Every year the Forbes Magazine staff takes a look at the NBA, ponders the value of the teams and ranks them. I won't tease the results, but it's ironic and it's no surprise, the LA Lakers, in the midst of one of their worst seasons ever and the New York Knicks are ranked #1 and #2 at evaluations of $2.6 and $2.5 billion. The Clippers came in at number five (up from 13th last year) at $1.6 billion, $400 million under their recent sale price. But the really big news is that the average NBA team now has an evaluated worth of $1.1 billion, up a whopping 76% from last year. As recently as 2011, Forbes was predicting doom for the NBA and reported that over half (17) of its 30 teams were losing money. But after just three years, the new numbers tell us that EVERY team, even the woeful (from a profit-and-loss perspective) Milwaukee Bucks, who ranked 30th in the evaluations are soundly in the black.
What the hell is going on? How did this happen? Did basketball change that much in the last couple of years? Sure, we're coming out of a recession but what on earth? The answers are simple, and complicated, and let's not forget, evaluating the value of a franchise or a business is not really a science. (As a matter of fact, this year it seems to be even less scientific than it was in past years... because, for whatever reason, Forbes is including LESS info in their report (at least the on-line version). Not that this stuff has ever been actually statistically detailed, teams don't really tell the public about profit-and-loss and the league doesn't let much info leak either. It's guesswork, good guesswork, but Forbes used to tell us about things like overall debt, arena debt, salary expenses, and some other stuff. This year they're just rolling everything into overall revenue and operating expenses. Why Forbes, why?)
Okay, but why the big rise in value? First there's the recent media deals the NBA signed with ESPN (Disney) and TNT. They will bring in $2.6 Billion a year, three times what the old deals generated. And local deals are exploding as well. The Knicks and Lakers have their own stations, and according to Forbes staff writer Kurt Badenhausen, "The Atlanta Hawks, Miami Heat and Sacramento Kings all signed new local TV deals in the last six months with rights fees roughly triple their prior agreements." Expect more of those to come.
Then there's the 2011 work stoppage which accomplished three important things. First it beat players salaries down from 57 percent of revenue to 51 percent, an enormous saving for ownership. Second, it established much more punitive "luxury tax" penalties to teams who overspend on salary. Third, newer, mostly small-market owners forced the larger owners to negotiate a revenue sharing deal wherein the most profitable teams would kick money to the least profitable teams (and only part of that money comes from the luxury tax).
And then came Steve Ballmer, who showed up in LA and outbid several other entities for the Clippers franchise and wound up paying a whopping $2 billion for the team. So what did Ballmer get for his money? On face value, maybe not that much, a second banana Los Angeles franchise which was a historical loser. They didn't come with an arena, a string of championships, or even a practice facility (which is still owned by the Sterling family trust). Moreover, even though the Clippers are ranked fifth in overall evaluation they are also sixteenth in operating income. Ballmer paid 10 times yearly revenue. A crappy deal right? Probably not.
First of all it's undeniable that Ballmer's purchase price and his zeal to join the exclusive NBA ownership has affected the value of every team in the NBA including his own. Ballmer's purchase alone pulled up all the NBA numbers at least a little bit and more likely a lot. There seems no shortage of fabulously rich guys who want to own NBA teams. So the market defines the price, and the price is pretty high.
But let's look at the Clippers and Ballmer's deal a little more closely and let's prognosticate a little. While it's true that the Clips haven't won anything-- ever-- there's an undeniable horizon of bright potential for the team and the organization-- and it might not have all that much to do with basketball. Yeah, the Clips have some stars and bright young talent. They're value would definitely rise if they won a championship (or even something less than a championship). But their Laker arena-mates are a terrible team lately and their handling of Kobe Bryant's contract, and on-going front office, coaching, and free agent dramas are embarrassing for the organization and for the Buss family ownership. But they are number one in the Forbes rankings, have an excellent balance sheet, and their evaluation rose a million dollars just this year.
But the Clippers have other somewhat ephemeral assets that make them worth $1.6B now and probably more later. First, they have a new, better infrastructure. Gone are Sterling and his funky low-paid cronies. Ballmer wasted no time in naming head coach Doc Rivers team president and going outside the company to hire Gillian Zucker as president of business operations. Expect a top to bottom refresh throughout the Clipper employee ranks.
Next, the Clippers make money. Always have. Even before the Ballmer sale, the Clippers were quietly profitable. Not only did Donald Sterling see an explosion in his equity investment (from $25M to $2B in 34 years) he also made plenty of cash. He regularly took down $10 million in profit in every year, including some absolutely wretched losing seasons. Those seventeen money-losers in 2011? None of them were the Clippers, not even close.
Next... the Clippers have no debt. None. Donald Sterling didn't borrow money to buy the Clips and neither did Steve Ballmer (at least as far as we know).
Next, they're in LA. Is the LA basketball market saturated? Not at all. There are still teams looking at Orange County as a potential rich venue. What about the San Fernando Valley, or perhaps San Diego? Don't forget the inland empire, it's vast, perhaps endless. Southern California is a rich, spread-out market, mostly un-plundered. How can the Clips take advantage of that? They sell out all or most of their games now, how can they expand their profits? Well, start with higher ticket prices. That's happening, get used to it.
Next, there's Staples Center. I know there are Clipper fans who wring (ring?) their hands over the idea that the Clips share an arena with the hated Lakers, but-- get over it. (The NY Giants and Jets share a stadium, one of the biggest and best, and no one worries about it.) Staples Center is the model for a well-run, well-funded sports and entertainment facility. It supports three high end professional sports teams and they have a full schedule of music and other events. They've blown up the LA Live area and made it a cool place to be in a formerly rundown ignorable downtown area. They'd make plenty of money even without the Clips. The Clips simply rent the arena for their games. No big mortgage, no begging the city fathers for dough. When this Staples Center is deemed too old and too charmless (and it is charmless, with all the personality of a Burger King. It's also too big, and the sight-lines are meh) ownership will tear it down and build something new... and the Clippers (and the Lakers) will almost certainly be part of it.
Finally, there is media. And more media. And then add more media. The Clippers have this year and next left on their deal with Fox Sports. In 2017, expect to see the Clippers local TV revenue double, triple, maybe more. As Badenhausen points out, networks love basketball because people tend to consume it LIVE, commercials and all. But that's just the beginning. There may well be more money for alternative media, streaming, VOD, etc. Steve Ballmer made his money in technology, the Clips are likely to leave no stone unturned when it comes to this stuff.
(We might add add one other thing, not covered in the Forbes article but at least tangentially related to the subject of arenas and basketball value and that is the changing nature of the live sport experience. With expensive TV deals, maxed out seats in a full arena, how can future profits grow? What is the future for a state of the art sports arena? The answer is at least partially outside the arena completely. I full expect the next Staples Center (by any other name) to be smaller and have fewer nosebleed seats. The experience of being in the cheap seats in an arena versus being at home watching a team on a hi def (4K or more) screen is already suffering from the law of diminishing returns. Venues will become smaller, more luxurious, with a playback device at every seat, and much more expensive. The Clips and other teams will make more money by selling their media packages directly to the viewer. Ten thousand people (or corporations) might pay 20,000 dollars and up for season seats, but 20 million fans might pay a hundred a year or more, for a super high def experience in their living room. It's your choice.)
Of course, everything isn't roses in the new, rich NBA. This sudden growth is a paper game. An owner can't actually realize any of that big money until he cashes out (thought he might be able to borrow against the increased value. And the sudden growth is certainly not sustainable. There won't be another new media deal for awhile so gains (and losses) should be smaller in the coming years.
And yeah the owners are getting rich, finally sharing profits, taking a page out the NFL book (without the violence and concussions) but they did at least part of it by stripping the players of 12 percent of their salaries. Now you can't feel TOO sorry for the players because the new national media deal will raise player's salary by more than 75 percent. But the player's aren't getting a nickel of ownership's stunning equity growth... and the players know it.
Michele Roberts, the new director of the NBA Player's Association knows it too and has is already been making noises about the inherent unfairness of the salary cap. The players can opt out of the current NBA in 2017, and, unless the owners start dancing fast, and perhaps show some willingness to negotiate that 51% number, a work stoppage seems relatively certain.
Did Steve Ballmer overpay? Are the Clips worth 2B? Not today, but soon enough, my friend, soon enough.