Tuesday Memo: Chipping Away at Costs

The Memo:

As always, if you’re more into PDF & printable formats, today’s memo can be found here.

Of course, PPA/MLP is back in the news…

Taking a Walk Down Memory Lane

Over the summer, MLP and PPA’s original merger fell apart during a rush to sign players to longer-term contracts. You can read prior pieces we’ve done outlining some of the perspectives from both sides and areas we supported and disagreed. Regardless of who was right / wrong for “starting it”, the main strategy was to acquire a material portion of the player pool to hinder the others’ ability to field a compelling professional draw. Despite all the debates we’ve had around ways to enhance the on-screen viewing product, at the end of the day, if you don’t have a majority of the highest caliber talent playing each other, it’s difficult to develop a league with compelling storylines for existing fans and an aspirational product for the next generation of talent.

In fairly short order, MLP acquired much of the ‘top’ talent and forced a rapid response by the PPA to bid on players. Both leagues effectively entered a bidding war without truly identifying how they’d support the materially higher overhead they were adding to the P&L. Getting talent at any cost was the name of the game.

Eventually, the saga simmered down and resulted in a new merger proposal after PPA effectively lost the battle for talent and MLP failed to independently secure the financing required to support these newly signed player contracts. Some estimates put that salary expense burden in the $20M/yr range.

Thus, was born the new marriage of necessity and things have been slowly progressing behind closed doors. Which brings us to the latest news.

Expense Reduction Contingencies

With the new merger, both leagues will be unified under one organization (though they’ll continue fielding separate branding & formats for the foreseeable future). As part of this new merger agreement, we’ve heard that there are requirements that both organizations get their costs under control, as it presents an existential risk to the continuation of the sport at a pro level.

The TL;DR: Both leagues overpaid for some talent during the bidding war, and they are now trying to scale back those player costs.

“The Email”

MLP sent an email to all players and owners last week, with the PPA reaching out to players in a similar fashion, which effectively requested players to agree to compensation reductions. Also to note from the email was the announcement of a leadership change which removed Brooks Wiley as MLP Commissioner. 

Key requests:

• 40% pay reduction with a commensurate reduction in work obligation (i.e. how many ‘days of work’ you’re required to be available for).

• Current contracts mandate 200 days of work. With the pay reduction, their mandate would be reduced to 120 work days.

• MLP players who cooperate with the pay reduction will be offered 10 guaranteed slots in PPA events.

• MLP players who don’t consent to the reduction will not be permitted to play in PPA events and will be put in a ‘development program’ where they’ll use their remaining ‘days of work’ to lead clinics, camps, and appearances set up by PPA & MLP.

One key piece to reiterate is that these changes are requested of players and not explicitly mandated, though there are some meaningful negative incentives pushing players to accept the deal.

Some Perspectives

While it was a pretty bold headline for many last week, it shouldn’t come as much of a surprise when we start thinking about it. These are startup leagues, who, on their own_, have struggled to find the killer feature that brings in material lines of business that turn the leagues profitable. 

We say ‘on their own’ because while we recognize the often cited point that PPA is profitable, we are skeptical that if you took the standalone P&L of the PPA excluding amateur events and e-commerce, the league would be profitable off traditional lines of revenue for professional leagues like media rights, sponsorships, original content, ticket sales, merchandise, and food & beverage. With that said, staying in the game long enough to turn a profit on your league is the focus and if they’re doing that off amateur play and e-commerce then that’s noteworthy in its own right and a lesson for MLP on the power of amateur formats that feed a passionate player base’s desire for structured tournaments.

Getting back on track…So, expecting them to find a way to finance $20M a year in just player salaries (never mind event costs, operational overhead, etc.), was always a little ambitious.

Going through some perspectives of different stakeholders:

If You’re a Player

We feel for a lot of the players out there who have been put in a tough position and this latest shift has probably eroded the remaining trust in either org. Not only are the orgs rejoining after you showed loyalty to one, sometimes at the price of a lower contract value, but now they’re requesting a haircut to your original deal if you want to continue playing professional pickleball in any meaningful way. The thing you were signing up for out of loyalty and as a bet on MLP, is now being used as a bargaining chip against you (your 200 days). And some of these players were dependent upon these contracts to lean into pickleball full-time to see how far they could take their skills and careers. Taking a 40% cut can materially change the calculus about whether you quit your existing job to focus exclusively on pickleball.

But if you don’t acquiesce, you’re basically sent to Siberia to conduct random pickleball camps across the country when you’re not playing MLP events and don’t get to step foot on a PPA tour court.

However, there’s a tough truth for any player passionate about playing at the highest level - would you rather play for less money or not play at all? There is a legitimate risk to the entire sport if the costs are not controlled and both (or either) leagues go bankrupt. 

Further, it has raised some questions about whether the leagues are engaging in monopolistic behavior and whether players should unionize.

We’re no lawyers, so not sure how to draw the line on monopolistic behavior if we’re being honest. It sounds colloquially like a big league exerting power over its employees (contractors?) is monopolistic, but, these are consenting players in a contractual agreement with the leagues, so could see a case to the contrary. Further, they’re in a tough predicament on boycotting, as it effectively kills the leagues and reduces their professional venues to play (suppose there’s APP?). And the talk about unionization can get dicey. Typically, a key role of players’ unions is to negotiate on behalf of all players for contract minimums, benefits, and other perks. However, this compensation is often done as a percentage of what the leagues & teams are able to generate. Well, awkwardly the player contracts are orders of magnitude larger than what the leagues are making as revenue…so a 40% pay cut starts to look nice.

What probably needs to happen is the creation of some sort of player representative who is privy to and actively involved in the negotiations with PPA/MLP. It’s probably a little too late to influence the latest round of cuts, but if the leagues seek to reestablish any amount of trust & goodwill with its talent pool, then giving them a voice in the room is a small step in the right direction.

If You’re a Team

Not sure this changes things too much for them, other than giving them better odds of making it to the other side of things. It also starts to slowly lay the future groundwork to offload player contracts / salaries onto the teams themselves like nearly every other professional sports league. We realize that the original Tour War opening shot couldn’t have commenced if every team was in on it (24 teams and seemingly countless owners would never have been able to keep this a secret), but it would have created more incentivized teams if they were involved in the contract negotiations from day one. Some teams would have paid up for certain talent and been pushed to develop true lines of business to support these costs, while others would have attempted to find “value” in the player pool and be less reliant on writing big checks. As we’ve said, one of the original sins of MLP’s initial push to sign players without consulting the teams is that they can’t push these player contracts on the owners, as they were never in the room agreeing to these salaries. Rather than MLP needing to figure out how to generate $20M in funding and/or revenue per year, it would have placed a burden of ~$800k on each team to figure out how to fund or build a business to support. And that assumes that some teams wouldn’t have negotiated their own terms at lower rates with players. Now that MLP/PPA can’t simply force these contracts onto owners, it’s unclear what incentive a team would have to accept these terms someone else agreed to for the ‘good of the league’. So, teams no doubt quietly support PPA/MLP trying to pare back their mistake in player contracts without materially affecting the brand / reputation most team owners have with the players.

If You’re Us

On the News
In our opinion, ripping the bandaid off needed to happen sooner rather than later. Yes, it puts players and potentially fans in a worse-off position. Yes, it makes the sport look immature and exposes it for getting a little too far ahead of where it is. But short of some highly motivated investors or existing owners shelling out serious money for the next few years, they had to start chipping away at some of the most expensive line items to survive. And this isn’t too unfamiliar in any merger transaction. As a deal gets closer to the finish line, you’ll often see both parties begin to identify areas of cost consolidation, as these affect valuation considerations, as well as post-merger roadmaps. These cost synergies are more identifiable, tangible, and actionable than amorphous revenue synergies. So, some buyers will push to exclude revenue synergies from the multiple they’re paying, but work with management to identify areas to cut costs. An illustrative view of this analysis might look something like the following:

On the Players
As we laid out above, we do feel for the players and naturally support each of them and their agents originally pushing for the best deals they could get. However, in the bankruptcy of the league, there isn’t going to be a lot of cash leftover to distribute to player contracts. Everyone taking cuts to help the leagues stay afloat benefits them in the long term as the sport continues to grow and garner interest. It’s not just their contract money that starts to dry up if the leagues collapse, but undoubtedly sponsors will begin to question the size and pace of their investments upon contract renewal if the two largest platforms for their players to compete and get exposure no longer exist.

On the Leadership Changes
In transparency, we’re good friends with Brooks, so naturally not seeing him in the same capacity is quite the change. With the most honest lens we can have though, his departure following Steve’s was surprising but not completely unexpected. There’s a case to be made that the original leadership would eventually need to change hands for a new slate of people slightly less historically involved to be able to lead the group in an independent and new direction. A near-term consideration for the league is who will replace one of Brooks’ key roles as a voice and liaison for players. Like Connor Pardoe with PPA players, Brooks has long served as a line of communication and temperature check that was built off trust over years. And if you’re MLP who has long had better relationships with players, largely from the work Brooks & Steve put into building those relationships, then you need to figure out who is going to fill that gap, as it can’t be done overnight.

On the Teams
We’ll continue to beat the same drum that teams should be leaning into building businesses out of their franchises. It won’t all be solved by a combined PPA/MLP or investor coming from the heavens. If they want their investments to survive (let alone grow), they’ll need to invest in things that can one day support player salaries and operational expenses. We won’t belabor this point further.