Creative corner

    Doctor Cleveland's picture

    Donald Sterling, the NBA, and the Free Rider Problem

    Can the other 29 NBA owners force Donald Sterling to sell the LA Clippers? Let's put it another way: can the other 29 owners be forced to remain Donald Sterling's partner? Of course, private citizens shouldn't be forced to sell privately owned businesses. But how much of Sterling's business exists if you take away his association with those other 29 businesses? If you take away the other 29 teams, what does Sterling own?

    Sterling's real business isn't the basketball team itself, but his partnership with the rest of the owners. Donald Sterling didn't "make the league" as he has put it. The league made Donald Sterling an owner. The league has made Donald Sterling very, very rich, while Sterling has never made any money for the other franchises. Can his 29 partners, who have indirectly subsidized his business for over 30 years and who are now worried that Sterling is going to cost them untold millions, be forced to stay in business with him?

    What would happen if the NBA owners decided that they couldn't make Sterling sell the team itself, so that the only way to get free of him was to expel the whole team from the NBA? Sterling would still own his business: a basketball team named the LA Clippers. He'd have that business's assets and its debts, hold its leases and its contract obligations. But the other NBA teams wouldn't play the Clippers. They would be free to find other opponents. But who would pay to watch that? Who would pay to advertise at those games? Who would put that on TV?

    A Clippers organization cut loose from the NBA would never bring in the profits Sterling has gotten used to as an NBA owner. It wouldn't be able to bring in enough revenue to pay the players' existing contracts. Without its league connection, the team would go bankrupt. Without the NBA, the Clippers organization does not exist. The other 29 owners are Donald Sterling's business.

    The truth is that Sterling's membership in the NBA has always involved both indirect and direct transfers of wealth from the other owners. The Clippers have been a notoriously terrible organization for most of Sterling's tenure; that they have actually been winning the last two or three years is an almost flukey interruption after three decades of futility. (And that fluke was directly engineered by the last NBA commissioner, who forced another team to trade a star player to the Clippers instead of the Lakers.) To put it very simply, Sterling has spent 30 years as the owner of a basketball team that people don't want to see. He has basically gotten rich as the owner of the Washington Generals.

    Sterling has made money because his team that people don't want to watch holds one of the 30 exclusive licenses to play the basketball teams that people do want to watch. Sterling's business has not been putting on the Clippers' home games but hosting the other 29 teams' away games. Sterling has been granted a special license to sell tickets to Lakers, Spurs, Bulls, Pistons, Celtics, and Heat games. The other 29 teams are obligated to play on Donald Sterling's floor 41 times a year, no matter what. And they are obliged to host the Clippers 41 times a year, no matter how low the demand for those games.

    Most of those teams, most of those years, could do as well or better by playing someone beside the Clippers. Fans happily paid to see Bird's Celtics, Ewing's Knicks, Jordan's Bulls, and generations of championship-bound Lakers teams play Sterling's Clippers over the years. But they were paying to see those teams, not the Clippers. And when your team was having attendance troubles, you never got a boost when the Clippers came to town. On the other hand, Sterling could always count on selling extra tickets when better, more popular teams came to town. Sterling has profited off generation after generation of visiting basketball stars, from Magic and Bird in the 80s to LeBron and Durant today.

    Now, running an also-ran team for 30 years, with only rare and brief playoff appearances, means that your team doesn't get much time on national TV. But that's okay for Donald, because the league has a formula for sharing out its TV revenue to all of the owners. So Donald Sterling has gotten a slice of the Lakers/Celtics money, the Bulls/Jazz money, the Spurs/Heat money. In the same way, league revenue sharing means that Donald gets some money from every NBA hat, jersey, and official knick-knack that gets sold, although nearly all of that merchandise has some other team's logo. LeBron's jersey puts cash in Donald's pocket. The cash other owners have gotten from the sale of Lamar Odom and Danny Ferry gamers doesn't even begin to match the revenue Sterling has made from Jordan, Magic, Shaq, and the rest. The number of kids who've bought an NBA video game so they could play as the Clippers might actually be the square root of -1, but Sterling has taken a split from every XBox cartridge.

    The other 29 NBA owners haven't been hurting, and they haven't missed the cut that goes to Sterling. But for the last 30 years and more, they have been subsidizing him. They have put money in his pocket, and he hasn't put any in theirs.

    You'd think that Sterling would be grateful. But, well. Only a few years after buying the Clippers, Sterling moved them from San Diego to LA (which, you may have heard, has another basketball team) despite being forbidden to do so by the league. Instead of building up the league by strengthening the San Diego market, Sterling took the NBA out of that market entirely. Instead, he went to a city where his team added nothing -- and indeed could add nothing -- so he could feed off the existing market created by the Lakers organization. Sterling could not possibly build LA's interest in the NBA; a better owner had already built a deeply beloved franchise there. Years later, NBA Commissioner David Stern would actually reward Sterling by forcing Chris Paul to go the Clippers instead of the Lakers. Sterling couldn't attract stars to his business, so the NBA gave him one. Sterling's relationship to the NBA has always been parasitic.

    Sports fans love to hate the big-spending owners who don't give smaller-market teams a chance. But fans give a free pass to owners like Sterling, who exploit their membership in the big-league club to get a lucrative free ride. Every major sports league has some owners who have decided that they can get rich fielding mediocre teams and making a buck off the stars that better owners pay. Attempts to restore competitive balance with revenue sharing don't fix this free-rider problem; they make it worse, because they make it even easier to profit off your association with better-run businesses. Some of these owners are in smaller media markets, but it's not just about the size of the market. Donald Sterling runs his crappy business in Los Angeles.

    George Steinbrenner took a lot of heat over the years, and I talked smack about him myself. But Steinbrenner put money in the other owners' pockets. Every team the Yankees play this year is going to make money marketing Derek Jeter's farewell; every team they played last year made money from Mariano Rivera's farewell. Yankee Stadium doesn't get to market the farewell tours of beloved Royals or Indians Hall-of-Famers. The Yankees don't have paid attendance double when the Padres come to town. And they don't double the ticket prices for spring training games against the Florida Marlins. Other teams do charge extra for spring training games against the Yankees; they make a profit off Steinbrenner's payroll. Free-riding owners are at least as big a problem for competitive balance as free-spending owners.

    One of the jokes about Sterling's self-immolation is that he castigated his girlfriend for "broadcast[ing]" her association with Magic Johnson. But associating with Magic Johnson has always been good for the NBA's business. He has always made them money and always improved their brand. (Magic is a likeable version of Hyman Roth -- he always makes money for his partners.) The other owners literally want to broadcast their association with Magic; they want him associated with the NBA on TV. The essence of Sterling's entire business model has been to broadcast his association with Magic Johnson, who has put fans in Sterling's seats and dollars in Sterling's bank account.

    The rest of the league has carried Donald Sterling for over 30 years, and the value of his NBA franchise has increased twenty-fold in that time; that increased value has been created by the other 29 franchises, not by Sterling. Now Sterling's craziness has threatened those other 29 owners' businesses. Advertisers don't want to be in business with Donald Sterling. TV networks don't want to be in business with Donald Sterling. So the rest of the owners simply cannot afford to be in business with Donald Sterling. They're considering making him sell, at a ridiculous profit that has nothing to do with how Sterling has run his business and everything to do with how the other owners have run theirs. If Sterling fights in court, it will be likely be on anti-trust grounds; major American sports leagues essentially do operate like trusts or cartels, and need to. The joke is that if the NBA didn't operate like a trust, Sterling's Clippers would not exist at all.

    Comments

    A friend of mine inherited an apartment in a Co-Op from her father.  Well, that's what we thought.  Turns out she inherited shares of the Co-Op and for whatever reason the Co-Op board did not approve her as a partner.  They basically forced her to sell.  I think they were incredibly short-sighted and unjust but it is funny to me how the law basically looked at her predicament and shrugged.  Every lawyer she consulted said she had no case.  Certainly, nobody wanted to make a moral issue out of it.  That's how Co-Ops are set up -- shares in a building, full of apartments, governed by rules and its own politics.

    This seems almost exactly Sterling's position even though he technically owns the Clippers rather than 1/29th of the NBA (and, were the NBA a Co-Op, all teams would not be equal and the Clippers would not be 1/29th).

    So, the legal situation is slightly different.  But it is interesting how many people will fret about the property rights of a 80-year-old billionaire who owns a sports team yet they don't really care that this happens to city kids when their parents die or that a homeowners association can put liens on your property or any number of things that happen to ordinary people.

    I suppose a solution, should the rest of the NBA really not want to force Sterling to divest himself of an asset (for which he will be paid) is that it could decide that it will not schedule games against the Clippers. Sterling will still have to pay his contracted players because contracts are sacrosanct, right? Then Sterling can basically own a giant cost center.

    That would actually be a good way to force the sale. 


    I agree that old white billionaires are more equal than others.

    If you think of what Sterling owns as a franchise, i.e., a license to operate a business as part of a national chain, it becomes clearer that they can make him sell.

    If you buy a Burger King or a Pizza Hut, there are circumstances under which Burger King or Pizza Hut can force you to sell. If you decide to say politically toxic things that endanger the reputation of your business ("Wednesday is Jihadi Night! Get a free topping if you say 'Death to Israel!'") then you'd better believe that they will find a way to make you sell.

     


    One thing about the Clippers situation is I keep seeing a $1 billion tag on this sale, for a team that a former colleague at Forbes who I trust values at half that.  Those numbers are fuzzy, of course, but the point is that even in a "forced" sale, he is going to get a good deal.

    Generally you never wanted to be a "forced seller."  It means you don't get the price you want, you get the offer.  If you sell stock on margin, or sell your home to avoid bankruptcy or get kicked out of the Pizza Hut franchise system, the buyer usually gets a bargain.

    Sterling seems to be avoiding that.


    Right. In some ways, the amount of attention the scandal has brought, and the team's presence in LA, may have attracted a number of high-profile bidders and artificially driven up the price. One valuation I've seen prices the team at $575 million.

    But Sterling bought the Clippers for $12 million, which, adjusted for inflation, is $33.something million. So even if the team sells for "only" $660-$680 million, which is a little inflated but much less than a billion, Sterling's asset will have increased its value twentyfold. And all that growth derives from the growth of the rest of the league between 1981 and today.


     

    If you buy a Burger King or a Pizza Hut, there are circumstances under which Burger King or Pizza Hut can force you to sell. If you decide to say politically toxic things that endanger the reputation of your business ("Wednesday is Jihadi Night! Get a free topping if you say 'Death to Israel!'") then you'd better believe that they will find a way to make you sell.

     

    The difference here being that Sterling ddidn't do anything like that. He made comments on his personal phone. 


    I think you have to add into the equation the comments he allegedly made about renting to blacks and Hispanics.  So the invasion of privacy issue has been largely ignored I think because it became further evidence of his racism rather than a single act of racism.

    Moreover, with the way we as a society invade the lives of celebrities, and the general acceptance that once you enter show business, which sports like the NBA are, you sign a kind of contract with society that says "you lose your privacy rights that the average Joe enjoys."  In other words, if you want to not have your private calls taped and broadcasted over the airwaves and youtube, then don't go buying a NBA team, because your private calls are no longer private.


    Yes. And I would be very happy to see Stiviano punished, in civil and maybe even criminal court ( if the release turns out to be part of extortion or blackmail).

    But although these comments should not have been made public, the other 29 owners have to deal with the fact that they are public. It's their businesses that stand to be hurt.  The players are still in rebellion. Sterling is still radioactive.  

    And, as Elusive Trope points out, we're talking about an entertainment business. Publicity and public perception is the whole ball game.

    If you're an actor, a director, an athlete, and some screwed-up things you said in private get out to the public, your career takes a hit. And other people become shy of associating with you. 

    And while I don't condone Stiviano or TMZ, you can't say Sterling was discreet here.  Stiviano is not someone to confide in. (Both because she's clearly some form of paid girlfriend, and because she's clearly an indiscreet publicity-monger.) Confiding your poisonous racist beliefs in your publicity-hound sugar baby and then deliberately antagonizing her by using her for millions of dollars .... It's just crazy.


    I'm also not so sure that your behavior has to be "public" to get you kicked out of a group business.  I mean, you can be excluded from owning a franchise, or from owning shares of a co-op, just because people find you unpleasant and they might make that judgment based entirely on circumstances that might be considered private.


    From some things I have been reading the NBA owners may well be more incentivized to just stall and wait for the furor to blow over even if their brand is a little tarnished.

    If a consortium interested in acquiring the Clippers set Tokowitz up then leaked the story to force a sale, other NBA owners have to wonder whether or not the same thing might happen to them. It would not have to involve racism, any knee jerk politically correct issue could work too.

    What consortium? The one Forbes thinks most likely to end up the buyers in a forced sale: Magic Johnson and Guggenheim Partners with the encouragement and support of Time Warner Cable.

     


    Donald Sterling appeared on "Anderson 360" to offer an apology. Instead of an apology, he slammed Magic Johnson and said that Black people do nothing to help Blacks in need. In truth, the Magic Johnson Foundation has focused on education about HIV/AIDS and as a businessman, Johnson brought businesses into under served communities.

    Sterling needs an adviser with enough clout to tell him to keep his mouth shut. The best thing Sterling can do at this point is undergo testing for dementia.


    That last sentence might have been snark, but it actually might help. I remember feeling a little guilty about the things I said about Reagan after finding out he was developing Alzheimer's…


    I think that Sterling may have signs of dementia (or he could be just a cranky old rich guy). He definitely didn't appear to have full control of himself in the Anderson Cooper interview. Cooper did not push Sterling on the housing discrimination issue. It may be that  Cooper thought Sterling was already discredited and didn't feel the need to embarrass Sterling any further.


    Latest Comments