INVESTING IN ATHLETES: Predicting the Brand Value of Andrew Wiggins and Doug McDermott A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Ryan Whitt Milne May 2014 INVESTING IN ATHLETES Predicting the Brand Value of Andrew Wiggins and Doug McDermott Ryan Whitt Milne May 2014 Economics Abstract This study investigates the company Fantex as well as creates a hypothetical model used to evaluate two upcoming NBA draft lottery picks, Andrew Wiggins and Doug McDermott. There is very little research on this subject being that Fantex is a relatively new company. Before this study, the only models that this company has created have been for NFL football players Arian Foster, running back for the Houston Texans, Vernon Davis, tight end for the San Francisco 49ers, and only recently EJ Manuel, quarterback for the Buffalo Bills. I will be creating these models so that I can come up with my own equation to value these phenomenal college athletes, and determine if investment in their brand would be a profitable venture. This analysis will provide new information about the effect of endorsement deals, player statistics, current contract, likeability, and other variables (that will be explained later) on a player’s stock. I am coming up with a forecast model to determine the influence of each statistic on a player’s salary. I am taking a specific player, plugging in their actual college statistics into the equation (player’s last year of college statistics + model coefficients) and coming up with each player’s predicted salaries. Once I have their predicted salaries I will estimate the likelihood of endorsements and exactly how much they might bring in. I will then approximate how long each player will play in the league. Finally, I will create a contract, similar to Fantex’s contracts, to offer each player. KEYWORDS: (Fantex, Projected Salaries, Endorsements, Contract) ON MY HONOR, I HAVE NEITHER GIVER NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Signature TABLE OF CONTENTS 1. Introduction……………………………………………………………………………...….1 1.1 Importance of Study………………………………………………………………....3 1.2 Overview of the Present Study…………………………………………………........4 2. Literature Review…………………………………………………………………………...6 3. Theory……………………………………………………………………………………....13 3.1 College Statistics………………………………………………………………….…13 3.2 Risk Smoothing……………………………………………………………………...17 3.3 Return on Investment………………………...………………………………………19 4. Data…………………………………………………………………………………………27 5. Results and Conclusions……………………………………………………………………34 5.1 Results from the Three Regression Models………………………………………….35 5.2 Endorsements…..……………………..…………………………………………...…45 5.3 The Contracts………………………………………………………………………...55 6. References………….…………………………………………………………………….…65 LIST OF TABLES 1. Variable Definitions……………………………....................................................................27 2. Regression results of estimated model proj. 1st year…..…………………………………….35 3. Regression results of estimated model proj. 4th year…………………..………...…………..36 4. Regressions results of model using Position, Age, X, AD, AC…………………..………….37 5. Regression results table using pos3, pos2, PA, X, AC, AD ………………………...…….…38 6. Regression results of model using pos3, pos2, PA, X, AC, AD ………………..…...………39 7. Projected salaries through first 8 years………………………………..………………..…....40 8. Average error in model prediction…………………………………………………………...40 9. Regression results table using mock draft position…………………………………….…….42 10. Projected salary based on mock draft position……………………………………….……..42 11. Average between mock draft regression and college statistics regression……….…………43 12. Present value projected salaries………………………………………………….………….44 13. McDermott endorsement deal using college statistics regression……………….……….…50 14. Wiggins endorsement deal using college statistics regression…………………...…………50 15. McDermott endorsement deal using mock draft position……………………….…………..51 16. Wiggins endorsement deal using mock draft position………………………………………51 17. McDermott player comparison…………………………………………………...…………57 18. Wiggins player comparison……………………………………………………...……….....58 19. McDermott final calculations……………………………………………………….………60 20. Wiggins final calculations………………………………………………..…………....……61 LIST OF FIGURES 1. Jake Mann’s scenarios for investing in Fantex………..………………………………………20 2. Jake Mann’s estimated return on EJ Manuel………………………………………….………21 3. Jake Mann’s second estimated return on EJ Manuel.………………………………………....22 4. Estimated Regression Equation…………………………………...........………………….….27 5. Second Regression Equation…………………………………………….…………...……….32 6. Final Regression Equation using college statistics………………………………………....…39 7. Regression Equation measuring mock draft positions……………………………….….…….43 8. NBA Shoe Endorsement chart………………………………………………………….…..…48 9. Regression Equation measuring endorsement deals with college statistics…………....……..51 10. Regression Equation measuring endorsement deals with mock draft position………...……52 ACKNOWLEDGEMENTS I would like to thank Professor Kevin Rask for his endless help, constant guidance and overall patience in this research. I would also like to thank my parents for their constant support and insight. In addition, I would like to thank Mike Edmonds for his mentorship throughout my four years at Colorado College. My deepest thanks go to Phoenix Von Wagoner for all his endless help and availability, I truly would not have been able to complete this thesis without him. Finally, I would like to thank John Rodin for taking time out of his busy schedule to help shed some wisdom and light on the company, Fantex. Introduction For years businessmen, banks, insurance companies, and individual investors have been buying, selling, and trading in the stock market. The stock market allows for businesses to be publicly traded, raising additional financial capital for expansion by selling shares of ownership of the company in a public market. History has shown that the price of shares and other assets are important part of the dynamics of economic activity and can even be an indicator of social mood and how well an economy is doing (Stock Market, 2013). The stock market is often considered the primary indicator of a country’s economic strength and development (Singh, 2011). Why am I explaining the stock market to you? The reason is that one company has decided to change up the stock market game for good. Every second of everyday people are trying to find something new, something fresh to gain a competitive advantage. One company thinks that they might have done that. Fantex Brokerage Services, a company based out of San Francisco, California, is the world’s first registered trading platform that lets you invest in Fantex, Inc. tracking stock that is linked to the value and performance of a professional athlete brand. Fantex, Inc. purchases a minority interest in an athlete brand and works to increase the value of this brand while Fantex Brokerage Services lets you do the actual buying and selling of the stock (Fantex Arian Foster, 2013). If the time ever comes that the brand stops generating income the tracking stock may be converted into Fantex, Inc. Platform common stock. 1 The first professional athlete brand that Fantex pursued to sign was that of Arian Foster. The Houston Texans running back agreed to receive $10 million upfront in exchange for payment of 20 percent of all football-related earnings to Fantex, providing a forecasted value of the income stream at $50 million. However, unfortunately for both Fantex and Arian, the Texans running back was put on the injured reserve for the rest of the season and will have to receive back surgery. The deal would have proceeded only if all the stock had been sold (Florio, 2013). Only time will tell if we will ever see a tracking stock option in Arian Foster. Fantex didn’t take long to build on their brand of selling futures in the brands of professional athletes. Within the next couple of weeks, Fantex had filed a proposal to sell shares in the future earnings of San Francisco 49ers tight end Vernon Davis. At a little smaller deal than Arian’s, they agreed to buy 10 percent of Davis’ future earnings for the upfront price of $4 million, a sum it plans to pay back by selling shares. Fantex also proposed selling 421,100 shares at $10 apiece (Sailors, 2013). As of February 10th, 2014 Fantex officially made shares of Vernon Davis tracking stock available for reservation in Colorado. However, the most recent Fantex deal came as of February 19th, 2014 when Fantex, Inc. announced that they had entered into a brand contract with Buffalo Bills young quarterback, E.J. Manuel. The contract states that Manuel will receive $4.97 million in return for a 10% interest in the brand income of Manuel (Fantex Enters, 2014). The central focus of this thesis will be to create a formula or model to explain how much each player is worth. For example, according to Fantex, the brand of Arian Foster is worth $50 million while the brand of Vernon Davis is about $40 million and E.J. Manuel’s brand stands at around $49.7 million. How did they arrive at those specific 2 valuations? This thesis will explore a number of variables to consider in order to build a winning model for Fantex and the investor and explain why. However, instead of searching the NFL for a brand, I will investigate a handful of basketball players from the NCAA that will most likely be entering the NBA draft this summer. The players