SteveBallmer053014

NBA’s owner bubble not popping any time soon

Thursday night it was reported the NBA, the Sterling Family Trust and former Microsoft CEO Steve Ballmer reached an agreement to sell the Clippers for a whopping $2 billion. The number alone is staggering and shows just how valuable even a toxic NBA franchise can be.

There is still no word whether Sterling will continue to fight the charges the NBA has levied against him but it appears the Sterling Family Trust, led by his wife Shelley Sterling, have completed the sale. All this needs now is NBA approval. No vote to kick Sterling out appears necessary.

But again: TWO BILLION DOLLARS?!

Most people will not even see that kind of money in their lifetimes. Or even their lifetimes and their children’s lifetimes combined. This is two thousand million dollars for crying out loud.

How did the Clippers get worth this much?

Certainly being in Los Angeles helps. There is a lot of potential in that market from TV deals and marketing for the club. And the team is good again and could be a very attractive team for players with competent ownership — Sterling was long suspected of keeping costs down to an obscene level and, thus, the Clippers were a joke on the floor for much of their time in his care.

There is clearly some hidden value with the Clippers that is not being accessed. Ballmer’s investment in the Clippers is as much an investment on their future potential worth than their current worth. They could certainly stand to get a better deal from the Staples Center and sustained excellence will make them an even more powerful brand.

ChrisPaulClippers_Thunder050514Still, and this deserves mentioning again, $2 billion is jarring. How could a team that Forbes values at $575 million go for this much? That is a 248 percent increase over Forbes’ valuation of the team!

It is part of a trend of ever increasing value for even the worst NBA franchises. Most recently, the Bucks sold for $550 million to Marc Lasry and Wes Edens in April. The Bucks, it should be noted, are one of the worst franchises in the league with an aging arena in a small market. There is not a lot of money to be made off the team alone.

As Bill Simmons of Grantland noted in reviewing the price to buy an NBA team and join the “owner’s club” is continuing to go up and up. Even for seemingly middling and small markets around the league. NBA teams that put a for sale sign are finding willing buyers that are putting up a ton of money.

Why is this so?

The NBA is the second most popular professional league in the world by some accounts and certainly the most popular American sport in the world. There is a lot of star power involved with these players and the status of owning a team. Not only that, the league’s television rights deal is coming up soon and it is going to put a lot of money into the revenue sharing pool.

The league’s new collective bargaining agreement is much more owner friendly than the previous one and there seems to be no sign of it reversing with league revenues inching up and everyone generally being pretty happy with where the league is at.

As Simmons noted, the sales price for the Pistons in June 2011 was $325 million. The sales price for the Kings approximately two years later was $534 million. Potential owners are seeing a strong investment opportunity and are trying to get in on this status symbol, predicting that the price will continue to go up.

This sounds familiar to the same speculation that caused the housing crisis in 2008. People at that time thought the housing market could only go up and so there were a lot of risky loans being made and investments being made. When the economy turned south, a lot of people were stuck with the bill with little recourse.

This is how bubbles are formed.

Sacramento Kings head coach Michael Malone, general manager Pete D Alessandro and majority owner Vivek Ranadive during a press conference at the Sleep Train Arena press room. Photo by Kelley L Cox-USA TODAY Sports

Is there an NBA owner’s bubble? It certainly feels like with these ever-escalating prices there is one.

Of course, the market for NBA teams is not like the housing market. Owning an NBA team is as much a business investment as it is a status symbol. Owners want to be part of sports teams even if it is not good business because they get to say they own a sports team. But a lot of the new owners are also very savvy businessmen. Several of them are going to expect to turn a profit. This is one of the reasons the lockout in 2011 got so nasty.

That profit is going to turn very quickly as the price for these teams continues to go up. There are going to be owners who sell their teams and find themselves losing money. When that happens, there could be some very serious trouble for the NBA as the owners try to recoup that money from the players in collective bargaining.

It is hard to argue the owners are losing money when they can sell their teams for such astronomically high prices — especially compared to what many of them bought the team for.

This bubble is not bursting any time soon. There is a lot of money getting set to come into the NBA’s coffers and there is no reason at this point to think the product on the floor will become less marketable. The business of basketball is good.

But that day is going to come eventually. Every market bubble bursts at some point.

Philip Rossman-Reich

About Philip Rossman-Reich

Philip Rossman-Reich is the managing editor for Crossover Chronicles and Orlando Magic Daily. You can follow him on twitter @OMagicDaily

Quantcast