The Russian moves to Brooklyn
Sports economic expert Robert Boland breaks down Nets, Warriors ownership/arena concerns
by Kyle Stack / @NYsportswriter
Try to name five NBA owners. Jerry Buss (Lakers) and Mark Cuban (Mavericks) are the first names that typically come to mind but it takes some thought for another owner’s name to simply pop up.
Soon there will be a third name that snaps off the tongue of any NBA fan asked to rattle off the League’s team owners. He’s Mikhail Prokhorov, owner of the New Jersey Nets, and if it weren’t for a 60 Minutes interview and an obscene amount of subsequent attention from the U.S. media, his difficult-to-pronounce name might make him known only as The Russian.
While it’s becoming well-known that Prokhorov accumulated a fortune worth roughly $13.4 billion primarily through investments in Russia’s top aluminum and gold producers, much less is known about how he’ll function as the Nets owner.
Robert Boland, a Sports Management professor at New York University, believes Prokhorov wouldn’t have been given the chance to own a team in past years.
“He’s a guy who the League never would have approved in good times,” Boland said. “They’re afraid of him.”
Boland explained that the source and stability of Prokhorov’s wealth is in question and that Prokhorov’s financial state “would have been much more questioned by American sports leagues before this economic collapse.”
Prokhorov did pass background checks by the NBA that were necessary for him to gain official approval in his 80 percent stake of the Nets and 45 percent stake in the team’s arena project in Brooklyn. While the legitimacy of Prokhorov’s approval process isn’t fully known, the NBA surely loved Prokhorov’s willingness to pay near full price ($200 million) for his stake in the Nets at a time when there aren’t many willing buyers. (For $200 million to count as an 80 percent stake would result in the Nets being fully valued at $250 million, which contradicts Forbes’ $269 million estimation in its annual NBA team valuation in December 2009.)
Whereas in the past the NBA would have been “afraid of foreign ownership and ‘new’ money,” as Boland explained, the U.S. economic recession has taken many potential American owners out of the market. As Boland stated in a recent article on this blog regarding the NBA’s labor negotiations with the player’s union, the primary way for the NBA to maintain team values is to have a healthy number of potential team buyers. The only viable way to keep that market of prospective buyers as large now as it’s been in the past is to welcome foreign investors.
So Prokhorov could eventually serve not only as the man who revitalized the Nets and led Brooklyn’s first major professional sports team since the Dodgers skipped town in the fall of 1957, but he could also become a pioneer for foreigners serving as the primary owner in a NBA franchise.
Nets’ Brooklyn arena
The $1 billion arena is destined to suffer financially right from its expected opening in the 2012-13 NBA season, according to Boland.
“They will have trouble selling out the arena the first couple of years,” Boland said. “The Knicks are having trouble selling out and they’re in Madison Square Garden with four million people walking under it every day.”
Even though the Nets’ Brooklyn arena would seemingly benefit from the 2.5 million people who live in the borough and the resulting enthusiasm of Brooklyn finally getting a pro sports team after what will have been a 54-year pro sports drought, there are plenty of questions yet to be answered. First on the list is whether fans are willing to pay for tickets to watch a team which has no assurance of being among the NBA’s elite during the next several years.
“We’re back to an age where we’ve priced these [sports] events so high that you really have to put out a quality of product for people to attend,” Boland said. “There isn’t so much demand now for a single sporting entity that people are going to attend in the absence of quality.”
According to Team Marketing Report, the average price for an NBA ticket to begin the 2009-10 season was $48.90, which actually represented a 2.8 percent decline from the previous season. The average cost for a family of four to attend a game, pay for parking and buy two beers, four hot dogs, two game programs and two caps was $289.87. Both costs at Nets games can be expected to be higher than average for two reasons: 1) Teams with new arenas will typically charge more for tickets since there is higher-than-normal demand, and 2) No professional sports team in the New York metropolitan area is associated with charging a reasonable price for tickets.
Whether the common fan can afford to attend games at the Nets’ BK arena is far from the their only concern. Finding corporate partners willing to shill out money for luxury suites could become a tough exercise.
The Brooklyn arena, if and when it opens in 2012, would be just the latest modern sports mega-facility to open in the New York metropolitan area. Prudential Center (2007), Yankee Stadium (2009), Citi Field (2009), Red Bull Arena (2010) and New Meadowlands Stadium (2010) have all taken their rightful places in line. That’s not to mention the renovations at Madison Square Garden which by the time it’s expected to be finished in 2013 will have given the building’s interior a complete makeover.
Any corporation willing to splurge on luxury suites is an unpopular choice in these times. “Their shareholders would be groaning,” Boland said. But it does still occur, although the Nets can’t be assured that their 104 planned luxury suites will sell out immediately.
Consider the number of luxury suites already existing at the other complexes: New Meadowlands Stadium (222), Prudential Center (76), Yankee Stadium (67 numbered suites), Citi Field (54) and Red Bull Arena (30 luxury skyboxes) have their own issues with finding buyers. Madison Square Garden didn’t return an e-mail requesting the number of luxury suites. The Garden benefits from being a popular venue for concerts and other entertainment events.
“You are really splitting that corporate dollar and it’s not a good time to be doing that,” Boland said in regards to the Nets being nearly the last to the party among the New York-area pro sports teams receiving a new home arena. Economic times might be more optimistic in 2012 but the current environment is a poor one in which to search for corporate partners.
“We had an issue in the past when supply was well-controlled and demand was always the issue,” Boland said. “Now we have a lot more supply at a time when we have lower demand.”
Factor in arena advertising and media rights and it’s apparent how much of a challenge it will be for the Brooklyn arena to succeed financially.
Two nuggets in Prokhorov and the Nets’ corner is that they are positioned in the country’s largest media market and can possibly tap foreign companies for advertising purposes.
Expect the Nets to have a positive effect on the Newark-located Prudential Center, which they’ll call home for the 2010-11 and 2011-12 seasons. The NHL’s New Jersey Devils won’t necessarily compete with the Nets for attention in the arena.
“The Nets will help the Devils tremendously because they’ll give their fans who are buying luxury boxes, club seats and in-game advertising 40 nights of extra product,” Boland said in lieu of the 41 home games the Nets will play during the regular season. “That’s a bonus to New Jersey. That’s why Newark was so desperate to get the Nets.”
While the added benefit of having the Nets for two seasons might be only a temporary one for the Devils and Prudential Center, at least there is a good chance the Nets will have a positive economic impact somewhere, even if it might not occur in Brooklyn.
Warriors ownership in flux
Golden State Warriors owner Chris Cohan is ready to sell the team and Oracle CEO Larry Ellison, whose company has the naming rights to the Warriors’ arena, is considered the front-runner to buy. The Warriors recently began the first stage of their bidding process and it was reported by ESPN’s Ric Bucher that four or five groups are expected to make bids at some point in the process. Ellison reportedly hasn’t been involved in the initial bidding process but that supposedly has more to do with his scanning the prospects of other interested buyers than it does with his own motivations to eventually place a bid.
Ellison, ranked by Forbes as the world’s sixth-richest person with a net worth of $28 billion, is an attractive owner for the NBA.
“Getting him in is a way to stabilize the franchises and make others more attractive,” Boland said.
The Warriors were valued by Forbes December team valuations at $315 million but the appeal of owning a team in the Bay Area, one of the country’s largest media markets, could be one major factor in pushing the sale price toward $400 million. That’s the number speculated by San Jose Mercury News sports columnist Tim Kawakami in a recent article as one that Cohan and his investors hope to extract from someone like Ellison.
Ellison might be willing to pay that number because of his extensive wealth and reported interest in owning an NBA franchise. Unlike the case with Prokhorov, the way in which Ellison attained his wealth isn’t in question. Moreover, he’s as secure financially as they come, perhaps even moreso than Portland Trail Blazers owner Paul Allen, whose $13.5 billion net worth placed him 37th on Forbes’ most recent list of the world’s richest men — two spots ahead of Prokhorov.
Having Ellison as an owner of one of its 30 teams makes the League just that much more credible to other prospective investors. Of course, he isn’t a given to be the Warriors owner and there are certainly reasons why he could shy away from placing a bid with which Cohan and his group feel comfortable.
“[The Warriors] certainly have some strikes against them. They have the oldest building in the league,” Boland said of Oracle Arena, which was constructed in 1966. “They’re playing in the smaller part of their market. They compete with a lot of other entertainment options in their city market and they don’t have a great recent history.”
The Warriors are in need of a new arena, although whoever buys the team shouldn’t expect Bay Area taxpayers to help finance it. The MLB’s Oakland Athletics and NFL’s San Francisco 49ers have had difficulty securing public financing for their proposed new stadiums, forcing both franchises to look into relocation options outside the Bay Area.
The San Francisco Giants’ $357 million AT&T Park opened in 2000 as one of pro sports’ few privately financed complexes. The new Warriors home would likely have to take the same route if the franchise wished to remain in the Bay Area. That’s something that Ellison could easily accomplish with his vast fortune, yet another reason why his potential ownership is so appealing to the NBA.
One last note to hit on with the Warriors is how meaningful it must be for the NBA to keep the Warriors in Oakland, or at least in a surrounding area. The NBA has struggled to keep its franchises in the Pacific Northwest.
Vancouver failed in its effort to become a viable NBA city, with the Grizzlies lasting there for just six years before bolting for Memphis. The Seattle SuperSonics were ripped out of the Emerald City by Clay Bennett and his Oklahoma cronies, who shifted the team to Oklahoma City after the 2007-08 season.
Even though only a true geographic nut would consider the Trail Blazers to be the NBA’s only true Pacific Northwest squad, the Warriors are close enough to that part of the country that it’s in the NBA’s best interest for them stay where they are.
“The NBA does derive money from its television footprint,” Boland said. “The NBA wants to draw a massive television audience for the All-Star Game and events like that. You can’t have a lot of franchise movement when you’re depending on television for a chunk of your revenue. The NBA must maintain a fair regional footprint everywhere around the country.”
-New Orleans Hornets minority owner Gary Chouest reportedly reached an agreement in early May with longtime majority owner George Shinn to purchase Shinn’s 75 percent stake in the team. (Chouest had owned 25 percent of the team since 2007.) No announcement has been made to confirm the sale although the agreement appears to remain in place.
The long-term viability of the Hornets in New Orleans is in question but the franchise will likely be better off without Shinn.
“Shinn is the most detested man in sports,” Boland said. “He went from having $6 million players to $60 million players,” alluding to the $84 million contract Larry Johnson signed with the then-Charlotte Hornets in 1993. “When his team became unsuccessful where he was, he ran.”
In 2002, he ran to New Orleans, a city which was destroyed by Hurricane Katrina in 2005 and whose local economy could be severely affected by the current British Petroleum oil spill. There’s no telling what effect the oil spill will have on New Orleans and on the Hornets’ ability to draw consistently large crowds. But if as many local industries are hurt to the degree which they’re expected to be, the area might not be a viable one for the Hornets.
“It’s still primarily a tourist/convention city and that always makes a 40-game home schedule sport difficult to exist there,” Boland said.
-There has been recent news of the Indiana Pacers and its owner, Herb Simon, being unable to afford living in Indianapolis. Conseco Fieldhouse, considered one of the finest arenas in the NBA, costs $15.4 million per year to operate, according to the Indianapolis Star. The city’s Capital Improvement Board stated the Pacers have estimated it costs them upward of $18 million to run the arena and that, along with dwindling attendance, an NBA payroll and poor on-court performance, has made it difficult for the Pacers to comfortably pay for their expenses.
“They’re a small market team that competes against a lot of college sports,” Boland said. “That’s the challenge.”
The notion that the Pacers should succeed because of basketball’s importance in Indiana isn’t exactly as rational as many people might presume it to be. Boland pointed out Indiana University and Purdue as direct competition to the Pacers, and that isn’t to mention the heightened popularity of Butler’s men’s basketball team as they come off their appearance in the April national title game against Duke.
The Pacers are a victim of bad economic times, Boland explained. In better times, an NBA team struggling in a city would have leverage to move since other cities, most notably Kansas City and St. Louis, could attract franchises with their NBA-ready arenas. Yet those cities, and many others, have their own problems with their pro sports teams.
The Pacers might be stuck in Indianapolis and it could take everything short of Larry Bird, the team’s President of Basketball Operations, suiting up for them to reconnect with their fan base.
-Bird’s former on-court rival, Michael Jordan, hasn’t done anything to convince Boland that he’ll be a successful owner. Jordan recently purchased the Bobcats at a valued estimated from $275-290 million by SportsBusiness Journal.
“I don’t think Michael Jordan has ever done anything as a general manager or as a business person to say he’s destined for success,” Boland said.
If nothing else, Jordan’s name recognition will surely make him one of the first NBA owners you think of when someone asks you to name five.