Reports suggest that Steve Ballmer has won the bizarre bidding war for the Los Angeles Clippers at the cool price of $2 billion. That's a lot of money. Let's explain why the franchise is worth so much to Ballmer.
First, some perspective on how mammoth a $2 billion valuation is.
The recent sale of the Milwaukee Bucks broke the record for the highest team purchase price at $550 million. The reported Clippers sale price is $1.45 billion more than that, or 3.6 times as high. As recently as 2010, a team (the Charlotte Bobcats) was sold for only $240 million. That's never happening again. (For what it's worth, Sterling paid $12.5 million for the San Diego Clippers in 1981.)
Considered another way, $2 billion was roughly the total NBA player compensation this season. That's about 450 players making anywhere from $500,000 to $30 million. The entire NBA's revenue is approximately $4 billion.
So we've established that this is an extraordinary purchase price. Let's dig into why Ballmer offered it ... and why he wasn't crazy to do so.
1. Team values have skyrocketed since 2011
This is the third straight record sale in the NBA. A year ago, Vivek Ranadivé and friends paid a record $534 million for the Sacramento Kings.* Last month, the Bucks sold for $550 million. These three teams plus the New Orleans Pelicans are the only ones sold since the 2011 lockout. (The Pelicans are a pretty special case, having been sold by the NBA to Tom Benson in 2012 at the price of $338 million. Apparently that was a bargain.)
Sterling reportedly deemed 'mentally incapacitated'
Donald Sterling was reportedly declared "mentally incapacitated" by experts, which allows Shelly Sterling to sell the Clippers without his approval, per the terms of their trust.
* Ballmer was involved in that whole dance, bankrolling Chris Hansen's attempt to move the Kings to Seattle. Ballmer and the crew actually made a last-ditch effort to pay $625 million for the Kings, but the NBA rejected the late bidding war.
Before the Kings' sale, the NBA record sales price was $450 million. That was the tag on the Golden State Warriors in 2010. But a bevy of teams sold below $400 million around that time, including the 76ers, Nets, Pistons, Hornets (née Bobcats) and Pelicans (née Hornets, who the league bought in late 2010). In addition, the current Hawks owners tried to unload the team at a comparably low price, only to have the NBA Board of Governors reject the prospective buyer due to finances.
Without considering anything else, NBA teams are selling for higher prices across the board since 2011. And we're talking about the Kings and Bucks selling for about $100 million more than the big-market, corporation-rich Bay Area squad just three years later. What happened in 2011? HMM.
2. After the lockout, NBA teams are more than toys for the rich
NBA owners absolutely crushed the players' union in the 2011 lockout, cutting player salary by at least $280 million per year. Over the 10-year term of the new collective bargaining agreement, that comes out to a minimum of $2.8 billion in savings for the league's owners, or an average of $93 million per team.
That's a huge chunk of money. For teams already operating at healthy profits, it's a massive boost to the bankroll. For teams breaking even, that creates a healthy positive margin. For the few teams who claimed to be losing money with the old deal, it makes the franchise a sustainable business.
Before 2011, the wealthy bought into the NBA often out of interest in the sport, to be seen courtside or to invest in a vehicle that would gain value in the long-term. But with the lockout deal, with all of those benefits still in place, NBA teams also become profit drivers.
3. Los Angeles is an incredibly valuable market
This could probably go without saying, but the Los Angeles market plays a major role in that $2 billion sale price. The nation's second-largest city has almost 4 million residents, and the L.A. area is at about 13 million people. Just in the city proper, according to The Economist, L.A. has 126,000 millionaires and 19 billionaires. There are 14 Fortune 500 corporations based in Los Angeles County, which provides plenty of sponsorship opportunities and suite sales.
In addition, L.A. still lacks an NFL team. All of the other major markets in the NBA have at least one. The absence of the NFL leaves a gaping cash hole in L.A.
4. Donald Sterling has underleveraged the Clippers for years
Sterling only recently began spending real coin on his team. For decades he operated the cheapest, most second-rate club in the league. It took until 2008 -- almost three decades into Sterling's tenure -- for the Clippers to sign a major non-incumbent free agent (Baron Davis) to a competitive deal. The Clippers are one of only six teams to had have never paid the luxury tax before 2014. This season, the Clippers (for some reason) paid $262,232 in tax, an absurdly small amount.
In a league in which more than half of the teams makes the playoffs, the Clippers made the playoffs three times in the first 30 years of Sterling's ownership. The franchise has been stained over the decades as a persistent loser, a team that most seasons doesn't even try. That perception has only changed in the last three seasons after the drafting of Blake Griffin and trade for Chris Paul.
It stands to reason that the Clippers had only a perfunctory existence in Los Angeles until 2011. This franchise's revenues have huge growth potential.
Speaking of which ...
5. The Clippers' TV deal is almost up
There is an immediate opportunity for Ballmer to begin to realize some of that potential: there are only two more seasons on the Clippers' current local TV deal. According to Forbes, the Clippers' local TV revenue is currently just $20 million, which is comparable with a mid-sized market. But TV deals have been exploding for NBA teams in recent years as time-delay culture takes over.
With rampant adoption of digital recording technology, fewer TV programs are watched live. And most people watching TV on time delay are skipping the ads. You can't do that with live TV. Ergo, programs likely to be watched live are more valuable than programs likely to be watched on time delay. Since most people still prefer to watch sports live, this has become a huge factor for sports leagues. In addition, NBA and Major League Baseball teams have leveraged their popularity by creating and partnering on regional sports networks (RSNs) that draw in carriage fees from cable providers and sell ads. Sports on TV is getting much more lucrative every year.
Some evidence: the Celtics doubled their local TV deal in 2011, plus grabbed a 20 percent stake in a new RSN with Comcast Sports. Closer to home, the Lakers signed a TV deal with Time Warner Cable worth at least $150 million per season. The Clippers won't get that -- they aren't the Lakers -- but there's a lot of room between there and the piddling $20 million the team currently rakes in.
6. The NBA's national TV deal is almost up, too
NBA teams currently receive $30 million each annually from the league's national broadcast deal with ABC/ESPN and Turner. A new deal is currently being negotiated, and Fox Sports is rumored to be interested in poaching the league. Given the competition plus the above-discussed increased value of sports on TV, many expect the national TV payout to double at least. There's some more profit for all of the league's owners.
7. This was a high-pressure, competitive purchase
Marc Lasry and Wes Edens didn't really seem to have any sort of deadlines bearing down when they negotiated to buy the Bucks from Herb Kohl last month. That is the exact opposite experience Ballmer has gone through. The Sterlings sprinted to sell the club before the other 29 owners got a chance to strip them of the team in a vote scheduled for next week. It's been just over a month since the first Sterling recording surfaced; the situation has moved incredibly fast.
In addition, there were a lot of deep-pocketed contenders for the club. We know Ballmer is really competitive, and he likely didn't want to fail in his quest for an NBA team twice in a year. That meant severely outbidding the Geffen and Ressler groups.
It's the difference in buying a team few people wanted on Amazon and buying a hot property in an eBay bidding war. The Clippers' sale price benefited from that.