Wednesday, January 23, 2008

Fantasy Baseball meets E*TRADE meets Human Trafficking

I came across a fascinating concept today of a company selling stock in professional athletes; not the teams, nor their outcomes, but the actual players themselves.

The company, Real Sports Investments, allows investors to buy shares (no more than 20%) in individual players. If the player who you own shares in makes it to the major leagues, you get paid when the player gets paid, similar to a divided. Down the line they hope to set up a market for buying and selling those shares in an open market-type forum. You could buy an athlete's stock based on market conditions, like last off-season would've been a nice time to own stock in over-the-hill free agent relief pitchers (Orioles fans wince and nod).

And why would a player give away a portion of his major league salary? Well, because the minor league player receives money from the sale of his shares today by giving up a percentage of his contract down the line, if he makes the big-leagues. Presumably when he signs a major league deal giving up, say, 5% won't be a major loss compared to the benefits he receives today with his current minor league contract. Of course investors are not only buying based on the predicted value of his major league deal, but whether the player will even make the major leagues. From the athletes perspective the sale is like a form of insurance against that chance and the prospect of a below-than-expected major league deal.

So far only one athlete Randy Newsom has signed on (Newsom not Newman). Shares of Randy can be bought for $20 and there are 2,500 in all, meaning that Newson gets 50 grand upon sale and gives up 4% of his future major league earnings.

As an economist this strikes me as a textbook example of networks effects and two-sided markets. The network effects aspect is obvious as like any market the market itself becomes more valuable to me personally the more people that buy and sell over it. Athletes are on the other side of the market and they to benefit from more users. For example, when uber college prospect Justin Smoak gets drafted this June his "IPO" will be bid up the more people that trade on RSI (and the more that Keith Law fawns over him).

The concept is very similar to the so-called Bowie Bonds in which an investor could purchase shares in the current and future revenue of David Bowie's collection (I wish I were joking). Apparently owning the rights to Let’s Dance and Changes isn’t the best long-term financial growth strategy as Moody’s lowered their rating to one notch above junk.

These market-maker examples are certainly intriguing and lead to a whole set of questions (do I, as 20% owner in Melvin Mora, get a say regarding his potential move to the outfield?). It’ll be fun to see if this concept has any legs.

Until then, here’s to hoping Borowski and Betancourt throw out their arms this spring, because me and my one share of Randy Newsom need a new pair of everything.

(Tip of the cap to Parker on the RSI find)

No comments: