David Beckham for Nothing? The Economics of the Deal
Phillip Anschutz stands to make a few million dollars profit on Mr. Beckham with virtually no downside risk.
By now, everyone knows that the Los Angeles Galaxy soccer team has acquired David Beckham for an estimated $250,000,000 for five years. That amount is enormous for any team, let alone Major League Soccer -- a minor league draw somewhere between hockey and horseracing. Of course, the sum certainly won’t bankrupt billionaire owner Phillip Anschutz, but he certainly wouldn’t risk that kind of loot on a potential disaster. Still, is he risking anything at all?
No. In fact, Mr. Anschutz is probably getting Mr. Beckham for free. That’s right, not one thin dime. Anschutz and company have constructed the deal of the century. In fact, he will probably even make a few million dollars profit on Mr. Beckham with virtually no downside risk. And Beckham will actually take a pay cut. How so?
Mr. Anschutz technically owns the operating rights to the Galaxy (and two other MLS teams) through his sports management company, Anschutz Entertainment Group, which maintains a sprawling presence in the Los Angeles sports scene. The contract drawn up by the Galaxy is similar to a contract that any company would give a high producing salesman bringing in a book of business. The principal risk to both parties is the question of whether or not he can bring over the book of business. Mr. Beckham, in the end, will be paid a percentage of the business he brings in. This means a low downside for Mr. Anschutz and a high upside with risk for Mr. Beckham. The Galaxy has not only shifted most of the risk to Beckham, but Mr. Anschutz should also make a few million dollars on the deal. Still, if Mr. Beckham can produce (both on the field and at the cash register), he will substantially increase his worldwide income.
Beckham will receive nearly $10,000,000 salary a year, a pay cut from his current $16,000,000 in salary and advertising at Real Madrid. Why would he take a cut in pay? According to the Wall Street Journal, as part of his agreement with the Galaxy, he'll be receiving 40% to 50% of team jersey sales, which means he will receive all the profit on the sale of the jerseys. Still, that’s OK for the team because the Galaxy probably didn’t sell many jerseys except to the few local fans to begin with anyway. And now, the team can auction off the name sponsors (worldwide) to put front and center on the jerseys before they start selling them. (The Galaxy hasn’t' disclosed whether or not Beckham gets any of the jersey advertising.)
In addition, Mr. Beckham also gets an undisclosed split on ticket revenue, probably based on the increased sales. The team has already reportedly raised $3,000,000 in a few days, just on new sales of their $3,000 premium season seats. So, between jersey sales and increased ticket revenues, Beckham could pull in $15,000,000 a year. If he does, the Galaxy as a team will make enough profit from increased jersey and ticket sales to pay Mr. Beckham’s base salary of $10,000,000, putting them at breakeven before we even begin talking about hotdogs and beer.
Then there are the endorsement deals. Anschutz Entertainment Group is a sports management company. Management groups typically make 20% of any endorsement deals they bring in. AEG estimates that Beckham will get $20 to $25 million a year. (Michelle Wie, a 17-year-old golfer on the LPGA, never having won a professional tournament racks, in $20,000,000.) If Mr. Beckham can make any kind of a splash in the Hollywood scene with his Spice Girl wife, $20 to $25 million worldwide should be a slam-dunk. AEG’s 20%, after their expenses, should leave an additional million or two in Mr. Anschutz's pocket. There are a few poo-pooers around that think he won’t be able to raise that much in endorsement deals, but the negotiating table is accepting bidders already.
The net result to all of this economic rearrangement? Mr. Anschutz pockets a few dimes with little risk and gets a world-class name to use as a marketing lever for a minor league sport that had to give away its TV rights until this year. David Beckham, for his part, gets exposure in a market that represents 45% of the world’s gross product. As long as his aging limbs hold up, both he and Mr. Anschutz and will be very happy -- and will remain very rich.