Basketball as business for Dan Gilbert
On Election Night in 2009, Dan Gilbert threw a late-night party on the practice court inside Quicken Loans Arena. The extravagance in the room called to mind a mob-movie wedding reception, complete with live music, roaming waiters and five-star cuisine served on fine linens.
Gilbert was floating, and not because, after a disconcerting 0-2 start, his Cavaliers had just secured their first win of the season.
The game was hardly the day's main event.
Before he arrived at the party, Gilbert was watching election returns on a TV in his luxury bunker down the hall from the Cavs locker room. He enlisted some of the team's ball boys to help him prepare a water cooler. He used the back elevator, with the cooler hidden under a towel. Then he doused his campaign manager as soon as the victory became official.
That night, Ohio voters passed Issue 3, which was a measure to amend the state constitution to allow four casinos to be built. Gilbert, set to own two of them, and a casino company poured $35 million into the project and ran an intense and wide-ranging campaign. With victory secured, they were on the road to a windfall that some estimate could be in the billions.
With his tie ditched and his beautifully-cut blue blazer picking up champagne stains, Gilbert worked the room and hugged business associates. Cleveland mayor Frank G. Jackson, who had won re-election that night himself, took a detour from his personal celebration to stop in and make sure he got in on the photo op. Several Cavs players and members of the team's management, some of whom had personally worked the campaign trail for Gilbert, milled about.
LeBron James was invited but wasn't there, though his presence hung in the room. After casino measures had failed four times over the previous 18 years in Ohio, Gilbert had pulled the sword from the stone with an all-encompassing deal that essentially gave him and his partners a monopoly on gambling in the state. He got there with an attractive plan and timing, plus his personal sterling reputation in Ohio.
But mostly he got there on the back of the massive popularity of the Cavs at the time, which of course was powered by James.
Gilbert was a success story and a business leader before he bought the team. He's generally known as being a good boss and a forward thinker. He's certainly had his detractors, and there have been a few personal and business relationships that ended both badly and publicly. But then what self-made billionaire doesn't have a few scars? They were just lines on Gilbert's face as he'd steamed ahead, the continuing conqueror.
At the time, James and Gilbert weren't enemies. They were still on the same team and occasionally James even sought Gilbert's advice on investments or other business matters. Now, of course, they publically exchange zingers without actually using each other's name. They're even more ruthless in private matters, neither passing up a chance to grate the other if possible.
As the 2009-10 season opened, James was well aware that July 1, 2010, was going to be a huge moment in his career. For Gilbert, the big event was that referendum, which passed thanks in part to the popularity James brought the Cavs and Gilbert.
No matter what James and the Miami Heat accomplish in the future -- even if they end up making Gilbert eat his infamous words guaranteeing a Cavs title before there's a single parade held for the Heat -- Gilbert's business victory has already been assured.
James has left the Cavaliers, but his seven seasons with the team played a valuable role in likely making sure Gilbert will become a permanent fixture on the Forbes 400 list -- where he currently ranks 293rd at $1.5 billion, higher than at any time when James was an employee.
To be clear, Gilbert had always been confident he would convince James to re-sign. All the way up until the two had their last conversation on July 3, 2010, when the Cavs made what they certainly believed was a great pitch to secure a contract extension.
Gilbert is both an unrelenting optimist and someone who has reason to expect things to go well. He sold his online mortgage company in 1999 for $532 million, then bought it back three years later after the tech bubble burst for $64 million and turned it into a cash cow. And that's just one story.
So despite conviction that James wasn't leaving home, Gilbert and his partners found a hedge. The need for such thinking hit Gilbert hard after James requested just a three-year contract from the team starting in 2007 instead of the five-year deal that was offered (they settled on a three-year deal with a player option for a fourth). Gilbert raised a glass to celebrate that deal at the time. But it also caused an organizational stutter-step that called for some long-term planning in both basketball and business operations.
On the court, the Cavs ended up spending tens of millions more than was planned, quickly ditching the organization's mantra that it could win big without becoming a luxury tax payer. This was perhaps what James wanted, for the team to feel urgency. The Cavs sold every seat season after season and landed a rich local cable deal, but they operated in the red as Gilbert kept green-lighting moves that added costs. No team in the league traveled, ate or was pampered better than the Cavs. By James' last season, seven players on the team were earning $8 million or more.
When the 2009 election arrived, which came on the heels of the mortgage crisis that hit Gilbert's core hard, he was committed to spending more than $100 million in salary and luxury taxes for the upcoming season -- more than the New York Knicks, more than the Los Angeles Lakers.
James, meanwhile, had turned down a nine-figure contract extension offer. His relationship with Gilbert, once rather close, had deteriorated. Was that natural? Was that just proper? Was it part of a plan that James' personal team implemented in preparation to leave? To this day, Gilbert must wonder. Regardless, in early 2009 he was already swinging for the fences business-wise just to make sure the whole thing didn't turn sour. Gilbert didn't get his championship. His $100 million ended up buying a bitter second-round loss. James was gone. Gilbert and his fans were devastated. But not before he'd hit a business grand slam.
In 2005, Gilbert bought the Cavs for $375 million -- a premium price for the team former owner Gordon Gund had bought 20 years earlier for $20 million. Looking at that transaction now, it doesn't seem like it was a great investment on the surface for Gilbert.
Teams in larger markets like Philadelphia, Detroit and Atlanta have recently sold for less money. James' departure in free agency directly led to a last-place finish for the Cavs in 2010-11. Attendance, sponsorships and merchandise sales are all expected to follow suit. Forbes estimated the Cavs' 2011 value at $355 million, though Gilbert would honestly have a hard time finding a buyer at that number if he wanted to at the moment.
Gilbert is fond of saying that owning an NBA team alone doesn't make a lot of fiscal sense. In interviews over the years he's compared buying a team to owning a rare piece of art. He is fond of talking about what he calls "threads" that come with such ownership. These threads are offshoots from the centerpiece, the team, that create value and make the investment worth making.
In his first few years of owning the Cavs, Gilbert started unspooling these threads. His mortgage company bought the naming rights to the arena and put the logo on the floor for all the national television games the Cavs played when James was on the team.
He bought Fathead, a company that sells sports-themed wall graphics. He promptly plastered hundreds of them around the arena in addition to ramping up the national advertising campaign. He bought a company that enabled the Cavs to get in on the secondary ticket market, a first in the NBA, and then sold the service to other NBA teams. Now he owns a ticket services company that operates electronic ticketing, as well.
No thread, though, is greater than the downtown Cleveland casino Gilbert is building. When it is completely finished it will literally be attached to the Cavs. A walkway will connect the arena and the casino, where fans will be able to park and walk to the game past the gaming tables and slots. The more fans that attend Cavs games, the more people there will be in the casino on game nights.
Park in the casino, have dinner there, walk into the arena past the slots and blackjack tables, stop at a bar in the casino for a nightcap on the way out after you walk past the slots and tables again. Or stop by before or after watching the Cleveland Indians, who play next door. You don't need an MBA to understand the business plan.
Threads everywhere, most of them leading to profit.
The Cavs aren't the only team to use such leverage. Just last month the Orlando Magic won approval to purchase land around their new downtown arena to develop a retail complex that promises to earn millions in upcoming years. The Orlando Sentinel called it a "sweetheart" real estate deal that upset competitors. The Magic might as well call it a thread.
It's not all just public projects. Houston Rockets owner Leslie Alexander's venture capital company got the chance at some Chinese IPOs after he drafted Yao Ming. Mark Cuban was a billionaire before he owned the Dallas Mavericks but that purchase made him a famous billionaire and opened the door to numerous other projects including a television career and a movie production company. There are numerous other examples and none of that scratches the surface on the taxpayer dollars that have built the arenas that teams play in.
All a great use of threads, Gilbert would say.
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