The $2 Billion Bubble? What the Clippers Sale Means for the NBA and the Players

The sale of the Clippers to Steve Ballmer could not have gone any better for the NBA. Adam Silver hasn’t even been on the job for six months and he already has a triumph that will be in the first or second paragraph of the stories about his retirement two or three decades from now.

He confidently stretched the league’s constitution almost as far as it could go in fining Donald Sterling the maximum $2.5 million, banishing him for life, and moving immediately to force the sale of the team to a less despicable person. He made clear it would be better for everyone if Sterling and his wife, Rochelle, would sell the team on their own before the NBA stripped them of it.

And, boom: $2 billion, a number that has sources across all areas of the NBA today writing emails and texts filled with exclamation points, like teenage girls gushing about One Direction. There will still be some ugly twists, given reports Sterling will sue the league, but Silver expected that. Everything appears to be on track. Just about everyone agrees that Ballmer is overpaying, perhaps dramatically, in forking over the second-largest purchase price ever for a North American franchise — a price that came in at just less than triple the most recent Forbes valuation of the team.

But the Clippers are debt-free — having a cheapskate owner helps in that regard — and on the verge of renegotiating their undermarket local TV deal, struck before the league’s most pathetic franchise somehow teamed up Chris Paul and Blake Griffin. The Clips get only about $20 million or so per season from the deal, according to various reports, roughly one-tenth what Time Warner pays the Lakers every season.

The league’s national TV contract, which yields about $30 million per team annually, is up after the 2015-16 season, and the new one will trump that in a landslide.

Franchise valuations are escalating at a nutty pace; the Bucks’ sale for $550 million broke the Warriors’ previous record, and Ballmer and partners were ready to go well over that to relocate the sad sack Kings to Seattle. Sales figures from 2010 and 2011 look like ancient relics now, like Don Draper paying some absurd price to go to the movies on Mad Men. Michael Jordan’s crew got the Bobcats (now Hornets) almost for free, on the condition they assume all the debt the franchise had piled up. A bunch of private equity dudes bought the Sixers, a huge-market team, for $280 million in 2011. Three years later, two other finance wizards paid nearly double that for the freaking Bucks, and they even agreed not to move the team to a more profitable market.

The forces driving this are obvious. The league slaughtered the players, forever disorganized and fighting among themselves, in the 2011 lockout. Players used to get 57 percent of all league revenue; they get 50 percent now, a savings of about $10 million per year for each team. Live sporting events only get more valuable to TV networks as fewer competing programs prove DVR-proof. China and India loom as untapped or only semi-tapped markets.

The league’s revenue-sharing system will soon ensure that every team makes a profit, or at least comes close. The Bobcats got $20 million from it last season, and they’ll get about that much again this season. The Pacers and Grizzlies snagged about $15 million apiece, according to several league sources, and even big-market teams such as Atlanta and Washington got some extra scratch. Only a short time ago, owning an NBA team was not a hugely profitable business. Owners used the losses as a tax benefit, knowing they’d reap the gain someday by selling the team outright. They just enjoyed the spotlight.

Now more owners and prospective owners are viewing teams as moneymaking ventures in their own right, not just glamour purchases with shaky short-term balance sheets.

The Clippers price is a healthy indicator, but it’s also something of an outlier. Los Angeles is a mega-market; it’s unclear how much the $2 billion eye-popper really affects what teams in smaller and midsize markets might someday draw, though every precedent matters. The accelerated timetable and auction-style sale created a frenzy that would be hard to replicate.

The Milwaukee price might be more meaningful leaguewide, but even that price is crazy by recent standards. There are burbling worries of a bubble, anxiety that the NBA boom can’t possibly persist forever, but there are no signs of a slowdown — and there likely won’t be any until well after the beefy new TV deal kicks in.

But there is a growing sense that some owners have to be looking at that $2 billion price tag and thinking, Jesus, how long am I going to wait if I can cash in like that now? Financial advisers are searching for minority and large-share owners seeking an immediate payday, and they’re growing optimistic that they might find some takers soon — especially among minority owners with smaller shares.

It seems counterintuitive to cash out now, and some owners big and small will dismiss the idea out of hand. The league is on an upward trajectory, it’s fun to own a team, and aging owners can pass a team on to their children. And rising franchise valuations don’t apply equally to all owners. A person who owns 3 percent of a team can’t necessarily point to the Milwaukee and Los Angeles purchase prices and suggest that the same proportional math should determine the value of their little shares. Some smaller owners don’t even get a seat at the table for big franchise decisions. Some have to buy their own tickets when they pop into town for a game on short notice.

But … $2 billion! If you’re Herb Simon, having owned a money-losing team in Indiana for so long, aren’t you at least thinking about how high the price might go tomorrow? Jerry Reinsdorf doesn’t really appear to enjoy owning the Bulls; what would he say if someone just handed him $1.75 billion tomorrow? The Buss family will probably never sell the Lakers, since it would go against the wishes of their beloved father, but if I were a Buss, I’d be the rogue brother chirping about whether we could get $4 billion and just call it a day.

Some of these owners come from the private equity world, where the model in lots of places is to get in, find the profit, and get the hell out — no matter what wreckage you leave behind. Selling on the way up might cost you, but no one knows if the escalator headed up could turn out to be the escalator to nowhere.

In the short term, things will almost certainly stay wonderful. And the short term is what matters here, since both the owners and players’ union can opt out of the collective bargaining agreement in 2017. It’s unclear how the rash of recent purchases, and particularly this watershed Ballmer deal, will affect the choice on either side.

There is growing resentment today from several players on Twitter, including Ty Lawson and Andrew Bogut. The owners cried poverty in 2011, claiming enormous annual losses. The players countered that those losses were at least in part accounting tricks, and, perhaps more importantly, that the increasing value of an NBA team as an asset overwhelmed the negative balance sheets. Revenue-sharing might put every team in the black going forward, anyway.

The players do not get to share directly in the profits from the sale of a team. They don’t put up the capital to buy teams, and the revenue from those sales does not go into the pot they split 50-50 with owners. During the lockout, the union had an internal discussion about proposing rules that would allow players to share in some way in franchise sales at unexpectedly high prices, but the idea never got much traction, sources say. (They even discussed just allowing the players to take a share of those sales profits and put them toward pension funds.)

It was no secret that power agents were unhappy with how the lockout unfolded. They pushed for a line in the sand well above the 50 percent mark, and they worked behind the scenes to decertify the union, depose Billy Hunter, and take over negotiations on their own. That discontent remains in some corners, and the Clips’ purchase price may not help.

But the idea that players might preemptively strike in 2017 seems outrageous. Players never strike anymore. Every sports labor dispute is a lockout. The union couldn’t even find cell phone numbers for some players in 2011, and they haven’t had an executive director in well over a year. They’ve already scrapped one search process, and they’re just starting the next one.

The players haven’t demonstrated the clout to take that kind of action or hold out as long as needed while paychecks vanish. It is hard to fathom them negotiating up from 50 percent ever again. The toothpaste is out of the tube, as lawyers like to say. Increases in league revenue are healthy for players, since they get that 50 percent of the growing pie. There will be a divide between agents who want to maintain the partnership and those who want to fight.

It’s unclear exactly where the union falls, but it has a lot to be happy about here — a new big-spending owner, signs of increased revenue (of which players get half), and the ability for players to approach the Clippers right away in free agency on July 1 without reservations. It also proves the union was right to trumpet the rising value of franchises.

The owners are the more interesting issue. It has long been assumed they will opt out in 2017, even though things are going swimmingly for them. Rich guys don’t turn down the chance to get even richer, and they crush labor underneath their $1,000 shoes. They might not be satisfied with winning the last lockout when they could win another one and trim the players’ share of revenue below the 50 percent mark.

But lockouts are work stoppages, which means no games, and at least for a time, no checks from the TV networks. They cost money. If things are going great, there is at least the chance the owners just ride out the CBA until its expiration in 2021. “There’s at least a chance they feel they’ve reached an equilibrium,” says Gabe Feldman, a sports law expert and associate law professor at Tulane, “and that we might be on the verge of an era of labor peace.”

But Feldman doubts it, even in light of a $2 billion purchase that suggests owners should just want to keep the party going. “I don’t think this really has a significant impact,” he says. “I don’t think it really changes some of the arguments the owners used in the last lockout. Teams don’t have to be losing money for owners to lock the players out.”

Ballmer’s purchase actually proves out one argument the owners put forth last time around, Feldman says: It costs a ton of money to run a team, and those costs are going up as the league expands its digital and international reach. The revenue-sharing system counters some of that spending, since it will lift up the poor teams, but it doesn’t help every team equally. “If I’m Steve Ballmer,” Feldman says, “I overpaid for this team. I can’t give up anything in the next collective bargaining deal.”

Ballmer is at or near the top of the league’s “wealthiest owner” totem pole, and so he represents another prickly possibility — the potential for another owner willing to blow past the luxury tax in order to win. The league paid lip service to “competitive balance” as a goal of the 2011 lockout, and Silver genuinely cares deeply for that cause, even if ratings for small-market playoff games continue to disappoint. The punitive tax hasn’t yet scared off Mikhail Prokhorov and James Dolan; what if it doesn’t scare Ballmer, either?

We’ll just have to wait to see the implications of this Clippers saga. But one thing is for sure: Silver has achieved a huge victory in ridding us of a disgrace the NBA enabled for too long.

Filed Under: NBA, Steve Ballmer, Los Angeles Clippers, Adam Silver, Lockout

Zach Lowe is a staff writer for Grantland.

Archive @ ZachLowe_NBA