Is the Sports Card Industry Dying?

Let’s Keep it Dry For a Second
Licensed card companies each year have to pay a royalty to sports leagues (NBA, MLB, NFL, NHL) and/or a players association. Royalty payments to the league are in the 10%-20% range off sales. A players association license varies, but it’s lower than what the league charges. You can’t make fully licensed cards without the dual license.

For baseball, the largest market, Topps has exclusive rights in the trading card category from MLB Properties and has the companion MLB Players Association license. Competitor Panini America also has a license with the MLBPA. Because Panini doesn’t have the MLB Properties license, they can’t use MLB logos and team names on their cards. They can show images of players but MLB licensed logos have to be ‘airbrushed’ out on player jerseys and hats. Companies like Topps and Panini’s entire business revolves around having a license from a sports league or players association. Imagine the EA Sports “Madden” video game without the real players or NFL teams. Think they would sell many games?

Biased Truth?
MLB doesn’t need trading cards to rake in money, at all, period, end of story. It sounds funny to even write that. Much of MLB’s revenues are tied to television rights and soft goods. For licensed trading cards across all sports, business has slowed tremendously since the glory days of the 1990’s. What was a billion dollar business, sales have shrunk by a huge margin. In 2012, CBS employee Armen Keteyian wrote a story and produced a video that struck a nerve with many involved in the industry. The crux of the piece was that the good years were long gone. Keteyian spoke with dealers, an author, Mr. Mint and others in his video. Each person echoed the sentiment that the industry was fading.

In response to the CBS story, Panini posted on their blog saying: “Frankly, the piece was light on investigation and heavy on sources seemingly hand picked to validate a preconceived conclusion: The collectibles hobby is dying.” Panini claimed the industry was far from dead and cited examples. One being this new HRX video technology. Here is Panini’s justification:

“Oh, and then there was the report last summer from FOX News on Panini America’s pioneering HRX Video Trading Cards. Both the CW 33 and FOX News reports would seem to indicate an industry that is not dying at all but transforming for a new generation.”

Funny thing is, Panini didn’t pioneer the technology, they just paid a vendor for it. I recently put in a phone call to the company who made the HRX video cards for Panini. The employee said they no longer had a relationship with Panini, but he asked if I wanted my own custom HRX card. I hear crickets coming from the Dallas, TX area… or maybe they are busy scanning QR Codes.

Another point Panini made in response to Keteyian was: “The late 1980s/early 1990s was the boom time with mass produced product that held no value. The category is now more refined and cards hold secondary market values. Cards sell for big money.”

I guess what Panini failed to mention were that packs in the 1980s and early 1990’s were sold for less than a dollar during that time. Boxes of cards produced today have wholesale prices in the hundreds, even thousands of dollars. The cards should hold their value if you increase the price 1000%. C’mon guys.

Each year the MLBPA files a LM-2 with the Department of Labor, which basically outlines all the royalty payments they receive. The final numbers for 2013 are due out in April 2014 and were not available the time this was originally written.

The single biggest revenue stream disclosed in the filing for the MLBPA is the video game segment. Annually, Take Two Interactive’s MLB 2K franchise is a bigger revenue winner for the MLBPA than the entire trading card category. In 2011 TTWO paid the MLBPA $15.4 million, and add MLB The Show (Sony’s) payment of $3.52 million and you get $18.92 million. Almost double what Topps paid in 2011; keep in mind it was Topps’ best year from the numbers I have.

The MLB 2K game is popular, but no where near as hot as other video game titles such as Grand Theft Auto, Madden or Call of Duty. I wonder how many people in the sports card industry realize a 10th tier video game is a bigger money winner for the MLBPA than the totality of every baseball set Topps makes during an entire year.

Let’s take a look at the royalty payments made by sports card companies to the MLBPA from 2005-2012. The figures are in millions. The MLBPA gets a % of every sale using MLB players. So, in effect, you can kind of tell the total revenue a particular category generated for the PA.

Also consider this revenue gets split up to all the members of the players association. The director of the MLBPA makes over $1 million a year. At the end of the day, the cards are pennies in the pocket considering the salaries some players are able to earn.

If you’re in the Topps camp you can spin the numbers in your favor. In 2005, Topps lagged behind Donruss and Upper Deck in MLB card sales. Just six years later, they are the only ones left standing with a MLB Properties license. If for some reason you only care about Topps and loathe every other card maker, the numbers are a thing of beauty. Private equity ownership Madison Dearborn Partners successfully eliminated any and all serious competition. Even before MDP bought Topps in 2007, the then current Topps management correctly predicted the fall of Upper Deck during a quarterly conference call with investors. It was almost like Babe Ruth calling his shot.

Put a blindfold over the card company names, and just look at the total payment to the MLBPA. It shows a less glorious story. Since 2007, the total royalty payments to the MLPA have declined, and fast.  In addition to the falling revenues, collectors of cards have less choices starting in 2006.

Fleer was the first to go when they ceased operations in 2005. To show you how fast these card companies can fold up shop take a look at this timeline for Fleer. Note how quick they went broke.

• September 9, 2004 – Fleer Signs Dwyane Wade to an Exclusive Spokesman Deal

• January 21, 2005 – Fleer Sponsors Card and Collectibles Area at NBA Jam Session

• February 24, 2005 – Fleer Signs Charles Barkley to Autograph Deal

• May 31, 2005 – both Fleer/Skybox International, LP and Fleer Collectibles, LLC has ceased all operations.  The assets of both companies have been assigned to Warren J. Martin Jr., an attorney with Porzio, Bromberg & Newman, P.C. in Morristown, NJ. Martin specializes in bankruptcy and insolvency matters.

Donruss lost their MLB license starting in 2006, and hung around long enough to sucker Panini into purchasing them in 2009. Would Donruss have gone broke? Probably. Can I prove that? Nope. The fact that the MLB didn’t renew with Donruss should speak volumes. It also tells you all you need to know about the sports licensing game. A card company needs the license from the league WAY more than the league needs the card company. I mean it’s laughable. The league can cut you off at any moment. That should be obvious. Wake up. These card companies are small fish and I treat them as such. They can be replaced or eliminated at any time.

The Upper Deck story is far more complicated and somewhat sad. Glory days at the now vacant 246,668 sq/ft company headquarters were when Richard McWilliam (October 20, 1953 – January 5, 2013) would drive his Bentley on the sidewalks of the property. Upper Deck was ballin’. Somewhere along the way Upper Deck, and certainly McWilliam lost their juice. Former employees will recount tales of days they were worried their paycheck wouldn’t show up on time. Upper Deck missed scheduled payments to various leagues including Major League Baseball. This all led to some ugly legal battles that have left Upper Deck in ruins. The company will probably go broke or get purchased in a similar way as Donruss. Just give it some time, it could go at any moment.

The Bad Economy

A favorite excuse of card company execs is to blame slacking sales on the Housing/Stock Market/Fake Rich crash of 2008. It’s such a cop out. I remember getting on ShareBuilder during the 2008 stock market crash and it was like a 75% off sale at Blowout Cards. The market has rebounded to record highs, and when I go to buy stocks now, I wonder where the heck my coupon code is.

Ok, so you say the stock market rebounding is a poor example. Regular Joe Blows don’t have the money anymore to buy sports cards. I can see that. Ok, why haven’t the card companies done anything about it? Why are box prices continuing to soar in price? Whose fault is that? I don’t run Topps or Panini. I can’t change their business. That’s their role. If they are pricing out a bunch of potential collectors, maybe they should change the business and configure products differently. Or maybe they are just trying to hit minimum sales targets set forth by the league?

So you say it’s hard to find these cards in stores? Whose fault is that? Hey Topps, Panini. Pick up the phone and make some calls. That’s what you do when you have a product to sell. Hustle. Hobby shops don’t want to stock your product? Call and schmooze them. There are lot’s of regular sports stores, about 5 of them in my local mall. Call them and see if they want to buy some product to put on the counter. With all the other expensive crap these stores have, a pack of Panini Prizm for $5 appears cheap.

Funny thing is. I had a sports card store from 2006-2008. Wow. Talk about bad timing. Epic bad timing. I owe close to $20,000 on a loan I still pay for. In February 2013 I wrote an article on the top 5 reasons I failed at the business. I didn’t blame the economy, I looked in the mirror. That’s what you do when you fail. Don’t make excuses. There are card stores still open today that weathered the 2008 crisis. Why couldn’t I? I failed, it’s okay to admit that and learn from it.

The irony is that I never made money in the sports card game until after the 2008 economic downturn. Always a net loser before 2009. So the bad economy thing, just doesn’t resonate with me. If your business model sucks, change it or go broke. Real simple.

Go Ahead, Make an Excuse Why Not

Why don’t these card companies authenticate their own cards? No I’m serious, like PSA & BGS would but don’t even grade them. Charge some money, make a margin. I can imagine people buying a box, then sending the cards to Topps to “authenticate” them. Such a sick greedy business, I love it. Easy sucker money. Look how easy the grading money has been for PSA & BGS. Collectors Universe (PSA) does quarterly conference calls about raking in money from coin and card grading. Why do card companies let all the good business models go to other outlets they have no piece of?

Topps made failed attempts at running their own marketplace: The Pit and eTopps. Seems like fan boys would be slurping at the opportunity to list their cards on the “Official Site to Sell Topps Cards”. There are way more people who want to sell cards than buy them. Why don’t you grab some of that money? COMC has, and shoot, eBay sure has. I find it funny that the #1 place to buy and sell sports cards, eBay, has absolutely no ties or obligations to the industry. I look at it like this, these card companies need to find a way to continue to get revenue off sets they’ve produced long ago. eBay and COMC sure have proven a business model, I guess Topps and Panini will just let them take all the money.

Conclusion

Topps: Owned by private equity. When is the last time you’ve heard a statement from ownership? Do they have a CEO? Research a little bit what private equity does when they buy a company. Also, look into the few years at Topps before the 2007 sale to MDP. The plan all along was to eliminate competition, seek exclusive licenses and run a lean business. These guys don’t care what you get out of your packs. If they did why would you have to wait years for redemption cards to be exchanged? Kids in their 20’s are product developers on the famous Bowman brand. How much do the cards really matter to the ownership at Topps? If you like new baseball cards, you’re forced to buy Topps and that’s just the way they like it.

Panini: Who knows what will happen here. Could they go broke like Upper Deck and Fleer did? Yeah, that’s probably the way I would lean. What are they doing different? I almost feel like they wish they had the culture and buzz Upper Deck had during the glory years. Sad thing is, Panini is just 20 years too late.

Upper Deck: When it gets to the point where employees are worried they won’t get paid….. well. That does hit a soft spot. Hopefully they are able to sell the assets they still have before it gets to be game over.

Is the Industry Dying: I’m probably not the best guy to ask. The business aspect of the hobby gets my juices flowing, not sparkles in Series 1. I’d rather read through the old Fleer bankruptcy files then open a pack of cards. I don’t think the business of making cards like Topps and Panini is a good model. Real bad actually. They not only have to get a license (where the card company is the *****), but they then have to get separate autograph deals with players, secure game/event used items. Shoot, they don’t even print and manufacture the cards themselves. That’s all outsourced. Have fun with that business.

That doesn’t mean it’s all bad. Over the years billions of cards have been printed and there are people who want them. If you have Michael Olowokandi autographs, then you can probably find me. It’s the accessory businesses where you can find success and there are plenty of examples.

“Service” type businesses have proven to be a good way to connect collectors and keep the industry alive, primarily online. A platform to sell cards like COMC. A website or forum where information is shared or discussed. BGS and PSA have got to be making gravy train type money. I shouldn’t have to tell you how much money eBay and PayPal make servicing sports card buyers and sellers.

While the service industry can thrive, the retail end can be brutal. People ask me quite often if they should open a sports card store. I reply: are you crazy? I actually think most buying and re-selling models in the sports card world are bad ideas at the moment. Things would have to dramatically change for me to sign off on them. Most are real low margin, lots of work. No barrier to entry. Anyone can open a store. Anyone can group break. Anyone can rip and flip. The odds of you making real money is slim. Good luck.

This thing isn’t dead. There are dead business models but you better not say anything about it.