Aug 04, 2021

The New Kids on the Block: Impact of the NIL Ruling

The New Kids on the Block: Impact of the NIL Ruling

Intro:

It's not often that we have the opportunity to work the world of college athletics into a finance post, so when the topic of NIL rights presented itself, we jumped at the chance to provide some commentary. Since its official start date on July 1st of this year, much has changed in the way of college athletics. Whether you agree with the rulings made that allows athletes to profit off their image or think that it tarnishes the purity of amateur sports, there is no denying that some serious money is changing hands. The analyst duo of Jason Seeb and Vincent Qiao, along with Georgia Tech intern Josh Braun, join the discussion to talk about the implications of this new ruling and what it will mean for college athletes and the businesses that sponsor them.

What is the background on the NIL ruling?

Jason Seeb: “For a while now, people have been pointing out the fact that college athletes are essentially working full time jobs generating massive amounts of revenue (especially in football and basketball) for universities, which are pretty much businesses, and not getting compensated for it. In a Supreme Court case this year justice Kavanaugh used the argument that, if this were any other industry, the NCAA wouldn’t be able to have the type of free labor they get from student athletes. The court ruled that restrictions on student athletes that prevent them from profiting off their ability are now illegal. Basically, this means that college athletes can now get sponsorships, they can sell autographs and memorabilia, universities can sell jerseys with the athlete’s names on them, video games can be made using their name and likeness and so on. Pretty much all the copywrite/business opportunities that weren’t available to athletes before are now permitted.”

Vincent Qiao: “But the colleges aren’t allowed to pay the athletes in the form of a salary even with these changes. I just wanted to make sure that was clear.”

Intern Josh: “One thing I’ll say on the background; this whole movement has been brewing for a while but was really sparked when a kicker from UCF (Jason interjects and reminds me that they were 2017 national champs) named Donald De La Haye was banned by the NCAA for operating and monetizing his own YouTube channel about his life as a college kicker. The NCAA banned him without a warning or an appeals process. This brought a lot of attention to the situation of whether or not athletes should have the opportunity to earn money on their own name, image, and likeness.”

What were some reasons for pushback of the NIL ruling?

Jason: “You hear all sorts of reasons that this new system is a bad idea. One of the big arguments that the NCAA has used to try and prevent this from happening is that the big schools that are already the most successful and have the most resources will be able to use this new rule to widen the gap between themselves and the smaller school, basically the rich would get richer and the poor would get poorer. Bo Nix was one of the first to sign a sponsorship deal (obviously that’s a big name at a big school), but after that announcement, I started seeing athletes from small market schools sign deals with regularity. It’s still really early, but I’ve been surprised by the number of athletes from non-top tier schools that seem to be getting sponsorships. Another concern I heard was that all the sponsorships would go to male athletes. In actuality, it seems that female athletes are having a ton of success picking up sponsorships, so it’s not playing out like many people had feared it would, but again, its early.”

What types of deals are athletes signing and for what value?

Intern Josh: “I think the most common type of deal we will see will be the “influencer” type agreement, where these athletes will use social media to promote products for companies. College athletes have so little free time, so sponsors will be able to play to that by offering payment or product in return for very quick and painless promotion on the part of the athlete. I think these sort of low hassle deals that require very little effort will be enticing to a college athlete and will provide the brand with some easy recognition. There was one deal that I read about that was a little more unique. It involved Mackenzie Milton of FSU and D’eriq King of Miami. They signed on as co-founders of a firm called Dreamfield, which apparently is set up to organize and run “meet and greet” type events where current college athletes will be paid to come out and sign autographs and meet fans. The two quarterbacks are trying to create a platform that will help other college athletes monetize their personal brand through these events. The company also aims to give athletes a better chance of signing deals with sponsors by bringing in companies to pair up with athletes. From what I read; they are looking to pay athletes $2,000 an hour to participate in these events. So that’s a pretty good opportunity for big name athletes to make a lot of money throughout the year. That is one of the more unique opportunities I’ve seen so far. I’m sure will see some unique and complexed deals with crazy payment structures, but like I said, I think most deals will be pretty straightforward.”

John Grayson: “Regarding the amount that some of these athletes are making, Nick Saban came out and said that Alabama quarterback Bryce Young has already made close to seven figures through the first month of these NIL deals. News also just came out about the top quarterback prospect in high school leaving early to attend Ohio State in order to capitalize on NIL deals worth a similar amount. Granted, these players both play arguably the most high-profile position in sports for two of the most prominent schools in the country, but that’s a crazy amount of money to tie to an 18/19-year-old kid.”

Jason: “Very true, I think you’ll see all sorts of deal types popping up. You will have the stars that sign massive deals like John mentioned, but you also may see a good number of players sign small deals with local stores/restaurants in the college towns that they play in. It wouldn’t be nearly as lucrative as the big deals, but athletes could still make some decent pocket change and these local businesses would get valuable publicity from prominent figures in the town.”

What will this mean for the companies seeking to promote their brand through athletes?

Vincent: “I think about the underlying reason as to why these businesses are dealing out sponsorships, especially as the marketing budgets across firms are being challenged in this environment. The advertising units within companies are really facing pressure to demonstrate how much real value each marketing dollar is bringing to the company. For the majority of these athletes, do we think that they will be able to bring in real value for the underlying business? If not, companies aren’t going to be willing to waste time and money on this sort of relationship, and this thing will fizzle out pretty quickly, or at least turn into a much smaller scale operation. We are in the super early innings of this whole event. It’s a brand-new potential pipeline of eyeballs and traffic that businesses are trying to explore, but if this pipeline is less fruitful than anticipated, future sponsorship opportunities could dwindle down quickly.”

John: “The first thing that comes to my mind is the increased downside risk that brands could experience because of these deals. What happens to Milos Sweet Tea if Bo Nix has a terrible year, will you have thousands and thousands of Auburn fans that now hate Milos because it’s tied to Bo?”

Vincent: “That’s actually an interesting point, I view these sponsorships very differently than I would view a professional athlete endorsement. These NIL contracts seem to be much more along the lines of social media, influencer-esque agreements. I think, because of the personal nature of these contracts, and because of the smaller size of some of these brands, companies will be more levered to the individual athlete than a traditional endorsement contract. Think about a random NBA player signed by Nike. If that athlete does poorly, it doesn’t have a real impact on Nike. However, with some of these new college deals that involve smaller brands or much more personal influencer-style relationships, there could be an outsized impact to the upside or downside depending on player performance.”

Intern Josh: “I think one of the aspects that makes these deals compelling for companies is that it offers the brand a way to access an athlete at a discount. This is obviously a gamble to bet on a 19-year-old athlete, but assuming the athlete is able to succeed in college and go on to the pros, the company may have gotten in with a future superstar at a great price.”

What do you think the lifespan of these sponsorships will be?

Intern Josh: “I would assume, all the influencer style sponsorships won’t have very long shelf lives. Athletes will more than likely approach that with the mindset of getting a quick return, and the sponsors will do the same. They will utilize the athlete, gain exposure and then move on to the next person in the network.”

Vincent: “Why?”

Intern Josh: “For most influencers, their ability to retain viewers on promotions is very low. You see someone post about a clothing brand, for example. The first post may catch your eye but soon enough you associate that page exclusively with advertising, leading you to start skipping over their posts all together. So, a company probably won’t have continuous growth with the same athlete. That’s why I would assume those influencer relationships will die pretty quickly on an individual athlete basis.”

Outside of the opportunity to make money, how will this new ruling affect athletes?

Intern Josh: “One thing I’m curious about seeing is what these companies will ask of the athletes they are sponsoring. Will Bo Nix be asked to wear a Milos shirt in warmups before a game or in the press conference after a game? That’s the moment where these athletes have the most visibility so I would assume that the sponsor would want to leverage that. Another thing that is crazy to think about is the potential contradiction that could happen between the sponsor of the school and the sponsor of the specific athlete. What if a player at Georgia, who is sponsored by Powerade, was offered a deal with Gatorade? Would the player’s rights outweigh that of the university, or would the school have the final say? Its going to be very interesting to see if players are put in tough positions because of this and if that changes the outlook of the NIL environment.”

Vincent: “I feel confident that the school would win that argument.”

What should college athletes do with this new-found income?

Jason: “The simple answer is that they should invest it. Truthfully, I’m not even saying they should invest in typical securities, but choosing to reinvest that money into their brand or using it to create something that will outlive their time in college would help that short income steam become more meaningful. I would say that it really depends on the person but, looking to use this money and their current influence to create something that can help carry them past their college career is what I would suggest they focus on.”

Vincent: “I agree with Jason on this. The path to becoming an individual influencer is becoming more and more accessible. Everyone truly has the chance to make it big as an influence because of the power of modern social media. Because of the platform social media provides, building that personal brand through sponsorships is the perfect way to begin the journey. In reference to the money resulting from these deals; in principle, these athletes should invest the money. Being that most of these individuals are 19-22 years old, they don’t need all the money they would be making right now, so taking advantage of that time horizon and capitalizing on compounding would be a wise decision.”

John Grayson

Account Executive

John started at Narwhal as an investment intern in the summer of 2019 while working to complete his MBA at Auburn University. After finishing his schooling, John joined the Narwhal team in a full-time role as a client service associate in the summer of 2020. John has been tasked with servicing a portion of Narwhal’s younger client base as well as expanding the company’s management of outside 401k plans. Along with his MBA, John holds a bachelor’s degree in finance from Auburn.

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