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Kellogg School of Management Sports Business Conference 2011 - Attendance Notes & Commentary

April 8, 2011 in public

http://kellogg.northwestern.edu/conference/sbc/index.html

 

Jennifer Lynn Storms (Senior Vice President for Sports and Event Marketing, Gatorade)

Gatorade History:

99-03: Organic Growth
04-06: Health & Wellness Craze
07-08: Economic Trouble

Gatorade has done research to see where they are losing their customers and primarily, they are losing them to tap water (49%). The perception is that it is ‘not what it used to be’ or ‘not for me’. The marketing strategy has changed and positioned Gatorade to be for ‘All Athletes’ (as opposed to elite athletes only). The marketing spend has also shifted away from TV/print toward digital. (87% in 2008 to 66% in 2009). That’s where the ‘teens’ are.

15-20% of sales are international.

There has also been a trend toward focusing efficacy in the marketing message. While it is difficult to integrate the science message into mass marketing (because you lose the customer), you don’t want to give up on efficacy either because that is your brand (it is not just colored water). A good ad along these lines is the Dwight Howard (with Orlando Magic) commercial, where after drinking Gatorade on the bench, a new, energized Dwight comes out of the old, tired Dwight and goes back to the game.

‘Eveything to Prove’ – marketing message

The Serena vs. Serena campaign portrayed Serena Williams, the tennis player against Serena the Dancer. ‘The Democratization of the Athlete’ This was well-received,by Serena because she was in the same league with Serena Williams, and by Serena Williams because she was compared to a graceful dancer.

The marketing shifted from traditional marketing (TV, print) toward social (online, blog, Twitter etc.) It is important for Gatorade to get athletes during their teen years because once they adopt, they are adopters for life.

G series. A holistic concept (but business started slow). The new campaign highlighted the importance of pre, during, post (Prime, Perform, Recover). People were drinking Red Bull, which is ‘bad energy’. Gatorade has Prime as ‘good energy’. In general, bookending G2 (by Pre and Post) helped with the placement of G2 (Perform). The new perception was ‘Ok – I need to drink it during the workout. Got it.’

Gatorade lost some money on the Tiger deal even though she thought they will keep it (We later asked her how they manage these type of risks. She said they manage it contractually and do heavy due diligence before a major sponsoring deal for about a year – meet with the athlete, the family etc. She was reasonably happy with contractually managing the risk, but we believe there is room for improvement)

Innovation is not a new concept for Gatorade, but they try to do it better. Their number one focus is it should be better for the athlete.

Product Development Cycle. Starts with the athlete. Athlete provides input, the lab tests it, sideline usage (by the athlete), commercialization. On the teen side, the teen sees the athlete drinking Gatorade on the sideline and asks mom (the decision maker/buyer/shopper) to get it.

Q & A – Performance food (not bars or ‘healthy frozen food’) could be a future opportunity for Gatorade (someone from the crowd asked about this possibility). Low calorie Gatorade coming up. Pepsi bought 80% of the bottling business. Gatorade does not consider 5-hr energy as a competitor – it is rarely discussed internally.

Our Takeaways:

1. Getting to the teens with the ‘all athletes’ concept and shifting toward the digital media has also implications for us. She specifically mentioned that being portrayed next to elite athletes was well-received. It is not you vs them, it is all of us. Think about it. The same divide exists in finance – the Wall Street vs the Main Street. Ultimately, the cornerstone of our education strategy will be the democratization of the consumer via a better understanding of finance at all levels.

Social media is less of a problem. We are just starting up, so we’ll be online, and I think we all understand the power of social.

2. From a marketing standpoint, Gatorade is facing the exact same problem. There is a technical message which they don’t want to get lost on the consumer, but your ad can’t just list the electrolytes and everything else Gatorade has, either, because you’ll lose the customer. The challenge is to subtly integrate the technical aspects into the marketing message, exactly what we are working on right now.

Panel 1 – The Economy’s Effect on Sport Business

Panelists:

Jay Blank (Executive VP, Chicago Blackhawks)
Ryan Luckey (Head of Sports & Entertainment Marketing, MillerCoors)
Andrew Miller (Assistant to the President, Clevaland Indians)
Jonathan Jensen – Moderator (Adjunct Professor, Sports Management, Columbia College, Chicago)

Challenges

Blackhawks – ESPN voted Blackhawks (BHs) the worst franchise (among all four major leagues) in 2005 or 2006. The BHs have not won the Stanley cup in 46 years (back then). From a revenue standpoint, they were at the 30th place out of 30 teams. With respect to sponsorship they were in the bottom and were one of the last two or three teams. The Blackhawks market needed credibility from a branding standpoint. There was work to do. A successful draft and the Wrigley arrangement (more on this later) helped to turn things around.

MillerCoors – The recession taught them beer is recession-resistant but not recession-proof. People dine out less and when they do, they drink less beer (yet switch to a better beer when they drink). For them, it’s more about marketing, not sports. You use sports as a tool to ‘eventize’.

Cleveland Indians – In 2007, they were one game away from the World Series. They had a brand new ballpark in 1994 and sold out 456 games. At some point, they had the third highest payroll. Over the last two, three years, manufacturing has decreased in Cleveland, three or four major companies left, and Cleveland experienced the second highest population loss in the country (after New Orleans). They are trying to re-engage fans, find alternative revenue streams and try to reach young fans. Indians haven’t won since 1948 (second only to Cubs) and the city of Cleveland has not won a championship (in major sports) since 1964.

What They Did

Beer does not grow at double digit (except for Blue Moon). Maybe goes up 1% in a good year and drops 2% in a bad year. Coors was official beer of the NFL. Miller was taking a team approach. Texas is a hot market (weather) – 1 out of 10 beers in the U.S. is sold in Texas. Cowboys is a good property. The strength of Cowboys and the Texas market helps them there.

BH – Build the sponsor relationship – let the sponsor win round one. Relationship with Chevrolet (Jay was with the Cubs before joining the Blackhawks and the previous relationship carried over). Two BH players, Jonathan Toews and Patrick Kane, were a major part of the branding initiative. The BH organization got them out there and made players a brand. When they won the Stanley Cup, two million people were at the parade.

Indians started the ‘Snow Days’ – additional 6 weeks utilization of the ballpark. People ice-skating around the field. The goal is creating fan engagement and fan memories. You just don’t watch a game, you are on the field. Other teams do similar events – Red Sox hosted a soccer game with Liverpool. San Diego Padres show Starwars on big screen, people camp on the field. Teams are ‘eventizing’ their property.

Some teams started to do 6-game or 13-game plans. These are good packages when you have a lot of inventory (seats). It is difficult to fill the stadium especially when the team underperforms. Baseball is extra difficult, you have twice as many games. The Wrigley field experience is unique, but not so for all teams. Concert tickets are harder to sell because i) more open access to music on the internet; and ii) economy.

Since 1994, Blackhawks and Bulls owned the building through a joint venture.

Indians performed a research on what the attendance drivers are. Here are the drivers (in no particular order): Performance, opponent, day of the week, whether kids are in school, weather. A lot of things you can’t control, like weather. They respond by variable ticket pricing (cheaper tickets in winter).

BH – Most Chicago people didn’t know much about BHs, or hockey, for that matter. They were not familiar with hockey terms (icing, powerplay etc.) They started a sponsorship with the Cubs and the White Sox (advertise between innings) and positioned it as an entertainment option. Turns out that the average NHL fan was a huge NFL fan, so they sat down with the Bears and started doing some commercials with players from both teams (it ended up not running due to some licensing issues)

MillerCoors – Different problem. Incremental signage is NOT the issue. Brand awareness is 97-98%. It’s all about activation. They also do Business to Business activation (can buy packages with Pepsi, Frit-O-Lay chips, and beer).

Indians – Ohio is a big football state and Cleveland is a big football town. Ohio State football is the big game in town – cross-marketing opportunities.

More on Tickets

The growth of secondary ticket markets (Stubhub, Ticketmaster etc). How does this change the business?

BHs had a relationship with Ticketmaster (Ticket Exchange). Lower level tickets are ~$180, which is expensive. The secondary market acts as an insurance to the consumer because they can recoup the cost of the ticket, which actually helps BHs (people are more willing to buy knowing they can offload it). Some people, of course, try to sell tickets with a profit, which is something BHs decided to live with.

Indians – MLB has a relationship with Stubhub. There are 300+ tickets available for every game, and for some of these games they haven’t started to sell tickets, so it must be the season ticketholders making their tickets available.

Q&A

1. Effect of Mobile

BH – Developed an app – free download. Fresh content every single day. Trying to get the person on the L. Mobile can also help with ticket sales, especially if they have inventory. They try to unload that four or five hours before the game (sometimes at discounts up to 50%) and mobile helps to reach the customer. Jay believes it’s all about content. Technology around it could change, but if you have good content, like player visibility, players picking up a flip cam, making jokes etc., it helps with the brand. Players were very cooperative, too. They are young; 21-22 years old, but fairly established in the market.

Indians – Social Media & Twitter. Fans love learning about their favorite players and teams Indians hired a former Northwestern baseball player who is now managing their social media strategy.

MillerCoors – Some apps, like Miller Lite Taxi finder. Also, people like to win stuff. They don’t care that much about winning 2 million dollars vs a T-shirt. The ability to win is what matters. From a technology standpoint, they have the Snap Tag technology, you are automatically entered to win.

2. BH Sponsorship with Cubs, White Sox. Are they competition?

BH – Not really. Once the hockey season ends (some time between April and June), the BHs don’t have a voice. The baseball partnership gave them a voice during off-season in the sports community. They don’t look at NFL as competition either. NFL is a great brand and they just wanted to attach to that market. Interestingly, now with the BHs on the rise, some other teams want to attach to the BHs. BHs have a very young fan base (the youngest in town), which helps them.

3. Revenue sharing?

Indians – Baseball is different from NBA and NFL. In 2007, they beat the Yankees and took the Red Sox to seven games. Not so successful since. Thin margin of error.

BH – Revenue sharing leads to parity. In the NHL, the top third of the market subsidizes the bottom third (BHs are a big market team). Salary cap is between $42-59 million. Jay thinks it’s healthy to have a hard cap because it creates balance. A $90 million cap would probably price the fans out of the market.

Indians – Big differences in baseball. Yankees spend $200 million and the Devils spend $40 million. But the Yankees have ten times the revenue, so they can afford it.

MillerCoors – ROI (Return on Investment) is the main metric. The purpose of the sponsorship is to earn money and activation. Better measurement tools are still missing. The sponsorships should be CARS (Credible, Affordable, Respectable, Simple).

4. How does losing players impact brand maintenance and sponsorships?

BH – It’s tough – you develop personalities and they’re gone. They are focusing on all their players. The BHs have more turnover than most of the other teams. They try to build new guys – but it is difficult.

MillerCoors – Sponsorship value does not depend on performance. Win or lose, you create value and more awareness. They are there through the thick and thin. Performance is not much of a driver for retail activation. The goal is to reach 95% of the fans they have never been to a NFL stadium and 70% of the fans that have never been to a ballpark. The question is how to activate them by using, say, the Indians as a tool?

5. Is Brand equity of players a determination in selecting them?

BH – If the player is a prospective draft player, teams will spend time with them, their families. But the marketing side comes after the performance side. They do have a media trainer though (a lady from Cleveland).

Indians – The marketing aspect is a little more important if it is a long-term contract or a free agent. But performance always outweighs that, especially in draft settings.

6. Can partnerships dilute the brand?

BHs – Sometimes you need to be careful – they did a commercial with Harris but didn’t run. Harris didn’t like certain things. You have to respect that.

Our Takeaways

The text in italics are pretty much the takeaways here. It is all about fan engagement, creating additional channels, during the season as well as off-season, and finding alternative revenue streams. The challenges in ticket sales was a good discussion – clearly that’s on the radar. The SRI does address pretty much all these points – it creates engagement, even during off-season, creates an alternative revenue stream for teams and helps with risk management.

Panel 2 – The Global Expansion of Sports Leagues & Business

Panelists:

Patrick Pierce (Director of Global Marketing and Sponsorships, Aon)
Brian Goldstein (Senior Manager, Global Sport Marketing, McDonald’s)
Johan Hedberg (Chief Operating Officer, Caddiemaster Enterprises)
Gordon Kane – Moderator (Founder, Victory Sports Marketing)

Gordon: This morning, Manchester United played Manchester City, and the salary total on both teams was $850 million, which is a record, and much higher than any sports event in the U.S.

Aon – Three primary business units: 1) risk portfolios, insurance brokerage; 2) reinsurance, work with insurers like State Farm, Zurich; 3) Recently acquired Hewitt (HR, consulting, outsourcing). 121 countries, over 60,000 employees, $8.5 billion in revenue. Manchester United shirt sponsorship.

McDonald’s – Sponsors the World Cup and the Olympics, Brian manages the day-to-day on sponsorships.

Johan – Did business in Canada, Israel, Germany, etc.

Aon – The goal is reaching young fans. You have these marquee events, what do you do in between? Fans crave more content (Comment: Note the very same issues – Young fans, need for content and off-season activation).

McDonald’s – 117 countries, 64,000 stores. 64 million people eating McDonald’s every day. Fans ARE their customers. How to expand customer base in places like South Africa, Qatar, Russia?

Aon – Soccer clinics in South Africa (Johannesburg). The assistant coach of Man U was there. You reach i) children of your clients; but more importantly ii) children in the community. These are big events for children. Other events in the Netherlands but in different formats (e.g., meetings with Van der Sar (a famous Dutch goalie))

McDonald’s – Recognition and recall is important. An example is the voice over by Morgan Freeman in McDonald’s campaign. In the World Cup matches, every player walks on the field while holding the hand of a child. All these children (22 per game, a total of 1408) were picked by McDonald’s. McDonald’s has a global budget but it is pushed to local affiliates.

To put things in perspective, the 2011 Superbowl was viewed by 116 million people in the U.S. 700 million people watch the World Cup. Similarly, while Super Bowl had a lot of viewers over the last few years (110 million in 2010), its 10-year average is more like 80 million. 88 million people watch Man U every single game.

Aon – Man U has phenomenal brand awareness in Asia. 100% in Korea (they have a Korean player), over 90% in Japan and China. For Aon, brand awareness in Asia is low, but the potential revenue is very high. Two years ago, people in Asia didn’t know Aon, now they see it on the TV every day through the shirt sponsorship on Man U jerseys. This makes conversations in Asia easier and a major reason why they have the sponsorship. (Comment: Note again the common elements – for corporations like Aon, Millercoors, sports is a tool to activate clients/consumers and it’s not so much about performance)

McDonald’s – South Africa is a unique market, no McDonald’s store within 1000 miles. You are NOT supporting a sponsorship because of a location, it is more of a tool to connect with the customer. 99.99% of the people do not go these events (the World Cup or the Olympics), so let’s bring the event to YOU. (Comment: Note again the similarities with the other panel – the exact point came up, how do you activate the 95% who never set a foot in an NFL stadium?)

How to measure?

Aon: We measure risk for a living, so we have a lot of analytical tools we employ before investing. We did 420 acquisitions in the last 20 years, but the Man U sponsorship has united the company like never before. We also look at what this does for employee retention and revenues. We have some complex models and proprietary tools around this.

McDonald’s – Beyond ROI, we also look at ROO (Return on Objectives). It goes beyond the dollars. What do moms think of McDonald’s? Find the best athletes and connect with local venues (like Yao Ming/China/NBA). McDonald’s Europe pays for the sponsorship of the Euro Soccer Championship, but now there is considerable interest by South Africa and Middle East and a potential buy-in into sponsorship by global (Comment: Good example of regional becoming global).

Q&A

1. Other notable sponsors in this area?

UNICEF – Aligned with sports even though it is a children agency. UNICEF had a Barcelona sponsorship until recently but now a Qatar company has it. Barcelona was leaving money on the table (the new deal is 30 million Euros a year). (Comment: Interesting case that combines social responsibility, globalization, need for revenues. Read more here:http://uk.eurosport.yahoo.com/09022011/58/la-liga-barcelona-drop-unicef-logo-shirt.html)

Ying Li Solar – another company that is active in this area.

In general, the trend is that the Middle East is popping left and right into the sports marketing and sponsorship scene.

2. Risk management with Aon sponsorship

There is some risk – but not a lot. First, it is a club, and not an individual. Two, it is a long term deal. Things may change – Alex Ferguson (long time coach) could leave for example, but not that much.

3. Community Building?

McDonald’s – Building rapport, engaging workforce. Viewing parties in Switzerland, Botswana.

Our Takeaways

Again, see the text in italics. Our first observation here is the community building aspect of it. It is important to engage with your customers and make a return on your investment, but it is crucial to do that under the social responsibility umbrella. We think this is perfectly aligned with our non-profit education arm and for-profit trading arm. Workforce engagement, the common goal elements etc. were also very interesting. Finally, note the link between sports and developing countries, especially Africa.

 

SportsRiskIndex™ (SRI) – Sports Risk Index Trading (Regulated “Sports Stock Market”) Global Economic Development and World Peace

November 29, 2010 in public

by Crystal World Holdings, Inc. CEO Chris Rabalais

The development of the SportsRiskIndex trading markets, educational infrastructure and surrounding industry will put the world on a path to sustainable prosperity while drastically lessening the perceived need for, and therefore occurrence of, armed conflict.

Here are the major points: In the future, most conflicts will be based upon a battle over informational, energy and economic resources. The days of a land grab for land grabs sake are over. If you take over a population, you have to feed, clothe and take care of them. That doesn’t look very good on a spreadsheet. Military operations will become increasingly difficult to support economically and justify politically. The “everybody knows everything all the time” future is going to make spinning lies to cover your real motives nearly impossible. Look at Wikileaks… and that is just the beginning. In a “flattening” economic world, supporting a big military machine will be increasingly difficult to bear and justify. And even if you CAN support a military, why does it really exist? In the vast majority of cases, any military action has an economic justification.

Why does the SportsRiskIndex promote world peace? First, as an extension of sustainability and a better world, it lessens the need for violent conflict over scarce resources. There will be less fighting because there is less scarcity.

A portion of the SportsRiskIndex economic effect will be a draw from other sectors. And, there is a certain economic “alchemy” that takes place when you introduce a new technology that monetizes elements that were not previously monetized. There will be improvements in efficiencies. Adding all these together, you have a new economic platform that will draw resources from less profitable areas, create new opportunities where they never before existed and make existing industries more efficient.

The SportsRiskIndex promotes economic stability and world peace because:

1. It creates more opportunity and reduces scarcity that leads to strife.
2. It makes developing sports industry in any given economic area a much more attractive and long-range profitable spreadsheet analysis than a “slaughter the people, extract the resources and (try to…) lie about your real motives (.. see Wikileaks above)” military operation.

To make this work, you must deal with human nature as it is… and redirect the natural tendencies toward some mutual good. Basically, doing good is by accident. THAT is a capability I see with sports and the SportsRiskIndex. The military sector is the ONLY sector larger than sports (in the United States). That isn’t true everywhere. Ponder that imbalance and what happens when a country develops its sports industry to a higher level than its military… in the face of a mechanism to monetize it (the SportsRiskIndex).

The idea here is that we can grow the economics of sports beyond the military economics and make it more profitable. Without a word spoken, natural human tendencies… competition… greed… etc… will bring them to the same conclusion. You see a phasing up of sports and a phasing out of organized institutionalized violence. Of course…people will still fight one on one and this won’t get rid of ALL military operations. But, I can see the foundations being eroded from beneath and the ceasing of a very large portion.

Some argue that people want to fight to fight. I think there is a certain amount of truth to that. But… isn’t that one of the main reasons sports is so popular? I think that element is already covered. The key here is to make the economics of sports more profitable than war.

International politics will be very important. Why?

1. It will be key to getting this thing done. No question about it.
2. It will be key to keeping the splitting of the atom (so to speak) confined to the space of clean energy and out of the realm of economic atomic weapons. We MUST retain OUR vision or it will become a new economic raping and pillaging machine. It wields enormous power and therefore can be used for “good” and “evil”.

We intend to be one of the principal drivers that make sure the true global economic potential is realized for the above benefits. That is going to take an incredible amount of political agility and skill… and help. That help will come when the time comes. There are super-sharp well intentioned leaders out there that will join up when they grasp what is going on here. It won’t take more than a hint here and there before they’ll be itching to get involved.

Bottom line: The SportsRiskIndex promotes peace and creates a better world.

So… is it all nuts? Maybe…

But, I really don’t think so.

Crystal World Holdings, Inc. SportsRiskIndex™ Strategy White Paper

November 18, 2010 in public

Strategy White Paper

Objective: The objective of this white paper is to lay out the vision and mission of Crystal World Holdings (“CWH”, or “the Company”) and the Company strategy.

Vision: To become the global leader of educational, financial and other related services to the sports industry.

Mission: Providing finance education using a sports-based curriculum so the public can make better financial decisions and developing financial products that will serve all sports-related business. This dual mission can be summarized as follows:

Learn finance through sports.

Trade teams like stocks.

Educating the public

The recent financial crisis has touched the lives of many people. Jobs were lost, homes were vacated and businesses went bankrupt. Morale declined significantly, retirement ceased being an option for a lot of individuals and pessimism took over. While the economy seems to be improving slightly, a broad recovery is yet to be felt by the general public. The experience is likely to stay with us and change our behavior for many years to come.

The financial markets became so complex that uncovering the exact reasons of the crisis is an elusive task. However, the evidence is undisputed that the broader public was removed from the intricacies of the financial world more than ever before. While this cannot start a crisis on its own, it certainly made the effects felt more widespread and the path to a recovery longer.

So, what do we do? Financial reform is a step in the right direction for certain. But, the best protection comes from understanding the risks and inner workings of the financial world, not from eliminating certain practices or creating a few more agencies with oversight responsibilities. To be clear, better oversight is sorely needed and will, to some extent, ensure that corporations do not benefit at the expense of the consumer. However, unless the consumer is well-educated and understands the risks and what can be done to manage those risks, the cycle is likely to repeat placing wide-ranging policy decisions in the hands of a handful of people once again.

We believe that the public is smart but it is unfair to expect them to be up to date with everything going on in the financial sector. Making things worse, money attracts all types of people into the finance business. There are those who are very skilled at what they do and hold themselves to the highest ethical standards. There are some whose practices are technically legal but not necessarily ethical.  Finally there are con artists and crooks doing everything possible to make a quick buck at your expense.

So, how do you separate one from another?

There is only way: knowledge and understanding.  Every individual and every family must understand finance and money at a basic level to distinguish between the good, the bad and the ugly.

Of course, teaching finance is already a lucrative business. There are many excellent books and advisors providing good advice. But the same problem exists: how do you separate the good from the bad and good intentions from crooked ones? The business of making money may be bigger than the business of teaching money but the latter is still significant so it draws a mixed crowd to the field.

Finally, the ever increasing complexity of finance makes it very difficult for the general public to digest advanced concepts.

Overall, there are some decent attempts in the marketplace. But, is it really working? No, not really.

The rules of financial education need to be rewritten.

The solution is to go back to square one and start the learning process over. The best way to learn something is start at a familiar place and work your way up the learning curve identifying similarities and differences.

That familiar place is sports.

Most of us watch sports, play sports and consume it heavily. We talk sports and we live sports.

We know sports.

The idea of using sports to educate is not new but it presently exists in disconnected and unorganized pieces. A college professor may use the technique in his class. A company may encourage sports for team building and morale. Those efforts are laudable but they don’t achieve a certain threshold to become widespread and meaningful for the society at large. The process has to be more organized to reach a tipping point and to make a lasting difference.

That can only be done by operating in areas that combine sports and finance in unique ways. This is, in fact, the sports trading aspect of the Company’s dual mission.

The core of the second idea is that teams and other sports related businesses are exposed to risks they need to manage like most other major industries. However, until now, these risks could not be managed.

Risks are everywhere and affect our decisions both at a personal and professional level. A person who could lose his shirt if he gets into a car accident buys car insurance. In this case, insurance is simply a tool that transfers the risk from the individual, who would lose quite a bit, to an insurance company who is willing to take that risk for a premium.

Another example: Let’s say you are a producer of corn tortillas and you are worried about increasing corn prices.  Your boss told you that he will fire you if profitability goes below a certain level. What do you do?

Thanks to the financial markets, you can buy corn at the price you desire and will know, with certainty, how much you will pay for your main ingredient. Even if corn prices increase considerably, you can sleep well at night because you transferred your risk to someone else. Your job is secure.

But who did you transfer your risk to and why is that person willing to take a risk you don’t want?

It could be someone who has an opposite risk. For example, it could be a corn farmer who does not wish to take a chance with corn prices and is satisfied with a reasonable price. Once you trade with the farmer, you are happy because your job is secure and the farmer is happy because he can feed his family from the guaranteed price for his crop.

Or it could be someone who thinks corn prices will go in a certain direction and wants to profit from it. This is a speculator. They are very important for properly functioning markets because they are sellers to buyers and buyers to the sellers. Without them, risk transfer would be much more difficult.

You may not care about corn prices at all because you are not a farmer or a tortilla maker. Maybe you don’t care about speculating on corn prices either. Maybe you are just someone who happens to like corn tortillas with your fajitas. So, you take a position because you have an affinity for the product.

In most cases, however, there is a risk that you or your company does care about. The question is: Do you have tools to manage that risk or speculate?

For orange juice? YES.

To manage gold prices? NO PROBLEM.

To hedge energy costs? OF COURSE. This is one of the largest markets.

Weather? YES, even weather. If no snow is a problem for you (hey, some of you own and operate ski resorts), you can manage that risk. Or do you think this winter will be especially cold? Trade on that hunch. There are weather contracts to trade in the markets right now.

And let’s say you are the broadcaster of NFL games for the next five years. If a lockout happens, you will lose quite a bit of money. So you have a sports-related risk. There is a tool for everything, so you are covered, right?

NO.  Well, not until now, anyway. This is our second mission.

Crystal World Holdings Inc. created the SportsRiskIndex™ (“SRI”) to provide sports-based risk management products to sports-related businesses

How does the SRI work? It is a tool that uses inputs that are publicly available and related to a team’s finances. Specifically, the inputs in the model are attendance, TV ratings, population and income characteristics where the team is located and finally, whether another local team competes in the same league. Think Chicago Cubs and Chicago White Sox, for example.

All these elements are significant factors that have a major impact on revenues. This has been argued in the sports economic literature and verified by Crystal through rigorous economic analysis. Higher attendance is an important revenue driver. Higher TV ratings lead to lucrative media contracts. The sheer number of people, as well as their income level, increase revenues through a variety of channels such as higher ticket prices and merchandise sales. Finally, a competing local team, while great for sports consumption, often has a negative effect on revenues.

It should be noted that game outcomes are not presently part of the model as their effect on revenues is less clear and indirect.

All the above factors are assigned a specific weight driven by Crystal’s economic analysis. Attendance, for example, has a higher weight than population. This means that while both are important to revenues, a 1% increase in attendance has a higher impact on approximate team value than a 1% increase in population. These weights, however, are different for each sport.

The index for a team can be considered an approximate financial value for a sports franchise. It is not a direct substitute for a valuation which requires detailed analysis of team financials (that are often private) and market conditions. But, it is a very useful benchmark and especially helpful in tracking the financial health of teams over time and across leagues.

Index Futures

While the index alone is a useful benchmark, an additional step must be taken to convert the index into something that can be traded in the financial markets. This is a necessary step because if we just stop at the index, the value is limited. It must be converted into something that can be bought and sold so that industry participants have a tool to manage their risks and sleep better at night.

What do you do if you are the broadcaster mentioned earlier? Through our instruments, you can “sell” the NFL index. There are two possibilities. Either the lockout does not occur and you are happy to have paid a relatively small premium or we get a gridlock and you financially recover through your SRI trading. The lockout means no TV ratings and no attendance which would drive the SRI value down. You then “buy back” at a cheaper price and pocket the difference.

This is very similar to the driver who may have an accident. With no accident, you paid a premium but you had piece of mind. If you do have an accident, the insurance company picks up the tab and you only lose your deductible. Either way, you don’t lose your shirt.

SRI futures provide a risk management tool to participants in the sports industry.

Some professional traders may not be exposed to certain risks that move together with franchise values but they may be looking for something that can spice up their portfolio. Diversification, or NOT putting your eggs into the same basket (so to speak…), has immense benefits.

SRI futures give traders an alternative investment tool in managing their portfolios.

More than likely you are neither in the sports industry nor a professional trader. But, you probably play sports, watch sports and talk sports.  In fact, most people will fall in this category.

How can you benefit from this product? It provides a novel way to participate in your team’s financial success or speculate on any team’s financial health. While speculation sometimes gets a “bad rap”, the speculator is actually crucial for the success of any financial market. Without them, the markets would not function as well and trading would decrease.

At the same time, it is important to know your objectives and understand the products. Be aware that you are speculating and only a small portion of your wealth should be deployed for that purpose. As long as these conditions are satisfied, you are helping to make the markets work. And, what you are doing is not at all different from the same role you play in the equity markets… just in sports.

Speculative traders vote with their money and help markets function efficiently.

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SportsRiskIndex™ (SRI) - What Is Sports Risk Index Trading And How Does It Work?

October 14, 2010 in public

What is the SportsRiskIndex™?

The SportsRiskIndex™ (SRI) is a published index figure that represents approximate market value for any given sports entity. The sports entity can be a team or league.

How is the SRI derived?

The SRI patent pending formula takes into account such variables as attendance, TV ratings, and other publically available economic data to calculate the SRI for the sports entity.

The SRI for my team is $800. What does that mean?

Based on the revenues your team is generating, the SRI predicts that your team has an approximate market value of $800 million. It is recommended that you compare this number to the SRI of the other similar teams and the league.

How do I buy/sell the SRI?

The SRI cannot be purchased directly. Brokers sell SRI contracts at a price based on the SRI price. An SRI contract for a sports entity can be traded like any other futures contract. Long or short positions can be used by a trader depending on their trading strategy.

How much does an SRI contract cost?

The value of a contract for a sports entity will vary based on the cash value as calculated by the SRI formula plus or minus any premium or discount built in by the market. In order to take a position, a trader will only need a fraction of the full SRI value in their account. The fraction amount required in the trader’s account is called the ’margin’.

Why should I trade the SRI?

The SRI can be used like any other trading or investing instrument. But since the SRI focuses specifically on sports related financial data, it is uniquely positioned to help businesses in that industry. Businesses with exposure to fluctuations in finances related to sports can use an SRI as a hedging tool to limit their risk. Individuals may want to trade SRI contracts as a tool to put their knowledge of a specific sports entity or sports in general to diversify from the usual stocks and commodities.

SportsRiskIndex™ Example:

For this example we will look at a fictitious Major League Baseball team called the Anchorage Huskies.

Before the Trade. We will assume the SRI futures contract for the Huskies is trading at $1,100.

Why Trade? A trader believes the MLB Huskies team is about to sign a contract with one of the best players in the league. The trader thinks the revenue this player will bring in through higher attendance and TV ratings will result in an increase in the SRI, so he decides to purchase a single Huskies SRI contract.

How Much Does the Trade Cost? Assuming the margin requirement is 10 percent, the trader will be required to maintain $110 in their account, 10% * $1,100 = $110. If their account falls below this amount, they will be required to add more funds or close the position.

After the Trade. As the rumors of the Huskies signing the player start to spread, a premium is built into the SRI contract driving it up to $1,200 a contract. The trader now believes the value of this player is fully reflected in the price, so he decides to close his position. When the transaction is completed, the difference between the selling price, $1,200 and the purchase price, $1,100, less fees, is credited to the traders account. Therefore, in this example, the trader’s profit is $100 ($1200—$1100) less transaction fees.

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Crystal World Holdings, Inc.
1701 Pennsylvania Avenue N.W. Suite 300
Washington, DC 20006
Architects of  The New Sports Economy™

SportsRiskIndex™ (SRI) United Nations World Intellectual Property Organization (WIPO) International Search Report (ISR) Published September 16, 2010

October 8, 2010 in public

WIPO link to published results of the International Search Report (ISR) on the SportsRiskIndex™ (SRI) - (click to open in a new window).

This 4 page summary contains the published results of the international patent search. Of particular importance is the indication on page 3 citing that the result “…is not considered to be of particular relevance”.