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August 25, 2004

Prospectus Q&A

Mark Cuban

by Jonah Keri

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Mark Cuban made his fortune through the sale of his company, Broadcast.com, to Yahoo for $5.7 billion in 1999. Rather than push his luck during the frenetic peak of the Internet bubble, Cuban took his cash and fulfilled a dream, buying the NBA's Dallas Mavericks for $280 million in 2000. With a risk-taking approach and a focus on marketing and investing in the product, Cuban has since presided over the Mavericks' transformation into one of the league's most successful and high-profile teams. Cuban recently chatted with Baseball Prospectus about the role of a good owner, labor relations in pro sports, and more.

Baseball Prospectus: Do you see pro sports franchises as bottom-line operations, or are they more the domain of the public, and come with a different set of rules?

Mark Cuban: It's up to the individual owner. I don't see the Mavs as a public trust, but I do see my responsibility to provide the best possible entertainment experience and make the Mavs an important part of our customers' lives.

BP: How do you view owners who have vast personal wealth but do not invest it in their teams, and in many cases demand public money for new stadiums?

Cuban: I couldn't care less. It's their money, it's up to them on how they want to spend it. Usually the bigger issue is how the league is structured to enable teams to change and improve. I don't know the (specific) rules in baseball, but in the NBA, because of guaranteed contracts, the rules are stacked against teams that have made mistakes on players. The contracts and the space they take under the cap really make it tough for teams to improve.

BP: Do you feel like other NBA owners resent you because you can be held up as an example of an owner willing to make financial sacrifices to win?

Cuban: Not anymore. That might have been the case before, but over the past five years, they have seen my commitment to making the Mavs and the NBA better. I work as hard as any other owner to know the financial minutiae and the details of every part of our business. I don't know many other owners who can quote passages from the CBA, knows the breakdown of revenue from the NBA, and knows the P&L of the league itself and the individual business efforts we continue to fail at.

BP: You said you closely study the CBA, revenue breakdowns and league financial details in your role as owner of the Mavericks. How do those steps help you in running the team? If those steps are as important as you've said, why aren't most other owners doing this?

Cuban: Means I know the details of the business. And all teams have someone who does this, it's just not usually the owner. It's important to me to know.

BP: Should owners be required to pay for their owns stadiums and arenas?

Cuban: There are so many elements involved. I wasn't around to deal with the question when the AAC (our arena) was built. We have paid for about 75% of our arena.

I guess it comes down to this: If a deal is a good deal, someone with financial means doesn't give it away. If it's a marginal deal, that's when you bring in third parties. Of course, the definition of financial means is always relative to the size of the project...How is that for a non-answer?

BP: Obviously it would be tough to top the profit you made when you sold Broadcast.com to Yahoo. That said, how has owning a pro sports franchise worked out for you as a money-making operation, both in terms of annual profit and franchise value appreciation?

Cuban: First, sports team appreciation is more a reflection of the overall league strength and how high the stock market is than on individual team performance. On top of that, it really doesn't matter what a team is valued at unless you are looking to sell, so I don't really think you can value a team until you try to sell it. All the other numbers you see thrown about are ridiculous.

As far as annual performance, let's just say, it's the worst investment I have ever made from a financial perspective, but the best from a fun perspective.

BP: With all the poor-mouthing that we hear from pro sports owners about the losses they take on their teams, what steps should owners be taking to turn strong, consistent profits on their investments?

Cuban: Get rid of guaranteed contracts. All sports should be like the real world. If a person produces and meets expectations, they get paid. If not, they get a pay cut or get fired.

It's bad for teams, because we get saddled with players who can't play and have to pay them. It's bad for every basketball player in the world when that guy is taking the roster spot and getting paid instead of a more deserving player. It's bad for fans whose teams are held back.

We are so stupid in the NBA that although our revenues increase in the low single digits, our rookie contracts increase by 12% per year, as do most of our contracts. Teams are so competitive, and owners want to win for ourselves and our fans more than we want to make money, so the agents are smart and use that against us to get the money.

We should also bring a little common sense into the player evaluation process. The perfect example is that the NBA won't allow us to try out players in a 5-on-5 game. The best we can do when we work out rookies is play them 3-on-3...How stupid is that?

BP: With Fox selling the Dodgers to Frank McCourt, Disney selling the Angels to Arthur Moreno and Time Warner selling the Hawks as examples, do you think professional sports ownership is seeing a shift back to individuals from corporations?

Cuban: Like I said, the stock market drives valuations. If the stock market rewarded ownership, my guess is that those teams would still be corporate-owned.

BP: What are the major differences in player/owner relations in the major team sports, and to what extent is that the result of a different caliber of union leadership?

Cuban: The NFL is the only league with a clue, although baseball is getting smarter with much shorter contracts, and the NHL could be the salvation for all pro leagues depending on what happens with their labor agreement.

I don't know why NFL players are smarter than the rest. I guess they know to protect their jobs for those who can play rather than just for those who have good agents.

BP: What are some of the pluses and minuses that you see in a salary cap system similar to the NBA's? If you could choose any league's salary structure, which would it be?

Cuban: I would choose the NFL's because of the non-guaranteed contracts, and some reasonability with the bonuses. I used to think the NBA salary cap was an iron-clad document. Now after five years of watching it in operation, (it's easy to see that) it's not. It's pretty poorly constructed. It's designed to keep bad contracts moving through the system, which in turn pushes up total salaries and reduces the ability of teams to improve, while at the same time excluding more deserving players from the league.

We talk about lack of player fundamentals in the league. It's hard to invest in developing a player when you have a guy who can't play eating up a roster spot that could go to a young player.

BP: How can sports owners look out for their best interests while still maintaining good relations with players and growing their respective leagues?

Cuban: I think players are afraid that without guaranteed contracts teams will just cut players and put the money in their own pockets. I would require teams to pay out at least half the salary of a cut player to either a replacement player, or if it goes unspent, give the unspent portion for the current year to the players union to share among the players. Call it an escrow for the players. It would be a win for players and teams.

I would also not be opposed to paying a small percentage--say 5% to 10%--of any appreciation in team total value (including debt) to the players when a team is sold.

BP: Do pro sports leagues need to break their unions for owners to get what they want?

Cuban: Hell no. Unions do a good job representing players. They just have to start to understand the economics of sports teams and how that varies by market. I don't think all do.

BP: What does being a good commissioner of a professional sports league entail?

Cuban: Optimizing the value of the league. That value is not defined by how much each franchise sells for--it's defined by the emotional pull of a team and the amount of money available from the stock market. The commissioner should operate the league so that the businesses the league enters into as an entity are profitable and so that the responsibilities the league undertakes increase the operating profitability of the teams, individually and collectively.

BP: MLB has made some investments with an eye toward one day expanding internationally. Meanwhile, the NBA is considered to have the best chance among all pro sports leagues to expand internationally. Has the internationalization of the NBA paid off yet financially from an owner's standpoint?

Cuban: No. To paraphrase someone I think is very smart, "international expansion of U.S. sports has a ton of potential...and always will."

BP: Do you see the trend of leagues expanding the length of their seasons and postseasons continuing, and if so, who will lose the most mindshare and dollars to other sports?

Cuban: No, I think we will see contraction. The minute something comes along that allows stadiums/arenas to fill whatever dates are created by game contraction, then watch out, we could see all sports but the NFL contract their seasons.

BP: To what extent is statistical analysis emphasized in NBA personnel decisions? How much deeper, if at all, does that analysis go beyond basic points, rebounds, assists, field-goal and free-throw percentage and the other better-known stats?

Cuban: It's not really. We don't keep the right data to have much value in player decisions. There is not a Moneyball equivalent at this time that allows you to build a championship-quality team. The Mavs are investing in new data that we hope will allow us to make better roster decisions, but we are not there yet.

BP: The Mavericks have drawn a lot of negative media attention for playing poor defense over the last few years. How advanced are the NBA's defensive stats at this stage? Are they seen as inadequate at this point, the way MLB's defensive statistics are seen by many as being lacking?

Cuban: They are non-existent. There are the couple that have been kept for years, but that's it. You guys are way ahead of us.

BP: What can sports leagues do to improve their leveraging of new media? How would you rate the job the NBA, MLB and other leagues have done so far on this front?

Cuban: This is probably a strength of all leagues. It's fun, easy and exciting to talk about new stuff, so all do a great job of it.

BP: From a marketing point of view, what do you feel you and your fellow NBA owners have done well, and not as well?

Cuban: I think we have created a great experience for our customers. We work as hard at making our in-game experience the best in the league as we do making our team the best.

BP: What can sports team owners do--beyond what they're doing now--to enhance their marketing efforts, make the games more enjoyable to fans and make more money in the process?

Cuban: Actually market. We're in the entertainment business. We compete against books, movies and restaurants in a very competitive world. We have to understand that and market accordingly.

Jonah Keri is an author of Baseball Prospectus. 
Click here to see Jonah's other articles. You can contact Jonah by clicking here

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