Lee Ohanian is a professor of economics at UCLA and teaches sports economics. This piece appeared in the Washington Post on June 11.
As the powers that be of the world’s most popular sport gather in Brazil this week for the FIFA World Cup, they ought to offer a toast to Donald Sterling. Sterling’s atrocious behavior and attitude, and the ensuing forced sale of his NBA franchise, has made the world a richer place for sports moguls everywhere. That’s because the $2 billion offered by former Microsoft CEO Steve Ballmer for the Los Angeles Clippers is likely to run up values for all sports’ franchises, not only NBA ones.
Prior to the Clippers’ forced sale, Forbes had proclaimed the soccer powerhouse Real Madrid as the world’s most valuable sports franchise at the now seemingly fire-sale price of $3.3 billion. For perspective, Real Madrid has the highest revenues ($650 million in 2011 to 2012) of any team in sports and recently signed a five-year, $195-million sponsorship with Emirates Airline. The top U.S. franchises came in at fourth (the New York Yankees, $2.3 billion) and fifth (Dallas Cowboys, $2.1 billion). The Clippers weren’t even in the top 50. Because sports teams, like valuable artwork, are scarce trophies collected by billionaires, the exercise of assessing their value (using metrics appropriate for appraising the value of a paper or detergent company) will almost always underestimate what the wealthy are willing to pay. Billionaires are always mocked for overpaying for sports teams, until the next one comes along and makes an even more exorbitant acquisition. Consider that in the 1990s people thought that Jerry Jones was crazy to pay $140 million for the Dallas Cowboys.
The fact that we’re now living in an increasingly globalized sports marketplace is also driving up these prices. John Henry, the owner of the Boston Red Sox, is better known in much of the world as the owner of England’s fabled soccer club Liverpool. The Glazer family, owners of the Tampa Bay Buccaneers, is better known as the controversial owners of Manchester United. And more teams in England’s Premier League and other European leagues claim cash-rich Russian, East Asian, and Gulf State moguls as owners. One Russian tycoon, Mikhail Prokhorov, owns the NBA’s Brooklyn Nets. The point is there are now more than 2,000 billionaires around the world, and for those who have it all, a professional sports franchise is a coveted asset.
So in the long run, even if it was far more than the $550 million the Milwaukee Bucks sold for in March, the $2 billion Ballmer paid for the Clippers may turn out to be a great deal – for Ballmer.
The Clippers were perpetual cellar dwellers for decades under Sterling, but they have surged past the Los Angeles Lakers in recent years to become the best team in Los Angeles. The Lakers were perhaps the league’s leading franchise for the last 35 years, winning 10 championships over that period and featuring some of the best players of all time, including Magic Johnson, Kareem Abdul-Jabbar, Kobe Bryant, and Shaquille O’Neal. But the Clippers are now by far the most talented team in L.A. and will remain this way for some time. Chris Paul, Blake Griffin, and the Clippers’ deep bench certainly make up one of the top five talent pools of players in the league. The Clippers also have one of the league’s best coaches in Doc Rivers, and now have an owner in Ballmer who will invest more in the team.
In contrast, the Lakers face an uphill battle in rebuilding. They are without a coach, having chosen to pass on rehiring Phil Jackson after having fired Mike D’Antoni. The luxury tax in the NBA’s current collective bargaining agreement, which penalizes teams that spend above the salary cap and is more punitive than previous agreements, plus the Lakers commitment of $49 million to Kobe Bryant over the next two years, means that the Lakers will be limited in pursuing high-profile free agents. The Clippers are clearly the best team in L.A., and the best team in the second biggest market in the country is worth a premium.
The Clippers’ regional TV deal is almost up, as is the NBA’s national TV deal. The price of broadcast rights for sports continues to rise enormously as televised sports is one of the very few televised products that is predominantly watched live, and thus is highly valued by advertisers. The Lakers received a $3 billion, 20-year TV deal with Time Warner Cable in 2012. If the Clippers can get a new TV deal close to that, and assuming that the league’s next national TV deal pays significantly more than the current $30 million per year that each team now receives, then the Clippers’ TV revenue alone supports much of Ballmer’s $2 billion price. What’s more, like European soccer, the NBA is hugely popular in China and elsewhere, and over time, the league’s TV revenue could rise from foreign sources as well.
The NBA is a cartel. Teams cooperate to raise profits in ways that could be prosecuted under antitrust law in virtually any non-sports industry. League cooperation includes limiting salary costs through a salary cap that keeps pay – particularly for superstars – well below the level that would prevail with free competition. The current collective bargaining agreement reduced player share of revenue to about 50 percent, which is substantially lower than the 57 percent that players received under the previous collective bargaining agreement. These cost-containing efforts help the owners of marquee teams the most, as they are able to hold down salaries along with the rest of the league, but can sign more lucrative regional TV deals than small market teams, such as Milwaukee.
Another factor driving up the Clippers sales price – and this one is admittedly counter-intuitive – is the fact that Sterling was forced to sell the team. A forced sale of a scarce commodity, after all, is like an auction. With several bidders attempting to purchase a team, the price keeps escalating until only one bidder is left. The same thing happened when Frank McCourt was forced to sell the Dodgers, which resulted in a record $2 billion paid by a group that included Magic Johnson and Guggenheim Partners. It may be the case that the Clippers – or the Dodgers – would have sold for lower prices had the sales of these teams been private, and involving not as many bidders.
The scarce nature of these assets, these professional sports franchises, can’t be emphasized enough in explaining Ballmer’s $2 billion move. It’s basic supply and demand. And while supply is fixed, demand is skyrocketing as the globalization of business and technology continues to produce ever greater fortunes by the year – many of them looking for an arena in which to play.
Unfortunately, there’s little good news for fans when teams sell for premium prices. Higher price tags for sports franchises ultimately mean higher ticket prices and higher cable and satellite dish bills as new owners look to increase revenue and content providers raise prices to pay for new expensive regional sports network contracts. There is a price to be paid as the value of sports franchises skyrocket – and unfortunately, that’s coming out of your wallet.