Tim Finchem and the PGA tours business model

How Tim Finchem Saved The PGA Tour From What Could Have Been Its Darkest Hour

Bob Croslin for Forbes

Imagine for a moment that you are PGA Tour Commissioner Tim Finchem, on the day after Thanksgiving in 2009. You are taking a much needed day off at home in Ponte Vedra Beach, Fla., with your wife and three daughters. The preceding year has threatened to destroy everything you’ve built. The world economic crisis has decimated the financial services and automotive industries, the dual bedrocks of your tour, which serve as the title sponsors of more than a third of your 47 tournaments. Five of those sponsors have gone bankrupt. Another four teeter on the brink. Two lucrative tournaments have been dropped from the schedule and more may follow. Adding to the misery, your tour–which you hold up as a vessel of good–has emerged as a poster boy of postbailout waste, after Northern Trust, a bank that had received a federal infusion, hired Sheryl Crow to headline a lavish party at its sponsored tournament in Los Angeles.

You have spent most of the year visiting with your nervous sponsors, trying to quell any panic. At the same time you have practically demanded that your players reach beyond the ropes to embrace both the sponsors and the fans. You know that the game must at least appear stable. The stakes have never been higher. The expiration of the tour’s broadcast contracts with CBS and NBC are near.

And then, in the gloaming of that day in November, your phone rings at home. Tiger Woods, the number one golfer in the world and a global sports icon who is more important to his sport–your sport–than any athlete in history, has been in a car accident. The details are disconcertingly strange. He has wrecked outside his own driveway; he was found unconscious; he is missing some teeth; and his wife has smashed the car’s windows with, of all things, a golf club.

Later Woods’ full, sordid tale will become public, just as he suffers a serious leg injury. And just like that–right when you need him the most–your tour’s biggest star and best player will vanish from tournaments and television. Sean McManus, head of CBS Sports then and now Finchem’s good friend and key business partner, sums it all up neatly: “At the time, the tour could have gone either way. That’s not an overstatement. The underpinning of the tour is the corporate sponsorship. If the brand is damaged or the product diminished, the entire foundation can wash away.”

**

Fast-forwarding three and a half years, Finchem, 66, reposes in a chair in his office in Ponte Vedra Beach, and looks out of a large window at TPC Sawgrass, the PGA’s home course–and over a tour that has never been more robust. “We had no idea that it would be as bad as it was,” says Finchem of the recession. “But we knew we wanted to be stronger coming out of it than we were going in.” How he managed that is one of the lesser-noticed sports success stories in recent years.

The PGA Tour, with its lack of teams and plethora of interested parties, might be the most unwieldy of sports organizations. Finchem heads five golf tours–led by the PGA Tour flagship and the Champions Tour (for players over 50)–which, in total, have 800 players and host 120 tournaments. He oversees 2,200 full-time employees and relies on a volunteer army of more than 100,000 people who put on those tournaments, doing everything from selling tickets to posting scores. He manages relationships with five other global golf tours, two rulemaking entities and 110 corporate sponsors.

But two of the most important constituents are his two broadcast partners. In late 2011, with the economy and Woods, who by then had plummeted to number 58 in the world rankings, still lurching, Finchem negotiated nine-year extensions with both CBS and NBC. (They joined an existing deal with the Golf Channel, owned by Comcast/NBC, which also ends in 2021.) The combined deals are worth a bit more than $500 million a year, a 27% increase overall.

His TV pipeline secured, Finchem focused on golf. First, he extended FedEx’s deal to sponsor the tour’s year-ending playoff series, known as the FedEx Cup, for another five years. He expanded into Latin America and Canada by adding tours there. He signed up Web.com as the official sponsor of a minor league tour and made it the feeder to the big time by redoing the tour’s qualifying procedure. Then, taking advantage of the downturn, he proactively restructured the tour’s schedule, giving it a real 12-month season that starts in October, making it more like other pro sports leagues. He pulled all of this off while the recreational golf industry–which includes travel, real estate and course construction and rounds played–had contracted by nearly 10% since 2005, to $69 billion in 2011, according to a report from SRI International.

So how did he do all of this while playing what appeared to be a very weak hand? By leveraging the tour’s unique competitive advantage: its tax-exempt status. Because the tour was set up without “owners,” there’s no one to dividend out profits. Despite its feel-good imagery, the tour doesn’t funnel its own profits to charity (see this sidebar). And most important, most of those profits come in tax free. Under Finchem the tour has been able to stockpile investment assets that are now almost precisely $1 billion. *(Some $675 million of that money is in player retirement funds, which the tour lists as both an asset and a liability. Another $73 million is in cash.)

So when the perfect storm appeared, Finchem was negotiating from strength. He was able to assure nervous broadcasters that the game would be a risk-free investment. In a worst-case scenario the tour could use that money to fund its tournaments and keep the game on TV. “Even in the worst of the recession, we never missed a beat financially with the guarantees the tour gave us,” says CBS’s McManus.

Finchem also pledged to the broadcasters and his sponsors that the tour would do all it could to develop the next round of golfing superstars. They’d been through this process before: Arnold Palmer had passed the baton to Jack Nicklaus. Then a decade or so later came Woods. The tour, as any league facing the prospect of having its biggest star exit the stage would do, doubled-down on promoting its budding stars, like Rory McIlroy, Bubba Watson, Keegan Bradley and Webb Simpson, in television ad campaigns and at tournaments, making sure they were in featured pairings with the likes of more established veteran players, like Phil Mickelson and Ernie Els.

The net result is a tour that is less reliant on Woods, generating record revenue–some $1.1 billion overall per year, just for the central tour, compared with $761 million in 2003 and $285 million when Finchem took over in 1994.

“Some people bitch about him,” Rocco Mediate, a tour player for the last 28 years, says of Finchem. “But he’s done well.” The most important player in golf is even more emphatic. Says Tiger Woods: “I think Tim has done an outstanding job.”

**

Finchem’s unconventional–and clandestine–financial model has its roots in the tour’s founding in 1968, when professional tournament players broke off from the PGA of America, a group that mainly focused on teaching professionals at golf clubs. The players wanted more money. Finchem’s predecessor, Deane Beman–who became commissioner in 1974–figured out a way to give it to them.

Professional golf is an enormously expensive sport to televise, with events that sprawl over hundreds of acres of varied terrain and take place at different venues each week. The usual moneymaking setup between a sport and its broadcasters–an annual television rights fee–was not working for the tour by the mid-1970s. “The tour and its broadcasters were basically living at a subsistence level at the time,” says Beman. His solution: Get someone else to pay for the sport to be televised–and thus guarantee the broadcasters a profit.

That “someone else”? Corporations. Here’s the model that continues to this day: A corporation–say, AT&T–signs up with the tour as a title sponsor of a tournament, usually paying between $8 million and $13 million for the honor (events that are televised only on the Golf Channel and do not have the final two rounds on either CBS or NBC pay a little less; a handful of sponsors pay more). Nearly half of that money goes directly to the event’s broadcaster, in the form of presold ads. The tour guarantees that between 60% and 65% of the broadcaster’s ads will be accounted for and traditionally delivers up to 85%. The remaining ad time is easy enough to fill: Unlike other sports, many viewers of tour events actually play the game, which gives endemic advertisers–like ball, clothing and club manufacturers–strong incentive to buy spots.

The rest of the title sponsorship money goes to a local tournament organizer, which is a nonprofit entity (the tour itself runs 16 events). These local groups use that money to put on the tournament–mainly with volunteers–and pay a share of the purse (the tour chips in as well). Revenues are generated through ticket sales, hospitality and local advertising. Any leftover money, after expenses, is donated to local charities.

Another source of revenue for the tour is its 50 or so “official marketing partners,” who pay between $1 million and $40 million per year for advertising and hospitality rights, and include the likes of GE, Coca-Cola, Citi, Charles Schwab and FedEx. (Full disclosure: Forbes Media LLC is also a marketing partner.) Fourteen of those marketing partners are also tournament title sponsors. Other tour revenue sources include the 32 Tournament Players Clubs (TPC) courses (the tour wholly owns 10 of them and either leases or manages the rest), its digital arm and the licensing of its brand name.

The benefits of this economic model are obvious for the tour, which gets the broadcast and marketing partnership money, and for the broadcasters, which get most of their ad inventory presold to hit the very sweet spot of 35- to 55-year-old affluent male viewers. Less obvious is the benefit to a corporation sponsoring a tournament.

Much of what these corporations get is qualitative. Their names are attached to the tournament, of course (i.e., the HP Byron Nelson Championship), and displayed in print, on the Web and on commercials during the broadcast of its tournament and others throughout the season. The charitable component certainly makes it easier for companies to justify the expense of sponsorship–even if the actual money for charity does not come directly from the tour, as most fans assume. But for most companies, it’s the hospitality and entertaining opportunities–the parties and the pro-ams at the tournament itself–that trump all. “We host more than 1,500 clients during the five days of the tournament,” says Frederick Waddell, the chief executive of Northern Trust, which even after the Sheryl Crow brouhaha recently signed an extension until 2016. “We get to interact with them, network with them and talk about new business opportunities all while watching the best golfers in the world.” Michael Glenn, the marketing chief at FedEx, says: “Our customers get to play in pro-ams and walk inside the ropes with the final groups on Sundays.”

Because of the transfusion they provide the broadcasters, these corporations are the lifeblood of the tour. The key to everything is holding on to them. And that’s where the model itself isn’t enough, and where Finchem has to earn his $5.5-million-a-year payday.

**

The son of a Marine, Tim Finchem grew up in Virginia Beach, Va. and went on to get his law degree at the University of Virginia, where he and a teammate reached the finals in a prestigious moot court contest judged by then Supreme Court Justice Thurgood Marshall.

Finchem entered a private practice in Norfolk with a firm that focused on maritime law. In 1978 he joined the Carter Administration as the deputy advisor in the office of economic affairs and eventually became his national staff director. “We managed to get interest rates and inflation into double digits and smoothed the way for his resounding defeat,” laughs Finchem.

After Carter’s reelection loss Finchem founded a market research firm in Washington, D.C. that catered to the airline and telecommunications industries. In 1984 the tour became one of his clients. (That same year he moonlighted as the national finance director for the Democratic presidential candidate, Walter Mondale.) Three years later, then tour commissioner Beman asked Finchem to join the tour. Finchem initially declined. “Then my wife got pregnant, and we said, ‘What the hell.’ Florida seemed like a good place to raise kids. I really wanted to run my own company, but I figured I’d do a few years at the tour, then see what happened.”

He quickly rose to the position of deputy commissioner. In 1994 Beman retired and Finchem took over, prompting tour player Peter Jacobsen to famously utter: “Deane left him a Mercedes with the tank a quarter full, and all Tim has to do is keep putting gas in it.”

Woods’ appearance in 1996 filled the Mercedes with high octane. But Finchem would be forced to navigate a few crises with some of his most significant players. The first clash came with Greg Norman, a former tour member and number one in the world who, in 1994, came up with the idea of a world tour for the game’s best players, backed by a reported $112 million of Rupert Murdoch’s money. Finchem pledged to ban any tour player who played in the events, adding fuel to a monopoly investigation by the Federal Trade Commission. Finchem, the old politico, personally met with the FTC commissioners. The FTC case was eventually dropped, and Norman’s idea withered.

Then, in 2000, at the height of his power, Woods publicly complained about his likeness being used by the tour without his permission. Finchem hurriedly flew to California to meet with Woods and defused what could have been a disastrous situation.

In the end, after all, the commissioner of the PGA Tour has a simple mandate: Make the players–who operate as independent contractors, effectively owners of their own personal franchises–richer. And Finchem has succeeded grandly in that respect. In 1994 total purse money for the PGA Tour was $56.4 million. In 2007 it was $272 million. This year, for 46 PGA Tour events, that number will be $298 million, in addition to another $72 million for the other four tours. (That’s better growth than the average Major League Baseball salary, which has tripled over that same time period.)

The tour’s growth has been buoyed by new revenue streams. Yet another unusual aspect of the tour: It does not own what most consider the five most valuable properties in golf–the four major tournaments (the Masters, U.S. Open, British Open and PGA Championship) and the biennial Ryder Cup, which pits the best players in the U.S. against the best players in Europe. It is the equivalent of Major League Baseball not owning the World Series. (The tour does own the Players Championship–the richest event in golf–but that event lacks the cachet of the majors.)

So Finchem founded the Presidents Cup, held in the years between Ryder Cups, in which the best American players play against the best international non-European players. In 1999 the tour, along with four of the world’s other large professional golf tours, started what’s known as the World Golf Championships, a series of now four tournaments for only the top players in the world, with purses of close to $9 million. It was basically Norman’s idea. “It still irritates me, big time,” says Norman. “He cast me as a guy who was trying to ruin the game of golf, then he does this.”

The FedEx Cup, another Finchem idea, began in 2007 and has now become a staple of the tour. And two years later Finchem, along with other golf entities, successfully lobbied to have golf included as an official sport in the 2016 Olympics in Rio de Janeiro, which presumably will get medal-hungry countries like Russia and China to invest more heavily in the sport.

Finchem expects to retire that year, and the Olympic debut provides him with a closing chapter. “My team here is mature and ready,” he says. His retirement challenge, he says, will be hiking to the summit of the 50-plus 14,000-foot mountains in Colorado. “I’ve done 16 so far,” says a man who knows a thing or two about peaks and valleys.