Does Pay For Performance Make Sense For Corporate Partnerships?

            The Arsenal Football Club and The Emirates Group recently made news when the Dubai based airline announced there had incorporated performance-based clauses in its sponsorship agreement with the English Premiere League team. Emirates and Arsenal have a five-year contract that pays Arsenal £30 million ($48.6 million) in annual fees for partnership inventory including a jersey sponsorship. While Arsenal has qualified for the Champions League every season for the past eight years, it has not won a major title during this span (FA Premiere League, FA Cup, and UEFA Champions League). If the team fails to qualify for the Champions League or does not perform well in the Premiere League then, "There are certain clauses, from 2015, that we pay them a percentage less if they don't perform," Emirates SVP Boutros Boutros said. "It's fair to us and fair to them."

            On the surface, it does seem fair. Sports organizations should absolutely be held accountable for their performance with regards sponsorship agreements. The question is what the definition of performance. More importantly, does competitive performance always translate to a successful sponsorship?

The answer is both yes and no. A team should be evaluated on both the quantity and quality of the impressions it delivers to corporate partners through inventory items like jersey sponsorships.

Quantity of impressions is relatively easy to define. It is generally considered to be the number people who view, consume, or experience an inventory item. For a corporate partnership agreement, a team should estimate the total number of impressions for each inventory during the course of the year. It should be rewarded for exceeding this number and penalized for missing these estimates.

Quality of impressions, however, is more difficult to define. At Block Six Analytics, we define the quality of impressions by a sports organization’s ability to help its partners to increase revenue and meet sponsorship goals.  By increasing revenue, B6A recognizes that different types of impressions can generate differing amount of revenues. For example, arena / stadium signage likely does not have the same impact on new customer acquisition or customer attention as having a partner’s core customers attend a game in a luxury suite. It is not that the stadium / arena signage in not a valuable piece of partnerships inventory. It is that that the luxury suite is more valuable to the partner because it targets specific customers and creates in an environment that is more likely to generate revenue.

Not all partnerships, however, are about generating revenue. Therefore, it is critical to define what the sponsorship goals are for each partner. Enhancing brand perception through sponsoring a community’s professional, collegiate, or high school team has a higher priority for many partners than increasing revenue. Sports organizations can be evaluated for its ability to maximize this type of impressions as well.

The Emirates deal, and the fairness component of this deal, appears to focus more on the quantity of impressions. Most of the Champions League value comes from the media rights deals for tournament games. If Arsenal does not qualify for the Champions League then the team will not be able to broadcast its jersey sponsorship to the hundreds of millions of fans who watch the tournament each year. This will decrease the overall number of impressions. However, it is not clear how much it will decrease quality of impressions. Most of the impressions from a jersey sponsorship go towards increasing brand awareness to viewers watching television broadcasts. While these are valuable, these impressions may not be as valuable those that go directly to increasing customer acquisition and customer retention. After all, how many airline purchases are individual purchases making in a given year?  

This goes to the heart of return on investment (ROI) calculations when it comes to sponsorship. Winning generally does help increase awareness and interest in a team or individual. This translates into increases in gameday attendance, television ratings, and unique visitors the organization’s websites. While this is good for the sports organization, corporate partners need to ensure that these new impressions actually generate profitable revenue growth or help meet sponsorship goals for their organizations. Simply generating a massive number of impressions can no longer be the standard used to evaluate partnership value. Books like Sasha Issenberg’s The Victory Lab: The Secret Science of Winning Campaigns shows how successful political campaigns use microtargeting to focus on the most valuable voters – people who can be persuaded vote for a specific candidate but only after being contacted by a campaign with a specific message.

This same logic should be applied to corporate partnerships. For example, Arsenal could provide Emirates with introduction to team fans or other sponsors that make enterprise purchasing decisions about corporate travel. This type of introduction could occur whether the team is losing or winning on the field. More importantly, this is the type of microtargeted impression that is much more likely to deliver increases revenue to the Emirates than if the team qualifies for the Champions League.     

While usually aligned, winning in competition can mean something entirely different than winning with the corporate partnerships. It is definitely a good idea to hold sports organizations accountable for sponsorship spend. Partners need to ensure that they are holding sports organizations accountable in the right way.  

Voicing Concerns Should Not Be A Concern For Those In Sports

Today’s shooting in Newtown, CT has caused unspeakable heartbreak for too many families at Sandy Hook Elementary School. Yet, the tragedy has already seemed to find a voice on numerous social media outlets. More specifically, people are talking about the unbelievable loss of life in the context of a larger debate about gun violence. The debate has centered on whether there should be a debate at all. Can a tragedy as terrible as this one be used to examine second amendment rights and gun control laws? 

For many sports fans, this unfortunately sounds eerily similar to the conversation that happened after Jovan Belcher’s death two weeks ago. The former Kansas City Chiefs linebacker shot and killed his girlfriend before driving to team’s stadium and shooting himself in front of Chiefs General Manager Scott Pioli and Head Coach Romeo Crennel. Many players, fans, and media members sought to express their opinions about this tragedy and spark a larger conversation about gun violence and professional athletes. NBC broadcaster Bob Costas used the halftime of a Sunday night NFL game to question whether the deaths of Belcher and his girlfriend would have occurred if he not owned guns.

This blog post is not to debate the merits of second amendment rights. It is a complicated issue in which both gun control advocates and critics have valid arguments. However, there seems to no debate that those in sports, whether players, coaches, or media members, should not be talking about issues outside of sports. Many people may not have agreed with Bob Costas sentiments about the Belcher tragedy. Yet, the larger controversy has come from his saying anything about killings at all. Because he was “simply” a sports broadcaster, Costas should not have use a football game to present his gun control views or provide his take on what happened with Belcher.

This sentiment is not just shared by people outside of the sports industry. Minnesota Vikings punter Chris Kluwe has been outspoken voice on numerous issues. Kluwe wrote an open letter to Maryland state delegate Emmett C. Burns criticizing his efforts to have Baltimore Ravens owner Steve Bisciotti fine Ravens linebacker Brendon Ayanbadejo for supporting the state’s gay marriage bill. Recently, Kluwe’s special teams coach stated that he was tired of Kluwe’s taking stances on controversial issues. “To me, it’s getting old,” Mike Priefer said. “He’s got to focus on punting and holding.”

When it comes to sports players, coaches, and media members talking about issues outside of sports there should really be no debate. To say that Kluwe cannot punt or holder as well as he possible could because he voices his opinions makes little sense. To criticize Costas for just talking about gun violence within the context Belcher’s death and claiming he is not doing is job as a sportscaster is upsetting.   

We understand that players, coaches, and media members have a large platform from which to share their opinions simply by being associated with professional or major collegiate sports. And yes, athletes, coaches, and media members can and will say things that are offensive to most people. Pittsburgh Steelers running back Rahshard Mendenhall’s comments about September 11^th or Ozzie Guillen’s comments about Fidel Castro are a particularly egregious example of people using their fame from sports to loudly and widely broadcast some asinine thoughts.

However, those in sports do have a unique opportunity with which to bring a spotlight to issues. It is their right to talk about issues that are important to them. There really should be no debate that those in sports have a right to start a debate.

Block Six Analytics Advisory Board

Block Six Analytics (B6A) is pleased to announce the creation of the company’s new Advisory Board. This three-member panel will provide recommendations to the company about strategic, marketing, finance, and operational opportunities and issues. Advisory Board members are leaders in their field and provide years of experience working on the types of challenges that B6A will face as it continues to add clients and create new service offerings. Advisory Board members include:

John Biggs – John Biggs background includes serving for more than ten years as Chairman, President and CEO of TIAA-CREF, the major pension and investment firm serving higher education. He recently resigned from the Board of Directors of Boeing and Chairs its Audit Committee. He has served as a Director of the National Bureau of Economic Research and is a past chairman of the NBER. He has also served as a Director of JPMorgan Chase, the NASD and numerous not-for-profit institutions. He joined New York University Stern School of Business as an Executive-in-Residence in 2005.

Irv Rein  – Irving Rein is a Professor of Communication Studies at Northwestern University’s School of Communication. He is an internationally known expert in public communication and popular culture. He has been a communication advisor to numerous highly visible places, organizations, and individuals including Major League Baseball and the United States Olympic Committee. He has authored 12 books including The Elusive Fan, High Visibility and Marketing Places with publishers such as McGraw-Hill, Free Press, Financial Times / Prentice Hall, and John Wiley & Sons (Asia).

Matthew Levin – Matthew Levin is the Executive Vice President and Head of Global Strategy Aon. He is responsible for developing Aon's overall global strategy, with a particular emphasis on accelerating its growth agenda. He has more than 17 years of experience in corporate development and strategy, where he led growth initiatives for a number of Fortune 1000 companies, including Hewitt Associates, Neustar and IHS, a global provider of technical information and decision support tools. He holds a master's degree in business administration from the University of Chicago and a bachelor's degree from Northwestern University. He currently serves as a visiting lecturer at both institutions.

Will Athletes Fall Off the Fiscal Cliff?

            With the 2012 elections and General David Petraeus sex scandal having mostly faded from the public’s consciousness, the next big issue in politics appears to be the fiscal cliff. What is this cliff and how does it get fiscal? (Yes, making oblique allusions to 1980s pop songs is the best way to make a discussion on tax policy more interesting.)  President George W. Bush helped facilitate the passage of a series of mostly “temporary” tax cuts that were set to expire in 2010. While these cuts reduced marginal income tax rates for all income levels, the wealthiest Americans (individuals or married couples filing jointly that make $388,530 or more per year) were the greatest beneficiaries as their income tax rates reduced from 39.6% to 35%. With the country still feeling the impact of the 2008 recession and high unemployment rates, President Barack Obama and Congress decided to extend these tax cuts through 2012.

            As 2012 comes to an end, however, these tax cuts will automatically expire unless Congress and the President agree to another extension or a permanent solution that reduces marginal tax rates. While promising to fight for lower and middle class tax relief, a key plank of President Obama’s reelection campaign hinged on letting the tax rates return to the 39.6% rate.

            A recent Forbes SportsMoney article showcases how the expiration of the tax cuts (or looming tax increases) would impact athletes who use their physical skills to become wealthy Americans. In a blog post entitled “Could Tax Savings Expedite Free Agent Baseball Signings?”, Tony Nitti argues that baseball players have an economic incentive to ensure as much of their income as possible counts as being earned in 2012. Because the minimum annual salary for a major league baseball player is $480,000, every single major league baseball player falls in the highest income tax bracket. Their rates will increase by 4.6%, and that could mean paying thousands of dollars more a year in taxes. Therefore, players will look to sign contracts as quickly as possible to achieve major tax savings.  For example, suppose a team would “sign [Josh Hamilton] to a 7-year, $140 million deal. If Hamilton’s agent, Michael Moye, is successful in moving $15 million of the contract into a 2012 signing bonus, Hamilton stands to save $825,000 in federal income tax.” Hamilton would achieve these savings because as much income as possible would be taxed at 35% rate instead of the 39.6% rate.

            While Nitti is accurate that marginal tax rates will increase for baseball players, he omits the fact that most people in the highest income brackets do not pay the marginal rate. In fact, the effective tax rate (what people actually pay in taxes) for the highest income tax payers is often far lower than the marginal income tax rate. One of the key platforms of Governor Mitt Romney’s presidential campaign was to eliminate deductions for the wealthiest Americans in order to generate billions of dollars in government revenues that could be used to reduce the federal government’s budget deficits. By definition, that means that there are billions of dollars in deductions being taken by wealthy Americans, including athletes, for things like retirement accounts, healthcare insurance, mortgages, capital gains, charitable giving, and education. In addition, aggressive accounting measures such as creating trusts or deferring income into overseas accounts create alternative methods to reduce one’s tax burden. According to the Urban Institute and the Brookings Institution, these efforts have helped 80.3% of people making over $200,000 pay an effective annual income tax rate of 25% or under from 2000-2008. This also means that the tax savings players would achieve by signing in 2012 versus 2013 will be dramatically less since their effective tax burden would be so much lower than the marginal rate.    

            Another major problem with Nitti’s analysis is that he fails to account for state income tax rates. In particular, Florida, Texas, and Washington all have baseball teams where players (or any individual) pay no state income tax. This is not the first time that someone has failed to account for state income tax rates when evaluating athlete compensation. The most famous example of when many people “forgot” to factor in state income tax rates occurred with Lebron James. While many people criticize James decision to leave Cleveland Cavaliers, most at least found it admirable that he took less money to join the Miami Heat. In reality, James is actually making more money by going to Miami than by staying in Cleveland because he pays no state income tax in Florida. Baseball players’ agents can and will factor in state income tax rates before making any decisions about where their clients will play for the 2013 season. Rushing to make a deal without factoring in effective tax rates or state income taxes would be a penny wise but more than a pound foolish.  

           

               

Do Terps Really Stand To Tarnish Image For A Big Payday in Big Ten?

           I am one of the few people happy about the University of Maryland’s move from the Atlantic Coast Conference (ACC) to the Big Ten Conference (Big Ten). Having grown up in Maryland and attended Northwestern University, I am excited to see football games between the Terrapins and Wildcats in either of the two smallest football stadiums in the Big Ten.            

            For most sports fans and media members, however, the moves by Maryland and Rutgers University (who is leaving the Big East) to the Big Ten conference seem like little more than “money grab”. More specifically, both the schools and the conference want to make more money through the Big Ten Network. Started in 2007, the Big Ten network provided each conference school (except for Nebraska this year) with $24.7 million in revenue this year.

            While B6A has often advocated for sports organizations maximizing all potential revenue streams, I recognize that strategic decisions cannot be made in a vacuum. Sports managers and decision makers need to gauge how attempts to make more money will impact their brands and via reactions by fans, boosters, sponsors, media, and employees. The damage caused by the vehement opposition by fans and the media to the school’s brand is the main argument against Maryland’s move to the Big Ten. The school was a founding member of the ACC when the conference was created in 1953. In addition, basketball games with Duke University and the University of North Carolina have created some of the Maryland's most iconic athletic moments. It does not make sense to many Maryland fans to jettison these games to play schools like Northwestern or the University of Iowa.

            Both the brand and revenue arguments, however, are questionable at best and flawed at worst. From a brand perspective, Maryland was already less likely to play its “rival” schools given the ACC’s recent expansion to 14 schools. Maryland’s protected rival (i.e. the school it would be guaranteed to play in all conference games) was the University of Pittsburgh. Since Pitt only recently joined the ACC in 2011, Maryland really has no history in competing with the school. In fact, Maryland’s stronger academic, recruiting, and athletic rival is probably Pennsylvania State University – a school already in the Big Ten. In addition, the recent additions of Pitt, Syracuse University, Boston College and Notre Dame (for all sports other than football) to the ACC makes impossible for all schools to play against each other in a football or basketball season making it games against Duke and UNC less frequent. Most importantly, not all of the school’s core audience members are against the change. In fact, Kevin Plank, the founder and CEO of Under Armour as well as the school’s biggest booster, applauded the team’s move to the Big Ten.

            If the brand argument has its flaws then what about the financial argument? That seemed like a no brainer. Maryland is leaving the ACC primarily to make more money. While the school is likely to make more money, it is actually far from a guarantee that this will occur. The ACC signed a new agreement with ESPN through 2027 that provides each school with $17.1 million in revenue. The additions of Maryland and Rutgers to the Big Ten mean that each of the 14 schools in the Big Ten would make about $20.3 million per year per school (a $2.6 million dollar year-on-year increase for Maryland) if media rights agreements remain constant.
             However, Maryland is currently required to pay a $50 million exit fee to the ACC for leaving the conference. B6A is not anticipating a significant change in the other sources revenue for Maryland by moving to the Big Ten. We do not see a great improvement in-game, sponsorship, merchandise, or event revenue based the on Maryland playing schools like the University of Michigan and The Ohio State University in football or Indiana University and Michigan State in basketball when the school already plays against nationally recognized programs like Florida State University and the University of Miami in football or Duke and North Carolina in basketball. Therefore, the school would rely on its increase in the media rights agreement to cover this costs. Because the school is only making $2.6 million more per year by leaving the ACC and joining the Big Ten, it would take over 19 years to pay off the exit fee.

            However, this assumes that Maryland will both have to pay the full $50 million and the Big Ten Network will not generate any increases it revenue. Neither part of the previous statement is likely to occur. First, it appears unlikely that the school will have to pay the full $50 million exit fee. Even though the $50 million fee is legally binding according to sources, it can be paid over a number of years. B6A believes that Maryland and the ACC will work out an agreement where the school will pay more up front to leave the conference but less in overall dollars. How much is difficult to anticipate, but we believe it will be somewhat closer to the $20 million dollar exit fee that existed for teams leaving the conference in 2011 (i.e. before the conference added four additional schools). We also think it is unlikely that Maryland will challenge the $50 million fee in court (as has been mention by the university’s president) and instead negotiate a lower amount in a settlement agreement.

            The larger question is will the Big Ten Network achieve the revenue growth targets that it is betting on by adding Maryland and Rutgers. The conference wants to make the Big Ten Network into a national network that could compete with the likes of ESPN and the NBC Sports Network. Adding schools like Maryland and Rutgers would give the conference a reason for cable providers in the Washington D.C. and New York areas to carry the Big Ten Network on their basic tiers (many carry the network on a premium sports tier). The increase in audience would mean an increase the carriage fees and advertising rates for the Big Ten Network as well as increase the number of companies who want to purchase advertising time on the channel. The addition of Maryland and Rutgers is expected to enhance the Big Ten Network’s annual revenue by up to $200 million (or about an additional $14.3 million per school).  

            While it is likely that adding Maryland and Rutgers will increase carriage fees and advertising revenue by some amount, it is far from certain that it will result in a $200 million increase on an annual basis. Maryland and Rutgers are not the universities that dominate their media markets. Maryland faces stiff competition from the University of Virginia and Penn State from a football perspective and Georgetown University (among others) from a basketball perspective. Rutgers certainly is not the dominant school in the New York television market as Syracuse and Notre Dame attract larger audiences. More importantly, professional teams have traditionally dwarfed college teams in the Washington and New York media markets in terms of ratings and interest.

            In addition, the Big Ten Network is not renegotiating its television contracts until 2017. Since Maryland is joining the Big Ten Conference in 2014, it will not see any impact of the new Big Ten television revenues for three years. If it has to follow a similar path as the Nebraska did when it joined the Big Ten conference in 2011 then it will also not receive the same portion of revenue as the other current Big Ten Schools in at least its first two years in the conference. Yet, it still has start to paying the conference exit fee likely starting ten months before leaving the conference. Therefore, it appears the school will not recoup its losses on its exit fee losses for at least five years after it starts making exit payments to the ACC even if that fee is reduced from $50 million.

And what happens if the league does not receive its estimated increases in revenue? While the sky appears to be the limit right now for current media rights deals, it is possible that the landscape could change over the next four years. In fact, there is an argument to be made that media rights deals are experiencing a bubble in the same way that the housing and technology markets experience a bubble before their collapse. If the league receives less than a $200 million annual increase then it could take Maryland even longer to make up the money it is losing by paying the ACC exit fee. If the media rights deals do decline in value and the Big Ten Network actually makes less money than in previous agreements then Maryland could be in more troubling financial situation than it is now.  

            The larger of point of this admittedly long analysis is that the popular sentiment may not actual hold true when it comes to analyzing Maryland’s move to the Big Ten. Maryland is unlikely to suffer the long-term damage to its brand base of its move from the ACC. The financial impact of Maryland moving to the ACC is not the guarantee it appears to be. The truth, like many of the universities in the Big Ten when it comes to their geographic location in the United States, lies somewhere in the middle.