November 15, 2006 — Edifice Complex

Why companies pay millions for the naming rights to sports facilities
By Charles Gerena

A practice facility for the Washington Capitals hockey team will soon bear the name of a local real estate developer: Kettler Capitals Iceplex. Nowadays, naming rights deals aren't confined to the stadiums where major league teams play their actual games. A variety of facilities used by minor league and college teams have been named after corporations, along with libraries, arts complexes, and other public buildings.

The size of the market for naming rights — an estimated $4 billion in stadium deals have been signed in North America — implies that it's a good deal for both sides of the transaction. The seller gets a steady revenue stream, which usually goes to a team's franchise owners in the case of deals involving sports stadiums. But are naming rights a sound investment for the purchaser?

It certainly gives a company a lot of exposure — M&T Bank estimates that having its name on the stadium for the Baltimore Ravens generates 350 million media impressions annually, including those seen by occupants in the 81 million vehicles that pass by the building. Sports marketing experts contend that the impressions generated by a naming rights deal cost less on a per-unit basis than getting similar exposure through other forms of advertising.

It may be true, but that doesn't necessarily mean that seeing M&T's name from a highway or in the sports section of the local paper has the same effect as watching a commercial for its banking services.

Temple University economist Michael Leeds questions how much a naming rights agreement can raise awareness for a company that is already well-known. For a company trying to build name recognition, however, buying the naming rights to a sports facility might be a good deal.

When M&T Bank announced its purchase of Baltimore-based Allfirst Financial in 2002, the company had no brand recognition in the region, says Justin Hoffman, its marketing manager. Paying $75 million to put its name on the Ravens' stadium for 15 years seemed like a good way to gain visibility.

"It was a vehicle that allowed us to go from zero to a high level of brand awareness," Hoffman notes. He says M&T is among the top three brands in Baltimore, plus a recent survey found that 21 percent of Ravens fans would consider doing business with the bank in the future.

If greater brand awareness translated into higher sales, it would presumably make a company more valuable on Wall Street. Leeds co-authored a study of 54 publicly traded firms, including M&T, to compare their stock performance after the announcement of naming rights deals to how the stock would have performed without the agreements. The study concluded that paying to put a company's name on a stadium failed to generate excess returns. "It was no better than putting the money into an ad campaign, or putting it in the bank," Leeds says.

So under what circumstances should firms pay a premium for naming rights? One possibility is when companies can reap nonfinancial gains, which may benefit the bottom line in the future but are hard to quantify.

Richard Irwin, director of the Bureau of Sport and Leisure Commerce at the University of Memphis, says most purchasers of naming rights have other motivations besides making profits. "FedEx doesn't need a stadium to raise awareness of its name; they have their name on all their trucks," Irwin notes. For $7.6 million a year, the company has the naming rights for the Washington Redskins' home in Landover, Md., until 2025, giving it a high-profile presence in the Washington, D.C., region where federal policy is formed.

In addition, Irwin believes companies are interested in being the "hometown hero" that helps bring professional sports to a community, which is believed to improve quality of life.

"When it comes time for consumers to make a choice, we want them to have a positive image of us," says Molly Sapienza, manager of corporate sponsorships for Raleigh, N.C.-based RBC Centura. That is one of the reasons the bank bought the naming rights to the home of the National Hockey League's Carolina Hurricanes for $80 million in 2002. Based on an informal survey of fans conducted last year, Sapienza says they appreciated RBC's role in bringing entertainment and a first-rate facility to Raleigh.

Companies also gain greater access to the stadium and the sports team as part of a naming rights agreement. They may get luxury suites where they can entertain clients, tickets to reward employees, or opportunities to hobnob with players. RBC gets all of these perks as part of its 20-year agreement — the company can even secure a ride on the arena's Zamboni machine during hockey games.

Finally, naming rights deals could serve as a sign of a company's financial prowess. When the 1990's high-tech boom produced a lot of rich entrepreneurs, they wanted to show the strength of their businesses by plastering their companies' names on stadiums, college bowl games, and other sporting events.

"It makes an impression," Leeds says, similar to a law firm spending big bucks on wood-paneled offices. Whether that impression is accurate is another matter — PSINet went bankrupt despite the exposure it received from having its name on the Baltimore Ravens' stadium for three years prior to M&T's sponsorship deal.