International Speedway Corporation
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UVA-C-2222 INTERNATIONAL SPEEDWAY CORPORATION Modern stock car racing had its start over 100 years ago on the beaches of Daytona Beach, Florida.1 The beaches were then as they are today − expansive and perfectly suited for automobiles. Auto traffic on Daytona’s beaches is still the norm as their sheer size alone makes them relatively free of pedestrian accidents. Once each day the sands are wiped clean by outgoing tides and become hard-packed. Vehicles trapped in soft sand, a problem typical of most beaches, is only of minor concern to traffic in Daytona. NASCAR In the mid-1930s, William “Big Bill” France saw firsthand the racing potential of Daytona Beach. As the owner of a local gas station, France had a natural interest in automobiles and frequented the speed trials and competitive races held on the beach. On occasion he was known to enter a race himself. Like all drivers and promoters of that era, France was frustrated by a lack of uniformity. Schedules, rules, car specifications, and driver safety requirements all varied. Corruption was rampant. It was not unusual for a race winner to arrive at a checkered flag only to learn that the promoter had skipped town with the purse. By rule cars entered were “stock” or right off the showroom floor. As might be expected, to gain advantage over competitors almost all drivers dangerously modified their cars from stock to gain extra speed. Despite the fact that racing was flourishing throughout the southeast, France recognized that for the sport to ultimately succeed it was necessary to set common rules, establish common racecar specifications, and vigilantly promote each race under a common umbrella. To effect this change in 1947, France organized a meeting of a group of business leaders at Daytona’s Streamline Hotel. From that meeting the National Association of Stock Car Auto Racing (NASCAR) was formed. 1 As early as 1903 the first automobile time trial was held just north of Daytona in the town of Ormond. Alexander Winton set the first auto speed record with a blistering 68.2 miles per hour. This case was prepared by Paul Simko, Associate Professor of Business Administration, from publicly available data. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2004 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation -2- UVA-C-2222 By 2004 NASCAR remained the premier sanctioning body for stock car racing. Its primary role continued unchanged: to sanction official NASCAR races, establish and enforce rules for those races, monitor the distribution of prize monies, and maintain a points system designed to determine an annual champion. Although from humble roots, NASCAR grew large enough to annually sanction over 1,750 races across 37 states. NASCAR racing ran the complete spectrum, from weekly races at small dirt tracks, to regional touring series, to three top- tier series. NASCAR’s three highest-level series were national in scope, with the most important the Nextel Cup (formerly the Winston Cup). Setting NASCAR apart from other sports was the independent-contractor status of the drivers and their crew members. In order to officiate or compete in a NASCAR-sanctioned event, individuals applied for licenses on an annual basis, and they maintained those licenses in good standing throughout the year. All officials and competitors abided by NASCAR’s rules and procedures. When NASCAR made a change, therefore, all parties were directly impacted.2 Stock car auto racing was by no means a second-tier sporting activity, and it was not cheap. NASCAR had grown into a multibillion-dollar business with races in most major markets, a national fan base by some estimates reaching 75 million, and a multibillion-dollar television contract. To participate driver teams financed out-of-pocket, the bulk of which typically came from corporate sponsorships. Estimates ranged from $10 million to $15 million to field a car for the 2004 Nextel Cup season. The Speedway Corporation In the late 1940s and early 1950s, NASCAR races were concentrated in the southeastern United States. In response to the surge in growth that came from his endless promoting, in 1959 Bill France moved racing off Daytona’s beaches to his newly constructed Daytona International Speedway. This 2.5 mile high-banked oval speedway was like no other of its kind; race fans left that first race in awe at the sight of 59 brightly painted cars running over 140 miles per hour for 500 consecutive miles (even if in a seemingly endless circle). As was the case at its opening, the mystique of this track has remained. Its signature race, the Daytona 500, is widely regarded as the most prestigious stock car race in the world. With the 1968 opening of a similar, but larger, track in Talladega, Alabama, Bill France’s speedway company had stretched beyond Daytona. The company, now known as the International Speedway Corporation (ISC), was the nation’s leading promoter of motor sports activities. By late 2003 it owned and operated twelve major race facilities (see Exhibit 1) and held significant interests in two others. Over the years, track growth came from a combination of purchases and outright construction, and expansion plans called for new facilities in the Pacific 2 One such change was the highly controversial point system approach that determined the winner of the 2004 Nextel Cup Championship. Late season races were now weighted more heavily than earlier races, as a means to avoid crowning a de facto champion too early in the racing season and thus sustaining fan interest throughout the year. -3- UVA-C-2222 Northwest and the New York metropolitan areas. With its track base the company promoted more than 100 events annually. Seventeen of these were Nextel Cup races. International Speedway Corporation was diversified across the racing industry. The company owned and operated (i) Motor Racing Network, Inc. (MRN Radio) the nation’s largest independent sports radio network, (ii) DAYTONA USA, the official tourist attraction of NASCAR, and (iii) Americrown and Motorsports International, providers of catering services, food and beverage concessions, and producers and marketers of motor sports merchandise. Each of the company’s segments has seen a surge in growth commensurate with the popularity of the sport. Exhibit 2 provides 1999–2003 income statement data for each line of the company’s operations. Exhibits 3 and 4 provide Balance Sheets and Statements of Cash Flows. Key revenue sources were defined by management as: Admissions Ticket sales for all of racing events, activities at Daytona USA, and other motor sports activities and amusement. Motor sports related income Television, radio and ancillary rights fees, promotion and sponsorship fees, hospitality rentals, advertising rentals, royalties from licenses of ISC trademarks, and track rentals. Food, beverage, and merchandise income Revenues from concession stands, hospitality catering, direct sales of souvenirs, programs and other merchandise, and fees paid by third-party vendors for the right to occupy space to sell souvenirs and concessions at ISC facilities. A new television contract effective in fiscal 2001 nearly quadrupled the broadcast revenues for the industry and has likewise had a material impact on ISC. Historically, each track was obligated to negotiate its own television contract independent of all other tracks. In keeping with tradition, NASCAR executives convinced track owners that a single contract was in their best financial interests. A seven-year, $2.8 billion deal with three networks (FOX, NBC, and TNT) was brokered. Commencing in 2001, NASCAR allocated television revenue to the individual tracks and race team owners under separate agreements. The aggregated industry percentages were fixed, but the allocations to each race track varied.3 Fueled by increased television revenue and expanded viewership, profits from continuing operations for ISC have almost doubled in the four years ending November 30, 2003. With an average ticket price of about $70 and capacity crowds at virtually every major event, growth in all business lines has far outstripped even the most aggressive forecasts. The 2003 Management Discussion and Analysis (MD&A) of ISC provided clear insights into the sources of the 3 The allocation of television rights was as follows: NASCAR retained 10 percent of the gross broadcast rights fees allocated to each NASCAR NEXTEL Cup event as a component of its sanction fees. The remaining 90 percent was allocated to the promoter. The event promoter paid 25 percent of the gross broadcast rights’ fees allocated to the event as part of awards to the competitors. -4- UVA-C-2222 company’s growth. Exhibit 5 summarizes the key components of ISC’s profitability and risk profile across the three-year period ending November 30, 2003. Exhibit 6 provides a summary of some of the more relevant excerpts from the MD&A. A Family Business A most unique feature of NASCAR is that it is a private governing body 100 percent owned and controlled by the direct heirs of Bill France (see Exhibit 7). In this respect auto racing is like no other major sporting league in the country, as a single family controls both regulation and prize distribution. Bill France, Jr. succeeded his father as chairman in 1972, and in 2003 was himself succeeded by his son, Brian. NASCAR continues to be headquartered in Daytona Beach. As of year-end 2003 International Speedway Corporation was publicly traded (NASDAQ: ISCA), and over 60 percent of voting shares were controlled by France family members.