Friday, June 11, 2010

Early Indications June 2010: World Cup special on sports brand equity

It's a familiar business school discussion.  "Let's talk about
powerful brands," begins the professor.  "Who comes to mind?"  Usual
suspects emerge: Coke, Visa, Kleenex. "OK," asks the prof, "what brand
is so influential that people tattoo it on their arms?"  The answer is
of course Harley-Davidson.

There is of course another category of what we might call "tattoo
brands," however: sports teams.  Measuring sporting allegiance as a
form of brand equity is both difficult and worth thinking about.

For a brief definition up front, Wikipedia's well-footnoted statement will do:

"Brand equity refers to the marketing effects or outcomes that accrue
to a product with its brand name compared with those that would accrue
if the same product did not have the brand name."

That is, people think more highly of one product than another because
of such factors as word of mouth, customer satisfaction, image
creation and management, track record, and a range of tangible and
intangible benefits of using or associating with the product.

The discussion is timely on two fronts.  First, the sporting world's
eyes are on the World Cup, and several European soccer clubs are
widely reckoned as power brands on the global level.  Domestically,
the pending shifts in college athletic conferences have everything to
do with brand equity: the University of Texas, a key prize, is one of
a handful of programs that make money, in part because of intense fan
devotion (one estimate puts football revenues alone at $88 million).

Our focus today will be limited to professional sports franchises, but
many of the arguments can be abstracted, in qualitative terms, to
collegiate athletics as well.  If we consider the revenue streams of a
professional sports franchise, three top the list:

-television revenues
-ticket sales and in-stadium advertising
-licensing for shirts, caps, and other memorabilia.

Of these, ticket sales are relatively finite: a team with a powerful
brand will presumably have more fans than can logistically or
financially attend games.  Prices can and do rise, but for a quality
franchise, the point is to build a fan network beyond the arena.
Television is traditionally the prime way to do this.  National and
now global TV contracts turn viewership into advertising revenue for
partners up and down the value chain from the leagues and clubs
themselves.  That Manchester United and the New York Yankees can have
fan bases in China, Japan, or Brazil testifies to the power of
television and, increasingly, various facets of the Internet in

Sports fandom exhibits peculiar economic characteristics.  Compared
to, say, house- or car-buying, fans do not research various
alternatives before making a presumably "rational" consumption
decision: team allegiance is not a "considered purchase."  If you are
a Boston Red Sox fan, your enthusiasm may or may not be relevant to
mine: network effects and peer pressure can come into play (as at a
sports bar), but are less pronounced than in telecom, for example. If
I am a Cleveland Cavaliers fan, I am probably not a New York Knicks
fan: a choice in one league generally precludes other teams in season.
 Geography matters, but not decisively: one can comfortably cheer for
San Antonio in basketball, Green Bay in football, and St. Louis in
baseball.   At the same time, choice is not completely independent of
place, particularly for ticket-buying (as compared to hat-buying).

Finally, switching costs are generally psychic and only mildly
economic (as in having to purchase additional cable TV tiers to see an
out-of-region team, for example).  Those psychic costs are not to be
underestimated: just because someone lives in London with access to
several soccer clubs, allegiances are not determined by the low-price
or high-quality provider on an annual basis.  Allegiance also does not
typically switch for reasons of performance: someone in Akron who has
cheered, in vain, for the Cleveland Browns is not likely to switch to
Pittsburgh even though the Steelers have a far superior championship

Given the vast reach of today's various communications channels, it
would seem that successful sports brands could have a global brand
equity that exceeds the club's ability to monetize those feelings.  I
took five of the franchises ranked highest on the Forbes 2010 list of most valuable sports brands and calculated the ratio of the estimated brand equity to the club's revenues.  If the club were able to capture more fan allegiance than it could realize in cash inflows, that ratio should be greater than one. Given the approximations I used, that is not the case.

For a benchmark, I also consulted Interbrand's list of the top global
commercial brands and their value to see how often a company's image
was worth more than its annual sales.  I chose six companies from a
variety of consumer-facing sectors (so long IBM, SAP,  and Cisco), and
the company had to be roughly the same as the brand (the Gillette
brand is not the parent company of P&G).

Three points should be made before discussing the results.  First, any
calculation of brand equity is a rough estimate: no auditable figures
or scientific calculations can generate these lists (see here). Second, Forbes and Interbrand used
different methodologies.  We will see the consequences of these
differences shortly.  Finally, corporate revenues often accrued from
more brands than just the flagship: people buy Minute Maid apart from
the Coca Cola brand, but the juice revenues are counted in the
corporate ratio.  All told, this is NOT a scientific exercise but
rather a surprising thought-starter.

The stunning 8:1 ratio of brand equity to revenues at Louis Vuitton is
in part a consequence of Interbrand's methodology, which overweights
luxury items.  Even so, six conclusions and suggestions for further
investigation emerge:

1) The two scales do not align.  The New York Yankees, the most
valuable sports brand in the world, is worth 1/24 that of Amazon.  One
or both of those numbers is funny.

2) Innovation runs counter to brand power.  New Coke remains a
textbook failure, while Apple's brand is only worth about a third of
its revenue.  Harley-Davidson draws its cachet from its retrograde
features and styling, the antithesis of innovativeness.

3) Geography is not destiny for sports teams.  Apart from New York and
Madrid, Dallas, Manchester, and Boston (not included here but with two
teams in Forbes' top ten) are not global megaplexes or media centers;
London, Rome, and Los Angeles are all absent.

4) Soccer is the world's game, as measured by brand: five of the ten
most valuable names belong to European football teams.  The NFL has
two entries and Major League Baseball three to round out the top ten
list.  Despite the presence of more international stars than American
football, and their being from a wider range of countries than MLB's
feeders, basketball and hockey are absent from the Forbes top ten.

5) Assuming for the sake of argument that the Interbrand list is
overvalued and therefore that the Forbes list is more accurate, the
sports teams' relatively close ratio of brand equity to revenues would
suggest that teams are monetizing a large fraction of fan feeling.

6) Alternatively, if the Forbes list is undervalued, sports teams have
done an effective job of creating fan awareness and passion well
beyond the reach of the home stadium.  Going back to our original
assumption, if tattoos are a proxy for brand equity, this is more
likely the case.  The question then becomes, what happens next?

As more of the world comes on line, as media becomes more
participatory, and as the sums involved for salaries, transfer fees,
and broadcast rights at some point hit limits (as may be happening in
the NBA), the pie will continue to be reallocated.  The intersection
of fandom and economics, as we have seen, is anything but rational, so
expect some surprises in this most emotionally charged of markets.