There has been a great deal of criticism towards Steve Ballmer for “overspending” on the Los Angeles Clippers. The theory is that recouping $2B from this purchase is nearly impossible. But this is confusing.
Starting with some comparisons to recent tech company purchases, here are some examples of recent companies that were bought:
- Instagram was purchased for between $700M-$1B depending on Facebook stock price
- Beats headphones were purchased by Apple for $3B
- WhatsApp? was purchased for $16B by Facebook
That last one is a great benchmark here: $16B for a chat app/service which is currently free for the first year. $16B is an insane amount of money for a company that does something somewhat ubiquitous, and with a mild revenue stream. When and how will $16B profit be made to recoup this? It doesn’t seem remotely possible. And yet this amount is 8x what Steve Ballmer paid for the Clippers.
There are only 30 professional basketball teams in the NBA. No other professional basketball league is about to crop up and steal customers the way that a photo or chat app could theoretically steal customers from Instagram and WhatsApp. So owning a professional sports team is essentially not a free market.
Speaking of markets, Los Angeles is the 2nd biggest “market” for sports in the country. They have no professional football team, and even though they have another more well-known basketball team, it’s still a huge city. Big city teams can still thrive (at least for a while) even without much success if they are run properly. And the upcoming possibility of a massive TV deal cannot be overlooked.
Thirdly, the Clippers just made the 2nd round of the playoffs. They have two of the 20 best players in the league. They have a top five coach. These situations rarely come up when teams are sold. The Milwaukee Bucks and Sacramento Kings have both recently been sold. Both are bottom feeding teams in need of new arenas. A team comes up for sale on average probably every 2–4 years. A team with a situation like this probably comes up once a decade, if that.
Sports teams don’t really lose money anymore. There are probably some instances where this is not, but generally they make loads of cash, despite what they try to make people believe. Good teams in big cities alway make lots, and that is the Clippers right now. Plus with a new owner and the current Lakers slump there will certainly be a rejuvenated interest in the Clippers in the next couple of years. It will probably take Ballmer a while to get back his $2B just on profits, but it’s unlikely he won’t chip away at it significantly in the next 10 years.
That doesn’t even factor in the possibility of selling the team again someday. Donald Sterling paid $12 million for the Clippers in 1981, which seems to be about $32M in today’s dollars. In other words, it’s unlikely the Clippers are going down in value any time soon. If Ballmer wanted to flip this team in five years, he almost surely would come out ahead.
The criticism just doesn’t make sense when there are all these other bizarre purchases out there being made that are far less safe than a sports team in Los Angeles. Rich guys don’t like to lose money, and one thing almost all sports owners have in common is that they are rich guys. So this is totally working out.