A Bad Basketball Team Is A Great Investment

NEW YORK, NY - JANUARY 12:  Kevin Garnett #2 of the Brooklyn Nets reacts as he is ejected from the game in the first quarter
NEW YORK, NY - JANUARY 12: Kevin Garnett #2 of the Brooklyn Nets reacts as he is ejected from the game in the first quarter against the Houston Rockets at the Barclays Center on January 12, 2015 in the Brooklyn borough of New York City.Garnett and Dwight Howard of the Houston Rockets got into a scuffle. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and/or using this photograph, user is consenting to the terms and conditions of the Getty Images License Agreement. (Photo by Elsa/Getty Images)

It's a great time to own an NBA team. And an even better time to sell one: A bad team losing money in a big city is ten times more valuable than it was just five years ago.

Take Russian oligarch Mikhail Prokhorov: He wants to sell the Brooklyn Nets, Bloomberg reported this week. The Brooklyn Nets are not good (they're 16-23). They lost $144 million last year, too.

Yet the Nets are also worth somewhere between $1.3 and $2.7 billion, according to various estimates.

How can such an bad, money-losing team be worth so much money? Television.

The Nets, like all teams in the NBA, get money from the league's revenue-sharing agreement, which parcels out the proceeds of national TV rights, taking money from rich teams and giving it to poorer ones. As part of that deal, every team gets an equal share of the TV money. That share was about $30 million this year. It will be more than twice that amount once a new nine-year, $24 billion deal takes effect in 2016.

And that’s just national media money. The Nets have their own local TV rights deal in the New York City area. It expires next year and is worth $20 million a year. Which is actually not all that much money -- it’s not unrealistic to think the Nets could get ten times more from a renegotiated deal. After all, the Los Angeles Clippers, who play in the country's second-largest media market, are expected to get $200 million a year when their current $20 million-a-year deal expires in 2016.

The Nets are losing money right now because they’re loaded up with silly expensive contracts for aging, poorly performing players that put them way over the league's salary cap. For breaking that cap, the team had to pay a league-record $90 million in luxury taxes for the 2013-2014 season.

Those player contracts are bad, financially and on the court, but they’re far shorter than media rights deals. Phase them out, sign a new, much-improved local TV deal, add in the soon-to-double league TV checks, and the Nets start looking like a pretty decent business: almost fixed revenue, slashed costs, and no real competition.

It’s actually more than a decent business model, it’s a great one -- unless you’re a basketball fan. Jay Z, former part-owner of the Nets, wasn’t just bragging when he said, “the Nets could go 0-for-82 and I look at you like this shit gravy.”

He was right. That’s just how the economics of owning an NBA team work: The costs of putting a team on the court are variable and under your control, while revenue is set in stone. The best way to make the most money is to spend as little money on players as possible in as big a media market as possible. Owners in such a market have an incentive to put a minimally viable product on the court: just good enough not to be a complete joke, but not much more. And even if you are spectacularly bad for a few seasons, high draft picks help you out.

Once the new owner sunsets the most expensive players, the Nets will be what they always should have been: a great business, regardless of how bad a team they are.

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