Business leaders are on the constant lookout for “leading indicators,” information that is predictive of the future.
We had one in the form of the new small-ball operator the Los Angeles Dodgers hired away from the Tampa Bay Rays to be the president of baseball operations, Andrew Friedman.
The Rays’ payroll was only $77 million last season, while the Dodgers was a league-leading $240 million. Apparently, the Dodgers forgot to spend enough on middle relievers, but I digress.
The rumor in L.A. is that Friedman’s mandate is to get the payroll down to $190 million in 2015, which isn’t going to be easy unless the Dodgers are only going to play with 14 players. The Dodgers have already committed $190 million to 15 players, and the active roster has 25 spots.
The hiring of Friedman is a leading indicator of a market correction for the price of sports teams. For several years L.A. was a market under-appreciated and under-valued by major sports leagues.
The NFL abandoned L.A. not once but twice. MLB’s World Series champion at the time, the Anaheim Angels, were sold for a bottom basement price, and the prestigious Dodgers were acquired by Frank McCourt for the equivalent of seller back junk debt.
After about two decades the market has overcorrected with a vengeance. The Dodgers were sold even without some of the original surrounding valuable real estate for approximately $2.15 billion, a record for a sports team, and was anywhere from 25 percent to 100 percent over the cover bid.
Further, Time Warner Cable (TWC), which paid a fortune for the rights to broadcast the Dodgers, couldn’t get any other substantial program providers to pick up the channel due to the cost. Providers felt they couldn’t pass along the cost to consumers and TWC was unwilling to go a la carte pricing (customers wanting the Dodger Channel pay extra).
The next market overcorrection was the $2 billion that Steve Ballmer paid for the NBA’s Clippers. I think Ballmer will be great for basketball. But his $20 billion fortune makes what he paid for the Clippers little more than tip money. He probably overpaid by about $1 billion. That said, I think he will create a compelling winner in the Clippers and may supplant the Lakers over time as L.A.’s team. The Clippers are one of maybe three NBA teams that are must-see TV, along with the San Antonio Spurs and Miami Heat. I can envision Ballmer becoming the dominant sports figure in L.A. The hiring of Friedman, a low-cost team builder, is a leading indicator that the group overpaid for the Dodgers and subsequent high-priced talent acquisitions. What does this portend for other teams on the market? As they say on Sports Center, “Is that bad? It’s not good.”
Brian Mulligan is currently the CEO of Brooknol Advisors, a Media, Entertainment and Sports Advisory Company. Mr. Mulligan has held CEO, Chairman, COO or CFO position of virtually every media/entertainment vertical for majors over a 30 year career, from Co-Chairman of Universal Pictures, CEO of Universal Television, Chairman of FOX Broadcasting and Cable, EVP/CFO of a Fortune 50 Company, SVP of MCA INC, EVP of Strategic Planning and Corporate Development Universal, Senior Executive Advisor Boston Consulting, Vice Chairman of Media/Telecom of a Money Center Bank, and worked extensively in/with private equity. Instrumental in over $175 billion of media and entertainment transactions.