1. The Weird Economics of Sports

    The economics of sports is fascinating. It’s unlike other businesses. Where else does a group of companies legally collude so that they can pay their average employee millions of dollars solely on the hope the player will show up for work and deliver their end of the bargain?

    Only in sports and Mrs. Banta’s second grade elementary school class does someone get a “time out to sit in the corner” for not behaving properly. But in sports, the offending player still gets paid.

    Where else but baseball can a player perform so poorly that he gets fired and still collects more then $70 million in 1040 wages? Just ask Pablo Sandoval; the man known as “The Panda” will get all this dough even if he gets another gig.


    What made the Red Sox make such a crazy ill-conceived decision? Wow $70 million down the drain. There are at least a half dozen small market teams that don’t spend that much for their entire payroll.

    A year ago at this time Alex Rodriguez was given a pink slip by the Yankees costing the Steinbrenner family nearly $40 million. What happened with Sandoval and A-Rod is part of a much bigger longer-term trend.

    Big Data Is Big Business Especially in Sports

    Money Ball, the hit 2011 movie about the Oakland Athletics GM Billy Bean popularized the term sabermetrics. One of the more interesting measures developed is something called WAP or Wins Above Replacement.

    WAP measures the value of a player compared to the cost of getting rid of the bum. Unlike a batting average or a pitchers earned run average, the precise calculation of WAP is above my pay grade. Nevertheless this obscure little measure has the power to change baseball economics.

    Millennial Ball

    Millennials have received massive attention for their contribution to technology. Their contribution to professional sports is easy to overlook. Without having the advantage of sabremetrics, I am going to speculate that the talent level of players pursuing a professional sports career has never been higher.

    The success of the Chicago Cubs and Cleveland Indians illustrates the point. The average age of a rookie in the major leagues is getting lower each year. It also appears that more high-level draft picks are coming from graduating high school students.

    Who can blame a young athlete; major league minimum pay is around $500,000. A 17-year-old high school kid can get a multi million deal. Even if the best college offers a full scholarship, it’s an easy choice.

    WAP Math

    WAP is giving young athletes the best opportunity to reach the major leagues anytime in modern history.

    Fans are packing ballparks in record numbers to what these future stars like Aaron Judge perform at super high levels.

    High cost contracts like Sandoval’s are a thing of the past, or at least an exception. Even Brice Harper may find a few more of his future pay linked to performance incentives.

    The Winners: Play Me Anywhere

    If a shortstop hitting .300 is worth $5 million a year and a second baseman hitting .310 is worth $8 million, how much is a player worth the hits .290 but is a gold glove candidate both at short and second?

    Minor league players are being trained at multiple positions. The next wave of talent can replace the current roister of players that specialize in a single position. That saves money. This value is enormous. If the player also happens to be a switch hitter, that’s even better.

    The Designated Hitter Is Dead

    The Designated Hitter is going the way of the Dodo bird. Last year the top five designated hitters were paid $58 million. Perhaps only Red Sox legend David Ortiz paid off.

    Shohei Otani the 22-year-old Japanese star pitcher and current home run king is a threat to become a unique asset capable of DH’ing and pitching. Several other players in the 2017 draft also fit this multi talent description.

    Think of it as having one player that can function as two but at a lower cost. Now that starts to make real economic sense.

  2. YogaWorks (YOGA) IPO

    In one of the classic episodes of Seinfeld, Frank Costanza repeatedly screams out, Serenity Now! Such desperate cries were never answered. Perhaps Frank needed a session or two at YogaWorks, one of the largest and fastest growing yoga studios in the country.

    Last year almost 3 million students paid $55 million to YogaWorks in 50 company owned studios. They also have a presence online MyYogaWorks.com.

    You may have the impression that Yoga is a mom and pop local business with a small following. To some extent this is correct. No operator or brand has a big piece of the market. YogaWorks is the only national brand positioned in six of the largest US markets in California (Los Angeles, Orange County, New York City, Northern California, Boston and Baltimore/Washington DC).

    YogaWorks helps people improve their physical and mental well being through the 5,000 year old tradition of yoga, using a community-oriented experience. The increasing stress of daily living is helping popularize Yoga as a solution. Yoga offers benefits to students regardless of age so there are no demographic limits to its popularity.

    YogaWorks offers a variety of class options ranging from rigorous physical exertion to classes that provide a deep stretch that is low-impact. Yoga practitioners believe that healthy physical strengthening and stretching combined with meditation can lead to a feeling of centered positivity and relief from stress.

    YogaWorks has over 2000 employees. Many of them are Yoga teachers. They claim that their teacher-training program is highly respected within the yoga community. More than 11,000 teachers have graduated from the program since its inception.

    YogaWorks is no startup company. They have been around since 1990. In recent times the company has geared up its management team to support much greater bigger level of business. The company is lead by former Merle Norman Cosmetics COO Rosanna McCollough who joined YogaWorks in 2015.

    Overall they list 8 senior executives of which 6 have joined the firm within the past 24 months. That is a lot of executive firepower for a company of only $55 million in revenue. Not only is YogaWorks staffed up for greater volume, more volume is mandatory. The weight of all these administrative expenses results in a money loosing condition at present.

    YogaWorks past the sniff test with three well respected Wall Street underwriters that include Cowen, Stephens and Guggenheim Securities. If these firms are willing to co-manage an offering of only about $75 million, this is a comforting indicator.

    Presuming the underwriters are successful in raising the capital, YogaWorks plans to pay off approximately $10 million in high costs notes. This leaves quiet a nice sum for expansion that could include both opening new studios as well as acquisitions.

    If you are already a student of Yoga, then the brand YogaWorks is probably well known to you and your friends. If you are a typical asset based investor, the concept of yoga studios may be a step beyond your normal universe. After all, with yoga studios, most all the assets are intangibles: it is the brand name and the consumer franchise created by the experience. In the final analysis, the business of Yoga is like a health club without all the weight machines.

    At the same time, it is a business that lacks a dominant leader and in a totally homogenized world of monopolies and duopolies this industry has neither: Serenity Now!

  3. Baseball: The Silent Spring

    Ah, it’s that time of year again when the most of us are locked in the frozen tundra of winter, dark and gloomy skies, all hope for joy long gone. This year on February 14, thoughts turn to Valentines Day with flowers, candy and a night out for a nice dinner.

    But not me: February 14th is the day pitchers and catchers report for Spring Training. The official start of spring may be a month or more away but I could care less. Hope has arrived, to hell with the ice and snow.

    Say what you will about baseball, it is slow, often boring, tradition bound or all of the above. There is just so much excitement about the start of spring training that all of these shortcomings are overlooked. There will be plenty of time for complaining around mid August when your favorite team is hopelessly locked in last place 22 games back of the second wild card spot.

    Of all sports, baseball is unique. Players are paid what the open market determines they are worth. Yes there is this thing called a luxury tax that punishes any team owner who spends more than $187 million on player salaries. But even this threshold that still works out to an average of $7.19 million per player. So what if 5% goes for agent fees and another 25% for taxes, that still leaves a bundle for the players to take home. Hooray for free enterprise.

    Keep in mind $7.9 million is just the taxable income. What about the other benefits like first class travel on private jets, the best hotels, rock star status and all those plump after game buffets? Just as part time baseball star and full time gourmand Pablo Sandoval for details.

    There is a lot of complaining about baseball salaries being so inflated they don’t relate to the value received. There is even a baseball statistic to measure this; it is called Wins Above Replacement or WAR. I don’t have a clue how exactly it is calculated. I think it is something like the NFL Quarterback rating system that I don’t understand either.

    Critics are all so short sighted never taking into account raw talent and the years of work and dedication it takes to make the major leagues. In addition to hitting, fielding and throwing, a top-level player also must learn how to spit incessantly, chew bags of sunflower seeds and adjust his protective cup only when in frame of a television camera. When a player is being interviewed and refers to his dedication to working hard everyday, this is what he is referring to: spitting, chewing and adjusting.

    Baseball’s business model is changing dramatically thanks to Theo Epstein and the Chicago Cubs. Over the past few years, Theo amassed a pool of highly talented and cheap (a little over $510,000 per year) players winning a World Series in the process.

    The Cubs success has not been ignored. Every team is now chasing young talent. It is no surprise that the high priced free agent market took a dive this last off-season. The people to feel sorry for are the players between 30-35 who are becoming free agent eligible for the first time seeking the big Robinson Cano 10 year $247 million contract. Sorry, it isn’t happening any longer. Even Bryce Harper may be in for a surprise come 2018.

    This holds huge implications for talented young high school and college players. The doors to major league baseball are about to open wider than ever before. Imagine any team fully staffed with players making the league minimum. Their payroll could be under $30 million. So kids, time is short, start working on your spitting, crewing and adjusting today. The future is yours if you are willing to work hard.

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  4. Momma Don’t Let You Sons Grow Up to Be Dallas Cowboys

    Without men, where would organized sports be? Comedian Jerry Seinfeld says that man cannot go more than 2 minutes without thinking of sex. That still leaves at least 30 minutes out of every hour when something else has to fill the void. It simply cannot take 30 minutes to take out the garbage. There has to be something more.


    Seinfeld maintains the men are not creative in the least. Without direction, they would walk around aimlessly, hands in pocket staring blankly into space. This is where Sports fills a vital role. It provides the creative direction for grown men to drink excessive amounts of alcoholic beverages, eat nachos yell insane thoughts and otherwise ignore their spouses.


    All of which naturally leads to professional football, the king of big money sports. There are no officially released figures so the facts we are about to reveal are not facts at all, just guesses. Some experts claim the NFL annually pulls in $9 billion others place the number between $11 and nearly $15 billion depending on Superbowl opponents and other factors. Advertising revenues from just the Superbowl alone are placed at a whopping $275 million. And then there is all that merchandise as well.


    Do you think this is a good business to be in? Well consider this thought. The Green Bay Packers are the only publicly owned NFL franchise and that stock trades about as frequently as a solar eclipse. So there is darn little hard evidence to go on. However, start by looking at the ownership list and the private valuations placed on the teams (a guaranteed low ball number) and you get the idea.


    Virtually every team has at least one billionaire owner. Some teams even have more than one. They are not the least interested in sharing any of the perks and financial rewards with anyone. That tells a lot.


    The NFL owners want you solely for your fan value. That means they want you to pay $314.94 for the Direct TV Sunday Ticket or lord knows how much for season tickets and fan paraphernalia. Oh yes, there is one other tinny, tiny item. The NFL owners humbly request that you Mr. Sports Fanatic pay for the $1-$1.5 billion cost to build a state of the art new stadium that no one short of a seven figure income could ever afford to attend.


    If you fail to pony up, then you get the same treatment Alex Spanos gave the San Diego Charger fans. Wow, who would ever have guessed that filling 30 minutes of vacant brain time would turn out to be so costly?


    This last item is just one of the things that is so reprehensible about the NFL. The fact that the public is so often willing to pay for the debt on stadium financing relieves ownership of sharing the profits through something like a public equity traded on the New York Stock Exchange. Thanks to a willing, if not gullible public, they get to keep it all for themselves. That’s pure greed.


    The other major blemish on the NFL is their treatment of professional athletes. Much attention has been drawn of late to concussions and related head injuries. But head injuries are not going to stop young kids (overwhelmingly from poor and under privileged backgrounds) from playing the sport.


    Compensation of the athletes by the NFL is a legal only by the grace of God and the antitrust exemption granted by the United States Congress. Salary caps represent blatant collusion. How else can you explain that star quarterback Tony Roma, in his prime signed a six year contract extension with only $55 million guaranteed while all start closing baseball pitcher Aroldis Chapman, also with a six year contract giving him an $11 signing bonus and then $15 million annually. These days’ professional sports are a year around commitment for athletes so both of these guys are totally devoted to hard work.


    Tony Romo, during his career thus far, has had two broken collarbones and two major back injuries leading to additional surgeries. Aroldis Chapman has only broken a sweat. The average life expectancy of an NFL player is five years less than the US average.


    While both Chapman and Romo are exceptional athletes at the top of the profession, what about the others? In 2016 the median contract salary for an NFL player was $770,000 compared with $4.25 million for an average MLB player. And the average MLB pine rider’s career will amount to 5.6 years compared with just 3.5 years for the NFL. There is only one conclusion to draw. If you play in a sport so violent that it threatens your health and shortens your life, you should be paid appropriately.


    And speaking of being paid appropriately, NFL Commissioner Roger Goodell hauled in over $33 million in salary and bonus last year that is more than 40 times the medium pay of one of his NFL players. We don’t know how much MLB Commissioner Rob Manfred gets paid. When he took the job in 2015, his entire net worth was estimated to equal what Goodell gets in about 7 months and not much more than 5 times the average MLB player compensation.

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