CRYHUGHES

“Following the light of the sun, we left the Old World”

-Christopher Columbus

According to 60 minutes, LeBron intends to be the first billion-dollar sports brand.

LeBron James made $40 million dollar last year on and off the court. $14 million in salary, and $25 million generated via endorsement. “Brand LeBron” already represents the bulk of his income, and its only the tip of the iceberg.

His product is undeniable, but it is his business acumen that sets him apart. Here stands the greatest basketball player on Earth, and he sips milkshakes with Warren Buffett in the off-season. Unique among athletes, LeBron seeks equity partnership for his endorsement. All contracts run through LRMR, a marketing company he founded. Equally clever, he established King James Inc, a holding company to reduces his tax liability.

I’ll spare the G.O.A.T. argument. Its been heard, and alone isn’t enough to become the first billion-dollar sports brand. As Nike charmingly points out, he can count zero championship rings on his fingers.

Ultimately, that number is how he will be defined as a basketball player. More relevant to this post, it will determine his eventual brand value.

This is where the math comes in…

Let us assume LeBron is homo economicus, and a monopolist (at least until the next LeBron James comes along) competing for salary only against his future self.

We simplify his revenue to be a calculation of his salary and endorsements:

REV = salary + endorsements
Endorsements = BASE ^ (championships*.5)
Salary = $20 million (a simplified NBA maximum contract)
BASE = $25 million (LeBron’s total endorsements in 2009)
championships = x

Forgive the model’s crudeness, and notice the weight given to championships. Obviously significant variables are left out, but the equation stresses the importance of championships to public perception and brand value.

Now, let us assume that small-market Cleveland cannot exceed the NBA’s soft-cap. Paying LeBron $20 million dollars per year (or 35% of the cap), his supporting cast will always look about as it does today.

As one of 4 teams left in the playoffs (and down 3-1), let us assume the Cavaliers have a 25% chance of winning the championship any given year with LeBron, and that LeBron will play for 10 consecutive years, winning 2.5 championships.

championships = 2.5

REV = 20 + (25^((10*.25)*.5)
REV = 20 + (56) = $76 million

Winning 2.5 championships over his career, we would expect LeBron’s endorsements to double, and estimate his annual income at around $75 million. Nothing to shake a fist at, but well short of the targeted $1 billion. As homo economicus, LeBron would seek to maximize this number. Because salary is forever capped at $20 million, that can only be done by increasing the value of his endorsements. In this simple model, his endorsement is a function of championships won. Pursuing this line of thought transforms the question: how can LeBron win more championships?

1) Move to a bigger market (NYC) that can afford to exceed the team salary cap.
2) Play for free, thus enabling the Cavaliers to sign a second superstar to a max contract

Both arguments pivot on increased likelihood of winning the championship by increasing his supporting cast. The first solution is no fun and mildly annoying, so we will examine the second.

LeBron James plays for free ~ the Cavaliers increase their supporting staff ~ likelihood of winning a championship doubles (now 50% any given year):

REV = salary + endorsements
Endorsements = BASE ^ (championships*.5)
Salary = 0
championships = 5

REV = 0 + (25^(10*.5)*.5) = $3,125 million

Here LeBron’s goal is achieved. He is the first-ever billion-dollar sports brand.

LeBron’s goal is bigger than the NBA. Basketball is merely the conduit to establishing a marketable brand. While this model is too crude to accurately estimate revenue, the principle remains: LeBron can only achieve his revenue goal through endorsements, that are directly correlated with his brand value. Salary is a mute point. Simply put, LeBron reaps the greatest reward through salary deference.

What would cause a bigger PR bonanza than to play pro bono? for the love of the game? Especially with China keeping a close eye.

There has never been a protracted war from which a country has benefited.

-Sun Tzu

Phelps’ agent is playing defensively.  Why?

Phelps lost the majority of his sponsors and substantial revenue when the now-infamous bong picture began circulating the Internet.  The notable exception among major sponsors was Subway.

Why Subway? Big businesses don’t operate on ignorance or principle; in the end it is their bottom line.  So what is the incentive for Subway supine inaction?

Financial departments of major corporations are stocked full of bright people.  Many of whom were once bright, privileged, Ivy-league trustafarians.  They didn’t miss the photo.  They saw it.  They debated it.  And finally made an educated business decision that maintaining their contract with Phelps was, in economic verbiage, the “least bad solution” on the table.

Lets face it: Subway is a place people eat at for two reasons:
1. They want to lose weight and look like Phelps, or
2) Because they are really, really high — and a toasted meatball hero is amazing when you are really, really high.

Pandora’s box was opened and Subway took its hit.  But Subway held its ground and stuck with Phelps because their (very profitable) audience identified with Phelps.

A good agent would capitalize on this.  What is the monetary value of the marijuana demographic? those who identify with the drug, or at least are cynical of Pleasantville marketing tactics.

A Michael Phelps wallet? High Times “Man of the Year?” What if the Phelps brand pulled a 180 and used the publicity as a springboard to new revenue.  It certainly worked for the House of Marley, LLC.

No agent would ever let fleeting thought slip.  A reversal of this scale would alienate fans, brands, and forever alter the image of Phelps.

Like Michael Corleone in the Godfather I, the move would have to be instant, unexpected, and unconditional.  A windfall of profits guaranteed at its end.  4/20 would have been the golden moment.

Two weeks postdate, one has to assume the agent missed the boat.

And thus, Michael Phelps needs to fire his agent.