Responding to Gladwell

As I try to build a career in writing, I am especially careful not to go out of my way to belittle that of others. I understand how agonizing the process of creating ideas and crafting a column can be and the last thing that I want to do is knock somebody else’s hustle (especially when I have not yet accomplished anything in my own). That being said, I agree with the premise of today’s Malcolm Gladwell column on Grantland but could not disagree more with some of his individual arguments. To fully grasp my issues with Gladwell’s column, I recommend reading the whole thing and then coming back to this.

The general thesis of Gladwell’s column is that professional sports franchises should be viewed by owners more as toys or art than as businesses to be judged on profits and losses. There are psychic benefits to owning these teams that Gladwell argues are not being properly valued. Gladwell’s first example of Tom Yawkey’s refusing to sign black players at the expense of profits and wins as well as his final analogy relating to high priced art are well-reasoned. He is correct that sports owners are afforded with tax benefits that border on absurdity.

That being said, while I have been far from sympathetic with the plight of the NBA owners in this lockout, some of Gladwell’s arguments are not logical. About Washington Redskins owner Daniel Snyder, Gladwell writes, “Snyder was a brilliant entrepreneur, who at the age of 36 sold Snyder Communications — the marketing company he built from scratch — for an estimated $2 billion. He has subsequently run the Redskins like a petulant 14-year-old fantasy owner. Snyder Communications was a business. The Redskins are a toy. The former he ran to solely maximize profit. The latter he runs for his psychic benefit — as a reward for all the years he spent being disciplined and rational.”

However, Snyder operates the Redskins as a pure business more than almost any other owner does in professional sports. Snyder bought the Redskins for $800 million in 1999 and the franchise was valued at $1.55 billion last August by Forbes. Also according to Forbes, the Redskins’ operating income was $103.7 million, the 2nd highest total in the NFL behind the Dallas Cowboys ($143.3 million) and $37.2 million more than the 3rd place Patriots. If anything, I would argue that although Snyder derives great financial benefits from owning the Redskins, they come at substantial psychic costs from the Redskins’ perpetually awful on-field performances of which Snyder deserves a lion’s share of the blame.

Later, Gladwell writes:

Forbes magazine annually estimates the value of every professional franchise, based on standard financial metrics like operating expenses, ticket sales, revenue, and physical assets like stadiums. When sports teams change hands, however, the actual sales price is invariably higher. Forbes valued the Detroit Pistons at $360 million. They just sold for $420 million. Forbes valued the Wizards at $322 million. They just sold for $551 million. Forbes said that the Warriors were worth $363 million. They just sold for $450 million. There are a number of reasons why the Forbes number is consistently too low. The simplest is that Forbes is evaluating franchises strictly as businesses. But they are being bought by people who care passionately about sports — and the $90 million premium that the Warriors’ new owners were willing to pay represents the psychic benefit of owning a sports team. If that seems like a lot, it shouldn’t. There aren’t many NBA franchises out there, and they are very beautiful.

This argument is precarious for many reasons. First, I would argue that the expectation for the value of franchises to appreciate over time is a hybrid between financial and psychic benefits as opposed to being purely psychic. When you buy an asset expecting it to go up in value, this is a financial decision even if it is somewhat based on expectations of a later buyer’s psychic benefits. Further, it is dangerous to assume that just because an asset class has always appreciated that this will be the case for perpetuity. As we have seen with houses, internet stocks, and tulips, when assets are valued more psychically than by intrinsic value of profits and losses, bubbles can burst swiftly and mercilessly.

Put another way, I was lucky enough to see Warren Buffett speak at his annual Shareholders’ meeting with my father and some friends in Omaha this past Spring. When the topic of gold came up, he said that the entire world’s supply of gold would measure out to be a 64 X 64 X 64 Ft cube and would be valued the same as all the farmland in America plus 10 Exxon/Mobils (the whole company, not gas stations). The gold cube would be shiny and stuff but which would you rather own? Gold has gone up quite substantially recently and may well continue to do so but it is dangerous to invest in something based more on what you think somebody else will pay for it later rather than the value it generates. Gladwell also does not mention that the NBA had to take over the New Orleans Hornets because owner George Shinn wanted to sell but could not find a high enough bidder.

While I do think the NBA is exaggerating the extent of its losses, it should not expect its franchise values to keep going up if it does not adjust its cost structure. As currently constituted, small market teams can be really savvy/lucky and compete on the floor like the Spurs and Thunder but are handicapped financially.

Profits and valuation gains should not be the primary reasons why people buy sports teams. The psychic benefits of owning a professional team are unimaginable and those lucky enough to do so should wake up every morning and feel blessed for being lucky and/or talented enough to reach such an enviable position in life. They should not, however, be expected to be completely carefree about profits and losses, especially if the system is broken for most of the owners as is the case in the NBA.

 

 

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One Response to Responding to Gladwell

  1. Pingback: Dan Snyder has run Redskins ‘like a petulant 14-year-old fantasy owner,’ says Malcolm Gladwell | HuntersMedia.com

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