In a recent article for Huffington Post, numberFire.com CEO Nik Bonaddio stated: “RG3: It’s Over”. Bonaddio is asserting that it is unlikely that Washington Redskins quarterback Robert Griffin III (RG3) will ever be able to return to the form that enabled him to win the 2012 Rookie of the Year Award and made him one of the best quarterbacks in the NFL that year. More specifically, Bonaddio claims, “The numbers are quite clear: no quarterback who suffered that bad of a precipitous fall in performance ever recovered.”
While Bonaddio may end up being proven correct, there are several problems with his analysis. More specifically, the numbers are not clear at all. Bonaddio starts with using his company’s Net Expected Points (NEP) metric that examines how many points a player’s team should score given his performance. He then states that only six QBs have ever had a drop in their NEP similar to RG3’s drop after his 2012 season. They are: Steve Beuerlein in 1999, Elvis Grbac in 2000, Jay Fiedler in 2001, Tommy Maddox in 2002, Derek Anderson in 2007, and David Garrard in 2007.
As far can be discerned from the information in the article, these are the only quarterbacks used by Bonaddio in his analysis. Having a sample size of six is a very small number to use in such an analysis. Furthermore, even this small sample has major problems when making a comparison to RG3. They are:
- The average age for when each of the quarterbacks in the sample had their best years is 29.8 years old while RG3 was only 22 years old during his rookie year. Only Anderson, at age 24, was close to the age of RG3 in 2012 during his best season.
- Each of the quarterbacks had played in the NFL for at least one year before having their best season. Only Anderson had played in one season before his best year. The rest of the quarterbacks had played in multiple years before having their best years.
- None of the quarterbacks had a significant injury that could account for the subsequent decline in their performance.
- Each of the other quarterbacks had little mobility. RG3’s success, as stated by Bonaddio, is predicated on his ability to run the football.
- None of these quarterbacks was a Heisman Trophy winner or had the same level of success as RG3 did in college.
At the end of the article, Bonaddio claims “Regardless of what the cause was [of the decline], the effect is obvious and it’s rather tragic.” The cause of RG3’s decline is extremely important, especially compared with these other six quarterbacks. For example, it is impossible to rule out that these six quarterbacks were never good, or at least as good as RG3. They had one good season in the midst of having many relatively mediocre or poor seasons.
In addition, an NFL quarterback’s prime is age 29 with his prime range being 26-30 according to Football Perspective. Again, the average age of the six quarterbacks is 29.8. Given his college and 2012 performances, RG3 could just be a more talented quarterback than any of these other players. Since he has not reached the prime age range in his career, RG3 could also continue to improve as he gets older and gains more experience.
There is also a clear reason for RG3’s decline: his injury history. Bonaddio does point out that RG3 did suffer significant injuries both during the 2012 and 2014 seasons that caused his NEP to decline. However, he does not fully account for the fact that RG3’s poor performances in 2013 and 2014 could be due to injuries and recovery from injuries rather than a decline in his skillset. It is definitely possible that RG3 may never recover his running ability from 2012 or that he is more injury prone than other NFL quarterbacks. However, it is impossible to know what RG3’s best performances can be until that can be proved to be the case or he has actually had played in more games where he has fully recovered from these injuries.
Bonaddio’s analysis does show the potential problem with working with advanced analytics in sports. The NEP could be a valuable metric that provides great insights about the true performance of quarterbacks. However, making assertions beyond the stated use of the metric that rely on small sample sizes with clear confounding variables can lead to problematic conclusions. It may or may not be over for RG3, but it is impossible to tell using the evidence presented in Bonaddio’s article.
Featured image credit: Robert Griffin III on a read-option run during the Redskins 24-16 loss to the Eagles in the 2013 season. Photo by Mr.schultz. CC BY-SA 3.0 via Wikimedia Commons.
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By Adam Grossman
On Sunday, the NBA approved the sale of the Los Angeles Clippers to former Microsoft CEO Steve Ballmer for $2 billion. From a brand management and crisis perspective, it is easy to see why the NBA wanted to approve this sale as quickly as possible. I, among many others, have written about the damage that current owner Donald Sterling has done to both the team and the league.
From an economic perspective, it becomes clearer why the NBA wanted to approve the sale as well. Using virtually any standard valuation metric that exists today, Ballmer has agreed to vastly overpay for the Los Angeles Clippers.
Finance industry professionals (investment bankers, venture capitalists, and private equity firms) primarily use three valuation approaches: inherent valuation, relative valuation, and comparable valuation. Using any of these approaches, it is virtually impossible to see how the Clippers are worth $2 billion.
To complete a valuation of a sports team, you need to start with understanding an organization’s revenue streams. Six revenue streams account for virtually all money earned by a sports organization. Like many new owners buying sports franchises, Ballmer is betting that two revenue streams will increase significantly to make his investment profitable: media rights and subsidy. Media revenue refers to the television, mobile, and digital distribution agreements signed by an individual organization. Subsidy revenue includes all revenue shared by a sports league with individual franchises.
The Los Angeles Clippers revenue will increase significantly in both areas after the 2015-16 season. Both the team’s local media rights deal and the NBA’s league wide revenue deals expire after that season. According to Forbes, the Clippers’ local television rights deal can increase to as high as $75 million per year from its current $18 million per year value. In addition, the NBA’s league wide media rights deal is expected to double from its current $930 million per year value. This means the Clippers will receive double its current media rights subsidy from a new deal – about $30 million per year.
Minnesota Timberwolves-LA Clippers game at Staples Center. Photo by David Jones, 2012. CC BY 2.0 via davidcjones Flickr.
While this is all great news for the Clippers, it does not make the team worth $2 billion. An inherent valuation approach uses a discounted cash flow model to evaluate an asset’s worth. This essentially means looking at how much profit is generated by an organization and discounting the profits based on the potential risk factors. Factor in both idiosyncratic (risk associated with owning the Clippers specifically) and systemic risk (risk associated with any financial asset). In our analysis, the Clippers generated an estimated $11 million in annual operating profit from now through 2015-16 season. Starting in the 2016-17 season when the new media rights and subsidy revenue streams start, the Clippers would generate $54 million in annual operating profit in perpetuity. Using this approach, we found the Clippers to be worth $1.05 billion.
We don’t want, however, to rely on a single technique for our assessment of the Clippers’ value. Therefore, employ a relative valuation approach that compares a company’s value using a standard valuation metric. The most common metric used is a price to earnings (P/E) ratio. This means that you compare the price of an asset compared to the amount of annual profit that asset is generating. For example, the average P/E ratio on the S & P 500 is currently at 18.3. The Clippers would have an estimated 36.8 P/E ratio given our estimated operating profits after the 2016-17 season after Ballmer purchases the team. Using the average P / E Ratio of the S & P 500 would produce a value of $990 million.
The only real argument that could be made for the Clippers being worth $2 billion would be by using a comparable valuation. With this approach, an investor looks at what other similar assets have been sold for to determine a value. You only have to look at the Clippers’ baseball neighbors to see a team that recently sold for a similar amount. The Los Angeles Dodgers were recently sold for $2.15 billion to a group led by Guggenheim Partners. While both are sports organizations, the Clippers and the Dodgers are actually very different types of properties. Because it has a bigger venue and plays many more games, the Dodgers currently make as much or more in annual ticket sales revenue than the Clippers make from all revenue streams. The Dodgers also recently signed a $7 billion 25-year local media rights agreement that will pay it far more in average annual dollars than any new media rights deal the Clippers could negotiate. A more appropriate comparison would be to examine the Clippers compared to other NBA franchises. The Milwaukee Bucks recently sold for a league record of $550 million. Ballmer is now paying 3.6 times more than the record amount paid for an NBA franchise.
To be fair to Ballmer, both the media rights and subsidy deals could far exceed expert expectations. The Los Angeles Lakers recently signed two new media rights deals for their English and Spanish broadcasts for $4 billion over 20 years, an average of $200 million per year. The NFL has recently signed new media rights deals that pay the league $7.25 billion in annual revenue, an average of $227 million per team. If the Clippers end up receiving $150 million per year in media rights revenue and the NBA contract triples from its current value then we would estimate the team being worth $2.05 billion. It is also likely that ticket sales and sponsorship revenue will increase significantly with a new owner.
ESPN’s Bill Simmons recently stated that the sale of the Clippers resembled the purchase of a home without the buyer being able to complete a home inspection. The sale of the Clippers was happening so quickly that it was impossible for Ballmer to know what exactly he was buying. However, Ballmer can (and likely has) completed an inspection of the Clippers similar to the one we just described — and he will discover there is no way to generate a $2 billion valuation for the Clippers.
Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. He is the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry with Irving Rein and Ben Shields. Read his previous blog posts.
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