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Follow-up to “Now the Recession Has Hit the NFL”

In more evidence of its size and scope, the recession continues to ravage professional sports — affecting everyone from Joe Sixpack fans to the players and owners themselves.

In February, we wrote “Now the Recession Has Hit the NFL” and “Bailout Culture Spreads to…Basketball?”  And in the months that have followed, the economics of the sports business have only gotten worse.   The mighty New York Yankees had to cut the prices of their seats behind home plate — by half!  $2500 tickets in the Yanks’ brand new stadium have been selling for $1200.  The Pittsburgh Pirates have turned to promotions worthy of Wal-mart or Dollar General — “Buc” Night, a play on the Pirate’s nickname in which tickets and concessions cost a single dollar.  On the NFL front, we saw rumors that the original owners of the Dallas Cowboys cancelled their season tickets, citing the costs.   (Hey, the new Cowboys stadium cost more than a billion dollars…Jerry Jones has bills to pay!)

But in a true sign of crisis, we see that the recession is starting to hit the players. Consider this story on the NBA:  ”With Banks Broken, Select Few Free Agents Will Break Bank”

“Throwing money around haphazardly is so 2007. If they haven’t already, teams and free agents alike are about to learn that a new era has dawned. Billion-dollar bailouts and trillion-dollar deficits have trickled down to the sector of the economy known more for largesse than restraint.”

Recessions have a way of slowing down labor mobility.  Whether you are a factory line worker or a database administrator, in this environment you’re more likely to keep your head down and continue working in your existing job than test a weak job market.  The same goes for basketball: “This free-agent class will be rife with examples like Carlos Boozer, who only six months ago guaranteed that he’d opt out of his contract and become a free agent, only to change his mind as the deadline approached.  As some team executives believed, Boozer decided it wouldn’t be easy to get a new contract that paid him more than the $12.7 million he would make in Utah next season.”

In a separate article, we see that “2010 Cap May Limit Signings“In a true case of wage deflation, for only the second time in league history the NBA is actually lowering the salary cap — reversing the trend of rising athlete salaries that have far exceeded the rate of inflation.

The NBA’s ballyhooed free-agent summer of 2010 might have quietly taken another hit late Tuesday night.  In a memo announcing next season’s salary cap and luxury-tax threshold, sent out shortly before the league’s annual July moratorium on signings and trades was lifted at 12:01 a.m. ET Wednesday, NBA teams also received tentative projections from the league warning that the cap is estimated to drop to somewhere between $50.4 million and $53.6 million for the 2010-11 season.

The official league memorandum, obtained by ESPN.com, forecasts a dip in basketball-related income in the 2009-10 season of 2.5 percent to 5 percent, which threatens to take the 2010-11 cap down some $5 million to $8 million from last season’s $58.7 million salary cap.  A significant drop for the luxury-tax threshold is also projected going into the summer of 2010.

For those that follow the game, these developments will likely have an effect on some of the biggest names today, like Dwayne Wade and LeBron James, both of whom will be free agents next year.Sports salaries — along with luxury stadium construction, season ticket prices, and sports merchandising in general — reached absurd excesses during the boom years.  

Now, with the bust into its third calendar year, we are dealing with the hangover.  Jerry Jones’ and George Steinbrenner’s new stadiums (estimated at $1.2 and $1.5 billion, respectively) will likely be the high-water mark of sports excesses for decades to come.  In this environment, the luxury martini bar in the new Yankee Stadium seems a bit out of place.

(Note: Thanks to Bill Washinski for compiling most of the sports research.) 

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy