“Tanking,” or deliberately trying to lose an athletic contest to gain a future competitive advantage, such as earning higher draft pick of prospective players, became the talk of the town or at least of many fans, in many US cities saddled with losing teams in such sports as hockey, basketball, and baseball. If actually practiced, however, tanking would exploit spectator, players, and coaches alike.
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By Adam Grossman
On Sunday, the NBA approved the sale of the Los Angeles Clippers to former Microsoft CEO Steve Ballmer for $2 billion. From a brand management and crisis perspective, it is easy to see why the NBA wanted to approve this sale as quickly as possible. I, among many others, have written about the damage that current owner Donald Sterling has done to both the team and the league.
From an economic perspective, it becomes clearer why the NBA wanted to approve the sale as well. Using virtually any standard valuation metric that exists today, Ballmer has agreed to vastly overpay for the Los Angeles Clippers.
Finance industry professionals (investment bankers, venture capitalists, and private equity firms) primarily use three valuation approaches: inherent valuation, relative valuation, and comparable valuation. Using any of these approaches, it is virtually impossible to see how the Clippers are worth $2 billion.
To complete a valuation of a sports team, you need to start with understanding an organization’s revenue streams. Six revenue streams account for virtually all money earned by a sports organization. Like many new owners buying sports franchises, Ballmer is betting that two revenue streams will increase significantly to make his investment profitable: media rights and subsidy. Media revenue refers to the television, mobile, and digital distribution agreements signed by an individual organization. Subsidy revenue includes all revenue shared by a sports league with individual franchises.
The Los Angeles Clippers revenue will increase significantly in both areas after the 2015-16 season. Both the team’s local media rights deal and the NBA’s league wide revenue deals expire after that season. According to Forbes, the Clippers’ local television rights deal can increase to as high as $75 million per year from its current $18 million per year value. In addition, the NBA’s league wide media rights deal is expected to double from its current $930 million per year value. This means the Clippers will receive double its current media rights subsidy from a new deal – about $30 million per year.
Minnesota Timberwolves-LA Clippers game at Staples Center. Photo by David Jones, 2012. CC BY 2.0 via davidcjones Flickr.
While this is all great news for the Clippers, it does not make the team worth $2 billion. An inherent valuation approach uses a discounted cash flow model to evaluate an asset’s worth. This essentially means looking at how much profit is generated by an organization and discounting the profits based on the potential risk factors. Factor in both idiosyncratic (risk associated with owning the Clippers specifically) and systemic risk (risk associated with any financial asset). In our analysis, the Clippers generated an estimated $11 million in annual operating profit from now through 2015-16 season. Starting in the 2016-17 season when the new media rights and subsidy revenue streams start, the Clippers would generate $54 million in annual operating profit in perpetuity. Using this approach, we found the Clippers to be worth $1.05 billion.
We don’t want, however, to rely on a single technique for our assessment of the Clippers’ value. Therefore, employ a relative valuation approach that compares a company’s value using a standard valuation metric. The most common metric used is a price to earnings (P/E) ratio. This means that you compare the price of an asset compared to the amount of annual profit that asset is generating. For example, the average P/E ratio on the S & P 500 is currently at 18.3. The Clippers would have an estimated 36.8 P/E ratio given our estimated operating profits after the 2016-17 season after Ballmer purchases the team. Using the average P / E Ratio of the S & P 500 would produce a value of $990 million.
The only real argument that could be made for the Clippers being worth $2 billion would be by using a comparable valuation. With this approach, an investor looks at what other similar assets have been sold for to determine a value. You only have to look at the Clippers’ baseball neighbors to see a team that recently sold for a similar amount. The Los Angeles Dodgers were recently sold for $2.15 billion to a group led by Guggenheim Partners. While both are sports organizations, the Clippers and the Dodgers are actually very different types of properties. Because it has a bigger venue and plays many more games, the Dodgers currently make as much or more in annual ticket sales revenue than the Clippers make from all revenue streams. The Dodgers also recently signed a $7 billion 25-year local media rights agreement that will pay it far more in average annual dollars than any new media rights deal the Clippers could negotiate. A more appropriate comparison would be to examine the Clippers compared to other NBA franchises. The Milwaukee Bucks recently sold for a league record of $550 million. Ballmer is now paying 3.6 times more than the record amount paid for an NBA franchise.
To be fair to Ballmer, both the media rights and subsidy deals could far exceed expert expectations. The Los Angeles Lakers recently signed two new media rights deals for their English and Spanish broadcasts for $4 billion over 20 years, an average of $200 million per year. The NFL has recently signed new media rights deals that pay the league $7.25 billion in annual revenue, an average of $227 million per team. If the Clippers end up receiving $150 million per year in media rights revenue and the NBA contract triples from its current value then we would estimate the team being worth $2.05 billion. It is also likely that ticket sales and sponsorship revenue will increase significantly with a new owner.
ESPN’s Bill Simmons recently stated that the sale of the Clippers resembled the purchase of a home without the buyer being able to complete a home inspection. The sale of the Clippers was happening so quickly that it was impossible for Ballmer to know what exactly he was buying. However, Ballmer can (and likely has) completed an inspection of the Clippers similar to the one we just described — and he will discover there is no way to generate a $2 billion valuation for the Clippers.
Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. He is the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry with Irving Rein and Ben Shields. Read his previous blog posts.
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The post Ballmer overbids by one billion appeared first on OUPblog.
By Adam Grossman
Donald Sterling’s lifetime National Basketball Association (NBA) ban, $2.5 million dollar fine, and potentially forced sale of the Clippers may seem to fit in the category of previous owners who received a comparable punishment. Marge Schott was forced to sell the Cincinnati Reds for her anti-Semitic and racist comments while owner of the team. George Steinbrenner was suspended twice as owner of the New York Yankees, with the last occurrence spurred by his allegedly hiring a private investigator to examine the history of his team’s star slugger Dave Winfield.
However, Sterling’s comments and the reaction they provoked is an example of the evolution of the modern crisis. This includes:
- Convergence of Sports and Entertainment — Sterling’s comments were first reported on TMZ.com, a site known for celebrity gossip more than sports coverage. This made sense, as TMZ created TMZ Sports because of the convergence of sports and entertainment. More specifically, players, coaches, and even owners are some of the most well-known celebrities in entertainment.
- Influence of Technology on Sports Crisis — Ten or even five years ago, there would have been less of a chance that a crisis would have emerged because of Sterling’s comments. The only reason the Clippers’ owner’s statements were made public is that someone recorded a private conversation on a mobile phone. The comments were then posted on TMZ.com and quickly spread throughout social media. While Sterling’s comments were abhorrent, it was unlikely he thought they would ever be made public. Rather than relying on hearsay of a fan sitting near the Clippers owner at the game, the league, media, and public could directly hear what Sterling had to say in his own words. This is a reminder that every sports fan can become a citizen journalist by turning on their smart phone.
- Pre-crisis Preparation — Sterling’s racial views have been well known and well documented. On his ESPN 980 radio show in Washington D.C., Tony Kornheiser and his Pardon The Interruption co-host Michael Wilbon recently discussed that they had conversations about Sterling’s views ten years ago. In addition, the Department of Justice had filed suit against Sterling alleging that his housing practices violated anti-racial discrimination laws. The NBA could have recognized this as a potential crisis and moved earlier to oust him before these events forced the league’s hand.
Los Angeles Clippers players stand up for the national anthem before the 31 December 2007 game against the Minnesota Timberwolves at Staples Center. Photo by Paul de los Reyes. CC BY 2.0 via Wikimedia Commons.
Virtually every one from players, coaches, and owners to media critics, pundits, and morning newscasters have analyzed the impact that Sterling’s comments had on his team’s and the NBA’s brand. What has received less coverage is why the NBA needed to take this type of action to try to resolve this crisis from an economic perspective. Sterling’s crisis potentially impacts three key revenue streams that demonstrate why his immediate ban makes sense for the NBA.
- Subsidy / Revenue Sharing — Like most major professional sports leagues, the NBA shares revenue among all 30 teams. In fact, the NBA rules dictate that teams keep 50% of their revenue with teams sharing the remaining 50% with the entire league minus expenses for items such as arena operating costs. Therefore, any revenue lost by the Clippers impacts every NBA team. Sterling has taken steps in the past to ensure that the Clippers have remained profitable even when the team is losing. His team’s recent success combined with the Lakers relative decline has made the Clippers a more important franchise for the NBA in the large Los Angeles market.
- Sponsorship – Corporate partners spend millions of dollars with the league and its teams to increase their brand awareness and enhance their brand perception. In particular, the NBA can help companies target young, male, and often African-American audiences. It would be extremely difficult to sell or with current corporate partnerships and sign future corporate partners when their brands could be associated with Sterling. The immediate exit of State Farm and Kia illustrates the possible crisis consequences. While some sponsors have already returned, Sterling’s comments and the uncertainty of whether he will sell the team still threatens their brand.
- In Game – In Game revenue consists of money a sports organization generates through competition. Most in game revenue comes from tickets, concessions, and parking that occurs on game days. The question here is whether fans would stop attending Clippers’ games because of Sterling’s comments. Unfortunately for Los Angeles sports fans, there is an example of another owner who had a similar impact on his organization. When Frank McCourt owned the Dodgers, he was embroiled in a bitter divorce and also took steps that forced the team into bankruptcy. During McCourt’s final year owning the team in 2011, average game attendance declined to 36,173 as compared to 46,172 in 2013. One could have expected a similar 22% decline for the Clippers with Sterling continuing to be the team’s owner.
Sterling’s past actions and recent comments deserved the harsh punishment. Understanding the relationship between crisis and revenue, however, can outline and forecast the possible financial questions of crisis responses. If Sterling fights the ban or refuses to sell the team, the above analysis will play an important role in the future of the club and revenue for the league.
Adam Grossman is the Founder and President of Block Six Analytics (B6A). He has worked with a number of sports organizations, including the Minnesota Timberwolves, Washington Capitals, and SMG @ Solider Field, to enhance their corporate sponsorship and enterprise marketing capabilities. He is the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry with Irving Rein and Ben Shields.
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The post Banning Sterling makes a lot of cents for the NBA appeared first on OUPblog.
So it's not often that I find myself not-reading. I almost always am reading except when I'm too busy writing/listening/typing... I can't process words incoming and outgoing at the same time. It's just too confusing! No reading makes me pretty crabby.
The last couple of weeks, in all of my spare time I have been designing websites, which was... a lot of hours. Really a lot. I'm torn between sleeping (I've been averaging two hours a night) and prying my eyes awake to get through another 30 pages of print, a battle I have lost more often than I have won. Ah well! It's not a total loss, and the things I have been doing other than reading have been fullfilling too.
In the mornings I've been listening to this year's Printz award winner,
In Darkness by Nick Lake, which is a great, well-written book but very ummmm... dark? (Sorry, I'm very tired obviously.) It's a grim tale of a boy growing up as a gangster in Haiti, with his story linked to that of rebel leader Toussaint Louverture. It's just as well my commute is only 40 minutes long or I'd probably be a crying, sloppy mess from all the emotion in this book. And I know it's a form of "reading" or rather, being read to, but it's not quite the same as sticking your nose in a book.
Anyway.
Instead of reading
Siege & Storm as I SO want to do, I have been working on
yarncrawlla.com and
misstammywrites.com. Click through to check them out! Especially Miss Tammy Blackwell's site, because she's the author of the paranormal YA
Timber Wolves series, and
Victoria Faye just made her some super-cool swag!
Before:
Don't look too closely!
After:
I'm so happy with the way it turned out that I'm doing a giveaway!
The winner gets to choose one of these possible prizes:
That's the shirt. You get to pick the color!
Giveaway Rules:
- Open to US only.
- We are not responsible for items lost in the mail.
- One set of entries per household, please.
- If you are under 13, please get a parent or guardian's permission to enter, as you will be sharing personal info such as an email address.
- Winner will be chosen randomly via Rafflecopter widget a day or two after the contest ends.
- Winner will have 48 hours to respond to to the email, otherwise we will pick a new winner.
- If you have any questions, feel free to email us. You can review our full contest policy here.
- PLEASE DO NOT LEAVE ANY PERSONAL INFO IN THE COMMENTS. Sorry for the caps but we always get people leaving their email in the comments. Rafflecopter will collect all that without having personal info in the comments for all the world (and spambots) to find.
Good luck!
Which prize would you choose if you won? Tell me what and why in the comments!
a Rafflecopter giveaway
Today you can win a copy of indie author
Tammy Blackwell's book,
Destiny Binds (
Timber Wolves, Book 1). OR if you have already read
Destiny Binds, you can have
Time Mends (
Timber Wolves, Book 2) instead.
The winner also gets to choose whether they get a paperback or Kindle copy.
Why did I pick
Tammy Blackwell and her books to feature for the Indie Author Giveaway Hop?
- She's a librarian.
- Her books are laugh-out-loud funny!
- Look at those covers. There are some "real" publishers whose covers aren't as good as these!
Seriously, even if you don't win my giveaway, if you love YA paranormal romance (and laughter) you should give these a go. The third book is due out later this year! You can find out more about Tammy at her blog,
www.misstammywrites.com.
Remember to check out all the other great blogs on this hop for more chances to win!
Rules: Open internationally. To enter you must be over 13 years old or have the permission of a parent/guardian since you may be sharing personal info such as your email address. The winner will be chosen randomly via Rafflecopter. The winner gets to choose either a paperback or a Kindle copy of the book, Destiny Binds, by Tammy Blackwell. Good luck!
a Rafflecopter giveaway
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<3!
you're funny. sorry the yarn ladies are making you crazy. it'll all be good. siege & storm!