Who Exactly will Pick Up The Tab?

Posted: February 18, 2011 by mcdonaldtaf in Business, Finance, Liverpool FC
Tags: , , ,

One of this site’s readers made a comment about how NESV (now FSG) have raised ticket prices tremendously at Fenway Park following their investments into the Red Sox’ infrastructure and team. I must confess it is an area that concerns me in regards to Liverpool Football Club. So I decided to take a look at what the situation was before and since NESV’s takeover. But before I continue let me provide two caveats:

1. I know very little of Major League Baseball (MLB). During my research I became aware of a fans’ index, run by a website, which provides financial data on the average costs of going to a game. In short they take the total cost of a family’s tickets, beverages and other costs for a single game every year. It is this ‘fan costs index’ I have used for my research and it is used in good faith.

2. I am not saying that what has happened in America will or will not happen at Liverpool FC. I am simply studying NESV’s methods stateside which may (or may not) provide an indicator as to how they operate in this sensitive area of the business.

Background

The United States of America, much like the UK, has benefited from steady economic growth over the past twenty years (source: inflationdata.com).  Average inflation has been recorded at 2.6% since 1991 and deflation was only recorded in one of those years (2009) at -0.34%, for which we are aware of the reasons (or should be).

On inflationary figures alone you would reasonably expect the cost of going to a baseball game to have risen since the 1991 cost of $86.02 to a, still reasonable, $137.82. But when it comes to sport we should know better. As I wrote about in my Custodian Theory paper, sports ventures benefit from (and take advantage of?) an emotive connection which allows them to take liberties (other organisations would never dare). While charging more for the privilege. In fact the average cost of going to a baseball game is $57.16 higher than it should be (in relation to inflation) at $194.98.

MLB appears to have benefited from the same surge in growth as Premier League football in the UK, and football in general throughout Europe. With both sports pushing up the costs associated with support in a bid to afford those mega contracts and drive the value of the underlying assets.

Overview of the Boston Red Sox

In 1991 you would have paid more than the average costs of going to an MLB game to see the Red Sox. In fact you would have had to part with an additional $9.80. Not too unreasonable at all, I assume. In the early days there was actually a trend towards this gap closing and in 1994 the difference between the average game and a Red Sox game had reduced to $6.75.

So if the Red Sox games were (historically) only c.$10 more than the average game, how far is the gap now? Let’s take $194.98 for the average, double the $10 (just to be on the safe side) and we should be expecting to pay no more than (say) $214.98, shouldn’t we? Try again and once you’ve added an additional $50, and then $100 – you’ll still be some way from the actual cost of $334.78. Yes, what was a 7.1% difference in 1994 is now a staggering difference of 71.7%; representing a tenfold increase!

Cost of Attending MLB Game ($)

The John Henry Effect?

John Henry as principal owner and the rest of NESV acquired the Boston Red Sox in 2002. What they have achieved since taking over is detailed in plenty of places. It is fair to say they have overseen a radical improvement of the club’s performance, both on and off the field (or is it ballpark?)

However, the question is how they have funded their growth and driven revenues. One look at the chart above would initially appear to tell a story in itself. But there is an anomoly. The biggest increase came the year before the takeover with the cost of attending a Red Sox game increasing by a staggering 26.95% (compared to a 10.3% average – which in itself was presumably driven by the Red Sox increase). Representing the largest % increase in the twenty years analysed. The next largest increases recorded were in 1998 (12.68%), 1999 (10.86%) and 1993 (10.27%) – all pre NESV’s involvement.

TOP 5 INCREASES (%)

2001 – 26.95%

1998 – 12.68%

1999 – 10.86%

1993 – 10.27%

1998 – 9.83%

1995 – 9.75%

As you can see John Henry’s Red Sox doesn’t make a single entry into the top 5 increases. The highest % increase recorded under NESV’s ownership is 9.03% in 2007.

But % increases don’t tell the whole story, given they are bound to decrease as values have increased over the years. Especially after the 2001 price hike. If we look at price increases in monetary terms we get a different picture.

TOP 5 INCREASES ($)

2001 – $45.50

2007 – $25.99

2003 – $19.71

1998 – $16.26

1999 – $15.69

As we can see NESV have overseen two of the three largest increases in the past twenty years.

Of course it is still the anomaly that sticks out. This was either a bid to increase the value of the club before being placed on the market, or (if you’re feeling a bit more cynical) an agreed strategy to take the heat of the price increase away from any new owners.

One thing is clear though. The disparity between the average cost of going to a game and seeing a Red Sox game has continued to grow under NESV’s stewardship and no effort appears to have been applied to reduce this gap.

Corporate Social Responsibility

I have long argued that sports ventures, because of their unique customer base, often appear to ignore their corporate social responsibilities. Despite the fact that sports ventures by their nature are social and community driven animals. So as we steer our way through these times of austerity it seems fair and reasonable for all businesses (including sporting ventures) to do what they can to reduce any hardship. In reality though, for any business, it is the economical factors which will determine the prices they can and will charge.

But surely we should expect more from sporting ventures, given how we’re a ‘team – all in this together’? That’s the mentality, isn’t it? Well in America following the deflation of 2009 (at -0.34%) MLB average prices fell -0.97% in the following year (maybe there is some morality in there after all). Meanwhile though the price of attending a Red Sox game still increased by 2.6%. This perhaps offers some insight into NESV’s culture. Who could be accused of being low on sentiment, empathy or sensitivity.

The Differences

I have written this piece without any real knowledge of Boston or how wealthy a city it is, in comparison to others. The comment made on an earlier post did suggest that it benefited from a wealthy financial sector. If that is true then perhaps the trend we see for the Red Sox would be similar to the increasing ticket price disparity we have seen at the likes of Chelsea or Arsenal. In which case I am sure that NESV would be more than aware of the differences between the North West and London.

NESV also arrived at a club with a fan base prepared and in the course of battle. There are different sensitivities surrounding Anfield compared to Fenway, I suspect. Again, I’m sure that John Henry and co. are very well tuned into these sensitivities.

Summary

There is nothing that can be proven from any of the information above. But what I would currently surmise would be as follows:

– FSG will have or be working on a strategy to increase revenues, including how they can maxmise ticket sales both in volume (new/amended stadium) and value.

– Expect ticket price increases at least in line with the average of what the market is currently applying

– If the club delivers success on the pitch and demand for tickets increases on a sustainable basis expect significant price increase of up to 10% per annum

– Don’t expect a reaction to wider economical factors affecting fans’ disposable income, unless of course it in turn affects demand for tickets or is delivered in a ‘PR bubble’.

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Comments
  1. Sam Wanjere says:

    I won’t much pretend to understand the math featured here, nor the matter of finances, but it doesn’t mean I shouldn’t appreciate the same.

    While watching the Arsenal-Barcelona game, it struck me that Arsenal is the world’s richest club in terms of match day revenues. That, like much of this piece, doesn’t tell a complete story. AFC is a club that has a fully paid for stadium and virtually no debt, but also features some of the highest ticket prices in English soccer.

    For a club like ours to compete with the likes of Arsenal, money does have to come from someplace. We’re currently ranked seventh richest by Deloitte & Touche in the club revenues list, but for this to continue I don’t see such costs as ticket prices coming down.

    While unsure about how NESV will set about increasing LFC’s profitability, there are ideas they can borrow from the USA. One is cultivating close relationships with corporates, whose money to the club can be ploughed inwards towards subsidizing ticket prices. The other is to plough back monies received into both the team and towards reducing the cost of ticketing.

    I qualify my opinion by admitting to ignorance about how actual finances work, but it’s a start.

    La Liga is a league heavily subsidized by the Spanish government, with clubs also having virtual guarantee of funds from financial institutions. While this might make the clubs survive bankruptcy in a way UK clubs can’t, it makes them weaker in organization (with finances playing a massive part in strengthening any club).

    The English model relies more on self-reliance and thinking outside the box. Germany’s Bundesliga provides areas where subsidies can be borrowed from and adapted for England. These are ideas that can help keep the costs to a fan reasonable.

    However, there is still one inevitability. A rise in ticket prices and general cost of merchandise. I do not see any instance that would make tickets become cheaper, and even if done in the short-term, might not be sustainable in the future. I still see the Kop Nation being forced to dig deeper to watch our beloved team. Something else, it’s a Hobson’s choice where the fan is damned whether Anfield is retained and redeveloped, or if it is demolished and a bigger stadium built.

    Arsenal’s ticket prices at Highbury must have been going up even before the move to the Emirates. Either way, as economics teaches us, money to run the club and keep the club competitive must come from someplace.

    It’s a wonderful piece of research and yet more quality from this site.

  2. Ed Margerum says:

    Premier League economics can’t be compared Major League Baseball economics because in the EPL teams get to keep everything they earn after taxes. MLB has revenue sharing. The wealthier teams share tens of millions of dollars with the poorer teams. Thus teams with high revenues perversely have to increase ticket prices more than would be expected in terms of inflation. It’s the rich, the poor and Robin Hood. The popularity of LFC in Asia will bring in substantial income from sales of club merchandise. In baseball, out-of-market income largely goes into the league coffers, not that of the team.

  3. Ben Stoneman says:

    Taf,

    I’ve got the day off today and finally have the time to read your website (and spend a bit of time on TTT finally). I’m very impressed and I have enjoyed each of the articles I read so far. I’ll be checking back on here often!

    There are a couple other details I wish to add to hopefully better shed light on the price increases that have occurred in Boston, and how they might translate to LFC.

    One principal similarity that the Red Sox and LFC share involve the very old and very nostalgic stadias in the two cities. Fenway Park has the smallest capacity in the sport – 37,402 versus 50,086 for their archrivals, the New York Yankees. Simple supply and demand dictates that ticket prices should be high in Boston due to such limited supply.

    Baseball is similar to football regarding wages. There is no salary/wage cap that clubs must adhere to. The Yankees’ payroll in 2010 was $206,333,389 (average salary per player: $8,253,336); the Red Sox were second in the sport at $162,747,333 (average per player: $5,611,977). I do not have exact figures, but I am confident that there is less correlation in baseball between success and wages than there is in football.

    Baseball uses revenue sharing, instead, as a way to level the playing field. The most successful clubs in revenue (often the best) must donate a portion of their proceeds to small-market and struggling clubs (often the worst). In fact, some clubs’ owners purposely field terrible teams knowing that their club will make a profit at the end of the year. John Henry thankfully does not do that, but he does suffer the consequences from fielding a competitive team.

    Herein lies one of the principal differences between the cities of Liverpool and Boston – and I do not mean to offend any Merseysiders by this statement – that explains much: the citizenry of Boston and the surrounding area are far wealthier. I will include a link below to compare metropolitan personal incomes per capita in the USA. To summarize, Boston is the third-richest area in the country with a population of at least 4 million (San Francisco and Washington DC, my hometown, are wealthier). Boston also has one of the largest fan bases throughout the country, and games sellout regardless of the opponent, time of the year, or other external factors. Even if the costs are significantly higher than the average baseball team, quite simply their fans are willing to pay the price to enjoy watching a game.

    To compare again to their main competitors, New York City has a far higher percentage of obscenely wealthy persons than Boston. The Capegmini Index calculates the number of High Net Worth individuals – $1m or more in assets – per 100,000; NY ranked first at 665 in 2009 while Boston had 102. The Yankees have a few seats that are incredibly expensive (season tickets cost more than the average American’s yearly salary). Boston instead has raised ticket prices throughout the stadium so everyone shares the burden, with the best seats still costing a great deal.

    http://www.census.gov/compendia/statab/2011/tables/11s0682.pdf

    I do not wish to draw conclusions on how this will translate to Liverpool, especially as you have stated your ideas above. I do agree with your general conclusion.

    Hope that helps Taf! Keep up the great work.

    Ben

  4. Bobby C says:

    Thanks for the follow up, as well as putting actual hard numbers to what is already common knowledge here in the states (that’s not sarcasm, though upon rereading this statement it somehow came off that way).

    FSG are smart business owners, they’re likely to be doing their homework and probably knows how much they can get away with charging. And while there aren’t much i disagree with Ben in the comment threat. Here’s a point I would like to pick on a bit:

    “To summarize, Boston is the third-richest area in the country with a population of at least 4 million (San Francisco and Washington DC, my hometown, are wealthier).”

    Here’s where context comes in. DC does not have a historical franchise in MLB, and the bay area has 2 teams- the Giants and the A’s. While the Giants have been pretty successful (winning the World Series just this year), it was franchised and moved from Brooklyn, NY in 1957. Thus I would argue that the Boston/New England area is about the second biggest market in the country.

    And I agree with the comment about NYC has highest wealthy millionaires per capita, but that’s why the Yankees have the biggest payroll. (It wasn’t always this way though, Steinbrenner spent his way to the top while revitalizing the team struggled to make money during an economically depressed 80’s NYC). And I would argue that while NYC has more wealth, Boston is a much more focused sports, and in particular, baseball town (similar to the way liverpool is a football town). Boston doesn’t have nearly the same level of cultural distraction for people to focus on, unlike NY. Moreover, New York also has the Mets, another MLB team that is much more identified with the working class and the suburbs of the City and Long Island. These are all advantages for the Red Sox to close the gap on payroll to that of the Yankees, and these are all reasons why the Red Sox have been able to raise ticket prices for ALL seats. They still have a long line for their season tickets. But I digress.

    Back to Liverpool:

    Some of the differences in match-day revenues between the London teams like Chelsea and Liverpool can be accounted for by the lack of corporate boxes in Anfield. I would be surprised if this is not included in the rebuilding process.

    As Ed mentioned in the post, merchandizing ends up in the clubs pockets. But reading over financial analysis on football by journalists such as David Conn and Kieron O Connor, I’m not convinced that they’ll necessarily do much since their profit margins are lower than one would expect— keep in mind that as far as I know, LFC does not own the factories that makes the shirts, scarfs and coffee cups. LFC have others make it for them and we can’t expect the profit margins to be on par with that of a clothing company. I do expect them to be more aggressive in the Asian market in terms of corporate sponsorships though.

  5. mcdonaldtaf says:

    Guys, thanks for the comments. I think I learn more from them than my research. Keep ’em coming.

  6. agaten says:

    You have also failed to mention that since their takeover of Boston, they have finally won the world series on a couple of occasions after 80 odd years of failure (remember it’s difficult for us to win a trophy and we have 4 chances a year, they only get 1 shot a year at being winning silverware). Success often comes at a price – after all you are then not just watching the Red Sox; you are watching the World Champions (alright i know its only the Americans view of the world but still…), lets face it if we win the League a ‘small’ price rise wouldn’t really be complained about by most due to the feel good factor.

    Finally to answer your question, “who will pick up the tab” – of course it will be the fans after all it is the only way a sports club makes money.

  7. Ed Margerum says:

    With regard profit sharing in baseball: Teams get all the money earned at their ballpark. There is no sharing for money earned at the home field. Most other sources of income are shared with the other teams. Thus the price of everything at Fenway becomes elevated because that is the only money the team is sure of keeping. EPL teams keep everything they earn even under the fairness rules. I would not expect LFC to raise ticket prices to the extent that the Red Sox have if outside sources of income can be generated.

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