Wednesday, March 26, 2008

Not a bad return on a paltry investment

There was an interesting article by Joe Nocera in the March NY Times sports magazine on a very interesting aspect of major league team ownership. (Login may be required to access this link.) He notes that, while sports teams tend to be owned by those who were sufficiently successful in business that they could afford to buy a team, teams are often run poorly and/or irrationally.

And, oh, yes, they tend to appreciate wildly in value - even if the team is irrationally and poorly run - and wildly unsuccessful.

Here's Nocera on the "spectacle" of "the Bad Owner:"

...He says he wants to win — really, he does! — but he never seems to have a clue as to how to go about it... Sometimes he spends his money so freely he appears to have forgotten the business acumen that made him rich in the first place...In other cases, he can’t bring himself to bid for free agents and keeps his payroll so low that players flee the franchise as soon as they can. He chews through coaches — or keeps them too long. He surrounds himself with mediocre executives. Even though he gets top draft picks almost every year (and, in the National Football League, an easier schedule) to compensate for all the losing, his fortunes never seem to change.

Clearly, he’s not in it for the glory — there isn’t any for him. Frustrated fans call for his head. Sportswriters mock him. At times his own league clashes with him. And yet, amazingly, he holds on to his wreck of a team, year after blessed year...Why does the Bad Owner seem so impervious to it all?

Because, as Nocera points out, if you own a team in any of the dominant U.S. sports - baseball, football, or basketball - the value of the franchise is in perpetual upward motion.

He points to Donald Sterling, who owns the hapless Los Angeles Clippers, the "other" team that plays NBA basketball in Los Angeles.

Sterling bought the Clippers for a paltry investment of $13.5 in 1981.

Since then, they've been nothing less than terrible. Through most of their history, the team was also a money loser, and have only become "marginally profitable" in the last couple of years.

And yet, the value of the team has grown to almost $300 million - and that's a conservative estimate, by the way).

Not bad at all, given the rule of thumb that an investment should at least double every 8 years. (At that rate, it "should" be worth about half that $300 million.)

As Nocera says:

That’s why the Bad Owner doesn’t sell, the way a normal businessman would be forced to if he ran his company into the ground. No matter what the Bad Owner does, the value of the franchise only goes in one direction: up.

Nocera then makes a Business 101 point: that there's generally a "direct correlation between running a company well and a rise in its value."

There are, of course, other things that get factored in - luck, the market you're in - but, as a rule to go by, it's hard to argue with this one.

But professional sports is, of course, a wildly different animal than most businesses.

No, it's not just that people adulate the hired hands in a way that they don't look up to, say, the average employee of GE or Bank of America. Nor is it that it's one of those odd-ball businesses in which the rank and file employees make more than the managers, which while not unheard of in business is not all that widespread. Nor is it that TV networks pay vast amounts of money for the rights to broadcast the work of the employees of sports teams - can you imagine a bidding war for the rights to "watch" the assembly line at the Saturn plant, or barrista training at Starbucks? Sure, there's a reality show that takes us behind the scenes of Southwest Airlines, and it's weirdly riveting when I'm in the right mood. But I don't imagine that Southwest gets paid all that much - if anything - for it.

The fact of the matter is that, like very few things in life - ocean front real estate being the only one that comes to immediate mind - they don't often make that many more of major league sports teams.

Sure, it happens. Leagues occasionally expand, opening up franchises in new cities. And there were, within my memory, upstart leagues in both football (the American Football League) and basketball (the American Basketball Association), which opened up shop in mostly what we would call in normal business an "underserved territory" (note: that's under-served not undeserved). When the new leagues were formed, there was clearly some disequilibrium going on: not enough supply to meet the growing demand.

Before the AFL, there was no professional football in New England. We followed the N. Y. Giants. Without the ABA, I don't believe there would have been a pro basketball team in New Jersey.

But in both cases - AFL and ABA - the upstart leagues were relatively quickly assimilated in with the existing leagues (the NFL and the NBA). I don't know all the ins and out of these assimilations, but clearly the original leagues didn't really want any competition. What they wanted was control - over the quality (too many teams and the product quality gets diluted) and, of course, over the money.

The last thing these guys are going to do is tolerate a threat to their monopoly.

And the cost of mounting such a threat is, of course, astronomical. In this day and age, you'd have to have an awful lot of dough to be able to foot the bill for the average sports team payroll, let alone all those extras like balls and uniforms.

Talk about barriers to entry!

In truth, while I don't think that the average sports team owner is turning up his nose at the money machine he's bought into, do we really believe that most of these owners are in it for the money?

It's axiomatic that most sports-playing kids - boys only, in my era - dream at some point about growing up to be a professional athlete. Not many get to realize this dream, but for those who get to realize another sort of dream - financial success in business - buying a sports team is, well, something of the ultimate. It's the private jet. The mansion on the hill. The big, fat Cuban cigar.

And, unlike private jets, mansions on the hill, and big, fat Cuban cigars, they aren't making any more of them, and there just aren't enough of them to go around.

So, the rich get richer, and Nocera's "Bad Owner", while failing to succeed on the usual terms of the sporting life - winning it all - are still doing what they have already proven they can do pretty well. And that's make money.

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