The Sentinel #23: Messi Revenue Sharing Contracts (Not a Typo!)

Kerala, Football, Apple and Platforms.

Revenue-sharing contracts have exploded in their applicability in recent years. In this essay, I talk about Revenue Sharing in Sports and Platforms, starting with the biggest football move.

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Maradona and Messi (left) - Argentina’s biggest football stars.

On August 10, 2021, two nondescript Indian men, Sameer and Anas, from small towns in Kerala were vacationing in Paris. Hearing crowds cheering outside their hotel, they stepped out to the balcony of their room, to be pleasantly shocked to see their football idol, Lionel Messi, with his family, waving at the crowds from a balcony next to theirs. It was Messi’s first day in Paris after joining the club Paris St. Germain after his storied career in Barcelona. Anas’ excited, teenage girls meeting the Beatles type repeated screaming (“Messi, Messi”), and his Malayalam gurgling of how stunned he was to see the “King of Football” — went viral in India. (Here is the 30-second YouTube video). This was before the world cup win and Messi has that kind of effect on fans all over the globe.

Kerala, in red, in south western coast of India traded with Arabian Peninsula and Africa over the centuries.

I’ll begin with a football-crazy region in India often called “God’s Own Country”. The Indian state of Kerala (see map) is an anomaly within India, and a cultural treasure in many ways. It is multi-religious (55% Hindu, 27% Islam, and 18% Christian as of the last Indian census) and more progressive compared to other Indian states. Nestled among the hills of the Western Ghats — the language spoken there is literally called the “language of the hills” — it was never under the British crown, and has always had a welcoming place for trade over the last 20 centuries.

It was the first state in India to achieve 100% literacy, a historic legacy of the progressive Hindu Kings of Travancore, who encouraged education, trade, and the arts. Aswathi Thirunal Rama Varma (known as Prince Rama Varma, as he is a descendant of the kings), is an exceedingly good classical musician, vocalist, and an exponent of Veena.

Kerala’s politics are complex and weird. It was the first state, in 1959, where the Communist Party of India (CPI) won elections to become the first democratically elected communist government in the world.¹ Unbelievable as it might also seem, in 2016, there was a guy from Kerala waving the Indian Tricolor flag, on Jan 6th US Capitol attack.

Kerala is one of the larger states in India which has a substantial presence of the three biggest religions (Hinduism, Christianity, and Islam).

Kerala is the first region where all Abrahamic religions arrived in India. Over the years, the religions are practiced here in a syncretic culture in relative harmony. (Of course, recently there have been efforts to discredit and diminish the ancient culture, but that is going to be a subject of a future India post).

It is said, the first Jews arrived after the destruction of the First Temple in the Siege of Jerusalem (6th century BCE). Christianity first reached India (1st century CE), when Thomas, one of the twelve apostles, reputedly arrived in India. According to Thomma Parvam (Songs of Thomas), St. Thomas arrived in Kerala in the 1st century and died in South India around hills that are absorbed by the current day Chennai (in an area still called St. Thomas Mount).

Kerala’s trade relationship with Arabs (also Phoenicians and Egyptians) precedes the birth of Islam. The earliest mosque in Kerala was built in 624 CE (even before Islam came to Andalusia, Spain in 711 AD). Unlike the history of most of northwest India, which still casts a long shadow on Modern India’s frosty relationship with its neighbors, the interaction between the religions in Kerala was not confrontational but collaborative.

Given the multicultural nature of the region, what binds the people in the modern day? One thing is definitely football, as evinced in the Netflix film Sudani from Nigeria.²

A lovely film Sudani from Nigeria (2018) — follows a Nigerian football player playing sevens-team soccer in Kerala where a number of African immigrants play. (Look at the global sports brands in the picture!).

The love of football in Kerala transcends class, religion, and nation. Cricket rules India, for sure, but in Kerala, it is all futbol mania. When I was interning at the Indian Railways, the workers ran a betting pool and would return groggy-eyed, having stayed up to watch soccer matches telecast at bewitching hours between 12 and 3 am.

Messi in Miami

Back to Messi. Lionel Messi is an amazing talent, a multiple Ballon d’Or award winner, World Champion, Golden Boot, Golden Ball, and all that. After the kerfuffle with Paris St. Germain,³ Messi is finally moving to Miami, USA.

Surely, Messi will be bringing in fans like Anas and Sameer from all over the world, when he leaves Europe and moves to the US to join the Major League Soccer (MLS) team Inter Miami. (A friend from Argentina often derides MLS as a poor-quality soccer league. I hope he changes his opinion after Messi’s move).

According to Front Office Sports, Saudi Arabian club Al-Hilal made a final offer to Lionel Messi, of $1.6 billion (!!) for 3 years.

This offer is unusually at the higher end, even for top athletes. Recently, A-list football stars have moved to join the Saudi Pro League. Cristiano Ronaldo of Portugal signed a contract with Saudi club, Al Nassr FC, which guarantees $75 million per year for his on-field services, with the potential to reach $200 million through other commercial activities.⁴ After 14 years at Real Madrid, Karim Benzema (the current Ballon d’Or holder) signed a three-year deal at Al Ittihad which earn him almost £200 million per season.⁵ Benzema has indicated he is also doing it for cultural and religious reasons.

In any case, Messi chose Miami overcoming an incredible payout option from the Saudi Pro League team. The Messis already owned a house in Latin-friendly Miami Area. It has been reported that his spouse did not want to live in Saudi Arabia. I am totally for making household decisions that accommodate family and spousal preferences. More men should do it, taking Messi’s cue, and try to maximize household utility.

From my own revealed preference, it is clear that I like being an American citizen (after a multiyear waiting line) and living in the US. I am so glad, for many reasons, that Messi turned down the billion-dollar offer to come to Miami. An easy thing for me to say. No one is paying me such obscene amounts of money!

WholeSale vs. Revenue Sharing Contracts

It is nigh impossible for Inter Milan to come up with a $500 million downpayment. So clubs often have to let go of star players like Ronaldo and Benzema. It is very much in the vein of the point illustrated in Gerard Cachon and Martin Lariviere’s paper comparing wholesale with revenue-sharing contracts: “Supply Chain Coordination With Revenue-Sharing Contracts: Strengths and Limitations.”

Using the example of the erstwhile video rental industry, the paper shows how revenue sharing solves the money-upfront problem. The problem was Blockbuster couldn’t invest so much money to purchase a high amount of inventory needed to support the high demand for the first couple of weeks of a film release (the demand then tapered off, leaving no use for high inventories). So, stores often bought less inventory — which left customers frustrated. This was solved by adopting a revenue-sharing contract buying inventories with a lower down-payment and giving up a share of revenues going forward. (Of course, all the inventory problem is now gone — but as I will argue soon, the informational problem is still here!)

The most rational way to understand Messi’s bet is to also understand how to compare the next two years of your life vs. the next twenty years of your life.

Every international soccer⁶ star knows and hates the finality of their career. After the pinnacle of winning the World Cup, you walk off into the sunset taking some lucrative payout, as your career slowly draws to an end over the next few years. From Thierry Henry to Bastian Schweinsteiger to Steffi Graf, this is the action some players close to retirement have taken. Scientifically, this action is like the last few actions in the last periods of a finite horizon dynamic program.

Another interesting way to look at it is to think like an author or creator of intellectual assets — selling into a longer horizon as in Revenue Sharing. Like JK Rowling (sorry!) George Lucas, let your work alone speak for you in the royalties of perpetuity.

The right way to think about the decision is to look at a longer future, and what being a global star means in the era of the internet, in times when being a YouTuber is a real profession that kids aspire to be.

Since American culture is the biggest export, and soccer is the most demanded consumed passion of the world outside the US, combining culture and high-quality soccer from the US has a great demand potential. It is not only incidental but almost expected that soccer and culture should come together eventually.

Apple TV+ and Sales

So, some numbers. According to the Miami Herald,

Messi’s complicated deal will include salary, bonuses and equity in the team. It is valued between $125 million and $150 million. League sponsors Apple and Adidas are still working on deals with Messi and will be based on the growth of revenues Messi generates.

The most important part of this puzzle is Apple. As I already wrote in #13: Apple as a Service, Apple “… famous for its products, is making headway into becoming a service company.”

Apparently, Apple has been instrumental in getting Messi to sign, with an extraordinary offer: a cut of revenue from new subscribers to their Season Pass service. (Within ONE day of signing Messi, Inter Miami has added more than one million Instagram followers, doubling its total).

Apple is a 3 trillion dollar company, buffered by a lot of cash cushion. However, they desperately need to grow Apple TV+ to compete with the likes of Netflix and Amazon Prime. (They also need to grow outside of the USA — Apple holds worldwide rights to MLS games). Messi is a great draw, as Apple TV+, which is low on content, can finally add some delicious MLS matches attractive to fans all over the world.

Now, Messi is a Sales Lead Guy for Apple!

Who can be a better salesman than Messi, whom some unknown guys in Kerala love and adore, and would pay to watch Copa America, and are happy to buy Apple TV+ just to watch Messi play?

In David Mamet’s play — made into the film Glengarry Glen Ross (1992) — Alec Baldwin’s Boss is exhorting (really, extorting) his real estate sales employees to “ABC — Always Be Closing” from the leads. The loser will be fired. Luckily, Apple doesn’t need such underhanded tactics.

For Messi too, this revenue-sharing arrangement is great: It allows him to walk away from $300 million over 3 years and perhaps nothing after that period, to take up a $150 million offer that has other continued payments over a longer horizon — sharing revenues on every customer he brings to a company like Apple, that is going to be around for a long, long time.

Pitfalls of Revenue Sharing

Of course, no solution is always better, all the time. Revenue sharing has its own problems as well. Mainly the moral hazard of retailer effort.

As Cachon and Lariviere (2005) write:

[…] the revenue sharing may not be attractive if the retailer’s actions influence demand. […] the retailer can increase demand by exerting costly effort and that retail effort is non-contractable. Since revenue-sharing contracts reduce the retailer’s incentive to undertake effort relative to a wholesale-price contract, the supplier may prefer offering a wholesale-price contract. […] When demand is sufficiently influenced by retail effort, revenue-sharing contracts should be avoided.

Platforms and MOOCs

So, one of the things to watch out for when it comes to revenue sharing is the ‘retailer influence’ has grown in the era of platforms. Usually, the intellectual property owner (Messi, MLS) is supplying content to the retailer (Apple TV+), which is often a platform, which has many incentives to induce effort.

Platforms invariably provide multiple content offerings to consumers. They invariably have pressures and motivation to recommend options that have a higher return rate — just as a selfish salesperson directs consumers towards offerings that give him a better bonus. You have already seen these payout effects manifest in aesthetically terrible ways: Netflix often promotes its own crappy products (which is why I strictly avoid binge-watching), and Amazon Prime prominently shills its products on the TV screen and landing pages on websites. It might be that eventually, Apple finds that per-viewer return on games featuring Messi is less attractive than their own offerings. When that happens, while continuing to feature such MLS games, they may be incentivized to promote different content that has a better return. This will reduce the suppliers’ income flow.

These kinds of temporary “distractions” of contractual incentives of revenue-sharing contracts explain why Massively Open Online Courses (MOOC) platforms like Coursera have not gone on to “solve” the online education problem.

When I teach my in-person classes, I update content and change things in the syllabus I discuss every year — usually dealing with examples, companies, and numbers — even for frameworks that are stable. For online courses, that is hard, as no one has a strong incentive. Coursera as a platform has a limited incentive to update courses, since most courses are free, instead choosing the easier action to promote higher-paid courses in their portfolio. On the other hand, for the creators of content, the low royalties do not provide sufficient incentives to make wholesale changes.

Similar incentives play a role in how service platforms like Spotify lose and gain music albums. It is not possible for them to pay heavy contract fees for all podcasts, so they have gone in the direction of licensing and revenue sharing — which has left musicians and artists in a very unhappy spot.

How to fix such problems? More posts on this as we go along.

Back to Soccer…

So has Messi made a great bet with the Apple TV+ contract? My own view on this is, yes. Next to owning an MLS team (Former player David Beckham owns part of the MLS team Inter Miami that Messi will be joining), this is the best one can dream of, as Apple is going to be stringent in sharing revenues going forward.

All of the success also depends on Whether the US will become a big soccer nation.

From the New Yorker:

Following the U.S.’s victory over Iran, a remarkable video of the U.S.’s Antonee Robinson consoling Iran’s Ramin Rezaeian was widely circulated on social media. Meanwhile, in the stands that game, it was plain to see that the supporters of each country were neither hard-line religious zealots nor the Great Satan. They weren’t remotely enemies. They were that most common denominator among humans: they were soccer fans, like pretty much everyone else. 

FIFA is corrupt beyond measure, countries have irreconcilable differences, the clubs are flooded with bad money, and yet… soccer can be a great cultural unifier. With the upcoming soccer/football World Cup in North America (US, Canada, and Mexico), I think the future for the sport is only looking up!

1. https://theprint.in/past-forward/cpi-was-first-communist-party-in-world-to-win-election-then-came-its-identity-crisis-and-fall/1028393/

2. Highly recommended. Sudani From Nigeria. https://www.netflix.com/title/81013200

3. https://www.reuters.com/sports/soccer/messi-apologises-psg-saudi-trip-2023-05-05/

4. https://soccer.nbcsports.com/2023/05/07/cristiano-ronaldo-signs-200-million-per-year-deal-with-al-nassr-report/

5. https://www.nytimes.com/2023/06/06/sports/soccer/karim-benzema-saudi-arabai-al-ittihad.html

6. Let me call it soccer here, just for the essay.