The Basketball Business

Forbes has a nice piece about why Lebron James is such a good investment.

By the time the 19-year-old James turns 25, the muscular 6-foot-8, 240-pound forward will have earned upwards of $200 million from playing basketball and sponsoring sneakers, trading cards and soft drinks. That's a record for an NBA rookie: Not even Michael Jordan made that much in his first seven years.

Could one player be worth so much? Actually he's a bargain. By James' seventh season, FORBES calculates, he'll have generated $2 billion in revenues for his team and all his sponsors. Not a bad return. This assuming no major injuries or personal missteps. (Los Angeles Lakers star guard Kobe Bryant's sexual assault case has sent sponsors like McDonald's and Nutella into a fast break out of the arena. All told, Bryant has lost some $2 million in annual endorsement income.)

In James' case, the math works like this: His rookie contract with the Cavs is a four-year, $19 million deal (the league maximum for a rookie). Due to restrictions from the league's collective bargaining agreement, James' next contract should start at around $13 million and have 12% annual salary increases.

Small change, when you consider the Cavs will get a much better team for the $60 million they'll pay James over the next seven years. Last season the Cavs tied for the worst record in the league–only 17 wins and 65 losses, their fifth straight losing season. Attendance was last in the league at 11,500 per game, and no-shows often topped 5,000. In a big city like New York, the Knicks can still charge big bucks for corporate sponsorships when the team can't dribble or shoot. But in a small market like Cleveland, winning is essential to maximizing revenues. No surprise that last year the Cavaliers had total revenue of just $72 million, fifth lowest in the league.

But since James arrived, the team's attendance has increased to almost 18,000 per game, the biggest jump by an NBA franchise in more than 20 years (excluding teams moving to new arenas). At an average price of $40 per ticket, that means an extra $10 million in revenue for the season. Add another $2 million from luxury suite rentals, all thanks to James, who's lived up to the hype, averaging 20 points, 6 assists and 6 rebounds a game. Halfway into the season the Cavs were 14-27.

Who needs an NBA championship when you can get a player surrounded with enough hype to get this kind of financial return?

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