The Income Statement Plays All Week

In the first memo I told you a football team can lose on Sunday and its team company stock can trade up on Monday, and I asked you to sit with it. This memo is the explanation. The short version: because with InPlay's team companies there is an income statement, and that income statement is bigger than any one single game.

Start with what a team company actually earns. There are three streams. The first is performance income, payments the company receives that are tied to what happens on the field over the course of the season. The second is commercial income, the team company's share of business done off the field: advertising, sponsorship, the commerce that forms around a team and its following within the InPlay ecosystem (in-app advertising, website traffic, research tools, chat, and the rest). The third is revenue based on team company capital on deposit earning interest. One stream plays on Sunday. The others work all week.

Now the part that matters. A team company is a seasonal enterprise. It operates through a pre-defined period of time (i.e., the regular season), earns what it earns from all three streams, and when the season ends, it winds down and distributes what the enterprise actually made to its shareholders. So a share is not a ticket on any single game. It is a claim on a whole season of operations, every Sunday still to be played, plus every dollar of commercial activity still to be done, and any interest earned, while the price on the screen is the market's running estimate of that entire remaining picture.

I spent my career pricing exactly this kind of thing. A Treasury bond is nothing but a schedule of future payments; its price is what the market thinks that schedule is worth today, and the price moves when the estimate of the schedule changes, not when a coupon arrives. Coupons that everyone knows are coming don't move anything. What moves the price is news about the payments still to come and the conditions, like inflation, that will shape them.

One February payroll Friday, 2003, if memory serves, the number came out miles from what the Street expected, and the bond market fell off a cliff: three full handles or more before it was over. (A handle is 32 ticks.) Pandemonium in the curve, and here is the detail that mattered. The ten-year note initially led the way down, and for an instant the spread between tens and the long bond went weak, because the bond hadn't caught up yet. That lag was the whole trade. I sold 24 bonds at the stale price and covered the scalp two handles lower as the long end violently moved lower. By then the spread had whipped the other way, tens were into the teens strong against the bond, and I sold it there, a couple hundred, all told, and covered as the market found its level. Then I sold fives against tens at nearly ten ticks strong: same trade, same result. A few minutes, start to finish, and I had made somewhere around $85,000. I was fortunate and I was fast, and I want to be clear about which one mattered more: fortune put me in position to act; speed did the rest. But the real story is what the market did. It absorbed a number nobody expected and re-priced the entire United States yield curve in minutes. It didn't wait, it didn't ask, and it paid the observant traders for exactly as long as the adjustment took.

Now run an InPlay season back through that lens and the Monday paradox disappears. Say a team is expected to win eleven games. Those eleven wins, and the performance income they carry, are already in the price before the opener. When that team beats a weak opponent in week three, the market learns almost nothing; the win was in the price in August. The stock does what a bond does when the coupon arrives: not much. Now let the same team lose a game everyone expected it to lose, while its injured starting quarterback returns and looks like himself. The result went one way. The estimate of the remaining season, the games still unplayed, the income still unearned, went the other. The stock can go bid on a loss because the loss was old information and the quarterback was new information.

That is not a quirk of our design. That is what it means for a price to be attached to an enterprise instead of an outcome. The scoreboard tells you what happened. The income statement is about everything still to come, and markets only pay for what's still to come.

One more thing, because I'd rather say it than have you discover it: the three streams of revenue will not mature at the same speed. Performance income is contractual and starts with the first kickoff. The commercial side, advertising, sponsorship, the business that builds around a market like this, takes time to develop, the way it does for any young enterprise. Interest takes time to accrue. Early on, the income statement will lean on Sundays. I think the off-field side is ultimately the bigger story, but I'm telling you the order of operations up front.

Next memo, we go inside the machinery that keeps these markets tradable, what a market maker owes a market, and why I have strong opinions about it. You already know the morning those opinions come from.

Ownership, not outcomes.