Will Professional Athletes Eventually Get Equity?

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Hey Friends,

Athlete compensation has always been a fascinating topic to me. Traditionally, the contract value for a professional athlete has been determined through a unique combination of free-market economic principles — think supply & demand — with a limit often imposed through the salary cap structure.

But what happens when that model fails to adequately capture the true economic impact of a top-tier professional athlete?

Tom Brady is a great example. Of course, we all know the story by now; the New England Patriots drafted Brady in the 6th round of the 2000 NFL Draft, and he has significantly outperformed expectations since, to say the least.

The Patriots were valued at $464 million when Brady joined the team in 2000, which was just slightly above the average NFL franchise valuation of $423 million. But fast forward two decades, and the Patriots are now worth $5 billion.

Not only does that make them the second most valuable team in the league — Dallas Cowboys are the most valuable at $6.5 billion — but they are now 44% more valuable than the average team ($3.5 billion), compared to just 10% when Tom Brady was drafted.

To be fair, it’s nearly impossible to accurately measure Tom Brady’s true financial impact in New England, not to mention the example above doesn’t even include any economic activity generated within the local economy across 20 years and 6 Super Bowl championships.

But based on the data, it’s hard to argue that Brady didn’t have a similar impact his first year with the Tampa Bay Buccaneers.

Another great example is LeBron James. When he left the Cleveland Cavaliers for Miami in the summer of 2010, according to Forbes, the franchise value dropped from $476 million to $355 million in a single year.

The impact was also felt throughout the local economy, home attendance, and merchandise sales.

Cavaliers Average Attendance

• Average of all LeBron years: 20,042

• Average of years without LeBron: 17,390

From a merchandise perspective, the franchise literally lost 25% of its sales overnight.

Tom Brady and LeBron James are obviously extreme examples. They are two of the greatest ever to play their respective sport, but that’s the point — why are two of the greatest players of all time not able to fully capitalize on the immense financial value they bring to their team?

Here’s a wild stat: Despite being the best player in the NBA for most of the last 15+ years, LeBron James had never been the highest-paid player on his own team until recently.

In his first stint with the Cavaliers, LeBron was paid less than Tony Battie, Darius Miles, Donyell Marshall, Ben Wallace, Eric Snow, and a 38-year-old Shaquille O’Neal. In Miami, he was paid the same amount as Chris Bosh, despite clearly being the better player.

This is sort of a touchy subject, as some people will inevitably point to LeBron James’ $1 billion in career earnings (on & off the court) as more than enough financial incentive to play the sport professionally.

Still, the question remains — why should he, and other players like him, be compensated at the same rate as others, despite performing their job at a significantly higher level?

One solution that is commonly floated around is the ability for professional athletes to be compensated with equity in an individual franchise. I like this idea and think that we’re moving in that direction as a society, but it still has fundamental issues.

For instance, what happens if a player gets traded? How does player equity impact team profitability? As a majority or minority owner, how do you manage equity ownership between future, current, and retired players?

Of course, the biggest issue would probably be convincing enough players to disrupt labor peace & force a lockout to get change. Remember, the average playing career ranges from only about 3 years to 5 years, depending on the sport.

Average Playing Career Length

• NFL: 3.5 years

• NBA: 4.8 years

• NHL: 5.5 years

• MLB: 5.6 years

In my mind, the solution is most likely a hybrid model of some sort. For example, what if the individual leagues & teams sold small, minority equity positions to their respective player associations at the current market rate?

That would enable the existing & profitable salary cap structure to live on while allowing players to participate in the financial upside they clearly helped create.

Again, I don’t know the right answer. There is a bunch of nuance to this, and I’m not sure anyone does. But as we move into a world where athletes are more empowered than ever before, don’t be surprised when they eventually demand an answer.

Have a great day, and I’ll talk to everyone tomorrow.

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