BY Art Thiel 06:30AM 04/15/2013

Thiel: Risk-takers offering big-time belief in NBA

The bid-up for the Kings is an extraordinary development in U.S. sports history, because the rich guys believe that the NBA is well-positioned to be a global gold mine.

Why are so many rich guys wanting into a league that saw 20 of 30 teams lose money as recently as two years ago? / 360 Architects

For some of us who haven’t been around the NBA in a while, a fair question for Chris Hansen, Steve Ballmer, Vivek Ranadive, Mark Mastrov and all other would-be investors in the Kings franchise at half a bill is this:

What the hell are you guys thinking?

Certainly, that was a question I pondered for Clay Bennett in 2006 when he paid local coffee-grinder Howard Schultz a ridiculous $350 million to purchase the Sonics.

Relocation issues aside, I remember thinking: What a moron. I learned that Bennett, unbeknownst to him, ended up bidding against himself, because his fellow bidder, Larry Ellison of San Jose and Oracle, dropped out at $250 million, only Schultz wisely never said anything.

Seven years later, it turns out Bennett still may be a dirtball, but he’s no fool, at least if you believe Forbes magazine’s valuations of NBA franchises. The latest version values the former Seattle franchise at $475 million, with a $30 million annual profit. So the big
Okie gets to dunk on Seattle. Again.

Who’s No. 1? The New York Knicks, at $1.1 billion, leap-frogging the Los Angeles Lakers partly because of revenues generated by a $980 million renovation of Madison Square Garden. The average NBA team is worth $509 million, a 30 percent increase over the previous year. The figures must be close, because Joe Lacob in 2010 paid $450 million to buy the Golden State Warriors, who haven’t won anything since shortly after dinosaurs became extinct.

What is going on here?

Media money, mostly. As has been seen with the astonishing revenues generated by the Pac-12 Network and its like among the college sports conferences, as well as the sums given MLB and NFL regionally and nationally, the play is in the pay for play-by-play.

Live-game sports programming is the last consistently popular appointment TV left in American pop culture.

Most entertainment programs and much news programming are available on Netflix, Hulu and other subscription services, to be watched largely free of commercials at the time and on the device of the consumer’s choice. Only in a handful of other instances, such as the Oscars or the presidential elections, do consumers mass in front of a scheduled TV event. No longer is it realistic to record a sports event and enjoy it later without already knowing its outcome. We are a now culture.

Not only is the money already large, it will grow exponentially larger with the awareness that while the American market for sports programming may be, to use the industry vernacular, “maturing” somewhere in the mid-future, the long-term bet is on international markets to sustain growth, as it is with many industries.

That growth will be led by the NBA, because it is the American game most portable to most points around the globe. Beyond North America, the NFL is likely destined to be a niche product because another kind of football prevails. Baseball will continue to draw a decent stream of international cash and hockey . . . well, it’s good for Canada, but it’s still niche sport in the U.S. and maybe only NHL commissioner Gary Bettman is hanging his financial hat on revenues from Finland or Siberia.

The NBA already is popular throughout Europe and continues to grow in the developing world, particularly in China. Any Seattle fan who mocks the ethnicity of lead investor Ranadive as a compelling asset of the Sacramento bidders has not been paying attention to economic events in India.

If he gets his way, Ranadive will be the primary owner of the Kings and the primary conduit for the infant relationship between the NBA and the world’s second most-populous nation. How fast can the game grow in India, at least as streamed entertainment available on tablets to several hundred million educated, middle-class, English-speaking Indians? Maybe as fast as Facebook. Which is why it doesn’t hurt to have former Facebook executive Chris Kelly in the the mix for Sactown.

The revenue potential in NBA globalization is staggering, and every single one of the owners knows it, but does not want to talk about it. That was why NBA Commissioner David Stern gave such a mushy answer to a question about a potential expansion following the April 3 presentations in New York by the rival bidders. He talked about “expansion on horseback,” a clumsy phrase that meant a rush to grow the league before more is known about future revenues.

While most basketball fans in Seattle and Sacramento are consumed with the necessary details of arena build-outs, environmental reviews and and local market demographics, it’s checkers compared to the three-dimensional chess the owners are playing. The impressive list of wealthies that have joined the proposed ownership group in a once-derided market should sound an ooga horn to discerning business people nationally and globally that something is up here.

Does the involvement of these heavy hitters to challenge the heaviest of hitters, Steve Ballmer, guarantee the success of the winner? Of course not. Ask anyone who worked for or had stock in Lehmann Brothers, Washington Mutual, Enron or many other colossal business collapses whether smart guys consumed by greed can make foolish mistakes.

There are some analysts who think the TV-rights fees growth is an economic bubble, like housing, derivatives or the dot-coms of the early 2000s. Others think that franchise prices will make tickets so expensive that teams cannot cover annual expenses, including debt  from public sources. Still others are prepping for the collapse of the U.S. economy.

Can’t say who is right. What can be said is that bidders on both sides have gained their wealth largely through taking risks when others have said they are fools. And the people they are seeking to join, the current owners, are exactly the same breed.

But those incumbents are reluctant to add new partners who will take a 31st slice of a pie that they believe will be someday quite juicy at 30.

At the moment, the robust picture is a little hard to see when teams in Charlotte, New Orleans and Memphis are still losing millions annually. But when the NBA in its new collective bargaining agreement squeezed the players down to 50 percent of the league’s revenues instead of 57 percent, and when owners agreed among themselves to a revenue-sharing plan that looks more like the one that made the NFL such a towering success, they created a path to break-even that can happen even before the bigger TV revenues.

If you remain skeptical about the bigger narrative, re-read the statement Hansen made Friday night on his sonicsarena.com website after he surprisingly raised the offer to the Maloofs for the Kings $25 million to a record $550 million:

“(We) voluntarily raise its purchase price as a sign of our commitment to bring basketball back to our City and our high degree of confidence in our Arena plan, our financing plan, the economic strength of the Seattle market, individual and corporate support for the team and, most importantly, the future of the NBA.”

Italics are mine, but the words are Hansen’s. It’s obviously flattery to the NBA, but he backed it with $25 million. That’s walking the talk.

I recently spoke with a current NBA executive and asked him if a vote can get done Friday, the regularly scheduled Board of Governors meeting that is supposed to be decision day on the Kings.

“No way they get it done on Friday,” he said. “It’s too complicated, too many things to consider.”

True or not, and independent of the merits and demerits of each side’s claims, this is a big damn deal for the NBA, as well as for American sports. Already the NBA had an unprecedented preliminary meeting on April 3, and now another unprecedented meeting Wednesday has been booked for a committee of owners. I imagine the discussions will include a variation of the question I pondered seven years ago about Clay Bennett’s seemingly foolish decision to over-pay for the Sonics:

“Gents, what are we thinking?”

Big, is what I would guess.


YourThoughts

  • MWH

    I agree that there is gold in India.. However the Ranadive as a conduit to India feels like an ad-hominem argument to me.

    Steve Ballmer and Microsoft have been doing business in India for over 30 years. As a corporation Microsoft helped to feed the national investment in technology over the last 30 years, by hiring employees, funding smaller tech companies and contributing to universities… As a region, Seattle is very well known throughout the country many in the tech industry have some sort of connection here either spending time working here or working with directly with Seattle’s many tech companies.

    Is suspect that the names Microsoft/Ballmer have more clout in India than Ranadive/WHAT EVER HIS COMPANY IS NAMED.

    The tech/engineering/cultural connection between Seattle and India is significantly stronger than Sacramento and India.

    • Michael Kaiser

      You are falling into the typical 21st Century Hooterville trap. You hear it everywhere in Hooterville these days. People considering Hooterville may more than it really is, and also thinking it is on the tip of the world’s tongue. With the Sacramento group we are, essentially, talking Silicon Valley, baby. Hooterville might have the credibility to carry its jock strap. Also, Microsoft is yesterday’s news. Microsoft is Seinfeld. Silicon Valley is whatever people today watch on TV. I would not know. I might turn the set on three or four times a year including for sports.

      • MWH

        Sacramento is LONG way from silicon valley in both Distance and Demographics. So to call Sacramento an extension of the silicon valley is a HUGE reach!

        Say what you want about Microsoft, but you can not deny the historical impact that the company has had in supporting India’s tech growth.

  • http://twitter.com/pepperdowns Pepper Downs

    Indian born Scheffler type on the end of the bench?? I don’t see Ranadiva being that big of a deal. India as it is today doesn’t support it’s National team why would they care about some tycoon from Sacramento? In 2005 the best player India national team had produced quite Reason ? lack of support from country.If expansion is on “horse back” Indian basketball is in the womb of some lucky Indian born mother who will produce the next Yau Ming ..or however you spell his name.

    • http://twitter.com/Kirkland Kirkland

      If soccer, by far the biggest game on the globe, is minuscule in India, basketball can’t do much better. Nothing will come even close to touching cricket there in our lifetimes.

  • Ted Van Dyk

    There is another possiblity. It is that the sports-franchise bubble, as other bubbles, will eventually burst. Depending on the state of their own finances, the big media conglomerates may decide they won’t pay the huge fees that franchise owners apparently believe will continue to rise indefinitely. Then the What Were They Thinking? question will truly have relevance.

  • http://twitter.com/pepperdowns Pepper Downs

    Oh, and I do agree basketball is growing world wide as a whole and will be very profitable. I believe I read somewhere Paul Allen paid 75 mil for Portland years back.

  • Matt712

    Regardless of what Stern said earlier on in this saga, at this point, they may actually be thinking of expansion.

  • jafabian

    First off let’s establish that with all the problems in our society, whether it be poverty,
    homelessness, cure for cancer or what not the idea of all parties throwing around over a billion dollars for a professional sport franchise is just-plain-wrong.
    That being said, Chris Hansen and company have smartly maneuvered the NBA into a corner. If they approve the Sacramento bid they will be denying a larger and more solid bid and to a city that has a long time, successful history with the NBA that is in a larger market, and a market that has no other NBA teams within it If they deny Sacramento they’ll be denying a fan base that has been fiercely loyal to its product and has a farily competitive bid that last year would have been enough to purchase the Hornets who were sold to Tom Benson for $338 million in April of last year.
    If Stern and Bennett recommend to decline the Seattle bid owners will at least be divided. That rebel Mark Cuban will call them on it as well. I’m sure Paul Allen will quietly question a decision to deny Hansen’s bid and that will cause a rumble among the NBA owners. You can bet that Hansen, Ballmer and even Wally Walker are working the line right now to have their side heard among all of them. I can’t wait for the vote. If Clay recommends “no” he’s going to come across as a hypocrite.

  • Nor-Cal

    If you don’t like that, you don’t like NBA basketball. California will prevail pendejos.

    • jafabian

      California already has the Warriors, Clippers and Lakers and the Warriors will be moving from Oakland to SF. Seattle is the biggest city and largest market in the NW. To not have a franchise there makes little business sense but then there’s question if that’s what the NBA is about.

  • Matt

    Let’s also remember that had Bennett and his cronies actually stayed here with a new or renovated arena, the franchise value would be higher than it currently is. We need only look at the team just ahead of them in the Forbes rankings, the Kings, to see this. Forbes gave the Kings that value based on Hansen’s group purchase price and assumption the team would be moved to Seattle. The measures that relate most strongly to franchise value weigh more favorably towards Seattle than OKC. Of course, Bennett and Co. didn’t care about that. They just wanted out of town from the get go. But essentially, the team that has yet to play a game here is already valued higher than the franchise that last played here five years ago.

  • SeattleNative57

    As Art said in this piece, the gold mine for NBA growth is in China. With over a billion people, its market for growth is staggering. Needless to say, Balmer and MS are already in China and positioned to stay. The NBA is faced with an impossible task: say no to an investment of almost one billion dollars and yes to an investment of almost one billion dollars. That’s crazy, who turns down a billion dollars. No way the NBA lets either group walk. A solution will be found to accommodate both groups. Relocation, expansion, or a combination of both, this deal gets done and Hansen/Balmer get a team. Write it done.