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Houston’s Rocketing NBA Franchise Price

The Toyota Center in Houston, at night
The Toyota Center, home of the Houston Rockets. Photo by Ed Schipul.

A good NBA team is hard to assemble, but it isn’t hard to sell.

Leslie Alexander, who owns the Houston Rockets, unexpectedly announced on July 17 that he planned to sell the successful NBA franchise. Speculation immediately arose that the sale might result in the highest price ever paid for an American sports team.

This raises the question: What is the upper limit for what someone will pay to own a professional sports franchise? Will prices just keep rising until, someday, someone buys the New York Yankees for $100 billion? That scenario may seem unlikely, but team prices have shot up dramatically in a relatively short amount of time. Eventually some buyers will pay more than teams are worth, if they haven’t already. One of these days, someone is going to lose a lot of money on a sports team.

That someone won’t be Alexander, though, who bought the Rockets for $85 million in 1993. Forbes recently valued the Houston basketball team at $1.65 billion. Valuations, however, have been handily outpaced by sale prices in recent years.

Alexander is reportedly selling the team in order to focus on his family and his philanthropic endeavors. But more than one observer has asked whether Alexander, known for his business savvy, is cashing out at what he sees as the top of the market.

The sale of the Los Angeles Clippers a few years ago serves as evidence for those who think the Rockets will go for a high price. Former Clippers owner Donald Sterling’s racist comments forced the team’s sale, though Sterling then sued the NBA and his wife, accusing them of conspiring to remove him. (The suit was later settled.) Despite the dubious circumstances under which the Clippers entered the market and their poor historical performance, former Microsoft CEO Steve Ballmer bought the team for $2 billion – the most ever paid, to that point, for an NBA franchise.

Ballmer has spoken about what he sees as the team’s profit-making potential, but for many prospective buyers, optimizing profit is not a priority. The supply of top-tier professional sports teams is limited; as Kevin Draper observed, writing for The New York Times, “Any billionaire can buy a Los Angeles mansion or a private plane, but only 30 of them can own an N.B.A. team.” For some owners, the built-in novelty and scarcity makes a high price for such a status symbol worthwhile, regardless of the team’s “real” value.

This is not to say you can’t make a lot of money in professional sports. Forbes valued 50 sports teams at or above $1.75 billion last year, and identified an additional 36 that didn’t make the list that are worth at least $1 billion each. Much of this rise in value has to do with major TV contracts, which have elevated the amount of money flowing into professional football, basketball and baseball, especially. For example, three years ago the NBA signed a nine-year, $24 billion broadcast agreement with ESPN and Turner Sports, a figure that does not include all the additional local deals individual teams negotiate.

Yet TV contracts cannot provide endlessly increasing cash flow. ESPN and its main parent company, Disney, are already creaking under the weight of these contracts in the era of cord cutting. While the allure of watching sporting events in real-time has kept them attractive to advertisers, even sports-focused channels feel the pinch of changing viewing habits. The Los Angeles Dodgers illustrate that there comes a point where providers say “no more.”

The Dodgers’ SportsNet LA channel has fallen afoul of a dispute between Charter Communications and area cable providers. For the past four years, many Angelenos have been left without a way to watch most Dodgers games. Charter inherited exclusive local rights to air the team’s games from Time Warner Cable, but Charter’s asking price – $5 per subscriber per month, according to the Los Angeles Times – is simply too high to tempt providers to carry to the channel.

Such disputes over TV rights are a major hazard for potential owners. Five years ago, a group of buyers headed by Magic Johnson bought the Dodgers for $2.1 billion. Despite the fact that Forbes values the team at $2.75 billion now, the owners must be frustrated by the TV contract dispute that has dominated most of their tenure. While we likely haven’t hit the end of the road for increasing television contract values, the Dodgers’ problems and other similar disputes may be among the first speed bumps.

Yet the supply of buyers hasn’t dried up, at least so far. Consider the Miami Marlins, a bad team with a beautiful stadium that is generally empty of fans. Team owner Jeff Loria, who bought the team in 2002 for $158 million or $30 million depending on how you look at the deal, is currently asking for over $1 billion. The sale has triggered struggles between groups of buyers, including one initially headed by Derek Jeter and Jeb Bush, until Bush bailed on Jeter to join a rival group headed by Tagg Romney. A third group of buyers, led by South Florida businessman Jorge Mas, is reportedly considering dropping out if the chaotic process continues to drag on. Yet whoever wins will be paying a lot of money for a team that hasn’t made it to the postseason since 2003.

As for the Rockets, it is too soon to accurately guess who will snap up the team, though that hasn’t stopped anyone from speculating. There is no doubt that whoever buys the Houston team will be getting a solid franchise in exchange. Whether the purchase will represent a prudent financial investment is much less certain.

Owning a top-tier sports team comes with plenty of prestige, but from an investment perspective it shouldn’t be considered a slam dunk. We may not have reached the tipping point yet, but finding smart buyers will get harder and harder as team prices continue to spiral upward.

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