Why Pro Sports Teams Should Not Be Publicly Owned

Lebron did not only tantalize the public and his suitors by withholding his “Decision” for a TV special last Thursday night. Wall Street was in for the ride as well, in particular shareholders of publicly traded MSG, owner of the Knicks, one of the finalists in the sweepstakes. The unusual trading activity and price fluctuations the stock underwent the second half of the week, purely on Lebron speculation and the eventual decision, show one of the reasons why most sports teams are not publicly traded.

For those unfamiliar, Cablevision spun-off MSG to shareholders in Q1 this year, and after its initial trading days in February presumably marked with some institutional buying, traded at an average volume of 342k shares/day prior to last Wednesday. Volume spiked 4-fold on Wednesday when rumors that Lebron would hold the TV special in Greenwich, CT, near the Knicks practice facility. As the soap opera played out the rest of the week MSG recorded 3 of its top 9 volume days since trading started in February, and 3 of the top 4 since the initial February trading period.

Along with the unusual volume, shares jumped 6.41% as the Knicks hopes surged Wednesday, then dropped 5.52% as the Heat rumors intensified Thursday, and dropped another 4.61% on Friday following the announcement. Those are 3 of the 5 biggest price changes since trading started. Average option volume is around 400 contracts, but one trade involving 2000 contracts executed on Wednesday, and the July 22.50 calls has over 20,000 open contracts – a short-term bet on Lebron signing – which have zero trade value this week.

This is all well and good, stocks move all the time on announcements, the better question is if Lebron would actually have that much impact on the intrinsic value. The answer is likely no. The teams (Knicks and Rangers) currently break even or operate a small loss. Lebron would have his biggest impact if he helps the team reach the playoffs, which could add up to $2.5m per home playoff game, according to CNBC. However, during the regular season the Knicks already operate near a sell-out (though clearly many of them go unoccupied) and it’s a little late to raise prices at this point, so his addition would add a minimal amount to tickets. Similarly, most sponsorships are category exclusives locked in on multi-year contracts. MSG would certainly gain some new sponsors, possibly benefit from some escalator clauses with current sponsors by signing the star (assuming they negotiated that in advance), but estimates place the benefit at only $5-10m per year in the near term. The CNBC and Forbes estimates, which are reasonable given these assumptions, estimate a roughly $35m windfall for MSG had they signed Lebron.

Most followers caught by the glitz of the teams don’t realize the biggest asset to MSG’s bottom line is the network, specifically the subscriber fees it charges cable providers. In the near-term Lebron would not likely impact these fees because they are typically locked in on long-term contracts, but when those contracts did come up for renewal, having that chip to leverage would certainly help garner a nice increase (though not as much as having baseball coverage would, but that’s a different story). The other revenue generators for the network are TV and online advertising. Local cable advertising is not a big market in the scope of things, and local online advertising is still not a significant revenue generator. He would probably add less than $10m total in advertising. In the longer run, if he is worth a 10-20 cent per subscriber fee hike, MSG could add 10-20m in profit per year as the contracts come up, but again, that depends on when the contracts are due.

Clearly, he would have had an impact, but do the numbers justify the 97.5m in market cap the stock gained Wednesday, or the close to $160m it gave back the next two days? By time, the stock started trading the Knicks season was already in the tank. If they improve though, fast forward to March and April when each win or loss could determine a playoff berth, and that extra revenue, or even to the trading deadline as acquisitions could impact ticket sales, playoff chances, and cost structure. Though most of the value sits in the network, sports illicit lots of emotion, and it appears that emotion would impact stock volatility, especially given the teams play in Wall Streets backyard.

In the end, if free agency elicits this type of volatility, its likely that wins and losses for a contending team would, and even more so that playoff performance would. If that turns out to be the case, is buying this stock any different then sports gambling? You can make a case that stock picking in general is not much more than gambling, based on some efficient market theories and studies on behavioral finance that show the impact of sentiment. But putting sports teams in the market would likely take that to a new level and dampen other financial benefits of public listing, such as access to credit and cost of capital. Thankfully, the Cavs are privately owned.

Nets Ticket Deal: Inappropriate or Innovative?

The Nets set off a buzz around NBA and sports marketing circles last week when they released the Match-Up ticket plan – 10 games against the NBA’s biggest attractions and 5 reversible jerseys with Nets player on one side and opposing superstar on the other side. Traditionalists didn’t know where to start, with promoting opposing teams players or attaching all the big games to the same ticket plan instead of forcing fans to buy the unsellable games in order to see Lebron. Brett Yormark broke basic ticket sales and marketing rules NBA teams have followed for years in one announcement.

Nobody has ever accused the Nets or their CEO for lack of creativity and innovation, but that only proves even the best salesmen can’t fill the arena with a bad team and a bad arena. That said, this deal makes sense for the team. Before addressing the potential negatives, some positives. Immediate awareness of the ticket plan with a splashy, unique offering, so everyone knows it exists. It’s generated interest. Though not scientific and not a large sample, I’ve heard numerous people say, “Wow, I’m thinking about buying that.” For how many ticket plans, and ticket price cuts scroll through, rarely does it actually elicit excitement – this one has.

On the flip side, the Nets are promoting other team’s players, not the best way of marketing your own team. Before digging in, keep two important points in mind that have proven themselves over time: 1) team success drives sustainable attendance, not ticket deals; 2) marketing’s top fear is cutting prices (applies to any business). New Jersey is coming off two straight seasons out of the playoffs, traded away its marquee superstar in Vince Carter (though arguably Devin Harris is a better player now), and have all but deserted its current fans by threatening to move to Brooklyn. Oh yeah, they play across the river from Madison Square Garden in the worst arena in the NBA. Like showing up for a gun duel with two fists, they have no chance to succeed under these circumstances.

Given these circumstances, why not market some of the teams the Nets are playing to get fans out to the arena. I have always felt small market teams struggling for attendance should leverage opposing teams and opposing stars more than they do. Face reality, a giveaway for the 5 Nets uniforms would not generate any excitement (nor would that same giveaway in most arenas). Add in Kobe, Lebron, KG, Dwight, and Wade, and you have added value for your fans, you increased their willingness to pay with the promotion. [I argue teams should consider marketing alliances to push travel packages in opponent cities, i.e. Nets market to Cleveland fans, or Boston fans, to capture revenue from fans with peak interest when a team’s own fan base can’t fill the arena – another subject for another day.]

Without running an analysis on sales numbers it’s hard to draw conclusions about the bundling all quality games together in one package vs. leveraging each game to upsell less attractive games. At a high-level, fans are now trained to expect the Cavs game packaged with Sacramento, Indiana, and Memphis. They don’t get excited about that, its still a tough decision to buy that package. The Nets took away any question – every game in this deal has an attraction, so fans feel like they are actually getting a deal, and are not left to judge if buying 4 games I don’t care about is worth the ticket to see Kobe play. This approach should boost sales for this package above what teams typically see for ticket deals.

Further, the Nets didn’t slash prices and they bundled 10 games together, so they are selling quarter-season ticket packages at or near full price. From that perspective, it’s a quick way to boost your full-season equivalents. Arguably, a bigger revenue bump than would have been received by separating these games and pairing them with less attractive opponents that drive fans away.

Time will tell if the plan succeeds, as measure by attendance numbers and revenue generated. Teams need to accept reality, as the Nets have, that fans want to see Kobe and Lebron and want to buy their jersey’s not necessarily those of the home team. And some fans only want to see the NBA stars, not a watered down package of lottery teams. Rather than continue to ignore these facts, teams need to find ways to capitalize on it, earn brand favorability for your team, maintain a sustainable business, and be ready to maximize profits when your team is one of those on the short list of NBA elite. For all those who criticize the Nets, I’ll place my bets on their average ticket price and overall attendance for those 10 games.

NBA Warning Signals Premature

The NBA fired off the first Class of 2010 free agent salvo, one year before the festivities begin, with a warning about a lower salary cap. It’s SOP to issue a forecast in the annual league memo, and it’s obvious where the warning stems from, but these projections seem premature.

Flash back to last year, same time, same memo, could anyone have predicted the economic situation 3, 6, 9, and now 12 months later. No way. I think the same holds true now, its unpredictable. The recession has definitely affected sports more than past economic slow downs, and 2009-10 will be the first full NBA season played since the financial crisis, however in sports flat could be the same as down.

Of the major items that contribute to BRI, the league has all major national TV deals, and teams have most, if not all, local TV deals locked in. While harder to come by, most major league and team sponsorship deals are multi-year contracts, guaranteeing that revenue. Plus, the NBA is not the LPGA, renewals continue to occur. That’s a significant amount of BRI that will increase next year due to annual escalator clauses in long-term deals.

Ticket sales, and related income such as parking and concessions, represent the wild cards. Despite the problems, the NBA posted strong attendance numbers last season, right near the record setting pace of the past few years. Off-season transactions thus far indicate a growing disparity in the league, a few teams getting stronger, many teams choosing to rebuild. Attendance figures should follow that, with the good teams filling the house every night (Cleveland, LA, Orlando, Boston, San Antonio), while bad teams in bad markets see attendance drop (Sacramento, New Jersey, Indiana). It’s the middle of the road teams that will swing revenue, mostly coming down to performance.

A few perennial disasters with renewed hope could give the league hope, and stabilize BRI. Memphis finally has some players to get excited about, the Clippers took the only prize from the draft, while Denver has room to grow after a deep playoff run, and Washington should bounce back from a poor season. Charlotte even has some hope. To put a spin on the negative teams, Indiana, Sac-town, and NJ can’t go much lower, so if they find a way to stay flat, and a few other teams get a lift it should off-set the lower overall ticket prices.

My point here, it’s all hypothetical. The NBA’s projection, my scenarios, Wall Street experts, everyone. Another key component, the NBA CBA is the most convoluted in sports, making it easy to manipulate. Heck, even Larry Bird has a rule named after him. Finding ways to exceed the salary cap are not difficult. If it comes to that, teams will find a way – the Knicks have done it the past decade for players not even on the team, I think they can find a way for Lebron and whoever else they want.

As a league, the NBA should not take to defusing the anticipation of next year’s free agent season. If it plays out well, it could be the tipping point to catapult the NBA to become the prominent league in US sports. It has the potential to be that big. They should go out of there way to make sure the media gives it front page coverage for the whole season and then every day next July, leading into the biggest Opening Night in league history. All the cards are in place, the league should do everything it can to leverage it. Not to mention that stirring the pot with the union for a possible strike/lockout standoff the following off-season could be debilitating.

NBA Proves Impact in China with Jersey Sales

It’s amazing to see the in-roads the NBA has made in China in the past generation. The league has a perennial All-Star from the world’s biggest country, is part of a deal with AEG to open basketball arena’s across the country, and operates an immensely successful business unit in NBA China. However, the list of top selling jersey’s in China provides concrete evidence of just how successful the NBA’s initiative is.

Yao Ming, one of the most well-known people in the entire country, ranks 10th. That’s right, nine other NBA players sold more jersey’s last year than Yao. Forget revenue, a big part of the NBA’s barometer for success is impact. The Top 10 list, thanks to Darren Rovell, indicates the Chinese are not just Yao fans, not just basketball fans, but NBA fans.

Could it be that everyone already has a Yao jersey after five seasons in the league, and not other Chinese player has made an impact. Possible, but unlikely. Take one look at the crowd reaction to Kobe Bryant, more fanatical than he sees in most NBA cities.

With popularity rising fast and furiously, is it possible that player’s are actually underexposed in China? Could agents and marketing representatives be leaving endorsement money on the table overseas? Big endorsement money. Instead of flirting with $50 million contracts to play in Europe, players could expand their brand to the far east to earn that extra money.

Obviously shoe companies, like Nike and addidas are already global. Look past that, each country has wireless carriers, car companies, the fast food and soda companies all have international exposure. Why not capitalize on the merchandise success and create that global brand that Lebron discussed when he mentioned the merits of playing overseas. Just maybe he doesn’t have to play overseas to reap the benefits.

NBA Superstars Talk Euroleague, Send Message To Stern

Josh Childress is one thing, LeBron James is a completely different story. Following Childress’ unprecedented move for an American player in his prime years signing to play in Europe, James and fellow current NBA royalty Kobe Bryant and Carmelo Anthony openly welcomed the possibility of playing in Europe when they become free agents.

All three players were quoted saying it would be difficult to turn down a salary as high as $50 million per season. Hint to David Stern, that’s obviously a league with no salary cap. Realistically, take the comments for what they’re worth. It’s unlikely to see a mega NBA star walk to Europe in his prime, leaving the endorsements, the life, and the chance for a championship. But, in no uncertain terms, the players sound prepared to fight for removing the maximum salary.

Whether James and Kobe speak in jest or not, Commissioner Stern can’t be happy. His two biggest meal tickets for the next decade overtly speaking out against the league during the Olympics, with the whole world listening. Second, the league can interpre the comments as a threat to remove the maximum player salary and team salary cap in the next CBA or face potential consequences. Responding to the Childress situation was easy, this response requires thought, but Stern must respond in some way. Since most of these players spoke about going to Europe in the future, expect the issue to blow into the background when the season starts. However, it’s not going away, and has the potential to become a big story as 2010 approaches.

James remarked how playing in Europe would transform Lebron into a global brand. AN interesting question, how valuable as an endorser is an NBA star playing in Europe? It’s a win-loss situation. Global companies and sponsors local to the area will salivate, while US companies unable to exploit the athlete to the same level nationally may step back. Superstars are superstars, but how valuable is Kobe if he plays and lives in Italy all season. His Q-rating in the country will likely decrease by virtue of the cameras not being on him day in and day out. Sponsors would lose the high recognition rate and association with players that are not playing domestically. In the end it might be a wash, Lebron and Kobe could conquer Europe, but take a step back in the US.

On the court, the NBA clearly needs James and Bryant more than they need the league. Basketball has always been a star-driven game, more so than any other major sport. Losing either of the two would be a serious blow in popularity and revenue. It also could start a mass exodus. If they can do it, why can’t others. On the other hand, removing the salary cap or maximum salary has numerous other ramifications. Either way, Europe is now a serious NBA competitor. If the NBA takes care of its stars, the large middle class of the league, like Childress, stand to earn substantially more in Europe than here, while if the league dismisses its superstars threats, Euroleague can make someone an offer they can’t refuse.

Stern needs to play his cards right. He has time, but should not try to avoid it. Meantime, many fans and players will keep an eye on Childress throughout the season to see how the experiment goes.

Lebron Needs Help

Classic sudden death playoff games break one of two ways, the game creates a legend or a legend makes the game. Sunday, one legend and one superstar made the game. Forget Bird vs. Wilkins from ’88, go back to Oscar Robertson and Sam Jones in 1963 to find the only other time two players scored over 40 points in a Game Seven. Add Lebron and Pierce to the annals after an epic duel in Boston.

James outdid Pierce with 45 points, 6 assists, and 5 rebounds to 41, 5, and 4, but the Pierces’ Celtics got the best of the Cavs 97-92 to advance to the Eastern Conference Finals. In a game featuring two stars at their best, a 38-year-old forgotten role player made the biggest shot, and was the difference in the game. PJ Brown buried an open jumper with 1:21 left to give Boston a three-point cushion. Off a timeout, Delonte West, the only other Cav to show up Sunday, missed a good look at a three, turning the game into a Celtic foul shooting contest for the final minute. Brown, who didn’t even play in the NBA until February this season, finished with 10 points, including six in the final stanza.

He took a few bad shots, maybe fell in love with the three ball too much in the fourth, should have pulled up before his last ill-fated drive to the basket, and as Van Gundy pointed out on the broadcast, missed a boxout on the crucial jump ball late in the game. However, Lebron can answer any criticism levied toward him with a simple question – where’s the help?

The 23-year-old now knows how Jordan felt his first 5 or 6 years in the league, except there is no Pippen on this team. Cleveland stinks. It’s a disgrace what surrounds Lebron. Forget 2010, he may be better off on the Knicks right now, and that’s saying something. Ben Wallace is no longer a rebounding and defensive monster, yet remains an offensive liability. Sczerbiak did not score. Did Ilgauskas even play in the second half? Many people forget the Cavs actually have two former Number 1 draft picks on the team. Clearly the GM who took Joe Smith is no longer employed. Explain to me how Anderson Varejeo and Sasha Pavlovic held out for new contracts before the season. Danny Ferry could dig into the D-League for better talent, or find a sharp-shooter like Boston’s Eddie House in free agency. Though spotty at times, West gave a valiant effort, the only other Cav that actually played like he wanted to win at all costs.

Without help, James almost did it all by himself. Scoring aside, he came up with two big steals in the second half, the second leading to a dunk that trimmed the Celtic lead to 89-88, the closest Cleveland would get. He skied for clutch rebounds after painfully watching former rebound legend fail to box out, allowing Boston to tip back offensive rebounds and maintain possession, forcing Cleveland to get multiple defensive stops.

In the press conference, James intimated the team needs to improve. He handled it with class, shouldering the blame, giving credit to Pierce, critiquing his own game and where it needs to improve. The bottom line is clear, get this man help. Ferry has cap flexibility, he has the biggest star in the world to entice players to come, get it done. At this point, forget finding a Pippen, just improve this make the rest of this team NBA-caliber.

Boston again escaped, this time hiding behind Pierce. Ray Allen was admitted to the Witness Protection Program, only to emerge for a few late-game foul shots. Garnett played decent, but 13 points, 13 rebounds hardly says Big Ticket. If Tim Duncan puts those numbers up in Game 7 tonight, he’ll be killed and the Spurs will lose. To my surprise, Rajon Rondo stepped up with a solid game, enough to keep playoff vet Sam Cassell glued to the bench, though Cassell’s putrid performance in this series also contributed to that.

8-0 at home, 0-7 on the road. No team who played decisive games in the first two rounds ever won the NBA title. The Celtics need to shape up immediately, or this dream season will end. Detroit will get a game in Boston, in fact they will get one of the first two. That’s what the Pistons do. Billups is rested, Lebron is out of the way, Detroit is ready. If Boston intends to advance, the Celtics have to show up on the road. 69 points for a 66-win team is unacceptable, especially in a Game Six against a mediocre, at best, defensive team. Garnett’s legacy is at stake. Rewind before the season, skeptics quietly questioned that none of Boston’s Big Three had advanced to the NBA Finals, and none was known for knocking down the big shot. Well, no need to wonder quietly anymore. Pierce answered the bell, Allen had his bell rung, and the verdict is out on KG. He has not played like a Hall of Famer, has not looked for the ball with the game on the line, and has not stepped up when he had his chance. The season ends in six games unless that changes.

Why Cavs Can Beat Boston

Two or three losses makes you think, at four its a steak, now Boston’s road problems are a troubling trend, following its fifth straight post-season road loss in Cleveland, evening up the Eastern Semifinal at two games apiece. Home-road dichotomy aside, the Celtics find themselves in trouble because they wilt under pressure.

Boston trailed by 3 points after the third quarter. They have three All-Star, superstar players, Cleveland has one, who continues to struggle by his standards. Logic says the Celtic trio steps up, makes big plays, closes the game out, and take control of the series. Yet offensively challenged Anderson Varejao outscored Ray Allen and Kevin Garnett combined in the deciding 4th quarter. Not a tremendous feat considering Allen and Garnett were shutout, attempting only three total shots. That’s Boston’s problem, nobody wants the ball in crunch time. Same situation during Game 4 in Atlanta, reluctance to take the big shot.

The Cavs don’t suffer from that problem. Despite shooting an historically poor shooting performance in the series, Lebron wants the ball no matter how many he misses, and he’s not afraid to the deciding shot, or take it hard to the basket. Like a preying animal, James smelt blood late in the fourth, and sunk his teeth into the entire Celts defense, driving by Pierce and Posey, before giving Garnett – the Defensive Player of the Year – a facial with a powerful, rim rattling signature dunk. A microcosm of the game, Boston on its heels, Cleveland on the attack.

Despite the road problems, Boston has continued to dominate at home, playing like a completely different team. But as the road losses mount, the pressure to win at home builds, and if it comes down to a close game, Cleveland has its go-to guy, but where will Boston turn? Monday night you would not have known KG was even on the floor in the fourth quarter if Lebron didn’t posterize him on that dunk.

All season Boston proved me, and many critics, wrong. Could Rondo run the point, would age catch up with them, can this team play defense? They answered each question emphatically. The last unanswered questions, none of the stars has ever won big in the playoffs and who takes the last shot, may sting Doc Rivers’ squad. Let’s say the Celts are in trouble if Rondo leads the team in scoring again.