On April 16, the Milwaukee Bucks sold for an NBA-record $550 million. Barely six weeks later, that figure was blown away Thursday, with Steve Ballmer agreeing to pay $2 billion -- nearly four times as much -- for the Los Angeles Clippers. Whatever happens with Ballmer's purchase, which still awaits NBA approval and requires previous owner Donald Sterling to be declared mentally incapacitated, a new frontier has been established for franchise values.
Can the incredible purchase price, which blew away even optimistic estimates for the Clippers' value, be justified?
Here are three explanations.
Rising tide of NBA valuations
Even before the Clippers unexpectedly hit the market,
As SBNation.com's Tom Ziller laid out, two key factors have contributed to the rising value of NBA franchises. The league's success in the 2011 CBA negotiations has helped contain costs, making franchises more consistently profitable. At the same time, the NBA is benefiting from a boom for sports TV rights, locally and nationally. With a new national TV contract set to kick in during the 2016-17 season, prospective owners want to lock in their share now.
Of course, the Bucks will get the same amount from the league deal as the Clippers. The difference in their values is at the local level, where the Clippers have a chance to benefit from the regional sports network craze that has escalated returns to teams in big markets.
According to the Los Angeles Times, Fox Sports is paying the Clippers $25 million to air their games in L.A., as compared with the $3 billion over 20 years ($150 million per year) the Lakers get from Time Warner Cable. The Clippers' deal expires in two years, and, although they're unlikely to make anything near the Lakers' figure (much less the $334 million per year the Dodgers will make over the next 25 years from Time Warner), their local rights will be much more profitable on the new TV deal.
The importance of local TV rights has driven the growing gap between the NBA's most and least valuable teams. Historically, the biggest sales prices for franchises have been about twice the lowest prices -- consistent with Forbes valuing the No. 1 franchise (the Lakers) 2.5 times more valuable than the least valuable (the Bucks) in 2005. Now, the Forbes ratio between them and the most valuable franchise (the New York Knicks) is 3.5 to 1, and the price of the Clippers suggests that might understate the difference.
Historically, the NBA has been successful in smaller communities such as Portland, Salt Lake City and San Antonio, where its teams have dominated the local sports sphere. As TV rights and sponsorship become more important relative to attendance, however, market size is a more important consideration. That's relevant as the league considers whether to return to Seattle, the second-biggest TV market in the country not represented in the three biggest major sports leagues (Los Angeles, with no NFL, being the largest).
Unique chance to win -- immediately
The Clippers' appeal goes beyond the L.A. market. They represent a unique opportunity for a new owner to buy into the NBA and win immediately. Naturally, teams are more likely to change hands when they're struggling. Since 2000, the average franchise that has been sold won 41.2 percent of its games the previous season (or current one, in the case of midseason sales).
It's been possible to buy a competitive team, such as the Memphis Grizzlies, who reached the Western Conference finals in Robert Pera's first season as owner. But the Clippers are a level beyond that. Despite bowing out in the conference semifinals, they won 57 games and had the league's second-best point differential behind stars Chris Paul and Blake Griffin. They're legitimate contenders for the 2015 championship.
The last time a team was sold coming off a season of 55 or more wins was the New York Knicks when they were purchased by Cablevision in August 1994, months after playing in the NBA Finals, along with the Rangers and Madison Square Garden.
Not only do the Clippers' stars make them more profitable but the chance to receive the Larry O'Brien Trophy from NBA commissioner Adam Silver in June 2015 offers considerable "psychic value" that's difficult to quantify but surely added to their price.
The winner's curse
The best explanation for the price of the Clippers might be the simplest one -- they're not actually worth the $2 billion Ballmer agreed to pay. The winner's curse, coined by economists to explain why companies tended to overbid for oil fields of uncertain value, explains that the winning bid in an auction is likely to come from the bidder who most overestimates the value of the item.
The Clippers sale doesn't qualify for the winner's curse in the strictest definition because the franchise isn't worth the same to all bidders. Thanks to the aforementioned psychic value, the Clippers might be more valuable to Ballmer, who's looking for a hobby after retiring as the CEO of Microsoft in February. A die-hard basketball fan who sat courtside at KeyArena before the Sonics moved, Ballmer might be more excited than his fellow bidders to own and run the team.
Still, it's notable that the other bids reported by ESPN's Ramona Shelburne didn't come close to Ballmer's $2 billion offer. According to her sources, a group led by music mogul David Geffen bid $1.6 million, and L.A. investors Tony Ressler and Steve Karsh offered just $1.2 billion -- still staggering sums and NBA records, but far south of Ballmer's offer.
In a more open, drawn-out sale process, Ballmer might have been able to secure the Clippers for less than $2 billion. But with Shelly Sterling accelerating the process in advance of Tuesday's NBA hearing that could have stripped ownership from the Sterlings, Ballmer -- worth north of $20 billion himself -- had to decide on his bid without knowledge of what his competitors would submit, thus driving up the value.