What Donald Sterling is Teaching the Maloof Brothers

Why would the Maloof brothers take the Kings from Sacramento – and reportedly some of the best home fans in the NBA – and move to Anaheim?  After all, fans in the LA area are not known for their passion.  For an answer (that goes beyond what I said earlier in the week), let’s look a bit closer at the Los Angeles Clippers. 

The Clippers came to Los Angeles in 1984.   In the 26 years since arriving in LA, the Clippers have made the playoffs four times.  And their very best season – in terms of regular season wins, efficiency differential (offensive efficiency minus defensive efficiency), and the playoffs – was 2005-06.  In that season, the Clippers won 47 games, posted a 1.66 differential, and advanced all the way to the second round of the playoffs (the only time they got out of the first round).  In sum, the Clippers at their best, were really not that great.

This season we see a story consistent with this history.  The team’s efficiency differential is -3.3, and that mark is consistent with a team that would between 27 and 28 games across their first 69 games (or 32 or 33 games across a complete season).  If the Clippers remain in the negative range (and that seems likely), this will mark the 24th time the LA Clippers failed to post a positive efficiency differential.

When we move from efficiency differential to Wins Produced we can see why this team has once again struggled.

As the above table indicates, the Clippers are led by Blake Griffin (no surprise). The team is also getting above average contributions (average WP48 – or Wins Produced per 48 minutes – is 0.100) from Eric Gordon and DeAndre Jordan.  This trio has combined to produce 23.1 wins.  And that means, everyone else on this team has only produced 4.3 wins.

Now where did the team acquire Griffin and Gordon?  Gordon was the team’s lottery pick in 2008, or the team’s reward for only winning 28 games in 2007-08.  And Griffin was the team’s reward for missing the playoffs in 2008-09.  In sum, the NBA draft lottery– which rewards losers — allowed the Clippers to acquire the most productive players on their roster.  The non-lottery draft choices, free agent picks, and trade acquisitions haven’t done much to help at all.  And that suggests, left to their own devices (i.e. no NBA socialism), the Clippers would be offering even less to their fans.

The NBA, though, doesn’t leave the Clippers to their own devices.  The NBA keeps rewarding the Clippers with high draft choices.  And every once in awhile, the Clippers turn these picks into players like Griffin and Gordon; two players who produce wins very cheaply.  Of course, the Clippers haven’t shown the ability to capitalize on this good fortune.  And this year, the Clippers have already sent their lottery pick to the Cavaliers in an effort to save some money (and increase the team’s profits).

This means that the Clippers are going to have to rely on their young players getting better.  And yes, that can happen.  But what if it doesn’t?  Well, it turns out that doesn’t matter much.

To see this, consider some basic financial information on the Clippers.

According to ESPN.com (who tabulated the attendance data) and Forbes.com (who tabulated the financial information that sports economist Rod Fort gathers), the Clippers have actually done quite well off the court in recent years.  Although the team only earns about $30 million each year at the gate, the team’s non-gate revenue is about $70 million per year.  Consequently, with player expenses of only about $62 million per year, the Clippers appear to have a positive operating income (appears is the word, since non-player costs in professional team sports are not always as clear as we would like) from 2005-06 to 2009-10.

In looking at these numbers, remember the Clippers had their best season in 2005-06.  But even after the Clippers returned to form on the court, the team’s operating income has remained positive.   In other words, despite losing on the court, the Clippers are not actually losing money.

Forbes.com doesn’t just report basic revenue and cost data.  They also attempt to estimate franchise values.  And according to their estimate, the Clippers are worth a bit more than $300 million today.  Donald Sterling bought this team in 1981 for $13 million.  So if we focus just on the change in franchise values (and ignore yearly profits), Sterling has earned about an 11.5% annual return on his investment.  Remember, the Clippers have been losers in virtually every season Sterling has owned the team. Yet despite being unable to give his customers a very good product, Sterling is still making a healthy return on his investment.

Now let’s look at the Kings.  Forbes.com reports that the Maloof brother purchased the Kings in 1998 for $156 million.  Today Forbes.com says the team is worth close to $300 million.  Such an increase in value suggests an annual rate of return of about 5.5%.  In other words, the Kings in Sacramento – despite having more success on the court than the Clippers (not much more, but more) – are escalating in value at about half the rate we see for the Clippers.

One suspects the Maloof brothers look at this data and guess they can do better than Sterling (one suspects, almost anyone could do better than Sterling).  Hence the allure of moving to Anaheim.   

Yes, the Maloof brothers could earn a profit in Sacramento.  All they would need to do is have a winning team.  But in Anaheim, the Maloof brothers might do better financially even if they never have a winning team.  This is why Sacramento – despite having much more passionate fans – might be losing their team to Anaheim.

Let me close by noting that what we see in North American professional team sports is not seen in Europe.  In European sports, the Clippers would no longer exist.  Perhaps a post on this subject would be worthwhile.

– DJ

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