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The $2 Billion Bubble? What the Clippers Sale Means for the NBA and the Players, by Grantland

Stashed in: Business Facts, Winner take all., Billions!, Microsoft, Michael Jordan, Steve Ballmer

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Suddenly basketball is a money making machine:

The sale of the Clippers to Steve Ballmer could not have gone any better for the NBA. Adam Silver hasn’t even been on the job for six months and he already has a triumph that will be in the first or second paragraph of the stories about his retirement two or three decades from now.

He confidently stretched the league’s constitution almost as far as it could go in fining Donald Sterling the maximum $2.5 million, banishing him for life, and moving immediately to force the sale of the team to a less despicable person. He made clear it would be better for everyone if Sterling and his wife, Rochelle, would sell the team on their own before the NBA stripped them of it.

And, boom: $2 billion, a number that has sources across all areas of the NBA today writing emails and texts filled with exclamation points, like teenage girls gushing about One Direction. There will still be some ugly twists, given reports Sterling will sue the league, but Silver expected that. Everything appears to be on track. Just about everyone agrees that Ballmer is overpaying, perhaps dramatically, in forking over the second-largest purchase price ever for a North American franchise — a price that came in at just less than triple the most recent Forbes valuation of the team.

But the Clippers are debt-free — having a cheapskate owner helps in that regard — and on the verge of renegotiating their undermarket local TV deal, struck before the league’s most pathetic franchise somehow teamed up Chris Paul and Blake Griffin. The Clips get only about $20 million or so per season from the deal, according to various reports, roughly one-tenth what Time Warner pays the Lakers every season.

The league’s national TV contract, which yields about $30 million per team annually, is up after the 2015-16 season, and the new one will trump that in a landslide.

Franchise valuations are escalating at a nutty pace; the Bucks’ sale for $550 million broke the Warriors’ previous record, and Ballmer and partners were ready to go well over that to relocate the sad sack Kings to Seattle. Sales figures from 2010 and 2011 look like ancient relics now, like Don Draper paying some absurd price to go to the movies on Mad Men. Michael Jordan’s crew got the Bobcats (now Hornets) almost for free, on the condition they assume all the debt the franchise had piled up. A bunch of private equity dudes bought the Sixers, a huge-market team, for $280 million in 2011. Three years later, two other finance wizards paid nearly double that for the freaking Bucks, and they even agreed not to move the team to a more profitable market.

The forces driving this are obvious. The league slaughtered the players, forever disorganized and fighting among themselves, in the 2011 lockout. Players used to get 57 percent of all league revenue; they get 50 percent now, a savings of about $10 million per year for each team. Live sporting events only get more valuable to TV networks as fewer competing programs prove DVR-proof. China and India loom as untapped or only semi-tapped markets.

The league’s revenue-sharing system will soon ensure that every team makes a profit, or at least comes close. The Bobcats got $20 million from it last season, and they’ll get about that much again this season. The Pacers and Grizzlies snagged about $15 million apiece, according to several league sources, and even big-market teams such as Atlanta and Washington got some extra scratch. Only a short time ago, owning an NBA team was not a hugely profitable business. Owners used the losses as a tax benefit, knowing they’d reap the gain someday by selling the team outright. They just enjoyed the spotlight.

Now more owners and prospective owners are viewing teams as moneymaking ventures in their own right, not just glamour purchases with shaky short-term balance sheets.

This is ridiculous. It's winner take all. The rich get richer. 

How the private equity mentality might eventually backfire:

But … $2 billion! If you’re Herb Simon, having owned a money-losing team in Indiana for so long, aren’t you at least thinking about how high the price might go tomorrow? Jerry Reinsdorf doesn’t really appear to enjoy owning the Bulls; what would he say if someone just handed him $1.75 billion tomorrow? The Buss family will probably never sell the Lakers, since it would go against the wishes of their beloved father, but if I were a Buss, I’d be the rogue brother chirping about whether we could get $4 billion and just call it a day.

Some of these owners come from the private equity world, where the model in lots of places is to get in, find the profit, and get the hell out — no matter what wreckage you leave behind. Selling on the way up might cost you, but no one knows if the escalator headed up could turn out to be the escalator to nowhere.

In the short term, things will almost certainly stay wonderful. And the short term is what matters here, since both the owners and players’ union can opt out of the collective bargaining agreement in 2017. It’s unclear how the rash of recent purchases, and particularly this watershed Ballmer deal, will affect the choice on either side.

There is growing resentment today from several players on Twitter, including Ty Lawson and Andrew Bogut. The owners cried poverty in 2011, claiming enormous annual losses. The players countered that those losses were at least in part accounting tricks, and, perhaps more importantly, that the increasing value of an NBA team as an asset overwhelmed the negative balance sheets. Revenue-sharing might put every team in the black going forward, anyway.

The players do not get to share directly in the profits from the sale of a team. They don’t put up the capital to buy teams, and the revenue from those sales does not go into the pot they split 50-50 with owners. During the lockout, the union had an internal discussion about proposing rules that would allow players to share in some way in franchise sales at unexpectedly high prices, but the idea never got much traction, sources say. (They even discussed just allowing the players to take a share of those sales profits and put them toward pension funds.)

Why the Clippers are worth $2 billion to Ballmer:

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