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Saturday, July 21, 2007

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. ...

    Posted by on Saturday, July 21, 2007 at 06:57 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (11)

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