Why Prices for Sports Teams May Stop Skyrocketing

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The Los Angeles Dodgers were sold for $2.3 billion earlier this year.

One of the more interesting nuggets in the 30th edition of the Forbes 400 is this: In 1982, nine members of the inaugural class of the richest Americans owned sports teams. In this year’s gilt grouping, the number is 32. That’s quite a jump, one that likely says more about the rise in value of all things sports-related over the past decades—teams, stadiums, broadcast rights, salaries, ticket prices, merchandise sales, sponsorships, ad rates—as it does about upper crust interests or hobbies. But considered alongside some other bits of news, the Forbes 400 factoid makes you wonder if we might be reaching a market top on sports team values.It goes without saying—but we’ll say it anyway, because the truism trumps everything else on the topic—that any discussion of team values comes with a caveat: No matter the economics, there always seems to be someone willing to pay top dollar for the right to say he (and yes, it’s usually he) owns a team.

That won’t change any time soon, especially given the distinct advantage sports has over its rivals: Individual games, matches, and bouts are by definition unique, and audiences prefer watching them live to an extent unrivaled by any other forms of entertainment. As a result, rights fees for sports properties across the spectrum of media platforms—TV, cable, radio, digital—have risen dramatically in recent years, fueling the jump in franchise values.

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Still, there are reasons to think we might at least see a slackening in the pace of franchise-value acceleration. These among them:

1. Prices look bubbly. According to Forbes, the 10 most valuable teams in the world are worth $16 billion, up 11% from a year ago. That seems frothy given the generally weak-to-poor state of the global economy, which explains the head-scratching and carping that occurred when a Magic Johnson-led consortium paid $2.3 billion for the Los Angeles Dodgers earlier this year, nearly tripling the previous highest-price-paid-for-an-MLB-team mark ($845 million for  the Chicago Cubs in 2009).

2. Some smart money has started selling. News broke last month that Philip Anschutz—whose Anshutz Entertainment Group owns NBA, NHL and MLS teams in L.A.—is looking to sell. This follows Randy Lerner’s August sale of the NFL’s Cleveland Browns (for $1 billion), not to mention rumors that Red Sox (and Liverpool) owner John Henry is mulling a sale of his baseball team (which he denies). All three men are thought to be among the savviest of current or recent owners, so any profit-taking from the likes of them is worth noting.

3. The workers are uneasy. For all the money generated in American pro sports, the relationship between management and labor is among the worst in business. In the 40 years since the MLB became the first league in the modern era to lock out its players, there have been more than two dozen work stoppages of one kind or another (strike or lockout) in the Big 4 sports, with three in the past eight years. (And one, in the NHL, happening now.) Poor labor relations does not an attractive acquisition candidate make.

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4. TV money is not immune to gravity. Rights fees are high because cable and broadcast networks have been willing to keep paying more and more money for sports programming under the assumption that a) they can keep charging consumers more and more money to watch their games; and b) they can keep charging advertisers more and more money to reach those consumers. Despite some recently signed long-term deals, neither status quo is a sure bet to remain that way. For one thing, there is always a chance that Congress or other market forces will impel the cable industry to start unbundling its channels, which could easily change (for the worse) the economics of big rights buyers like ESPN.

For another, as marketers inevitably become more sophisticated in their understanding of viewer habits and ad effectiveness, the pace of price hikes they’ll be willing tolerate will surely come under pressure to slow. Smarter people than me are thinking along similar lines: At Advertising Week in New York recently, there was a panel titled “Sports Rights On Television: Can The Marketplace Afford Sports Anymore?” As Leo Hindery Jr., who helped build the highly profitable Yankees Entertainment and Sports Network, told the Bloomberg Sports Summit in September: “It’s that assumption of perpetual ups in traditional media that’s a fallacy. It can’t be proven to be true.”

Does any of this mean that 2042′s Forbes 400 won’t have ballooned to include 90 pro teams? No, of course not. But it might mean that a lot of those franchises won’t be worth quite the fortunes their then-owners will have expected.

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