Why Donald Sterling Must Sell the Clippers Immediately

With Donald Sterling's racist rant that went viral over the weekend, the NBA, fans, players, and sponsors were rightfully outraged by his actions. No doubt, everyone involved would be happy if Sterling quickly sold the team and exited in the night, but he has a history of battling detractors and the league when he doesn't get his way.

Earlier today, commissioner Adam Silver said he would have the other owners vote on forcing Sterling to sell the team but there may be a bigger incentive to sell than that. Even before that vote takes place I think Sterling will realize his days are numbered and the reason is purely economical.

The Clippers will likely have a new owner next year and economics will drive that change. Source: Wikimedia. 

Cash rules and it will for Sterling too
Even before Silver's ruling, sponsors and fans had left the Clippers in droves, removing two of the economic incentives Sterling has to own the team. Without their support, the Clippers become a money-losing operation, which even Sterling doesn't want at this point.

The NBA and its owners don't publish financial data but we can get a feel for what Sterling has at stake based on public estimates. According to Forbes, the Clippers are the 13th most valuable franchise in the NBA at $575 million and will make $15 million in operating income on $128 million in revenue this year. Based on the estimated gate receipts of $41 million, that means the company gets about $57 million from sponsors and other sources.

Source: Forbes.

The top-line item in the table above is revenue split by all NBA teams, so no matter what Sterling does that won't be affected.

But money coming from fans and sponsors can dry up quickly if he remains as owner. We know that Amtrak, CarMax, Chumash Casino, Mercedes-Benz, and Virgin Air have already terminated their relationships with the Clippers and Kia, Lumber Liquidators, Red Bull, Sprint, State Farm, and Yokohama Tire have suspended their relationships.

To ballpark the potential impact, let's run through two potential scenarios for the Clippers. Under projection #1 I'll assume that 30% of fan revenue disappears because attendance falls and 50% of sponsor revenue is gone next year. Projection #2 I'll call a worst-case scenario where 50% of gate receipts dry up and 80% of sponsors leave. These could vary but you can get a feel for the financial impact these two groups have on Donald Sterling's pocketbook.

Source: Author's calculations.

This impact won't happen overnight and the 2013-2014 season is largely in the books. But by next season fans and sponsors could both abandon the team and have a huge impact on revenue. Sterling could cut some costs to lower operating losses from what I've projected above, but the team has a 10-year agreement to play in Staples Center and player contracts for next year are already $74 million. Stars Chris Paul and Blake Griffin are signed through the 2017-2018 season at a total cost of over $45 million that year alone.  

You might think that revenue sharing in the NBA could save Sterling from losses but that's likely not true. There are provisions that require teams to perform up to market standards, which are high in Los Angeles. Even if the Clippers revenue falls off a cliff, the NBA may not be there to help.  

In short, Sterling could easily lose $20 million to $50 million next year if sponsors and fans flee the Clippers as a result of his recent actions. When given the choice of that or taking $575 million to sell the team it should be an easy decision.

No matter how you slice it, Donald Sterling's days in the NBA are numbered
In public cases of racism it's often economics that drive change, not political pressure. We saw this when Don Imus used racial slurs in reference to the Rutgers University women's basketball team. It wasn't until sponsors and partners pulled out that CBS decided to cancel his show.  

When Donald Sterling is faced with the option of losing tens of millions of dollars or taking an estimated $575 million buyout for the Clippers it's the economic incentive that will be the NBA's best leverage to get him out of the league. Sterling doesn't appear to care what people think of him, where political pressure comes from, and certainly not how successful his team is on the court. But if you start messing with his pocketbook the tune may change.