Everyone by now knows that Steve Ballmer, the 34th wealthiest person in the world,
according to Forbes, and former Microsoft CEO, has offered to buy the NBA Los Angeles Clippers basketball franchise for $2 billion. At this writing, it’s not a done deal. But since the price demolishes all records for sports franchise sales, I will be very surprised if the deal doesn’t close. The price has triggered a lot of questions. The most common: “Are the Clippers really worth $2 billion?” This is a teachable moment.
A preliminary answer is: “The Clippers are worth whatever a buyer is willing to pay.” Period. That’s not entirely satisfying. But it is instructive. People don’t always buy things because they believe it will make (more) money for them. If you’ve ever collected coins, art, or baseball cards, you know that you “overpaid” at one time or another just for the joy of owning that Bob Uecker Topps card you were searching for on ebay for several years, or the Ken Griffey Jr. Upper Deck refractor.
Ballmer, who is said to be worth $20 billion, merely places a lot of value on owning a professional sports franchise, like his former Microsoft associate, Paul Allen (who owns the Trailblazers and Seahawks), and other high tech giants who now own professional sports teams.
Ballmer is brilliant and charismatic, but he just got pushed out of his Microsoft CEO job; he’s 58 years old, probably wants to have some fun the rest of his life, remain relevant somehow, and stay in the lime light. That’s worth $2 billion to him. Want to fight about that with Mr. Ballmer?
The main reason we ask if the Clippers are worth $2 billion is that we’ve all learned
from Econ 101 (and by osmosis), that economic behavior is always “rational” in some sense; that economic actors only buy or invest when “it pencils out,” meaning that the buyer will get a positive monetary return on the investment. Yet, even within the classic economics framework, if you think about it for a moment, Ballmer’s purchase may very well “pencil out.”
From Father Sarducci’s, five minute economics PhD, with 2.5 minutes devoted each to “supply” and “demand,” it’s obvious the supply of major league sports franchises is small and artificially constrained; while, the demand for them is going through the roof. Guess what happens to price.
Check out the number of newly minted billionaires in America and the world who are looking for new things to do with their billions; and compare that with the number of major league sports franchises on the market. And then look at the trends. If you believe Thomas Piketty, the number of multi billionaires is going to get much larger in the next few decades. The quantity of major league sports franchises won’t grow nearly as fast. That’s true, almost by definition. If every mid size city in America gets a major league franchise, its no longer “major league.”
But, the NBA will grow internationally. Ballmer is a forward thinker; and can play chess on a very high level. Don’t you think it crossed his mind that in 20 years, the NBA will have franchises in China, Brazil, and Germany? How much do you suppose those markets will generate in cable revenues and gear sales for every NBA owner?
Congrats, Mr. Ballmer and have fun with your new toy. Condolences to Seattleites who’s last best hope for bringing NBA basketball to that town, Mr. Ballmer, is now committed to a franchise in LA.