Nets Ownership Bid Opens New Doors, May Change Buyer Profile

What has already been an active off the court off-season became even more intriguing over the past week with the bid and sale of majority interest to Russian billionaire Mikhail Prokhorov. It’s and unprecedented deal on many levels – the focus is on the first foreign owner of major US sports team, but the motivation and rhetoric also strikes me.

Prokhorov was quoted in an article last week calling this a “hostile bid”. Hostile or not, Prokhorov seems more interested in the team as an investment vehicle, not as the typical sportsman owner (ie Mark Cuban, Steinbrenner, John Henry, etc.). The team is bleeding money, Bruce Ratner’s real estate company is has collapsed under the economic pressure, and just like many other American corporations the Nets (and its current ownership) needed a fresh infusion of cash to continue operations and keep the dream of moving to Brooklyn alive. The deal looks to be more Venture Capital than typical team ownership transaction, an outsider investor providing operating cash in exchange for equity.

While the league is probably excited about the new international frontiers that become available with a Russian owner, could it simply be that most American businessman have shied away from the risk and low annual profitability of sports team ownership, and VC type investments in the broader market have all but disappears in this economy, forcing Ratner to turn elsewhere.

Funding the deal with up front cash, extremely rare in what I’ve seen of these type of transactions, further supports the transaction of more VC investment than new ownership team. Ratner apparently stays in the picture and gets new cash flow to continue the Brooklyn venture and will now share in the upside with his fellow investor, in the process disintermediating himself from the team, which he had little or no interest in to begin with.

Following this hypothesis, will having a different perspective in the owners chair effect how the team is run? Does Prokhorov have a short-term exit strategy in place to sell out of his investment once he can boost the value of the team after it moves to Brooklyn? If so, what are the implications of that relative to how most owners manage with a long-term horizon focused on winning?

If the numbers reported in SBJ are accurate, Prokhorov bought in for 80% at a valuation of $250mm for the team alone (no venue) and has the option for a stake in the venue. The $250mm valuation is below what Ratner paid in 2004, which I don’t fully understand since teams rarely depreciate in value, especially one on the brink of a move that would tremendous value. It states Prokhorov will provide “other financial considerations”, unless they are substantial he could yield a significant ROI. The minute the Nets move to Brooklyn and Brooklyn on their uniforms, the teams brand value jumps at least 50%, if not doubles, and its upside for fielding a quality team becomes much higher. Throw in the potential for an improved economy early next decade, the possibility the team improves, and its not unrealistic to think the Nets are worth closer to $500-600mm in 5-7 years, allowing Prokhorov to sell out for over 100% return.

The league and team can certainly benefit from the new international doors this opens, but that’s a different discussion. The speed and nature of the deal intrigue me most, and how this affects team management will be interesting to watch. Sports rarely attract owners with short-term mindsets focused on building value more than winning, so this could be an interesting precedent.

Nets Ticket Deal Defies Marketing Principles

Below is an adaption of the previous post with edits and more structured arguments:

Nobody will ever accuse Nets CEO Brett Yormark of lacking creativity or innovation. However, the recently announced “Match-Up” 10-game ticket plan raised eyebrows and drew some criticism. The plan bundles arguably the ten biggest draws on the Nets schedule – Lakers, Celtics, Cavs twice, Magic, Spurs, Heat, among others – plus, fans receive five reversible jerseys with Nets player on one side and an opposing superstar on the other.

Team marketing veterans will question marketing other team’s players through a ticket promotion because it defies building brand loyalty and not using marquee games to increase sales for less attractive matchups, for instance forcing fans to buy Indiana and Sacramento tickets in order to see Lebron’s Cavs.

Before overtly criticizing the Nets on these points, teams must come to accept and act on the following facts: 1) success is the top driver of sustainable attendance, not ticket deals; 2) marketing’s top fear should be price cuts (applies to any business); 3) fans will buy jerseys of top players, often regardless of what team they root for. Now, look at New Jersey’s situation, who like many teams is rebuilding. Off two straight seasons out of the playoffs, it traded its marquee superstar in Vince Carter (though Devin Harris is a rising star), and have all but deserted its current fans with the planned move to Brooklyn. Further, they play across the river from Madison Square Garden, in the worst NBA arena. Few jobs could be tougher than selling Nets tickets, especially in the current economy.

Given these circumstances, why not market some of the teams and superstars the Nets play to get fans out to the arena. The annual list of top jersey sellers indicate fans value certain individuals, so the Nets are leveraging that to add value to potential customers. In fact, the team improved its own marketing by attaching a Nets jersey on the reverse side, rather than having fans go to the NBA Store and just buy the Kobe jersey with no Nets branding.

Packaging the ten best games into the same package is another way the Nets differentiated the offer. Teams have trained fans to expect the Cavs and Lakers games tied to Charlotte, Minnesota, Memphis, and the rest of the NBA Lottery. It does not excite fans, and they face a tough decision deciding whether to buy that package. The Nets eliminated any question about the value – every game in this deal has an attraction, so fans feel like they are getting a deal, rather than judging if one ticket to see Kobe is worth buying four games I do not care about. Ticket offers have become a dime a dozen, but this package rises above the clutter, and gives fans that “wow” moment. By combining the best teams with the most sought after jerseys, the Nets added value for customers and increased the fan’s willingness to pay for the offer. This approach should boost sales above what teams typically see for ticket deals.

Further, the Nets did not slash prices by bundling ten games they are selling quarter-season ticket packages at or near full price, a quick way to boost your full-season equivalents. Arguably, the team will net more revenue than had they separated these games, paired them with less attractive opponents that drive fans away, and been forced to cut prices later on.

Teams need to accept reality, as the Nets have, that fans want to see Kobe and Lebron and want to buy their jerseys, 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, maintain a sustainable business, and be ready to maximize profits when your team is on the short list of NBA elite. Each team holds a monopoly or duopoly in its market, so jointly promoting your team and an opponent will not lose that fan in the future. For all those who criticize the Nets, I will place my bets on their average ticket price and overall attendance for those ten games, the true measures of success.

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.

Who Loses More With Sales of NJ Nets: Ratner or Team?

To no surprise, at least in this camp, reports surfaced late in the week that Bruce Ratner plans to sell the New Jersey Nets. Though the team indicates ownership is “as committed to ever” on moving to Brooklyn, that’s a tough statement to make when you don’t know who exactly ownership is. Brooklyn is Ratner’s project, without it he has no interest in the Nets, without the Nets he’ll probably pull the plug on the project since he’ll lose most of his upside. It appears the Nets face an uncertain future – Brooklyn, Newark, new ownership, possible move out of the area, free agent players or dumping more salary. These questions always lingered now they are reality. Across town the Islanders and owner Charles Wang face a similar predicament. Before criticizing the owner, and rightfully so, is it possible the owners end up losing more than the team and its fans?

For anyone who ever doubted Ratner’s intentions with buying the Nets, here is a statement directly from Forest City Ratner’s most recent 10-K, right up front in the business description:

“The purchase of the interest in The Nets was the first step in the Company’s efforts to pursue development projects, which include a new entertainment arena complex and adjacent urban developments combining housing, offices, shops and public open space. The Nets segment is primarily comprised of and reports on the sports operations of the basketball team.”

A few other tidbits from the 10-K analysis. The company views this project as the top business risk it faces given the economy and other uncertainties. Further, media coverage has focused on the $42mm loss Forest City suffered on the Nets investment. In fact, Nets Sports & Entertainment incurred a $77mm loss in fiscal 2009, the same as the previous year, and only slightly more than 2007. However, as a partial owner with less than 50% ownership, Forest City assumes a percentage of the loss. Due to its investment in the Brooklyn project and the financing it needed to make those investments, which it listed under the Nets subsidiary, Forest City recognized a larger portion of the teams loss on its financial statements. Without further analysis of the Annual Report it’s difficult to accurately uncover the entire financial situation, but it appears revenue dropped slightly, as did player expenses, though neither enough to create a financial disaster, and Operations remained a stable loss as I mentioned. The difference this year, Ratner was unable to use as much debt to finance the losses. His company had another poor financial year, and is already financing much of its losses, leaving highly overlevered. Forbes team valuations report the Nets have by far the highest Debt/Value ratio in the NBA. My thought is Ratner can no longer fund this project as expenses mount and revenue gets pushed further into the future, so needs to pull the plug and regain some liquidity. In fact, he probably held on too long.

Again, this requires further analysis, but Net fans can take some solace, since Ratner has pushed his entire company into poor financial condition partially thanks to this project. Where was the league as this situation developed? I’m sure Stern had his staff monitoring the situation and league consultants reviewing the Nets financial situation, but how did they allow it to go this far. These leagues either have control or the don’t. The owners either flex muscle, run the show or they should stay out of everything. The NHL wants to dictate the Phoenix situation, the NBA did something similar with Seattle, they rescue clubs failing to meet payroll, yet nothing once on the Nets situation. Leagues should show more consistency, and remain transparent on what they can and can’t involve themselves in.

Now, what’s to come of the Nets. It’s guaranteed that out of town suitors will come calling, its possible the Devils ownership can rescue them from the Meadowlands and put them in Newark, and its almost a guarantee that no owner is stupid enough to buy the team and leave them in the Izod Center. With this uncertainty, are they even a player in the 2010 free agent market. Better yet, do fans have any reason to support the team?

The NHL has shown at least some interest in the situation with the Islanders and Charles Wang, which differs from the Nets since Wang seems genuinely interested in owning the team and his other investments are not linked to the team nor suffering as much as Ratner’s. But the lesson is that leagues need to step in, and when owners welcome a new member it needs to be for the right reasons. Sometimes less money for a good fit creates a better long term fit.

Another Word on Franchise Ownership – Beware the Real Estate Mogul

Building off yesterday’s discussion of the Phoenix Coyotes ownership mess, the problem is actually rooted in Jerry Moyes’ original purchase. He partnered with Steve Ellman, who’s sole purpose was to build a development near the arena. Another one of these grandiose retail areas that real estate developers sell the public on how it will infuse the local economy, however usually only benefits the developer.

Fast-forward a few years, Ellman builds his development, sells his share to Moyes, and eventually we’re left with Moyes unable to fund the losses the team sustained. It’s hard to know the original intentions of the owners in 2001, but this deal smells of real estate motives. The goal was to build and arena and retail development – not run a hockey franchise. And that’s how its played out. Maybe Moyes had better intentions, but without he was not equipped to run the team or finance its losses, at least without Ellman. Look at the Islanders, taking just as big a hit in the pocket, however Charles Wang is not running into bankruptcy court and causing controversy.

With so much power over who joins the ownership ranks, the NHL and every other sports league should evaluate the motives of the potential owner and the commissioner’s office should consider contractual obligations that allow the league to mettle in team business if a franchise is not meeting certain performance expectations. On the second point, it’s no different than operating a company, the board of directors are accountable to shareholders. In this case, the shareholders are the other owners and the league office represents them. A poorly run team diminishes the value of the entire league, while a well run team improves the economics of the league at large.

The first point specifically targets owners who try to use sports teams as pawns in a real estate project. Bruce Ratner is playing out this same game with the New Jersey Nets. He bought the team with the sole purpose of creating a mammoth development in Brooklyn with an arena, apartment buildings, and retail. The focus has been on his project, not the team for the past 5 years, as he has battled court cases, had his staff strike landmark sponsorship deals, hired and then fired a well-known architect, and for better or worse stirred controversy. Meanwhile, the team was forced to cut expenses and trade its best players, and is losing over $40 million a year. Admittedly, they probably needed to make the trades and start over from a player development perspective, but the franchise is in a holding pattern. Everything centers around “when the Nets move to Brooklyn” – the free agents will come, fans will come, profits will come.

The deal may never happen. Ratner reportedly wants to sell, another indication it will never happen. If that’s the case, they are stuck in the Meadowlands losing boat loads of money and have basically lost the last 5 years when they could have addressed the situation because Ratner was trying to leverage the team for a project to benefit his business.

Owners with real estate motives destroy franchises, then leave the problem to the next person. The franchise suffers, the league suffers, the fans suffer, and the players probably suffer. Given their control over the situation, leagues should recognize this type of deal and either prevent it or put stipulations in that prevent an owner from leveraging a franchise for real estate, ruining the team in the process, then walking out on it. The leagues should blame themselves – and do something about it.

Nets Continue Innovative Marketing at Izod Center

Arguably the worst professional sports arena today, the Izod Center at the New Jersey Meadowlands, continues to lure sponsors with creative sponsorship packages from NJ Nets Sports and Entertainment. Brett Yormark, marketing wiz of the New Jersey Nets, who secured a post-season sponsor for a team that failed to make the playoffs, now introduces highway signage to his latest marketing deal.

In signing Vonage as the first legacy partner for the Izod Center, the deal includes highway advertising on two prominent routes leading to the Meadowlands complex. Nets Sports and Entertainment teamed with NJ Sports and Expo Authority on the deal. Legacy partners essentially have control of a concourse in the arena, in addition to heavy signage around the arena.

It’s the latest creative in a series of creative contracts arhitected by Yormark, who somehow manages to sell against an outdated arena that can’t draw fans and is on the brink of extinction if the Nets execute their planned move to Brooklyn, and with a team that operates in the background, a distant second to the Knicks even with all the problems they have had.

Highway signage is an interesting value add for potential sponsors, extending the sponsorship outside the stadium. Companies get exposure everyday and from potential customers that may not attend games. It’s a great bargaining tool for a team, since it extends the sponsorship into a high traffic area, not just a sports arena. Further, it integrates more parties into the marketing play, the NJSEA in this case. Another scenario would include local merchants within a certain radius of the arena, or colloborating with local transit for signage on buses and trains that passengers take to the arena.

Besides sweetening the marketing deal for all parties involved, outdoor advertising, particularly alternative outdoor advertising (digital, for example) is a growing business with innovation and growing revenues. The team could also try for a power-play by involving local TV and radio partners in sponsorship contracts to make the total value of the deal even bigger. Other teams should follow the Nets lead in marketing, especially smaller markets with less to work with. Somehow, though, the team continues to bleed, losing over $40 M last year. Imagine if they didn’t have almost every inch of the Izod Center sponsored.

Nets Trade Opens Doors

When New Jersey acquired Yi Jianlian from Milwaukee (with Bobby Simmons) for franchise stalwart Richard Jefferson last week, the trade achieved a lot more than clear up cap space for the Lebron chase in 2010. Yi becomes the first Chinese born NBA player in the heavily Chinese populated New York City area. If Yi can deliver on the court the Nets have opened up a new “world” of business opportunities.

A team that has long struggled to sell tickets, even with playoff caliber teams, in the dark, dank, Izod Center now has an entirely new demographic to tap into. As proven by Yao, Matsui, and other prominent Asian athletes playing in major American leagues, locals of the same nationality will flock to see their fellow countryman. The Nets may also benefit from the wave of momentum built by the Olympics, where Yi will not only play but which will be held in his native China.

Along with increased attendance, the Nets have an opportunity to increase sales of corporate suites by tapping on Chinese-owned companies with New York offices. An opportunity to entertain businessmen traveling from China – the perfect selling point.

Never at a loss for marketing creativity, Brett Yorkmark, who seems to have every piece of the Izod Center and ever possible event sponsored, now has a major asset to market to a new clientele. Expect Yorkmark to leverage Yi’s presence to add major Chinese corporations into the Barclay’s Center sponsorship portfolio, quickly becoming one of the most internationally oriented sports buildings in North America.

Indirectly the Nets just added over 1 billion potential viewers without signing a TV contract. With the unprecedented exposure in China that Yi’s presence will bring, Nets mercandise sales and sponsorships in China will soar. Case in point, last year the highest selling NBA jersey in China: Tracy McGrady, Yao’s teammate. Vince Carter, Devin Harris, Brook Lopez – Hello, World!

Merchandise should pick up steam closer to home, both due to Yi’s popularity among Chinese-Americans, and the increased exposure the Nets will receive within the basketball community. Sponsorships, marketing opportunities (local and abroad), ticket sales, merchandise sales – the Nets and their players have an opportunity to significantly jolt revenue…and maybe even improve on the court.

China is clearly one of the NBA’s top initiatives. In recent years, the league hired a top executive to run NBA China and is partnering with AEG to build 12 new arenas in China. Now the Nets are deftly positioned to capitalize as the league expands the game within the world’s most populated country. When partnership opportunities arise with Chinese businesses, or a chance to play an exhibition game in the country, with Yi on the roster the Nets move to the front of the list – not a bad place to be with the potential revenue at stake.

Before we get ahead of ourselves, one small prerequisite exists. Yi needs to become a star. Averaging eight points a game coming off the bench will not cut it, he needs to elevate his game, become an All-Star. If not, he’ll go the way of Wang Zhizhi, the bally-hooed Chinese star who became the first Chinese player in the NBA. He never lived up to the hype, became an NBA journeyman, and disappeared into oblivion, never capitalizing on his on-court or off-court potential. In the next two or three seasons Yi will either go the way of Yao and star in commercials, or the way of Zhizhi and disappear. The Nets will be right there riding his coattails.