Editor’s note: This post proved prescient when, two and a half weeks after it was first published, the Dodgers were purchased for $2 billion. TIME’s Sean Gregory sizes up the deal here.
As Major League Baseball moves closer to picking new ownership for the Dodgers, speculation about the eventual sale price has some observers wondering if the various bidding groups have lost their marbles. Could any team, let alone one as sad as this once-storied-but-currently-stymied franchise, really be worth upwards of $1.5 billion?
Hard to say, of course, if you’re not privy to the official numbers behind the deal. But the key things to remember about pro sports teams and the (mostly) men who own them are: No one ever made money betting against rising team prices; and never believe a word owners say when they talk about money.
Owning a pro team is almost always a good-to-great investment in the long term, and team owners are almost always being dishonest when they talk about franchise values and the day-to-day finances of their clubs. As ESPN’s Peter Keating (a former colleague of mine) wrote last last fall: “Most NBA franchises are like the Mona Lisa; they’re worth owning not because of what they make or lose in a given year but because they are rare and prestigious and accumulate value.”
Indeed, according to the The U.S. Professional Sports Market & Franchise Value Report 2011, average franchise values in the first decade of this millennium increased 141% for the NFL (from $423 million to $1 billion), 101% for MLB ($233M to $491M), 78% for the NBA ($207M to $369M) and 54% for the NHL ($148M to $228M). This over a decade that witnessed a once-in-four-generations recession.
The source of the report, San Francisco investment bank WR Hambrecht + Co, is likewise upbeat about club values going forward: ”While we anticipate a slowing in the rate of growth of the sports segment of the economy, professional sports will remain an attractive investment over the next decade. Teams are enjoying both the benefits of globalization and the emergence of new distribution platforms, affording them new means of product monetization. New arenas and stadiums continue to be built and broadcasting rights have increased (albeit at a slower rate than in the past), generating still further increases in revenue.”
For the Dodgers, the words “globalization” and “broadcast rights” are key to any deal. The former because the Dodgers have long been a favorite among Hispanic baseball fans, in Southern California, Mexico and Central and South America. And while it’s true the team has lost ground with that audience to teams like the Angels, that means there’s more room for growth when the team’s play improves.
As for broadcast rights, at least some of the bidders are hoping to create a cable operation similar to the Yankees’ YES Network, which is a major source of the Bomber’s monstrous cash. Some question whether the Dodgers brand has the same potential. I am not one of them, since any Dodgers network is likely to become part of a virtuous circle: More money from broadcast rights = more money for players = more wins = more demand for broadcasts = more money. Everybody’s a winner!
Then again, it’s hard not to win when the rules are stacked in your favor. To understand the economics of team ownership—and to see why owners and league officials aren’t to be trusted when it comes to money—you must understand a peculiarity of U.S. tax law. It’s complicated, but team owners can basically write off the entire purchase price of their teams over 15 years, on whatever schedule they like. As Keating noted, “This is a fabulous way to make profits disappear for tax purposes—or during labor negotiations.”
In other words, when owners tell unions (and you) that player salaries are killing them, they conveniently fail to mention that those salaries also provide a key tax break, the so-called Roster Depreciation Allowance. This affects accounting in various ways, all of which are completely legal and totally advantageous to owners. Most importantly, owners get to deduct player salaries twice over, as an actual expense (since they’re actually paying them) and as a depreciating asset (like GM would for a factory or FedEx a jet). The result? Ledgers that routinely show lower profits (or even losses) than in reality exist.
It’s hard not to see the RDA as a loophole begging to be closed. But whatever your view, it’s one example of how tough it is to make accurate judgments about the purchase price for any team. That said, in hindsight most have come to look like bargains.