Check your couch cushions, because if you have $12.5 billion in loose change under there, you could have bought an iconic NBA franchise last week.
That was the valuation on the Los Angeles Lakers' franchise, a 77% stake in which was just purchased by a former Disney CEO and the brother of a Republican political operative. The $12.5 million price tag was not merely a record for an American pro sports team; it represents a crazy acceleration in franchise valuations. When the Celtics sold at a $6.1 billion valuation almost exactly a year prior, it set a new record. This Lakers deal more than doubled it. DOUBLED. In 52 weeks. And we thought inflation was painful on gas and milk and burritos.
Even the Lakers' franchise itself illustrates the point, as outgoing owner Mark Walter only took the helm last October, purchasing that same 77% stake but at a $10 million valuation. That means in around nine and a half months, the asset value grew by $2.5 billion. That's a killer rate of return. If the average American household worked for 29,857 years without paying income tax, rent or having any other expenses, that family would still be shy of having $2.5 billion in the bank. Walter made that amount simply by buying a thing, owning the thing for nine months, and then deciding to not own that thing anymore[fn]OK, he actually made 77% of $2.5 billion because he only owned 77% of the thing, but you get the point.[/fn]
Whether it was his original intent or not, Walter essentially flipped the Lakers the way your favorite HGTV stars flip a mid-century rambler in Kenosha. Which leads one to wonder: what is the impact on the NBA and its franchises — including the Jazz — if NBA teams are increasingly traded like a giant stock?
The Jazz have one of the more stable ownership situations. For the past 40 years, the Jazz franchise has been the property of exactly two families, both Utah-based. It could become a competitive differentiator if the clubs around them are more frequently having to reset their vision or recalibrate their decision-making engines. You don't have to look far to see how the fortunes of a team or indeed an entire city shift when new people occupy the owners' suite.
Mark Cuban sold a controlling share of the Mavs, and almost immediately regretted it when he saw the way new ownership was running the team, including by notoriously trading a first team All-NBA megastar. The Portland Blazers were sold earlier this year to a billionaire from the lending sector who instantly began looking for ways to shred budgets. He refused to offer a market-value coaching salary, let a broadcasting legend walk, didn't buy standard playoff swag, didn't let two-way players fly with the team, and gutted the front office. And yet all of that pales in comparison to the game of chicken he's currently playing with local officials over arena funding, which has fueled speculation about a Sonics-style franchise heist. It's not an exaggeration to say that the Blazers leaving the Northwest would impact millions of Oregonians, beyond just basketball fans.
The Mavs, Blazers and now Lakers are all conference rivals of the Jazz, and will all be dealing with some version of ownership shaking the Etch-a-Sketch. And in the Lakers' case, it will be second time in less than a calendar year.
We're going to completely ignore for the sake of this discussion that Walter chose to divest precisely as he's reportedly under investigation by the Department of Justice for financial practices across his various business. Or that buyer Josh Kushner's brother works in the administration that oversees said DOJ. Or that the other buyer, Bob Iger, is a close partner to the league office from his tenure atop the Disney media empire. Smarter and better sourced people than this schlub will look into all that. We're also ignoring more recent news about the Buss family's final Laker shares, which may be getting sold or may not be.
Because what interests me more at this stage is what increased commodotization of the franchises could mean to actual basketball. There's a chance that skyrocketing franchise values could actually disincentivize long-term ownership. Simply put, if running a franchise is nowhere near as lucrative as selling a franchise, then selling franchises will become way more common.
There is a difference between a business' profit margins and the same business' overall value increasing or decreasing. Owning a house that has doubled in value doesn't necessarily mean you have that money in your checking account and can go buy a Bugatti. Which is something that people like to ignore with their fake syllogisms.
Jeff Schwartz is a powerful agent and a smart guy. He knows that these are two very different realities he's talking about, and he's banking on the rest of us conflating them.
It should be painfully obvious why the logic here is faulty. You can't turn that incremental franchise into spending power without selling the franchise. If an NBA owner bought a franchise for $1 billion and today it's worth $4 billion, that doesn't mean that owner has $3 billion to spend on players. They only access that $3 billion in capital by selling!
Very basically, there are three very different economic issues at play here. They are all related to a degree, but not nearly as much as the rhetoric would lead you to believe:
- A team's income or profit/loss margins
- Appreciation/depreciation in a team's overall valuation
- Roster costs in a cap/exceptions structure
Roster costs certainly have an impact on profitability. Profitability certainly has an impact on overall value. But it's entirely possible to be a massively profitable team that is also out of salary cap tools... or to be bleeding money on the yearly balance sheet and still worth billions overall. They're connected concepts, but different.
Just like any lemonade stand, Arby's franchise, Fortune 100 company or Albuquerque meth empire, an NBA team is a business with costs (like the cost of talent) and revenues. Some businesses make money by having more revenues than expenses, some the other way around. But that's different than an overall valuation.
And as it relates to the NBA, player salaries are a relatively fixed cost, collectively speaking. However much money the NBA generates next season, the players will get exactly 51% of it, because that amount was collectively bargained by the Players' Union and the league. Some teams will obviously foot more of that 51% overall bill than others based on personnel choices, but the owner-player split is the same every year on a 30-team level.
Let's illustrate the profitability vs. valuation point with more Laker math. Forbes estimates that as of last year, the annual operating income of the club was $170 million before taxes. That means that it would take nearly 15 years of operating the team to generate equivalent income to the $2.5 billion profit this sale represents! Speaking strictly from a financial perspective, why would a smart owner want to wait 15 years to realize a windfall he or she could have today?
And that's for a relatively profitable franchise in one of the NBA's largest markets. The small-market Grizzlies make $28 million, Forbes estimates. Assuming they could draw an offer of just $3B, a third less than the Blazers' valuation — that offer is equivalent to 107 years of running the team at its current income level.
At those numbers, who could blame an owner for selling?
To be clear, none of this is mean to sound like a pity party for the megarich owners. It's simply raising the issue that If the only way for an NBA owner to realize a financial benefit is by selling the team... then more owners will sell teams.
Bringing it closer to home, Ryan Smith bought the Jazz for $1.66 billion after famously looking up the Forbes franchise value estimate in a casual conversation with then-owner Gail Miller. Recent franchise sales have been for nearly three times that amount at the low end (Blazers, valued at $4.25B), four times that in the case of the Celtics ($6.1B), or a whopping eight times that with this historic Lakers valuation. Smith could reasonably pocket multiple billions in pure profit by selling right this second.
Luckily for Utah fans, he almost certainly won't. Smith is, importantly: 1) a lifelong Jazz fan, 2) obsessed with raising Utah's profile, and 3) flush with cash after selling an experience management empire he started in his garage. The Jazz are also generally profitable. So let me be crystal clear: Smith is used here only as an example of how the math has to reward owners for keeping a franchise.
There are, of course, reasons to own a franchise that are not financial, starting with the fact that it's cool and fun. Many equate team ownership with owning high-end art or collectibles; having the thing is by itself valuable in an irrational and nonquantifiable way. Smith gets to help shape the team he used to root for as a kid. Iger and Kushner now get to preside over one of the winningest brands in all of sports. For a certain type of billionaire, that's worth more (but in weirdly the same kind of way) as owning an original Monet.
Schwartz went even further, juxtaposing roster cost vs. valuation... which is honestly kind of silly. Whether a team chooses a veteran or a rookie for their 15th roster spot has precisely nothing to do with their franchise valuation in a sale. But in a salary cap league with limited financial tools and finite roster spots, being judicious about contracts is a competitive necessity.
To be clear, signing or not signing Kevin Love, a Schwartz client, to a subsidized[fn]Teams only pay $2.45M of the salary for vets on 1-year contracts, with the league picking up the balance.[/fn] veteran minimum contract is highly unlikely to be the thing that dictates whether a given team makes or loses money. If a team decides to pass on offering Love, or Russell Westrbook, or Kelly Olynyk (all repped by Schwartz, all in their 30s, and all still unsiged) it has to do with neither profitability nor with franchise appreciation. It's simply because roster spots and salary cap exceptions are precious!
Teams can employ 15 players with standard contracts. That's it, and it has to accommodate their stars, their recent draft picks, they're project pieces, their role players... everything. An extra $2.45M on a minimum-salary player isn't going to materially a team's financial reality unless they're already deep in the luxury tax. Instead, it's the opportunity cost teams are worried about: now they can't use that roster spot to keep and/or develop someone else.
If Schwartz had wanted to make this about roster cost vs. profitability, that would have at least required less of a leap. There are plentiful examples of teams making decisions about roster affordability at the expense of basketball needs.
OKC saved more than $300 million in salary and luxury tax payments by trading Lu Dort, Isaiah Joe and Aaron Wiggins, yet sports books still set their over-under for wins at 60.5. It's not what fans who love Dort's toughness or Joe's sharpshooting want to see, but it's actually the responsible thing to do. Even in one of the NBA's smallest markets, they'll continue to compete for titles while allowing ownership to feel good about their investment.
Because — back to the point about ownership being as rewarding as selling — the Thunder's estimated operating income is $114 million. That means the extra $300 million they might have spent on the above trio could have literally been the difference between them posting a 9-digit profit or a 9-digit loss. And this is for an ownership group that bought in at $0.35B and could probably sell today for $5B or more. How tempting would it be for that ownership group to pocket a 1300% profit instantly if the alternative is losing nine figures this year?
The overarching points here: profitability / valuation / roster-building limitations are very different concepts. And if we insist that owners must exhaust all their profits just because franchise values are rising, then we're begging them to sell the teams.
The owners don't need our sympathy, and this isn't at all about justifying a cheapo owner scrooging his fans out of playoff t-shirts. But if we want a world where franchise stewardship is a more lasting commitment, then it's OK if ownership benefits owners even between sales.
Otherwise, with the way franchise values are trending, more owners will be tempted to seek that multi-billion dollar off-ramp.
