Steve Ballmer shocked many people when he agreed to purchase the Los Angeles Clippers for $US2 billion. That is a staggering sum considering Forbes.com had recently valued the franchise at just $US575 million.
Even if the Clippers are not worth 3.48 times as much as their Forbes valuation, it is clear the team’s value is much higher than everyone thought and the Clippers are not alone.
Local television contracts are growing faster than expected
The biggest factor driving the value of franchises in the NBA, is that unlike the NFL, where television revenue is shared equally among teams, NBA franchises sell their own local television rights.
In a world being taken over by DVRs and video-on-demand services, live sports are more valuable than ever as they draw fans to televisions while the event is being aired.
This has led to some enormous contracts, including a recent $4 billion deal for the Los Angeles Lakers. Last year alone, the Lakers received $US122 million in local television revenue, a record for a U.S. sports team.
This same trend in local television contracts has been seen among Major League Baseball franchises and is a big reason why MLB teams have grown in value at a faster rate than their NFL counterparts. The values of NBA franchises will likely show a similar pattern soon.
Pro sports teams are now more like small media empires
When the Dodgers recently sold for $US2 billion, Dallas Mavericks owner Mark Cuban was one of the people bidding on the team. However, he bowed out because the deal became more about the television rights than about the team, pushing the price higher than he was willing to go.
That television rights package was eventually sold and valued at $US7-8 billion for the Dodgers.
The owners are making more money than ever
Following the most recent NBA lockout, the owners and players agreed to reduce the amount of revenue shared with the players from 57% under the previous collective bargaining agreement to 49-51% in the new deal.
In 2010-11, the NBA took in $US4.3 billion in revenue with the owners keeping just $US1.85 billion and the players receiving $US2.45 billion. Last year, NBA revenue grew to $US4.6 billion, which meant as much as $US2.35 billion for the owners, a 26.8% increase in their share in just two seasons.
So not only is revenue growing for the league and for individual teams, but the owners are taking a much bigger cut increasing the profit margins of all teams.
In addition to putting more money into the pockets of the owners, a salary cap also limits how much the teams can pay their top stars. This is important because it allows teams in the NBA to promote their stars while minimising the affect that the players’ popularity will have on contract negotiations.
In baseball, teams often have to overpay for popular players (e.g. Derek Jeter) as there is no hard cap on team payrolls.
In the NBA, the popularity of NBA stars increases the popularity of NBA teams and more stars means more merchandise sold and tickets purchased. Meanwhile, the league has a nice, cushy situation where a player like LeBron James is underpaid by at least $US10 million.
Supply and demand
In the end, the value of team is whatever somebody is willing to pay for it, and basic economics tells us the value of the item will go up if demand exceeds supply.
There are only 30 NBA teams and the Clippers sale taught us there is no shortage of people who want in to the exclusive owners club. This will likely lead to expansion and the addition of a couple of teams which will just put more money into the pockets of the other owners.
Some want to own a toy, as has been suggested of Ballmer. Others will see how franchise values helped make billionaires of owners like Michael Jordan and will want in on a huge investment opportunity.
As long as there are wealthy people with money to spend on a limited resource, the value of NBA teams will continue to soar.
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