Friday, September 7, 2007

The Business of Sports: Here Come the Technocrats

The Business of Sports: Here Come the Technocrats
Wall Street Journal
By Russell Adams | September 16, 2006

This past spring, the Houston Rockets hired a 33-year-old guy with almost no playing, coaching or scouting experience to be the National Basketball Association team's general manager of the future -- a move that reverberated loudly in the basketball world.

In some corners, the hiring of Daryl Morey, a graduate of the Massachusetts Institute of Technology (Sloan School of Management), part-time business professor and former financial consultant, signaled the official arrival in the NBA of the data-oriented approach to running a team chronicled in "Moneyball," Michael Lewis's 2003 best-seller about baseball's Oakland A's. Others saw it as evidence of an owner gone mad.

The Business of Sports

As sports has grown into big business, the teams and leagues have gotten serious about how they find off-field talent. Plus, as any nonathlete who has tried knows, it takes a lot more than desire to get to the top of the sports business.

But at 226 Causeway St. in Boston, where the NBA's Boston Celtics conduct business, the Rockets' move brought validation. It was the Celtics that, three years earlier, had given Mr. Morey, then a financial consultant who had never sniffed an NBA front office, his first job in professional sports.

"It's so much fun trying to do things in a way they haven't been done before," says Wyc Grousbeck, managing partner and governor of the Celtics. "I didn't hire him thinking he was going to become an NBA GM. But why couldn't a junior consultant become an NBA general manager?"

Striving for Efficiency

Since taking over the team in late 2002, the Celtics ownership group has exemplified the challenges of bringing modern business sensibilities to a tradition-bound franchise operating in a world historically averse to change. They've replaced nearly half of the team's employees (some of those through natural attrition), turned the ticket-sales operation into a yield-management business that allows them to use inventory data to maximize revenue, and built a small army of statisticians to unearth valuable information -- on ticket sales and players' performance -- for the front office and coaching staff.

It's a phenomenon playing out throughout sports in recent years: Having spent astronomical sums on their franchises, a new breed of aggressive, tech-savvy owners are demanding greater efficiency in an often pathetically inefficient industry.

But they're not always well-received. The Oakland A's success and "Moneyball" made baseball front offices around the league more open to number-crunching general managers, setting off a turf war between these outsiders and the baseball lifers who view their experience in the game as a requirement for entry. And in the NBA, Dallas Mavericks owner Mark Cuban's convention-defying approach -- whether it's turning the arena into an all-purpose entertainment venue or exploring new statistical tools for measuring player performance -- is part of what has made him one of the league's most polarizing figures.

The group of venture capitalists and private-equity investors, who in 2002 paid a then-record $360 million for the Celtics, arrived at the beginning of this sea change, but with the added challenge of melding modernity with tradition. By then, the proud franchise of Bob Cousy, Bill Russell and Larry Bird had fallen into a distant third in the Boston sports hierarchy -- behind baseball's Boston Red Sox and the National Football League's New England Patriots. So when Mr. Morey mastered the NBA salary cap in a weekend while doing a valuation analysis for the prospective owners, the group saw someone who could help maximize an underleveraged asset.

"I said, 'Daryl, you're going to look pretty good in green if you get this deal done,' " recalls Mr. Grousbeck.

Modernizing Ticket Sales

As senior vice president of operations and information, Mr. Morey's first job was to modernize the ticket-sales operation. He tapped a Cambridge company called StratBridge Inc. to install technology allowing the sales team to visually analyze, in real time, who the customers are, where they're sitting and what they're willing to pay for tickets. A 40-inch plasma screen on the wall of the sales office shows a map of the TD Banknorth Garden, with each seat rendered a different shade to indicate availability and sales patterns. The 25-person sales team uses that data to study buying trends and develop promotions -- sometimes just hours before the start of the game -- to sell unused seats.

"It's about finding the right seat for the right price for the right person on the right night of the week," says Rich Gotham, the team's chief operating officer. "It's not rocket science."

Since the new system was implemented a year ago, Mr. Gotham says, the team has doubled its group-sales business and remained at the top of the league in individual ticket sales. But he adds that it's not all about the technology; they've significantly increased their sales staff as well.

Scott O'Neil, the NBA's senior vice president of marketing, says 22 of the league's 30 teams have since adopted the same system. "The Celtics are one of the most forward-thinking, innovative and creative teams when it comes to using data and taking the analytical approach to decision making," says Mr.O'Neil.

Evaluating Players

But basketball operations is where this approach might ultimately produce the biggest rewards. Mr. Morey also had long explored basketball analytics and had worked as a consultant at Stats Inc., a company that provides sports statistics and analysis primarily to teams, leagues and media outlets. At Stats, he had developed a way to apply the Pythagorean theorem of baseball - which predicts wins based on runs scored and runs allowed -- to other sports. Mr. Morey offered to do statistical analyses for the Celtics, which gave him the go-ahead to hire a small team of statisticians who would provide input to the basketball operations and coaching staffs.

One of the first big projects was a regression analysis of 25 years of NBA drafts to determine which college statistics best equate with NBA success at each of the five positions. The stats group now is developing a similar database of European players, says Danny Ainge, the Celtics' executive director of basketball operations, as well as an analysis of the composition of NBA championship teams. But Mr. Ainge plays down the utility of statistics for evaluating basketball players, saying it is "dangerous" to assume the numbers can tell you everything.

"I still am in favor of the old-fashioned way of spending time and studying players," says Mr. Ainge, who adds that the statistical information is merely a complement to what the scouts say.

He says that his skepticism is, in part, a function of the newness of this approach, and that data showing which combinations of players perform best together have been helpful to head coach Doc Rivers and his staff.

For his part, Mr. Morey says he takes a balanced approach, and that while he's "obsessive about testing beliefs about what helps a team win using analytics," the foundation of his beliefs come from traditional approaches. "I'm not someone who leads with numbers," he says.

For sure, the team so far has had mixed results producing a winner -- on and off of the court. The Celtics have lost more games than they've won in two of the past three seasons. And over that period, they've never been higher than 18th in the league in attendance. This season might bring more of the same, as the team remains light on stars and loaded with talented but inexperienced players.

Team officials say that in sports, business only booms when the team wins.

The key is squeezing the most out of the asset when demand is low so that you can maximize growth when the team is winning. The model for getting the most out of an asset is just across town, where the Red Sox have squeezed every last penny out of historic Fenway Park. In so doing, the Red Sox have opened themselves to criticism from some baseball fans who see a front office full of bean counters willing to stomp on tradition.

Emotional Investment

The Celtics' new regime has been similarly aggressive on the business side, but team officials say they realized early on that they couldn't operate the team like they operate any other business. Buying a season ticket or a sponsorship, say team officials, is an emotional investment that demands personal attention from the team.

"It's very much an interpersonal industry," says Mr. Gotham, "and you can't just take a quantitative approach. The successful organizations understand that pretty well."

The Mavericks' Mr. Cuban advised these owners early on to let the fan base know that the owners are the team's biggest fans. Mr. Grousbeck is such a staple in the stands and around the team that some of the players have taken to calling him a clone of Mr. Cuban. At least it's not an act.

Mr. Grousbeck is a lifelong fan of the team. And in that, he's far from alone among the ownership group. Stephen Pagliuca, a managing director of Bain Capital, one of the biggest buyout firms in the world, is a Celtics diehard with a basketball court in his house. Robert Epstein, a principal at Boston real-estate company Abbey Group, is a graduate of Mr. Cousy's basketball camp. And James Pallotta, a managing director at Tudor Investments Corp., plays in a regular pick-up game at Harvard University's gym with several former NBA players. Mr. Grousbeck has asked if he could play but was told he's not good enough.

No comments: