Jul 16 Get the Facts
Last week a panel of experts convened by the King County Council presented their reports on our Arena proposal. While those reports were largely positive, I did want to take this opportunity to address the market analysis provided by the panel.
As I am sure everyone can appreciate, we would not be willing to risk investing over $600 million in private capital in the professional sports industry if we really thought that the Seattle sports market was already overly saturated. But even more important is the fact that from an economic standpoint, it is the investor group that bears the financial risk of the NBA and NHL not being successful in Seattle, not the City or the County.
Accordingly, we have done a considerable amount of market research on our own, which leads us to a far different conclusion than the analysis. Specifically, that analysis is SOLELY based on “potential attendance” relative to population, and thus by definition fails to take into account:
- Actual attendance of sports franchises
- Household income levels
- Average ticket prices
- Media revenues
- Corporate sales and sponsorship
- Competing sports franchises from the same league
- History of the NBA in Seattle
We believe that a market’s ability to support a professional sports franchise goes far beyond just an analysis of how many fans in a given market can attend a game. As described below, with media and sponsorship revenues now eclipsing the attendance revenues of most pro sports franchises, it is clearly important to look at a broader range of variables than just potential capacity if we want to get a true understanding of the Seattle market’s ability to have two more “financially viable” sports franchises.
Actual Attendance of Sports Franchises: The entire basis of the market saturation analysis is the “potential” attendance of Seattle’s four professional sports franchises: the Seahawks, the Mariners, the Storm, and the Sounders. While it may be interesting to look at market saturation from this perspective, it should also be clear that this analysis fails to take into account the other key variables to a professional sports franchise’s profitability and viability.
In regards to attendance specifically, our research tells us that it is not the percentage of capacity that is relevant, but rather the average attendance relative to some sort of relevant metric, like league average attendance. With the exception of professional football, very few professional sports franchises consistently (over a multi-year period) sell out 100% of their capacity. As such, selling out every game is almost never an expectation built into a professional sports franchise’s business model, and thus not the key determinant of their financial success.
Thus, to base a market saturation on potential capacity when a league’s average attendance is significantly lower than capacity does not make a lot of sense to us. While we mean no disrespect to the Mariners, Storm, or Sounders, all of them are currently attracting far less than their current stadium/arena’s capacity. We would also just point out that our business model calls for only league average attendance for an NBA franchise.
This analysis is also based on the fallacy that a stadium’s capacity is somehow a relevant measure of attendance success or saturation. The obvious example here would be the Sounders, who play in a NFL stadium. By that definition Seattle is more “soccer saturated” than almost any other MLS team simply because it plays in a large football stadium, and would become less soccer saturated if they moved into a soccer only stadium with a capacity of just 38,000 – even if their average attendance was the same.
As such, we believe any accurate analysis of market saturation should be based on relevant attendance figures, not potential attendance.
Household Income Levels: The analysis also fails to take into account household income levels. Household income levels play an important role in the following key monetary aspects of the professional sports business: ticket prices, premium seating/suites, media rights, sponsorship, and concession/merchandise. These factors are obviously critical to a team’s financial success, and any analysis of a franchise’s market prospects that fails to take into account household income levels is thus incomplete.
As shown in the table above, Seattle would rank as the 6th most affluent of the top 20 sports markets in the US, and compare very favorably to other markets of similar size.
Average Ticket Prices: A team’s admission revenue is a product of both attendance and ticket prices. As discussed above, average ticket prices are highly dependent on the average household income of a city. For this reason, the obvious point is that the higher a city’s household income level, the greater its capacity to support professional sports as its inhabitants will be able to sustain higher ticket prices than market with relatively low household income levels.
Thus, any market saturation analysis that fails to take into account the average ticket prices relative to the household income levels of the market is likely to lead to dubious conclusions.
The simple counterpoint here would be that any professional sports franchise could sell out nearly any game it wanted to by simply pricing its tickets at $1.
Media Revenues: By far the most important variable the analysis fails to take into account is the importance of media revenues. Professional sports television rights fees have skyrocketed over the last five years, and now exceed admissions revenues for many professional sports teams. However, for leagues like the NBA, NHL and MLB, where the individual franchises control their local television rights, media rights fees will vary considerably by several factors – the most important of which is market size.
While we will refrain from commenting about other professional sports in Seattle, we would note that Seattle compares very favorably with most of the NBA’s smaller to mid-sized markets and would thus be likely to command a significantly higher local television rights fee. While we are in no way suggesting that Seattle compares favorably to large markets like New York, Chicago, or Los Angeles, given its size (12th largest Neilson TV Market) and affluence (6th highest household income), we believe it would rank well above the league average.
The obvious point here is that if we were to limit our analysis to just “potential attendance” we would likely reach the conclusion that the best place to put an NBA franchise would be a number of second-tier markets without any pro-sports competition. Accordingly, the obvious failure of this type of analysis is that the difference in the local television rights fees alone would almost certainly single handedly offset any attendance benefit from a lack of sports competition.
In this regard, we would also point out that as the national television rights fees for the NBA, MLB, NHL, and NFL are shared pro-rata, their continued rapid growth is also substantively changing the business mix of their teams.
For this reason, it should be clear that any market saturation analysis that fails to take into account media rights fees will be incomplete and lead to erroneous conclusions. There are plenty of media properties (sitcoms, broadcast news, reality shows) that sustain themselves just fine without any attendance revenues and the failure of a market analysis to acknowledge that pro sports are as much a media business as they are a spectator/attendance driven business will significantly misjudge the financial viability of a pro sports franchise.
Corporate Sales and Sponsorships: Just as with media revenues, we believe that any market analysis that fails to take into account the strength of the local corporate base and potential corporate sponsorship and premium seating revenues is incomplete. Local corporations play an important role in purchasing tickets, suite and club seat purchases, building sponsorship, game day sponsorship, and other revenue generating promotional activities.
While Seattle would rank 14th in terms of the number of companies with over 1,000 employees (84), given the size, strength, and diversification of its employment base, we believe Seattle is a much better corporate sponsorship market than those numbers would imply. In this regard, in 2012 Seattle ranked 2nd of the top 20 sports markets in a recent economic strength analysis done by market research firm Policom.
However, we would also just like to mention that the corporate sales and sponsorship opportunity extends far beyond regional employers. In addition to stadium naming rights, national corporations typically compete for other building sponsorship opportunities, team sponsorships, and things like exclusive beverage pouring rights.
Competing Sports Franchises From the Same League: Another less obvious factor the analysis failed to take into account is that it is not just the size of the market that matters in terms of market saturation, but also the number of teams in the same league operating in the market.
As shown in the table above, if we look at it strictly by the numbers, we would conclude that the two biggest markets, New York and Los Angeles, would clearly be a better market to put a new professional sports team than Seattle. What this analysis fails to take into account, however, is that New York and Los Angeles each already have two basketball teams and two baseball teams.
Given that sports allegiances run long and deep, the sports fan base is not simply divided on a pro-rata basis. One would only need to look at the relative financial success of the Knicks compared to the Nets, or the Lakers compared to the Clippers, as evidence enough. Thus, while we would readily acknowledge that adding a NFL team to the Los Angeles market is probably the most obvious new market opportunity in professional sports, I think few people would argue that adding a third NBA team to either market would be a great opportunity.
Given this reality, we believe that Seattle is clearly the best U.S. market to put an NBA team and one of the best to put an NHL team. By the numbers, Seattle would rank as the largest city in the U.S. without an NBA team, and the second largest MSA after Riverside/San Bernardino. From an NHL perspective, Seattle would rank as the 3rd largest city and fourth largest MSA without an NHL team.
History of NBA in Seattle: The last point that we believe was not taken into account in the analysis was acknowledgement of the Sonics relative performance during their 40-year history in Seattle. While the Sonics certainly had their ups and downs, as is the case with most professional sports teams, this was largely correlated with their on the court performance, not a lack fans or market saturation. In fact, during their 40-year tenure, the Sonics on average drew better attendance than the NBA league average.
After considering all of the factors above, we think it is abundantly clear the market analysis does not give an accurate portrayal of Seattle’s ability to support additional sports franchises as it was focused solely on “potential attendance” and didn’t take into account all of the other revenue streams that are imperative to a professional sports franchise’s financial success.
After taking all of the above factors into account (and in particular the recent rise in media rights fees), we believe it is clear that the Seattle market can support additional NBA and NHL franchises and we stand by our assertion that Seattle is the most attractive new market for the NBA and amongst the most attractive new markets for the NHL.
But the most important consideration remains that we have not asked the general public to underwrite our analysis and conclusions. We are planning to invest over $600 million in private capital in the Arena and NBA franchises and have completely assumed (and insulated the City and County against) the financial risks that the NBA and NHL franchises do not perform as we expect..
— Chris Hansen