Fantasy football has reached its high-stakes extreme. Last week, Fantex, a San Francisco-based company created by a couple capital investment firm veterans, announced its intent to make an Initial Public Offering on… Arian Foster.
The idea is actually somewhat brilliant. Fantex paid the running back of the Houston Texans $10 million in exchange for 20% of his future earnings on salary, endorsement contracts and appearance fees. In turn, Fantex will issue shares of stock backed by Arian Foster’s financial performance, which will be initially valued at $10.5 million (Fantex gets the $500K).
As we speak, you could be financing your account to get in on next month’s I.P.O. for Foster, who is the first player to be offered on the Fantex market. The company’s CEO claims that the plan is to target other players across all sports and even entertainers soon after Foster. Remember, even when dealing in players, diversifying your investment portfolio is always wise.
Once stock is issued on an athlete or entertainer it can be traded within a marketplace set up by Fantex. However, since this is “real” stock, everything is monitored by the SEC, just the same as if you were buying and selling shares of Apple or Microsoft.
At first blush, this seems a little seedy, right? Buying stock in another human seems almost like indentured servitude. But, there is some real benefit to the athletes that sign up to be traded; specifically they get guaranteed money right now, no waiting.
This will be particularly valuable for NFL players, who generally do not get the kind of guaranteed contracts that baseball or basketball players usually ink. It’s hard to imagine what value someone like Albert Pujols would see in trading out 20% of future earnings when he is guaranteed a salary into the next decade. But for NFL players, like Foster, future earnings are much more speculative.
Certainly Foster could end up getting hosed in this deal. He signed a five-year contract worth up to $43.5 million with $20.75 million guaranteed in 2012. If he receives most or all of his incentive compensation and then signs another contract in 2017, all of a sudden he is in danger of losing out on some big dollars. But if he gets injured, cut, or otherwise becomes unable to capitalize on contract incentives, he’ll make out like a bandit on this deal.
For the actual traders/consumers, it’s hard to say how well this is going to work. There are a number of risks and Fantex itself says it has no idea how stocks will trade once shares are issued. The most glaring problem is the rapid and guaranteed diminishing value of every “stock.” Unlike buying a corporate stock, which could continue to grow steadily for decades, stock in an athlete’s earning potential will necessarily tank within a few years.
Foster is 27 years old and has been in the league for five years. He is probably playing on the one “big” contract of his career right now and so his current earning potential and stock price are both high. But each day he plays is one less day he has on the contract; the inevitable end of his career when his earning potential is completely depleted. Suddenly you have a stock worth nothing. Exactly how large of a return can you expect to make as an investor if the I.P.O. comes at the height of a player’s value, but that value is reduced to nothing within a short period of time?
Fantex is obviously piggybacking off the incredible popularity of fantasy football, which has turned into big business itself. But unlike fantasy football, the variables that make a player valuable to “own” are not particularly fluid. How much a player makes changes only every few years. Because that is the case, it is hard to imagine the trade market flourishing.
Where I think this idea could potentially work well, however, is in dealing with college athletes. It’s hard to imagine the NCAA allowing college kids to sell off their future earning potential while they are still in school, but this model could be beneficial to the player and the “market.”
As it stands now, college athletes with professional prospects can buy insurance policies that pay out in the event of injury. These policies allow the player to pay off the premium once they have turned professional to provide a safeguard in the event they cannot capitalize on their prospective earning potential as a professional. This could work the same, only instead offering guaranteed premium payments, Fantex could offer a guaranteed payout. To make the NCAA a little less irritable, the payment would be deferred until the player turns professional.
This would seem to work to Fantex’s benefit as well. Unlike signing established players, signing a college player means greater speculation, which means more trade action. Think about stock for Jadeveon Clowney right now – touted as the best player in the country but concerns about his commitment. How is his draft position being affected week to week? What sort of contract is he going to receive and from what team? How will his draft position and team affect his marketability? Questions like these would lead to a buzzing market.
If nothing else, Fantex has a cool idea. It’s hard to tell how well this will play out, but it’s certainly possible that this thing could work. The beauty is that this is a win-win-win scenario. The player gets some protection from his own career volatility, Fantex profits off the service, and fans get another venue in which to interface with sports and the athletes they follow. I guess only time will tell whether fans are willing to tie their money so closely to their adoration.