Is the sporting world inflating a giant bubble? OK, not real estate or dot-com sized, but one that might leave more than a few franchises, leagues, and sports channels sucking helium and picking tattered shards of polypropylene out of their Kobe jerseys? If so, could my lonely little blog be among the first to see it coming?
Let’s start with this: the conventional wisdom among all folks jockish is that the demand for live sports is insatiable. The prices for teams, players, broadcast rights and pictures-on-Wheaties boxes can do nothing but go up, geometrically and forever. Now I don’t have any specific evidence that this is all nonsense, other than a thousand years or so of economic history. But just for the sake of argument, let’s start right here in LA. Take the Dodgers. (Please.)
Most of you know by now that after falling into bankruptcy under the Fightin’ McCourts, the Dodgers were auctioned off to a group led by Mark Walter, a principal in Guggenheim Partners, for 2.15 billion dollars. That price was reported to be $500 million higher than anyone else had valued the franchise. Exactly where the money was coming from was a bit murky, as reported by Andrew Ross Sorkin in the New York Times last April. Was it coming directly from the investors? Or from the assets of the financial group Guggenheim? All we really knew is that the financing satisfied Commissioner Bud Selig and Major League Baseball. Then again, Frank McCourt’s financing deal satisfied Major League Baseball. I don’t want to question the good intentions of Mark Walter et al. Let’s just say that if you want to play “Match Wits With Inspector Selig,” I am going to bet the field.
More to the point, that $500 million dollar overpayment seemed based on the assumption that the Dodgers are about to walk into a massive windfall when their television contract expires next year. So massive that, in addition to the $2.15 billion they ponied up, the new management completed trades for a bunch of high priced players who had worn out their welcome with other clubs, to the tune of another quarter of a billion dollars. Now, LA is a huge TV market, and yes, the Yankees, with YES, their television network, have reaped a fortune. But it is worth noting that the Lakers, currently the number one sports attraction in town, just became the flagship team for a new Time Warner sports network, and the Pac12 network just appeared on our local scene and we now have league networks for NFL, NHL, MLB, ad naseum, ad infinitum.
And now for a small data point. Last April, Fox Sports West, which carries the Angels baseball broadcasts, purchased a package of 25 additional games that had been owned by over-the-air KCOP. Fox Sports West then asked its cable and satellite carriers to pay more for the additional games. Several of them, including DISH Network, which is my provider, refused to ante up. What followed was the usual catfight between FSW and Dish et al, blaming each other, with viewers caught in the middle. Only this time, no agreement was reached. The black-out for the 25 games was never lifted. As a Dish customer, I was offered a rate reduction of $10 a month as compensation for not having the 25 games and I gladly took it. There was not, after all, any shortage of baseball games on television. Now I am not going to suggest that this small hiccup is signaling the end of Sports As We Know It. On the other hand, if you’re operating on the theory that fans will pay any rate for games, any time, and that it is impossible for these rates to go anywhere but up, you might want to read a little about the price of tulips.
Here’s a few other loose data points. With the first Lakers exhibition telecast a few weeks away, the new Time Warner Sports Channel still isn’t available on most providers, including the satellite carriers. Direct TV hasn’t picked up the Pac 12 Network. Will sports fans pay any price to get these broadcasts? Will Lakers fans shock Time Warner with their astute knowledge that the NBA regular season is meaningless and anyway, when is Dwight Howard going to actually play?
And what exactly happens if these TV deals don’t fetch quite the bounty that was expected when teams were sold and mega-salaries were drawn up?
One thing about the real estate debacle: the values of real estate didn’t have to crater for the bubble to burst, although they eventually did. They just had to stop going up. Once holders of leveraged assets realized that there wasn’t a Greater Fool to bail them out, the whole house of cards collapsed. As Warren Buffett put it, you never find out who is swimming naked until the tide goes out.
Could something like this happen in the Toy Department? And more importantly, how could you or I profit from it, armed with this Cassandra-like warning uniquely available at this blog?
Is there somebody out there writing derivatives on sports teams, or networks, or entities that own them?
Sorry, you’ll have to figure that out for yourself. You get what you pay for. Personally, I’ve got a call into Michael Lewis.