LeBron James is literally the most valuable pro athlete of our time, generating more than $80 million a year in revenues and more than $250 million in franchise value for the Cavaliers. Both figures almost certainly rank as the highest in team sports. And that cash, plus millions more that LeBron pumps into Cleveland's municipal economy, will vanish if James bolts this summer.
Getty ImagesCleveland may have maxed the revenue peaks they'll reach from LeBron's presence.
But here's the shocking twist: Even if the Cavs do re-sign him, their best financial days are probably behind them.
Let's start from the beginning. It's often a complicated task to estimate the effect one player has on a team's finances. Not so with LeBron. Before the Cavs landed James, Cleveland basketball was as dead as the fish in Nixon-era Lake Erie, so we can confidently attribute the franchise's changes since then to him.
To get a handle on the LeBron Effect, start with what sophisticated analysts call "butts in seats." Before James arrived, the Cavs averaged fewer than 11,500 fans per home game, the worst attendance mark in the league. That number jumped 59 percent during James' first year in the NBA, and hit 20,562 -- 100 percent of capacity -- this season. Next, add in the couch potatoes. Before LeBron, Cleveland couldn't even get all its games on local TV. But during his rookie season, ratings shot up by about 300 percent, and for good measure, Internet surfers made
www.nba.com/cavaliers one of the league's most popular websites. Result: bigger rights fees, better broadcast schedules, more money from corporate sponsors.
Ordinarily, sports leagues and teams wildly overhype their impact on local economies. But because of LeBron, the Cavaliers have plowed about $40 million into renovations and construction at Quicken Loans Arena since 2006, turning their neighborhood into something of an economic development zone. Every spring, local shops sell out of LeBron jerseys and sneakers; before James arrived, the Cavaliers couldn't crack the NBA's top 10 in merchandise sales, but they have usually been in the top five ever since. Meanwhile, bars, restaurants and hotels have boomed from surging interest in the Cavs, hauling in new money -- not just cash that was already circulating around town -- because LeBron is so popular that he draws tourists to Cleveland. Local officials estimated, for example, that 300,000 visitors came to the city to see the Cavs during the 2005-06 season.
Overall, the Cavaliers' revenues, which were just $75 million a year or so before LeBron, doubled in the four seasons after he hit town, according to Forbes. And thanks to the NBA's wage scale, Cleveland was able to pay James far less than he would be worth on the open market, particularly during his rookie contract. Think about this: In 2006-07, LeBron ($5.8 million) made less than Eric Snow ($6.1 million). So a good chunk of the Cavs' increased take dropped straight to their owners' bottom line. From 2003 to 2007, team profits zoomed from $4 million to $32 million. Indeed, the one man who has profited most from LeBron's success is probably former Cavs owner Gordon Gund, who bought the team for $10 million in 1983 and flipped it for $375 million in 2005.
Over the past two years, however, as the Cavaliers approached but did not win an NBA title, the team's financial stats have plateaued: From 2008 to 2009, the Cavs' revenues were flat ($159 million in both years) and so was its franchise value ($477 million to $476 million). Further, when Cleveland extended LeBron's deal in 2007, then added big contracts like Shaquille O'Neal's and Antawn Jamison's last season, it dramatically increased player costs and went over the league's luxury-tax threshold, driving profits down to just $5 million last year. This is a phenomenon common to many breakout performances or technologies, which social scientists call an S-curve.
If you graph any team's revenues against its wins over time, you won't get a straight line, but a curve that's flat at one end, steep in the middle, then flat on the other end. (Hence, the "S.") An NBA club, for instance, won't gain much financially by moving from 20 wins one season to 28 the next -- either way, it's a mess. Nor is a team likely to squeeze too much out of moving from 60 to 68 wins; it's probably already a championship contender. But if a team moves from 40 to 48 wins, it crosses from losing into winning territory. It gains new and more regular fans. It can hike ticket prices and media fees. And it will qualify for the postseason, in which revenues turn into almost pure profit (since teams can take in considerable new money without paying players extra salary for the additional games).
Now look at what's happened in Cleveland over the past seven years. Before James arrived, the Cavs were a league-worst 17-65. With him on board, they have gone to 35 wins to 42 (and just missing the playoffs) to 50 (and making the conference semifinals) to 50 (and making the Finals) to 45 (and losing in the conference semis) to 66 (and losing in the conference finals) to 61 (and losing again in the conference semis). LeBron has carried the Cavs from the left-hand side of the S, up the middle, to the right-hand side.
As a result, Cleveland's financial situation is unusually stark. If the Cavs re-sign LeBron, their expenses well into the next decade will be higher than they ever were in the early years of James' career. (Giving LeBron a max contract and adding nobody else would put them at least $15 million over the league's likely luxury-tax threshold in 2010-11.) Which means the only way to drive profits up again is to boost revenues. Given how far they've already come, the only way to do that is to win a title. And as we've just seen, even James doesn't come with championships guaranteed.
But that's still a lot better than the alternative: losing games and revenue, and sliding all the way back down the S-curve. You don't have to look too far to see what the Cavs would be without LeBron -- just one more smallish-market team without a superstar or profits, like the Bucks or Grizzlies or T-Wolves.
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