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Why $2 billion is the new price for an L.A. sports franchise

Warriors Clippers Basketball

City of Angels? How about City of multi-billion dollar franchises?

With the news that former Microsoft CEO Steve Ballmer won the bidding war for the Clippers with a $2 billion submittal, Los Angeles may soon be home to the two highest-selling franchises in sports. For those that have forgotten, the Dodgers sold to Guggenheim Partners for just over $2 billion in 2012.

What makes L.A. so valuable to prospective bidders compared to other locales? It has to be more than the beaches, palm trees and beautiful people, doesn’t it?

Well, yes and no.

Those same attributes have served to help create one of the world’s largest media markets, including regional sports networks Fox Sports West (home to the Clippers, Kings, Ducks, and Angels), Time Warner Cable SportsNet (home to the Lakers and Galaxy) and SportsNet LA (home to the Dodgers).

The existence of those networks helps create a bidding war whenever a local team’s media rights deal is up for negotiation. The ability to gain access to a rabid fan base and guaranteed DVR-proof content is extremely valuable. When one of the region’s handful of teams rights goes to market, it is guaranteed to secure an enormous bounty.

The Dodgers’ sale price was partly driven by the promise of their current deal with Time Warner Cable, a deal that will bring in a reported $8.5 billion over its 25-year term (the Dodgers’ valuation also took into account real estate opportunities surrounding Dodger Stadium).

The Clippers’ current deal with Fox ends after the 2015-16 season. Whoever owns the team then will be in position to capitalize on the demand for their rights.

The L.A. market also has other inherent advantages that serve to increase franchise value. The ever-present celebrity culture serves to create a unique buzz around its most successful teams. Jack Nicholson and Denzel Washington sitting courtside at a Lakers game brings sponsors and corporate partners more bang for their brand association buck than Donnie Wahlberg at a Celtics game.

Additionally, the Clippers had the sixth-highest ticket price in the NBA in 2012-13. Ticket prices are a function of supply and demand. Being able to draw from a region with such a high cost of living that it can easily absorb such a high price creates additional value compared to smaller-market teams. Even in the face of the league’s latest revenue-sharing plan, in which a large-market team may have to contribute up to 50 percent of its total revenue to the overall pot, the ability to continually rely on a higher ticket price only helps bring additional value to the franchise owner.

With all that in mind, it’s easy to see why $2 billion sales prices begin to make sense.

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