Just because NBA owners treat their teams like vanity projects doesn't mean they shouldn't be able to profit off of them, too.
Aug 23, 2011 - 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.
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2 ENDNOTES 4 EVA. (Okay, I'll stop now.)
The Hook is an NBA column that runs Monday through Friday. See the archives.
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Totally agree
"Slammed that hoe on the counter like I just got 35 on the domino table!!"
Sherrod Harris
by AlDe2356 on Aug 23, 2011 10:18 AM EDT reply actions
There is good reason to believe, however, that sports teams are generally structured to lose money on a year-to-year basis, that’s always part of the spiel when they come calling to local governments for subsidies to keep the team in town.
Owners generally have other businesses where the real money is made; the team can instead be the loss leader. If you own Company X, as well as the local pro sports team, for example, you can provide Company X’s employees and/or clients with perks (access, tickets, etc.) at a cut-rate discount, or even for free. Or Company X could be a media outlet, for which the team is a critical chunk of the content. There are lots of ways for owners to make their cash while showing a bottom line loss at the team level.
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by Dirk Hoag on Aug 23, 2011 10:35 AM EDT reply actions
Great Rebuttal
I know I tweeted this to you as well, but while having a conversation about the Grantland column yesterday, I mentioned that Gladwell’s Sale Price – Forbes Valuation = Psychic Benefits formula was entirely too simple. Glad someone called him out on it, nicely done.
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by GeauxHornets on Aug 23, 2011 11:26 AM EDT reply actions
On the other hand...
…Gladwell had some compelling points re: why an NBA team is not “just like any other business” and is emphatically not operating in a free market.
Although his numbers for public financing of NBA arenas are probably low.
by occassia on Aug 23, 2011 1:47 PM EDT reply actions
You're wrong Tom
People lose money everyday in making bad investments and don’t get to demand a refund. Sports is like entertainment and movies flop everyday in Hollywood even with great actors.
Investing a lot of money into something does not entitle you to make a profit.
And it’s surprising how many of these new owners don’t understand that the value of a franchise is in the long-term equity. Hell, you can write off 100% of the entire purchase price over 15 years through the RDA exemption. You build more equity by WINNING.
If you’re looking to flip a quick buck by owning a sports team, you’re stupid from the start.
The Nets just doubled their local TV revenue, so cry me a river about the owners losing money. These guys get tax breaks, exemptions, public funding just like big corporations. They’re no different than GE
by HoopsSEO on Aug 24, 2011 5:29 AM EDT reply actions
"Investing a lot of money into something does not entitle you to make a profit."
No, but the issue isn’t so much that they’re asking for a refund—it’s that they’re trying to crush the players in a collective bargaining negotiation. And they are absolutely entitled to try that, even if everyone else in the NBA ecosystem is made to suffer for it.
A big problem for me is that we don’t know the true required IRR for owners, and we don’t really know the IRR they’re realizing either. Annual cash flows are part of it, eventually selling the teams is part of it, accruing benefits to parent/personal taxes is part of it, and “psychic benefits” are part of it, too. The latter is essentially impossible to quantify, but all we can conclude is that we’ll never know for sure.
The best proxy for all these things IMO is how much money both sides are willing to lose in order to get a better deal, but that’s not a satisfying conclusion given it will be a backward looking thing, not a way to figure things out now. If owners really are willing to lose a whole season, then you can safely assume the owners ARE falling short of the return needed to validate their investment. Obviously it’s not the same for all owners, but in aggregate that would be the obvious conclusion.
For the players it’s different. Even a “bad” deal for the players would likely be much better than anything else they could do with their lives (go to Europe, become college assistants, whatever). That doesn’t mean they have a moral obligation to let the owners pocket a certain amount of money, but it also means they have more to lose.
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by Frank Madden on Aug 27, 2011 4:00 PM EDT up reply actions
Trying to run the NBA like a corporation
The whole thing is not about losing money. The last CBA gave to owners Cost Certainty. If any owner in the league has lost over a few million in one season, there’s something wrong that goes far beyond salaries.
This whole sham is REALLY about implementing a wealth redistribution system.
The owners want a system that reflects how regular businesses operate – and have destroyed our current economy. The country is going to hell in a hand basket because of the woefully unbalanced, distribution of wealth.
They want to strangle-hold as much money at the top, and trickle down as little as possible to the players. It’s how they are used to operating their other businesses — it’s how they made their billions
by HoopsSEO on Aug 27, 2011 10:24 PM EDT up reply actions
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