves generally lose money, even for playoff teams, unless a team is lucky enough to advance to the championship round. And yet, even for the championship teams, the marketing profits far exceed the profits that are earned by staging the games.
Thus, if you decide to purchase a professional sports franchise, how would you define your business investment? No team advances to the championship round each year; even perennial favorites like the Yankees go through extended droughts. Thus, your only pragmatic business decision would be to focus on generating marketing revenue, and to use the sporting events as a platform for selling ads.