Money for Nothing

BY Grant Dodd | 18 Oct 2008

When you’re 15,000 km from home, the sound of a familiar Aussie accent tends to snap you to attention. Needless to say, it has an even greater effect when you are in the back blocks of Carson City, Nevada, where running into a countryman doesn’t seem the most likely of occurrences.

Unlikely or not, there was no mistaking the distinctive tone coming from the mouth of the guy buying a yardage book at the pro shop counter. We were obviously here for the same reason, as this was one of the venues for the first stage of US Tour School in 2004.

As luck would have it, I’d met Mick Smith briefly before. A Sydney resident, he had moved to the U.S. a decade prior, married an American, and was now happily ensconsed in Colorado, just out of Denver.

Mick had been playing mini-tours for a while and had just taken up a teaching position. He still harboured ambitions to make it onto the PGA Tour, and had entered Tour School once again to see if they could be fulfilled.

What I remember most about our encounter was a conversation we had whilst playing a practice round. I asked him how he liked living in the U.S.

“Mate, its fantastic. So much opportunity. Over here, you don’t even need a deposit to buy a house. The banks will loan you 100% of the selling price- they’ll even loan you the money to pay the taxes. It’s brilliant. We’ve bought one and we’re looking to buy another now. I could never do this in Australia.’

With a typical Aussie fascination for property, this piqued my interest. How does, or could, such a system work? If you weren’t a high income earner, how could you afford payments on two properties?

Simple really, he explained. Introductory interest rates were very low, sometimes 1%-2%. They usually stayed low for a set period. If you were nearing the end of your honeymoon, low interest phase, and thought that you might struggle a bit with the new repayments, you just sold the property. The brilliant part, the clincher, was that because property values always went up, it was like printing money. It was the safest bet in town, and everyone, young and old, was riding this horse all the way to the bank.

I’m not sure how Mick is faring at the moment, in the midst of the most perfect financial storm the world has seen for over half a century. What we do know, in stark, glaring reality, is that the largesse of this fundamentally flawed business model is driving the global economy and personal fortunes into a gaping, illiquid vortex from which there appear to be limited avenues of escape.

As a result, this moment in time could mark one of those key points in history where a quantum shift in power takes place. This is potentially the case in relation to the United States of America’s weakening position in the established world order.

By association, we may also see this crisis initiate a change in the balance of power with regard to professional golf. The PGA Tour has been the unchallenged benchmark organisation in this arena for a century, but corporate America, the life blood of U.S. tournament golf, is reeling.

Traditional, previously indestructible powerhouses of this world have imploded in the past month. Crucially, the sponsor base that provides the backbone of tournament funding in the U.S. is packed to the gills with banking, financial services and insurance companies.

A closer look at this list reveals just how reliant the PGA Tour is upon the continuing support of the vulnerable finance sector. Companies such as FBR, Northern Trust, Banco Popular, Zurich, Wachovia, U.S. Bank, Royal Bank of Canada, Barclays, Deutsche Bank, Merrill Lynch and Bank of America are all naming rights sponsors of at least one event on the playing calendar.

Wachovia and Merrill Lynch have already become notable casualties of the credit crunch. Others are reportedly in better shape, but whether they will continue to be in a position to pour millions into golf sponsorship vehicles is an entirely different question.

What is more, the worst may well be yet to come. The frightening spectre of credit derivatives, the most toxic debt component of this complicated mess is the elephant still lurking in the cupboard. The sum of outlying credit default swaps still to be dealt with totals greater than $50 trillion . To put that in perspective, it is a sum more than three times the total GDP of the USA.

The one ray of light for the PGA Tour amongst all the gloom is the fifteen year broadcast rights deal signed with the Golf Channel that shores up a key revenue stream.

The Golf Channel of course has based its future funding model around the ongoing growth of the pay-per-view subscriber base. Pay per view is widely touted as where the future of televised golf lies, but it is a medium that relies upon the continuity of affluence and economic growth. Whilst this fundamental is particularly pertinent to cable, no-one in broadcasting is resting easy at the moment.

Revenues are falling, and the announcement by CBS of a $14 billion asset write down will do nothing to assuage anyone’s fears. If Bear Stearns and Lehmann Brothers can evaporate into thin air, then it would take a brave man to suggest that a cable TV channel is the proverbial Fort Knox.

The joker in the pack for the PGA Tour is the future allegiance of Tiger Woods. The expectation is that Tiger will always remain loyal to the US Tour, thereby tying up both corporate and broadcast support. By and large, this appears to be perceived as a given, and that unspoken understanding has enabled the US Tour to ride Tiger’s coat tails for a decade.

The well publicised, exponential purse growth that has trailed the Woods phenomenon is proportionate to his massive cross cultural and multi demographic appeal. This unique combination of factors makes Woods the most bankable sports commodity in the world, and the pivotal component of the PGA Tour’s marketing platform.

There is no indication that this arrangement is about to change. However, it isn’t a secret that Woods has now pitched his tent in the oil rich Arab states in signing course design and endorsement deals. At the same time, the European Tour has moved to shore up long term support in the Middle East through its Race to Dubai end of season extravaganza, where €10 million awaits the ultimate winner in 2009.

Clearly this association is part of a key strategic plan that complements the European Tour’s prescient 1990’s initiative of investing in tournament golf in Asia. Whatever teething problems that idea may have had, it now appears to be a stroke of genius and leaves the Europeans in an enviable and powerful position across two continents.

Enticing Woods to compete regularly in the Middle East and Asia will be the final piece of the puzzle. It is unlikely that such a move on Woods’ part would be officially announced, but the symbolism of even a subtle change in his schedule will not be lost on anyone, least of all the PGA Tour and its key domestic sponsors.

The potential riches on offer, both short and long term, may be too much to ignore, particularly in the advent of a declining US Tour. Whether the Woods scenario comes to pass is mere supposition.

In the end, it will be dependent upon the PGA Tour’s ability to hold its place in the face of both the pressures of an extraordinarily difficult trading environment, and a resurgent, ambitious challenger.