For this particular season, we also asked clubs for the first time to not just give us those three-year projections, but also a stress test rather than just giving us a one-shot, ’09 projection. We control in our office a significant portion of their next revenues from national TV contracts. But just based on their revenues from ticket sales, their local TV contracts, and their sponsorships, we asked them to tell us what would happen if they dropped 10 percent, and tell us again what would happen if they dropped 20 percent.
A lot of clubs in December and November said they didn’t think that they’d feel the impact of the economic crisis. We gave it some follow-up and the clubs are in fact starting to see some real resistance of people stepping up and writing that check.
You kind of forced them to give you these numbers. What kind of pushback did you get, and why did you think that there might be a discrepancy between what you thought was going to happen and what the clubs thought?
We have quarterly owners meetings. And usually in the November meeting and again in the January meeting I will present to the owners the compilations of the teams’ forecasts. In the final results they submitted in December, the 30 clubs told us that they thought that together that although they would be down maybe 5 percent in attendance, revenue would actually be up as much as 3 to 5 percent up for 2009.
Some of what they said was fine, because some clubs have pretty substantial TV contracts, and those are usually long-term deals that are contractually obligated and produce fairly stable revenue streams.
But we looked at every single club’s base case, its 10-percent-down case, and its 20-percent-down case. And then we said at the meeting, about selected clubs: OK, this one’s lying; OK that one’s lying. There’s no way they could get these numbers. I presented our own projections to ownership. I thought at the time we would be down at least 5 percent revenue, and I think the indicators tell us that it’s going to be a tough summer for us.
As CFO, obviously the stress-testing and the increased financial reporting information is a new process for you. What have you learned through this process?
People look at my business and they think, gee, it must be pretty special. One of the things that you learn is that the business principles still apply. You know, there’s nothing unique about what we go through. Just to give you some perspective: 2005, 2006, and 2007 were three consecutive years of record attendance for us. And in 2008, we were just off about 1 or 2 percent off of 2007. And so you look at that trend —four straight years of almost record growth— and you think gee, this is recession-proof.
The laws of gravity work for everybody, though. If you can’t control your player costs, you’re going to lose money. Teams lost money in the 1930s and so I think we’re going to see that trend again.