Introduction to athletes doing business off the court
Competing in the best professional sport leagues in the world can be very lucrative. The top 100 earners of 2019 all made well over $25 million (Lionel Messi topping that list with $127 million in total earnings) and yet, as crazy as it sounds, a majority of them might just end up with nothing.
In 2009, Sports Illustrated published a breakout paper “ How (and why) athletes go broke “ claiming that 78% of NFL players end up either in bankruptcy or in financial distress within 2 years of retiring and that 60% of NBA players go bankrupt within 5 years of retirement.
When it comes to losing money, professional athletes notably tend to share behavioral patterns such as: cashing in the first big paychecks at a very young age and spend it lavishly, coming from tough upbringings and financially supporting family and friends, having troublesome relationships triggering hefty divorces or child support payments, misplacing trust in people offering bad investment opportunities, and keeping an unsustainable lifestyle after retirement.
Above all, athletes tend to fail to address their main financial challenge which is to juggle between the inconsistent length of their careers and the complicated allocation of their financial resources. Athletes’ careers are short and it’s also unlikely that most of them stay at the top for a long period of time, partly due to fierce competition and injuries. As of 2012, the average stay was only 5.6 years in the MLB, 5.5 years in the NHL, 4.8 years in the NBA, and 3.3 years in the NFL. Professional athletes often have odd financial needs, rapidly accumulating important amounts of capital early in their careers to manage for the rest of their lives.
Managing an athlete’s finances nowadays mainly consists of dealing with contracts, budgeting expenses, optimizing taxes, building a balanced portfolio of assets and savings, and keeping up with a post-retirement financial plan. Even though agents usually act as a focal point to manage players and sign contracts, financial advisors are more suitable to help navigating the troubled waters of finance and money management. Ideally, the financial advisor work hand-in-hand with the player and his agent, and act as a financial coach keeping the player accountable.
The problem is that athletes have an history for picking bad financial advisors (or not picking any) and that financial advisors fail to bridge the gap with athletes. In fact, most of the time athletes would choose someone from their entourage over someone who’s qualified for the job because they’d trust their uncle a lot more than the guy from wall street trying to take their money let’s say. That’s a pity because athletes should prioritize working with professionals capable of performing at a high level just like they are. If you’re a top athlete, you should expect nothing less than a top wealth manager.
10 years later, some things have changed, and some haven’t. A lot of athletes keep on struggling to get good financial counseling and behavioral patterns are still deeply embedded into the culture of being successful in sports. On the other hand, the sport ecosystem has been maturing with institutions providing better support and developing initiatives to protect players, notably through player associations, while an increasing number of athletes are becoming more financially responsible by building better habits. Overall, things will take some time.
In the meantime, what’s really interesting is that there seems to be a global trend of athletes becoming a lot more aware of opportunities to build long-term wealth off the court. Athletes have noticeably been leveraging their burgeoning influence to generate additional and future sources of income which are likely to have a tremendous impact on their long-term financial situations.
With sports exploding into a trillion-dollar industry over the past 40 years, athletes became an ever-growing source of entertainment and business opportunities. Great athletes are fascinating; they’re somewhat like humans doing superhuman things. Watching them perform and compete at the highest level is a guarantee for a spectacular show and a display of what greatness can look like. Above all, they bring emotions to people and companies can bank on that.
Corporates realized that athletes weren’t just good at filling up stadiums, they were the perfect marketing tools to cross sell other products and services. Brand ambassadorship and endorsement deals strived on engaging the public through emotional connections and giving the opportunity to fans around the world to share something with their favorite players. Corporations started endorsing athletes as early as at the beginning of the 20th century, but it wasn’t until the 90’s that sport marketing really evolved towards what it is today.
I grew up in the 90’s when all the kids wanted to “be like Mike” and I think Michael Jordan was the prime example of what modern athletes were meant to become: powerful brands. Nike was quick to understand that they had a fast lane to sell Jordan shoes to all the kids in Chicago and beyond. These shoes fueled hopes and dreams that you could ball like MJ and it was a slam dunk for Nike to say the least. Last year alone, the Jordan Brand generated $2.9 billion in revenues annually for the swoosh company.
Interestingly, what made everything took off was the rise of new technologies allowing sports to become mainstream. Radio, TV, and later the internet, made sports accessible to millions of people across the world and greatly contributed to help the market grow to what it is now.
Since then, salaries and endorsements never looked back. For example, in the mid 80’s the highest paid athlete, Michael Jordan, earned between $2–3 million per year in salary and about $500,000 in endorsements. In comparison his successor, Lebron James, collected $36 million in salary and $53 million in endorsements this year.
For many players today, endorsements became just as important, if not more important, than salaries as part of their total earnings. Last year, Roger Federer reportedly earned close to 92% of his total earnings ($93.4 million) in endorsements with $86 million, the most of any athletes.
In a world where we spend an increasing amount of our time online, athletes have noticeably gained even more influence and endorsement potential thanks to social media. Today, athletes can offer to businesses a direct access to millions of consumers and they often rank amongst the most popular social media accounts. Football player and social media superstar Cristiano Ronaldo notably topped up 180 million followers on Instagram, 122 million likes on Facebook, and 79 million followers on Twitter at the time writing; that’s about two times more than Nike for each social media platform respectively. Ronaldo is reportedly the most-followed account on Instagram and earns $750,000 upward per post, while Neymar and Messi earn $600,000 and $500,000 respectively.
Modern athletes started to understand the power of social capital to leverage business opportunities and companies were increasingly looking to monetize these collaborations. Athletes became “bankable” and it helped many of them to sign more lucrative contracts; from salaries to new endorsement deals. At the end of the day, clubs are businesses: if they have two comparable players and one has a better fanbase built through endorsements or social media and is going to bring more people to watch games, then they’ll sign that player. We can think of how Neymar’s negotiated an astonishing $41 million salary and a $108 million signing bonus in a $263 million blockbuster transfer from Barcelona to the PSG based on potential future revenues for the PSG in merchandise (jersey and equipment), ticket sales, marketing reach, and re-negotiated contracts (TV rights, sponsorship, etc.).
Endorsement deals contributed to push athletes to have a greater control of their own business and to be more involved. It forced them to open up to the business world and to gain a better understanding of how to monetize their brand. Even better, it allowed athletes to partner with other brands they love and be at the forefront of what those businesses are doing. In fact, a lot of athletes can further pursue their interests with companies in fields they’re passionate about and collaborate on products they use every day, which is pretty awesome. Eventually, they became more “business savy” and started working with a more complete range of professional including community managers, marketing professionals, business managers, accountants, or financial advisors.
Most importantly, endorsements can provide a great revenue stream for athletes in post-retirement. Last year, Lebron James signed a lifetime $1 billion endorsement deal with Nike, the first of its kind and the largest single-athlete deal in Nike’s 45-year history. Retired in 2013, football player David Beckham reportedly earned $65 million in 2015 including a deal worth $8 million annually with British fashion brand Kent & Curwen and a deal worth $5 million a year with Chinese real estate firm Luneng.
Athletes today gained so much influence that they can have an instant impact on businesses revenues and valuations. Last year, Cristiano Ronaldo was transferred from Real Madrid to Juventus FC, selling 520,000 shirts in 24 hours and generating about $64 million, while also sending Juventus’ stock soaring by 127% from July to September and roughly adding $980 million in market cap. The same year, he took home $44 million in sponsorship deals and produced about $1 billion in value for sponsors on social media. During the summer 2010, Lebron James left the Cleveland Cavaliers to the Miami Heat and while the Cavaliers took a 25% valuation drop in a single year (from $476 million to $355 million), the Heat more than doubled its worth (from $364 million to $770 million) during 2010–2011. It’s interesting to think of how much value athletes can create and what they get in return.
People tend to think athletes get paid too much for what they do but I think they will get paid much more in the future; and it will notably come from an increased access to ownership. Most Fortune 500 companies pay up to million-dollar salaries to their top executives, but they’re also adding stock packages as an incentive to perform. This makes a huge difference as stockholders often share most of the upside in the value creation and a lot of athletes have been missing out on a lot of the incredible growth of the sports industry the past 40 years. For instance, Magic Johnson, whom has been a central figure for the Los Angeles Lakers over the years, bought 4.5% of the Lakers for $10 million in 1994 at a roughly $222 million valuation. Even though he sold his shares later on, the Lakers are worth $3.7 billion today and you’d probably have to buy in at a premium. That’s more than a 15,000% return in 25 years.
As athletes keep gaining more influence and awareness, I believe they will push the conversation about ownership. It should become more frequent for athletes to ask for shares as part of their salaries or their endorsement deals and it comes with no surprise that the most successful athletes off the court (e.g. Magic Johnson or Michael Jordan) have all been involved with equity deals as investors or as entrepreneurs. I think that keeping the system as it is will start creating conflicts and soon enough, we’d see the emergence of other competitive initiatives forcing major sport leagues to adapt to this new environment. What would happen if all the players decided to team up and create their own league? What if many players as important as Lebron James or Cristiano Ronaldo decided to flee to China instead? Even though that sounds a little unrealistic right now, this is the kind of questions that could challenge the current distribution of power between owners and players. After all, athletes might have been the face of money in sports but aren’t the owners the ones cutting checks?
Originally published at https://www.linkedin.com.
