Olympic Games: The Price of Glory - [Business Breakdowns, EP.176]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from. and we are here to bring them to you. To find more episodes of Breakdowns, check out joincolossus .com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Welcome back to Business Breakdowns. This is Matt Russell, and today we are diving into the economics of the Olympics. It's a timely episode with the Paris Games ongoing right now. And the economic reality for host cities is extremely poor. It's estimated that Paris is going to spend $9 billion for these 2024 Games. Now, that's an improvement versus the $35 billion spent by Tokyo in 2020, the $60 billion spent by Sochi in 2014, and a similar number spent by Beijing in 2008. But even with that improvement, with para -spending, let's say $9 billion, it's a loss compared to the revenue that they'll generate, which is somewhere in the mid -single -digit billion dollars.

1:36Our guest today is Andrew Zimbalist, author and economics professor at Smith College. Andrew has written extensively on the economics of the Olympics, specifically for host cities, the poor reality, and what led us to this environment where cities are spending so much money and not receiving that same reward. Now, I think it's easy to step back and say, well, there's probably some long -term benefits here that are being captured in the economic story related to the games. And that was my initial thought. But when you look into the maintenance spend that is required for the upkeep of all of the infrastructure, the lack of follow through with tourism, the lack of follow through with the jobs market.

2:20It is a poor reality. Andrew brings us behind the curtain to share more about the IOC and the bidding process for the Olympics, how that has changed over time and what has led us to this period of time where cities are spending so much money for this type of outcome. We also get into some of the success stories where you have Los Angeles in the 80s and Barcelona in the early 90s who found a way to make the economics a net benefit for them. It's a really fascinating discussion and one of those episodes that leaves you thinking, what is the long -term viability of this? Andrew shares some of his ideas for solutions to the Olympics.

2:55But this is thought -provoking, to say the least. Now, please enjoy this episode. All right, Andy, excited to have you here. Very timely discussion. You have written a lot about the economics of the Olympics and some very, very interesting things over the course of many years, books, articles, and whatnot. And I thought a good place to start would just be to outline the core thesis or the core idea behind most of your writing. And then you and I can dissect the different angles throughout the conversation from there. Well, I guess the singular most common theme in what I've written about is that cities that want to host the Olympics should be extraordinarily cautious that it takes an enormously lucky alignment of the stars to come out even, let alone come out ahead.

3:47Most host cities end up losing billions and billions of dollars and suffer a good deal of disruption socially, economically, environmentally in the process. I think if you go back over the last 60 or so years of hosts, you do find one or two cases where they were able either to come out even or because of very particular and unique circumstances in terms of local political planning, they were able to benefit from hosting the games. But those are very rare cases. The most common case is that you're dealing with an international monopoly, the International Olympic Committee or the IOC. We have no world government that regulates the IOC.

4:28We have the United Nations. They're basically defeat on all grounds, but certainly with regard to international Olympic competitions. There's nobody who regulates the IOC. They're an international monopoly. They have a great deal of power. How much power they have varies over time depending on their popularity, but they have a lot of power. Historically, they've been able to place cities off against to each other, have cities compete to make proposals about the venues and the transportation and the amenities and so on about their city relative to other cities. And cities have, again, historically, not recently, but historically have engaged in vigorous competition with each other and end up making promises and commitments that cost billions and billions of dollars more than the revenue that they attract.

5:11There's always been this notion that even if there is a short -term loss. And the IOC will very rarely admit to that instead of engaging accounting finagling to cover up the losses. But even when there are no losses, there's a tremendous amount of disruption that happens in the Olympic Games. And you have to, after you've made your commitments and you've built or renovated 20, 30, 40 venues, sometimes even more than 40 venues for the games, you then have to maintain them. Or you can let them go to seed. Or if you do temporary venues and you have to dismantle them. But maintaining these venues involves a lot of cost and also involves the use of scarce urban real estate for facilities that didn't have an economically viable use before the 17 days of the Olympics and are very, very unlikely, therefore, to have an economically viable use after the Games.

6:06So there are all sorts of very complicated things that go on and the odds are stacked against you. And hence, I go back to my initial statement, Cities need to be very, very cautious before they undertake this massive commitment. You painted a very clear picture there, and I saw some of the statistics about the cost of maintaining some of those buildings that might cost $400 to $500 million just to build initially, and then another $10 to $30 million to maintain thereafter. So you're incurring that loss, not necessarily just at the time of the Olympics, but if you decide to maintain that building and infrastructure after the fact, you could be maintaining losses for a long period of time.

6:43We could start maybe just with the bidding process itself. And maybe over the course of time and history in terms of what that's looked like, it certainly seems to be the case over the past decade, maybe 20 years. This idea of the substantial cost that's associated with the Olympics has really come more into the mainstream. I think it's something that I've started to see more things written about, both the Olympics and the World Cup and the substantial amount of money that it costs. How has that impacted the bidding process? What does the bidding process look like? How much competition is there?

7:18Anything that you could share in bringing us behind the curtain a bit there? So the bidding process has changed. The IOC made a major change in 2019. And basically, just a very quick historical sketch, starting with the 1968 Summer Olympics in Mexico City, where there was a very large amount of student and political protest about various things connected to the Mexican government and to the university experience and expense. There was a very large protest. It just happened a week or so before the Olympics were to start. The government could not countenance that level of discord being on the world stage.

7:53And they suppressed it. And they ended up killing, I can't remember the numbers, but dozens of protesters were killed. It was a very ugly situation. It was also ugly because Mexico City had and still has terrible pollution. and it happens to be about 7 ,000 feet altitude. So that created issues for the athletes to compete, to depend upon their cardiovascular system, where the air was very light and the air was very polluted, was not something that was very favorable. So Mexico got a lot of bad publicity in 68. In 72, you had the Olympics in Munich, where there was the attack by terrorists on the Israeli compound.

8:3011 Israelis were killed, and I think some of the terrorists were killed as well. So that was a very ugly Olympics, did not provide positive imagery, positive feedback for Munich. And following that, we had the situation, the IOC had awarded the 1976 Winter Olympics to Denver, Colorado. They'd actually gone through the competition and they said, Denver, you win. Wonderful. You're so lucky you won. Then the people of Denver called for a plebiscite or referendum, which they had, and they voted it down. They thought it was too expensive and that environmentally it was too unsound. So you had the Montreal Olympics in the summer of 76 that ended up going more than 10 times over budget.

9:10Also, there was a lot of corruption involved there that was extant and publicized. So all of a sudden, the Olympics, which had been this wonderful jewel for a city to get, started getting a worse and worse reputation. So fewer and fewer cities in the mid and late 70s were willing to bid. And finally, along comes Los Angeles and says they'll host in 84, but they'll only host under certain conditions. And one of those conditions is that they weren't willing to guarantee any losses. And the IOC had no choice. They went along with it. But what happens in Los Angeles is that Peter Ubroth is the CEO of it.

9:44He develops a new model for corporate sponsorships. The amount of money they garnered from that goes way up. He's hosting, organizing the games in Los Angeles, the second largest city and the entertainment capital of the United States. And they also happen to have UCLA and USC major Division I sports programs, that therefore they have major stadiums and arenas and swimming competition venues. And it turns out, because of good management, because of the unique circumstances, because of bargaining leverage that Los Angeles had vis -a -vis the IOC, it turns out that they generated a nice surplus.

10:17It wasn't massive, but it was a surplus. And all of a sudden, the bad publicity that had accumulated over the previous 12 years or so became good publicity. And once again, cities started this clamor to be able to enter the competition to bid, to host the games. And that pretty much continued through the remaining years of the 20th century. There was also a positive experience in Barcelona in 1992. So the Olympics became very popular, and typically the IOC would make the announcement, okay, it's time to bid to host the games that are eight years or 10 years down the road, and then get five, six, seven, eight cities entering the competition at the beginning.

10:54What happened though is more and more cities were competing openly, and the Olympics were expanding, and technology was changing, and expectations about luxury and beauty and shine would grow, the expenses went out of control. And all of a sudden, you have situations like Beijing in 2008, where they're spending $45 billion to host the games. And then you have Sochi, Russia for the Winter Games in 2014, they're spending somewhere between $51 and $65 billion. So more and more cities are starting to feel reluctant that this thing has gotten much too expensive, whereas cities are spending for the Summer Games, they're spending 15, 20, 25 and up, a billion dollars.

11:35On the revenue side, they're getting some money from international television and sponsorship deals that the IOC signs, but not that much. They get a billion to a billion and a half dollars. They sell tickets, and that could be anywhere from 750 million to a billion dollars. They sell domestic sponsorship. You add it all up, and how much revenue comes in? Somewhere in the neighborhood of $4 or $5 billion for the summer Games and a bit less for the Winter Games. So you have on the one hand, you've got $4 or $5 billion in revenue. On the other hand, you're looking at cost when you count all that needs to be counted, because very often they just count a slice of it.

12:09But when you count everything needs to be counted, you've got cost that, depending on which Olympic Games we're talking about, 15, 20, 25, 30, up to perhaps $60 billion with Sochi. That's not a very good economic balance. And cities start having second thoughts. Some places you have plebiscites or referenda where the population votes down. Some places the city council votes it down. Some places there are petition drives and they voted down. And all of a sudden, instead of having five, six, seven, eight cities bidding, you've got two or three cities or even one or two cities bidding. And indeed, what happened in 2017 is that five cities dropped out of the competition.

12:47They had entered the competition and they dropped out. And the IOC is left with a choice between Los Angeles and Paris. This is in 2017. So we're talking about the competition to host the games this week, 2024. And Los Angeles, in the middle of this competition, makes a statement. And they say that if we don't get the games, if we don't get the host in 2020, we're not going to host. We're not interested in subsequent years. The IOC then is facing a situation where they might have nobody coming to their party to bid for the 28 games. So instead, they go to Los Angeles and they say, how would it be if we committed today, or not today, but when we make our announcement later in 2017, we'll commit to having you be the host in 2028.

13:29We'll let Paris, because it's their centennial, they hosted the games in 1924. We'll let them do it in 2024. And we'll give you payments up front to cover some of your costs and to promote youth sports in Los Angeles. Under those conditions, Los Angeles said, okay. And the IOC did something they'd never done before, which is to announce the Olympic hosts for two successive games going forward. Subsequent to that experience and that situation, which was embarrassing, and they faced something that was potentially even more embarrassing going forward. Subsequent to that, the IOC decides that they're going to change their bidding process.

14:03It's too embarrassing to them to allow this open process to continue, which historically, it was like running a 100 -meter dash. All these people are competing. Who's going to win? Nobody was competing. So the IOC decided, since we've lost the fanfare that we seek, we're going to start having bids in private. And all of the discussions will happen in private. And that way, if the city decides not to bid or the city decides to drop out or people start protesting, that'll be all under the cover. It'll be under wraps. Nobody will see it. And we'll simply make deals on the side with these cities. We won't have open bidding.

14:39And then we'll announce it. When the city agrees, when the city finally gets its bid up to a level that's acceptable to us, we'll announce it. So now since 2019, there's no more open competition. The games in Brisbane, Australia that were awarded for 2032, those games were awarded in the secret behind the curtain process. They simply announced at some point that Brisbane was going to be the host. Brisbane has not been very happy about that. It still remains to be seen what will transpire. There's always a signal in terms of what's happening in public versus what's happening in private. It tells you something about the negotiating process, the leverage of the negotiating process, and at least trying to create that type of environment.

15:17What is Brisbane not happy with in terms of the process that you just alluded to? Interestingly, Melbourne, Australia was slated to host the next Commonwealth Games. And people started looking at the costs and potential benefits and the disruption, the commotion, security issues. And they said, we don't want to do it. And they simply canceled after they had said they were going to do it. They just canceled. So people in Brisbane started asking similar questions. The plans in Brisbane, initially they come out with, the city says, okay, we're going to bid historically when it was still public. And they hire an architectural company to make some fancy drawings.

15:56And they say they've got it all figured out. And then when they get into it and they have to start to award contracts for things. And not just building sports venues, but they have to build roads. There's a transportation infrastructure that has to be built. There's a telecommunications infrastructure that has to be built. There's a hospitality and security infrastructure that has to be built. So they start getting into it and they say, well, wait a minute. Those beautiful plans that we drew up really aren't what we wanted to do. We have a better idea now. We're going to make it even better and bigger.

16:24So they start switching out the plans. In Brisbane, their plans, it's going to be hard for me to describe it. Their initial plans were to have four clusters of Olympic venues and to create linkages between them for transportation. And by the way, the IOC executives always demand that there's special lanes on the highways or the roads for them so they don't get hit by any traffic. And they demand other amenities for themselves too. So it's more complicated than simply building roads for common use. It's a special service that they require. Anyway, Brisbane started looking at the costs and looking at the uncertainty that in fact surrounded doing all of this.

16:59And people started to raise questions. And there was a fairly lively debate about whether they want to pull out altogether. So who knows what will end up happening there. You have mentioned some of the commitments that cities have to make to the IOC. But when it comes down to the actual agreement, is it mostly driven by infrastructure and we agree to build XYZ based on this plan? Is there any monetary commitment in terms of how much they're actually going to need to spend. And where I'm getting is it feels like some of these cost overruns might be driven more by the cities themselves than by what the IOC is demanding of them.

17:37Is that a fair statement? I think it's driven by both. The IOC has so many demands. And by the way, the bidding process never was one city says, I'll bid $15 billion and the next cities are going to all be $16 billion. Never in money. It was always in venues, the number of venues, the specialization of the venues, the amenities of the venues, and then the cost of the venues. So if you say to the IOC, we're going to build 17 venues, then you add up the projected costs and then you get your bid or you get part of your bid. Because as I just said, it's much more than just building the venues. So it's not an amount of money.

18:11But what the IOC requires for the summer games is somewhere around 35 to 40 venues. And it depends because each of the hosts gets to have the introduction of experimental new games. So the United States will get to reintroduce baseball in 28 for the games in Los Angeles. So somewhere between 35 and 40 venues. Typically, the process has been something like the following. Politicians, in order to get political approval, a mayor, a county commissioner, country president, they've got to put forward a plan that looks somewhat reasonable. In putting forward that plan, what they like to do is put forward a bare bones plan without any bells and whistles.

18:49Then once there's political approval, Then they started adding the bells and whistles. So a project that was supposed to cost whatever, $7 billion, all of a sudden it's costing $10 or $20 billion. So part of that is just the political process. In order to get approval, you can't put out a really large price at the beginning. Part of it is that we're talking about a system that operates where the games used to get awarded seven years in advance. Now they're saying it could be less than that or it could be more than that. Obviously, Brisbane, which is in 32, is more than that. It was awarded a couple of years ago.

19:20But during the course of five years or seven years or 10 years, we have inflation. And one of the strongest areas of inflation is in construction costs. So there's just a process of prices going up from that. There's also inevitably this corruption going on. Some places there's a little bit of corruption. Some places there's a lot of corruption. But you've got an organizing committee. And usually the organizing committee has already involved bigwigs from the construction industry, from development companies, construction companies. And those people have an enormous amount of power because they're going to be doling out, giving out contracts, signing contracts worth billions and billions of dollars.

20:00So they get paid. They get paid off to give the contract to this company. Here's a million dollars. Give the contract to this. We'll make sure your son gets good work in the future, whatever it is. So that is a process that escalates the costs as well. And then I think there's just some honest reconfiguring that goes on. It's enormously complicated to do this. You're talking about you have to build an Olympic village that's going to house somewhere in the neighborhood of 13 ,000 or 14 ,000 individuals, about 11 ,000 of them are athletes, and there are coaches and managers and so on. So you have to build an Olympic village.

20:30The Olympic village isn't just dormitories. It's cafeterias and restaurants and tracks and weight rooms. It's polyclinics. It's entertainment venues. You're actually building a village. You're not just building a tenement building. and it's enormously expensive. It could be $2 or $3 billion quite easily to do that. That's complicated. You have to build a media village. You have to build a telecommunications center. You have to renovate your airport, build a new wing in your airport. Then you've got to think about, so you're going to have maybe 25 ,000 directly connected to the New Olympics, but then you have tourism.

21:03All the people who are going to come from surrounding cities and other countries that have come, and it's usually figured to be somewhere in the millions, the number of people are going to come to the city. And particularly in a day like today, politically, where we have so much international instability, you've got a tremendous security situation on your hands. You've got millions of people running around the city, going from one venue to another. If somebody wants to make a political group or a terrorist group wants to make a political statement, we're better to do it. You've got the world's attention.

21:32So in Paris, they're going to have somewhere. I've seen different figures. I've seen a figure of around 50 ,000. I've seen a figure of around 80 ,000 security personnel who are going to be staking out the grounds. And it's not just the personnel, but it's also military equipment and high technology and drones and so on that are going to be hopefully protecting people's safety. And then you've got to feed all the athletes and you've got to move the athletes around. By the way, for the games in Paris in the coming weeks, they're going to have the surfing competition in Tahiti. that's not next door to Paris.

22:03You got to move the athletes around within a city and between cities. It's an enormously complicated situation. I've spoken to Casey Wasserman, who's the chair person of the LA Games, many times about this. He's a really smart guy. He's well -informed. He's a great businessman. And every week, he's confronting some new issues that he never thought of before. So it's an enormously expensive and complicated thing. And that's another element that contributes ultimately to the cost overruns. And the typical cost overruns since 1960 for the summer games is 250%. The price is going up more than double.

22:39And I think I read that every single game since 1960 have had cost overruns. Yeah, every single game with a caveat that there are some games that we don't have data for, like when Moscow hosted in 1980, we don't have adequate data. And the data that we had going back to the 60s is not as comprehensive as it is today. But yes, basically, that's the case. They always have cost overruns. Incredible. And I think you pointing out the logistical challenges and all of this paint a very clear picture in terms of not just the building and construction, but much, much, much more in terms of managing this with major question marks in terms of what you do after the Olympics end as well.

23:17The IOC has come up several times here. What is the economic arrangement for the IOC itself. Any details on that body? Is it one of these nonprofits? Is it a profit -seeking entity? Are there revenue share agreements? What can you share about their own economic arrangements? The IOC is a nonprofit. The top executives like the president and the vice president, they don't receive a salary. Thomas Bach, the president, gets all of his expenses paid for wherever he goes. One Antonio Samaranch, who was two presidents ago and had been president of the IOC for a couple of decades. He wanted to be treated like he was a prince.

23:55And on a permanent basis, he rented a loft in the most expensive hotel in Lausanne. They get treated very well. Obviously, he gets private plane service and everything else he wants. But they don't receive a salary. And there's nobody who owns the IOC who gets to take home profits at the end of the year. What the IOC does is it pulls in maybe $4 or $5 billion for the summer games every time they're health. Most of that money is then redistributed to international sports federations and national Olympic committees. It doesn't stay in the IOC, where the IOC, again, has stockholders who get dividends or profits or capital gains.

24:32That's not how it works. There's a staff at the IOC that is very well remunerated that operates in Switzerland. There's about 100 members on the International Olympic Committee itself. A large share of those members are very wealthy, very well -connected business people. Some of them are royalty. They have royalty connections. There are a handful that are just normal people who were previous athletes or had other connections. But basically, it's a group of very elite individuals who derive not salary, but all sorts of amenities and perquisites from being on the committee. They, of course, get free transportation, business or first class to all of the events that the IOC holds, not just the Olympics, but other events, they had gifts and other awards.