The Economy and the Lakers

Kurt —  February 19, 2009


This winter, with the national economy tanking and sports team owners taking hits on stock and real estate, the market for baseball players shriveled up. Bobby Abreu goes to the Angels for just $5 million. Consistent 40 home run guy Adam Dunn to the Nationals for just $10 million. Manny Ramirez still doesn’t’ have a deal.

Except in the Bronx. There, the Yankees spent money like it was 2005, throwing out by far the three largest deals of the off-season.

How did they do that in this economy? CNBC’s Darren Rovell explains:

Think about all the other owners who have gotten pounded this year in the sector of the economy that they might still have their money in.

Think about the New York Mets, whose owners not only lost money from the Madoff mess, but also are in the real estate investment business. So too is Theodore Lerner, the owner of the Washington Nationals, who were hoping to land Teixeira. The Chicago Cubs are being sold by an entity that is bankrupt.

Go down the list and you can see that there’s a lot of people that lost money this year in other businesses. I have no idea where the Yankees are investing their personal money, but the bottom line is that their business is only the New York Yankees.

What does that mean? It means that as long as the Steinbrenners believe that the business of the Yankees will be good, they are not as affected as the others are. Will people still go to games? If not, will they watch the YES Network. It’s a pretty simple equation.

That brings us to Jerry Buss and his family, the majority owners of the Los Angeles Lakers. Buss made his money on real estate deals, but today he is in the Lakers business and very little else.

And right now the Lakers are a very good business, recession or no. The building still sells out at the highest ticket prices in the Association. The Lakers television ratings are up (unlike the Steinbrenners, the Buss family does not own the cable network showing games, but they do get a healthy payment). While Lakers officials said they have felt some pinch from sponsors, go to a game and it does not appear to be significant.

Just how healthy are the Lakers financially, as the second highest valued franchise in the NBA? This is what Forbes says (thanks to Darius for finding this info):

Based on the team valuations made by Forbes for all the 30 teams, the Lakers were pegged at US$ 534 million. Here’s the breakdown:

1. $123 million or 23% comes from the earnings from the league’s shared profits
2. $240 million or 41% comes from the value of the city’s market size
3. $140 million or 24% comes from the stadium earnings (ticket sales, merchandise, food, etc.)
4. $81 million or 14% is attributed to the team’s brand

Last season the Lakers were second in the league in operating profit at $47.9.

All of this ties into the big question for we Lakers fans — just how much is Jerry Buss willing to spend to keep this team together?

This summer, Lamar Odom, Trevor Ariza will be free agents. The Lakers if they pick up Sun’s option (his deal is two years) will have nine players on the books for next year with a payroll of about $74 million. This season, the luxury tax is at just higher than $71 million, but that number is expected to drop the next two seasons. (To really get a feel for what this means, read the excellent post from the always-amazing Tom Ziller over at Fanhouse. That guy should be bronzed. In a good way, not the Hans Solo way.)

Right now, in Jerry Buss’ head, there is a number of how high he will go. We can speculate all we want about it, but the fact is we have no real idea what that number is. We know he will spend more to win, but we also know he made some cost-cutting roster moves during the three-peat years to keep payroll under control.

Not only do we not know the number, we don’t know if it is possible to fit both Odom and Ariza under that number. Remember, if the Lakers sign both of them, they are still going to have to sign at least three more minimum level players (this year’s late first rounder, maybe Shannon Brown and another pick or free agent). The likelihood that the Lakers would keep Odom and Ariza and use the Mid-Level exception on a free agent seems almost nil.

If Kobe opts out and resigns a max deal extension, he will make about $1 million less (but will extend five years out). That is not a huge savings, but every little bit helps.

No doubt this Lakers roster, as is, can win — the Lakers have the best record in the NBA and are serious title contenders. The question is can the Buss family keep the band together.

One other factor in all of this is AEG, the company that owns 30% of the Lakers and the majority of Staples Center. AEG just spent insane amounts of money to build LA Live, the restaurant and entertainment complex across the street from Staples Center. This is a tough time to open a venture like that, and you need foot traffic to make it work. The kind of foot traffic that a sold-out Staples Center 41 times a season plus playoffs provides.

AEG cannot afford to have the Lakers slip. The question again is how much AEF is willing to pay to make sure they do not.

This is a hard topic, because reading into the Buss family and its finances is about as easy as bringing peace to the Middle East. There is no way to get 100% knowledge or certainty.

But it looks like they should be in position to keep the band together. Unless the market goes crazy this summer and a couple of band members get huge offers. Then, well, who knows?


Kurt

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