The sports industry has been one of the most severely impacted by the ongoing coronavirus pandemic as stadiums have been forced to close and players have had to maintain social distancing. Over the last few months, we have seen a number of creative solutions in some sports leagues to restart play while maintaining new pandemic health requirements.
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In this interview, Jason Colodne, Managing Partner at Colbeck Capital Management, sat down with Andrew Kline to discuss the impacts of COVID-19 and the future of live sports.
Andrew Kline is a former offensive lineman for the St. Louis Rams. Following his retirement, Kline founded Park Lane, a boutique investment bank that specializes in providing M&A advice, corporate finance, and other services to leagues, franchises, sports businesses, and independent investors. Since its inception, the company has advised dozens of leading sports franchises, including the Cincinnati Reds, Los Angeles Dodgers, and Miami Heat. In addition, they have become recognized for their work on some of the top sports M&A (mergers and acquisitions) mandates and have played a fundamental role in the ability of many early-stage sports-based businesses to secure financing.
Kline’s background in business started when he attended San Diego State University and the Business Management and Entrepreneurship Program at Stanford Graduate School of Business. He holds his FINRA Series 7 and 63 Registrations. Kline is the founder of the Australian Surf Academy (sold to Surf Diva in 2004) and The Athletes Agency (sold 49% in 2005). In 2013, he was named to the M&A Advisor’s 40 Under 40 list. Today, he is a member of the Stanford Executive Circle, Young Presidents Organization (YPO), the Association of Corporate Growth, the NFLPA, and the NFL Retired Players Association. Additionally, he serves on the Board of Directors of the Navy SEAL Family Foundation.
Colodne: Before we delve into what the pandemic means for the future of sports, can you talk about your professional journey and how you became involved in investing?
Kline: In 2000, I was drafted to play for the St. Louis Rams. During my two years on the team, I unfortunately experienced a multitude of injuries. So, with my future in mind, I decided to pursue new opportunities. I had always known that I wanted to go into business. My dad was an insurance broker and owned a small business in Los Angeles, and I admired his tenacity and work ethic. So, I wanted to explore my options. I started to invest, initially investing in a sports marketing company and working with a real estate developer. Then, I was presented with the opportunity to purchase a professional hockey team, and I decided to pursue it.
We engaged in negotiations for nine months until we were finally informed that we had won the deal. However, on the same day that we signed the Letter of Intent, one of the investors issued a press release that reflected negatively on one of the principle investors, which ultimately killed the deal. Even though we did not win the deal, the experience was priceless. During the negotiations, I was fortunate enough to work with a team who taught me the bankers’ models for acquisitions. This was much different than I was used to as my previous experience was more focused on real estate models. I found the bankers’ models to be more sophisticated – there were more numbers and more moving parts. This experience spiked my interest in investment banking.
So, I decided to hire some of the bankers that had worked on the hockey team deal with me to assist in founding Park Lane. They helped me develop an effective business model for a sports-focused investment bank. This was in 2005. Since then, the company has grown exponentially, and we have continued to diversify.
Colodne: Thank you for sharing. So, you have been in the business for some time, and you have experienced how economic challenges impact the industry. How do you feel the pandemic has impacted the underlying financial structure of leagues?
Kline: This pandemic is unlike anything we have experienced. We never would have imagined the necessity to underwrite a pandemic that would destroy revenues the way that COVID-19 has: in some cases, leagues and teams have lost over 90 percent of their revenue. The reality is that no one could have predicted a complete stoppage in play – not even the commissioner.
Now we are left with teams that are dependent on their owners. Those with wealthy owners who can front the bill to manage the revenue loss are going to get through this; however, those teams who were dependent on revenue, well, their futures are questionable. Moving forward I believe we could see a restructuring within the industry to help overcome the losses. This can be anything from renegotiating media rights to players’ salaries.
Colodne: As we all know, the pandemic is an international issue; leagues across the globe have been impacted. How do we fare compared to international leagues? Have any of them adopted successful solutions we could bring to the US?
Kline: This is a broad question, and the answer will depend on what market you look at. It all depends on the financial modeling and structure of the team. What you have to consider is how the balance sheets are assessed for a team and what the revenue is dependent on.
For example, there is a major difference between how the US operates their teams versus those in the EU. I actually noticed this years ago when I first started working as a banker. The average American sports team employs roughly 150 people for business operations while there are anywhere from 10 to 15 coaches and trainers. This model emphasizes how a sports team is operated as a business.
On the other hand, there was a European soccer team that I worked with in the past whose team was operated by 7 or 8 people while they had hundreds of coaches and trainers. The teams had stuff at their disposal that was just unreal from a player’s perspective. The difference here is that they get paid for winning games. If you lose, you get relegated. The emphasis there is on winning.
In addition, you have to look at the difference in how we market sports. In the US, we are focused on how sports provide entertainment and how this can be monetized. During the pandemic, however, this entertainment has been lost. In the UK, though, sports are more tribal – people are focused on supporting only their team. This is the same in Germany, where the German Bundesliga sell out annually their season tickets. There is a difference in how we perceive our teams. For example, if someone were to visit Los Angeles, it would be common for them to consider going to a Laker’s game just for the experience. In the UK though, the idea of going to a competitor’s game is unheard of.
Colodne: We have seen many players’ pay in limbo as the pandemic has shut down the league’s revenue streams. We’ve even seen owners proposing new revenue sharing agreements for the 2020 season. What do you think will ensure the future of players’ pay?
Kline: First, we must address the fact that the financial impact of the pandemic will be massive. Investors, players, and leagues have all lost money. There were hundreds of games stopped, and the revenue from those games can never be recaptured. Furthermore, to make things more difficult, many teams that accepted the PPP money were shamed into giving it back.
Thankfully though, the fan demand remains present – in fact, they are craving new content. So, once the players re-enter the stadium, the business model of live sports is going to be restructured to adapt to the changes. Producers will accommodate the changes and identify new ways to keep the audience engaged. These adaptations to the new world we live in will be essential for saving the future of sports.
Colodne: Not all teams are going to survive these times. As you previously mentioned, the most likely to survive are the ones backed by wealthy owners. So, what do you think will happen if there is an influx of bankruptcies? Do you think there will be buyers for those teams?
Kline: No matter how many bankruptcies there are, there will always be a buyer. Teams are a limited commodity, so when one becomes available, there is always a handful of buyers prepared to execute. The challenge then becomes finding the right buyer.
Colodne: We have spoken primarily about major league sports. What can we expect to see happen to minor league teams, such as minor league baseball teams?
Kline: Minor league sports are similar to teams in the EU in that they depend on ticket sales and in-stadium experiences while major league teams benefit from media rights deals. This, paired with the pandemic, is going to make the future of minor league teams uncertain. We expect that teams without MLB ownership, strong balance sheets, or affluent owners are going to be in distress. Even the top franchises who have not managed their balance sheets well may be looking at uncertainty.
Colodne: What other changes can we keep an eye out for in the sports industry as we move forward?
Kline: The changes that we see moving forward will be dependent on our response to the virus. However, in the short term, we can anticipate a few major changes:
First, as we have witnessed already, there will be a shift in the landscape of how we view live sports, and there will be an increase in the overlap between e-sports and traditional sports. There will be an emphasis on providing audiences a virtual experience so that they can enjoy the live games from a distance.
When we are able to return to games in person, we will see a major shift as well. If you look back at the early 2000’s following 9/11, there were high alerts for terrorist attacks at stadiums. This resulted in increased security to prevent violence.
This time, we will see another increase in security but from a difference perspective – from a public health perspective. The goal will be to make guests feel safe attending the events without the threat of leaving the stadiums with COVID. How this will be organized is still a question.
Lastly, we can expect technology to play a larger role at the stadiums and for franchises to adopt digitally connected models similar to that of Disney and Carnival Cruise. Disney offers the MagicBand, and Carnival Cruise has their own wristband to control the experience for each visitor.
Although these changes will be implemented in the immediate future, the truth is that, with time, people’s memories will fade and things may return closer to normal. Ultimately, whatever happens culturally will also happen in the sports venue. But I hope there’s a day where we’re not wearing masks and dousing ourselves in hand sanitizer. That has its own set of side effects.
Learn more about Jason Colodne here