Even If NBA Teams Are Rich Men's Toys, Profitability Is A Reasonable Aim

Just because NBA owners treat their teams like vanity projects doesn't mean they shouldn't be able to profit off of them, too.

Malcolm Gladwell is the latest great (North) American thinker1 to join the NBA lockout, writing a piece for Grantland on the psychic benefits of owning a franchise.2 The essay makes the point that virtually every writer has made, myself included, and that point is that the owners are being pretty ridiculous. Gladwell, of course, does it in typical Gladwellian style, making a rather pedestrian point and ultimately bringing it around to make it look profound. It's a wonderful skill.

In this case, Gladwell's thesis is that sports franchises are more like opulent toys or status symbols than smart investment vehicles. While I'm glad he's bringing that bit of truth to a wider audience, it's hardly news that this is the case. Gladwell quotes the owner of an Italian soccer team who admits as much; he could have just as readily quoted Mark Cuban, who seems to make this point clear in every waking hour. The axiom goes something like ...

If you can't afford to lose money on your sports team, you can't afford to own a sports team.

Owning a franchise in any sport is a vanity project; in the NBA, crank that reality up to 11. Basketball's a showman's game, and few NBA owners hide from the cameras that scour courtside seats for celebrities. So when Gladwell talks about the psychic benefit of owning a team, the glamour is a part of it. So is the opportunity to be a civic hero; ask Clay Bennett. (Please, for the love of God, do not ask Howard Schultz.) For some, to own a sports team is -- as Gladwell describes with respect to Dan Synder -- to gain the opportunity to act like a reckless buffoon without risking your main business. Every owner will have a different psychic benefit, and a different balance between economic and psychic benefits. It all makes complete sense.

But in the end, Gladwell has so embraced this idea of psychic benefits as drivers of sports team ownership he ignores that these psychic benefits are just part of the equation.

The NBA is not filled with sentimental gloryhounds. There are some, to be sure, but most of these men -- yep, every last majority owner is a man -- are also in this to make money. And many do, as Gladwell notes: teams usually sell for more than they are initially acquired for. What Gladwell is getting at is that the economic benefit derived from owning an NBA team is found in rising team values, which escalate over time. Here, he compares the market for NBA teams to the art market:

Pro sports teams are a lot like works of art. Forbes magazine annually estimates the value of every professional franchise, based on standard financial metrics like operating expenses, ticket sales, revenue, and physical assets like stadiums. When sports teams change hands, however, the actual sales price is invariably higher.  

The first example Gladwell cites is the Detroit Pistons: Gladwell notes that Forbes said the Pistons were worth $360 million, and the team sold for $420 million. He doesn't mention that one year prior to the sale, Forbes pegged the Pistons at $479 million before correcting the figure downward to account for the local economy and flagging attendance. It's unlikely that the Pistons actually lost $119 million in value in 12 months. It's more likely that once the Pistons went on the market, Forbes realized it had overrated the team's drawing power in the current environment. When Forbes butchered the valuation, they took off too much. Given that Forbes has no access to team's books, it's not a surprise that this would be inexact science.

Gladwell also curiously leaves out four other recent sales: the Nets, Bobcats, Sixers and Hawks. Bruce Ratner lost money on the Nets. Robert Johnson lost money on the Bobcats. Forbes itself reported the Sixers sold for around $300 million, under its valuation of $330 million. Forbes has also reported that Alex Meruelo may have purchased the Hawks this summer by simply taking on the seller's debt obligations.

I don't bring up these examples to pick nits with Gladwell's theory; these other, ignored instances just help color the reality of the NBA right now. Look at the teams that sold above Forbes valuations again. What do they have in common? The sellers had owned the teams for a good chunk of time, 15 years for the Warriors and more than three decades for the Pistons and Wizards. The Sixers had been in Comcast-Spectator's hands since 1996, but the Nets, Bobcats and Hawks were all flipped since the turn of the century. The fact that each of those three owners lost money or broke even on the investment, used red ink to spit out a net operating margin virtually every season and sold for less than what Forbes estimated ... that proves the point that the finances of owning an NBA team are not what they used to be.

If team values aren't rising like they used to, owners need to shore up the books and ensure they can turn a profit year-to-year. Team values clearly aren't guaranteed to go up unabated, which leaves only operating margin as a vehicle for return on investment. And while psychic benefits will no doubt continue to play a role in team ownership, there's no reason that economic benefits can't also play a role going forward. There's no reason the 30 divisions of a company with $4 billion in annual revenue can't be profitable, even if they get the biggest kick out of watching their beautiful teams play basketball. It's in the best interest of the players, the fans and the owners that teams make money. To ask for sustainability isn't a high crime; the way the owners have gone about it is what deserves our ridicule.

---

1 Gladwell is Canadian.

2 ENDNOTES 4 EVA. (Okay, I'll stop now.)

Star-divide

The Hook is an NBA column that runs Monday through Friday. See the archives.

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