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Both are a business. Learn how they work.

Chapter 6: The Business of College and Professional Sport

Both are a business. Learn how they work.

The Structure of Major College Sports

90% the NCAA’s revenue comes from the men’s basketball tournament otherwise known as “March Madness.”

Major college sports generates billions of dollars every year. The overwhelming majority of the money is derived from Division I football and basketball. Within the NCAA structure there is a revenue sharing system that benefits all college sports. At most major colleges football and/or basketball support all of the other sports teams in an athletic program. While there is ongoing debate about extending benefits to athletes in revenue-generating sports (football and basketball), there are a number of entities that benefit, including, the NCAA, conferences, universities, coaches, and student-athletes.

 The graph provided on the next page shows the overall structure of the revenues of college sports. At the top is the NCAA, the governing organization of college sports who receives most of its revenues from the mens basketball March Madness tournament. It’s contract with CBS/Turner brings in close to $800 million per year. Some of the money is filtered down to the conferences which in turn is distributed to its member schools. The universities use the money for coaches’ salaries, scholarships, facilities, etc.

 Further, with the recent College Football Playoff series the conferences have gained a significant amount of power. The ACC, Big 12, Big Ten, Pac-12, and SEC, also known as the Power Five, will each make $75 million in the first year of the contract. In addition to the $75 million, each conference will receive $300,000 per team for participating in a bowl game, $6 million for each team that is selected as one of the four playoff teams, $4 million for every team selected for a non-playoff bowl game, and $2 million to cover the expenses of the teams that participate in the semi-final and national championship games. The smaller conferences outside of the Power Five, will also split about $75 million.

 

Should I Stay or Should I Go?

“When I was in 9th grade, Kevin Garnett did it, and I said, ‘Man, I want to do it . . . It’s been my dream since I started running up and down the court.”

— Ellis Richardson

      1998 NBA draft hopeful

 

In 1998 Ellis Richardson, a standout player from Los Angeles Sun Valley Poly high school, declared for the 1998 NBA draft. According to different sources he averaged between 21 and 30 points in one of the weaker leagues in Los Angeles city basketball. He wasn’t listed in the top 100 players in the state of California and did not appear on the radar of most of the major recruiting services. Predictably, Richardson was not selected in a draft that featured Mike Bibby, Vince Carter, Jason Williams, Dirk Nowitzki, Paul Pierce, Ricky Davis, Tyronn Lou, Cuttino Mobley, Miles Simon, Toby Baily, Rafer Alston, to name a few. Carter, Nowitzki, and Pierce will be elected to the NBA’s Hall of Fame. In an interview years later Richardson realized that he “had made a mistake.” He also said, “I saw so many players drafted before me . . . I know I was better than Olowokandi.”As any Los Angeles Clipper fan would know Michael Olowokandi was the No. 1 overall pick in the 1998 NBA draft by the Denver Nuggets.

 Unlike Richardson, in 2014 Emmanuel Mudiay, a high school player from Texas, signed a one year, $1.2 million contract with the Guangdong Southern Tigers in China. Mudiay skipped his college career and scholarship opportunity and went straight into the professional ranks. In this case Mudiay, who signed a Head Start Contract, made the right choice. One year later, he looked smarter as he was selected number seven in the 2015 NBA draft.   Every year high school and college athletes decide to forgo a college career and pursue a professional career. This happens mainly in basketball and football—at the college level— but track, baseball, golf, and soccer athletes have been known to do the same. However, for the purpose of this discussion I am mainly referring to football and basketball players.

 Whether you are in high school or college my Should I Stay or Go Decision tree provides a set of questions you should ask yourself before making a decision to pursue a professional career. Essentially, the only person who should leave school to pursue a professional career is a surefire first round draft pick or someone who can sign a Head Start Contract. Anyone else should consider a number of important factors:

 

Are you less than two semesters away from graduating? As you get older and acquire more responsibilities (children, mortgage, job etc.) it becomes harder to find time to go back to school. Having less than two semesters to graduate is a manageable situation if you leave college then decide to go back to school later in life. Any time frame more than two semesters may be discouraging and will require a higher level of commitment.

 

Can I sign a Head Start Contract (Chapter 2: The Athlete Life Cycle) playing in a professional league outside of the United States? A Head Start Contract will allow you to buy a house and save money for a business or investments.

 

Can I sign a Comfortable Contract (Chapter 2: The Athlete Life Cycle)  playing in a professional league outside the United States? With a Comfortable Contract you will earn as much or slightly more as a regular working person. However, if you don’t graduate but play into your early to mid 30’s you will have no work experience while your peers will have worked since college. Furthermore, once you forgo your college career you will no longer be eligible for a scholarship. So if you decide to go back to school later in life you will have to pay for your classes, books, parking passes, etc.

 

Don’t Take Your Scholarship for Granted

In 2013, 70 percent of graduates left college with an average of $28,400 in student debt. At high-debt public colleges the average debt ranged from $33,950 to $48,850, while at  high-debt nonprofit colleges it ranged from $41,750 to $71,350. In most states the cost of college increases every so often. For example, in 2014 the UC Regents, the governing body of the University of California system, voted to increase tuition 5% for the next five years. The in-state tuition will go from $12,192 in 2013 to $15,563 in 2019-20. Out-of-state students are expected to pay as much as $44,766 in 2019-20. These figures do not include living expenses, books, room and board, and class-specific fees.

 The gift of a scholarship should not be taken lightly. If you are planning to forgo or leave college early, remember that there are significant consequences to your decision.

 

 

 

 

The Business of Professional Sports

“Spain’s Real Madrid, worth $3.44 billion, leads the way for the second straight year, a notch ahead of fellow Spanish soccer power, Barcelona, which is worth $3.2 billion. Manchester United rounds out the top three with a value of $2.81 billion.”

— Forbes Magazine

    The World’s 50 Most Valuable Sports Teams 2014

 

 

The business of professional sports is similar to college sports. However, in professional sports the athletes, coaches, and management make a lot more money. According to Forbes Magazine, the first three spots on the most valuable sports franchises are soccer teams. Overall three soccer teams are in the top 10, two MLB baseball teams, one NBA team, and three NFL teams.

 

What makes teams so valuable?

To start, professional sports teams make money the following ways:

  • Ticket sales – teams sell individual tickets to its games.
  • Concessions – teams make money from the sale of food as well as stadium and arena parking fees.
  • Merchandising at games - teams sell everything from jerseys, hats, key chains, and programs, to name a few.
  • Licensing – Teams will also grant licenses to companies who want to use their likeness (team logo). Companies will pay a flat fee called a license fee and a royalty fee for each item (hat, jersey etc.) sold. Royalties can be anywhere from 3% to 10% of sales.
  • Television rights – each team can sell their rights to televise team games. This means that a television network will pay a league and/or a team for the right to televise their games. Television rights deals can go into the billions of dollars.
  • Corporate sponsors – most professional teams now sell corporate sponsorships. This includes but is not limited to, everything from the naming rights to a stadium (AT&T Stadium in Dallas, Texas), to stadium advertisement, to access to suites.

 

 Typically, the most valuable teams are winners (or have a rich history of winning), have well known players, and possess the right mix of merchandising, licensing, ticket sales, corporate sponsorships, and television rights. Forbes Magazine, in 2014, ranked Real Madrid, a soccer team in Spain, as the world’s most valuable sports franchise. Its sources of revenues included $675 million in team revenue (2012-13 season) and corporate sponsorships with Adidas and Emirates worth a combined $80 million annually.

 In 2014 the Los Angeles Clippers were sold to Microsoft billionaire Steve Ballmer for $2 billion despite the fact that the organization had a history of losing, no championships, no hall of fame players, and a controversial owner. It had been previously valued at $575 million early in 2014.

 The Clippers were clearly a beneficiary of several factors including market timing, the financial position of the new owner, a new team and coach, the local market (Los Angeles), etc. Perhaps, the most influential component is the potential value of the renewed NBA and Clipper television contracts (2015-16).  The NBA receives $930 million from its current television contract agreement with ESPN/ABC and TNT. When contract negotiations resume in 2015-16 some speculate that the annual amount could reach $2 billion. Furthermore, the Clippers local television contract is expected to go from $20 million to $75 million.

 

 

What Is A Collective Bargaining Agreement?

The 2004-2005 National Hockey League strike was the longest in sports history. It spanned over 300 days and the players and owners lost hundreds of millions of dollars.

 

 

Most major sports leagues have what’s called a collective bargaining agreement (CBA). Simply stated, a CBA is an agreement between players and team owners. It contains things like how long players can practice, the minimum and maximum salaries, revenue splits between owners and players, punishment for misconduct, to name a few. Each professional sports league has different rules in their CBA.

 

 In most leagues the players are part of a union, a group that ensures the fair treatment of its players. Typically, a union has a leader who represents the interests of the league’s players. As of 2014-2015 the current president of the NBA’s players union is the Los Angeles Clippers Chris Paul. CBA’s are voted on every so often. The life span of a CBA ranges from five to 10 years. When a CBA expires, the leadership of the union will sit down with the representatives of the owners and negotiate a new CBA.

 

 When owners and players disagree this often leads to a strike or lockout. A strike is where the players refuse to go to work until they receive what they want in the new CBA. A lockout is where the company (owners) prevents the players from working by physically locking the doors to all of its facilities. While strikes and lockouts are used to gain a negotiating advantage, they usually hurt both sides. Players and owners both lose money and the fans don’t get a chance to enjoy their favorite teams.

 

Sign Your Contract Now!

“The Jaguars aren’t obligated to sign Fowler to the same four-year, $23,490,242 deal he was expected to receive before his injury. “

Joel Corry

    CBSSports.com

A few weeks after being selected as the number three pick in the 2015 NFL draft by the Jacksonville Jaguars, Dante Fowler tore his anterior cruciate ligament (ACL) in a three-day minicamp. He had not signed his contract. Prior to the injury Fowler was set to sign a fully guaranteed four-year $23.4 million contract with a $15 million signing bonus. Most experts agree that Fowler’s deal won’t change drastically, but considering the circumstances, the team will be able to construct a deal that could be less beneficial to Fowler. This would likely happen if Fowler did not fully recover from his injury. Further, from a legal perspective, the team is not obligated to agree to the same deal that Flower was entitled to. While an ACL injury is no longer considered a career-ending injury, it is certainly serious enough to raise honest concerns about an athlete’s ability to perform in the future.

 

 On the brighter side, although the injury is a major setback for Fowler, he is protected by a provision in the NFL’s Collective Bargaining (CBA) agreement that states that teams must continue to act in good faith negotiations if an unsigned player is hurt during a team-sponsored minicamp or off-season workout. This simply means that the Jacksonville Jaguars must honor the same contract he would have signed before he was hurt. The only thing that changes is that the Jaguars will be able to negotiate clauses that will benefit them if Fowler does not recover or perform up to expectations. This will likely happen toward the end of his four year rookie contract. It is possible that Fowler may lose a few million dollars, but in all likelihood, he should be compensated the full amount of his contract.

 

 The consequences of Fowler’s  injury will reach beyond the NFL. Agents in all sports will now recommend that athletes who are drafted or undrafted, sign a contract before participating in any team activities.

How do Athletes Make Money?

“Forbes estimates that Woods pulled in $78.1 million over the last year from prize money, endorsements, appearance fees and golf course design work.”

— Forbes Magazine

    Tiger Woods Is Back On Top Of The World’s

    Highest-Paid Athletes

 

The opportunities for athletes to make money vary from sport to sport. Salaries are the norm in sports such as football, basketball, soccer etc., while in individual sports like golf, tennis, and the like, athletes receive appearance fees and compete for a pool of prize money. In general, athletes can make money through the following means:

 

  • Salary – players are paid salaries in most sports. Salaries are determined by a contract usually negotiated by an agent.  Most leagues have a minimum required salary.
  • Endorsements – athletes are afforded the opportunity to endorse single or several products. In some cases, an endorsement deal can be bigger than a player’s employment contract with their team. A recent example of this is Kevin Durant. In 2014 he signed a 10 year deal with Nike which is purported to be between $265 and $300 million.
  • Sponsorships – this kind of deal is similar to an endorsement. However, in this case I am referring to individual sports like tennis and golf where athletes are supported by various sponsorships (and prize money) rather than a salary from a team. For example, in 2013 Kei Nishikori, a Japanese tennis player not ranked in the top ten tennis players in the world, earned $1.5 million in prize money and a whooping $9 million in sponsorship money.  In individual sports athletes may have several sponsorships. For example, a golfer may have a shoe, clothing, and club sponsor, to name a few. In most cases, sponsorship deals are reserved for the top ten players.
  • Appearance fees –appearance fees are also prevalent in tennis and golf where players are paid hundreds of thousands, and in some cases, millions of dollars to play in a tournament. In 2013 Tiger Woods was rumored to have made $8 million in appearance fees for overseas tournaments.
  • Speaking Engagements – many athletes earn healthy incomes speaking to various organizations. Typically, athletes can command up to $25,000 or more per appearance. This line of work can continue even after an athlete’s career is finished. Interestingly, non-athletes can earn several hundreds of thousands of dollars for speaking fees. For example, take a look at the speaking fess for the following politicians and business people:

 

  • Donald Trump $1.5 million per speech
  • Hillary and Bill Clinton $200,000 each
  • George Bush $150,000
  • Condoleezza Rice $150,000
  • Al Gore - $100,000
  • Colin Powell - $50,000
  • Autograph sessions - autograph sessions are another source of income for athletes. Deals can range from $125 per autograph or a flat fee of $25,000 or more.

 

 

 

How Do You Purchase A Professional Sports Franchise?

“Successful business people venturing into sports often find themselves in a vastly different world. As Kraft put it: “They don’t teach you how to run a professional franchise at Harvard Business School. You have to get knocked around a bit first.”

— Quote from Robert Craft owner of the New

    England Patriots

    May 20, 2011  LA Times article.

 

 

The majority of people who own major sports franchises have had successful business careers before becoming a sports franchise owner. In most cases, these individuals are worth hundreds of millions, and in some cases, billions of dollars. They often purchase a sports franchise as a high-end toy to entertainment friends and business associates. Author Blank owner the Atlanta Falcons (founding member of Home Depot), Paul Allen (Microsoft), owner of the Portland Trailblazers, and Mark Cuban of the Dallas Mavericks, all fall into this category.

     Typically, the value in sports franchise comes from a number of different factors like the brand, the worth of its television contracts, and the power of its merchandising. In 1989 Jerry Jones purchased the Dallas Cowboys, one of America’s most valuable sports franchises, for $150 million. As of this writing, the franchise is valued at $2.3 billion.

     The best way to purchase a sports franchise is to simply go out and build a successful business empire worth hundreds of millions to billions of dollars. It’s that simple.

 

 

Joining And Leaving A Team

Every year approximately 1,184 professional football hopefuls will be cut from NFL teams.

 

Sports leagues have different ways a player can join or leave a team as well as different meanings for each term. The following is a general description of each term.

 

Ways To Join A Team

  • Draft - The most assured way to join a professional team is to be selected in the first round of a draft.
  • Restricted free agent – the requirements for restricted free agency vary from sport to sport. However, in general a restricted free agent is an athlete whose contract is up for renewal but there are restrictions on what he/she can do if he/she wants to sign with another team. This usually means that his/her current team has the right to match any offer another team proposes.
  • Unrestricted free agent – an unrestricted free agent is usually a player who is not under contract with another team. He/she is free to sign with any team in their respective league.

 

Ways To Leave A Team

The following three terms are used interchangeably but have different meanings.

  • Waived – when a player is waived another team has the right to claim his or her contract. Waivers have different meanings in different sports.

 

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