Unwinnable Games

LIV, PGA, and Innovator's Dilemma

The past couple of weeks in the golfing world have been a whirlwind. The PGA tour, once thought to be one of the most admirable business models in the sports world, has, for the first time in several decades, a legitimate challenger. The LIV Tour, a Saudi-backed golf league had it’s first event a couple of weeks ago, just outside of London, and will be hosting it’s first American-based event in Portland next week (June 30th). This is significant not because it’s the first golf tour to pop up and challenge the PGA Tour since it’s founding (it’s not), but because it’s the first one that has shown an ability to attract some of the world’s top players, such as Dustin Johnson, Brooks Koepka, Bryson DeChambeau, Patrick Reed, Abraham Ancer, Phil Mickelson, and Oliver Fisher (a real person and not a name I just made up, who is ranked 979 in the world and playing on this tour).

The implications of losing players to a rival league are endless for the Tour. But it’s important to remember that, while the PGA Tour has effectively always been the leading sports league in the game of golf, its grip on the sport has not always been as tight as it was pre-LIV. In the 1980’s and 90’s, the European Tour was on the rise, and European-born stars, such as Seve Ballesteros and Nick Faldo showed that there might be some contention for the world’s top golfing tour. Then, in the late 90’s, Tiger Woods came along, and helped the PGA Tour put all challengers into the dirt. I could regale you with how important Tiger Woods is to the PGA Tour, but I don’t think substack allows that many characters. Instead, read this piece from the folks over at NoLayingUp about the Tiger tax and you will get the picture.

However you slice it, Tiger made the Tour what it is today. There has always been some consternation about life post-Tiger on Tour, but I don’t think anybody expected things to change like this. Most Tiger-related hand-wringing had to do with a hypothesized steady decline in interest overall. At one point, after Tiger’s scandal in 2009, there was a literal press conference from the Tour’s commissioner about the Tour “surviving without Tiger”. And that had nothing to do with Tiger being out for good, just for a couple of months. Many feared the sport would just not have the same popularity without its biggest star and that folks would stop showing up to tournaments and tuning in on TV.

Instead, the Tour’s 2010’s saw an increase across the board in revenue and new TV contracts. Purse sizes grew steadily and are now significantly ahead of where they were in 2009 (which was significantly ahead of where it was in 1996). The Tour’s TV contract value increased to $700 million annually in 2020, up from $400 million in the previous contract, a deal signed in 2013. In 2006, at the height of Tiger’s powers, the contract was renewed for $212 million per year, another significant increase. While some of the credit for the Post-Tiger growth is potentially due to Tour leadership’s ability to negotiate, most of it (99.999%) is due to the shift in the TV Media landscape. Live television has become the last great bastion of advertising spend, resulting in crazy contracts in the NFL, the NBA, even the MLS.

Yet, the Tour, with all it’s strengths and growth, faces a new Rival, poaching well-known names from its ranks. As a result, it might appear as though the PGA Tour is facing a classic Innovator’s Dilemma. In this scenario, the new entrant is the LIV Tour, with a brand new format and structure. The Tour is hamstrung surrounding innovation because it has a reliable product (four day stroke-play events) that produce reliable results for interested parties (sponsors and TV rights holders). It has grown precipitously over the last several decades and any change in product could potentially harm the current cash flow situation. But now, the barbarians are at the gate, and the PGA doesn’t have a ton of tools in the chamber. It needs to change and act quickly.

But the trick with this dilemma is that LIV Tour doesn’t necessarily have a great product. It’s playing an uncompetitive 54 holes with a lot of no-names and a handful of big-time players. It has introduced a bunch of interesting wrinkles into the game (some might call them gimmicks), like a shotgun start, a team play element, more international venues, and the like. But the biggest wrinkle, by a landslide, is the money. And importantly, LIV is not currently taking market share from the Tour, but instead poaching resources. This is almost the inverse of an Innovator’s Dilemma, where the upstart is stealing the resources from the incumbent, not through organic growth or market capture, but instead literally just buying the players.

So if this isn’t a real innovator’s dilemma, what is it? And what should the PGA Tour do? What could it do? Does the PGA tour have enough cash in reserves to fend this upstart off? What’s more, it doesn’t appear that the LIV tour has any semblance of a business model. It is currently burning cash at an unprecedented rate and doesn’t have any traditional revenue streams: no sponsors, no tv contract, very little fan revenue. Sure, a lot of startups start out not making any money, but this takes that to a whole different level.

The PGA Tour is in an arms race where it’s opponent has way, way, way more arms. The LIV tour is not a competitor of theirs because that would imply that the LIV tour has something to lose - which doesn’t appear to be the case. Despite being a 501c(6), the PGA Tour is still motivated to make a ton of money for its players. The LIV tour is motivated to… do what exactly?

That’s the problem the PGA tour is facing - an unwinnable game. The same happens to startups and BigCo’s alike. It’s important to recognize that as it’s happening in real time, because trends might be distorted, and fads might be chased. You might think that golf is suddenly a much more lucrative enterprise, as you see folks like Graeme McDowell get cut a $20 million check for doing not-a-whole-lot. But the reality is that you have entered into the industry funhouse, where reality and appearance don’t really line-up.

The same happens in tech as well. A founder might think, wow, the ridesharing model is going to take over the world, and as a result, they start a company that is Uber-for-X (like buying a home, which is a real startup I worked for in 2014). But they then find out that ridesharing is not as profitable of a model as it appears, and that a lot of it has been propped up by “venture money” (interestingly enough, largely financed by the Saudi Investment Fund as well). Bust goes a lot of Uber-for-X businesses.

Or maybe a founder thinks that co-working is the way of the future because WeWork has exploded in size, dollars fundraised, locations, valuation, etc. As a result, they launch their own co-working space. They go on to raise capital at SaaS-multiples (or crazier), and then you realize that really you are just in a pretty tough commercial real estate segment and that maybe co-working is a cool new trend, but not the radical change to work many thought it would become. Suddenly that commercial real estate loan they took out with a personal guarantee doesn’t seem like such a safe credit.

The point isn’t that these fads are pure nonsense - most of the time, they have serious legs. Ridesharing is a real thing. Co-working spaces should exist. But the problem is that the potential get’s overblown and money gets thrown at them without considering realistic expectations. A former colleague of mine use to always ask me “so how do we eventually get to the cash flows to back-up that valuation?” And if the response to that question is something like “we are going to need the population of the Earth to double in the next 30 minutes”, then you might be playing an unwinnable game.

Unfortunately, a lot of founders, investors, and employees get wiped out when these unwinnable games go un-won. When the hype goes away, realistic business measures still need to be practiced. Cash flow still needs to be generated. Growth still needs to be achieved. If, somehow, that message gets lost, then things can get ugly. But if you keep that in mind through all the hype, you might come out on the other end with minimal damage.

But what to do in the meantime? What is the PGA Tour supposed to do? That’s hard to say for an organization such as this. But ultimately, it is an entertainment product. It’s cash flows are because people enjoy watching it on TV and going to live sporting events. If it focuses on providing the best players in the world great opportunities to play for large sums of money alone, things could get dicey. It needs to do everything in its power to keep those players on tour, of course, but it needs to also focus on what generates interest in the tour in the first place - a great entertainment experience. While the LIV Tour continues to flounder in that regard, the PGA Tour needs to make sure that it’s entertainment side of the house is second to none. That’s fundamental, of course, but now is the time to focus on the fundamentals.

[As an aside, if you are interested in learning more about the Tour’s full business structure, highly recommend the breakdown by Neil Schuster of NoLayingUp found here.]