Why Do People Buy Sports Teams?

Austan Goolsbee, of the University of Chicago Graduate School of Business and an adviser to the campaign of Senator Barack Obama, on why people buy sports teams:

A Billion Bucks for the Cubs? It’s Only Money, by Austan Goolsbee, Economic View, NY Times: What makes a man so desperate to own a sports team that he would be willing to pay a billion dollars for it? ... Answering why people buy teams turns out to be important to more than just sports fans. There is big money at stake.

After owners indulge their childhood fantasy of buying a team, they tend to switch to an adult perspective and start viewing the team as a business. And they typically conclude that it’s a bad business.

Consider the Seattle SuperSonics basketball franchise. The Starbucks mogul Howard Schultz sold the team to an Oklahoma businessman, Clayton Bennett, last year. Evidently, the Sonics lost about $60 million in the five years that Mr. Schultz owned the team. Mr. Bennett now wants a big subsidy from the city of Seattle to build a new arena, or else he may move the team to Oklahoma City. Other team owners use large losses to force tough salary caps and other restrictions on the pay of the athletes during labor negotiations. If teams can’t make money, they reason, the business can’t survive.

But if this is such a bad business, we are back to the same questions: Why do these guys line up to buy the teams? Should we really care that it’s a bad business? If a billionaire throws a lavish 60th birthday party, it costs a lot of money. But that doesn’t make it a bad business. It’s a party. It’s not supposed to make money. Is a sports team really that different?

Owners’ complaints about losses leave out the basic fact that capital gains are profits, too. And when scores of grown men desperately want to buy sports teams, there tend to be big capital gains.

Take the Sonics. The team may have lost $60 million while Mr. Schultz owned it. But he bought it for $200 million in 2001 and sold it for $350 million five years later. So he ended up making something like $90 million (taxed at the favorable capital gains tax rate, no less) on top of the fame, prestige and free tickets he got while he was owner.

If the Cubs ... sell for $1 billion, Tribune will have earned an annual return of almost 15 percent since it bought the team for around $20 million in 1981. Given the company’s recent problems, it’s probably the best investment it ever made.

So owning a sports team gives budding billionaires local stardom and a big return — no wonder that they are lining up to buy these teams. The only question that remains, I suppose, is why the vanity value of teams keeps climbing. You might have thought that this value would be about the same whenever there’s a sale, so that the capital gain wouldn’t be such a big component. But because ever-richer guys are bidding against one another, there has been persistent inflation in team values. ...

Comments

[anne]

The other day, my sister asked Michael Moore how he responds to criticism that his film "SiCKO" is unbalanced. Moore told her, he was the balance. I do admire Barack Obama, and I hope there is is decent enough economic advice for him to know how to be the balance needed. But, so far Austan Goolsbee has given me no hint of where there may be balance in his economic advice.

Yes; I understand the column. So what?

[Noni Mausa]

Ah, ya gotta love Terry Pratchett. Here, from his book "Maskerade"

'Money gets put in, money gets taken out. . .' said Salzella vaguely. 'Is it important?'
Bucket's jaw dropped. 'Is it important?'
'Because,' Salzella went on, smoothly, 'opera doesn't make money. Opera never makes money.'
'Good grief, man! Important? What'd I ever have achieved in the cheese business, I'd like to know, if I'd said that money wasn't important?'
Salzella smiled humourlessly. 'There are people out on the stage right now, sir,' he said, 'who'd say that you would probably have made better cheeses.' He sighed, and leaned over the desk. 'You see,' he said, 'cheese does make money. And opera doesn't. Opera's what you spend money on.'
'But. . . what do you get out of it?'
'You get opera. You put money in, you see, and opera comes out,' said Salzella wearily.
'There's no profit?'
'Profit. . . profit,' murmured the director of music, Scratching his forehead. 'No, I don't believe I've come across the word.'
'Then how do we manage?'
'We seem to rub along.'
Bucket put his head in his hands. 'I mean,' he muttered, half to himself, 'I knew the place wasn't making much, but I thought that was just because it was run badly. We have big audiences! We charge a mint for tickets! Now I'm told that a Ghost runs around killing people and we don't even make any money!'
Salzella beamed. 'Ah, opera,' he said.

[Bruce Webb]

When the Atlanta Braves were owned by Ted Turner he had large operating losses, in part because the team's broadcasting contract brought revenues way below market. How did a billionaire get in this position? Because he also owned WTCG, later TBS, which held those rights.

The Tribune situation is even worse, not only did they sell a lot of papers and advertising covering the Cubs, they also own WGN. Want to bet that revenues directly derived from ownership of the baseball team are landing on ledgers quite removed from those maintained by the Cubs.

There are similar cross ownership deals across the country. Rarely is there a deal where there was a capital loss when operating expenses are subtracted, and this quite aside from the revenues generated that never hit the team's actual books.

[anne]

This reminds me, there is a reknowned sports economist from/in Massachusetts who has written much about owning baseball franchises in particular and how profitable they are beyond anything Austan Goolsbee writes. I will ask the name, but Goolsbee's article strikes me as inanely trivial.

Bruce Webb touches on what has been explained to me, by the sports fiends who insist for ridiculous reasons I have to go to Red Sox or Mets games (no Yankees). Football is out.

[donna]

I'm always more curious about why people watch the teams and get compelled to support "their" team which they in fact have nothing to do with other than watching them.

People are strange, strange creatures.

[btgraff]

owning sports teams is an example of the "greater fool" theory working, for now.

[drchaos]

An obvious solution must be that in fact, sports franchises are much more profitable than they publicly admit to. It may be like hospitals---which often are run at no-profit or a loss, nominally---but everybody who is in business involved with them makes a mint.

Maybe owning sports teams gives you access to other profitable ancillary businesses?

Note also how the league owners ensure that most sports teams have to be owned privately by other wealthy moguls and opaque unaudited finances. This is so they can cry poor and shake down taxpayers.

If sports teams regularly made real losses for all owners---I don't think the price for them wouldn't continually be going up. Even the opera stars don't cost as much as Alex Rodriguez.