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.