50% + 1 Rule
Successful professional sports team are no longer solely owned by one wealthy individual. The 50%+1 rule is the perfect fan-owned team model that creates both high revenue and fan engagement.
Most professional sports teams are privately owned by wealthy individuals or companies that are the major stockholders and the final decision makers regarding any business or team related issues. The fans are the team’s customers, and as such generate revenue from tickets, merchandise and F&B. This private model stands in juxtaposition to a fan-owned model, in which the team’s fans are also the stockholders and decision makers.
Fan-owned teams can be structured in several ways. In some fan-owned teams, the fans have full ownership, while in other cases, they have majority or minority ownership. F.C. Barcelona, which is one of the most successful soccer teams in the world, is a non-profit that is entirely owned by nearly 200,000 fans that pay annual membership fees. The German soccer league incorporated the “50% + 1” rule. This states that members of a club must retain more than 50% ownership, thus preventing any single entity taking control. In the last case, a team owner may sell a minor stake of the team to its fans. In recent years there were several cases of fans taking control over a team after being dissatisfied from the private owner or after the team failed financially and professionally. In those situations, the team’s fans united into a non-profit organization and bought the team from the owner in order to recommission the team. This usually happens in low tier leagues where the capital required is affordable.
The biggest value created for a fan-owned team is the revenue stream coming from membership fees or from purchased team stocks. Additionally, the level of fan identity and fan engagement is dramatically increased as fans feel more loyal and have stronger connection to their team and fellow fans. The result is that there is higher attendance during games and greater support in good and bad times. The value capture is being reflected in revenue channels mentioned above that are being affected by the increasing attendance. Having more fans also leads to more advertisers, higher TV rights fees, and a better atmosphere in the stadium that creates a better customer experience.
The value created for the fans is that they get to be part of an ownership group of their beloved team, a dream of almost every young fan. They also get actual voting rights and a chance to influence business decisions. For example, every six years, the FC Barcelona fans get to elect a Team President. This means that fans’ best interest is always on a top priority for the team managers. For instance, the cost of tickets in the English Premier League, where teams are privately owned, is double the cost in the German Bundesliga. Lastly, “member” fans get to enjoy benefits that “non-member” fans can’t, such as priorities, discounts and exclusive team events. Lastly, there is always a possibility for a member to take a professional position in the team and have a direct impact on how the team operates.
There are however a few challenges in the fan-owned model. There is a big concern that there would not be enough fans that want or have the ability to pay the membership fees, resulting in a major loss of revenue. Another risk is that a candidate for a senior position in a team would care more about his popularity among the fans rather than acting in the best interest of the team. For example, a candidate for the position of Team President would announce that if he would be elected as President, he would sign a big superstar such as Cristiano Ronaldo, just to increase his popularity among the voters, without having a real financial ability to sign the player.
Personally, I believe that the 50% + 1 is the most successful model, as it allows a team to enjoy a big private investment along with the support of a big fan base that feels part of the team.
Thanks for the post, AlonKremer. Your idea reminds me of a case study on Loyal3 that we analyzed in Investment Management. Loyal3 is a financial technology company whose aim is to promote stock ownership among companies’ consumers. The basic hypothesis, as explained by the company’s Chief Creative Officer, is “If you like the company, you’re loyal to the company and you use its products. You become even more fanatical once you become an owner. That locks you in.” He points to a study that found that consumers who also owned a company’s stock “spent an average of 54% more per year at that company, visited its stores and Web sites 68% more often, and referred twice the number of new customers than consumers who did not own stock in the company.” If ordinary consumer/retail companies achieved such stunning results among their consumer-shareholders, I imagine the impact on engagement would be even greater for an explicitly fan-based company such as a sports team.
Loyal3 has created various digital offerings to fulfill its aim. The most differentiated is a Social IPO platform, which partners with companies going public to allocate a portion of shares to the companies’ consumers. Sports teams could actually use this very platform to achieve the goal you’ve outlined. The next time a team’s owners sell a stake via an IPO (as Manchester United did in 2012), they can leverage Loyal3 to allocate a portion of the offering to fans. Another one of Loyal3’s offerings that could be used to implement your idea is “Stock Rewards,” which offer small chunks of equity as rewards for consumer behavior. Perhaps sports team could offer micro-portions of equity to fans who attend a certain number of games, who buy a certain amount of merchandise, or meet some other consumer spending threshold.
One criticism of Loyal3 is that it enables and persuades individual investors to allocate their savings to single stocks without conducting due diligence. Individuals would generally achieve superior risk-adjusted returns via a mutual fund or index fund where they cede individual stock-picking responsibility. This concern is relevant to the sports team crowdfunding idea as well. For instance, a particularly passionate fan may irresponsibly invest his/her entire life’s savings into a team that turns out to be a bad investment. A platform that encouraged and facilitated this decision would be partly culpable in the fan’s financial loss and would have perpetrated a social wrong.
Thanks for sharing! I completely agree with you that more professional sports franchises you adopt the 50% + 1 rule. I share your same concern that there might not be enough fans to pay the membership fee. This is why I think the 50% + 1 rule is better suited for smaller markets (and potentially single professional sports team markets) where the team is already a part of the community fabric; a place like Green Bay, Wisconsin, home to the Packers–the only community-owned professional sports franchise in the United States–is ideal.
There are notably some legislatures in Congress who care about this issue. Representative Earl Blumenauer from Oregon periodically introduces the Give Fans A Chance Act, which “would require that owners give 180 days’ notice of their intention to move a sports franchise, and allow members of the community or other interests the opportunity to make proposals to buy the team during that period. It also would allow the league to play a greater role in determining whether the team can be moved using factors such as community involvement and whether there is a viable offer to buy the team in the community where it resides.” Check out the text here from the 112th Congress: http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.3344:.