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Monday, October 27, 2008

If You Build It, Will They Pay?

Luxury stadiums are on the rise. A top seat can cost $150,000. Beer costs extra.

Rich Pilling / MLB-Getty Images
Seats at the new Yankee Stadium in the Bronx

Two diligent, if hapless, would-be sports entrepreneurs couldn't resist the pecuniary opportunity at hand. It was April 18, 1923—opening day of the new Yankee Stadium. A $2.5 million marvel (the equal of $30 million now) built on a 10-acre parcel in the Bronx, it was reputedly the first ballpark to be heralded a "stadium." No other sports venue rivaled the size of the "House That Ruth Built," as the place was soon known. And it was worth every cent of Babe Ruth's annual $52,000 salary. Swinging mightily on that chilly inaugural day before a festive crowd of 74,200, Ruth hit a home run to bring the Yankees a 4-1 victory over the archrival Boston Red Sox. But the luckless entrepreneurs missed out on the electrifying action: one had tried to sell his ticket for $1.25, 15 cents more than the official $1.10 admission. The other guy was holding out for $1.50. Police arrested both for scalping.

Next April 16, history's most storied franchise and most lavishly compensated players (2008 payroll: $209 million) will begin playing in a 21st-century, state-of-the-art Yankee Stadium that is, at $1.3 billion, one of the world's costliest sports venues. When the gates open, fans may have a tough time distinguishing between bona fide scalpers and the Yankees' management. The pin-striped team is charging, for example, $2,500 per game for each of the stadium's choicest seats, up from $1,000 in this dismal final season in Ruth's now decrepit shack. But the Yankees are hardly alone in finding new ways to gouge fans; their premium seats are a bargain when compared with prices in Dallas just for the right to buy a season ticket: as much as $150,000. In the latest sign of hyperinflation in the sports business, a slew of ultraexpensive venues are rising, or have been built recently, across the country from Dallas to Washington to New York—where not only the Yankees, but also the Mets, Jets, Giants and New Jersey Nets will all be getting new digs (the New Jersey Devils got a new arena last year). The total price tag for the New York-area building boom alone: more than $5 billion.

Of course, with the nation's financial system teetering, all this construction couldn't be coming at a worse time. Many of the sports industry's most golden gooses, including financial-services giants and automakers—might have a tough time scrounging up thousands of dollars for a seat these days, and might have to slum it with the hard-pressed masses in the cheap seats (meaning under $100 each at Yankee Stadium). These new sports palaces were conceived in a more conspicuous era, and as such they're replete with luxury suites, upscale club seating, catered food and any number of high-tech distractions. Each stadium has an economically stratified seating scheme that will have fans scraping their pocket bottoms or, in a few cases, even mortgaging their homes (if anyone can get a loan these days).

Take, for example, the new Dallas Cowboys stadium, scheduled to open next year in suburban Arlington, Texas. Topped off with a retractable roof and featuring the world's largest high-definition scoreboard, spanning 60 yards, the $1.1 billion facility is an amalgam of steel from Luxembourg, glass from England and other pricey materials. To partially pay for it, owner Jerry Jones is employing a long-controversial financing tool of the sports business called the "personal seat license." For an upfront fee of up to $150,000 a seat, fans get an exclusive long-term license that allows them to buy season tickets each year—for thousands of dollars more. The license may be sold on the open market, if the owner is ever squeezed for cash or sours on the Cowboys. "I could have built this for a third less," Jones recently told reporters. "But this is what the Cowboys fans and the NFL deserve."

Once ensconced in their pricey seats, fans are captive to corporate sponsors, whose multimillion-dollar ad and promotional efforts in stadiums are essential elements of sports-franchise and league economics. These corporations and others are the primary occupants of the luxury suites (they'll go for up to $500,000 a year at the new home of the Cowboys) that take up an increasing percentage of stadium real estate these days.

Sports has a reputation for being recessionproof, but the nearly unprecedented economic travails of the past month may crush that chestnut. Leagues and team owners say they are cautiously monitoring the economy, but they insist that, so far, there is little evidence that fans are scaling back on their spending. Corporate sponsorships and luxury suites "for the most part are long-term arrangements … not one-year deals," says Thad Sheely, the New York Jets' top stadium-development and finance executive. "Economic cycles don't immediately impact our results." Indeed, even as fans bemoan that their favorite sports have become nothing more than moneyball (and in some cases even protest the trend, as Giants and Jets fans did recently), they continue lining up at the shiny new stadium gates and checking whether their names have ascended on the season-ticket waiting lists. "It's just more corporate greed," says Ronald Freeman, a Jets season-ticket holder from Orange, N.J.

Stadium development has come in waves, about every 30 years, beginning around the start of the second decade of the 20th century. Some 13 ballparks were built from 1909 to 1915, thanks to the advent of concrete construction, which was used to replace the rickety and unsafe wood-and-nail park, says Bill King, special projects editor with Street & Smith's SportsBusiness Journal. The 1990s saw a boom that ushered in the era of high-end stadiums. Often designed with a "retro" look of yesteryear's stadiums, they were crammed with suites and upscale seating, concierge services and in-seat food-ordering. Stadiums, King says, "were always a huge part of the business [of sports], the ticket sales and concessions."

As the sports economy has become more complex, the business of stadiums has come to rival sports television in financial significance. A new stadium can help keep a city from losing a team, and turbocharge the local fan base. Most critically, it can give a team a huge advantage in snaring top talent. All 32 NFL teams, from tiny Green Bay to the mighty Super Bowl champion New York Giants, share equally in national TV revenues. But their total incomes vary wildly based on attendance at the local ballpark, premium seating and corporate sponsorships, among other things. "You have teams that are grossing as much as $100 million more than other teams," says Pete Ward, senior executive vice president of the Indianapolis Colts, who opened a new stadium last month. That has implications beyond the owner's pocketbook. The league averages the gross revenues to calculate the salary cap, so the rising revenues of the rich teams drive up the cap, and the poorer teams have to play catch-up. "When you have such a wide range of revenues, the salary cap skews to the disadvantage of the low-revenue teams," Ward says.

Baseball's Minnesota Twins offer a stark before-and-after study of a stadium's financial impact on a franchise—and the greater demand a venue's economics can make on fans' budgets. Despite success on the field, the small-market team missed millions in potential revenues largely due to the shortcomings of its home field, the Hubert H. Humphrey Metrodome, the last multipurpose stadium for football and baseball. Fans seldom buy season tickets at the Metrodome, which is widely regarded as one of the worst venues for choice seats (the ballpark ranks near the bottom in baseball in that category). The Twins have captured virtually nothing from premium seating, while their co-tenant, the NFL's Vikings, has monopolized revenues from the 100 or so luxury suites. The local government has siphoned proceeds from parking, concessions and stadium ads. "And that's why we have been looking to control our own destiny, to control the revenue streams around our own games," says Dave St. Peter, the Twins' president.

It took 10 years, but in August 2007, the Twins broke ground on a 40,000-seat stadium in downtown Minneapolis. The team will pocket nearly all revenues, which include such sources as the naming rights (Target Field), premium seats and 55 to 60 luxury suites. Slated to open in 2010, Target Field will include 3,000 club seats averaging about $52 per game—on top of an upfront "membership fee" of $1,000 to $2,000. Most are already spoken for, says St. Peter, and the team has leased about 50 of the luxury boxes for up to 10 years for an unspecified sum.

Spectator sports ceased being about fun and games long ago. Now, in the age of the billion-dollar sports emporium, they're about financial life and death. Which probably explains why some teams have taken to scalping their fans.