Part 1 - An Insider’s Guide to the World of Licensed Sports Products: How Licensing Works - Follow The Money or How $5,000,000,000 can be less than you think

Greeting folks!

This note is written by Scott Sillcox in fall 2023 in response to a lot of readers asking me two questions:

A. You wrote and posted this 12 part blog in 2012-ish, is it still relevant today? Short answer - absolutely! The basics of sports licensing change very little over the years, so I strongly suggest that if you are trying to learn about sports licensing, read away! I have also tried to update certain areas where there have been significant changes, so I feel comfortable in telling you that this information is still highly relevant.

B. You mention that you are a consultant and might be able to help me, do you still do consulting? Short answer - absolutely! I work in the licensing field virtually every day of my life, so if you have questions or would like my help, contact me! The two primary ways I work are hourly telephone consulting ($175US/hour) and face-to-face meetings where I come right to your office for a full day ($1500US/day + $650 travel expenses).

Many thanks and happy reading -
Scott Sillcox

Please also note: This 12 part series initially appeared on my "Heritage Uniforms and Jerseys" blog, but I moved it in March 2012 to this blog which has a more single-focus on the world of licensed sports products.

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Greetings!

This is Part 1 of a 12 Part Series of blogs Scott Sillcox wrote called “An Insider’s Guide to the World of Licensed Sports Products”. For a backgrounder on Scott Sillcox and his company, Maple Leaf Productions, please see the introductory blog and/or watch Scott's 11 minute introductory video.
The 12 Parts of this Licensed Sports Products blog are:
Part 1: How Licensing Works - Follow The Money or How $5,000,000,000 can be less than you think
Part 2: What’s Involved in Getting a License – You need them far more than they need you
Part 3: The Landscape and some of the players
Part 4: Quality Control – Where The Real Power in Licensed Sports Lies
Part 5: Royalty Reporting and Audits
Part 6: Selling Licensed Goods - Why it’s not as easy as it looks
Part 7: Players Associations and Current vs. Retired Players
Part 8: Royalty Rates – Is 12% the norm and when 12% isn’t enough
Part 9: Local Licenses – myth or reality?
Part 10: Packaging
Part 11: Ten Things (Actually 12 Things) I Learned Along The Way
Part 12: Ten More Things (Actually 14 Things) I Learned Along The Way

Let’s put the sale of licensed sports products into some sort of perspective. In 2010 approximately $200 billion dollars worth of licensed merchandise was sold worldwide. Of that $200 billion of annual sales, approximately $25 billion was sports related.

Figure below were updated in February 2021:

Of the $35-$40 billion of "North American" licensed sports products sold worldwide in 2020, some of the leading licensors are:
1. US colleges: $15 billion in retail sales
2. NFL: $7 billion in retail sales
3. MLB: $5 billion in retail sales
4. NBA: $3 billion in retail sales
5. NHL: $2 billion in retail sales
6. WWE: $1.2 billion in retail sales
7. NASCAR: $1 billion in retail sales
8-10. MLS: <$1 billion in retail sales
8-10. PGA: <$1 billion in retail sales
8-10. UFC: <$1 billion in retail sales
Missing: Non North American soccer teams (England, Germany, France, Spain, Italy, Brazil, etc.), largely because when it comes to merchandise licensing most of these teams operate independently and not as leagues – it would be as if the New York Yankees licensed their own merchandise and operated outside of the MLB umbrella. The North American sports leagues treat each team in the league as equals when it comes to sharing royalty revenue from the sale of licensed sports products, and most have done so since the 1960’s, whereas Manchester United of the English Premier League (a 20 team soccer league that is arguably the world’s best), says “No, we’re not going to be a 1/20th partner when we sell 30% of all licensed merchandise – we will control this revenue source ourselves”.

These figures aren’t hugely accurate but they are reasonable guesses based on industry knowledge and the great work done by License Magazine which publishes a terrific “Top 125 Global Licensors” list each year. I have compiled a one page summary of the Top 50 Global Licensors for 2010 and 2009 below.

[Please click on this image to see a larger size - I realize this is impossible to view at this size.]

With respect to sales of licensed sports products by professional league, the NFL with their $7 billion in sales is #1 (MLB is not too far behind with roughly $5 billion in sales), but to keep it a bit in perspective, the $12 billion of MLB + NFL licensed product sales are dwarfed by Disney which sells more than $55 billion worth of licensed products each year. So at $35-40 billion for 2020 (which includes all US colleges), the sale of all licensed sports products sports is big, but Disney sells more licensed products than all the sports leagues combined.

Now let’s focus on the $35-$40 billion that is the world of North American licensed sports products.

Traditionally, all products licensed by the leagues listed above fall into one of two categories:

A. Soft goods
- Sometimes referred to as soft goods and headwear; or apparel; or apparel and headwear.
- This category is generally dominated by Nike, Reebok, adidas and a handful of other apparel giants.

B. Hard goods (aka Hardlines)
- Sometimes referred to as hardlines; or trinkets and trash.
- Electronics, especially video games, falls into this category although some people/leagues might call it a third category – I am going to leave Electronics as part of Hard Goods.
- This category has no giants on the scale of the apparel companies, rather this category is characterized by lots and lots of small, entrepreneurial companies.

Please see Part #3 of this blog series for more information about Soft Goods vs. Hard Good licensees – there are some important differences between the two categories of licensees that it is important to understand.

All that having been said, let’s now “Follow the Money”…

I’m going to assume that if you are reading this, then you are likely a pretty good sports fan. As such, I want you to answer a question – quickly and off the top of your head.

Ready?

The question is: How much revenue do the New York Yankees receive each year from the sale of licensed sports products around the world? Not how much revenue is generated, but how much revenue do the Yankees actually receive.

You might want to read the question one more time, then write a number down on a piece of paper and then read on. Come on, just try it.

If you have a figure written down – well done – thanks for participating. If you haven’t written a figure down, this is your last chance – what do you have to lose?

So here is today’s lesson about how licensing works in general – let’s "follow the money" together…

A. Let's say my company is a hard goods MLB licensee.

B. Let's say we sell $1,000,000 worth of merchandise to retailers each year, i.e. we sell $1,000,000 of merchandise at a wholesale level (not retail).

C. We owe MLB a royalty equivalent to 12% of the wholesale value – 12% x $1,000,000 = $120,000. You can read more about royalty rates in Part #8 of this blog series, but for now I ask you to accept the fact that 12% is a decent average royalty rate in the sports world.

D. It doesn't matter what the stores sell our $1,000,000 worth of product for - they could turn around and sell the $1,000,000 worth of product that they buy from us for $3,000,000 or they could sell it for $1,500,000 - MLB gets the 12% of $1,000,000 from us, the licensee, not from the retailers. This is generally called the “First Level of Distribution” principle – the league derives their share of the revenue (their royalty) as a percentage of sales from the wholesaler, from sales to the “First level of distribution”.

E. MLB then takes our royalty payment of $120,000 and combines it in a pool with all the other payments from all the other MLB licensees. MLB then takes that royalty revenue and splits all of the royalty revenue EQUALLY among all 30 MLB teams. Even if 35% of all the MLB merchandise sold in a year is New York Yankees merchandise, the Yankees only get 1/30th of the revenue.

F. Now let’s do some simple math.

- Retailers sell approx $5,000,000,000 of RETAIL MLB merchandise per year (as noted above, this figure comes from the good folks at Licensee Magazine – they have published the figure of $5,000,000,000 as the MLB sales figure for both 2009 and 2010 and I believe it to be a fairly accurate number because MLB itself provides it to License magazine).

- A reasonable guess is that the wholesale value of the $5,000,000,000 worth of MLB licensed product sold is $2,500,000,000. This is the key figure – the $2,500,000,000 wholesale amount.

- We then take 12% of that wholesale amount – 12% of $2,500,000,000, which equals $300,000,000. This is the total amount of royalties that MLB collects from their licensees - $300,000,000. As mentioned above, 12% is a fairly standard royalty rate for a sports league.

- MLB then takes the $300,000,000 of annual royalties it receives and divides it equally among all 30 teams. This means that each MLB team gets $10,000,000 a year from the sale of licensed merchandise. That’s right - $10,000,000 from $5,000,000,000 – $10 million from $5 billion.

- So the answer to the question I posed above is $10,000,000. The New York Yankees get $10 million from the worldwide sale of licensed sports products. My guess is that if you took a chance and wrote a figure down on a piece of paper a few minutes ago, you guessed something considerably higher than $10 million.

- What I am trying to get at is although $5 billion is a huge amount of licensed sports products – and MLB is the leading sports league when it comes to the sale of licensed sports merchandise - the $10,000,000 per- team-share is barely enough to pay the salary of one decent pitcher. I am certain that most fans, and media, and even seasoned business people in the licensed sports industry see all sorts of MLB licensed merchandise being sold worldwide and they automatically jump to the conclusion that the MLB teams are "raking it in", but simple math shows you that they really aren't – they are only making “$10 million from $5 billion”.

- And to me, that's the big story about the sale of licensed sports products, one that you as a (potential) licensee need to understand. Each MLB team is only earning $10 million from the sale of licensed merchandise – and thus their natural inclination will be to want more, and in many ways it’s hard to disagree with that sentiment. When you consider that each MLB team’s share of the national TV revenue pool is $100,000,000-ish (in 2021 each NFL team will likely get at least $260 million from their deals with ESPN, CBS, NBC and Fox), and that even the smallest market MLB teams generate at least $15,000,000 of local TV/radio revenue (the Yankees might be $100,000,000 or more), you can see that the $10,000,000 from the sale of licensed sports products is important but not all important. The lesson? Keep things in perspective and you will have a better understanding of the business you’re in.

I would like to add a couple other side notes, but the primary lesson of this blog is “$10 million from $5 billion - How $5,000,000,000 can be less than you think!

Side note #1:
I will expand on this in Part #3 of this blog series, but I’d like you to understand that I have been using verbal shorthand when I refer to MLB, NFL or NHL, etc. I should really be referring to them as MLB Properties, NFL Properties and NHL Enterprises. My quick point is that each league typically forms a stand-alone subsidiary company (generally ending in “Properties”) as their licensing body, and as such each is its own entity, separate from the league itself. To me it looks like the league and acts like the league, but legally and structurally “Properties” are a separate entity. This is neither good nor bad, you should simply be aware of it and move on. This list may help you understand what each league calls its licensing entity:
1. US Colleges = Please see Part #12 of this blog series for more on NCAA licensing
2. NFL = NFL Properties
3. MLB = MLB Properties
4. NBA = NBA Properties
5. NHL = NHL Enterprises
6. WWE = WWE
7. NASCAR = NASCAR Properties
8. MLS = Soccer United Marketing
9. PGA = PGA Tour
10. UFC = UFC

The one thing that each league handles differently is the overhead cost of running the league. I have a reasonable grasp of how MLB handles it, so let’s stick with MLB. Each MLB team is required to pay back to the league [they call it the MLB operations fund] approximately $5,000,000 to cover all of the salaries, office rent, overhead, etc. of running the league (keep in mind MLB employs approximately 1000 people). I have no idea what it costs the league to run MLB Properties, the licensing side of the business, but a reasonable guess might be that 25% of the $5,000,000 MLB operations fund payment per team relates to MLB Properties (25% x $5 million = $1.25 million per team). So if you were to factor that cost into the whole equation, the $10,000,000 per team share of royalties gets reduced to a net profit of $8,750,000 per team – so perhaps the truer story being told here is “$8.75 million from $5 billion”.

Side note #2:
Almost every team in the NFL, MLB, NBA, NHL, etc. owns their own retail store(s) at their home stadium and perhaps elsewhere in the local community as well. The revenue and profits from the sale of merchandise at these stores, is handled differently than the royalties that accrue from the sale of licensed sports products. I don’t have any exact figures, but let’s do a bit of an educated guessing game.

- The Green Bay Packers have one of the most successful retail operations in the NFL. My guess is that they sell approximately $15,000,000 of merchandise each year. When you factor in the cost of the goods sold, the staff costs, and all of the other overhead costs, my guess is that the Packers retail operation might be turning a profit of $5,000,000 a year. $5 million is a significant amount of money, but again, not enough to pay even a modest 1st round draft pick.

- Now contrast this with a team like the Jacksonville Jaguars – a fine team and a fine organization, but the Jags’ retail operations probably sell less than $2,000,000 worth of merchandise annually. And when all of the costs are factored in, my guess is that the Jags don’t make any money on the sale of merchandise from their retail operations – they would like to of course, but in the end it’s really a service to their customers and fans, they are almost obligated to offer Jaguars merchandise.

- So in addition to a 1/30th share of royalties from the sale of licensed sports products worldwide (the $10 million from $5 billion equation), each individual team might make anywhere from $0 to $5 million additional profit from their own retail operations – a significant difference between teams, but still not a game changing amount of money when compared to the team’s operating budget.

- My point in all this? It is key that you, a (potential) licensee, would do well to understand that each team makes no more than $15,000,000 from shared royalties and their own retail operations.

Side note #3:
In the MLB example above, I used a 12% figure as a somewhat average royalty rate paid by licensees to the league. What I haven’t yet mentioned are products that are licensed by MLB AND the MLB Players’ Association. Please see Part #11 of this blog series for much more on this subject, but I wanted to point out that for certain products, such as trading cards or video games, each licensee is paying a “blended” royalty rate. Let’s say the blended rate is 18% - 9% going to MLB and 9% going to the MLB Player’s Association. So the fact that when there is a joint MLB-MLBPA license, the licensee will be paying less than 12% to the league, means that in reality the total royalty collected by MLB will actually be less than the $300,000,000 speculated earlier, and the per team share will be somewhat less than $10,000,000 – maybe as much as $1,500,000 less – meaning each team may actually only receive $8.5 million from $5 billion. Not subtract the “operations fund” overhead costs I guessed at being $1,250,000 per team, and we’re now down to “$7.25 million from $5 billion”. That’s 0.15 of 1% of retail revenue – not 1.5% of retail revenue, but just 0.15% of retail revenue.


So if you have “Followed the money” in this lesson, I hope you can understand why Jerry Jones, the owner of the Dallas Cowboys, or the Steinbrenner brothers, owners of the New York Yankees, would look at their $10 million from $5 billion – or $8.5 million from $5 billion – or $7.25 million from $5 billion – and say, “I like the way Manchester United handles things a whole lot better”.

That’s all for Part #1 of “An Insider’s Guide to the World of Licensed Sports Products”.

Thanks for reading and all comments are welcome!

Scott Sillcox
Email: ssillcox@rogers.com
Cell: 416-315-4736


PS from fall 2023: In case you weren't aware, I created and constantly maintain a searchable Online Directory of 2500+ North American Licensed Sports Products Companies – it can be found at www.LicensedSports.net and only costs $59 to use for three full months. This is a highly searchable directory of licensed sports products companies in North America, companies that have been licensed by various sports leagues (NFL, MLB, NBA, NHL, NCAA, NASCAR, MLS, etc.) as well as the various players’ associations (NFLPA, MLBPA, NBAP, NHLPA). There is nothing like it anywhere on the internet, and I update the database weekly, oftentimes daily.

Virtually all 2500+ company records have a contact name with title, phone number and email address. In many cases, I list up to six contacts within the company. What's more, many of the records have a Linkedin url so you can learn much more about that contact including if you know people in common.

So if you’re looking for all the licensed sports products companies based in Connecticut, or all of the NFL licensees which sell housewares, or all companies licensed by the NBA and the NHL and MLB for soft goods, check out this terrific and highly searchable resource at www. LicensedSports.net .


PPS from fall 2023: I am a very active consultant to people looking to learn more about the licensed sports product industry - you can find the full detail here.  I spend almost every day in the licensed sports product field and I work with between 300 and 500 clients each year. There are three primary ways I work with people:

1. Hourly telephone consulting
2. Full day face-to-face meetings where I will go almost anywhere in North America to spend a full day with you and giving you a fire hose amount of information that is directly applicable to your circumstances.
3. I have a bundled package of services for those people who know that they want to work with an existing licensee.

So visit here for more detailed info and let me know how I can help you move your idea forward.