It’s no mystery that a handful of teams benefit from the fact that their domain happens to be a “big-market.” But just how much of an advantage do these teams have over their peers in less desirable locations? Could the revitalized Bobcats ever outsell the slumping Lakers?
A NBA team has many revenue streams – TV deals, merchandise, refreshments – but a big chunk comes from ticket sales, and that is what we’ll be taking a look at here. Let’s start with this: the top 10 earning teams made over $593 million, more than the other twenty combined at $561 million. What parity?
The underachieving New York Knicks ($105 million, no playoffs) made more off ticket sales than the five lowest earning teams combined – New Orleans, Charlotte, Memphis, Atlanta and Washington (four of which made the playoffs) made $99 million off ticket sales combined. The Knicks, Lakers and Bulls ($253 million) out earned the bottom ten teams combined ($216 million). You get the point. But in case you want more, below is the full data showing ticket sales by team for the 2009-10, 2011-12 and 2013-14 NBA seasons, ordered by total revenue from 2013-14 NBA ticket sales.
Looking over some of the calculations, a few things stood out: the Knicks earn more than double most teams in the league, Milwaukee ISN’T the most fiscally miserable franchise (surprising, no?), and of course the LeBron James Effect™ – attendance dropped by ALMOST 25% in Cleveland, while going up 12% in Miami from 2010 to 2012 (league average was +1.3%). But most interesting was the fact that correlation between Win % and Total Revenue was 0.12, otherwise known as non-existent. Interestingly enough, when you remove the Knicks and Lakers from the equation the correlation jumps to 0.38, though still not high enough to constitute a strong relationship.
The two correlation figures mean two very important things. Firstly, though winning helps, the few fortunate souls who happen to be owners of franchises like the Knicks, Lakers, and to an extent Bulls and Celtics, don’t have to stress too much about winning. The fans will still come in packs or be glued to the TV watching their team rebuild while tweeting #LakersNation. On the other hand, you have the small-market teams that must win to get out of the low-revenue purgatory.
Secondly, the numbers may also help explain the $2 billion valuation that the LA Clippers got when they went up for sale. As per the correlation numbers, win or lose, teams from larger markets – NY, LA, CHI - will generate substantially more revenue from ticket sales (not to mention TV deals) than their smaller counterparts. Even more importantly, when the team tanks their revenues won’t. Strictly from an investment standpoint, more stable revenues mean less risk for the investor. And if there are two otherwise identical assets, the one with lower risk will command a premium. The LA Clippers are that asset, and the (more) stable revenues are the reason Steve Ballmer forked over a heck of a premium ($2 billion, 7.1x revenues) versus what Wes Edens and Marc Lasry paid ($550 million, 5.0x revenues) for the Bucks.
At the end of the day, it’s important to remember that most people who own an NBA franchise don’t depend on it for income. A franchise is more status-symbol trophy than income generating asset. As per Miami Heat owner, Micky Arison, owning a team is “not a business. This is a hobby of passion.” Well said Micky, well said.