"You And LeBron James Will Help Donald Sterling Make His $2 Billion"
Donald Sterling isn’t going down without a fight.
Monday night, the owner of the Los Angeles Clippers who was caught making racist comments in an audio recording, announced that he would not sign off on the deal his wife, Shelly, reached to sell the team to ex-Microsoft CEO Steve Ballmer, and that he would proceed with his lawsuit against the NBA for banning him for life and trying to force a sale. Most likely, though, that suit will be fruitless, and one way or the other, Sterling won’t be the owner of the Clippers for much longer.
Whenever the absurd theatrics of the Sterling fiasco end, NBA players and fans will be happy to put it behind them. So will non-NBA fans who have endured constant updates about it all. Still, all of them should take note of the sale, because it affects them all. When Sterling cashes his check for $2 billion (minus the $600 million or so he’ll hand to the government), he will do so thanks to the financial aid of everyone from LeBron James to NBA fans to people who have never watched a basketball game in their lives. We have all, in our own special way, helped make Donald Sterling a lot of money off of his basketball team.
Let’s start with LeBron and his fellow players, who played a huge role in forcing the NBA’s hand in the Sterling mess but, in seeing that $2 billion price tag, have taken notice of exactly how short the end of the stick they hold is.
In the three years since NBA owners cried poverty and locked players out, canceling the first third of the 2011 NBA season, four franchises have sold, and three — Sacramento for $534 million, Milwaukee for $550 million, and now the Clippers for $2 billion — have gone for new-record prices. Those price tags dwarf the figures NBA teams commanded in the years immediately prior to the lockout, when all but two teams that weresold went for less than $400 million (the Wizards went for $551 million in 2010, including the price of their arena). Overall valuations and estimated profits of NBA teams have escalated since the lockout, and the 7 percentage points players gave up of their share of so-called “basketball-related revenues” is no doubt a reason why prices since have soared into new atmospheres.
“That’s a big chunk of costs that have disappeared, and generally those will fall to the bottom line,” sports economist Andrew Zimbalist told me. “Ten years ago, in any year, you may have found half the teams were losing money on an operating basis, and half were making money. Today, I think you’d find that easily three-quarters of the teams are making money in any given year, and those that are making profits are making even bigger profits.”
The lockout has made the good life of owning an NBA team even better, largely by reducing the amount of money owners have to spend on player salaries. That, Zimbalist said, is “a large part of the story” when it comes to rising franchise values.
But it’s not the biggest part. You are.
“I think a larger part of the story, though, particularly with these explosions in franchise values, comes from the expectation of media profits and media revenues,” Zimbalist said.
In recent years, broadcasters have paid an increasingly large amount of money to teams, leagues, and sporting organizations for the right to show their games on live TV. This has increased the value of sports franchises by providing an influx of new revenues for leagues to split among their teams or, in the case of teams with their own rights deals, for teams to rake in themselves. The belief that networks — both national and local — will continue paying higher and higher prices for these rights has driven up the value of sports franchises.
How do you factor into that equation? It’s simple. A large portion of the money broadcasters like ESPN pay for the rights to show games comes from you — even if you never watch the NBA.
As Sports On Earth’s Patrick Hruby explained last year, television broadcasters make up for the massive rights fees they pay by passing the costs along to us. Not some of us who are sports fans. All of us who have cable. This is all thanks to the practice known as cable bundling, in which channels are grouped together into a single package for a set price. There’s a price for each channel in the bundle — it’s known as an affiliate fee — and sports channels command the highest fees because they are the strongest remaining bastion of live TV programming. ESPN, for instance, charges nearly $6 per cable subscriber, whether or not he or she watches ESPN. Other sports networks can’t set prices that high, but they still charge. Scroll through the number of sports channels in your cable package, examine the fees you’re paying for their inclusion, and you start to get the picture.
“Add it all up, and big time sports are taking a minimum of $84.90 out of my pocket, year after year,” Hruby wrote. “Before I buy a jersey. Or a licensed video game. Or even a single game ticket. Just because I have pay television.”
That business model is lucrative for television companies like ESPN, which makes as much as $6.5 billion a year from these fees alone. And it is lucrative for leagues and team owners too, even as it has driven up the price of TV for consumers. As Hruby wrote, the business model, through the rights fees networks pay to leagues and teams after collecting fees from you and every other cable subscriber, is “the reason why investors paid $2 billion for the Los Angeles Dodgers” two years ago. It is not the only reason Ballmer will pay $2 billion for the Clippers — that the Clippers play in L.A. and have a stable arena situation certainly helps too, and as Zimbalist wrote in a column for Time, Ballmer is probably overvaluing the team’s worth in making a bit of a “vanity purchase” — but it is a huge part of the equation. The team’s TV deal expires after the 2015 season. The NBA’s ends a year later. The expectation of new rights deals that pay more than the current ones has driven the team’s value even higher.
There are, however, signs that what Hruby called “The Sports Cable Bubble” is slowly — very slowly — starting to deflate.
“I think a large part of that expectation is unrealistic,” Zimbalist said of the idea that broadcast rights fees will continue to escalate the way they have in recent years. “I think that sports has been in a bubble in general, that there are too many forces that fed the bubble that are now going into reverse, including increasing interest and concern on the part of both Republican and Democratic members of Congress to do something about television pricing and television delivery.”
Congress has, as Zimbalist said, taken an interest in the cable bundling practices on which the growth of this bubble is predicated — Sen. John McCain (R-AZ) has introduced legislation to break up the bundles (that legislation, though, isn’t moving any time soon). So too has the judicial system: the Supreme Court recently heard a case involving a company that is trying to reshape the entire pay-TV model. There have been other lawsuits challenging the business model, including one right in the Clippers’ backyard. And cable providers have started fighting networks over these fees with more regularity.
Whether or not that model needs to be abolished, and how to replace it if it does, is up for debate. As The Atlantic’s Derek Thompson has written, “Sports keeps the cable bundle together. And the cable bundle is powering the media companies through a remarkable surge in quality TV entertainment.” Both Thompson and Matt Yglesias have noted that ending the bundling scheme could lead only to all of us paying more for less (Yglesias suggests returning to direct governmental regulation of cable pricing instead). But make no mistake about it: the existing model has helped spark a surge in the value of sports franchises and leagues overall. Combine it with the lockout, and that means that when Donald Sterling finally gets out of his own way and sells the Clippers, you, me, and LeBron James will have something in common: we will all have been integral parts of a business model that helped Sterling become even wealthier than he already is.