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May 8, 2023

Sports Leagues of Future Likely to be Structured as Corporations

It has become increasingly apparent that emerging and challenger sports properties will need to diversify their revenue streams to both survive in the short-term and achieve big four-like long-term success. They cannot rely on large, guaranteed media rights payments to carry the business. 

Most of “these leagues don’t have any choice but to make the investment in new spaces for the strength, growth and viability of their brand,” Mark Shapiro (president and COO, Endeavor) said.

Gerry Cardinale (founder and managing partner, RedBird Capital Partners) argues to do that most effectively sports leagues of the future will need to be structured like corporations, rather than as governing bodies for a series of independently owned franchises.

“What’s missing –and should be coming– is that these [properties] should become companies. They should have their own balance sheet, they should be independently capitalized,” he said.

That would "enable leagues to sponsor future business initiatives for the benefit of the teams and/or in partnership with them,” Cardinale said. “It also will enable leagues to more strategically adapt to the evolving media [ecosystem] and other revenue streams environment from a position of strength and proactivity."

Cardinale used to believe most of money in sports was trickling down to the teams and leagues, and not the players. So, RedBird invested in OneTeam in 2019.

“But now

having sold OneTeam

, as I’ve been playing [it] over in my head, that premise actually isn’t accurate,” he said. The money goes “to the teams, it hasn’t really gone to the leagues.”

That is because the established pro leagues are largely “just portals for media deals; they’re a pass through,” Cardinale explained.

That model worked exceedingly well for the last 30 years.

However, “The proliferation of content and distribution and the everchanging media landscape is now forcing [the big four] and everyone else to look around more corners,” Shapiro said.  

“WWE is a great example," he explained. "80% of their revenues are driven by media dollars and their network deals. Vince McMahon and Nick Khan are now saying, ‘we have to pivot, we can’t just rely on this going forward. We need to become a league, a content company, a media titan'...That’s why they’re moving into licensing and social, and doing more in sponsorship. Internationally they’re trying to expand. And they’re creating more events.”

Cardinale believes the big four leagues are leaving money on the table by failing to leverage their popularity and influence to grow their respective businesses beyond the game.

In fact, he’s suggested to at least one league that “the next time you do a media deal, take 20% off the top for the house and go create the next Disney around [the IP].”

None have done it to date. 

To be clear, the big four leagues have, and continue to, invest in their future.

Back in November, the NFL, via 32 Equity, made a substantial investment alongside Skydance Media to create

Skydance Sports

. Prior to that, MLB founded and sold BAMTech.

However, the bulk of those investments have historically been related to their specific sport or expertise (see: media), leaving a relatively small fairway.

“In my view, one of the primary reasons the NFL owners don’t have a giant private equity business is because the franchise owners are competitors on the field, and now that most of them are coming from other successful business activities, they are often competitors off the field,” former Goldman Sachs partner and NFL EVP Eric Grubman said. "It also wasn't a league core business, and owners saw other things as having a higher priority.”

The same could be said of club owners across the NBA, NHL and MLB.

In theory, a league backed PE fund could invest in real estate knowing where future franchises may be awarded, or where stadiums will be built. But good luck getting a powerful owner with a commercial development business on board with that idea.

"The leagues evolved financially by agreeing to pool media rights and cooperate in collective bargaining," Grubman said. "It’s a great model that evolved before private equity existed in any meaningful way. Pooling and raising capital is an activity unto itself, and I don't think that is likely to be achieved on a large scale anytime soon.”

While the horse looks to be out of the barn for the big four, emerging and challenger properties with a central owner or set of owners could operate more like companies. And Grubman believes some will.

“But that is not because any of these other leagues have done anything wrong,” he said. “Times have changed. The business of sports is now really a business, and nobody questions that anymore.”

The XFL is operating with that mindset.

“[Our] goal is to build a live event entertainment company that is more adaptable to the evolving ways fans want to consume content today,” Cardinale said. “No different than UFC and WWE given the philosophical construct.”

WWE and UFC are centrally owned by Endeavor.

Cardinale suggested there would be industrial logic in aligning his league with

TKO

.

“Especially when you consider the poetic-ness of Dwayne Johnson’s history with Vince McMahon and WWE, as well as his relationship with Endeavor,” he said.

There’s certainly no deal on the table. But Shapiro admires the business.

“We are big fans of the holy trinity, which is Dwayne Johnson and Dany Garcia, Gerry Cardinale and the XFL as a viable property filling an attractive space on the calendar. We are optimistic about their growth opportunity. They are carried on best-in-class platforms at the right time of the year and absolutely can develop into the feeder league the NFL desperately needs.”

While there is upside in the centralized ownership model, it does not come without its own series of challenges.  

“What sports leagues and franchises risk losing in moving too far towards corporate control of leagues and franchises is passion,” Grubman said. “True corporate ownership looks at quarterly or annual results in dollars and cents, not in Super Bowl rings. That may maximize dollars, but it doesn’t maximize passion. And the fans know the difference. Just look at EPL fan rage when they believe the front office is failing to pay up for talent.”

Favoring the value of the entity over the franchises may also temper demand for the individual clubs should they hit the market at a later date.

“You’re not going to have giant personalities with massive wealth wanting to own a franchise in the same way if too much power and opportunity is centralized in the league, and that probably hurts franchise investment value,” Grubman said.

And remember, billionaire pro sports owners are capable of expediting league growth.

“You get the right board of directors, meaning franchise team owners, who are new-age, digitally savvy, innovative and entrepreneurial in their mindsets, coming together with one common vision, and the pie exponentially grows; and the growth is accelerated by the network of those relationships,” Shapiro said.

They are sacrifices many leagues may need to make to position themselves for long-term success.