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Insurance Allows NBA Stars to Spin the Wheel of Fortune

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There is probably no greater example of the term “human capital” than a high-priced athlete, whose body will always be in harm’s way and should be protected from a serious or career-ending injury, particularly if it prevents the next big contract from becoming a reality. Like any successful professional, whether a corporate CEO, high-end surgeon or celebrity TV chef, an athlete’s greatest asset is the ability to play their sport and work in their occupation.

A sport that seems to define these criteria is basketball. With the National Basketball Association, athletes’ contracts are guaranteed and relatively iron-clad. Those contracts are also about to head into the stratosphere thanks to a nine-year, $24-billion television deal signed by the NBA in 2014, which will cause the salary cap to rise higher than it ever has. The consensus is that the NBA’s salary cap will reach $108 million by the 2017-2018 season, up from $89 million for the 2016-2017 salary caps. The large increases will accelerate heavy free agency spending.

Thanks to this sugar daddy TV deal, everybody, from superstars to lower-tier players, now sees a pot of gold at the end of the rainbow. And to their credit, or at least to the credit of their influencers (such as agents, financial advisors and wives), they are beginning to also realize that this rainbow could very well be pitted with career-ending landmines. As a result, we are now seeing a large number of NBA players ramping up their disability coverage. It makes sense; buy peace of mind, and then seek an even bigger payout the following year. Sounds like a win-win when you are looking at life-changing money—the difference between signing for five years at $30 million or five years at $8 million.

Where the game has also changed somewhat is in the player’s ability to put player-friendly options on the table. For instance, Kevin Durant signed a two-year deal worth $54 million with the Golden State Warriors, with the deal containing a second year player option. This means year-two of the contract is completely up to Durant on whether or not he stays in California, looks to another big payday looming on the horizon, or is unhappy with the direction the team is taking. Lebron James and numerous other players negotiated options into their contracts because they know the big TV money is coming.
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In the long run it is not only about protecting their careers but also safeguarding potentially lucrative endorsement deals, which can sometimes match the size of a playing contract.
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LeBron James remains the NBA’s big star in the endorsement world with estimated earnings of $48 million this season off the court, according to Forbes. And with coverage in place 24/7, a player the stature of a LeBron, or Stephen Curry, or Kevin Durant is not only protected if he blows out a knee driving to the hoop, but also if he gets rear-ended and suffers a neck injury driving to his kid’s middle school recital.

NBA players will continue to gamble their free-agency status for a grab at the brass ring (without, hopefully, falling off the carousel and blowing out a knee). But there are insurance products that are essentially a safety net to athletes who are in their walk year. In recent years there seems to be an increase in the number of players willing to take that risk off the table, so they can safely gamble that soon there will be even more money put on the table. Given the compressed career lifespan, disability protection can be critical for marquee players with considerable endorsement income.

A recent article in The Economist summed it up nicely: “As salaries in professional sports have soared over the past few decades, so has the price tag associated with the risks inherent in such strenuous physical activity. As a result, the economics of the business are now shaped by insurance markets just as they are by TV contracts or ticket sales.”

This means that players who opted to sign a one-year deal this offseason, or incorporated the player option into their contracts instead of looking for multi-year deals—in anticipation of a bigger paycheck down the road—will need to protect themselves if they want to see their part of the new TV money.

Why Mark Cuban Lost Interest in Facebook Brand Pages – And Why the Social Network Should Care

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Mavericks owner Mark Cuban (third from right) with his players at ESPN’s ESPY Awards.

Each year, our December issue of Risk Management highlights the Year in Risk. Basically, we look back at the year that was through the lens of risk and offer a time line of its biggest events as they relate to the discipline. (Look for it in your mailbox or online in a few weeks.)

One of the trends I wrote about this year was how some of the internet/tech companies that the world has been buzzing about for years are starting to lose their shine. Facebook (with its disastrous IPO), Google (with its third-quarter earnings embarrassment) and Apple (with its iPhone map fiasco and fall stock drop) have all looked a little less rosy this year. After some high-profile gaffes, that are starting to seem more like any other major brands with major revenues and major detractors.

Now, it seems that Facebook also may have to begin dealing with an outspoken critic: Mark Cuban.

The boisterous billionaire owner of the NBA’s Dallas Mavericks and television network AXS TV wrote an op-ed chastising Facebook’s sposored post arrangement with companies and, really, its whole strategy. In his eyes, the company is getting away from what made it such a good network in the first place and is now force-feeding users content based upon its proprietary algorithm rather than what they want. Thus, given the diminishing returns he now sees on the time and money the Mavericks devote to Facebook, he is instead directing the team’s staff to prioritize other networks, like Twitter, Tumblr and Pinterest.

Cuban wrote the following on Business Insider today.

First, I’m not recommending to any of my companies that we leave Facebook. I am recommending that we de-emphasize pushing consumers or partners to like us on FB and focus on building up our followings across all existing social media platforms and to evaluate those that we feel can grow a material following. In the past we put FB first, twitter second. FB has been moved to the bottom of a longer list.

The crux of his dwindling interest in using Facebook to promote his brand is the company’s increasingly pervasive EdgeRank algorithm, which decides which items in a person’s time line are the most important and thus elevates them to the top. For a brand like the Mavs, which often posts the score of the team’s game as it is occurring, the result can be a non-chronological display of the breaking information they’re trying to provide those that “like” their page. Or worse, it means that fans might miss interesting nuggets of info altogether.

Essentially, in its attempts to become, as Cuban terms it, an “efficient information delivery source” via their algorithm, the company is making it harder for companies to get the benefits they signed up for — and often pay for with “sponsored posts” that purport to help reach a wider audience.

By trying to be an incredibly efficient information delivery source, they confine our ability to organically reach most of our followers to using Sponsored Posts. They also significantly increase our costs because if we create a post that doesn’t engage our followers to the level the algorithm expects it to, it can impact our ability to be seen in the future. Talk about pressure.  Put up a post, but be sure that EdgeRank doesn’t think it sucks.

Then of course there is the money. As many have written before me, sponsored posts can get expensive. If you post many times a day, that can get incredibly expensive.

So why would brands who can’t afford the algorithmic presentation risk, or the financial cost, want to continue to drive their user interaction by investing in FB if there are alternatives?

Of course, all this critiques are basically just mumbo jumbo to most of us non-techgeeks. These are details that few people actually care about. With his closing comments, however, Cuban gets to what sound like a potentially larger problem — and one that, if a host of other executives feel similarly about, could cost Facebook a lot of cache from the companies it has been enticing to join in recent years. In short, with its strategic shift, it may have invited strategic risk.

I also think that FB is making a big mistake by trying to play games with their original mission of connecting the world. FB is a fascinating destination that is an amazing alternative to boredom which excels in its SIMPLICITY. One of the threats in any business is that you outsmart yourself. FB has to be careful of just that.

And in case you were wondering: I first became aware of Cuban’s essay from @BusinessInsider on Twitter.

The Oakland A’s Billy Beane Addresses RIMS 2012

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As the saying goes, “Winning isn’t everything.” That is unless you’re the general manager of a Major League Baseball team. Then it’s probably the main thing. But in the baseball world, winners and losers are often separated by millions and millions of dollars. The smaller market have-nots can’t easily compete with their wealthier large-market counterparts that can spend much more money acquiring star players. Famously, however, the Oakland Athletics’ GM Billy Beane was able to buck this trend in the 1990s by using data analysis to craft a winning team on a relatively small budget. The subject of the book and movie Moneyball, Beane recounted his story in his keynote address this morning at the the RIMS 2012 Annual Conference & Exhibition in Philadelphia.

Beane talked about how his unsuccessful playing career first gave him experience with the proper valuation of assets. As a young prospect, Beane was a first-round draft pick and projected to be a star. But it turned out he was an “overvalued asset” and as he said, he just didn’t have the skills. Beane only played for a few years, compiling a meager .219 career batting average. As an executive, Beane didn’t want to make the same mistakes, particularly since his team didn’t have the money to spend on a pick that didn’t pan out. His cash-strapped team had to get the most bang for its buck, and in order to do that the Athletics needed to identify and invest in undervaled assets that other teams missed.

“The biggest risk for the Athletics was doing things like everybody else,” he said. Beane and his assistant, Paul DePodesta, looked at years of baseball statistics and found that many teams were “paying for skill sets that didn’t correlate with winning.” By concentrating on these areas, such as on-base percentage rather than stolen bases, for instance, Beane put together a baseball team that may not have been glamourous, but it was effective. Throughout the 1990s and early 2000s, the A’s became a frequent contender, depsite their low payroll.

Throughout his career, this adherence to data-driven decision making has meant that Beane has had to make some unpopular and seemingly illogical personnel choices, including trading some of his best players. “The riskiest thing as an A’s fan is to buy a jersey with your favorite player’s name on the back,” he said.

Ultimately, however, the metrics are what rules out. His strategy may not always be popular with the fans, but for Beane, it’s all about what benefits the team. Kind of sounds like what many risk managers have to go through, doesn’t it?

Billy Beane and Baseball’s Big Spenders

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For me, the surest sign that spring has arrived is the beginning of the baseball season. And although the season officially kicked off with a series of games between the Oakland Athletics and Seattle Mariners last week in Japan, it really began in earnest last night when the defending World Series champion St. Louis Cardinals beat the new-look Miami Marlins on Opening Night.

In the spirit of the new baseball season, I recently had the chance to speak to Billy Beane, the general manager of the aforementioned Oakland A’s and the subject of the book and movie Moneyball, for the latest issue of Risk Management. Beane will also be delivering a keynote address at the upcoming RIMS 2012 Annual Conference & Exhibition in Philadelphia. In our interview, Beane discussed how he uses data to run a competitive baseball team and addressed some of the risk management and insurance concerns that a general manager of a baseball team has to face.

One comment I found particularly interesting was the following:

About 10 years ago, we’d insure player contracts. What’s interesting is that, for years, say you signed a player to a five- or six-year contract, you could get that entire contract insured. And I remember one time [our insurer] came to us and said they’re no longer going to insure contracts for longer than three years. After three years, they need to be underwritten again. And my assistant and I said, “that’s an insurance company telling us that it’s not a good idea for us to sign players beyond three years.”… So that was basically them telling us these aren’t good bets.

What makes this comment so interesting is that it doesn’t seem like this philosophy is shared around the league. For instance, this past offseason the Los Angeles Angles of Anaheim signed first baseman Albert Pujols to a 10-year, $240 million contract while the Detroit Tigers gave first baseman Prince Fielder $214 million over 9 years. Not to be outdone for the privilege of paying players $20 million a year, just last week the Cincinnati Reds gave their star first baseman Joey Votto a 10-year, $225 million contract extension, while the San Francisco Giants extended pitcher Matt Cain’s contract by 5 years for $112.5 million.

Regardless of the value of these contracts, they all go against Beane’s (and his insurer’s) no-more-than-three-years rule and it’s hard to see how these players will deliver full value on their deals. Granted they are some of the best players in the game right now but injury and age could take their toll on performance at any time. Pujols, in particular, may be one of the greatest baseball players of all time, but he is 32. Not many players, no matter how good, are still productive (or even able to play) in their 40s. These signings seem to illustrate the difference between baseball’s big markets haves and it’s small market have-nots like the Oakland A’s. The richer clubs are simply able to take on risks that Beane cannot.

Or maybe there’s a more insidious method to their madness, as Jonah Keri writes on ESPN’s Grantland:

Sweating potential value, opportunity cost, and other related principles might be focusing on the wrong details. The recent $2 billion Dodgers sale points to a baseball landscape that has changed dramatically. Current and prospective owners see an industry that grew revenue through a tough recession and now stands poised to rake in far more money, with media deals rising, the economy improving, and the game in the midst of its longest period of uninterrupted labor peace since the advent of free agency.

According to Keri, these owners are making what they think are smart choices given the current market. But these choices may be based on the assumption that that the value of their clubs can only go up into the rarefied billion-dollar air.  So what’s a few hundred million here and there? A baseball team is basically a license to print money. Obviously, nothing can ever go wrong with that strategy. Right, housing market?