Is the Era of the Deep Pocketed Owner Ending? 💸
Well, maybe not yet. But storm clouds are gathering. Plus, MJ's Zoom background game, Jason Whitlock Says Stuff, and more
PREGAME
Welcome back! We hope you enjoyed last week’s issue, in which we predicted that Ben Simmons would report but not play, quickly followed by him reporting but probably not playing. While we’re at it, recall we once speculated that Klutch Sports might try to establish an east coast outpost in a city like Atlanta… which happened last month. We’re normally not ones to toot our own horn (we really, really are), but we’re starting to freak ourselves out. This week, we look at the impact of increasing financialization of NBA ownership. Stay tuned for our season preview coming up next Friday.
OPENING TIP
The NBA has seen some resoundingly bad owners. Still, even the most vilified NBA owners of yore (we’re looking at you, Donald Sterling) did not inspire spontaneous public celebrations when they sold their teams. But we’d like to invite Mike Ashley to take a bow, because that’s exactly what happened this week in Newcastle:
No, Joe Pompliano, this wasn’t a celebration of the Saudi sovereign wealth fund taking over; it was collective relief at Newcastle United being freed from the shackles of that most hated curse: the penny-pinching owner; something we mostly don’t see in the NBA, but (spoiler alert!) we think could be on its way back into vogue.
Ashley’s time in charge was initially greeted with optimism. Here was a guy who once went to a popular London pub and challenged an analyst on his staff to a drinking competition. After 12 pints with 12 vodka chasers, he vomited explosively into a fireplace, while encouraging his senior management team to applaud. What wasn’t to love? Unfortunately, that was the high point of his time in charge. Newcastle was relegated twice in a seven-year period, while Ashley was sued twice—for failing to pay a club legend AND for failing to pay a player suffering from testicular cancer (he lost both cases). Just four days ago, Ashley was spotted in Soho celebrating selling the club for $410 million. He left a five pound tip.
With the Ashley era over, everyone expects the new Saudi owners to ramp up the spending (and hence Newcastle’s ability to compete on the pitch). But it’s worth noting what also accompanied Ashley’s cheapness: a team on sound financial footing! Premier League teams, especially ones not at the top of the table every year, are renowned for the persistent precariousness of their financial existence, with Financial Fair Play rules forever trying to catch up. Newcastle was different: the team more than doubled its value during Ashley’s ownership; was sold with zero debt, a rarity; and likely resulted in strong cash flows to Ashley as equity holder.
In other words, Ashley ran the team not as a fan looking to maximize wins (at the cost of his wallet) but as an investor looking to maximize returns. And the fans hated it! This is not new: Atlanta Braves fans complained when their team was sold to a giant profit-first conglomerate in a tax-avoiding transaction. Suns’ owner Robert Sarver is legendary for his thriftiness, selling the draft pick that became Rajon Rondo and more recently giving away TJ Warren, who immediately broke out as an impact player. If this is the kind of behavior that makes your blood boil, we have some bad news for you.
This June, the NBA changed the rules to allow investment funds to become minority investors in teams, with up to 30% ownership available for funds. The impact has been immediate. So far, two different funds have invested in the Kings (Dyal Capital Partners and Arctos Sports Partners); the Suns (Dyal), Spurs (Sixth Street) and Warriors (Arctos) have also received investments. And that’s just since June! We expect a number of other deals to be announced in the coming months.
While these investments are minority stakes, and thus don’t come with control rights, they will undoubtedly impose financial discipline on the teams that accept them. For one, Dyal, Sixth Street, and Arctos have investors expecting a return. For another, their LPs don’t get courtside seats or the other non-monetary benefits associated with team ownership.
The NBA has deliberately changed the rules to prevent the worst excesses of prior ownership, with max contracts, shorter contract lengths, and restricted free agency all reining in teams’ abilities to light money on fire. But early signs of fund minority ownership are notable. Given Sarver’s above-noted cheapness, would the new minority investment allow him to open his wallet more? Yeah, nah: news reports emerged last week that emerging star Deandre Ayton was not offered a max contract, despite most commentators calling that move a no-brainer.
But fear not! The days of the ultra-rich spendthrift owner aren’t quite over yet. The Premier League is dominated by teams controlled by billionaire owners who have no problem spending themselves into oblivion. And while some NBA owners are happy to claw some money off the table by monetizing the increased value of their investment, others have so much money that they’re happy to spend whatever it takes to let them… do this?
It’s worth noting that financial ownership does not necessarily mean running teams to maximize cash flow. Liberty Media, who (in addition to being a villain of Braves fan narratives owns Formula One), has poured resources into that sport’s growth, and has been rewarded by healthy share price appreciation. The Milwaukee Bucks are perhaps the team whose ownership situation most resembles an investment fund like Arctos (hedge fund vets Marc Lasry and Wes Edens are the principal owners), and while the Bucks have been somewhat, ahh, reticent to pay the luxury tax in the past, the team as constituted faces a significant tax bill after re-signing Bobby Portis and bringing in Grayson Allen and George Hill. Most successful investors got to where they are by being good capital allocators; we imagine the idea of bringing back PJ Tucker to the Bucks was tough to justify not from his court impact in isolation, but relative to the incremental $35M in salary plus luxury tax he would have cost.
On the other hand, Tucker is clearly better than the 15th player on the Bucks roster (Greek legend and 60th overall pick Georgios Kalaitzakis), so while the financial return may not have justified him coming back, as a fan you’re better off having an owner who literally wouldn’t even notice the difference. Forbes estimates Lasry and Edens as having a combined net worth of approximately $3B; Steve Ballmer’s is 30x higher than that.
Podcaster Danny Leroux likes to say that ownership is the biggest competitive advantage in the NBA. If anything, that advantage is only going to keep increasing. Sorry, Suns fans.
TWEET OF THE WEEK
And here we thought our copy of Moneyball on the bookshelf made us look like intellectuals:
STL INVESTIGATES: CHIP ODDS
As noted below, 538 recently released their NBA model’s full season championship predictions (live updating version is here). We compared those odds to the latest championship odds we found on Sports Betting Dime. Suffice it to say, there are some differences!
As we wrote last year, the 538 model has its quirks, so Bucks fans should hold off on buying their “back-to-back” merch and Lakers fans can climb down from the ledge (at least for the time being). We promise to sort it all out soon.
AT THE BUZZER
It might seem like Kyrie’s anti-vax stance is a combination of vague platitudes and a reluctance to play basketball. But Jason Whitlock knows it’s actually Lyndon B. Johnson and lesbians trying to castrate Muhammad Ali (Blaze Media; reading this piece may give you a stroke)
The best Chinese prospect since Yao Ming skips college to go straight to the G-League Ignite (ESPN)
The aforementioned 538 full-season predictions. You might well wonder if 538’s NBA metrics are not that great, but we couldn’t possibly comment… yet. (538)
You thought King James moved to LA for the weather? Nah. Investors value LeBron’s SpringHill Entertainment at $725M in latest funding round (Yahoo)
Is it a little odd to watch the MLB and NBA shit on the value of their own rights when asked about Sinclair’s RSNs? It kind of is. (The Athletic, $)