Franchise Value

The horror of the NBA, it seems to me, is that it’s one of the rare businesses in which a firm that’s persistentlyT mismanaged and constantly failing can nonetheless be a profitable business. Take the LA Clippers:

Forbes.com doesn’t just report basic revenue and cost data. They also attempt to estimate franchise values. And according to their estimate, the Clippers are worth a bit more than $300 million today. Donald Sterling bought this team in 1981 for $13 million. So if we focus just on the change in franchise values (and ignore yearly profits), Sterling has earned about an 11.5% annual return on his investment. Remember, the Clippers have been losers in virtually every season Sterling has owned the team. Yet despite being unable to give his customers a very good product, Sterling is still making a healthy return on his investment.

In a European-style promotion/relegation system, the Clippers wouldn’t be nearly this valuable—they’d have been pushed out of the top-ranked hoops league years ago, thus forfeiting the bulk of the franchise value that comes from operating an NBA team.