Why most New Team Owners Struggle to Win Titles

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1 Cover Story Why most New Team Owners Struggle to Win Titles A NEW GENERATION OF PRO SPORTS-TEAM OWNERS IS FINDING OUT YOU CAN T ALWAYS BUY CHAMPIONSHIPS.

2 ONLY A FEW months into the new National Basketball Association (NBA) season, but it doesn t take a genius fan to know that one team will be playing for the league championship in June: the Golden State Warriors. After all, the team has made it to the last three NBA championships, winning two of them and setting a record for most wins in a season. They re such a sure bet that Vegas oddsmakers have placed a negative money line on the Warriors winning it all bettors picking them have to put up more money than they would win. 27

3 By Peter Lauria Winning and the Warriors weren t always synonymous. Before 2013, the franchise only made the playoffs six times since 1980, and lost in the early rounds each time. But new ownership this decade led by venture capitalist Joe Lacob and movie producer Peter Guber has managed to turn the team not only into a perennial powerhouse, but also a well-known global brand. Based in Silicon Valley, and armed with poster star Stephen Curry, this is the team whose success is often associated with the rise of neighboring tech giants like Apple and Google. Feel like going to a game? Not a chance the Warriors have sold out more than 230 consecutive games. This kind of success, of course, is rare in any professional sport. But it turns out, it has become so rare that few can seem to replicate it or know how. The major professional sports leagues have worked hard in recent years to create parity. They balanced divisions, changed schedules, increased opportunities for players to switch teams. And yet the data paints a dismal picture of how badly new owners who spend billions of dollars trying to win championships are doing. Over the last 10 years, there have been 36 new sportsteam owners roughly 30 percent of all franchises across the National Football League (NFL), Major League Baseball (MLB), the National Hockey League (NHL) and the NBA. Of those, only the Warriors and the 2016 Chicago Cubs have won a championship. (As of press time, baseball s World Series was about to produce a third.) Forget championships, though most new owners rarely have a winning record or reach the playoffs. Steve Ross, the billionaire real estate developer, bought the NFL s Miami Dolphins for $1.1 billion in 2008, only to watch the team post a losing or.500 record in all but one season through last year. Similarly, baseball s San Diego Padres have been a below.500 team in all five seasons since an investor group bought it for $800 million in The Dallas Stars of the NHL have made the playoffs in two of the six seasons under owner Tom Gaglardi, a The Problem New sports owners are spending millions buying teams to win titles. And surprisingly few even get close. Why Worry? The reasons may differ, but business leaders are facing similar issues trying to win in today s global economy. The Solution A handful of teams have discovered that alignment through an entire operation can be a game changer. Canadian business executive, but his $240 million purchase-price investment has reached no farther than the second round. A Korn Ferry analysis of the championship competitors across the five major professional sports in the US over the last decade shows that fewer than half of all teams 28

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5 ARTHUR BLANK Owner, Atlanta Falcons

6 in every sport except soccer ever get the chance to play for a title. In the NBA, only 30 percent, or nine of the 30 teams, have made it to the championship round, while pro baseball and hockey aren t much better, with 43 percent having been to the final dance. And in the NFL which has gone through painstaking schedule shuffling and other parity efforts only 13 of 32 teams have played for a title since Turning a losing franchise into a championship team is like trying to turn around a bankrupt company, says Jed Hughes, Korn Ferry s vice chairman and global sector leader of sports. You have to get the culture, strategy and leadership exactly right to make it a place where talent wants to go. But that is extremely hard to do in a supercompetitive, constantly changing landscape. For their part, owners and other observers say the difficulties of reaching the pinnacle of their business which would frustrate virtually any CEO or entrepreneur are a sign of the times, with free agency and rising player salaries reducing the odds of winning every year. Certainly, with multimillion-dollar TV contracts, the pressure to build new stadiums, and an entirely new world of digital technology affecting sports and sports viewing, running a sports franchise has never been harder. And with the leagues doing little to nothing to onboard new owners, the playbook for ever winning a title becomes more elusive for all but a few. Just ask Arthur Blank, whose Atlanta Falcons were edged by the New England Patriots in last year s Super Bowl. The days of operating one of these franchises as a hobby are long over, he says. They are very complex today, and they are growing tremendously on the business and marketing side. That complexity and the costs of running a sports franchise today are directly responsible for the seismic changes in the nature of ownership taking place. Sports franchise ownership used to be a family affair, with teams passed down from one generation to the next. Or owners were superfans who wanted to live out their boyhood dreams vicariously from a luxury suite. (Ownership was, and still is, male-dominated.) Briefly, media conglomerates News Corp. and Time Warner jumped onto the field, believing that combining team ownership with television distribution assets would add synergistic value to both but they eventually ditched the business. Today, a new breed has stepped in. The rise of the global billionaire class, coupled with the soaring worth of sports franchises, make owning a team a great investment for the buyer and a lucrative exit for many of the families that own teams. This new generation of owners comprised of leaders such as former Microsoft CEO Steve Ballmer, entrepreneur Mark Cuban and investment banker Tom Ricketts, among others made their names and fortunes in technology, finance, real estate and elsewhere. Asset values are going up across the board, says Sal Galatioto, whose firm Galatioto Sports Partners advised on the sales of both the Warriors and the Cubs, among others. Sports is the most valuable media content, and digital technology is allowing franchises and leagues to maximize how it is distributed because they own the rights. 31

7 Buying... But Winning? The selling of sports franchises continues to be hot, but new team owners struggle to win any titles. Here are the numbers: NFL NBA MLB NHL Average Franchise Sale Price $ 1 billion $ million $ million $ million Number of Franchises Sold Percentage of League Franchises Sold 14% 33% 17% 36% Percentage of Teams with Appearance in League Finals 40% 30% 43% 43% Source: Korn Ferry for the National Football League, the National Basketball Association, Major League Baseball and the National Hockey League Our Playbook GETTING TO THE TOP What really works off the field to win on it? Former coach and longtime sports expert Jed Hughes, vice chairman and head of Korn Ferry s Global Sports practice, interviewed more than a dozen sports owners across four leagues and found four key steps:

8 Pick up the phone. Consistency is key. Invest beyond players. Connect with the community. Professional sports-team owners are part of an elite, exclusive club; there are only 122 in the US. Find fellow owners and peers that you can trust to be confidantes. Owners that determine their roles early on and set the strategies and values that form their culture often succeed if they stick to them. Inconsistency off the field is often worse than it is on the field. Focus on building out the business side of the franchise to provide the fan base and resources necessary to support the sports side and enhance the experience beyond the game. Technically, the owner owns the team. But, as Dallas Mavericks owner Mark Cuban notes, it really belongs to the community. Recognize the importance of community involvement to the team s overall success.

9 JED HUGHES Vice Chairman and Global Sector Leader of Sports, Korn Ferry Media rights are just one avenue new sports-team owners can mine for growth. International expansion, so-called e-sports, hospitality, fantasy sports, gambling, branding, licensing, stadium and sponsorship partnerships, virtual reality, artificial intelligence and a host of other emerging technologies all present significant additional revenue streams. According to one report, combined pro-sports revenue will reach nearly $73.5 billion by 2019, up from $60.5 billion in 2014, an annual growth rate of 4.8 percent. In conjunction with the growth in revenue has been a sharp increase in team valuations. According to Forbes, the top 50 prosports teams globally were worth an average of $2.2 billion each, a more than 25 percent increase in valuation from the $1.75 billion average a year prior. Small wonder then that since 2000, the top eight US team sales were at prices in excess of $1 billion, and three of them have been for above $2 billion including the sale of the NBA s Houston Rockets for $2.2 billion in September, the highest price ever paid for a sports franchise. The new owner: Tilman Fertitta, a billionaire restaurant-and-casino mogul. And the high-priced buying isn t limited to the US, with Malcolm Glazer, the head of a commercial real estate empire, as perhaps the most famous example. Though he passed away in 2014, his family estate controls Britain s Manchester United, the soccer equivalent of the Yankees or Cowboys, which Glazer had bought nine years earlier for a cool $1.4 billion. But while many teams have found ways to generate record revenues and profits from ticket sales and TV rights, most of the new owners have had remarkably limited success on the field. In many ways, it s the leagues that have made this harder. Hoping to make all games on the schedules more interesting, many have juggled schedules so strong teams don t constantly get to play against weaker opponents, while also imposing salary caps or so-called luxury taxes on teams that overspend on players to discourage sports dynasties. New owners quickly discover that the skills and experience that made them successful in another industry aren t always transferable. They aren t immune from the same mistakes new CEOs make, such as making high-profile leadership changes that overlook day-to-day operational challenges, or not doing enough due diligence on the organization s strategy, culture and talent. Falcons owner Blank says the biggest mistake he sees new owners make is thinking that power translates into sports knowledge. It doesn t. But when has that ever stopped an owner from thinking they know better than the general manager or coaches about what s best for the team and its players? It doesn t help that none of the major sports leagues offer a formal mentorship or initiation program for new owners. The league never did one thing for me to help, says Houston Texans owner Bob McNair. I didn t even know what resources were available. In simpler times, few owners would have expected or 34

10 needed such help but new owners are coming into a sporting world that was unimaginable a decade ago, with the fan base alone so greatly affected by everything from globalization to the digital media. We no longer have the luxury of every household having a team they love, says Dallas Mavericks owner Mark Cuban. Kids focus on their devices. We only have 10 years of experience with smartphones as a primary entertainment alternative. We have to learn how to get kids who are growing up on Minecraft and other games to learn to love our teams or we will have challenges in the future. Still, the suggests that there is a playbook to build and success of the Warriors and the Cubs as well as Cuban s Mavericks, for that matter sustain a championship-caliber operation. For Lacob and Guber, it was developed early when they drew firm boundaries around their roles as equal owners. Lacob, who had a feel for the culture of the NBA as minority owner of the Boston Celtics, took control of the basketball side of the operation. Given his Hollywood background and experience with Mandalay Entertainment, Guber assumed leadership of the operation s business side. It sounds simple, but one of the biggest challenges owners face is deciding what role to play in the organization. Or, as Korn Ferry s Hughes puts it: Are you going to make day-to-day decisions? Are you going to be in charge? Are you going to let the coach and GM be in charge? How public do you want to be? A surprising number of new owners never figure out the answers to these questions. When the Ricketts family bought the Cubs, they inherited a popular but financially struggling team battling with its home city. During the first several years of ownership, Tom Ricketts focused on renovating the iconic Wrigley Field and restoring the team s relationship with the community. The family then hired Theo Epstein as general manager and gave him the freedom, time and money to build the baseball side of the franchise. That kind of front-office respect for the community and trust in its leaders creates a culture of shared values where everyone in the organization thinks team first, self second. Culture feeds from the front office right through to the players, says Mike Ozanian, who puts together the widely read and respected lists of the most valuable franchises in each sport for Forbes. Some owners [like the Ricketts] really seem to have the pulse of the team, fans and city. Other owners are more disconnected. In the end, experts say, the cliché that a winning attitude wins may be the biggest key to success. Many owners, for example, tend to use all their leagues efforts to level the playing field as an excuse not to try hard to compete. But Cuban noticed that none of these rules prevented him from investing millions of dollars to upgrade training facilities and to hire extra coaching and front-office firepower. After taking over the Mavericks, he hired twice the number of assistant coaches as other NBA teams, and at higher salaries ultimately turning a perennial loser into two Western conference appearances and one NBA title. In his view, new owners ought to be as active as you possibility can in your area of specialty. And realize that it s work to keep up. Yet even Cuban thinks it isn t all in his control. It s just as much art as science, he says, and the team belongs to the community as much as it does to me. 35