Earlier today, Ben posted a link to Steve Aschburner's excellent interview with economist Kevin Murphy. There has been some great discussion in the comments section of that post and I'd encourage you to participate in what's happening there. However, one aspect of Murphy's comments triggered some thoughts in my mind that I believe warranted some deeper examination - comments regarding NBA franchise values and how they come into play in the ongoing negotiations between the owners and players. Here's one quote that I found particularly thought-provoking:
Let's say the NBA is a $4 billion revenue business -- that's not exactly right but it's close enough. Then let's say you lose $200 million. That's 5 percent. OK, my franchises are worth -- let's make it simple, 2½ times revenue, which is well below Forbes [valuations] -- that's $10 billion. Now let's say it's appreciating at 4 percent a year. I'm getting $400 million in appreciation even though I only have $200 million in losses. I'm getting better tax treatment on the $400 million that I'm making, and I deduct at a higher rate the $200 million that I'm losing. Suddenly this picture doesn't look so crazy any more.
Murphy is clearly suggesting that appreciation of franchise value, over the long term, is more than enough to offset the claimed yearly operating losses being incurred by teams. Is he right? After the jump, I want to take a closer look at the numbers that he uses in his discussion of NBA franchise value....
EDIT NOTE: A big thanks to L.A.B who pointed out in the comments that there was a problem in the sums of my original post. I've corrected the numbers and the charts to reflect the actual numbers.
First of all, let's be clear about what Murphy is saying about NBA franchise values in this interview:
- $10 billion is a fair estimate of the value of all 30 NBA franchises. In fact, that is below the valuation that Forbes has made.
- Teams have not been appreciating much over the last few years, but there was a time when they were appreciating by 8 or 9 percent a year.
- Historically, franchise value appreciation has been large enough to offset yearly operating losses incurred by teams.
- [His conclusion] Projections for the future, including those that will directly impact the specific terms of the next Collective Bargaining Agreement, should be based on more on history than on what has happened to franchise values over the last 3 years.
Let me cover each of these in order:
1. $10 billion?
Murphy sets the value of the league at $10 billion and says that this number is "well below" the Forbes valuations. I believe that he's referring to the 2010 iteration of Forbes' annual Business of Basketball article, in which they give each franchise a valuation. Forbes has been valuating NBA franchises for over a decade, and over the years, I've tracked their numbers in a spreadsheet, summarized here (click to enlarge):
The total of valuations for the 2009-10 season is
$9.726 billion $11.063 billion This might not literally put Murphy's number of $10 billion "well below Forbes", but the two figures are in the same ballpark. is right in line with Murphy's statement that a valuation estimate of $10 billion is "well below Forbes".
2. Team Value - Than and Now
The Forbes data also gives us a good guess at what's going on with fluctuations in team value from year to year. I'm not implying that Forbes' numbers are accurate to the dollar (or million dollar), but if this world class economist who is working with the NBPA during negotiations gives credence to Forbes' valuation numbers, that indicates to me that they are good enough for my purposes. I do need to point out, however, that the data does not include the 2010-11 season (I would expect those numbers to be printed by Forbes sometime in the next few months when they publish their annual Business of Basketball article), but I think that examining the data through the 2009-10 season will provide us with enough insight to be able to see trends, to evaluate and to make some conclusions.
The average (mean) team valuation for the 1997-98 season was
nearly $146 million just over $167 million, while the average (mean) for the 2009-10 season was $324 million nearly $369 million - a substantial increase. Here's a chart showing the growth of the average (mean) team valuation over that period (click to enlarge):
As you can see, appreciation in team values rose pretty steadily for a decade, but has dropped off over the last few years. This is what Murphy had to say:
If you go back before the last 3-5 years, these guys did incredibly well. Their franchises weren't going up by 4 or 5 percent, they were going up by 8 or 9 percent a year. They were making money hand over fist.
Here's another chart, this one showing the annual growth/reduction in the value of the average (mean) team valuation (click to enlarge):
It's clear to see that for years, the average team valuation increased by anywhere from 6% to 14%. Even in 2004-05 and 2005-06, the average valuation increased by the 8-9% figure that Murphy mentions. But - as he points out elsewhere in the interview - the average team valuation hasn't grown much since the 2006-07 season, and in fact even dropped during the 2008-09 season. Murphy admits this when he says:
The fact is, guys have not done well over the last few years as asset prices generally have gone down.
Once again, his statements seem to honestly address the available data.
3. Is Appreciation Enough?
Murphy claims that - with the possible exception of the past few recession-impacted years - appreciation of team values has been enough to offset any operating losses. Here's his quote:
I'm getting $400 million in appreciation even though I only have $200 million in losses.
Is he right? Well, if the Forbes numbers are to be believed, this chart shows the total valuation of all NBA franchises during recent history (click to enlarge):
Before the Bobcats were added to the league, the data shows that total team valuation of the 29 franchises grew from
$4.09 $4.85 billion in 1996-97 to $7.65 $8.75 billion in 2003-04. That represents an increase of over $500 million a year for those 7 years. The data for 2004-05 is a bit skewed since the $300 million valuation of the Bobcats was added to the pot, but even 2005-06 and 2006-07 saw increases of the $500+ million variety.
Then, once again, the chart levels off. It would appear that appreciation league-wide was large enough to offset large operating losses earlier in the first decade of the 21st Century, but not recently. This, too, would seem to match Murphy's statements, such as this one:
But who bought anything in '07 that they're happy with the price they paid? If you bought a house in '07, if you bought stocks in '07, if you bought bonds in '07 -- I don't care what you bought, you're not happy with the price you paid. When you buy at the top, you don't make your money. That's not unique to the NBA, that's everywhere in life.
4. So What About Murphy's Conclusion?
Murphy comes to this conclusion about appreciation of franchise values and the current CBA negotiations:
But by and large, NBA franchise ownership has been a good investment. You can't base long-run projections on how you did in the biggest financial downturn of the last 50 years. On that basis, there are no good investments out there. But we know that's not true.
In other words, when projecting fiscal health for the league, Murphy believes that the last 3-4 years have been the exception, not the rule. He seems to be arguing that a fair agreement with the players should expect that the league will once again see team valuations increase by at least 4% if not 8% or 9% annually.
Is he right? The answer to that question, unfortunately, can only be made years from now. Perhaps league-wide team valuations will once grow by $500 million or more per year. Perhaps league-wide revenue will once again increase by more than 6% a year, as it did during the first two years that the 2005 CBA was in effect. But how far can 'perhaps' take you? How much of the labor negotiations should be based on 'perhaps'?
I am sure that this is one of the things being debated in the CBA negotiations. The NBPA is probably saying, "Look at history - the numbers are bound to get better." Meanwhile the owners are probably saying, "But they're not good now and now is all that matters." I can see both sides of that argument, and I hope that you can, too - it may help all of us understand the standstill between the two sides just a little better.
I'm in no position to state conclusively that Murphy's conclusion is either right or wrong. I understand his contention (and that of the NBPA). But I also understand the position of the owners. For the league's sake, I hope he's right about the last 3 years being an aberration. But without a clear indication that he's correct, the owners might be justified in wanting to approach financial projections for the next 6-10 years from a conservative perspective.
In short, I find no major fault with any of Murphy's analysis, based on the data available to me. But should the next CBA should be drafted based on the historical economic health of the league or based more in light of the financial effects of the past 3-4 years? That's what's ultimately in the the hands of the two sides negotiating now. Let's just hope that they can reach an agreement soon so that a 2011-12 season can be salvaged.