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Almost All NBA Team Owners Have Made Profitable Investments

By Matthew Yglesias  

"Almost All NBA Team Owners Have Made Profitable Investments"

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Michael Wilbon’s curtain raiser on the NBA lockout repeats the sin of looking at the fiscal state of sports-related firms with reference to their annual cash flow:

The NBA, meanwhile, has teams losing real money. The league says 22 of 30 are operating in the negative; the players association would surely say it’s fewer than that. Either way, it’s reasonable — if not downright inescapable — to conclude there are NBA teams awash in red ink.

Normally when we talk about firm performance we make at least some reference to share prices or other measures of equity value. This is especially true when we’re talking about owners who are, by definition, the people who own the equity. Microsoft is considerably more profitable than Twitter, but someone who bought a large stake in Twitter four years ago is in much better shape than someone who spent an equivalent sum buying a stake in Microsoft. I would say that this is especially the case when it comes to something like these sports teams since the accounting profit or loss can be easily manipulated. For example, the Washington Wizards are owned by the same corporate entity that owns the Verizon Center in which they play. By shifting around the Wizards’ rent payments to the arena you can manipulate the team’s cost structure in arbitrary ways. Similarly, if I owned a profitable team and wanted to make the profits go away I might hire myself and my friends at high salaries. None of this speaks to the actual value of owning the firm. What’s more, a sports team isn’t like a dry cleaning business. Owning and managing a basketball team would be fun. If Ted Leonsis offered to gift me the Wizards with the proviso that the team loses $10,000 a year that would come out of my pocket, I’d leap at the opportunity. Indeed, the number of people who would like to own an NBA franchise far exceeds the number of NBA franchises available. Which is why WR Hambrecht’s comprehensive analysis (PDF) of the financial stake of pro sports teams in the United States confirms the obvious point that NBA teams have a large and positive equity value:

When you think about it, the remarkable thing about pro sports is that it’s possible to make any money at all owning teams. If someone put the New York Knicks up for auction under the condition that any profits the team makes will be annually stacked up in Madison Square Park (former home of the Garden!) and lit on fire, I would expect to see a large number of bids by consortia of wealthy NYC-area basketball fans. Under the circumstances, it’s interesting that in recent years the vast majority of NBA owners have actually been making profitable capital investments:

It’s particularly worth noting that several of the teams who’ve lost the most franchise value have been fairly catastrophically mismanaged (I’m looking at you Minnesota), which is hardly the NBAPA’s fault. All things considered, the vast majority of the owners have nothing to complain about in terms of their financial fortunes over the past few years (years that have been unkind to the finances of many Americans!) and among the minority who may have “lost money” in some real sense, most primarily have themselves to blame and all are in possession of valuable financial assets. Even the lowly Memphis Grizzlies are estimated to be worth $266 million.

[UPDATE] Here’s a very useful post from Deadspin about how profits can turn into losses via the magic of accounting. There’s not even anything particularly dishonest about this. There’s a reason that accounting is a profession. You can’t just look at a firm in terms of naive cash flow, but once you go beyond that deciding what is and isn’t profitable gets complicated. The question “how much would I have to pay to take this team off your hands,” by contrast, admits of a fairly unambiguous interpretation.

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