Everyone out there is commenting on the fact that Steve Ballmer is paying too much for the Los Angeles Clippers. And while I would love to get into a Gladwell-esque philosophical debate about why sports teams shouldn’t even be considered businesses, I’ll go another route and entertain the very notion that we should give a damn about whether Ballmer’s $2 billion bid for the Clippers makes sense.
The short answer is, “Yes.” Of course the bid makes sense, because Ballmer isn’t paying for the Clippers…you are!
Well, maybe not you, unless you live in the Greater Los Angeles Area, have cable and plan on keeping it for the foreseeable future. However, if you do fall into that category, brace yourself, because your cable bill is about to go sky-high.
I’ve read a bunch of articles trying to make sense of Ballmer’s bid based on previous valuations of the Los Angeles Clippers. Now logic would tell you that Forbes’ most recent valuation of the Clippers, at around $575 million, couldn’t have multiplied by 4 in just a few weeks. And I think we all can agree that had Sterling willingly sold this team before all his racist drama was public knowledge, there’s little reason to believe this team would have sold for even a billion dollars given that the record purchasing price for an NBA team is less than $600 million. In a twisted way, drama helped drive up interest, and therefore the price for this franchise.
So that happened. A $2 billion sale is about to go down. Why? Two reasons.
One, this isn’t real money to Ballmer, who has made $2 billion since February alone.
And two, Ballmer’s not even paying for this. Cable subscribers in Los Angeles will see their cable bills skyrocket in the next year or so, because whoever buys the Clippers knows that’s where the most room for growth is within this “business.”
As of right now, it’s reported that the current broadcast rights owner of the Clippers’ games, Fox, pays the franchise $20 million per season. That’s chump-change this day and age, as that amount doesn’t even put the Clippers, who play in the second biggest market in the US, among the top cable rights getters in the US.
The Clippers contract with Fox will end at the conclusion of the 2016 season. When it does end, many people expect the Clippers to increase their current broadcast rights revenues from $20 million to about $70 million a year, putting them on par with other teams of their market size and recent success. And that $70 million may be a low estimate. The fact is that there are going to be two bidders, maybe a third, going after the Clippers rights like the world is going to end tomorrow. Having the rights to a team, especially in a basketball-laden town like Los Angeles, makes you a major player and a must-have in the area no matter what. Thus, for the cable company that does bid the most for the Clippers rights, they will have the ability to offset their payments to the Clippers by charging cable subscribers even more money.
In addition to the additional $50 million a year that Ballmer’s Clippers could receive, they will, in all likelihood, negotiate an ownership stake in the cable company or channel that wins the bid.
I know what you’re saying, “Why on Earth would a cable company agree to pay the Clippers $70 million a year and then feel any kind of need to give them ownership stake as well?”
Three reasons. One, you have to take into account that there will be at least two bidders, and so negotiating a stake in the “Clippers” channel won’t be all that hard when they are playing the two sides against each other. Two, it’s actually not an unprecedented thing, given that both the Yankees and the Mets have stakes in their respective channels.
And three, having an ownership stake in the company is actually a smart thing to do for the cable channel. Think about it. If you have offered to pay a team $70 million a year, they could easily take seasons off, bring down their salary costs, and collect that $70 million check without investing it in the success of the team. That would suck for the cable channel, as they would then have a product that nobody cares to watch, and they would lose a ton of money due to low ratings and drops in subscriber-ship. However, if the team is incentivized by having a stake in the success of the cable channel, then the team is much more motivated to put out a quality product every season, because higher ratings means more money in the Clippers’ (and ultimately, Ballmer’s) pocket.
So when you take into account that Ballmer is not only going to see his team’s revenues increase by $5o million with no significant costs needed to do it, along with the idea that he’ll get an equity stake in what will probably be one of the top 5 channels in the Los Angeles market, it’s not that hard to get to a $2 billion valuation if you use the same revenue multiples that the Bucks got in their last sale. Some might say its wishful thinking, but the truth is, if sports continues to grow like it has since its modernization, then Ballmer’s $2 billion valuation isn’t at all wishful.
But that’s not really my point. Whether Ballmer made a good investment or not is beside the fact. The main point here is that his $2 billion is something that he is going to try to recoup, and that attempt is going to come in the form of new cable rights fees. That means cable subscribers will be footing the bill, and ultimately paying Ballmer back.
This exemplifies yet another sports channel sucking the money and life out of cable subscribers. Already, Los Angeles is in the midst of a battle as Time Warner, the owner of the Dodgers’ broadcast rights, fights tooth and nail to get every penny they can get out of other PayTV companies in the LA area. As a result, people in LA without Time Warner Cable can’t even watch their Dodgers, and if and when they can, they are going to pay through the nose to do so.
When will the high rates that sports channels are charging finally break the camel’s back? The motion to break sports out, or to unbundle cable channels in general, has been brought up in Congress several times–but to no avail. It seems like the American public still hasn’t reached its breaking point. But in my estimation, all it will take is just 1 major sports league taking their product directly to the people in a way that allows fans to watch their games without a cable package. Once somebody becomes daring enough to do that, and can demonstrate a model that works, others will quickly join, and the cable monopoly as we know it will cease to exists.
Of course, we’re probably a long way away from that. The NFL has already re-upped for years, albeit with broadcast channels. The NBA doesn’t appear to have any intention of going rogue when its TV rights contract with ESPN is up at the end of next season. And baseball, the league with the most available digital options out there, still doesn’t let fans watch their home teams over the internet.
So, until we see a sports league break the mold, billionaires like Ballmer who outbid the next highest bidders by $400 million, will continue to have reason to do so. Because at the end of the day, they aren’t the ones writing the checks, instead its you paying for these teams every time you pay your cable bill.