Monday, August 9, 2010

The Impact of American Needle v. NFL on Sports Apparel Industry

Daniel Walsh of the Advertising Specialty Institute has a very thoughtful and comprehensive article on the litigation background of American Needle v. NFL and the impact of the decision on the sports apparel industry. The nearly 2,000 word article titled, "Reversing Field," is unique because it looks at the decision partly from the vantage point of the sports apparel industry, as opposed to offering solely an antitrust or sports business perspective. Here is an excerpt:

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Then came the 1980s and a fashion explosion. Sports caps and jerseys became hugely popular, thanks to fashion tastes and the rise of sports on cable television. “It just became a major, major thing,” [Jeff] Carey [American Needle's in-house counsel] says. “Sales went through the roof. We grew accordingly.”

So did others. New businesses jumped into the mix, and the sports leagues gave out licenses to more and more producers. Licensed merchandise flooded the market. The increased supply and competition drove down prices. In turn, that decreased NFL royalties from the sales, Carey says.

It also created “chaos,” according to Matt Powell, an analyst with SportsOneSource, which follows the sporting goods industry. Different firms would make products of varying quality, some better than others, Powell says. “The league really realized that this was a failed business concept,” he says. “Let’s put aside the legal side for a moment. This just wasn’t working, and the league had to do something about it.”

NFL owners voted in 2000 to move toward exclusive licenses, an increasingly common trend in licensing. Among the exclusive licensees was Reebok, which claimed the hat contract at American Needle’s expense After that move, NFL hat prices rose $10. “I remember American Needle had this huge catalog in like 2000,” says Dave Weintraub, chief operating officer of Pinnacle Promotions in Atlanta. “It was just beautiful. It was like 150 pages. Then they just fell off the map.”

License to Succeed?

Licensing is often the first and last word when it comes to professional sports merchandise. “You’re in with a license situation, or you’re not,” says Bob DeMasse, co-owner of Colorado-based APC, which once held exclusive promotional product licenses for the NBA’s Denver Nuggets, NHL’s Colorado Avalanche and Colorado Rapids of Major League Soccer. “You’re obviously a major player if you’re in, but if you’re not, there obviously are no options.”

But, while licensing may seem like a golden ticket for a few lucky distributors, it can also be a millstone. For one, some leagues offer preferred-bidder status to companies that make up-front payments. Preferred status allows distributors, for example, to be 5% higher than the next closest bid and still win the contract. The problem is those up-front fees can run into the tens or hundreds of thousands of dollars, depending on the size of the contract being pursued. These fees and licenses can outweigh almost everything else.

Tim Lavin thought his NFL ties would help secure business for his company, Mad Dog Promotional Products. The former University of Southern California starting fullback had handled security for the NFL’s San Francisco 49ers and Oakland Raiders, as well as the Golden State Warriors of the National Basketball Association, so he had the contacts. As it turns out, it wasn’t enough.

“The tricky part is, even if you had $200,000 to shell out, I find with so many people involved, there’s heavy bidding,” Lavin says. “Your profit margin is so low to begin with that we’d be lucky to get a 10% to 15% markup. Then if you’re paying 8% to 9% to the NFL, the profit margin is very low.”

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To read the rest, click here.