Chapter 1. Building a Business

Don't Try This at Home

Before reading about how to build successful sports business models, consider a couple of examples that, although they hardly hold up as sound models for business, are worth mentioning.

Long before we were intrigued by the NFL and MLB -and the antics of successful yet controversial team owners like the Oakland Raiders' Al Davis and the New York Yankees' George Steinbrenner - there were the Silna brothers.

Ozzie and Dan Silna, arguably among the shrewdest and most opportune owners in the history of big-time sports, purchased the Carolina Cougars of the American Basketball Association (ABA) for $1.5 million in 1973. When the brothers bought the team, which they ultimately held for only three years , they surmised the league had a shaky future and a merger with the National Basketball Association (NBA) was, if not imminent, at least likely.

Hoping to be one of the teams that would successfully merge into the NBA, the Silnas moved their team to the largest city they could find that lacked a major sports team -St. Louis. The Silnas invested big bucks in players like Moses Malone, Marvin Barnes, Maurice Lucas, and Fly Williams. However, the team only averaged about 3,800 fans per game in its final year, after, according to Ozzie Silna, a promise by the St. Louis Blues owner to secure 5,000 season ticket holders never came to fruition.

When the NBA Board of Governors met in 1976 to broker the ABA-NBA merger, they only wanted four of the six ABA teams -the Denver Nuggets, Indiana Pacers, New Jersey Nets, the San Antonio Spurs. The NBA agreed to buy out the remaining two franchises. The Kentucky Colonels owner John Y. Brown, accepted a $3 million settlement . The Silnas, on the other hand, accepted far less -$2.2 million. However, the brothers also had the NBA agree that they would receive 1/7 of the national television revenue from each of the four accepted teams, in perpetuity .

At the time, it wasn't necessarily easy money. The NBA Finals were worth so little during the early 1970s that they were shown on tape delay in the wee hours of the morning. The Silnas had no idea that their share would grow to be as valuable as it is today.

It turned out to be one of the most brilliant -if not serendipitous -moves in sports business history. Thanks to the explosion of television rights, and the fact that they have not yet been bought out despite numerous offers, the Silnas have collected approximately $100 million over the past 25 years.

The Silnas made an estimated $8 million throughout the 1980s and, as broadcast rights fees swelled, so too did their share. They received checks annually totaling approximately $4.6 million from 1990 through 1994. The checks increased to $5.6 million per year until 1998. And the Silnas' portion of the NBA's recently expired four-year, $2.64 billion contract with NBC and Turner netted them $13.5 million annually. ^[1]

^[1] Rovell, Darren, "Spirit of ABA Deal Lives on for Silna Brothers," ESPN.com, January 22, 2002.

Thanks to the NBA's current six-year, $4.6 billion TV deal with ABC/ESPN and AOL Time Warner's Turner Network, which runs through the 2007-2008 season, the Silnas could receive more than $20 million a year from the four teams combined. Although the affected teams have spent more than $250,000 trying to find a way out of the deal, the brothers have no inclination to accept an offer.

Just because the Silnas weren't aware of the future impact of TV on the NBA, that doesn't discredit their business decision. Plenty of high- powered executive decision makers have found themselves in similar positions . Successful executives don't allow themselves to easily take these types of risks frequently, but when they are presented with an opportunity, they possess the vision necessary to accurately gauge the risks and potential returns.

If that example doesn't leave you shaking your head about the sports industry's decision-making ability, try this one.

In 1995, the city of San Diego, to ensure that the NFL's Chargers would remain in the city, agreed to an amazing deal that would eventually include $78 million in stadium renovations (at then-named Jack Murphy Stadium, now known as Qualcomm Stadium). Along with the 14,000 additional seats, new scoreboards, and additional luxury boxes, the city council agreed to guarantee that from 1997 through 2006, if the Chargers didn't sell a minimum of 60,000 tickets per game, it would cover any shortfall.

If attendance were healthy , the city would stand to make a nice profit off the team because of the sharing of parking and concession revenue, as well as proceeds from ticket taxes. However, if the attendance figures lagged , the city would be paying the Chargers more in compensation for unsold tickets than the team would pay in rent.

The Chargers' annual rent to the city, not including what the team generates from the ticket guarantee, is approximately $5.7 million. Under the guarantee, the Chargers have paid an average rent of $1.5 million when enjoying strong attendance. In the team's lean years, the city has actually paid the Chargers through the purchase of unsold tickets for using the stadium.

From 1992 to 1996, the Chargers were a competitive team, never posting a losing record. From the 1997 through the 2001 season, however, the Chargers won fewer than one in three of their games (23-57 for a .288 winning percentage). Not surprisingly, the city reportedly paid the Chargers $882,463 for 21,129 tickets for a game against the Chicago Bears in 1998. In the 2000 and 2001 seasons alone, the city paid for $14 million in tickets.

For the 2002-2003 season, ticket prices to Chargers games - whose six-year playoff drought was the second-longest in the league -increased $5 to $10. The taxpayers of San Diego remain understandably squeamish. Even though they had new coach Marty Schottenheimer at the helm and league newcomer Drew Brees calling the plays in 2002, enough damage was done from years of losing that the city had to buy over 30,000 tickets at a cost of $1.6 million for a preseason game against the Arizona Cardinals.

For the Chargers, however, the ticket guarantee is not unlike the tax breaks major corporations seek from cities in return for their commitment to the community and the scores of local residents they will employ . The guarantee also allowed the Chargers to use their local leverage to gain an important economic advantage.