KOBE BRYANT OR THE CASE FOR A PRENUP

Celebrity marriages don’t usually have stellar track records, so news of a divorce may be surprising but not unexpected. However in the case of Kobe and Vanessa Bryant, such news is sure to make a splash. The main issue here is not the divorce in itself but the fact that Kobe did not have a prenuptial agreement in place. In financial planning, clients are taught to protect themselves against the 3Ds (Disease, Death or Divorce) as they are the surest ways to financial ruin. For celebrities, Divorce is the main culprit and this Bryant case is bound to be costly.

First of all, Kobe is one of the highest basketball players in the league and according to Forbes, he racked in $53 million last year with $28 million in off-court earnings. His net-worth is estimated to be in the $300 million range and he is still owed almost $80 million by the Lakers over the next 3 years. Given Kobe’s age (33 year old) his earning potential could be in the several hundred million over the next few years.

In the absence of a prenup and based on the state of California community property laws, Vanessa could be entitled to upwards of $150 million. The question now is, should she be entitled to that much? A supportive wife is an invaluable asset to any successful man, but Kobe was already established by the time they met. After 10 years of marriage and two children, the numbers amount to $15 million a year or $75 million per child. How much of Kobe’s wealth should be attributed to his wife? We may never know but I doubt that her contributions outweigh or even equal his. His own drive, determination and basic raw talent led him to where he is.

The future will tell how much Vanessa eventually ends up with and if they even go through with the divorce. The sad part is that all this potential drama could have been avoided had Kobe listened to his father and signed a prenup. This is an expensive lesson to be learned and hopefully other wealthy individuals will learn from his mistake. Marriage is a lovely institution but over 50% of unions end in divorce. Wouldn’t it make sense to insure a fair level of protection for the wealthy party just in case? After all, we take the time to insure our vehicles even though we may never have an accident. We insure our homes even though we might never be the victim of a break-in or a fire. So with odds of a divorce at 1 out of 2, this should be a no-brainer.

Lady Gaga or the cost of Popularity

Lady Gaga has taken the music world by storm since she burst onto the scene in 2008. Since then, she's transformed into one of the leading touring acts worldwide, with her Monster's Ball Tour grossing over $125 million. Those numbers reflect a successful run, but in an article with the Financial Times1, she actually revealed that she ended up almost $3 million in the red. How is that even possible you say?

The reality is that a tour of that caliber is a major financial undertaking. On a typical tour like Lady Gaga's, over 100 individuals have to be on payroll: musicians, dancers, production staff, and dozens of crew members. With weekly salaries in the $1000-$6000 range and daily per diem at $45 a day, bi-weekly payroll usually tops $250k. This army also has to be housed in hotels in every city, with some of them staying in Luxury hotels with the celebrity. Given the frenetic pace of a world tour, one has to keep in mind that these expenses incur even on off days in between shows. Transportation (tens of tour buses and trucks, even charter planes sometimes) catering on show days also increases the bill. However, the biggest expenses are related to the stage performance itself. Lights, sound, stage rigs (elevators), special effects and other tricks require a couple of hundred thousand per show. On a 100+ cities tour, you do the math.

One little known fact is that depending on the deal with the promoter, the artist is actually responsible for most of the aforementioned costs. A promoter will promise the artist a guaranteed fee (says $500k a show) and may even throw in a small weekly allowance to cover certain costs (i.e. $10k a week for lights). This in essence skews what the artist him or herself is really making. From experience, these costs run well into the 50% range, thus making actual income half of the gross. This is why efficient tour accounting is key as those expenses can usually run out of control and push those costs in the 70% range. Horror stories range from hundreds of hotel room reservations that could not be cancelled due to scheduling errors, to artists requesting more and more elaborate costumes or special effects regardless of costs.

Finally, commissions have to be paid to the various players that help the tour happen. A booking agent will probably get 7.5-10% of the guaranteed gross. Management and business management respectively amount to 15% and 5% of gross revenue. In Lady Gaga’s case, let’s say that the above commission rates apply. This means that the booking agent made $9.375 million, the management made $18.75 million and the business management $6.25 million, for a total of $34.75 million in commissions. Assuming that the reports of production extravagance that Lady Gaga allegedly required2 pushed the expenses to 75% of gross, she would have netted $31.25 million on $125 million, which is about 3 million less than the commissions she would have owed. There is an internal industry debate as to whether these commissions should be calculated on the real income the artist made, which is after expenses are deducted.

Touring is one of the last areas where musicians truly make money. It is therefore important that the ship be run tightly and that costs be controlled. What’s the point of going on a grueling worldwide tour to come back deep in debt? Luckily Lady Gaga can rely on the additional millions she makes from publishing and endorsements. So the next time you hear about a high grossing tour, just know that there might be more to the story.

Sources
1 http://www.nypost.com/p/pagesix/gaga_monster_debt_GcmQx3CLmuTAOSJepo3fAJ
2 http://www.azcentral.com/thingstodo/music/articles/2010/01/06/20100106lady-gaga.html