This video was brought to you by HubSpot but more on that later. In July of 2023, a group led by billionaire Apollo co-founder Josh Harris purchased the Washington Commanders NFL team for $6 billion, marking the highest price ever paid for a professional sports team. The Washington Commanders broke the previous record which was set just one year prior when the English soccer team Chelsea was sold for 4.25 bill ion pounds equivalent to $5.4 billion at the time. Over the past 20 years, a new trend has emerged of billionaires buying professional sports teams for ever increasing amounts of money.

And as the value of the teams increase, these billionaires see their wealth increase even further, at least on paper. Back in the year 2000, Mark Cuban purchased the Dallas Mavericks a struggling basketball team for a seemingly lofty sum of $285 million. Despite appearing to overpay for the team, this ended up being one of Cuban's most successful. Investments What did you pay for the team? How? 285 million? 285 million? Yep, What the is that team worth now? 2.5 billion? Godam.

Give me the deodor! Since then, the value of the team has increased still further. As of 2022, the team is worth $3.26 billion according to the sports media outlet Sportico, and even with this seemingly Rich valuation, it barely cracks the top 10 most valuable NBA teams. It's not hard to see why professional sports teams are so valuable. Every year, millions of fans collectively spend billions of dollars on tickets in overpriced food and drink at professional sports games, and billions more watch the games on cable television, generating tens of billions of dollars in advertising and Licensing fees.

And finally, successful teams can easily generate tens or even hundreds of millions of dollars per year from sponsorship deals. For example, the e-commerce company Raketen paid $20 million per year just to get their logo on the corner of the Golden State Warriors jerseys. With so much money coming in, it's perhaps unsurprising that the teams are worth billions of dollars, but you might be surprised to hear that in some years, nearly half of the NBA teams lose money, and the ones that are profitable usually barely break even in this video. We'll take a deep dive into the counterintuitive economics of professional sports and see why the multi-billion dollar valuations of sports teams are mostly just smoking mirrors.

There are many professional sports leagues around the world for Simplicity. We'll focus mostly on the NBA. If you're not an NBA fan, that's fine because your favorite sports League probably operates a very similar business model. The NBA is a professional basketball league consisting of 30 teams.

The NBA itself is responsible for setting and enforcing the rules of the game, as well as organizing the season schedule, among other administrative tasks. One thing to note is that nobody owns the NBA itself. The NBA is run by a Board of Governors who are elected by the 30 teams. Each of the 30 teams are independent of each other and are typically owned by either billionaires, media companies, private Equity firms, or a combination of the three.

The NBA itself has two major sources of revenue. Firstly, is broadcast rights for the games. Media companies like ESPN pay billions of dollars for the right to play NBA games on cable television. The second major source of Revenue is League level sponsors.

For example, Wilson reportedly pays $20 million per year to be the official basketball supplier to to the NBA. At the league level, the NBA is extremely profitable. They generate billions of dollars of revenue from television licensing, and they incur minimal costs. They only have about 1,000 employees.

The league level profits that the NBA generates are allocated to its 30 member teams. Thus, the teams are kind of like shareholders who collectively own the NBA. The formula of how the league level profits are allocated is exceedingly complicated and Beyond the scope of this video. But the core point to understand is that all of the profits generated by the NBA ultimately flow down to the teams.

In addition to the revenue they get from the league. each. NBA team also generates Revenue individually. NBA teams generate revenue from ticket and Concession sales at their home games.

In addition to League level sponsorships, each individual team can get its own sponsors. The more successful a team is on the court, the more fans they will have and thus the more sponsors are willing to pay them. And finally, some games are not broadcast on National Television For these games, the teams can license them to Reg television providers. Of course, because these are Regional broadcasting rights, they're far less lucrative than the national and international deals signed at the league level.

Over the past 20 years, the NBA has done quite well. Increasing interest in basketball and international markets like Europe and Asia have allowed aggregate NBA Revenue to more than quadruple from about $2.5 billion in 2002 to more than $10 billion in 2022. Of course, Coid was a major disruption as live audiences at games were cancelled, but after restrictions were lifted, Revenue quickly rebounded to all-time highs. One of the main reasons the NBA has been so successful at increasing revenue is their salespeople, with each deal being in the tens or even hundreds of millions of dollars.

The brands and television broadcasters need a lot of convincing that they'll make a return on their investment, which is no easy task. Whether you're a big business like the NBA or a small business of any kind, having a sales plan is critical. That's why we're so excited to share Hubspot's Free Sales Plan template, which is also the sponsor of today's video. This template lays out every aspect of a successful sales strategy.

It starts with big picture items like your target market, customer value proposition, pricing strategy, and how your offering Stacks up against competitors. Then you get down into the specifics like what channels you'll use for marketing and creating buyer personas to nail down what type of sales pitch is most likely to convert prospects into a paying customer. It's everything you need to create a concrete action plan to start Landing new customers and generating sales if you work in a sales role or have any type of small business. HubSpot Sales Temp Temp is a must-have so get started today by clicking the link in the description below.

NBA Teams are not required to publicly disclose their financial statements, so our ability to analyze their profitability is limited. But fortunately for us, one NBA team is publicly traded. The New York Knicks is one of the most successful NBA teams and consistently ranks within the top five teams by Revenue Forbes Estimates the value of the team at 6. 1 billion.

The NX is owned by a company called Madison Square Garden Sports or Msgs. Msgs also owns the New York Rangers professional hockey team, which has an estimated value of $2.2 billion. So altogether between the Knicks and the Rangers their assets are worth about $8 billion. Msgs does not provide segment level disclosures, so these numbers include both the Knicks and the Rangers combined.

In 2022, their single largest revenue generator was from ticket and Concession sales at home games which totaled $332 million. The next biggest item was television broadcasting rights, which include both Regional Deals they signed themselves as well as their share of the league level licensing Revenue The next category is Team level sponsorships which brought in $173 million and then $41 million of Revenue share they got from the NBA. They incurred $500 million of direct operating expenses, the majority of which is player salaries NBA Players are very well paid. The highest paid player on the Knicks is Julius Rand who makes almost $30 million per year and that's just one player.

They then had $230 million of selling in general administrative expenses in a small amount of depreciation. In total, they made an operating profit of $86 million representing about 10% of their revenue. 2022 was a record year for Msgs and 2023 is on track to do even better. But it's important to note that during the 2020 and 2021 Seasons they were severely disrupted by the Co Pandemic as they were unable to host live audiences at their games.

This created pent up demand, allowing 2022 and 2023 to be record years. The extraordinary live event Revenue that they generated in these post-pandemic years is likely not sustainable as demand will eventually go back to normal levels, so it's probably most fair to use 2018 and 2019 to judge the company's normalized operating results. In those years, Msgs generated operating losses of18 million and $58 million, respectively. Over the past 6 years, Msgs has made a cumulative operating loss of $31 million on more than $4 billion of Revenue.

Basically, Break Even This raises a couple of questions: Firstly, why are profit margins so low and secondly, given that profits are almost non-existent why are the valuations of the teams so high? Basketball is a pretty simple sport. It doesn't require any advanced technology or expensive capital equipment. All you need is a court and a basketball. So for the most part, the only difference between a good team and a bad team is the Players.

Let's say, we started our own new basketball team called the Wall Street Millennial Land Crabs and we somehow convinced all of the top NBA players to quit their teams and play for us. We would also hire one of the top coaches. We'd have a pretty good chance of winning the championship even though we have zero expertise in managing a team. And similarly, even if you took the most successful NBA team and replaced all of their players with rookies, they would immed, mediately fall to the bottom of the league.

The players know this and it puts them in an extremely strong position when it comes time to negotiate their salaries. When a team performs well for a few years, their popularity increases, bringing in more revenue from the sponsorships and broadcasting rights. but almost all of these gains will be eaten up by the higher salaries to the players. For example, in 2010, LeBron James left the Cleveland Cavaliers to join the Miami Heat.

At the time, LeBron was their most valuable asset, both in terms of their ability to win games and draw interest from fans. hands. Losing LeBron was disastrous for the team with their ticket sales Falling by more than a third in the first year. Without him, you can see the impact clearly in their revenue.

The green bars showed the years when LeBron was on the team and the red bars showed the years when he was not. At the end of the day, people weren't really Cavaliers fans, they were LeBron fans. Once their favorite player was gone, they had far less interest in the team. The Cavaliers management team went into panic mode and decided that they needed to get LeBron back no matter what.

The cost. That cost ended up being $100 million for a three-year contract with LeBron back. The Cavaliers indeed saw their revenue recover, but almost all of this increased. Revenue went to paying LeBron's $100 million contract.

so the team's bottom line barely moved. All the top players are willing to move around to different teams based on whoever offers them the best deal. The teams are forced to engage in a bidding war which ultimately eats up most if not all of their profits. In 1980, the highest paid NBA player was Moses Malone who made $1 million.

That's equivalent to $4 million today adjusted for inflation. Steph Curry has already signed a deal with the Golden State Warriors for the 2025 season which will see him take home $56 million that's more than 10 times greater than what Malone made even adjusted for inflation. This is why despite the increasing popularity of the NBA, the teams have struggled with razor thin margins and inconsistent profitability. This brings us to the next question.

Given all of these challenges, why do the valuations of sports teams seem need to go up? Let's go back to MSG Sports which owns the New York Knicks and Rangers. According to Forbes, these two teams have a combined value of $8.3 billion. 2022 was their best year ever, and they made $86 million of operating profit. At this rate, it would take them well over 100 years to make back their value and profits after considering corporate income taxes.

That's to say nothing of the fact that the 86 million operating profit is likely unsustainable given the temporary benefit of postco pent up demand. So how can Forbes possibly justify such an insanely High valuation? There are two ways you can value any asset: the income method and the comparable sales method. Let's say you wanted to buy a house and operate it as a rental property. The house generates $10,000 of rental income per year based on the prevailing interest rates.

Let's say you can expect to make a 5% earnings yield. So the value of the house should be about 200 ,000 So the $10,000 of annual income is 5% of the purchase price. Now consider a different asset class: Fine Art A piece of art doesn't generate any income, so the income method clearly won't work. Instead, people use the comparable sales method.

For example, if a Picasso painting recently sold for $1 million and you have a similar Picasso painting, it would be fair to say that your painting is also worth about $1 million. NBA teams are being valued using the comparable sales metrics. Every time a team is sold for a record valuation, the value of all the teams increases on paper regardless of their financial performance. When you use the comparable sales method, you can eventually get valuations which appear completely disconnected from reality to understand just how absurd things can get.

Let's travel across the Atlantic to Europe which is experiencing an even more shocking sports team bubble. The main sport in Europe is soccer or football as they call it and one of the most popular leagues is the English Premier League. The Premier League's business model is conceptually similar to the NBA with each team being owned independently and they generate Revenue pretty much through the same sources. One of the most popular football teams is the Chelsea Football Club all the way back in 2003, the Russian billionaire Roman Abramovich bought the team for 140 million.

Following the outbreak of the Ukraine war in 2022, Abramovich found himself sanctioned by the UK government for his alleged ties to Putin. His status as a sanctioned individual effectively banned him from doing business in the UK. It made his ownership of Chelsea untenable. He had no choice but to sell the team.

While Chelsea is not a public company, they're still required to disclose their financial statements every year so we can see how the team has done over Abramovic's 20-year Reign. On the revenue side, things look pretty good. When he first bought the team in 2003, they generated 110 million of Revenue. By 2022, this had more than quadruple to 481 million.

Despite the strong Revenue growth, Chelsea has struggled with profitability. having generated cumulative operating losses of more than billion during this period. They've only made a positive operating profit in four out of the past 20 years, and these profits were the result of onetime breakup fees when their players were poached by other teams. When players join a football club, they generally sign a multi-year contract.

If the player becomes extremely successful and popular, other teams may want to poach that player. If the player leaves, he'll have to terminate his contract with the original team, which generally incurs a breakup fee. The breakup fees can be in the tens of millions of pounds and are generally paid by the competing team, not the player himself. In 2018, Chelsea posted a record profit of60 million, but this included $13 million of gains from breakup fees.

Had it not been for the breakup fees, Chelsea's record year in 2018 would have been a loss. That's not to say that breakup fees are not legitimate Revenue Money is money. But the point is, the normal sources of revenue like ticket sales, sponsorships, and broadcasting rights have never been enough to cover their costs, which primarily consists of shelling out hundreds of millions of pounds to attract. Top Talent on traditional metrics Chelsea has been a complete failure of a business, having burned a billion pounds over the past 20 years and having no viable path to profitability.

If any other type of business generated Financial results like this, they would probably be worth next to nothing. Yet shockingly, Abramovich was able to sell the team for 4.25 billion pounds. That's more than 30 times what he originally paid for it and more than enough to make back the cumulative operating losses. But why would anyone pay such a high price for a money losing asset? The buyers were a Consortium of investors led by billionaire Finance year Todd Bly Bly also owns a 20% stake in the LA Lakers NBA team as well as the LA Sparks WNBA team.

In fact, many professional sports teams are owned by billionaires. A former Microsoft CEO owns the Los Angeles Clippers Walmart air, Rob Walton owns the Denver Broncos and billionaire hedge fund manager Steve Cohen owns a New York Mets just to name a few. It's important to consider that there can be significant non-monetary benefits to owning a sports team. If you're a billionaire, chances are that you've got every car, yacht, and Mansion you could ever dream of.

So what's left to buy? After all that, you might as well buy a professional sports team. In the world of the super rich, owning a sports team isn't just about making more money, it's about being part of the elite club. It's a way to show the world that you're not just wealthy, but you're a player in a game that only the top Echelon can ever think about joining. It's about Prestige Fame and that extra special something that that sets you apart even from the other billionaires.

Not to mention that these billionaires are themselves sports fans and get a tremendous amount of enjoyment by sitting Courtside during games and interacting with all the top players. So it doesn't really matter if the team is losing money, this is just a small price to pay for all the intangible benefits of being the owner. This explains some of the story, but not quite all of it. Let's go back to the Chelsea Football Club It was acquired by a Consortium of investors which included three billionaires.

It's conceivable that they're all Avid football fans and are making the acquisition for non-economic reasons, but surprisingly, one of the co-investors was a massive private Equity Fund called Clear Lake Capital. And it's not just Clear Lake. In recent years, there's been a growing trend of private Equity firms in both the US and Europe spending billions of dollars to buy minority stakes and sports teams. So what's their angle? How do they expect to make a profit out of this? I Obviously don't speak for these private Equity firms and they may have other reasons for making these Investments But in my opinion, the only only way to justify buying a professional sports team from a purely Financial perspective is the greater fool.

Theory They hope that at some point in the future they'll be able to sell their stake in the team to some billionaire or they can sell it to another private Equity Firm who ultimately intends to sell it to a billionaire. Take the example of Manchester United an English football team very similar to Chelsea in terms of its financial performance. Despite strong Revenue growth, it has struggled with profitability due to ever increasing player salaries. The team listed on the New York Stock Exchange in 2012 and for most of that time the stock has been flat.

but you can see a couple discret spikes in the share price. In 2018, the stock surged on media reports that Saudi Arabia may be interested in inquiring the company. Ultimately, this deal never materialized and the share price gave up its short-term gains. In 2023, the stock price surged again on media reports that a billionaire Qari Prince may be prepared to pay as much as $6 billion to acquire the team.

I Don't know if this deal will go through and by the time you're watching this video, it may have already been resolved one way or another. The point is, the only reason anyone invested in this stock is in the hopes that eventually it will be acquired for a higher price. On fundamentals alone, the company is worth a tiny fraction of its current market value. This is the definition of Greater Fool investing.

All right guys. That wraps it up for this video. What do you think about the world of professional Sports investing? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.