SBJ/Oct. 28-Nov. 3, 2013/Opinion

How competition for superstar endorsers is changing sports biz

Worth more than $90 million before he even graduated from high school thanks to a sponsorship deal with Nike, LeBron James has embraced the freedom that comes with such a big payday as few athletes have. Keen to run his own business — or, in his words, “be his own business” — James famously established his own firm in 2005, LRMR, to handle all aspects of his business ventures and marketing activities. He gave his childhood friend Maverick Carter, then 23, the role of chief executive officer. “I always felt he should take more control,” Carter told me. “And LeBron is a true entrepreneur. … He is bigger than what he does.”

James is hardly alone in this desire to have his own venture. Andy Murray, fresh off his Wimbledon win, is the latest star to make the jump. These “do-it-yourself” businesses have the potential to alter the balance of power
Editor's note: This column includes excerpts from Anita Elberse’s book “Blockbusters: Hit-Making, Risk-Taking, and the Big Business of Entertainment” (Henry Holt, 2013).
between superstars and the firms that enlist their services. Not only is that the case in the world of sports — LRMR has been labeled a “new financial model for the 21st-century athlete” — but it’s also true in other sectors of entertainment. Anyone who works in these sectors needs to understand how superstars like James are choosing to use their powers in business and what’s at stake for everyone else.

Going it alone

Why do stars like James decide to go it alone in the first place? Some suggest it is all about avoiding paying hefty fees to traditional agencies. I’d argue that what’s more important is the increased control that comes with running one’s own business. Taking matters in their own hands gives stars like James the freedom and flexibility to pursue the opportunities they value most.

Comparing LRMR with an agency like IMG, Carter explained: “The old model is a salesman’s approach. They would sell LeBron like they would sell mattresses! They go like, ‘We have six slots for endorsement deals — hurry up before we run out.’ Consumers figure this out. They know it isn’t real. It should be about the person behind the brand. Selling something is just a transaction. We want partnerships.”

LRMR’s Maverick Carter says: “LeBron is a true entrepreneur. … He is bigger than what he does.”
Photo by: GETTY IMAGES
That doesn’t mean that running a boutique agency like LRMR isn’t a challenge. For one, LRMR lacks the scale, resources, and experience of larger-scale, more traditional agencies such as IMG, so it likely cannot provide a full suite of services, limiting LRMR’s ability to attract a portfolio of athletes. And LRMR does not have the sales force to be as connected and constantly in tune with the business world as larger agencies are, so LRMR will probably have to settle for a more reactive and opportunistic role. But James’s enormous star power can help limit some of these shortcomings. Capitalizing on his popularity, Carter and his team have amassed a strong network of partners, which includes collaborators such as Nike (where dozens of people work on James’s product line on a daily basis), Fenway Sports Group (which gave James a tiny share in Liverpool FC), and even Warren Buffet, who on occasion provides advice.

What is interesting — and critical to the future of the superstar endorser — is that many stars are using their greater control and their appetite for longer-term partnerships to drive for innovations in compensation models. James, in particular, is known for seeking a share of the revenue of products he endorses or an equity stake in the companies behind these products.

Pushing the boundaries

In my role as a Harvard Business School professor, I was fortunate enough to be able to study one such decision up close in 2008, when LRMR had received three unsolicited endorsement offers in the video-game market. Electronic Arts (EA) hoped to sign James to be the cover athlete for the new installment of the company’s flagship basketball series, “NBA Live.” 2K Games, meanwhile, wanted James to become its signature athlete for “NBA 2K,” the most highly acclaimed basketball video game at the time. And Microsoft was keen to develop a downloadable Xbox Live game revolving around James.

It is not a coincidence that by far the biggest player in the world of video games at the time, EA, offered a fixed-fee payment while the two less powerful studios, 2K Games and Microsoft, proposed that James share in the upside. As the market leader and the studio behind the game with the highest level of exposure and a cover spot that is in high demand among athletes, EA could afford to be less aggressive in recruiting talent to endorse its game. “Being on the cover of an Electronic Arts game is great exposure,” Carter told me about the opportunity, pointing to the value of, as he put it, “LeBron’s face” being “in millions of homes around the country.”

Microsoft, meanwhile, was trying to grow its Xbox Live platform, so the company may have felt that it needed to sweeten the deal for James in order to compete with producers of better-selling games. If its game with James were to succeed, however, Microsoft would end up paying a heavy price for its proposed compensation structure.

Superstars may take an opposing view of these compensation models. As they progress through what I call their “talent life cycles,” popular performers tend to shift their emphasis from wanting to build to wanting to monetize their brands. The more wealth they have already accumulated — or the more confident they are that significant rewards are on the horizon — the more risk they are generally willing to take on by betting on revenue-sharing (or profit-sharing) agreements. No surprise then that James in 2008 chose the offer from Microsoft Xbox over the proposals from EA and 2K Games. Although a multitude of considerations went into that decision, the fee structure played a key role. (Earlier this year, James signed with 2K Games, finally making his debut as a cover athlete for the “NBA 2K14” game.)

Tug-of-war

With such different perspectives on what deal is right, it’s no wonder that stars and the companies they work for often find themselves in a tug-of-war. As athletes such as James gain in power and achieve wealth at an ever-younger age, they can accept more risk in subsequent career moves and push for ever-larger rewards. That dynamic, in turn, can seriously erode the profits of the firms that rely on those athletes to produce or market content. Yet even if most managers in entertainment businesses worry about their ability to compete for the most sought-after talent, they often find that they can’t afford not to compete for that talent — at least, not in the long run.

Explaining his client’s enthusiasm for the revenue-sharing deal, Carter said: “For LeBron, an up-front payment of a few million dollars does not make a difference. It does not drive his choice. That money just adds to the pile of money he already has — it makes it a slightly bigger pile.” He added: “For me, it can determine what kind of floor I can get in my kitchen. But I cannot think about what is best for me — I have to think about what is best for LeBron. And we are trying to build a billion-dollar business.”

Carter is on to something here. After all, Michael Jordan’s Nike product lines alone yield revenue of several billion dollars each year. Imagine having even a tiny slice of such a large business. That is increasingly what superstars like James are aiming for. The high rewards that are up for grabs for stars in the entertainment industries create a vibrant, highly competitive market with supremely talented performers. Businesses that rely on top-ranked talent will experience strong advantages in the marketplace. But because true superstars can use their power to secure unprecedented levels of compensation, they are able to capture much of the value they add. The result is that those superstars — and not the firms that pay their wages — often emerge as the biggest winners.
 
Maybe the moniker “King James” is more fitting than we all thought.

Anita Elberse (aelberse@hbs.edu) is the Lincoln Filene Professor of Business Administration at Harvard Business School.

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