There was a period in 2021, right as the financial stimulus was starting to run out and before inflation ran wild and the FED raised interest rates, where wealthy people began unloading massive amounts of various assets at the top of the market. Chamath Palihapitiya, noticed this movement in the market and sold huge amounts of stock. He reasoned on All In that if the smartest people in the market were selling, maybe that should be an indicator of what you should be doing with some of your assets.

In hindsight, this was the perfect time to sell your stocks, crypto, etc., as the market has been a massive downtrend since that time. Despite the circumstances that made selling so compelling at this time, one thing didn’t quite make sense to me, which was that Chamath sold not only a huge portion of his securities portfolio, but also his stake in the Golden State Warriors.

Even when you are in full-on, fire-sale mode, this sale still didn’t make sense to me. A sports franchise isn’t a trade, it’s a ticket to the most exclusive club of the ultra wealthy. You don’t sell it just because it does a 10x and you foresee a recession. Sports are recession proof, the TV rights keep getting more and more lucrative, the player contracts more and more insane.

Then I started to think, why are these sports franchise so seemingly rock solid as an asset class? If Chamath is so weary of the economic conditions that he sells his interest in his team, why is someone else willing to pay potentially 8 or 9 billion dollars for the Washington Commanders?

And what makes these franchises so different than any business? To me the answer is clearly network effects, a phenomenon whereby the value of a good or service increases based on the number of users. Eventually, some things reach an escape velocity where they became a default option simply due to network effects. The best example may be the QWERTY keyboard, a design originally created to intentionally slow people down when typing to avoid jamming their typewriter. This layout was intentionally designed to be poor performing, and yet it is still the default today due to network effects. Everyone knows it, everyone uses it, nobody wants to switch.

Network effects are just as potent to a sports franchise. Being a fan is more than being a loyal customer. As an owner of a sports franchise you probably have more customer loyalty than just about any other business possible. That is the enormous power of network effects. 

Whoever buys the Commanders is simply not worried about a competitor taking their market share. Nobody is worried that the XFL is going to overtake the NFL the way that Google did to Yahoo. It’s simply not fathomable. 

This brings us to the LIV golf tour. The LIV tour really presents the ultimate experiment in pushing the limits in overcoming the network effects of an incumbent sports league. The people who launched LIV where very smart about the approach they took, which was mainly to lower the barrier of the walled garden that is sports fandom. People know the tour, they know the golfers, they know the courses, they know the tournaments. So how did LIV go about creating the best possible chance of success? They made their tournaments free to view online on a multitude of platforms. You simply aren’t going to compete on Network television so you have to making viewing as easy as possible during these early stages of trying to capture some modicum of market share. 

The next biggest thing is the golfers. I think this is where LIV miscalculated. They assumed poaching away Dustin Johnson and Cam Smith would be the equivalent of the XFL taking away the Dallas Cowboys or the Kansas City Cheifs.

Unfortunately for LIV, it doesn’t appear to be the case. From personal experience, yes I have golfers I root for, but I don’t have any devoted fandom that is going to dictate my watching habits. The only person who would have been capable of doing that is Tiger Woods, and at this point his playing career is over. Whatever LIV has spent on talent, they could have pooled all of that on Tiger 10 years ago, and filled the rest of the field with Korn Ferry Tour players and they may have had a shot to compete with the PGA. Outside of Tiger, that just isn’t possible. As much as I love Spieth, my habits and familiarity with the PGA tour just outweighs that. I would rather watch two new young and up and comers compete in the tournaments I know, in the format I know, then watch Spieth and DJ play in a team format in some unknown tournament that has no history and no legacy attached.

Consider the power of network effects. Even if LIV is a superior format, has superior golfers, I suspect it will ultimately be a failed experiment in trying overcome the network effects embedded in the business of athletics.