News Column

The Seattle Times Geoff Baker column

June 23, 2014

By Geoff Baker, The Seattle Times



June 23--Inside sports business

Something would-be Seattle NBA owner Chris Hansen said recently got me thinking about the value of professional sports franchises and their increasing dependence on television.

Hansen touted the growing value of NBA franchises as a positive for Seattle and King County. He's pledged his future NBA team as "collateral" for receiving up to $200 million in municipal bond money, thus, his logic goes, any franchise value growth also increases the worth of that guarantee.

Which is great as long as that franchise value lasts. But what if value plummets?

Yeah, sounds crazy as regional sports network TV deals propel franchise values to unprecedented heights. But growing fear of an RSN "bubble" means there's a downside to team values being inflated this much by TV: the risk that a collapse in value of multibillion-dollar RSN deals could take sports franchises down with them.

This isn't a shot at Hansen's plan, which appears less risky than private-public ventures elsewhere. It's a cautionary look at the danger of municipalities fronting money for decades to teams that might soon experience a seismic shift in how they are valued.

The Los Angeles Clippers were bought by Steve Ballmer for $2 billion -- more than three times previous estimates of their worth -- and have little revenue upside beyond a pending local TV deal.

Much of that price, aside from Ballmer's desire to win a bidding war, was inflated by perceived future TV value. And that price paid should cause all NBA franchises to climb in value as well.

This is where you question whether unsustainable RSN practices are inflating team values beyond reason. Even if the Clippers double revenues to $300 million via TV, Ballmer paid nearly seven times that.

Traditionally, team values are estimated at a multiple three or four times revenue. Meaning, it's possible the Clippers sold for twice as much as they're actually worth, with little but TV justifying it.

It's tough not to recall the 2008 real-estate bubble where unsustainable lending practices inflated home prices beyond all reason. We know what happened once that bubble burst.

Today, nobody knows how TV-inflated team values would fare if an unsustainable RSN bubble pops, mainly because there's little consensus on how big any market correction will be.

But TV executives and analysts agree a correction is coming.

There are too many viewers balking at higher cable bills wrought by RSN deals; too many cries for lawmakers to eliminate bundling of an RSN into basic-cable packages; too many cable and satellite distributors refusing to carry RSN broadcasts; also, too many TV homes "cutting the cord" in favor of streaming devices like Hulu and Netflix.

A slight, gradual downshift in RSN deal values probably won't hurt teams. A team guaranteed $3 billion over 20 years should get paid as long as the RSN survives the contract's duration.

The danger comes if the market correction is bigger and faster -- if RSN deals are really worth only half, or even, a third of their longterm estimates.

Such a downgrade can force companies into bankruptcy.

Good luck collecting from a bankrupt RSN, or, from one seeking to renegotiate under threat of folding. Or paying massive player salaries based off original RSN revenue projections.

Have fun making franchise ends meet after paying two times more for your TV-inflated team than it was worth. And good luck to cities collecting on money fronted team owners, or "collateral" severely reduced in value.

Never mind added complications for teams owning their own RSN.

Sound far-fetched? Again, look at the 2008 real-estate collapse.

Once homes purchased for $400,000 turned out to be worth $150,000, signed paperwork proved meaningless when banks tried to collect on $350,000 mortgages. Homeowners renegotiated or walked away.

Sports teams won't want to play bill collectors if their $3 billion RSN deal is really worth $1 billion.

Now, I'll admit this outcome would be extreme. But remember, increased speed of technological advancement today causes extreme business world change seemingly out of nowhere.

Kodak sought bankruptcy protection when digital technology flattened its 125-year-old film and camera operations. Tower Records collapsed after 46 years as music fans pirated or downloaded price-discounted songs off the Internet. Newspapers began folding as online upstarts crushed their industry's centuries-held monopoly over classified ads.

The TV industry is hardly immune.

Even veteran TV insiders are uncertain how quickly the ground could shift. And if they don't know, you can bet every tax-subsidized dollar being sought that team owners have no idea how a bursting RSN bubble will alter franchise value.

"People think the team owners know a lot about television just because they've gotten into bed with these regional networks,'' a longtime TV executive told me last month. "But many of them have no clue about TV. They just went along for the ride because of all the dollar signs attached.''

I'm hardly suggesting teams face imminent collapse. Just bringing up a topic seldom heard in today's private-public sports discussions.

We live in fast-changing times. And until somebody figures out what RSN deals will look like in five or 10 years, we can't know how much future value teams riding this bubble truly have.

Geoff Baker: gbaker@seattletimes.com or 206-464-8286. On Twitter: @GeoffBakerTIMES

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(c)2014 The Seattle Times

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Source: Seattle Times (WA)


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