TAG & RCM Present: Youth Sports & Pro Franchise Valuations

This piece is part of a series and is based on a quantitative study put together in a collaboration of The Audible Group, RCM Alternatives and RCM Securities, and the University of Illinois at Urbana-Champaign and UCLA’s Masters in Financial Engineering Programs.

by Joe Witkowski - September 3rd 2020

Participating in youth sports is a long-standing tradition in the United States. Though the duration of a child’s involvement can vary widely, most participants dream at some point of becoming a professional athlete in their favorite sport, no matter how unlikely it may be. This unique allure of professional sports has historically created strong pipelines of youth talent and new generations of fans, something we factored into our quantitative pricing model that we use to value professional sports franchises. Interestingly, recent data appears to show that youth engagement in sports is on the decline. We here at TAG and RCM set out to understand exactly how changing youth sports participation rates in the United States might impact the strategies of professional sports leagues in the future.

The first thing to analyze when addressing the question of pro sports’ talent pipelines is to look carefully at the percentages of youths participating physically in each respective sport. According to the Aspen Institute – a global nonprofit focused on cultivating participation in sport to foster healthy communities –  the following figures show the participation rates in 2017 across the big four American sports for youth aged 6-1:

·         Basketball: 14% of youths (down 2.5% from 2008)

·         Baseball: 12% of youths (down 3.5%)

·         Football: 3% of youth (down 0.8%)

·         Hockey: 1% of youth (up 0.5%)

On the face of it, this data paints a grim picture of future sports audiences. When we dig deeper, however, it’s clear that the absolute numbers (rather than just the proportions) add some crucial context to the story.

According to ChildStats.gov, the actual number of children aged 0-12 increased from roughly 43 million in 2008 to about 47 million in 2017. This means that from ’08 to ‘17, the large observed drops in participation end up corresponding to an average decline of less than 500,000 youth per sport. This helps to mitigate what initially looked like a precipitous decline, but it doesn’t change the fact that participation in youth sports is certainly not as high as it once was. We decided to look next at what could be classified as a substitute for physical sport participation: digital engagement.

Over the last decade, the growing role of technology in sports and fan engagement has increased dramatically. Recent partnerships between major game developers like EA Sports (the maker of Madden, FIFA, and other titles) and Visual Concepts (maker of NBA and MLB 2K) have doubled-down on their partnerships with the NFL and NBA, respectively. In some cases, they’ve launched whole new esports leagues centered around engaging young fans in a wholly new medium. In a 2018 article analyzing the performance of NBA 2K, for example, it was revealed that 1.6M people played the video game daily for an average of 90 minutes. In 2013 a Forbes analysis placed the annual player figure of the Madden franchises at 10M players. While it’s impossible to determine how many video game players overlap with physical sport participants, it seems safe to say that it is not 1-for-1, indicating that the rise of sports-based video gaming in the past ten years has helped to offset any drop in physical participation rates. Such participation may even be one of the reasons why youths are slowly turning away from the sport itself, but it is likely a combination of factors.

One of these factors, according to a 2016 poll from the Alliance of Youth Sports, may be how competitive participating in sports has become at an increasingly early age. It may be that the once magical allure of making it to the big leagues of a given sport has become more of an “economic allure” as sports valuations and salaries have steadily increased over the past few decades.  It may also be that playing sports has become prohibitively expensive. According to D1 Baseball Offer, one season of travel baseball for a child can cost over $5,000 dollars. For the majority of American families, that can be too high a cost, especially when there are numerous cheaper alternatives to sports. Finally, there is the possibility of injury while playing a sport, especially getting a concussion. According to Bob Cook of Forbes, several states are looking to ban tackle football for youth under age 12 because of the possibility of concussions.

Whether economically or technologically, it’s clear that the once easy decision for American youth to play sports is now taking place in a more complicated environment. Since our pricing model demonstrates that a pro sports team’s valuation is ultimately based on its audience, we are deeply interested in what this might mean for the future of sports team valuations. The answer, we feel, will depend on what leagues do to grow their audience across non-TV and non-US groups. We took a look at each league in detail to see how they’re currently approaching these strategies.

• The NBA is likely to be least impacted by the decline in physical participation for a few reasons: the NBA has taken a clear approach to integrating gaming and dynamic content into its media strategy and basketball is the most global of the sports in this study. Such an international standing helps the NBA find superstars like Dirk Nowitzki, Yao Ming, Luka Doncic, and Giannis Antetokounmpo, each of whom helps the League grow its footprint.

• The MLB  appears to be in a mixed position relative to preserving audience numbers and engagement. According to MLB.com, 28.5% of the players on Opening Day rosters in 2019 were born outside of the United States. The separating factor that makes the NBA slightly better off is the fact that 66% of the international players in MLB originate from two countries. The MLB is somewhere in the middle when it comes to international talent, but struggles to keep fans coming to games domestically (started long before the pandemic) have seen the league tossing around ideas for changes to the 9-inning structure and other such radical moves to get younger fans more excited about America’s pastime.

• The NFL appears to be most vulnerable to a decline in domestic youth participation in football, primarily because talent is almost exclusively sourced from the US. Add to this the prevalence of the “concussion” issues inherent in the sport itself and the 10-year drop in participation by a factor of three and it starts to look like the league may have some challenges ahead. It will be critical for the NFL to continue engaging younger fans through non-traditional channels, including fantasy football and video games, and to increase its international strategy.

• The NHL has actually seen physical participation numbers increase in the ten year period ending in 2017. Whatever the League has been doing to engage youth across the country has been working, though the ultimate test for the NHL will be how well it can renegotiate its national broadcast deal when the current term expires in 2021-22. Their deal is currently far lower than any of the other Big 4 Leagues.

Taken together, the decline seen in youth participation is nothing to worry about today for professional sports franchises. First, the trend has not been uniform – numerous years within the 2008-2017 decade have seen increases over the previous year, indicating that shorter term factors are likely at play. Second, the relative and absolute declines in youth playing the sport are not currently anywhere near the level of threatening a pipeline of talent. But the trend cannot be ignored. Leagues will need to focus on globalization. They will need to rethink the traditional “TV-centric” business model of content distribution. One thing is for certain: if the leagues do not take these factors into consideration, the attendant drop in fans and talent will  to fewer ticket sales, less-lucrative media deals, and therefore lower franchise values.

We here at TAG and RCM are bullish on league management to keep newer, younger fans engaged. In fact, the NBA and NFL are already several years into executing these very strategies. As many leagues’ broadcast deals come up for renewal in the coming years, it will be fascinating to see how leagues approach the shifting dynamic of youth participation to keep their audiences strong, a factor of the utmost importance in preserving sports team valuations.