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Why AAF investor sees long lifespan for new football league

USA TODAY SPORTS logo USA TODAY SPORTS 2/22/2019 Brent Schrotenboer and Kevin Allen
a close up of a football field: The AAF logo on the 25-yard line before the game between the San Diego Fleet and the Atlanta Legends. © Provided by USA Today Sports Media Group LLC The AAF logo on the 25-yard line before the game between the San Diego Fleet and the Atlanta Legends.

Do the math. After getting a new $250 million commitment this week, the new Alliance of American Football isn’t going away for a while, if it ever leaves.

Just ask the guy who is making that investment – Tom Dundon, the billionaire investor and owner of NHL’s Carolina Hurricanes. Even with the expected bumps that come with a startup pro football league, how much time does that buy?

“Five years, something like that," Dundon told USA TODAY Sports Thursday.

That’s more like a worst-case scenario. But because so many other minor-league pro football ventures have collapsed financially, the dark cloud of history still follows the AAF, whose business model is different than other sports leagues. A recent hiccup with payroll added to the perception that the league was in trouble just a week after it started.

To clarify the long-term outlook of this league, USA TODAY Sports addressed some of these issues here, based on recent interviews. The eight-team AAF enters its third weekend of play Saturday and Sunday, with games televised on the NFL Network and CBS Sports Network.

Was Dundon’s investment a bailout to “meet payroll?”

If the league was in trouble and Dundon merely was trying to keep it operational this year, he would not have invested as much as he did. In fact, using simple math, his $250 million is enough to meet roughly seven years of player payroll. AAF players make an average of $83,333 per year at a minimum. Multiply that by 416 players per year, and the league has about $35 million per year in minimum player payroll expenses. And if Dundon's goal only was to fund the league for a year, that’s not a very smart investment because he’d be throwing away money.

League co-founder Charlie Ebersol told USA TODAY Sports before the season that “you’re going to lose hundreds of millions of dollars before you get to profitability” when launching a new pro football league, because of all the upfront expenses.

"It's going to cost money to get it there, but it's a better investment than most in terms of venture capital,” Dundon said.

Then what about that payroll lapse?

The league gave the following response to USA TODAY Sports:

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“We had an administrative issue with the transitioning of our players and coaches to a new payroll system last week,” Ebersol said in a written response. “Paychecks were processed on Friday (Feb. 15), and due to the President’s Day holiday (Feb. 18), funds were not available in many player accounts until (Feb. 19).”

Citing unnamed sources, The Athletic reported earlier this week that the league was running short on cash, threatening its ability to meet payroll Friday, Feb. 15. It said Dundon’s commitment enabled the AAF to meet its obligations.

Dundon said he gave the AAF money on Thursday, Feb. 14. It’s possible that the league could have hit a funding crunch, and payroll might suffered an administrative delay. The AAF is a private startup venture that relies on seed money from investors to build a ramp for a planned takeoff to profit. Such ventures raise money in stages, and sometimes the funding doesn’t come in as planned.

USA TODAY Sports asked the league if planned investors had dropped out. Ebersol didn’t directly answer that but responded in writing, noting that startups traditionally raise money in a series of investment rounds. With Dundon’s commitment, Ebersol said the league is in a position to eliminate the need for fundraising and now “can solely focus on accelerating our growth.”

"It's been a little bit strange that people have focused in on the problem that I already solved," Dundon said. "We have the capital to do whatever we need to do to make this thing successful, and I strongly believe it's going to be successful."

What is Dundon thinking?

Dundon is a billionaire investor with a firm in Dallas that has funded companies in various industries, including Topgolf, the sports entertainment company. He is now chairman of the AAF and its biggest investor.

Why would he commit so much to a league that so far has drawn some crowds of about 11,000 in stadiums that seat more than 60,000?  For one, the venture’s business model is based on more than traditional sports revenue sources such as ticket sales or even television ratings. He’s still been impressed by the latter, led by an average of 3.25 million viewers for its debut games on CBS Feb. 9, when the AAF beat an NBA game at the same time, according to Nielsen data. Games on the NFL Network last weekend drew about 425,000 average viewers each.

Dundon said even if the league got half the TV ratings they are getting now "it would still be a pretty solid league."

"Other than if no one watches, there's not a scenario where I don't have enough money to build the league," he said

Investors also are banking on the league as a technology business. The league hired a former software engineer from Tesla and Lockheed Martin to develop proprietary technology that intends to process and deliver vast amounts of data in real time – something that could be transformative for sports gambling applications and other fields.

That’s why MGM Resorts International, the giant casino company, is an investor. MGM sees a big future in “in-game” sports gambling – using a mobile phone application to bet on the next play or current possession in a football game, for example. The faster this technology works, with more and better data processed, the more this tech product appeals to MGM and others that might want to buy it or license it.

Ebersol previously named other notable investors such as the Founders Fund and the Chernin Group.

“It was the technology that we liked,” said Scott Butera, MGM’s president of interactive of gaming. “(Dundon) very much likes the football side of it. It’s a good marriage.”

What does this tech have to do with a startup football league? 

They are intertwined. Ebersol said investors bought into the parent company which owns the football league and the technology. The AAF also is using football to develop and experiment with this technology.

Players are wearing sensors in games to provide useful gaming data about who’s on the field at the moment, what just happened and scores of other statistics. This conceivably is an advantage over competitors developing in-game sports gambling applications without sensors on live players.

“You need the games to scale the technology,” Dundon said.

This technology could be used in other types of sports gambling, not just football. In basketball, Butera said, the data even might show how a basketball player’s shooting percentage correlates to his heart rate.

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What is the potential risk and reward?

Costs will remain high for the league and might not be covered any time soon by conventional sports league revenues such as ticket sales and television rights. The investment from Dundon and others might need to keep it going until other revenues grow. One popular theory among armchair observers is that the NFL eventually might buy the tech and the league as legalized sports gambling expands into more states. It’s also possible that a competitor develops better tech, or that the tech doesn’t pay off as planned. The seed money won’t last forever if something doesn’t sprout.

Dundon said he's had numerous calls from people wanting to invest with him but doesn’t “need any capital.”

"There is no story here about the money it takes, and whether I can fund this league," Dundon said.

Follow sports reporter Schrotenboer @Schrotenboer. E-mail: bschrotenb@usatoday.com

This article originally appeared on USA TODAY: Why AAF investor sees long lifespan for new football league

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