Research

Podcast: Subsidized stadiums — if you build it, they will come?

The sports industry operates by its own set of rules when it comes to achieving and measuring success. In Part Two of our discussion, Knowledge@W. P. Carey looks at the economic impact teams have on local economies. Ray Artigue, executive director of the W. P. Carey MBA Sports Business Program and former senior vice president of marketing for the NBA's Phoenix Suns, discusses publicly-funded stadiums and other aspects of the sports business. Joining him is Robert Stearns, professor of practice in the W. P. Carey School's finance department and chairman and chief executive officer of Quepasa Corporation.

2007-01-17

The sports industry operates by its own set of rules when it comes to reaching and measuring success. In Part Two of our discussion, Knowledge@W. P. Carey looks at the economic impact teams have on local economies.

Ray Artigue, executive director of the W. P. Carey MBA Sports Business Program and former senior vice president of marketing for the NBA's Phoenix Suns, discusses publicly-funded stadiums and other aspects of the sports business. Joining him is Robert Stearns, professor of practice in the W. P. Carey School's finance department and chairman and chief executive officer of Quepasa Corporation.

Transcript:

Knowledge: In the last edition of Knowledge at W. P. Carey, we looked at how the sports industry operates by its own set of rules when it comes to reaching and measuring success. In Part Two of our discussion, we look at the economic impact teams have on local economies. Taking part in the discussion is Robert Stearns, chairman and chief executive officer of Quepasa.com.

Stearns is also a professor of practice in the finance department of the W. P. Carey School of Business. Joining us is Ray Artigue, executive director of the W. P. Carey MBA Sports Business Program and professor of practice in the W. P. Carey School of Business. Before joining Arizona State University, he was senior vice president of marketing for the NBA's Phoenix Suns.

Now we've been talking about the economic impact to the teams, the economics for the team owners. But increasingly you're seeing many cities being asked to shell out this amount of money to help finance a stadium if they want to get an expansion team. Is it still economically worth it for cities to undertake these types of expenses?

Ray Artigue: Well, evidently it is, because they continue to do it, and the answer really lies in which market, which municipality, and to what extent are they subsidizing that team. Here in Phoenix, we're one of really just 10, 12 cities in America with the four major professional sports teams.

Each has their own facility, each has been subsidized to some extent or another by the city or the county, and so you have these city governments believing that having a team play in their backyard will be an economic engine in and of itself, driving other tax revenue, stimulating business.

We have not seen that yet in Glendale, where the NHL and NFL reside almost as next-door neighbors there on the same street, so time will tell. But it's unquestioned that formerly America West Arena and the Bank One Ballpark have been the drivers of this [Phoenix] downtown that now is blossoming, and in the next half a dozen years will be a downtown unlike we've ever known or imagined and much like the great downtowns in America.

Robert Stearns: I think I agree with Ray, but I'd have to have a very positive view of mankind and municipal governments in general to fully agree. Ray's comment of "evidently it is, because they keep doing it" assumes that there's a rational judgment being made by the various governments, and I'd like to believe it, but I'm just not totally convinced.

But the larger question for me, is even accepting Ray's premise that "evidently it is." My question is, why should that "evidently it is" be given a higher priority in the municipal government's or state government's hierarchy of business support than to other businesses?

And if you took the hundreds of millions of dollars that have been given to various teams to subsidize their stadiums, which are used once a week or at most twice a week in various municipalities, if you were to take those dollars and spread them around to subsidize, oh, you name it, pizza parlors, shoe businesses, manufacturing businesses, service businesses in the same geographic area, to say nothing of higher-tech businesses or hospitals, or for that matter even schools — query whether you would have the same economic impact over time and perhaps do even better good for the citizenry of the city or the town.

I don't know whether "evidently it is" is correct or not, but even if it is, I would ask the question, why are we subsidizing the NFL to the exclusion of subsidizing hospitals or schools or even for-profit businesses to try to stimulate economic growth and to make the cities and towns more hospitable for the citizenry?

Knowledge: Well, don't we have a test of that coming up here now with the Cardinals? They've left Tempe, so what is going to happen to Tempe? If Tempe just keeps chugging along, did it matter? Ray?

Artigue: Well, Tempe will certainly keep chugging along, because they have an entity called Arizona State University that is the core of all of that. The Cardinals played in Sun Devil Stadium seven, eight times a year, and while that brought a stimulus to the businesses downtown that will be missed on those particular Sundays, there's enough else going on there, and in fact it all existed before the Cardinals played in Tempe.

I think the better test will be to see what kind of development and infrastructure comes about in the 15-20 mile area around the stadiums in Glendale. The question is simmering right now relative to baseball and spring training as the city of Surprise and Glendale are vying for the latest Cactus League stadium.

Here we have two cities competing, again, maybe not rationally, but they are vying against one another to be the chosen one, to house this new Cactus League facility, which after all will only really be active for some five, six week period of time throughout the year, but they do it with the belief that it's going to be the stimulus for other things to come.

The other point I'd like to make is, because Rob brings up a good one, why the sports team owners and their franchises get these handout tax moneys and not mainstream business. I think the stadiums and the existence of the teams almost fall into the category of the police station, the fire station, the art museum, the library, and the other kinds of structures that cities are responsible for building.

I'm not suggesting that the city is literally responsible, but I think that when they sit down and talk about all the many things that they need to have to be a great city, to create the quality of life for their residents, they do view, correctly or incorrectly, right or wrong, they view sports and the entertainment value that it brings to a community as something that is important and that they need to invest in if they want to be a multifaceted city that has meaning and importance.

Stearns: I would agree with Ray on the overarching concept that he just raised, that it's good for cities and their citizenry to have athletic contests for a variety of reasons. Where I disagree respectfully is that when you build the firehouse or the library, the firemen and the librarians don't reap millions of dollars. They are municipal employees and are paid a wage.

Here, you're subsidizing, ostensibly, something that benefits the private sector tremendously to the exclusion of, in some cases, the people you're actually confiscating tax dollars from. Many of the people who pay the additional sales taxes are in fact priced out of being able to see the sports that they're actually subsidizing live.

So for me it's not an issue of whether I love sports or not, I clearly do; not whether I'd really rather have my city have a professional team or not, because I clearly would; but rather, is it fair? Is it the thing that governments should be doing and is it appropriately prioritized in the hierarchy of how our tax dollars should be spent?

That's my issue, and again, I look at it as a warping of whether the owners themselves have risk in earning a profit or not. In this case, where their largest facility, their plant, their stadium, which is equivalent to their factory, is subsidized by public dollars, the owners themselves have less risk in their economic equation, and as a result are guaranteed a more probable higher rate of return. And as a result, in more likelihood, are not necessarily induced to run a more efficient business.

Knowledge: Well, Ray brought up a point that I think was interesting, where you said that Tempe and its attractions existed before the Cardinals came to town. And that goes to the crux of the argument of economic development hinging on building a stadium. "Build a stadium, and the rest of downtown will rise up." As opposed to Tempe, it was already there and the Cardinals were just a component that added to that. That's still the big economic debate amongst cities. Any thoughts on who's right on that?

Artigue: Well, Tempe was already there, though if we're going to drill down, I think it's true that Mill Avenue and other outlying areas of attraction probably have been helped by 15 plus years of the NFL playing their home games there on Sunday, one Superbowl, back in 1996 and even a Monday night football game or two along the way.

But, again, Tempe and its downtown corridor are always going to be driven by the university. It's a college town and after all ASU has probably doubled in size in the same number of years that the Cardinals have been in town. Glendale and the pastures where these new NHL and NFL stadiums have been planted really are just in their embryonic stage. I think that's a better test or examination of what they will bring.

Downtown Phoenix is somewhere in between in that it, too, already existed but you never went there unless you were forced to work downtown and at 5:01 you left to go home in the suburbs.

We have seen documented growth in downtown Phoenix. It's really been quite impressive as 45 hockey games, when the Coyotes still played downtown, 45 Suns games, 82 Diamondbacks games, along with all of the concerts, ice shows and family shows; things that would not have been downtown had those venues not existed.

Stearns: Ray's point is correct but the question, particularly as it applies to Glendale is: They've made the decision that there should be a stadium and athletic complex there and that's evidently how they want to develop the economy in Glendale. They've asked the tax base to support that. Fine. I get it. How about making a different choice? How about making Glendale the greatest cancer treatment area in the country?

We will subsidize the building of the Mayo Clinic or another hospital, Sloan-Kettering West, for example. Allow a huge research community and medical community and all the housing and all the servicers and all the technicians and all the related services to that particular area of endeavor rather than the Cardinals.

Again, I'm not arguing that football is less important to the fiber of a citizenry than good medical care, or not. But I am saying, "Gee, that question should be asked." It shouldn't be thrown to the tax base by saying, "You see, here's the panacea for developing the pastures: we'll plant a stadium and have someone else pay for it."

You could make the same argument by saying let's put another airport out there, which the Glendale people would have largely voted against. Or we could have said let's build another hospital out there or, for that matter, build a campus out there and support the area that way. The choices that are being given to the tax base, and the electorate, are not multiple variable choices. It's always stadium: up or down. It's not being debated if there should be something else that we're going to to spend the tax dollars on. That's the thing that concerns me.

And to the NFL's credit they've managed to convince people, through good branding and good sports, for that matter, that it's OK for tax dollars to be spent to endorse both the team and the development of the community in that area. But I think you could make the same case that the NFL is making, marketed properly, for hospitals, airports, new factory areas. There's lots of ways to develop a region that currently has pastures.

Incidentally, the reciprocal is also true. There are stadiums in terrible parts of cities that continue to thrive as stadiums but do nothing to raise the economic growth of a particular area of the city. Yankee Stadium is a prime example, in a terrible area in the Bronx. Over the past 40 years has gotten progressively worse. You would think that that area would be completely redeveloped but totally has not. That, perhaps, is an outlier but I bet we could find others.

Artigue: Arco Arena might be another example, where the Sacramento Kings play, in a very outlying area that has not seen the development that was once promised. The difference is this, and Rob brings up an excellent question, why the investment of tax dollars in sport versus a world class medical research center or so many other things that might, MIGHT, create similar kinds of economic development in the area. I think the answer lies in the media attention that is created by having a sports team in your community.

ESPN or NBC will never be interested in broadcasting the arrival of patients to the medical facility and doing exposes on the treatments that they're receiving and then ushering them out as healthy patients. It just doesn't make for good TV. It's not what people would pay to watch in terms of a cable package.

I'm simply making the point that these politicians, rationally or irrationally, do understand that dateline Glendale, next year, when the Superbowl is in town, will attract about 180 million domestic viewers and a couple of billion viewers from around the globe. And though it's impossible to calculate exactly what that's going to do for Glendale, Arizona, that's attention and notoriety and importance that could not be achieved by any other means.

Stearns: And Ray is totally correct and it really brings us totally full circle back to the original question that you asked which is: is the economics of winning and losing being warped from the owners' perspective. And clearly from this discussion the answer should be yes. The fact is that Ray is right.

NBC or Disney or whoever will pay huge amounts of money to broadcast from the Superbowl in Glendale next year regardless of whether the Cardinals, the home team in that stadium, win or lose. To me that is the point proven, the economics are different in this particular industry, and that winning and losing become less and less important to the individual teams from an economic standpoint.

Knowledge: Any final thoughts Ray?

Artigue: Well I agree with Rob and as a former chief marketing officer of a NBA franchise, it's a curious business. Our product is such that we could never promise wins, so we didn't — unlike in the telecom industry where you're going to promise that you're going to deliver the best signal to the cell phone and that it has the best features, and you proudly proclaim that this product is the one to buy because it's the best.

In sport you straddle the fence a little bit. You talk about the hope of victory, you sort of hint at a promise of things to come but it's a great unknown. You're hoping that fan loyalties that have been there for years if not generations are going to be what causes people to come back again and again despite the cost of the tickets.

Knowledge: Any final thoughts Rob?

Stearns: Basically what you have in the leagues, regardless of whether it's the NBA, the NFL or Major League Baseball, is a portfolio of businesses. Leagues are simply portfolio managers. Yes, they would like all of the components of their portfolio to win or lose, but the leagues themselves are most interested in the overall returns of the portfolio. Since the owners are ostensibly the portfolio managers that is their objective also. They want the overall portfolio to do well.

That's the way that professional sports is run today. Yes, each team is run as effectively as they can, but it's the overall return on the league which is going to drive the success or failure of the economic proposition. That's why the media is so important, and that's why municipal support is so important in the financing of stadiums, because that drives the overall economic returns of the league.

As a result of that, it's not the individual team where winning or losing is the primary product anymore. It's a large bag of components which really drives the economics today. That's different than it was several decades ago, for sure. It continues to change and we will continue to see it change.

Economics Faculty Sports Business