Chapter 1 Sports Industry—Heading to the Top of the Most Profitable Business Sectors – Great Coaching and Your Bottom Line

CHAPTER 1

Sports Industry—Heading to the Top of the Most Profitable Business Sectors

There is a huge amount of money circulating in the sports industry today. Every day we read in newspapers, visual media as well as on social networks about salaries, bonuses, sponsorship deals, and transfers worth tens of millions of dollars in sport. This sounds appealing but you have to be aware that today’s sport is subject to constant change because it has to compete for a part of money people are ready to spend for fun and entertainment. And the offer is getting bigger and more complex every day. Sport differs from consumer goods or services because it involves people, and people are inconsistent and unpredictable. This is also the reason why sport itself is attractive, no matter whether you want to be involved in it, participate in its organization, management, or just want to be a side observer.

Across the globe, there is a growing association of sports and entertainment industries. Thanks to the challenges of social networks that increasingly shape the way we spend our leisure time, the sports and entertainment industry records continuous revenue growth. At the same time, sponsorships and media rights appear as the main engines of this growth, pushing the traditional domination of ticket revenue to the rear.

Sports Industry Continues to be One of the Largest and Fastest Growing Industries in the United States and the World

The world at the beginning of the third millennium is not like the one it was 50 years ago. The area of life in which this is particularly manifested is sport. Sport has entered through the small door into all pores of our lives, making it an important part of it—from entertainment, culture, health to the economy.

The sports industry continues to be one of the largest and fastest growing industries in the United States and the world (Plunkett 2013). Sport as an industry is characterized by huge sums of money involved in it today. Big figures sound tempting but they are just a small part of the sports industry. Today’s sport is subject to constant changes because it has to compete in a market for the part of the money that has been spent for fun and entertainment. And the choice is every day getting bigger and more complicated.

Thanks to the challenges of social networks that influence our leisure preferences, the sports and entertainment industry has also witnessed a steady growth in revenue. The close convergence of sports and entertainment industry is rapidly growing. At the same time, sponsorship and media rights emerge as the main generators of sport’s growth, putting traditional revenue generation into a second plan. The popularity of sports organizations and events is growing every year. This comes as the result of their top organization and marketing exploitation supported by high-tech digital technology that provides better coverage than ever before. Media companies use social media to establish direct contact with sports enthusiasts. Today, most marketing campaigns are already in the very beginning planned as an interaction between the brand and its fans. As an indispensable part of any sports story, the sponsors are also directly related to sports organizations and sports fans. The economic transformation of professional sports has taken a huge leap in the last decade. Large professional sports organizations today are a complex and profitable business. The way in which sports organizations or interested parties respond to the ever-increasing economic transformation of sport raises the discussions all around the world on daily basis. Discussions are mostly held about unobstructed market access including issues such as revenue sharing, focusing on business goals such as profit, shareholder value, and market share.

Just like any business, generating revenue is a constant preoccupation for leaders of professional sports organizations. Unlike companies in other branches of industry, the need to generate revenue in sports is not primarily driven by profit efforts, but rather by the desire to improve sports performance. Bigger revenues allow sports organizations to hire better coaches and players, and improve sports facilities and infrastructure.

The main determinant of generating revenue in sports is the value of entertainment. All sports pay close attention to their viewers, but some sports have a mass appeal because they are passionately followed by people who are not directly involved in sports events. It gives the sport an additional global dimension that attracts media and social networks and results in a level of spending that exceeds far the actual number of participants.

One of the most important factors contributing to the growth of sports in the business sphere was television, in particular satellite television, both in terms of the amount paid for broadcasting rights and the radical changes in the distribution of income among sports organizations.

Although in sports today the professional sports organizations and their athletes and coaches are the ones mostly followed, it would be unjust not to mention the importance of amateur sport. Every year hundreds of millions of athletes around the world enjoy the satisfaction of amateur-level competition. Sport provides many opportunities for professional athletes, but without the driving force of amateurs and amateur athletes who will never become professionals there wouldn’t be the top professional sport either. Likewise, without sports stars, professional models, it would be difficult to engage so many children in sports activities. This is the true value of sport: a character built through participation and experience and awards for participation in the team. These lessons often serve as a guide and platform for athletes’ success in the real world. Those who are able to apply what they’ve learned in sports to real life situations can quickly progress in their work. There is a little difference in renunciation that differentiates success in sports from success in real life.

North America and Europe Are Fundamentally Different in Terms of Organizing Sport

As an European and an author who is writing about sports for the ­American publisher, I want to clarify at the beginning, for the sake of further better understanding of the text, that there is a significant difference between American and European sports. Understanding some of the texts in the book will surely be easier if you recognize this difference since my knowledge comes from an European context.

Although North American culture is largely derived from the culture of immigrants from Europe, North America and Europe are fundamentally different in terms of organizing sport. The biggest difference that sports fans on both continents can immediately notice is the appreciation of the popularity of sports. In North America football, baseball, basketball, hockey, and soccer are the most popular sports. In Europe, the popularity of soccer is far bigger than other sports. Soccer is the undisputed king of European sports, and the popularity of other sports differs from country to country. In Ireland where I live, along soccer the most popular sports are Gaelic football, rugby football, and hurling. In neighboring England, along with the most popular soccer, the favorites are rugby football, field hockey, and cricket. In the eastern part of Europe it is something different. In Russia, after soccer, the most popular sports are ice hockey, handball, basketball, boxing, volleyball, auto racing, athletics, tennis, wrestling, and gymnastics.

What’s the Difference Between European and North American Sports?

The European model of sports organization is characterized by two basic features: the system structure of the pyramid and the system of promotion and relegation (Nafziger 2008).

The system of the pyramid structure, as its name suggests, is built on the pyramid as its basis. At the bottom of the pyramid there are sports organizations forming the base. The next level is made up of regional alliances, and sports organizations are members of regional alliances. The next, now somewhat narrowed pyramid level is made up of national alliances whose members are regional alliances. The national alliances level is followed by the level of the European federation. It is made up of national alliances. At the very top of the pyramid there is the world federation consisting of members of the federation of all continents. The cycle of the competition moves from the bottom of the pyramid and the sports organizations, depending on their performance, can climb to the top.

The rise to the top of the pyramid is possible thanks to another key feature of the European model of sport: system of promotion and relegation (Nafziger 2008). Under this system, the worst performing sports organizations in the competition move to a lower division, and the most successful go to a higher division to replace the worst sports organizations in higher-level divisions. In practice it looks pretty simple, because the league formats are very simple. For example, in soccer the winning team gets 3 points, 1 point for the draw, and 0 points for the loss of the game. The team with the most points becomes the champion and together with other two or three teams (depending on the rules of the competition) goes to a higher level of competition, and the team (or two or three teams, again depending on the rules of the competition) with the least score drops to a lower level of competition. Due to its openness, the European model of organization is known as the “open league” system (Nafziger 2008). Open leagues gives to all teams, on any geographic area of a country, the theoretical opportunity to reach the top division and play with top clubs.

Unlike European sports, the North American sports is facing more business side and as such it is treated more like a job done by professionals. It is understandable therefore that the vast majority of Americans can hardly understand the functioning of “open league” since such a system does not exist in North America. In North America there is a system of “closed leagues.” This is a system where promotion and relegation does not exist because the number of clubs in the major professional sports leagues of North America (NFL, MLB, NBA, MLS, and HNL) is determined based on the franchise obtained and it does not change. It is constant, and no team drops out of it.

The North American sports system, in comparison to the European, promotes higher equality and competition among the teams, and this makes the great competitive advantage. Equality and competition are encouraged by ensuring a balance between teams through carefully elaborated rules. One of those rules is the salary cap, which limits the amount of money that clubs can spend on wages.

Another important rule is to evenly allocate the highest talents within the league’s team (so called draft). It means that the lowest ranked team in the previous season gets the first choice of talented young players who get the right to play in the league next season.

In the closed leagues, the clubs in the competition system and their investors have assurance that they will always be a part of the league (provided they meet certain criteria). Closed leagues in some ways ensure the long-term stability of clubs because they can, with quite a certainty, estimate the ratio of future budget revenue and expenditures, which is very difficult in Europe. The biggest deficiency of closed leagues is that they are limited by the number of places in the competition system. Teams outside the league cannot enter the league based on the sport performance.

There are also big differences between European and North ­American sports in the ownership of sports organizations and the ownership of competitive leagues.

In most European leagues, it is well known that the clubs do not have the right of ownership of the leagues. Under the influence of American sport, and the fact there are more and more American owners of European sports teams, this has been changing slowly lately. An example of such changes is the English Premier League (EPL). EPL is a corporation made up of 20 teams involved in the league in which the club members act as shareholders. Given the European system of promotion and relegation in the EPL, the league system is expected to change every year, consequently changing the ownership structure of the league each year.

In the North American sports system, the club owners / franchise owners are also the league owners, so there is a clean private ownership structure. The owners have the exclusive right to decide who is involved and to appoint a “commissioner” who has the full power to make decisions regarding the league (essentially a CEO).

Unlike the North American sports system, where the clubs are privately owned “franchises,” in privately owned European professional clubs, there is a mixed model of club ownership. There are private clubs in Europe, but there are also a large number of clubs that are public institutions in the community, the so-called associations. Here are some examples of the different ownership structure of the biggest European clubs: Manchester United (England) is a privately owned soccer club (the owner is Glazer family, USA; uk.businessinsider.com 2017). The big Spanish football clubs, Barcelona and Real Madrid, have a specific social ownership model where the fans are the club’s owners. The most famous German football club, Bayern Munich, has a mixed ownership model: 75 percent is owned by fans and 25 percent by private investors. Such ownership structure is not a coincidence. In the German Football League (Deutsche Fussball-Liga), there is a rule 50 + 1. It is an informal term used to refer to the clause in the regulations of the German Football League. The 50 + 1 rule states that no single person or entity may hold more than 49 percent of the voting rights in a German club’s professional football division (Bundesliga), preventing the sale of a majority stake to external investors, thus protecting clubs from irresponsible owners and maintaining the democratic nature of fan-owned German clubs (www.dfl.de).

When it comes to amateur sport in North America, there is a dominant educational and commercial sport system. The North American amateur sports system is a system in which schools, colleges, universities and commercially managed sports centers form the main principle of organizing sport participation. Volunteer clubs and public authorities have a negligible impact on the system compared to the European system. In Europe, the predominant system of voluntary sports clubs and associations prevails. In most European countries, volunteer sports organizations are actively supported by the public sector, while the impact of business community and education system is negligible.

Is It More Cost-Effective to Invest in Sports in North America or in Europe?

In today’s uncertain economic times, investors are looking for stability and predictability. When considering the investment, there are two main things to consider: risk and potential earnings. The higher the risk of investment, the lower the value to invest as fewer people will be willing to accept that risk.

Investing in a North American club is certainly less risky than investing in a European club. Why? Unlike European clubs, North American clubs do not depend on sports scores. Sports results in North America do not have decisive significance on their finances. In North America, a club is at the same time a shareholder of the league, and as such has the power to protect its interests from new participants. In favor of investors investing in North America, there is a regulation of wages, so called salary cap, which gives a guarantee that there will be no large oscillations in the payroll. The risk of investment in the North American club is low and therefore the value of the franchise is very high.

The nightmare chasing the investors who want to invest in the European clubs are unpredictable sports results. If the club has a risk of falling out of the league or not qualifying for one of the continental contests, there is a great deal of uncertainty about future revenue. For the European club to be confident in achieving its profitability through competitive goals, significant financial resources have to be invested in bringing quality players and top coaches. Since there are no regulated rules in Europe that limit the amount of money that clubs can spend on salaries (salary cap), there is an objective risk of inflationary expenditures. The inflation of expenditures is particularly visible at European professional football clubs, which have been taken over by Chinese, Arab, and Russian billionaires. As a result of their takeover, inflation has increased in terms of spending and paying players. Therefore, the FIFA President Gianni Infantino is increasingly thinking of introducing the American model of regulation in commercial and sporting conditions
(www.espn.com 2018).

Unlike North America, in Europe (except the English EPL) the investor is not the owner of the league who can easily protect the investments.

Despite all the existing problems, the value of professional sports teams has exploded over the past decade thanks largely to the massive increases in television rights fees paid for the games.

Investing in sports clubs and affiliated auxiliary companies that roll billions of dollars in sports business in North America and Europe is, despite existing risks, an attractive and profitable business. High consumer demand, power, price, and media demand are key to success and big sports teams and leagues bring with them greater financial benefits. The fact that sport is a great and profitable business is best shown through the entry of the big Internet business, Amazon, in sports business. ­Amazon bought part of the TV rights for matches and summaries of the EPL (the English Premier League) for the UK region from 2019 to 2022. Amazon will offer the matches on Boxing Day and 20 more games over the week through its streaming service Prime (www.bbc.com 2018).

Certainly in sports, besides the benefits, there are always risks that can spoil the “good” investment. We must never forget that sports business is primarily affected by emotions. The same human or emotional factors that make us today to spend our last dollars on sport product can equally prevent us tomorrow from doing so because of unforeseen events.

There Is a Growing Need for Skilled Sports Staff

Along with the growth of the sports industry, there is a growing need for staff educated to deal with the unique nature of the sports industry. With increasing employment opportunities in the sports industry, there is also a growing need to educate sports experts. Educational institutions around the world have quickly adapted to the growth of sports activities and have developed a large number of curricula and programs at the graduate and undergraduate level to meet the need for specialists trained specifically in sports management (Stier 1993).

The accelerated growth and popularity of sports have fueled the constant desire of many people to continue their career in the sports industry. A large number of students every year, both in the United States and abroad, are enrolling in academic sports programs to prepare for their future career in the sport business. A large number of them, among other programs, choose sport programs to become coaches.

The increase in demand for sports is due to its strong development and social media exposure in the past twenty years. The increasing trend of professionalization in sports reinforces the demands for coaches and other professional staff in sports. Behind the increased demands, there is often a disparity between high expectations of the public and difficult conditions in which athletes, coaches, and other professional staff are working. Professionals in professional sports are increasingly struggling to cope with the high expectations of the public.

Working in sports industry is not an easy job. The sports industry is subject to a high level of public oversight. Thanks to social networks, coaches, athletes, and sports management are evaluated by sports fans and parents, I can emphatically say, on a daily basis. Since most estimates of sports enthusiasts and parents are influenced by emotions, it is clear that they do not give credibility to the people who make the assessment. But public expectations are high and members of sports organizations must be aware of them and must know how to deal with them.

Sport Stars

Sport stars are an integral part of today’s sport. They are a personalized expression of top sports values. Without them there is no real spectacle or spectators. Sport stars are not only a source of income, but also an indicator of the effectiveness of a sports organization or sport event. Because of the interest of sports enthusiasts, appearances on social networks, and the attention of public magazines, the participation of sports stars gives a special charm and quality to the sporting organization and competition they are participating in. Stars, because of their successes and popularity are able to attract the attention of the whole sporting public to the sport they are engaged in and to the sporting organization they are performing for. They are able to inspire a multitude of young people to enter the world of active sports and also pull thousands of spectators to watch them. It is not exaggerated to point out that the entire marketing system of top-notch sports is based on sport stars. This is also the basic economic explanation of their astronomical income.

According to Forbes magazine (2018), the 100 best-paid athletes made in the period from June 1, 2017 through June 1, 2018 a total of $3.8 ­billion, including endorsements, which is 23 percent up from the previous year. Their earnings include salaries, bonuses, prize money, endorsements, licensing, and appearance fees.

On the list of top earners is Floyd Mayweather ($285 million, boxing, U.S.) followed by Lionel Messi ($111 million, soccer, Argentina), ­Cristiano Ronaldo ($108 million, soccer, Portugal), Conor McGregor ($99 million, MMA, Ireland), Neymar ($90 million, soccer, Brazil), LeBron James ($85.5 million, basketball, U.S.), Roger Federer ($77.2 million, tennis, Switzerland), Stephen Curry ($76.9 million, baskeball, U.S.), Matt Ryan ($67.3 million, football, U.S.) (Forbes 2018).

The earnings of sport stars are provoking excitement among moralists, who are forgetting that the top scholars and other professionals, such as attorneys, actors, singers, politicians, businessmen, also charge for their media popularity.

Obviously, as shown by the list of their earnings, sport stars are a grateful promotional marketing tool. The high income earned by sport stars is an acknowledgment for their talent, work, and dedication. Behind their earnings there is the global popularity and recognizability of their status. Sport stars are authentic because they are visible, understandable, and their value can be checked. Unlike the effort of some athletes to try to gain the status of an athletic star by violating regulations, various privileges, unfounded publicity, or support of the potentate with no talent and effort. The sports public cannot be deceived because before or after the shabby glow of such fake “stars” comes out.

Public Spending on Sports Infrastructure and Organization of Major Sports Events

There are few things that can unify the world. One of the phenomena that has this power is a big sports competition. The Olympics and the FIFA World Cup are a unique example of events that have the power to unite people of all colors and religion in the interest of sport.

You probably wonder how come I did not mention the Super Bowl (NFL), the biggest celebration of American sports? I did not mention it because events like the Super Bowl (NFL) or World Series (MLB), the Finals (NBA), the Stanley Cup Finals (NHL), the MLS Cup Finals, unlike the Olympic Games and the FIFA World Cup in football, primarily aim to unite the inhabitants of North America.

North America and Europe, apart from different approaches to organizing and valuating of sports, also differ in the organization of major sports events. In North America, sports are part of the city’s strategy and are largely based on investment in the infrastructure (stadiums) for the needs of national professional teams. Over the last decade, American ­cities have offered professional teams great incentives, such as the construction of new stadiums, to make them relocate from their domicile cities. In Europe, something like this is unthinkable.

In Europe, cities and states are more focused on hosting great sports events, such as World or European Championships in various sports: soccer, athletics, basketball, handball, volleyball, tennis, rugby, and boxing.

As with all sports events so are the mega-sport events subject to schedule and the country in which they are held. In practice, there are positive but also negative examples of economic justification of the organization itself. Particularly encouraging and positive is the strong indication that sporting events have been shown as catalysts for the economic development of cities and host countries in terms of international tourism spending (www.visa.com).

Countries and cities are organizing large sports events for a variety of reasons, including branding, building the necessary infrastructure, and economic development. Unrealistic expectations of the city or state’s economic development following the organization of sporting events are often subject to discussion by economic experts.

In 2006, Professor of Economics at the College of the Holy Cross, Victor A. Matheson, in the research “Mega-Events: The Impact of the World’s Largest Sporting Events on Local, Regional and National Economies” came to the following conclusion:

Public spending on sports infrastructure and the organization of large sports events necessarily entails reducing costs for other public services, increasing government borrowing or increasing taxes, and all this represent a burden to the economy. At its best, public spending on sports facilities has a null net effect on the economy, as the benefits of higher employment are undermined by the negative effects of higher taxes and lower spending in other segments of public services.

Matheson also argues that when assessing the economic effects of large sports events, the significant costs of security and alignment of “general infrastructure” with “sports infrastructure” are often ignored (Matheson 2006).

Unlike analytical economy experts, sports event organizers, sports organizations, and professional team owners are bent upon trying to stress on the great economic impacts from events to justify heavy public subsidies. I am convinced that the interest in organizing mega sports events in the future will not disappear, but it is certain that the costs of infrastructure will be rationalized, especially if after the completion of mega events it does no longer serve purpose.

In the past, most sports facilities were single-purposed, which means that neither more purposeful use of facilities was considered nor the effectiveness of future management. Today, there isn’t almost a single community that can afford to maintain a single-purpose facility. In addition to its multifunctional use, it is of crucial importance that the manager of the facility, in search of efficiency and effectiveness possesses knowledge of factors that can contribute to its successful operation.

Such an example of building the necessary infrastructure is the bob competition at the Winter Olympics, which after competition is finished no longer serves the purpose and is deteriorating shows that it is necessary to carry out rationalization of infrastructure investments. This is just one of example of irrational investment, and there are for sure much more. The reflection of such an International Olympic Committee policy is that fewer and fewer countries are interested in organizing the Olympic Games.