The global economy is a mess. Each day thousands of jobs are lost. Central banks are cutting interest rates to record lows. The housing market in the U.S. is crumbling. Retailers are prodding shoppers to open their wallets.
Experts warn we're in for a tough ride for a long time.
Did we mention that the New York Yankees signed pitcher CC Sabathia to a seven-year contract worth $161-million (U.S.), and former Blue Jay A.J. Burnett for five years at $82.5-million, and Mark Teixeira for eight years at $180-million?
Is the economic crisis hitting the arena of sports? Or are the Yankees an anomaly.
Brad R. Humphreys joined us for a discussion on Thursday. Professor Humphreys is an associate professor in the Department of Economics at the University of Alberta. His vast research on the economic impact of professional sports, including the financing of the Olympic Games, has been published in numerous journals, including Sports Illustrated, The Wall Street Journal and USA Today.
Prof. Humphreys believes we shouldn't expect sports to be unaffected. We're seeing the impact in several areas, such as new facility construction for the Vancouver Olympics.
There are other examples. Wayne Gretzky has confirmed that the NHL Phoenix Coyotes are in trouble. FedEx is sitting out the Super Bowl this year as an advertiser. General Motors has ended its marketing contract with Tiger Woods. The LPGA has cut three events from its 2009 schedule. Honda has pulled out of Formula I racing.
Thanks to all those who submitted questions.
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Jeff Labow, reportonbusiness.com: Thank you for joining us today Brad. We have a number of questions waiting so let's get right to them. Let me open by asking you this. Are you surprised at how quickly companies and associations have moved because of the economic climate?
Brad Humphreys: Not at all. Sports organizations are service industries. Their "output" is perishable, unlike some other businesses. Also, we tend to overlook that professional sports teams are profit-oriented businesses just like any other firm. They face the same pressures to turn a profit as the local doughnut shop. Sports organizations also have a lot of variable costs, mostly in their front office and scouting operations.
Jeff Labow, reportonbusiness.com: Most agree that if a recession takes deep root, the sports landscape will look different in five years. What are your thoughts?
Brad Humphreys: First, I am not sure that the recession will take "deep root." The average post-Second World War recession has been less than two years in duration peak to trough. We'll have to see how long this one lasts. Sports were not particularly harmed by the business cycle turmoil of the 1970's and early 1980's. The advent of free agency had a much bigger impact on sports than any of those recessions, some of which were quite deep. The big difference between now and then is the importance of television revenues to sports. In the 1970s and early 1980s, pro sports revenues were largely based on gate revenue. Now, pro sports revenues are much more dependent on media revenue.
Jeff Labow, reportonbusiness.com: You have done quite a bit of research on the Olympic Games. Vancouver is already encountering significant problems with funding the event's facilities. What are your thoughts about what the Vancouver Olympic Committee has already had to deal with? How do you see the situation developing?
Brad Humphreys: The economic impact of hosting the Olympic Games is always overstated by the organizers. There is little evidence that hosting the games has any positive tangible economic impact, except to the extent that new infrastructure (roads and transport, not venues) is put in place. On the cost side, venue construction is always the biggest cost of hosting the games, and the International Olympic Committee does nothing to defray the costs. Also, there are always significant cost overruns in Olympic venue construction. Since venue construction is a big-ticket item that has to be financed through borrowing, the credit market crisis has had a big impact on Vancouver. Fortunately for the games, and unfortunately for the taxpayers, Olympic venue construction can always be government financed.
