Malcolm Gladwell's first piece for Grantland deals with the psychic vs. economic benefits of owning an NBA team, and how they play into the ongoing NBA lockout.
I have nothing but admiration for Gladwell, but his first attempt is an airball.
He does a good job of explaining the concept of "psychic benefits" - the idea that simply owning something like a sports franchise or piece of art creates value for the owner above and beyond dollars and cents. But calling those psychic benefits the primary reason that NBA teams are selling for values well above Forbes' estimated values is a gross over-simplification.
Why did the Warriors, Pistons and other teams sell for such high numbers?
- The New CBA Premium: Forbes' estimates are based on each franchise' current value. As such, they don't reflect the changes to each team's business that will come as a result of the next collective bargaining agreement. I believe those changes have been priced into all the recent sales - the Joe Lacobs and Tom Gores of the world know they'll be getting a substantially-larger share of revenue going forward, and that means the teams are worth more.
- The Tax Benefit: If President Obama really wants to close tax loopholes for the super-rich, he should take a long look at the IRS code relating to the ownership of sports franchises. Until that happens - and I'm not holding my breath - owners of NBA and other professional sports franchises will see tremendous tax benefits, including the ability to use paper losses relating to their teams to offset profits made by other divisions.
And let's not forget... most of the league's newest owners, including Lacob (Warriors), Gores (Pistons), and Joshua Harris (Sixers) are finance guys. Are they buying teams because they love basketball? Or are they Wall Street sharks scooping up under-valued assets? My money's on the latter. Technically, Gores didn't even buy the Pistons - according to Fortune, the team will be owned and operated as part of a private equity fund he controls. That means he'll be legally obligated to maximize the return on the fund's investment; the SEC is notably skeptical on the whole "psychic benefits" thing appearing on a balance sheet.
That aside, Gladwell closes with this assertion:
(NBA owners) are indulging in the fantasy that what they run are ordinary businesses -- when they never were. And they are asking us to believe that these "businesses" lose money. But of course an owner is only losing money if he values the psychic benefits of owning an NBA franchise at zero -- and if you value psychic benefits at zero, then you shouldn't own an NBA franchise in the first place.
Clearly, this is nonsense.
Psychic benefits play a role in economic decisions all the time. But the aren't the only factor. You might choose one job over another, despite lower pay, because you enjoy the work. That's a reasonable decision. Spending the day fishing might give a greater psychic benefit, but is unlikely to pay the rent.
Put that in strictly basketball terms. According to the Forbes numbers that Gladwell uses in his article, the Indiana Pacers lost $16.9 million in 2009-10. Herb Simon got some psychic benefit from his team... but $17 million worth?
Psychic benefits may cover losses for a team building towards a title. Like the Mavericks - who lost nearly $8 million in that same span according to Forbes' analysis. But it seems unreasonable to ask the owners to absorb that sort of loss on an annual basis, even if it is cool to say, "I own an NBA team."
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