Get Ready for a Massive World Cup Hangover, Brazil

Stadium 'Arena da Baixada' in Curitiba
Marcus Brandt—picture-alliance/DPA/AP The stadium 'Arena da Baixada' under construction in Curitiba, Brazil, December 14, 2013.

The overzealous and costly build-up to the games will leave the country footing an astronomical bill.

Nobody expected the United States to emerge out of the group stage in this month’s World Cup. Yet by compiling a 1-1-1 record against Ghana, Portugal and Germany, they squeaked by thanks to FIFA’s score differential rule. Hundreds of thousands of fans of the U.S. team celebrated long and hard Thursday night. Around the globe, hundreds of millions of soccer fans have been doing the same.

Brazil is throwing a party that, in the end, will cost it somewhere between $15 billion and $20 billion, according to a report in Sports Business Journal. FIFA keeps the revenue from TV rights, tickets, corporate sponsorships and marketing. Brazil gets to keep, in my estimate, around $500 million from tourist spending. That’s not a very favorable equation.

South Africa spent around $6 billion for the 2010 World Cup. Germany (2006), France (1998) and the United States (1994), with developed infrastructure and modern stadiums, spent less than a billion each. When they co-hosted in 2002 and built new facilities, South Korea spent $2.5 billion and Japan $5 billion.

Here’s part of Brazil’s problem: FIFA requires that each host country have eight modern stadiums with at least 40,000 capacity, one of which seats 60,000 for the opening match and another with 80,000 capacity for the final contest. That threshold alone would have been difficult enough to meet, but Brazil decided to do one better: in the hopes of exposing 12 of its cities to the world, Brazil committed to having 12 venues, each with a minimum capacity of 40,000.

In 2009, the Brazilian Football Confederation initially estimated the 12 stadiums being refitted or built for the World Cup would cost about $1.1 billion. The total stadium budget eventually rose to more than $4.7 billion. Nine of the stadiums were new, and of these seven were built on the site of existing stadiums that were demolished. Four stadiums were built in cities with no football team in the first division of Brazil’s soccer leagues. In Manaus, there is a second division team with an average attendance of around 1,500 per game. Manaus now has a new stadium with a capacity of 42,374, at a cost of $325 million. It will be used for a grand total of four games during the World Cup.

The Mane Garrincha National Stadium cost a reported $900 million to build and has a capacity of more than 70,000. Fortaleza, Recife and Salvador all have football teams in the first division, but the average attendance per game is around 15,000, with an average ticket price of $10. Recife already had three large, multi-purpose stadiums. The populations in these cities do not come close to having the purchasing power to pay ticket prices high enough to maintain those stadiums, let alone to service the construction debt.

In São Paulo, the venerable Morumbi Stadium was excluded from the World Cup because it didn’t meet FIFA’s standards. The local organizing committee for the World Cup decided to build a new stadium rather than refurbish Morumbi. After its overview visit to Brazil in May 2011, FIFA required enhancements to the new facility’s design. Those upgrades carried an estimated price tag of $650 million, a 30% increase in the total cost. The construction was disrupted in early 2014 when a crane collapse destroyed a good section of the stadium; a work stoppage followed.

At the famous Maracanã Stadium in Rio, which was originally built for the 1950 World Cup, there was a $200 million renovation for the Pan American Games in 2007. That renovation was not sufficient in FIFA’s judgment, so subsequent to the Pan American Games, Maracanã Stadium was partly demolished and then rebuilt for more than $500 million. Part of the rebuild required the demolition of the Indigenous Cultural Center (the first indigenous museum in Latin America), a school and a gymnasium to allow for a parking garage. A nearby water park was also leveled.

The land was slated to become a parking lot, but, as the World Cup matches began on June 12, 2014, there was no lot there. Seven-hundred families had been displaced. The first 100 were removed at gunpoint and resettled two hours away in a western suburb of Rio. The remaining families protested and sued, and eventually received better treatment.

The non-sport infrastructure investments for the Cup principally involve the construction of rapid bus lanes to transport officials, athletes and fans from the airport and hotels to the stadiums and new airport runways or terminals. Security costs likely will rise above $1 billion.

Apart from an estimated 250,000 poor Brazilians who have been relocated from their homes, the country suffers from highly deficient public health and education systems and woefully inadequate public transportation. It is little wonder that massive demonstrations and strikes accompanied the build-up to the World Cup.

It will all be over in a few weeks and the Brazilian government will have a massive bill to pay – both to its bondholders and to its people. The party’s hangover is coming.

Andrew Zimbalist is the Robert A. Woods Professor of Economics at Smith College. His latest book is The Sabermetric Revolution: Assessing the Growth of Analytics in Baseball.


The Clippers Are Worth Nowhere Near What Ballmer Is Paying

Celebrities At The Los Angeles Clippers Game
Noel Vasquez—GC Images Steve Ballmer (L) and NBA Commissioner Adam SIlver attends an NBA playoff game between the Oklahoma City Thunder and the Los Angeles Clippers at Staples Center on May 11, 2014 in Los Angeles, California.

A sports economist crunches the numbers on how much the basketball team is worth, and says the former Microsoft CEO has no reason to bet the Los Angeles team will ever be worth $2 billion

A billion here, a billion there, pretty soon you’re talking about real money. But Steve Ballmer doesn’t seem to treat $2 billion as real money.

Forbes magazine estimates that last year the Los Angeles Clippers generated $128 million in revenue and earned $15 million in profits. At a 5% rate of return, the Clippers would be valued at $300 million. But NBA teams are scarce commodities and their value goes up over time. Moreover, owners garner handsome indirect and non-pecuniary returns, so sports teams commonly sell at a multiple of their previous year’s revenues. The typical multiple in the NBA is 4. That would put the Clippers’ value at $512 million.

But the Clippers will be signing a new TV contract in a few years, and the team is playing better and is more popular than ever. One can anticipate that their revenues will experience robust growth going forward. What if revenues grew by $52 million, to $180 million? Using the revenue multiple of 4, that would put the team value at $720 million.

The only way to get an economic value of $2 billion would be to have projected revenues rise to $500 million. How could that happen? Well, the Lakers got a long-term TV deal with Time Warner for $200 million a year, and the Dodgers have a new one at $340 million annually for 25 years. If the Clippers could get a Lakers- or Dodgers-type contract, then the team’s revenue might begin to approach $500 million.

Perhaps this is what Ballmer and his financial advisers were thinking. They should think again. Time Warner is losing its shirt on the Dodgers deal. It projected it would be able to sell the Dodgers’ RSN (regional sports network) to all greater Los Angeles households for $5 per month. So far, only 30% of area households receive the Dodgers games — those are the households served by Time Warner cable. No other cable or satellite distributor is willing to pay the price that the Dodgers’ RSN demands. In fact, the price has recently been lowered to $4 and there are still no takers.

It would be unreasonable in the extreme that Time Warner, or its competitor Fox, would be willing to sign a Dodgers-type deal. Even if the Dodgers deal were working out, baseball has twice the number of games as basketball and historically has garnered much larger television contracts than basketball. And the Dodgers are the Dodgers — the second strongest brand in baseball after the Yankees.

Recall, too, that the Dodgers own their own facility. The Clippers are tenants.

Topping things off, Ballmer was sent a financial package by the Sterlings just a couple of days ago. In normal deals, that’s just the first step. After that, there are questions, details, more contracts to view, people to interview (including companies like Time Warner) and so on. Sterling insisted on final bids within a couple of days — preventing proper due diligence on the franchise, perhaps knowing that the more time he gave the bidders, the more they would learn and the more issues they would find.

So what’s going on? Ballmer is making a vanity purchase — he’s buying a toy. His net worth is reportedly valued at close to $15 billion. He could still survive if his net worth were $13 billion. He’s a basketball nut. He wants to have some fun. He wants to sit next to Jack Nicholson.

Andrew Zimbalist is Robert A. Woods Professor of Economics at Smith College. His latest book is The Sabermetric Revolution: Assessing the Growth of Analytics in Baseball.

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