ValueScope

NCAA Final Four – So Long to Cinderella?

By: Brent Shockley

The college basketball season concludes over the next four days as the NCAA Women’s Final Four (on ESPN) takes place tonight in Tampa and the Men’s Final Four will be played tomorrow night on CBS. The women’s game has generally been top heavy and the trend continues this year with three No.1 seeds. The only No. 1 seed to fall short of the Women’s Final Four, the University of Southern California (USC), lost star guard JuJu Watkins in the second round to a torn ACL and faced 11-time champ and No. 2 seed Connecticut (often referred to as “UConn”) in the regional final.

All four No. 1 seeds in the men’s bracket reached the Final Four for the second time in tournament history (previously 2008). There has been a noticeable lack of “Cinderella” teams advancing in this year’s tournament, leading to speculation that the transfer portal and NIL will significantly reduce the occurrence of a lower seeded team making a deep run. Arkansas was the lone double digit seed (No. 10) in the Sweet 16 but the Razorbacks were one of 14 teams from the Southeastern Conference (SEC) that made the field and the program was active in the NIL market for its players. Seven double digits seeds have reached the Final Four since tournament expansion in 1985, including six No. 11 seeds. Four times an 8 seed reached the title game, but only Villanova won the championship in 1985.

The Matchups

In the first game of tonight’s women’s bracket on ESPN, defending champ South Carolina is a 5.5 point favorite over Texas. This will be the fourth meeting between the schools this season with South Carolina winning two of three, including the SEC Tournament championship game 64-45. UConn is a 7.5 point favorite in the second game over UCLA. The women’s championship game is set for Sunday. Tampa’s Amalie Arena is the host for the third time in 11 years.

The men’s semifinals in San Antonio’s Alamodome features a battle of SEC teams in Florida and Auburn (Saturday 5:09pm) followed by Houston and Duke. Florida is a 2.5 point favorite to advance to the title game and won the regular season meeting at Auburn 90-81 in early February. Duke is a 5.5 point favorite over Houston. The Alamodome is hosting for the fifth time and first since 2018.

TV Ratings

Overall, the men’s tournament ratings are up 1% from last year and 3% from two years ago. The ‘First Four’ play in games were up 20% in part due to the participation of major brands like Texas and North Carolina. The first two rounds averaged 9.3 million viewers, the best ratings since 1993. Sweet 16 games were down 6% from the previous year and Elite Eight games were down 10% from last year’s Easter weekend.

Viewership for the women’s tournament declined from the prior year, which was fueled by the Caitlin Clark phenomenon, but significantly up over 2023. The women’s tournament is part of an 8-year, $920 million media rights deal with ESPN that includes 40 NCAA championships. The men’s tournament is a separate media rights agreement with CBS and Turner Sports, for an annual payment of $891 million through 2032.

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Let the Madness Begin

By: Brent Shockley, CFA, CVA

March Madness is upon us – with the first two of the “First Four” play in games of the NCAA men’s tournament airing tonight on TruTV. Play in games three and four for the men’s bracket will take place Wednesday night on TruTV. The Women’s “First Four” will be spread across Wednesday and Thursday nights on ESPN networks. The first round of the men’s bracket features 16 games on Thursday and another 16 on Friday across four networks, with the round of 32 over the weekend to determine the “Sweet 16.” The women’s first round action will be played Friday and Saturday and round of 32 on Sunday and Monday.

The women’s Final Four will be held on Friday April 4^th at Amalie Arena in Tampa with the championship game on Sunday April 6^th. The men’s Final Four is Saturday April 5^th at the Alamodome in San Antonio with the championship game on Monday, April 7^th, the same day the final approval hearing of the House vs. NCAA settlement, which could alter college sports even further.

TV Deals

The NCAA men’s tournament coverage is carried by CBS and Turner networks (TBS, TNT, TruTV) as part of a $8.8 million extension in 2016 for eight years ending after the 2032 tournament. CBS games will stream on Paramount+ and Turner games will be streaming on Max. The NCAA women’s tournament deal with ESPN is $65 million per year. Last year’s women’s title game between South Carolina and Iowa was the most watched basketball game since 2019. Some women’s tournament games rated higher than the men’s, generally featuring sharp shooting Iowa guard Caitlin Clark, defending champ Louisiana State, and eventual champion South Carolina, which posted a perfect 39-0 season. The women’s tournament remains bundled in an ESPN deal with other NCAA championship events but could be spun out in the future.

Brackets and Betting

It is estimated that over 50 million Americans will fill out at least one March Madness bracket. Once the first four games have concluded and the field of 64 is set for first round action, there are over 9 quintillion possible outcomes. The American Gaming Association estimates $3.1 billion will be ‘legally’ wagered on the men’s and women’s tournament in 2025. This would represent an increase of 15% over last year, due to increased availability of legal sports betting options. In comparison, $1.4 billion was wagered on Super Bowl LIX between the Chiefs and Eagles.

On the men’s side, 14 of the Southeastern Conference’s (SEC) 16 teams made the field of 68, most of any conference in the history, although we live in a different era with consolidation of major programs/brands into the SEC and Big Ten in the last year. The men’s national champion typically is top 20 in offensive efficiency and top 40 in defensive efficiency. The top 5 teams in combined efficiency are Duke, Florida, Houston, Auburn, and Tennessee. Others to keep an eye on include Alabama, Texas Tech, Gonzaga, Iowa State, and Wisconsin. Duke is a popular pick but the health status and effectiveness of star freshman Cooper Flagg bears watching after injuring his ankle in the ACC Tournament last week. Iowa State also has a key injury in Keshon Gilbert, its second leading scorer and assist leader. On the women’s side, defending champ South Carolina is the odds favorite to win the crown followed by the Connecticut Huskies, UCLA Bruins, and Texas Longhorns.

Download the PDF here.

Expanded College Football Playoff Begins, Top 10 Most Valuable Athletic Programs

The long awaited expansion of the College Football Playoff (CFP) debuted December 20, 2024, with the surprise team of the season, the Indiana Hoosiers, traveling to South Bend to face Notre Dame on ABC. First round action continued on Saturday with a tripleheader from noon EST through the evening. Game temperatures in three of the games were forecasted to be in the 20s in contrast to lower 60s in Austin, Texas.

ESPN/ABC extended its media contract with the CFP through the 2031 season for an average annual payout of $1.3 billion. In an effort to reduce costs, ESPN reached a deal with TNT Sports to sublicense two first round playoff games this season and next season and then add two quarterfinal games for the 2026, 2027, and 2028 seasons. This is similar to the approach CBS employed with the NCAA Men’s Basketball Tournament to partner with TNT, TBS and TruTV as a broadcast syndicate of one of the most popular sporting events in the United States. In the new CFP format, first round games are played on campus, and the winners advance to play the top seeds at traditional bowl sites. The semifinals will also be played within the traditional bowl structure.

Top 10 College Athletic Program Valuations

There has been talk of private equity investment in college sports to further monetize assets and infuse schools with money in a changing landscape with revenue sharing with athletes on the horizon as part of the NCAA vs. House settlement. CNBC released a list of the top 10 program valuations.

The average revenue multiple for top 10 college athletic programs is 4.6x compared to the NFL average of 9x.

Download the PDF here

Breaking Down U.S. Professional Athlete Contracts

By: Andrew Pearson and Brent Shockley, CVA, CFA

The New York Mets and Juan Soto have shaken up the baseball world with a jaw-dropping $765 million deal over 15 years, averaging $51 million per season. Baseball has seen its share of blockbuster contracts lately, but this one stands out as the biggest yet. Soto now holds the record for the largest total contract value in U.S. sports history, surpassing Shohei Ohtani’s $700 million agreement with the Dodgers just months ago. The new Soto-Mets deal is nearly double the value of all but one other contract across major American sports. Here are some of the most notable deals from the NFL, NBA, and MLB:

A major factor in the total size of baseball contracts is their length, with deals commonly surpassing the 10-year mark, compared to NFL and NBA contracts generally falling in the 4–5-year range (with the rare exception of Patrick Mahomes’ 10-year contract signed in 2020). MLB teams may feel more comfortable committing to these long-term deals for two reasons: baseball players tend to have longer careers than their NFL and NBA counterparts, and MLB operates without a salary cap, relying instead on a luxury tax system that penalizes teams for exceeding a payroll threshold.

One wrinkle with these lengthy deals is the time value of money – the concept that a dollar today is worth more than a dollar in the future because today’s dollar can be invested and grow. When accounting for this and adjusting some of the largest contracts in U.S. sports for the time value of money, Juan Soto’s deal still ranks as the highest contract value.

Applying this to the player’s average annual salary, Soto is nowhere near that of his highly paid peers. In fact, we see the NBA’s Jayson Tatum, and his Boston Celtics teammate Jaylen Brown, both earn nearly $50 million per year, dwarfing Soto’s $29.5 million per year:

After factoring in the time value of money, NFL and NBA players reign supreme in per year salary, with MLB players falling to the bottom four slots out of the ten contracts sampled. This is largely due to their longer contract structure, and in the case of Ohtani and Betts, the significant impact of deferred compensation agreements that extend well beyond the life of their contracts.

While record-breaking deals like Juan Soto’s redefine the upper limits of total contract value in U.S. professional sports, the blockbuster but shorter contracts of the NFL and NBA highlight the crucial role of the time value of money in maximizing players adjusted annual earnings. This demonstrates that contract size is not the sole indicator of financial success for professional athletes; rather, a nuanced understanding of contract structure and its long-term financial implications is equally critical.

Pre-September 2024 Fed Meeting

By: Thomas Rizzo

Vol. 24 No. 9

The Peak of Contractionary Monetary Policy

Today represents a shift in monetary policy as the Fed pivots from contractionary to expansionary monetary policy. In this monetary policy cycle, in an attempt to fight inflation, the Fed has raised the benchmark rate 11 times, leaving it unchanged at 5.25% – 5.50% for over a year. The circumstances that ignited this aggressive rate cycle resulted from post pandemic headline inflation climbing to over 9.1% in June 2022. Through the rate hikes mentioned previously, inflation has cooled down to 2.5% as of August 2024, which is slightly higher than the policy target of 2.0%.

Another policy target of the Fed is to maintain maximum employment. Maximum employment can be looked at as either the highest level of employment or lowest level of unemployment that the economy can sustain while maintaining a stable inflation rate. Some indicators of shifts in the labor market that the Fed closely watches include nonfarm payrolls, which as of recently have rebounded after a slump over the past several months, but that are still significantly lower than a year ago.

With the battle against inflation appearing to be won, the Fed is shifting its focus to maintaining the balance between stable prices and maximum employment as the labor market begins to show signs of weakness.

The Future of Monetary Policy

A new expansionary monetary cycle has begun, and market participants are pricing in what that is going to look like for the remainder of the year. Given some of the latest market data, market participants are pricing in a 50 basis point cut in today’s meeting, then a 25 basis point cut for the November meeting, followed by another 50 basis point cut in the December meeting. This takes the benchmark rate down from the current 5.25% – 5.50% to 4.00% – 4.25% by the end of the year.

Key Takeaways:

The Fed’s pivot from contractionary to expansionary monetary policy signals a significant shift as inflation cools down to 2.5%, close to the Fed’s 2.0% target.
Market expectations suggest a 50 basis point cut today, followed by a 25 basis point cut in November and another 50 basis point cut for December.
Market participants are pricing in the benchmark rate to settle at 4.00% – 4.25%, representing a 125 basis point drop from the current 5.25% – 5.50%.
With inflation under control, the Fed’s focus shifts to balancing stable prices and employment as the labor market begins to show signs of weakness.

NFL Opens the 2024 Season and the Door to Private Equity

By: Brent Shockley, CFA

The 2024 NFL season kicked off Thursday night with a late touchdown overturned by replay to preserve a victory by the defending Super Bowl champion, Kansas City Chiefs, over the Baltimore Ravens. The second game of the NFL season will take place this evening in Sao Paulo, Brazil between the Green Bay Packers and the Philadelphia Eagles. The Sports Broadcasting Act of 1961 (“SBA”) was passed to preserve Friday nights for high school football and Saturdays for college football – with a catch. The Act protects high school and college football from the second weekend of September through the second weekend of December. There is a “Black Friday’ game after Thanksgiving for the second consecutive year, but the start time of 3pm eastern / 2pm central is in compliance with the SBA since it will conclude prior to 6pm eastern.

NFL Valuations

The start of the NFL season brings updated franchise valuations. The average NFL franchise value is $5.9 billion per Sportico. The top 10 NFL valuations and details are listed in the table below.

NFL Votes to Allow Private Equity

Last week, NFL owners voted to allow private equity to acquire up to a 10% passive stake in a given franchise. The NFL is the last major professional sports league to allow private equity. The details of private equity investments in professional sports are presented in the following table.

Allowing private equity allows more owners to monetize their investments, which has been increasing rapidly in recent years. For example, Jerry Jones purchased the Dallas Cowboys for $140 million in 1989. The total value of the Cowboys today is estimated at $10.3 billion. The Washington Commanders sold for $6 billion last year and the Denver Broncos sold for $4.65 billion in 2022.

Post-July 2024 Fed Meeting

FedScope, Vol. 24 No. 8

By: Thomas Rizzo

Fed Meeting Decision

During the July 31^st, 2024, Fed meeting, the Federal Open Market Committee (FOMC) kept the target federal funds rate unchanged at 5.25% – 5.50%. Federal Reserve Chair Jerome Powell put the possibility of an initial September rate cut on the table. During the meeting Powell mentioned, “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate”, after citing that greater progress towards lower inflation as well as a cooler job market no longer threaten to overheat the economy.

Monetary Policy Cycle Timeline

The Fed has kept the federal funds rate at a 23-year high of 5.25% – 5.50% since July 2023, after an aggressive series of hikes that began in March 2022. The potential close of this cycle of contractionary monetary policy comes on the back of promising economic data, providing a level of confidence that the tools that the Fed has implemented to fight inflation have worked. The economy has remained resilient, inflation has cooled, and the labor market has remained strong with subtle signs of cooling prior to the Fed meeting.

Future of Monetary Policy

Following the Fed meeting, on August 2^nd, the July Jobs Report was released, indicating a weaker than expected labor market showing signs of slowed hiring with unemployment climbing to a 3 year high of 4.3%. Market participants are pricing in a 100% probability of the first rate cut occurring in September, that after the July Jobs Report is projected to be a 50 basis point cut based on market data.

Given the commentary from the July Fed meeting along with recent economic data, the conversation has changed from trying to determine when we should expect initial rate cuts, to trying to determine how many we should expect by year end. Taking a deeper dive into the probabilities below, you find that the market is fully pricing in consecutive rate cuts for each of the next 3 Fed meetings. These rate cuts may take the form of either 25 or 50 basis point cuts, cutting the federal funds target rate from a 23-year high of 5.25% – 5.50% to 4.00% – 4.25% in December.

Key Takeaways:

After an aggressive series of rate hikes, the economy is showing signs of progress towards the Fed’s policy objectives.
A weak July Jobs Report following the Fed meeting drove the market to price in a 50 basis point cut for the September Fed meeting.
For the remainder of the year, the market has also priced in the possibility of a second 50 basis point cut in November followed by a 25 basis point cut in December.
The target federal funds rate is projected to be cut from 5.25% – 5.50% to 4.00% – 4.25% in December.

Pre-July 2024 Fed Meeting

FedScope, Vol. 24 No. 7

By: Thomas Rizzo

US Economy:

Inflation
- The Consumer Price Index (CPI), a key inflation gauge, rose 3.0% year over year in June, down from 3.3% in May.
Economic Growth:
- Real Gross Domestic Product (GDP), increased at a 2.8% annual rate in the second quarter of 2024, which was greater than the 2.1% expected.
Labor Market:

Monthly job growth remains strong, unemployment has increased to 4.1% in June, and job openings have fallen slightly to 8.2 million.

Looking at market data presented above, as indicated by Fed futures, market participants are pricing in a 100% probability of the first rate cut occurring in September. With rate cuts beginning in September, the door opens for the possibility of 2 rate cuts this year. Overall, in comparison to after the June 2024 Fed Meeting, market participants have been pricing in higher probabilities across the board (with exception to July) for rate cuts this year. Commentary later today for the July 31th Fed Meeting will clarify how many rate cuts we should expect for the rest of the year.

Key Takeaways:

Headline inflation has cooled down to 3.0% after a hot start to the year.
Economic growth has remained strong, exceeding expectations.
The labor market is strong but showing signs of potentially slowing down.
Market participants are pricing in initial rate cuts to begin in September.
Additional Fed commentary will clarify whether we should expect only 1 or 2 rate cuts this year.

Bonjour! 2024 Summer Olympics Begin in Paris, Peacock Looks to Rebound

By: Brent Shockley, Principal

The 2024 Summer Olympic games officially begin today and run through Sunday, August 11^th. The opening ceremony will feature over 10,000 athletes aboard over 90 boats floating down the Seine River in Paris at 7:30pm local time and 1:30pm Eastern US time. A few sports, such as football (soccer in the US), got an early start to their opening rounds on Wednesday, July 24^th.

A study by Oxford University found that nearly every Olympics since 1960 has gone over budget, by an average of 172%. The cost of the 2024 Paris games is expected to be approximately $10 billion, roughly 25% over its original budget. However, this cost is well below recent Olympics.

The difference is largely due to event specific construction. Unlike many host cities, 90% of the venues in the Paris Olympics are pre-existing. The major capital expenditures include $1.6 billion for the Olympic Village, $190 million for the aquatics center, and $150 million for gymnastics and badminton. Los Angeles is utilizing a similar strategy to limit spending, along with private funding, to meet its ambitious budget of $6.8 billion for the 2028 Summer Games.

The 2024 Olympic Games will be broadcast in the U.S. on NBC, its Peacock streaming service, and Telemundo. In 2014, NBC Universal signed an extension with the International Olympic Committee (IOC) to broadcast six Olympic games from 2021 through 2032 for $7.75 billion. NBC executives hope the 2024 Olympic games reverse the decline in Peacock subscriptions, despite recent price increases of $20 for annual plans and $2 for monthly plans.

Peacock subscribers increased from 4 million in mid-2021 to 33.5 million during the first quarter of 2024. However, in the second quarter of 2024, Peacock experienced its first quarterly decline losing 500,000 subscribers. Peacock will stream weekly college football games as part of the Big Ten Conference’s new media package this fall. In addition to Big Ten games, six Notre Dame football home games will stream on Peacock simultaneously with the linear NBC national broadcast. Peacock will be the exclusive outlet for Notre Dame’s home game with Louisville on September 28^th. The controversial move by the NFL to grant Peacock exclusivity to a playoff game last January (featuring eventual Super Bowl champion Kansas City Chiefs) angered many football (and Taylor Swift) fans but resulted in an average of 23 million viewers, the largest live streaming event in the U.S. Peacock also has the exclusive rights to Green Bay Packers vs. the Philadelphia Eagles in Brazil on Friday, September 6^th. With these strategic additions to its streaming lineup, Peacock aims to regain momentum and attract a broader audience in the competitive streaming market.

The Return of EA Sports College Football Video Game

This week marks the return of the Electronic Arts (NasdaqGS:EA) college football franchise for the first time in 11 years. The video game originated in 1993 as Bill Walsh College Football (the former head coach of Stanford University and three time Super Bowl champion with the San Francisco 49ers) but changed its label to College Football USA and then to NCAA Football. The franchise ended after NCAA Football ’14 (released in summer 2013) because of legal disputes regarding the usage of name, image and likeness (NIL) of the players and violation of the Sherman Antitrust Act.

The legal issues began in May 2009 with an NIL lawsuit filed by former Nebraska football player Sam Keller against EA. Former UCLA basketball star Ed O’Bannon filed a similar lawsuit. In January 2010, U.S. District Court of Northern California Judge Claudia Wilken granted a motion to consolidate several cases against EA, the NCAA, and the Collegiate Licensing Company. In August 2012, O’Bannon filed a motion to include current student athletes and to allocate proceeds from NCAA football and basketball video games into trusts with the proceeds paid at the end of their eligibility. The legal battle continued to a point where the NCAA and its major conferences did not renew its licensing deals and the franchise ended.

In early February 2021, EA Sports teased the return of its popular college football franchise, although acceptance by all major schools was not universal, citing uncertainty with ongoing legal concerns regarding NIL for players. Although the Alston decision by the U.S. Supreme Court in late June 2021 was a narrow ruling regarding educational-related benefits to student athletes, the Court signaled an end to the practice of NCAA prohibiting compensation for NIL. Just days later, on July 1, 2021, the NCAA officially allowed student athletes to profit off their NIL. EA Sports announced in 2023 that NIL would be a part of the next college football video game.

EA Sports will pay each player $600 plus a copy of the video game. Certain players have or will receive more compensation to help promote the game. Individual schools will be paid by tiers according to their finish in the Associated Press rankings over a ten year period through the 2023 season. 13 schools in Tier 1 will receive a minimum payout just under $100,000. Tier 2 schools will receive approximately $60,000, Tier 3 will receive $40,000, and Tier 4 will receive $10,000. The renewed version of the game, College Football 25 is expected to sell more than 3 million copies, perhaps outpacing the popular Madden NFL series for this cycle.

The release of EA Sports College Football 25 is available on the latest generation of PlayStation and X Box game consoles. The standard version is priced at $69.99 and is accessible starting 12am on Friday, July 19^th. The Deluxe version for $99.00 or $149.99 bundle with the next edition of video game Madden will grant early access, perhaps as early as 4pm EST this afternoon. EA reported annual revenue of $7.6 billion and EBITDA of $2 billion for the fiscal year ended March 31, 2024. Capital IQ estimates EA’s EBITDA margin to increase from the mid 20 percent over the last three years to mid 30 percent over the next three fiscal years.

By: Brent Shockley, CFA, CVA

Top 10 College Athletic Program Valuations

By: Andrew Pearson and Brent Shockley, CVA, CFA

By: Thomas Rizzo

The Peak of Contractionary Monetary Policy

Key Takeaways:

By: Brent Shockley, CFA

NFL Valuations

NFL Votes to Allow Private Equity

FedScope, Vol. 24 No. 7By: Thomas Rizzo

By: Brent Shockley, Principal

FedScope, Vol. 24 No. 7

By: Thomas Rizzo