Back when Eddie DeBartolo Jr. owned the San Francisco 49ers, winning was as important to him as it was to the athletes he paid so well. When the team returned to the locker room after a game, he waited just inside the door to greet the players. The 49ers became known for their first-class travel accommodations and a willingness to invest in players and staff. DeBartolo didn't think of championships as an occasional bonus. Rather, he operated the franchise with the expectation of a Super Bowl win every season.
DeBartolo, while a wealthy man, didn’t see his team as merely an asset in his portfolio. He made the Niners an extension of his personal identity, which the team's fans appreciated. But the “family business” model that DeBartolo operated under is no longer the norm in pro sports. The August sale of the Los Angeles Lakers was a loud announcement of the new financial environment for professional sports. Less than a year after purchasing the franchise, Mark Walter, billionaire owner of the Los Angeles Dodgers, sold his controlling interest in the team to businessmen Josh Kushner and Bob Iger for $12.5 billion, wrapping up a deal that would normally be a months-long affair in a weekend. When someone who's desperate for cash gets offered a $2.5 billion profit on a 10-month investment, the pen comes out fast.
Walter’s cash hunger was the result of federal investigations into illegal, self-dealing loans—loans that personally benefit corporate executives rather than the firm itself. A whistleblower alleges that Walters’ insurance firms made loans to shell companies which then made loans to support his professional sports empire. The intense DOJ/SEC scrutiny meant that Walter suddenly had to reimburse his insurance firms $20 billion for those loans.
Owners of professional sports franchises have no need to panic when hit with a serious cash crunch because their rare and ever-appreciating asset is in such great demand. The government extending monopoly-law immunity to professional leagues means there's a set limit to the number of teams to purchase, and those teams enjoy government-approved wage suppression (salary caps) and taxpayer-funded stadiums. Buying an NBA team is a can't-miss investment for those with deep enough pockets. It's socialism for the rich.
The Lakers sale prompted speculation over the possibility that Walter might sell the Dodgers too. Dodgers president Stan Kasten attempted to calm that storm by declaring, “I can't tell you how important the Dodgers are to Mark.” Maybe a few bought that line, but my guess is that the Dodgers are now in play because Walter still needs $8 billion more in cash to fix his loan problem. Mark Walter’s no Eddie DeBartolo when it comes to emotional attachment to his teams, especially with the feds on his trail.
Professional sports franchises have always been the domain of the wealthy, but what’s changed is that they’ve become so expensive to purchase—because of rising valuations and media rights income—and operate that even billionaires need outside funding. In the last five years, the NBA, MLB, and NFL have responded by rewriting ownership rules to permit regulated institutional investment, especially private-equity minority stakes. So while the traditional controlling owner remains, because of league rules putting limits on outside investment, the group behind that owner can now look like a finance-and-investment consortium.
Private equity wasn’t allowed to purchase a stake in a pro sports franchise until 2019, when Major League Baseball changed its rules. Sovereign wealth funds (investment vehicles run by governments) were kept out until 2022, when the NBA began allowing them. This type of investment wasn’t allowed because professional leagues realized it didn't fit with the idea that the top priorities for teams should be winning and keeping the fans happy—two things that aren’t taught in business schools.
The Lakers sale signals the onset of a new era for professional sports—one in which the franchises are seen as institutional assets that demand a bottom-line-oriented strategy regarding how they're operated and sold. When the effects of this new paradigm kick in fully, it's inevitable that a desire to win a championship becomes a vestige of the time when businessmen allowed their emotions to override their portfolio-building acumen.
When the major professional sports leagues broke the seal by allowing the wrong kind of money in, they knew it would spark a shift towards finding even more ways to extract more money from the fans who are already paying $60 just to park their cars. Going forward, fans are going to find themselves even more tested on the question of how much their fandom makes them willing to pay for anything their team has for sale. The fans are going to get nickel and dimed to their absolute limits, and they're going to resent it even more than they always have.
That's what Las Vegas has been doing to its customers for years and it's backfired on them. More and more, it's going to look like franchises are daring their diehard fans to stop letting their hearts make their financial decisions for them. If the finance-bro mentality pushes this too far, pro sports risks losing the most loyal customer base in all of the business world.
Mark Cuban bought the Dallas Mavericks because he wanted to win an NBA championship and was willing to spend what it took. Robert Kraft, owner of the New England Patriots, risked his own money towards the same goal, which got him to 10 Super Bowls. Private equity has no such passion and dedication. Its affections for sports fans is limited to the cash that can be squeezed out of them. Most Los Angeles Lakers fans are going to find out that their team being valued at $12.5 billion isn’t a plus. Crypto.com Arena, home to their team, is currently undergoing a massive makeover that dovetails with the new ownership’s vision by turning the space into a playground for the uber-wealthy and corporate partners. As for the average Laker fans, the only change will be that they're paying more for the same expensive things they got before.