Saturday, June 02, 2007

Mark Cuban's Right - CD's Are On The Decline

Mark Cuban's certainly totally wrong about the football business , but he's right on regarding compact disks and their future as a music distribution system. Just check out his blog and its references.

As I think about it, I can remember the last time I listened to music on the CD and that was in a car. But I've not done that anywhere else: not at home, for example. I watch movies on DVD, but music on CD's? Only in the car. It's a matter of time before one's able to just plug in their iPod and use it as a full car stereo for all cars, not just a few.

But Mark's totally wrong about football; the UFL will fail.

Does Ever Rising Salary Cap Put NFL Parity in Danger?

In 2005, former NFL Commissioner Paul Tagliabue closed out a stellar tenure by negotiating a new collective bargaining agreement with the NFL Players Association. With that new agreement, the NFL salary cap jumped from just over $85 million to a whopping $102 million dollars providing cap releif to several NFL teams. This season, the salary cap has swollen to $109 million. Is the salary cap reaching a point where small-market teams cannot afford to reach the limit leaving big-market teams the ability to start stockpiling talent?

June 1, previously a red-letter day in NFL free agency came and went with a relative whimper this year. Usually a day where NFL teams discard high-priced veterans to find salary cap relief, many teams found themselves comfortably under the $109 million cap without releasing some of their bigger names.

Since the new CBA was signed in 2005, the cap has grown an astounding 27.5%. In 2005 alone, the cap grew nearly 20% from $85.5 million to $102 million. Even big-spenders like the Dallas Cowboys suddenly found themselves in the tens of millions under the cap. At the time the CBA was signed, small-market owners such as Cleveland's Paul Brown and Buffalo's Ralph Wilson expressed concerns that under the new CBA, even with provisions that spread some of the wealth to them, that the runaway cap would eventually spell doom for their ability to compete.

With the rising cap comes rising contract demands. But with more and more teams and agents opting to place roster bonuses on March 1 instead of June 1, free-agents find themselves released at the beginning of free-agency while teams are still flush with cash. So contracts will continue to rise because the market has adjusted to bear it.

The gap between the role-players and the superstars is also growing. In a case of entertainment mirroring life, the NFL middle class is slowly disappearing. While the CBA stipulates minimum salaries based on number of years, the real dollars are spent on signing bonuses and roster bonuses. A mid-level player may see a roster bonus in the tens of thousands if at all. But players like Terrell Owens of the Dallas Cowboys received a $3 million bonus on June 1st just for being on the roster.

The NFL today is a league constantly in transition. As contracts of star players expire, more and more choose to enter the free agent bonanza rather than sign an offer sheet with their current team unless the offer already puts them among the top paid players at their position.

As the cap continues to swell, more and more of these free agents in smaller markets will move on where the pastures are as green as the money. Even with room under the cap, the Cleveland Browns of the world will eventually be at the limits of their budget before they are at the cap limit. Will Lee Evans make it to a second contract in Buffalo? It depends on whether or not the cap continues to soar.

On the other hand, General Managers across the league have learned to work the salary cap very well. A little creative financing can go a long way. But unless the profit shares to the smaller market teams grow in proportion to the cap, it is very feasible to say that buying consecutive championships will return to the NFL.

Why Bill Hambrecht and Mark Cuban's UFL - United Football League - Will Fail

Well, all I can say is "here we go again." A group of rich guys with egos -- no women involved here -- think that because they have enough money to start a football league, it will automatically work.

In the newest example, we have the to-be-called United Football League , or UFL. This is an idea started by San Francisco Bay Area investment banking maverick Bill Hambrick, who's firm WR Hambrick and Company I remember as Hambrick and Quist, and who employed a friend of mine from Skyline High School school, Marla Goldstein.

Ok, enough of that.

Hambrick managed to come up with this idea of the UFL and get Internet entrepreneur and Dallas Mavericks owner (funny, how the word mavericks comes up here more than once) to sign on as the first owner of a team. As I understand the UFL concept, they're going to establish cities in areas where the NFL does not have a team, and "compete" with the NFL for players that come out of college "lower than the second round."

OK. Here's the foundation upon which their failure will be based -- if they ever get enough owners to start an eight team league. The lessons of football league failure are captured in that business school case study called The XFL.

In fact, I created a system dynamics online simulation now called the XFL Simworld , and with Forio Business Simulations created a company around it called Sports Business Simulations .

The idea of the XFL Simworld is to make the right business decision to cause the XFL to last longer than the one year it did in reality.

What I've learned after countless hours and years of analysis, and design, and play and test and watching others run the sim is this: people watch people. What I mean in detail is that the XFL's biggest mistake was that it didn't have players people cared to watch. Mark Cuban's right about the "pent-up demand for football" but that doesn't mean anyone will come out and watch you and me play pro football.

What I learned from the XFL Simworld is that the XFL, and now the UFL, stand a better chance of survival if they hire recently retired or close to retiring NFL players and mix them with college players. Why? Because each of the NFL players close to ending their careers either by choice or for other reasons has their own brand name. For example, you know who Keyshawn Johnson is if you're even a causal fan of the game. But do you know who Jacoby Jones is?


See that's my point. Jacoby Jones is a wide receiver from tiny Lane College, drafted by the Houston Texans in the third round of the 2007 NFL Draft. That's one of the rounds Hambrecht and Cuban say they're going to "compete" with the NFL for players. That's great for the player and for the NFL, because the NFL doesn't have to worry about paying that player who may have dropped to the lower rounds for weird reasons more than a third round pick, and the player at least has another place to go, but don't think there's going to be a bidding war -- in fact, I predict the opposite.

The Jacoby Jones of the world may try to use the UFL as a negotiating ploy, and wind up not being signed by the NFL team. It's basic math -- there are more "third round level" players, than first round level players, so someone else who fell past the eyes of NFL scouts may look better in free agency than the third round pick using an upstart league to cause a bidding war. So Jacoby Jones goes to the UFL and gets the same money he would have earned as a third round pick by the Houston Texans. Fine, so he's happy. Meanwhile, the UFL gets a player no one ever heard of, and no one save for his family, friends, and the curious, will come out to see or turn on the TV to watch.

What Hambrecht and Cuban miss is that football is entertainment. The bottom line is to put people in seats at the stadium and have them watch on television. People follow names. They'd sooner watch a team with Keyshawn Johnson than one with Jacoby Jones. That's one big reason why the XFL failed; it lacked name NFL players to maintain TV ratings. Without them, XFL ratings dropped like a rock, and the league folded after NBC pulled from its commitment.

The UFL faces the same fate for that reason, and one more that's in a way related to the first problem I discuss. It's team location. In the XFL Simworld, the player has the option of having XFL teams in NFL cities, cities of the actual XFL, and warm weather cities. Which combination brings the best attendance? The Warm Weather Option, of course. This scenario was created based on the problems the real XFL faced in having constantly high attendance in all cities.

The best city for this in the XFL system was San Francisco, where the February through May climate was constantly mild, and never burdened with snow. Snow's a big deterent to the fortunes of a new football league hiring players no one has ever heard of. People don't buy tickets to teams that hire unknown players to play in cold weather.

Better to have a Southern Strategy.

With all of this, you'd think Bill Hambrecht and Mark Cuban would have thought more carefully before launching the UFL as a business. But they didn't, and I'm not surprised. There's one common element in all of these "new football league" cases -- ego. Someone always thinks they can clobber, outdo, take advantage of, or just plain be the next NFL. And in all cases, that never comes to pass. The UFL has all of the color of failure for that reason and the ones I gave above. What Hambrecht and Cuban should really do is work to start an NFL team to LA.

In other words, they're not going to beat the NFL, so they might as well join them.