Tuesday, August 23, 2011

dollars and sense

Two interesting articles I came across today regarding sports team ownership as business. I'll post some quotes from them here as I will probably touch on the idea in this week's podcast.

First, Malcolm Gladwell's introductory piece from Grantland discusses the value of sports ownership beyond what can be measured on paper in the context of the NBA lockout.

...Forbes magazine annually estimates the value of every professional franchise, based on standard financial metrics like operating expenses, ticket sales, revenue, and physical assets like stadiums. When sports teams change hands, however, the actual sales price is invariably higher. Forbes valued the Detroit Pistons at $360 million. They just sold for $420 million. Forbes valued the Wizards at $322 million. They just sold for $551 million. Forbes said that the Warriors were worth $363 million. They just sold for $450 million. There are a number of reasons why the Forbes number is consistently too low. The simplest is that Forbes is evaluating franchises strictly as businesses. But they are being bought by people who care passionately about sports — and the $90 million premium that the Warriors' new owners were willing to pay represents the psychic benefit of owning a sports team. If that seems like a lot, it shouldn't. There aren't many NBA franchises out there, and they are very beautiful.

The big difference between art and sports, of course, is that art collectors are honest about psychic benefits. They do not wake up one day, pretend that looking at a Van Gogh leaves them cold, and demand a $27 million refund from their art dealer. But that is exactly what the NBA owners are doing. They are indulging in the fantasy that what they run are ordinary businesses — when they never were. And they are asking us to believe that these "businesses" lose money. But of course an owner is only losing money if he values the psychic benefits of owning an NBA franchise at zero — and if you value psychic benefits at zero, then you shouldn't own an NBA franchise in the first place. You should sell your "business" — at which is sure to be a healthy premium — to someone who actually likes basketball. ...

Next, Gregg Easterbrook of writes that sometimes making the best business decision as a team owner leads to bad outcomes for players and fans.

...According to a financial officer for an NFL team, after ticket price, concessions and parking are added up, and then the visitor's share, overhead and taxes are deducted, each sold home seat represents around $30 in profit. This jibes with the numbers reported by Green Bay, the sole NFL club that discloses financial data. For 2010, the Packers sold 566,362 tickets and reported an operating profit of $10 million -- about $18 per occupied seat. The Packers' expenses were high in 2010, as they appeared in four road playoff games. Had they not, the profit per seat would have risen to $25 or $30.

The $30 estimate is a simplified number, but suppose it's roughly accurate. That suggests the 2010 attendance leader, Dallas, had a $21 million profit on seat sales, while 2010's worst-drawing team, Oakland, had a ticket profit of $11 million. That's a $10 million swing between the best case and the worst case for filling the stadium. Because most teams are in the middle of that calculation, going all-out to win with player and coaching salaries will add considerably less than $10 million in profit on packing the stadium. Contrast that with not spending up to the cap, which can add $20 million to $30 million to the bottom line. If your first goal is financial results, losing cheap can look a lot sweeter than winning expensive.

When this is taken into account, seeming nonsense suddenly makes sense. The Bengals, a low-spending team, are refusing to trade Carson Palmer, who says he retired but actually wants out of the Queen City. What's the point of getting nothing for Palmer? The point is to shed Palmer's large salary while creating an excuse for another bad season. When in this situation, teams with winning mindsets shrug and trade the unhappy star for whatever they can get -- think Green Bay with Brett Favre or Philadelphia with Donovan McNabb. Cincinnati management does not make winning its first priority. Losing cheap is fine, and getting nothing for Palmer generates a nifty excuse for a weak 2011 season. ...

Check out the full stories at the links above, feel free to offer your comments below, and tune into the podcast this week for a discussion of the unmeasurable benefits of team ownership in real life and fantasy.

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