You Got Served: If I had two billion dollars

I was asked Thursday night what I believe in, spiritually speaking, and the answer I gave is that I believe in the power of people, specifically myself.  What I really believe in is self-interest, and that all people will strive to achieve theirs, to the extent that they’re fully able to understand what that self-interest is.  The world is an enormous collection of self-interests, and that’s true of people, companies, nations, and any other type of entity.

This is a key determinant of my thought process about everything that happens in the world.  For example, it’s why I consider myself to be a foreign policy realist.  (In terms of the American political spectrum, realism is centrist-to-center/right; it has been a key tenet of the foreign policy activities of the Nixon, Ford, Carter, Reagan, Bush I, Clinton and Obama administrations, and it was openly disdained by the Bush II administration.)  Nations act in their own best interests, and therefore the best way to approach diplomacy is to try to understand what those interests are, and what those nations think their interests are, in the event that there is a difference.

I decided to share this, because it’s just so fundamental to my thought process, and by reading my work, each of you knowingly partakes of the resulting thoughts.  Today, as always, I’ve got some thoughts to share.

The direct effects of the NFL lockout and the legal maneuvering around the injunction thereof have gotten a lot of headlines recently.  Everybody - including me - who comments on NFL football has been focused on those issues, because they directly affect whether there will or will not be professional football played this year.

It’s easy to forget that there is a parallel case going on in the Minneapolis District Court of Judge David Doty.  Doty has already found that the NFL was materially in breach of its collective bargaining agreement by willfully choosing not to maximize the amount of current-period revenue earned from its television deal.  Instead, they gave their television partners a discount, but negotiated a provision whereby the NFL would be paid for football rights, even if games were missed due to a labor action.

That provision came to be known as lockout insurance, because it would allow the owners to hold their lockout, wait for a majority of the players to go broke, and then force their union to cave to the demands of the owners.  The problem is this: Since the 1993 CBA (as extended a number of times) is based upon the players receiving a percentage of total revenues after defined expense credits, then by agreement the NFL is required to maximize those revenues.  Judge Doty found that they did not - which is clearly the case - and he found that the NFL will owe the players damages. 

The class of plaintiffs (players) asked for $707 million, and damages in cases like this tend to be trebled (tripled).  That means if the players were to get their full amount, they’d be awarded $2.121 billion.  The plaintiffs have asked for the amount of any award to be placed in escrow, pending appeal, and I figure it takes a year to get through the federal appeals process.  I don’t see where it could reasonably be argued that the NFL didn’t short its own revenue for strategic reasons, or that doing so doesn’t violate the CBA.

So here’s one thing I’ve been pondering:  What does a class of about 2,000 plaintiffs do with $2 billion?  If you think about that math, $2 billion divided by 2,000 is a million dollars each.  For a minimum type, that’s a lot of money, right?  For Tom Brady, it’s the $80 that Johnny Carson’s wife made working at her boutique.  I mean, maybe there’s a party at Tryst where 81 bottles of Cristal and 54 bottles of Patron are consumed, but that only costs like $400 grand.  You still have like $2.07 billion left.  How can this money be put to good use by football players?  Ponder that, because we’ll come back to it shortly.

Here’s another question to ponder: Are you more a fan of the Denver Broncos, or of the players on the team?  It’s a tougher question than what it sounds like.  I’ve always thought that I’m significantly more loyal to the franchise than I am to the players, but I convinced myself that that may not be the case today.

During the 1987 strike, I was 10 years old and had less than a year to my credit as a Broncos fan.  I don’t recall watching any games with replacement players, but I doubt that I would have looked too fondly upon them if I had paid any more attention.  I honestly can’t name one player who was a replacement guy for the Broncos.  If you’re older than me, and/or were already a very active Broncos fan by 1987, please let us know your thoughts on replacement players in the comments.

I think that what I am saying is that I am a Denver Broncos fan, more than I’m a fan of any player, right up to the point that I think the Denver Broncos aren’t willing or able to put the best product on the field.  I know there are lean times, but if the effort is there, I’m there.  If the Denver Broncos become structurally hopeless, I’ll have to re-evaluate my position.

Back to 1987 - the labor action was a strike by the players, and the intent was to cause the owners revenue problems.  The owners used replacement players and kept the revenue coming, to some degree, and that eventually served to break the strike.  In 2011, the labor action is a lockout, initiated by the owners.  How can the players best serve their own interests in a situation like this?

If the players had $2 billion, they could change everything.  I’ve already advocated never recertifying the players' union again, and that would leave the NFL with a clear antitrust problem.  The players could solve that problem for the owners by putting that $2 billion toward forming a legitimate competitor for the NFL.

I’ve been thinking about this a good bit lately, and it’s not too far-fetched.  I believe that the product on the field that people pay to see is the players and what they do.  It’s not the owners, whose profit needs are an externality to the system.  I know - this is America, where we conflate wealth with virtue, and all that jazz, but these guys are really not providing any value to the operation, vis-à-vis the product on the field.

If the players, or a significant number of them, were to invest their winnings from the class-action lawsuit into a new league, things would sure get turned upside down.  I know that’s painful to consider for many conservative people, which is funny, because they’re mainly the same people who talk about how great free markets are.  The foundation of a new league would be the welcoming of free market capitalism.

The players have $2 billion, and to keep it mathematically simple, as above, let’s go with the assumption that there are 2,000 members of the class, each with a $1 million share.  At first pass, I imagined this new league as being more viable than others (like the UFL) by virtue of having many of the best players as part of it. With that reasonable assurance of viability, the 2,000 partners in the new venture could sell off equity stakes to interested rich people to form a franchised league.

Then, I got to thinking that that would be a mistake, to invite more of these owner types into the business.  Within 10 years, the relationship between the new league’s labor and management would be right back to being adversarial, and all you’d have would be the same thing as the NFL is today, even if the 2,000 players kept some equity in the new venture.

The way to go is to consider the new league to be a limited partnership, like a Big 4 accounting firm.  That means that there would be one centralized cooperative entity, and that each team would be a wholly-owned strategic business unit of that single entity.

I mention a Big 4 accounting firm, because their ownership structure is really interesting.  A kid graduates from college at 22 and becomes a Staff Accountant for a Big 4 firm, let’s say Ernst & Young.  He or she spends two years at the Staff level, and then three years at the Senior level.  If they’re good, they get promoted to Manager - and if not, they’re encouraged to leave as E&Y alumni and to go be an analyst or general accounting manager in some industry firm.

The Managers serve for about three years, and the best of them become Senior Managers.  Those Senior Managers who make the cut after three or four years are offered partnership in the firm.  They buy in for $100,000, and they have an equity stake going forward.  E&Y has about 5,000 active partners globally at any time, and the profits are split among those 5,000 people, as payouts or retained earnings to their equity accounts.  (For the record, I interned at E&Y, and they’re a large client of my current employer, which is how I know so much about them.)

So, let’s put this model to our 2,000 members.  Let’s say that each of them contributes their $1 million and is granted an equity stake, in that amount, in the new venture.  Some of those players will play immediately in the new league, if they’re contractually able to do so, and others will continue to play in the NFL, but will be financial partners in the new league.  Some will howl about a conflict of interest, but I doubt that there’s anything in a standard NFL player contract prohibiting them from investing their money any way they want to.  We’re freedom-loving Americans, right?

The new league will need executive management, and this is where it gets interesting.  Most players aren’t educationally or experientially qualified to run a business like this, so a Board of Directors would have to be selected, and they’d have to ultimately hire business unit presidents for each team.  You’d want those people to be partners too, probably at a level of about $100,000.  (We’ll come back to that number.)  Let’s say there are 10 members of the Board and a CEO, and that a President and Senior Vice President of each of 20 teams will be granted partnership.

This is a theoretical  ownership structure for the first season:

Class Number Relative Share Each Relative Share Total Relative Share % of Total Cash Paid In To Equity Actual Equity by Class Actual Equity by Participant
Players 2,000 1,000,000 2,000,000,000 99.700897% 2,000,000,000 1,994,017,946 997,009
Board of Directors & CEO 10 200,000 2,000,000 0.099701% - 1,994,018 199,402
Team Executives 40 100,000 4,000,000 0.199402% - 3,988,036 99,701
Total 2,050   2,006,000,000   2,000,000,000 2,000,000,000  

That means that each player’s $1 million stake is actually now worth slightly less than that, because it was diluted to include the business managers.  It’s clear, though, that the players own the league, right?  If enough players got mad at the CEO and Board, they’d be able to fire them, so the CEO and Board are therefore incentivized to keep their shareholders happy, like any CEO and Board.

So, this league forms and begins operations.  They sign TV deals, lease stadium space, sell tickets and concessions, and make money.  Let’s say they have this income statement, which is of rectal origin, but probably reasonable.

Item Amount
Revenue 4,000,000,000
Player Salaries (2,000,000,000)
Other Expenses (700,000,000)
Pretax Profit 1,300,000,000
Tax @ 35% (455,000,000)
After-Tax Net Income 845,000,000

That means there is $845 million of profit to distribute among the partners.  I think this is reasonable because nobody is going to stand for unnecessary extravagance that doesn’t add value to the business.  Nobody’s private jets, or country club memberships, or other nonsense will be run against this income statement, because this is a profit-seeking enterprise, and how it’s run is transparent to all owners.  Some of the profits will be retained to be invested in future value-adding operations, and some will be paid out in cash.  Look at it like this:

Class Number Actual Equity by Participant Total Equity Share of Profits by Class Share to Payout Share to Equity Payout per Participant Equity Addition per Participant New Equity Stake per Participant New Total Equity
Players 2,000 997,009 1,994,017,946 842,472,582 421,236,291 421,236,291 210,618 210,618 1,207,627 2,415,254,237
Board of Directors & CEO 10 199,402 1,994,018 842,473 421,236 421,236 42,124 42,124 241,525 2,415,254
Team Executives 40 99,701 3,988,036 1,684,945 842,473 842,473 21,062 21,062 120,763 4,830,508
Total 2,050   2,000,000,000 845,000,000 422,500,000 422,500,000       2,422,500,000

Each of the owners at the $1 million level got a payout of $210,618, and their equity accounts also grew by that much.  That’s important, because as new owners get added, they’ll come in at the flat $100,000 rate.  I would envision that all players who complete three seasons in the new league are offered partnership for a cash buy-in of $100,000.  Once a player retires, he would have one league year to remain a partner.  If he became employed by the league in some capacity, he could remain a partner, and if not, he’d be paid out in cash for the full amount of his equity share, and be free to invest that money as he saw fit. 

In other words, on an ongoing basis, partnership in the league is only available to the initial class of investors and employees of the league, as approved by the Board of Directors.  If Tom Brady had his $1 million stake, and never played in the new League, he’d be allowed to be partner for as long as he played football in any league, and for one year after that.  At that time, if he were never employed by the new league, he’d be paid out for his share.  If he became an executive five years later, he wouldn’t automatically be allowed to buy in, and it would be a function of approval by the Board.

Within 10 years, the new league would have most of the high-dollar initial investors paid out, and would be operating on an ongoing basis just like E&Y or another accounting firm.  Work is collectively done toward making money, and profits are distributed to the partners, who come and go over the years.  Non-partner employees work hard in hopes of becoming partners someday and sharing in the wealth creation that’s taking place.  What a novel concept that we don’t need some fool who was born rich to sit at the top and collect the real money.

As for team operations, each team would have a fixed budget for player salaries, and standardized operating expenses like travel, meals, and coaches’ salaries.  Lease expense, marketing, and other budgets would be strategically handled at the league-wide level.  Revenue expectations would vary by market size, but each team would be expected to contribute to overall revenue in line with a reasonable forecast, just like any business unit in any large company.

I realize that this is a big leap to make, but think about how well it could work.  Players out of college could choose between the NFL and the new league.  In one, they’re employees, and in the other, they’re on a track for partnership in the overall enterprise.  Whichever league does the best job of attracting players and marketing itself to fans would prevail as the superior business.  That’s competition in a free market.  And if the new league was putting out a superior product, I think I’d have to find a new team to root for.

I hate the term food for thought, because I don’t think it makes any sense, but this is something to think about.  There’s a Part 2 of this coming eventually, regarding a more intelligent approach to the generation of profits for the new league, but I’m heading out to Vegas again tomorrow morning.  There will be Capital One Girls, drunken debauchery, gambling, and one planned dinner at a nice steakhouse.  From there, I’m traveling straight to Dallas for work from Tuesday to Thursday night, and that’s my month-end close, so I don’t really know when I’ll have time to write next.  When I get to it, though, we’ll continue to burn down the barn.

1.  I’m not in the arguing business, I’m in the saying what I think business.
2.  I get my information from my eyes.

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You Got Served