SBJ/20100816/Opinion

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  • How a team’s value can suffer when a star player departs

    Every successful company goes to great lengths to protect its good will and implement risk management programs designed to protect against catastrophic loss to its major assets. They typically do this by maintaining adequate financial derivatives to protect against currency or commodity price fluctuation; by obtaining insurance against major damage to their key assets, product liability and the like; and by implementing vigorous procedures and standards to protect the good will associated with their businesses.

    A business whose value is tied significantly to its good will or intellectual property, such as Microsoft or Pfizer, for example, spends millions of dollars on patent and trademark registrations and vigilantly policing infringements of the company’s intellectual property rights.

    Franchises in the NBA and in other professional sports leagues cannot protect their businesses in these customary ways from the loss through free agency of their most valuable assets: their marquee players. That inability and potential loss can have an adverse impact on the brand that the franchise has built through its investment in its players.

    The Cleveland Cavaliers will be an interesting case in point following LeBron James’ decision not to re-sign with the team.

    Hark back to the pre-LeBron years and the struggles that the Cavs had in their home market. In the year prior to James’ arrival, the Cavs suffered through a 17-65 season. That earned them the right to select James with the first pick in the 2003 NBA draft. Their average attendance that year was 11,497. According to Forbes, in 2002, the Cavs were valued at $222 million.

    In 2003, the year James played his first game with the Cavs, Forbes valued the Cavs at $258 million. Since then, the franchise has increased in value dramatically, to a reported $477 million in 2008-09 (sixth highest of all NBA franchises). Over that period, Forbes reports that the Cavs’ annual revenue has increased more than 100 percent, from $72 million to $159 million in 2008-09.

    The Cavs and Raptors used sign-and-trade
    options after losing James, left, and Bosh,
    right, to Miami.

    Dan Gilbert reportedly paid $375 million for the Cavs in 2005. One can only speculate how the value of the Cavs will decrease with James’ decision to leave for Miami. Will other free agents be attracted to the Cavs without him? Will team sponsors or other team partners place the same value on those sponsorships and relationships without James? Not likely in either case. The revenue drawn from season-ticket sales, suites, merchandise, television and radio deals can reasonably be expected to decrease, and perhaps dramatically.

    SportsBusiness Journal recently reported that a deal involving the sale of David Katzman’s 15 percent minority interest in the Cavs to a Chinese investor had been languishing (June 21-27 issue). Is it possible that the delay was due to the uncertainty of where James would decide to play? It is entirely conceivable that the value of that 15 percent interest is worth considerably less now than it was before James decided to leave Cleveland.

    What, if anything, could Gilbert and the Cavs have done to protect against the loss of a player such as James, the team’s greatest asset, and the potentially dramatic impact this may have on the Cavs’ value?

    While an NBA team can and does buy insurance compensating the team against the loss of a valuable player due to injury, it can’t buy insurance against losing a player to free agency. The NBA’s collective-bargaining agreement, which allows teams to draft and protect players for a period of time, also rightfully permits players to move on after a point in time without any guaranteed compensation to his current team. An NBA team is entirely reliant on its internal player personnel management and the use of the collective-bargaining agreement to try to re-sign their own players, trade them before their contracts expire, or work “sign-and-trade” transactions to try to mitigate against the risk of losing a major player.

    There is no question that a player should have the right to seek employment where he chooses, perhaps even sooner than six or seven years into his career. The more difficult task is to strike a balance in the CBA to try to compensate a team that loses players who are so key to its success both on the court and financially without creating impediments to the players’ ability to sign with other teams. The sign-and-trade provisions offer opportunities for a team to work some compensation for the loss of a player, but they are woefully inadequate in the case of a player such as James.

    In Major League Baseball, teams can earn compensatory picks in the next annual player draft based on a departing free agent’s ranking by the Elias Sports Bureau over the player’s previous two years of playing, and against players of similar position.

    In the case of James, or in the case of the Toronto Raptors also losing Chris Bosh to Miami, neither Cleveland nor Toronto had a built-in right in the CBA to receive compensation for losing the player. Both Cleveland and Toronto were fortunate to be able to use the CBA’s sign-and-trade provisions to notionally sign the player and then trade him to Miami, which enabled both players to receive more money and a year-extra term on their contracts. Both Cleveland and Toronto received draft picks and a large trade exception. In James’ case, that included two first-round picks between 2013 and 2017.

    As a sophisticated multibillion-dollar business, the NBA can develop a better system to protect franchise values than its current CBA without creating any undue impediment on the players’ freedom to work in a city of their choosing. Nothing less should be expected given the dollars paid for franchises today and the risks involved in those investments.

    Just ask Dan Gilbert and the Cleveland Cavaliers.

    Jeffrey A. Citron (jcitron@goodmans.ca) is a corporate finance and sports lawyer in Toronto.

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  • Sound it out: Technology now offers choice in game audio

    In New York in the 1960s and ’70s, many of the games played by the area’s teams were not televised. Growing up there and then, my radio was indispensable. There was no choice.

    The very ubiquity of radio helped rhythmic announcers like Mel Allen, Red Barber, Marty Glickman and Marv Albert build iconic pulpits.

    In 1958, the Dodgers’ first year in Los Angeles, only 11 of the team’s 154 games were on television: those played in San Francisco against the rival Giants. Yet Dodgers fans didn’t feel deprived because Vin Scully painted a masterpiece every day on the radio.

    Through the years, radio play-by-play announcers have infused commercial messages magically. For that matter, Scully’s reads today for Farmer John still have listeners craving hot dogs. In his time, Allen labeled home runs “Ballantine Blasts” for the longtime beer advertiser of the Yankees. In Detroit, when the Tigers were sponsored by the local Stroh’s brewery, Ernie Harwell would say, “He Strohs to third,” fostering an indelible bond between the team, fan and sponsor.

    As more and more games made their way onto television, cable and elsewhere, radio’s role waned insidiously. Over time, even radio’s monopoly on purveying immediate information out-of-home faded. BlackBerrys and iPhones became instantaneous sources of customizable information almost anywhere.

    How does radio expand its relevance in 2010? One direction perhaps is to expand the play-by-play audio options that are available to television viewers. The radio call could headline an expanded menu of audio channels that accompanies the picture.

    Television’s leaders talk cheerfully about 3-D, choosing camera angles and real-time game statistics, but audio on telecasts has remained static for decades. The play-by-play announcer, color commentator and occasional sideline reporter all caption the picture. Other than some nuances, it’s been the same way for the 60-plus years of television. There has been no striking innovation in audio.

    Imagine watching a game and choosing from a range of audio offerings. For starters, options might include:

    The television standard: The conventional audio that accompanies telecasts.

    The word-picture: The radio play-by-play of either team (home and away) or the national radio broadcast when and where applicable.

    A further expanded and concomitant audio menu might include:

    Radio host/talk personality version: In addition to the crowd noise, the public address announcer and enhanced graphics, a provocative host, entertainer or personality could interpret and opine. For example, Jim Rome, Jerry Seinfeld or another colorful personality might share his or her viewpoints throughout a telecast.

    Foreign language: The bigger the event, the more the options. Sirius Radio promoted Super Bowl coverage in a multitude of languages. Wouldn’t it be nice to watch games with the language of choice, all synchronized with the picture?

    Translation: A conventional analyst captions the picture; no play-by-play announcer. Think John Madden in his prime, alone, joined only by the public address voice, graphics and crowd noise.

    Ambient: How would it feel to sit on the 50-yard line with no other intrusions, enjoying the public address announcer and crowd noise? NBC first experimented with this format to mixed reviews decades ago. Today, with the help of beefed up graphics, eavesdropping acoustics and real-time data, the overall viewing experience would be superior.

    Because its telecasts are also available online, NBC’s “Sunday Night Football” might be a good start. Al Michaels and Cris Collinsworth are wonderful, yet NBC can also offer its viewers the home and visiting radio announcers, the call of Westwood One’s national broadcasts, foreign language play-by-play when available or other creative versions of the audio concoctions described earlier.

    The availability of broadband and SAP (secondary audio programming) makes much of this feasible almost immediately. Down the road, following its impending acquisition of NBC, Comcast could also run NBC’s “Sunday Night” telecast on several cable channels, each one delivering unique audio.

    Many NBC affiliates also have digital subchannels that are capable of running separate audio feeds of the same telecast. For that matter, NFL.com this summer is making available 65 preseason games, some with separate home and away feeds of the same game. Radio operators are also building HD substations where these additional audio presentations could complement the picture hatched by their television colleagues.

    Sponsors would benefit, too. Should Toyota, for example, own halftime on the flagship NBC NFL telecast, it might also own parallel programming on all the accompanying audio options. NBC might also give Toyota more interstitial features in the expanded audio, something that it is not likely prepared to do on the flagship network telecast because of stricter policies on advertiser infusion.

    Advertisers, for instance, might also own the broadcast booth on these additional audio presentations, at least figuratively, as Lowe’s does in Yankees games. On these extended audio feeds, shorter audio commercial messages could be immersed and sponsor ads would appear organically in dialogue boxes for those tuned in online. Cross-promotional opportunities are also endless.

    Taking a visionary role, ESPN Radio is transitioning to “ESPN Audio.” Still distributed primarily through traditional terrestrial radio stations, ESPN can now also be tuned in online and on Sirius/XM. From “Mike and Mike in the Morning” to game-day programming and play-by-play, ESPN is presented in a variety of forms and through various channels of distribution. On-air personalities are saliently visible on espnradio.com, which continues to pick up traction with users and advertisers. “Mike and Mike,” essentially a radio show, does a healthy number for ESPN2 on its simulcast.

    It’s time for the leaders of radio, television, sports governing bodies and teams to consider a mutually beneficial undertaking to enhance the fan’s audio experience.

    David J. Halberstam (halby@halbygroup.com) is the principal of Halby Group, consultants to the sports, media and marketing community.

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