At least on a surface level, the Los Angeles Clippers appeared to be a lousy investment for any potential buyer — a franchise with none of the championship history and Hollywood buzz of the rival Lakers and one still reeling from the racist comments made five weeks ago by now-deposed owner Donald Sterling.
But as the sports industry begins to process the staggering amount — $2 billion — for which Sterling’s wife agreed to sell the Clippers, it is clear, in this new Golden Age of sports television, there is no franchise too weak or too sullied to command a windfall at auction, especially in Hollywood.
“This sale sets a new standard for market price for sports teams, at least in large-market cities,” said Marc Edelman, a law professor at the Zicklin School of Business at Baruch College of City University of New York. Noting that it was only two weeks ago that the sale of the Milwaukee Bucks was finalized for what was then a National Basketball Association-record price of $550 million, he added, “To jump from $550 million for the Bucks to $2 billion for the Clippers, at least on the face of it, seems absurd.”
The agreement to sell the Clippers (franchise value, according to Forbes: $575 million) to former Microsoft CEO Steve Ballmer (net worth, according to Forbes, $21 billion) was signed Thursday by Sterling’s wife, Shelly, and approved Friday by the NBA. The sale still must be approved by the league’s Board of Governors.
Donald Sterling, who bought the team for $12 million in 1981 and was banned for life by NBA Commissioner Adam Silver five weeks ago, filed a $1 billion lawsuit against the league in U.S. District Court in Los Angeles on Friday, but Sterling has indicated to the NBA he would not seek to block the sale. As part of the sale agreement later in the day, Shelly Sterling and the Sterling family trust agreed not to sue the league.
The story of how the high-water threshold for the sale of an NBA franchise made a nearly four-fold jump in only two weeks in some ways is a simple tale of supply and demand.
There are no other NBA franchises on the market, at least not publicly. An NBA franchise had not become available in Los Angeles — the second-largest media market in the United States and the center of the entertainment industry — in more than 30 years. And Ballmer, 58, had tried to purchase the Sacramento Kings a year ago with the intention of moving them to Seattle but failed.
Ballmer has said publicly that if his bid for the Clippers goes through, he would keep them in Los Angeles.
“You had a guy [Ballmer] who couldn’t get in the first time, and now there’s an even better option in a bigger market,” said one high-ranking NBA official, who spoke on the condition of anonymity because the league office ordered staff not to speak about the sale until it was done. “He saw another opportunity, and he wasn’t going to be outbid.”
But Ballmer wasn’t the only bidder willing to smash the previous record sale price for an NBA franchise. There were at least four other bids submitted — including one by a group headed by music mogul David Geffen and featuring Oprah Winfrey as an investor for a reported $1.6 billion.
“The [NBA’s economic] system is designed for franchise values to skyrocket,” said Mark Bartelstein, a prominent NBA player agent, who cited gains made by the owners in the league’s most recent labor agreement. “They have cost certainty on the player [payroll] side, and they’ve got unlimited revenue they can generate. The way the [labor agreement] is set up now, it’s almost a license to print money.”
It was more than sheer economics that was driving the Clippers sale. When the Los Angeles Dodgers sold for $2.15 billion in 2012, that price included a television contract and stakes in land and parking lots. The Clippers, on the other hand, are tenants in their arena, the Staples Center, in a lease that lasts nine more years, and thus they do not receive any non-basketball revenue. They also earn a relatively modest $20 million-$25 million per year on their current television deal, which expires after the 2015-16 season.
Huge increases being paid to franchises for the rights to televise their games are fueling the explosion in team valuations. And while the Clippers’ next television deal could increase their payout exponentially, industry analysts believe the team will get substantially less than the estimated $150 million per year the Lakers get from Time Warner Cable.
“I think [$2 billion] is at least two times too large to make economic sense,” Andrew Zimbalist, professor of economics at Smith College, said of the Clippers’ sale price. “There’s one of either two things going on. [Ballmer] is either making a vanity purchase . . . or he’s expecting the Clippers to generate the type of television deal the Lakers or Dodgers got. If that’s the way he’s looking at it, he’s going to be sorely disappointed. He won’t get anything close to that.”
The NBA official said the league’s owners think the $2 billion sale price for the Clippers is “fabulous” because it raises the bar for their franchise values. “You reset your price based on comparables, and the only comparables are what the last guy sold for,” the official said. “I do think it has a quantifiable impact across the league on valuations.”
Sports franchises are frequently seen as vanity purchases by wealthy individuals who crave the spotlight, and the Clippers may have provided a unique twist to that market force. Edelman, the Baruch College law professor, was among those shocked at first when he saw what the Clippers had sold for given the lingering fallout from the Sterling scandal.
“But once I had a chance to reflect,” he said, “I came to the conclusion that Sterling’s racist rant actually enhanced the value of the team by giving someone the opportunity to ride in as the white knight who saved the day.”