From the pure power of LeBron James, to the artistry of Dwayne Wade and understated stardom of Dirk Nowitzki, the NBA Finals represents a climactic two weeks of fan interest to celebrate a staggeringly successful year.
With viewership of all four rounds of the playoffs up double digits, along with sharp upswings in attendance and merchandise sales, the NBA is enjoying a cultural boom not seen since its Golden Age of Michael, Magic and Larry.
But Carol Sawdye, who was hired as the new CFO for the NBA a year ago, recognizes the harsh realities facing the $4 billion industry. There is a rapidly approaching labor war between players and owners on tap this summer, along with alarming growth in the percentage of expenses. According to league commissioner David Stern, 22 of 30 clubs are losing money.
In an exclusive interview with Business Finance, Sawdye shared the fiscal perspective of the NBA as a business, the managing of risk amid bustling gate receipts and the role finance plays in creating a winning product.
Business Finance: As the 65th season of the NBA wraps up, how does the landscape from a financial perspective compare to what you saw earlier in the decade?
Carol Sawdye: Despite the state of the economy, the 2010/11 season has been very successful in terms of fan response to our teams, players and the game.
Overall revenues are at the highest they have ever been with gate receipts up significantly and team sponsorship sales at an all time high. We are on pace to have our most-watched season ever on TV. Subscriber growth has increased dramatically on NBA TV to 55 million homes in the U.S. We are experiencing double-digit revenue growth this year both in the digital business and internationally.
However, in order to achieve the revenue growth that we have experienced over the last decade, we have had to spend much more to generate the same $1 of revenue than we had to in decades past. As a result, the league overall has been experiencing significant net losses now, which wasn't the case back in the mid 1990s.
BF: What does the office of finance do to contribute to the success of the league as a product?
CS: Finance is responsible to the commissioner and the owners for assisting business units in maximizing the financial results of the league and managing the financial risks associated with running this business.
The Finance department is involved in the financial aspects of all transactions, including ensuring league-wide financing is available at competitive rates and supporting financial analysis for significant business agreements and team sales transactions. Although much of these activities are invisible to the fans, they are all critical to delivering a consistently successful product for them.
BF: What were some of the steps you've initiated since you came onboard as CFO?
CS: My principal area of focus has been on expanding our capabilities in connection with financial reporting on and analysis of the results of our teams and the league as a whole.
We also have a growing business to support. Much of that growth is coming internationally and has required a lot of my focus on planning for profitable growth and managing the financial risks of operating in so many different tax, regulatory and labor environments.
BF: When you stepped into this role as CFO, what have been some of the organizational changes that you made to help finance become more effective?
CS: The single biggest change I have made is to expand our resources and interaction with the teams. This allows us to provide better combined financial information for use in all aspects of our business, ensuring that we are running a more effective and efficient business in general.
BF: What is your philosophy of finance and what kind of job have you wanted to create?
CS: The CFO should be a trusted adviser to the CEO and all business leaders and a critical member of the senior management team of any business enterprise.
In the NBA's case, this extends to the owners and team management as well. The entire finance department should view itself as a critical service provider to all departments throughout the organization and, in our case, to all of the teams as well. The league office and our 30 teams are only as strong as our weakest link so we always have to serve with a view that support to any one team or department will raise the bar for all of us.
BF: What types of skills and principals does an effective CFO have? How are they changing in your mind within sports entertainment?
CS: I think there is an increased recognition by sports team owners and league management that in order for the sports leagues to be successful, they have to operate as a profitable business, not just as a trophy asset. I don't think you can be an effective CFO in any organization unless there is agreement amongst the owners or shareholders that a principal goal of the enterprise is profitability. That change in mindset in the sports business makes room for effective CFOs to operate.
An effective CFO in this business, though, has to understand how this business has evolved and needs to appreciate that competitiveness and winning are enormous drivers of behavior in this business and always will be. The system in which the league operates has to take that very significant factor into account in order to effectively project and allow for profitability.
BF: Has your role at the NBA challenged your philosophy regarding the role finance should and should not play?
CS: You have to appreciate where I come from. I was a partner at PricewaterhouseCoopers in the Entertainment and Media Practice. Then I was first the CFO and then ultimately the COO of Skadden, Arps. Both of those organizations have unique management structures: non-public and highly partner focused. It is not very different at a sports league where the owners are partners in the league. In fact, in many ways my background and expectations are completely aligned with the league's philosophy.
BF: How have you factored this summer's uncertainty into your budgeting plan?
CS: You hope for the best but plan for the worst. We have to plan for a variety of outcomes.
BF: Some things are very predictable as far as revenue streams go—the number of games, the number of teams, the lengths of the regular and post season, media contracts, etc. Where do you see growth coming from beyond that—especially for teams at a local level?
CS: There continues to be significant growth in local cable revenues due to the increasing competition in the marketplace. There is also very significant growth opportunity in the digital space and in all of our international markets.
BF: What is your role with the owners and in particular with the finance committee?
CS: I regularly interact with the owners as a participant on most of our significant committees: Labor Relations, Planning, Audit and Compensation Committee, Advisory/Finance Committee, Relocation Committee, as well as regularly attend and participate in the Board of Governors meetings. I host the Audit and Compensation Committee, which is chaired by one of the owners. All of these committees have been very active over the past year so we have gotten to know each other pretty well. The owners also regularly reach out to me with questions on the league's finances.
BF: What types of key finance metrics are you watching these days in the NBA through this slower-than-anticipated recovery?
CS: As I mentioned at the onset, most of our metrics for revenues are near or at the highest levels they have been. The key for us is to continue to grow revenues without continuing to grow our expenses at a faster rate than revenues. This isn't unique to us but we have been living beyond our means. There needs to be a new normal reached in terms of overall expense levels and expense growth.
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