I THINK

The USATF/Nike Deal? Bet On Nike

Thoughts from a guest contributor on the “present value” of money and the contract’s future

by David Greifinger

USATF’s sponsorship deal with Nike, due to expire in ’17, has recently been extended 23 years from ’18 through ’40 at about $20M per year.

USATF has trumpeted the half-billion dollar extension as a “game-changer” that “significantly increases the overall support for Track & Field for athletes throughout the United States.” Upon further review, this boast is iffy for ’18. And definitely not true for the ’40 Olympic Team.

USATF (then called TAC) jettisoned its national-team uniform deal with the Italian clothing outfit Robe di Kappa in favor of Nike just prior to the ’91 World Championships.

Nike paid USATF $1M per year—generally considered a grand bargain for Nike—through ’00. The contract for ’01 through ’09 yielded about $4.5M in cash per year, and the extension for ’10 through ’17 more than doubled the annual cash to USATF to about $11M.

The gross yearly amount of $20M starting in ’18 falls a bit short of the expected doubling based on the previous two contracts, but is not grossly far off—for the first few years. Nike’s big win comes as the years pass. Let’s do the math.

Future fixed payments have a “present value” based on the time value of money. A dollar today is worth more than a dollar tomorrow. Money in hand can be invested to earn income and hedge against inflation. As the rate of return or time period increases, the present value decreases.

A conservative rate of return is the yield for a 30-year T-Bill, now at about 3.5%. Assuming 23 fixed annual payments of $20M each, the first payment in ’18 is worth $17.43M in today’s dollars. [Table 1] (text continued below)

 

TABLE 1: PRESENT VALUE IN 2014 DOLLARS OF USATF-NIKE CONTRACT BASED ON FIXED ANNUAL PAYMENTS ($1 Million)
      Present Value Present Value Present Value
    Contract 3.5% per
annum
5% per
annum
7% per
annum
Calendar Year Contract Year Amount      
           
2018 1 20 17.43 16.45 15.26
2019 2 20 16.84 15.67 14.26
2020 3 20 16.27 14.92 13.33
2021 4 20 15.72 14.21 12.45
2022 5 20 15.19 13.54 11.64
2023 6 20 14.67 12.89 10.88
2024 7 20 14.18 12.28 10.17
2025 8 20 13.70 11.69 9.50
2026 9 20 13.24 11.14 8.88
2027 10 20 12.79 10.61 8.30
2028 11 20 12.36 10.10 7.76
2029 12 20 11.94 9.62 7.25
2030 13 20 11.53 9.16 6.77
2031 14 20 11.14 8.73 6.33
2032 15 20 10.77 8.31 5.92
2033 16 20 10.40 7.91 5.53
2034 17 20 10.05 7.54 5.17
2035 18 20 9.71 7.18 4.83
2036 19 20 9.38 6.84 4.51
2037 20 20 9.07 6.51 4.22
2038 21 20 8.76 6.20 3.94
2039 22 20 8.46 5.91 3.68
2040 23 20 8.18 5.62 3.44
           
TOTAL   460 281.77 233.04 184.03

 

In ’26—when the contract would have increased after a new negotiation under the old paradigm—the annual present value will have dropped to $13.24M; in ’34 after the next 8-year period to $10.05M; and in ’40 to $8.18M. The total present value is $281.77M, about 61% of the gross cash payment.

The numbers get dimmer for USATF as the rate of return increases. At 5%, the value of the payment is $16.45M in 2018, $11.14M in 2026, $7.54M in ’34, and $5.36M in ’40. At 7%, the values are $15.26M in 2018, $8.88M in 2026, $5.17M in 2034, and just $3.44M in 2040.

These higher rates fall within the realm of reason: The inflation rate and returns from the Treasury have been at historic lows for many years. Who remembers the late-’70s, with double-digit inflation and interest rates in the teens?

If the total contract amount is doled out in graduated payments, the picture is even worse for USATF. [Table 2] This is again because of the time-value of money. With graduated payments, the deal is marginally better in ’40, but a whole lot worse in ’18. (text continued below)

 

TABLE 2: PRESENT VALUE IN 2014 DOLLARS OF USATF-NIKE CONTRACT BASED ON GRADUATED ANNUAL PAYMENT SCHEDULE ($1 Million)
      Present Value Present Value Present Value
    Contract 3.5% per
annum
5% per
annum
7% per
annum
Calendar Year Contract Year Amount      
           
2018 1 15 13.07 12.34 11.44
2019 2 15 12.63 11.75 10.69
2020 3 15 12.20 11.19 10.00
2021 4 15 11.79 10.66 9.34
2022 5 15 11.39 10.15 8.73
2023 6 15 11.01 9.67 8.16
2024 7 15 10.63 9.21 7.63
2025 8 15 10.27 8.77 7.13
2026 9 20 13.24 11.14 8.88
2027 10 20 12.79 10.61 8.30
2028 11 20 12.36 10.10 7.76
2029 12 20 11.94 9.62 7.25
2030 13 20 11.53 9.16 6.77
2031 14 20 11.14 8.73 6.33
2032 15 20 10.77 8.31 5.92
2033 16 20 10.40 7.91 5.53
2034 17 25 12.56 9.42 6.46
2035 18 25 12.14 8.97 6.04
2036 19 26 12.20 8.89 5.87
2037 20 26 11.79 8.46 5.48
2038 21 26 11.39 8.06 5.13
2039 22 26 11.00 7.68 4.79
2040 23 26 10.63 7.31 4.48
           
TOTAL   460 268.87 218.13 168.10

 

How much money did USATF potentially leave on the table? That depends on a realistic rate of increase for Nike’s rights over the next 25 years.

The justification for the deal—at least in Internet chatter—seems to be that track is dead or dying, that Nike guru Phil Knight loves track but will not be around forever, and that USATF had better strike while the iron is hot. Though Knight will not live forever—and perhaps not even to ’40, none of the arguments holds water.

In May ’91 the cover of T&FN featured a photograph of an empty Los Angeles Coliseum, headlined, “What If They Gave A Track Meet And Nobody Came?”

The issue included an extensive series of articles about the imminent collapse of track & field in the United States from the youth level on up. It bemoaned the lack of attendance at meets and included a 10-point program for reviving the sport. But for a few of the names, the issue could have been published today.

While the track & field world has spent the last quarter-century caterwauling over the sport’s demise, the USATF/Nike contracts have consistently increased, for good reason.

Nike gets the Olympic uniform—exclusively. Nike has built itself into the world’s premier sporting goods company by being authentic: real athletes wear Nike and everybody else follows.

In running, nothing is more authentic than the Olympic Games and the great athletes who compete in them. Track & field remains the centerpiece of the Olympics, at a minimum sharing the spotlight in the U.S. with swimming and gymnastics.

The masses might not be turning out for professional track meets, but they are lacing up for road races and fitness. Sit through the Mt. SAC Relays or Penn, or go to a youth meet anywhere in the land, and watch thousands of kids run.

While professional track in the U.S. is moribund, running is alive and well.

Nike’s running and women’s categories bring in billions each year and continue to grow. Nike needs the Olympic uniform because Olympic athletes drive those sales. Lose the uniform, lose authenticity, lose the following, lose market share. Nike could never afford to take that risk.

Is it reasonable to assume that the national-team uniform value will continue to increase at its historic rate? Yes. Olympic TV rights fees have increased exponentially. CBS paid $50,000 to broadcast the Games in ’60. In ’11 NBC agreed to pay $4.38B to broadcast the ’14, ’16, ’18, and ’20 Olympics.

Broadcast, naming, and sponsor rights in the sports industry have increased similarly. The doubling of the Nike contract over each of the last two 8-year periods equates to about a 9% compounded annual rate of increase, which pales in comparison.

In effect, track & field’s woes have already been factored into the equation.

The track & field community in general and USATF in particular have allowed track & field’s problems to blind them to its resilience, at a great cost. By how much?

If the renewed deal were for 8 years instead of 23, we can conservatively assume that the next contract in ’26 would double to $40M per year, and the contract in ’34 to $80M per year. (If this seems unrealistic, ask if in 1991 $20M per year seemed possible.)

This scenario would yield gross revenues of $1.04B, or $566.77M in today’s dollars. [Table 3] That’s $580M, or $285M in today’s dollars left on the table under the most conservative projections. The shortfall is probably far greater. (text continued below)

 

TABLE 3: PRESENT VALUE IN 2014 DOLLARS OF HYPOTHETICAL USATF-NIKE CONTRACT BASED ON HISTORIC INCREASES ($1 Million)
      Present Value Present Value Present Value
    Contract 3.5% per
annum
5% per
annum
7% per
annum
Calendar Year Contract Year Amount      
           
2018 1 20 17.43 16.45 15.26
2019 2 20 16.84 15.67 14.26
2020 3 20 16.27 14.92 13.33
2021 4 20 15.72 14.21 12.45
2022 5 20 15.19 13.54 11.64
2023 6 20 14.67 12.89 10.88
2024 7 20 14.18 12.28 10.17
2025 8 20 13.70 11.69 9.50
2026 9 40 26.47 22.27 17.76
2027 10 40 25.58 21.21 16.60
2028 11 40 24.71 20.20 15.51
2029 12 40 23.88 19.24 14.50
2030 13 40 23.07 18.32 13.55
2031 14 40 22.29 17.45 12.66
2032 15 40 21.53 16.62 11.83
2033 16 40 20.81 15.83 11.06
2034 17 80 40.21 30.15 20.67
2035 18 80 38.85 28.72 19.32
2036 19 80 37.53 27.35 18.06
2037 20 80 36.26 26.05 16.88
2038 21 80 35.04 24.81 15.77
2039 22 80 33.85 23.62 14.74
2040 23 80 32.71 22.50 13.78
           
TOTAL   1040 566.77 446.01 330.18

 

But there’s more. According to USATF’s press release, Nike becomes the “exclusive athletic footwear and apparel licensee within the running and route tracking/management app and social networking category.”

Nike has terrific lawyers, and the contract surely encompasses current and future technologies. Guaranteed. As valuable as social networking rights are now, we cannot imagine the technologies and value in ’40.

These rights could someday dwarf the national-team uniform. And who is to say that professional track & field won’t experience a revival at some point during the next quarter century adding even more value for Nike?

Is there a scenario where USATF comes out ahead? Yes, if we encounter severe deflation never experienced in our nation’s history or if track & field falls off the Olympic map. Otherwise Nike wins big or Nike wins huge.

Nike negotiated as a visionary while USATF negotiated from a bunker. Bet on Nike.

 

[David Greifinger was USATF’s Counsel to the Board from ’96 through ’08 and has since served as the Athlete Advocate for the Athletes Advisory Committee. He has served as the lawyer for the Santa Monica TC and its athletes since ’82. He bought 100 shares of Nike stock in ’98 and wishes he had bought a lot more.]

April 29, 2014