Last week, former Microsoft chief executive Steve Ballmer plunked down a $2 billion bid to buy the Los Angeles Clippers from the Sterling family. That’s…a lot of money to pay for a franchise that has only 10 NBA playoff appearances to its name (three of them were when the Clippers were known as the Buffalo Braves in the mid-1970s).
Is Ballmer getting a good deal? Sports economist Andrew Zimbalist says no in Time magazine:
Forbes magazine estimates that last year the Los Angeles Clippers generated $128 million in revenue and earned $15 million in profits. At a 5% rate of return, the Clippers would be valued at $300 million. But NBA teams are scarce commodities and their value goes up over time. Moreover, owners garner handsome indirect and non-pecuniary returns, so sports teams commonly sell at a multiple of their previous year’s revenues. The typical multiple in the NBA is 4. That would put the Clippers’ value at $512 million.
But the Clippers will be signing a new TV contract in a few years, and the team is playing better and is more popular than ever. One can anticipate that their revenues will experience robust growth going forward. What if revenues grew by $52 million, to $180 million? Using the revenue multiple of 4, that would put the team value at $720 million.
The only way to get an economic value of $2 billion would be to have projected revenues rise to $500 million. How could that happen? Well, the Lakers got a long-term TV deal with Time Warner for $200 million a year, and the Dodgers have a new one at $340 million annually for 25 years. If the Clippers could get a Lakers- or Dodgers-type contract, then the team’s revenue might begin to approach $500 million.
One issue: Zimbalist points out that “Time Warner is losing its shirt on the Dodgers deal,” and that “no other cable or satellite distributor is willing to pay the price that the Dodgers’ RSN demands. In fact, the price has recently been lowered to $4 [per month] and there are still no takers.”
It would be unreasonable in the extreme that Time Warner, or its competitor Fox, would be willing to sign a Dodgers-type deal. Even if the Dodgers deal were working out, baseball has twice the number of games as basketball and historically has garnered much larger television contracts than basketball. And the Dodgers are the Dodgers — the second strongest brand in baseball after the Yankees.
Recall, too, that the Dodgers own their own facility. The Clippers are tenants.
Ballmer’s net worth is reportedly in the $15 billion range, so it’s not like this purchase is going to sink him. But it likely won’t be a money-maker for him, either.