# We the New North

Posted by on Wednesday, June 5, 2019 in National Basketball Association, National Hockey League, Sports Econ Blog.

Globe & Mail 6/14/19 / Article PDF / Complete Interview (PDF with Graphics)

Globe & Mail–Will the Championship directly or immediately affect the team’s valuation?

The first Canadian NBA Championship for the Raptors will certainly pay the bills and sell plenty of We the North t-shirts, but in the relatively risky business of pro sports it will not affect the bottom line value of the franchise as much as the consistent run of 5 Atlantic division titles in 6 years leading up to it (2014, 2015, 2016, 2018, 2019).

Like any sports league, franchise values in the NBA are driven by the certainty of long-term net cash flow. The NBA is slightly different than other leagues because they have committed to a long-term strategy of dynastic dominance by a few teams driven by Superstars. The intent of dynastic dominance is to secure long-term national TV contracts and the risk-free cash flow.

Forbes most recently valued the Raptors at $1.675 billion for 2018-19. This is slightly higher in value than the beloved (often beleaguered) Maple Leafs valued at$1.45 billion. The difference of course is that the NHL Leafs are 230 percent of the much lower NHL average value of $630 million, in spite of being eliminated in first round of the Stanley Cup playoffs and not winning the Stanley Cup in 50 years. By modest comparison, the NBA Champion Raptors are valued slightly less than the much higher NBA average value of$1.868 billion.

The fundamental difference is that the value of the Leafs is largely derived from the unique market in Toronto as hockey heaven, whereas the value of the Raptors is largely the result of shared NBA revenue sources.

The revenue split between local and shared national revenue is about 50/50 in the NBA compared to about 75/25 in the NHL (local/shared).

For reasons discussed here winning doesn’t seem to matter (not statistically significant) as much as does market size for NHL valuation (see the Leafs), but consistent winning over a cumulative 5 year-10 year span is relatively important for NBA club values (see the Raptors).

Forbes franchise valuations are usually pretty accurate on the revenue side but consistently low on the valuation side. When franchises are sold they are usually go at prices 25% to 30% higher than their actual true value, because a sports franchise is a monopoly cash cow and the winning bidders systematically pay top price in a highly-limited subjective monopoly auction.

The values of these two Toronto teams are relatively close (MLB Blue Jays are valued at $US 1.5 billion). The major difference is that the value of the Leafs is largely derived from the unique Toronto market as hockey heaven, whereas the value of the Raptors is largely derived from shared NBA revenue sources. NBA gets about$90 million per club annually from the national deals, compared to the NHL with TV at about $21 million a year per club. The revenue split between shared national and local revenue is about 50/50 in the NBA compared to about 25/75 in the NHL. The more revenue shared the greater the risk reduction in the value of the overall league. That is perfectly true if the teams in the “portfolio” have precisely the opposite performance fortunes on the field, court or ice. The diversification and risk-reduction benefits of revenue sharing have often been overlooked by the NHL, and to a lesser extent the NBA. Increased revenue sharing means increased risk reduction, certainty of cash flow and a higher value. The value/revenue multiple for the NBA is about 6, compared to the NHL with a value/revenue multiple of 4. So just like in a stock portfolio, a revenue dollar in the NBA (6x) is 50% more valuable than one in the NHL (4x), because it’s relatively certain money. V Post Script: See the attached graphics showing monopolistic rates of return for the franchise values in professional sports league cartels as compared to the best available competitive rate of 5.1% since 2000 for the S&P 500 stock market index. This is strong evidence of the monopoly power of professional sports franchises and their respective league cartels. Toronto Star: Wondering if you’ve got some time to chat tomorrow about what the Raptors’ franchise value might be, and how it might have changed because of their playoff run. –V-Man: Does it pay to win in the NBA? The best straight answer is not so much for the short run one-season wonder, but definitely yes in spades for consistent long-run winner. So in terms of franchise value, the first Eastern Conference championship for the Toronto Raptors has probably less of an impact on the Raptors’ “We the North” brand value than the run of five division titles in the last six years (2014, 2015, 2016, 2018, 2019) building up to it. Forbes recently valued the Raptors at$1.4 billion for 2018. This is roughly the same value as the beloved (and often beleaguered) Maple Leafs at $1.45 billion, who can’t seem to get out of the first round of the Stanley Cup playoffs. The difference of course is that the Leafs are 230 percent of the much lower NHL average value of$630 million and the Raptors are only 85 percent of the NBA average value of $1.652 billion. For reasons discussed here winning doesn’t seem to matter as much as market size for NHL valuation (see the Leafs), but consistent winning over a cumulative 5-10 year span is relatively important for NBA club values (see the Raptors). Based on rough estimates,$1.4 billion (in 1918) is a touch on the conservative side for the “We the North” Raptors. Given the cumulative consistency of the Raptors game on the court and in the front office over the last 6 seasons, the Raptors have probably surpassed the NHL Leafs in value and cracked the top 10 in NBA franchise values with an estimated value of $1.8 billion (or 108 percent of 2018 NBA average) for 2019. Follow-up Questions from Toronto Star 6/4/19 –what is the biggest driver of NBA franchise values, and how does that compare to other major-league sports? Like any sports league, franchise values in the NBA are driven by the certainty of long-term net cash flow. The NBA is slightly different than other leagues because they have committed to a long-term strategy of dynastic dominance by a few teams driven by Superstars. The intent of dynastic dominance is to secure long-term national TV contracts and the risk-free cash flow. This is all the result of Magic Johnson Larry Bird rivalries saving the NBA from bankruptcy in the early 1980s. As a result the NBA is the most imbalanced sports league in North America. –You’ve shown that being a consistent contender is more valuable than making a single lengthy playoff drive, at least in the NBA. Why is that? Local cash flows can be secured by appealing to the long-term corporate partners and season ticket base, and that is done by consistency on the court. The value of an NBA franchise is like that of any other asset. It ultimately depends on the certainty of net cash flow, and sports is an inherently unstable risky business. –what’s more important in driving franchise values (in nba or elsewhere): hard #s like revenue, or less easy to measure things like brand recognition/equity? Brand recognition is somewhat superficial and the ultimate driver of value is certainty of cash flow over the long haul. –your valuation of the Raptors differs significantly from that of Forbes. What’s the biggest reason? Forbes valuations are usually very accurate on the revenue side but consistently low on the valuation side. Also, when franchises are sold they are usually sold at prices 25 to 30% higher than their actual true value, because a sports franchise is essentially a monopoly cash cow where the winning bidder in an monopoly auction pays the highest price, not the most accurate price. Post Script: See the attached graphics showing monopolistic rates of return for the franchise values in professional sports league cartels as compared to the best available competitive rate of 5.1% since 2000 for the S&P 500 stock market index. This is strong evidence of the monopoly power of professional sports franchises and their respective league cartels. So Forbes is very good on the on the revenue side but usually low on the actual selling price. Also their valuations are based largely on the previous year’s revenue. In the end the value of a single sports franchise is still very subjective especially in the eyes of potential buyers. My valuation of sports clubs usually starts with Forbes. –who are you rooting for in the NBA finals, and why? I usually try to stay objective in my evaluation of postseason play, and my V-man power picks actually give GSW a slight edge with a 56.7% chance of winning the series (even though the Raptors had the better season record by one win). But as much as I like Stephen Curry I still find myself pulling for Fred Van vleet to shut him down, especially when everybody on Earth knows that the Ws are going to make a surge in the third or fourth quarter usually led by Curry from somewhere downtown. I grew up a Spurs fan but still I am pulling for the Klaw to hit the jumper from the corner at the buzzer and go for more than 30 points. In the final analysis this is a David against Goliath championship match, and nobody pulls for Goliath (GSW). To paraphrase BB King, “Nobody loves Goliath but his mother, and she could be jivin’ too.” Let’s go Raptors. We the North. –Just wondering if you were accidentally looking at last year’s Forbes valuations. The list I saw on their site has Raptors at$1.7 billion, not the $1.4 you mentioned to me. https://www.forbes.com/nba-valuations/list/#tab:overall You are correct. Forbes and I agree…$1.8 billion in value for the Raptors… I still think the Raptors will surpass the Leafs.

–So is there any question — at all — in your mind, that the Raptors are worth more than the Leafs?

The values of the two teams are relatively close. The difference is that the value of the Leafs is mostly derived from the unique market in Toronto hockey heaven, whereas the value of the Raptors is largely derived from shared NBA revenue sources.

The revenue split between shared national and local revenue is about 50/50 in the NBA compared to about 20/80 in the NHL.

The Leafs are valued at about 3 times the average NHL team and the Raptors are valued slightly higher than the average NBA team.

–20 national 80 local for NHL?

Yep. National/local = 50/50 NBA = 20/80 NHL for the average team.

The one weakness I see for the Raptors is that NBA ratings are down on ABC ESPN TNT and NHL ratings are up on NBC. This may not be a stability problem because of the length of the deals. The current NBA deal is 10 years from 2016 to 2025. The current NHL deal with NBC is also 10 years but it extends from 2012 to 2021. These NHL deal with Sportsnet goes 12 years from 2014 to 2026. These long-term TV deals are a major valuable source of risk free cash flow.

–Is that because of revenue sharing? Or just that the national revenues are bigger in the NBA? (ie local revs are same-ish in each league, but NBA’s national revs are much higher).

NBA gets about $90 million per club annually from the national deals, compared to the NHL with TV at about$21 million a year per club.

One of the major survival lessons learned early by the NFL in the AFL War of the 1960s is that revenue sharing is a form of portfolio diversification that reduces revenue risk.  I have always said that the NFL is like a perfect portfolio. The more revenue you share the greater the risk reduction in the portfolio. That is perfectly true if the teams in the portfolio have precisely the opposite performance fortunes on the field, court or ice. This diversification lesson about the benefits of revenue sharing is often overlooked by the NHL and to a lesser extent the NBA.

Increased revenue sharing also means increased risk reduction, certainty of cash flow and a higher value. This is why NFL teams are always valued with higher revenue multiples than  other leagues. In this case,  the value/revenue multiple for the NBA is about 6, compared to the NHL with a value/revenue multiple of 4.  So a revenue dollar in the NBA (6x) is about 50% more valuable than one in the NHL (4x) because it’s relatively certain money.

(Value= multiple x revenue)