Mark Cuban Won't Get Rich Off Sports Gambling

(Bloomberg) -- So Mark Cuban thinks that everyone who owns a major sports franchise in the U.S. “just saw their value double at least” thanks to the Supreme Court’s decision on Monday that legalized sports betting. Or so he told CNBC shortly after the decision was released.

In addition to being a ubiquitous presence on television,  Cuban is the billionaire owner of the Dallas Mavericks basketball team, a franchise he’s run well since he bought it 18 years ago. According to Forbes, the Mavs, which Cuban bought for $285 million, are worth $1.9 billion, making them the ninth most valuable team in the National Basketball Association. In other words, he’s no dummy when it comes to understanding the sports business.

QuicktakeWhy U.S. Sports Betting Was Mostly Illegal, Until Now

Yet his rationale for his “double-the-valuation” thesis was … well, I don’t really know what it is, because his three interviewers never pressed him, instead allowing the conversation to veer off into blockchain, the societal downside of gambling and whether Elon Musk is a good chief executive.

Cuban did say that legalized sports gambling would improve the TV ratings for games — which is doubtful. And he said that having money riding on a baseball game would make it “fun to go to a baseball game again” — thus showing a profound misunderstanding of why people love baseball.

So I’ll go out on my own limb. Cuban has it dead wrong. Legalized sports gambling will be great for state budgets. It will give rise to an online betting industry and a gambling advice industry. It might help casinos, though in Las Vegas, where sports gambling has long been legal, it is not a huge money-maker. What it won’t do is make any difference to teams in the major U.S. sports leagues. If I turn out to be wrong about this, I’ll dribble a basketball in my underwear during a Mavs timeout while Cuban mocks me from the sideline.

Let’s start by taking a look at a country where sports betting is already legal: the U.K. The most popular league in the world is the Premier League, where top-tier soccer teams like Manchester United, Arsenal and Liverpool make vastly more in revenue and profits than the typical American sports team. ManU’s 2015-16 revenue, for instance, was $765 million, while its operating income was $288 million  — more than seven times the Mavs’ operating income that season.

Is sports gambling the reason Premier League fans follow their favorite teams with such intensity? Hardly. Soccer simply arouses passions that no other sport in the world can match. Does gambling revenue undergird the Premier League’s finances? No, again. Unlike any other sports league, the Premier League has television contracts all around the world, which bring in billions of dollars. And sponsorships and merchandising alone reap ManU about $1.5 billion.

Nor do Premier League teams get a cut of gambling revenue — something American sports leagues are expected to lobby for. The one way sports gambling helps their bottom line is that about half the teams display gambling company logos on their jerseys. But paying teams for that right, the gambling companies are simply replacing other companies; if they were to go away, they would be replaced.

There will no doubt be new gambling companies in the U.S. after the Supreme Court decision. And they too will advertise in arenas and on jerseys, something the NBA first allowed last year. But those jersey deals bring in only an average of $9.3 million, which is hardly the kind of money that will double the value of a franchise.

An NBA executive testified earlier this year in New York that if sports betting was legalized, the league would seek a cut of the action because the NBA would be taking on “the risks that sports betting imposes.” It will seek 1 percent of all the money wagered on professional basketball games, which it is calling, hilariously, an “integrity fee.” The Washington Post called this “a massive financial windfall for the leagues.”

But is it? Eilers & Krejcik Gaming LLC, a research firm, has estimated that legalized sports gambling could generate $200 billion; 1 percent of that is $2 billion. That sounds like a lot of money, but it’s not quite so gaudy when you break it down.

There are 146 major league teams currently playing hockey, basketball, baseball, football and soccer.  If each team got an equal portion of that $2 billion, it comes to $13.7 million. That is a nice chunk of change, but except for the relatively new Major League Soccer teams, it won’t radically change the valuation of any franchise.

Will gambling cause television ratings to rise? I doubt it. Fantasy sports, and especially daily fantasy, brought the same kind of intensity that legalized gambling is expected to bring. Yet they have not stopped the ratings drop in recent years. The networks that matter most to sports leagues — especially ESPN — are having trouble retaining viewers. The rise of streaming and other forms of digital viewing are far more likely to affect the value of sports franchises than gambling.

Over the last 30 years, sports teams have risen remarkably in value. George Steinbrenner bought the New York Yankees in 1973 for $8.8 million. Today the Yankees are worth a reported $4 billion. That is partly because sports owners have become savvier marketers and merchandisers, and partly because television networks have become so desperate for sports content they are willing to pay crazy sums of money, such as the $3.3 billion Fox recently agreed to pay for five years’ worth of generally mediocre Thursday night National Football League games.

But it’s mostly because there always seems to be another rich guy — an American tech billionaire, a Chinese mogul, a Russian oligarch — willing to pay a premium for the chance to own a major-league sports team. It’s worth noting that despite their stratospheric valuation, the Yankees’ operating income is a scant $14 million, according to Forbes.

In 2014, Steve Ballmer bought the Los Angeles Clippers basketball team for $2 billion. It was more than twice what anybody had ever paid for an NBA franchise before. Several years later, I asked Ballmer whether he had overpaid. He shrugged. “Things are worth what other people are willing to pay for them,” he said.

Mark Cuban of all people should understand this most basic fact about the sports business. It won’t be legalized gambling that drives the value of franchise. It will be ego, just as it’s always been.

To contact the author of this story: Joe Nocera at jnocera3@bloomberg.net.

To contact the editor responsible for this story: Stacey Shick at sshick@bloomberg.net.

1. “Shark Tank,” “The Benefactor,” “Dancing With the Stars,” etc.

2. All of these figures are drawn from Forbes magazine’s economic rankings of professional sports teams.

3. Some of those teams are in Canada, of course, but would presumably benefit from any deal cut in the U.S.

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