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The SportsFolio Journal - January 21, 2020
Sportico has the NBA valuations out. The delivery is cool, but are the numbers realistic?
The average team’s valuation, according to Sportico, is almost $2.4 billion. Three teams, the Knicks, the Warriors and the Lakers are each valued at over $5 billion dollars. The NFL has only one worth more than $5 billion according to Sportico: the Cowboys. The NBA franchises, collectively, are valued at more than $71 billion, more than 8 times its revenues, which, for the 2019-20 season, stood at $8.3 billion. In contrast, Amazon’s (AMZN) price-to-sales (P/S) ratio (defined as market cap divided by trailing twelve months of sales) was 4.83 as of today, and that can be considered rich, at least by historical standards. Measured at quarterly intervals, it has never been higher since December 31, 2006 (George W. Bush was President back then and Steph Curry was a freshman at Davidson). Apple (AAPL) is at 8.78 today, also at its 14-year peak. For an entire decade, Apple’s P/S ratio oscillated between two and four. Alphabet (GOOG) is at 8.09 today, the last time it was this high was December 31, 2009.
Adam Silver goes even further. He thinks that $2.5 billion would be very low for a franchise expansion fee.
What is happening here?
One view is that the 2020 season was not the only NBA bubble in town. A conservative (realistic?) analyst would likely find the Sportico valuations are inflated.
The potential counter-narrative is that sports has a lot of growth to be had and the NBA stands out even more. If you think the markets are fairly valued today and if you believe the NBA can be as innovative as Amazon, Apple and Google (that’s two BIG ifs), then one can potentially justify the Sportico valuations.
We would buy into that story under one condition: genuine innovation needs to happen for that narrative to be realized. Something bold. Something truly out of the box.
That something is sports investing.
Bitcoin recently gave away some of the gains it made, but the core problem remains. If Bitcoin (and most of the other cryptocurrencies) are not assets, should they be allowed to trade? Even if they are allowed to trade, is it ok if we call them assets or investment opportunities?
Bakkt, an exchange for “digital assets,” primarily bitcoin, is going public through a SPAC transaction. Its former CEO is none other than Kelly Loffler, who lost in the Georgia runoff elections. Had she won, we would have had a split congress.
Do you know why the exchange was named Bakkt? Because it reads as “backed.” It is a form of a homonym, and it was theorized by Forbes that it meant to give “investors” the perception that “digital assets” are backed by something. A small problem: other than some exceptions, they are not. Certainly, Bitcoin is not backed by anything. It is speculative trading because one either hopes that Bitcoin will one day replace the USD and become the world’s first worldwide digital currency; or that there will be somebody else buying it (hint: the latter is the more likely scenario).
Remember - both the SEC and Christine Lagarde, the President of the European Central Bank refer to Bitcoin as an asset. Simply put, we are concerned that the asset label is giving investors a wrong sense of confidence that Bitcoin is a reliable investment. We will soon have a public company, whose very name will likely contribute to the confusion. Conveniently, the name is designed to incentivize people to trade more bitcoin.
When we submitted a comment letter to the SEC (pdf) in September 2019, we said:
We are concerned, however, that an unintended consequence of adopting the broader definitional framework might, in the eyes of investing public that may not appreciate the subtle difference between investment and speculation, equalize cryptocurrencies with traditional equity instruments.
Protecting investors is the main goal, and if a financial product masquerades as investment, then we believe the matter would fall under SEC’s jurisdiction. “Congress’ purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.” Reves v. Ernst & Young, 494 U.S. 56, 61 (1990) (emphasis original).
We stand by our position. To us, whether Bitcoin is technically a security or not is only part of the analysis. It is promoted as an investment, and that alone should be enough to invoke SEC jurisdiction. The SEC is correct when it sued Ripple and said:
Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies.
In fact, it is even broader than that. Pseudo-assets such as Bitcoin are riding on the positive connotations around the words investing, assets and the reputation of Wall Street and converting those positive associations into profits without being subject to the costs and risks of accepting the jurisdiction of the SEC. As we stated in our comment letter:
[O]ne cannot have its cake and eat it too. Labeling a purely speculative opportunity as an investment, without bearing the associated risks and costs is extremely unfair to the portion of the industry that is offering legitimate investment opportunities.
The fact that there is no centralized entity that is “offering” Bitcoin is not enough to save it. It is promoted as an investment and it is bought by people as an “investment,” despite not being “bakkt” by anything. That is a problem.
Sports & Money
The big news this week was the First Circuit Court of Appeals affirming the District Court’s decision and finding that the scope of the Wire Act is limited to sports gambling. (.pdf opinion)
The History of Lotteries in the United States
Is it only us that thinks it’s odd to discuss the applicability of the Wire Act to lotteries when no lotteries were even in existence when the Wire Act was enacted?
America has always gone through cycles when it comes to gambling. In the context of the lotteries, the early 1960s was really the end of the prohibition cycle. In a strange twist of fate, the state of New Hampshire was the first state that started to offer a lottery in 1964 (New Hampshire Lottery Commission was party to the case). It took roughly half a century and now all but five states have a state lottery.
Let’s travel back in time to 1961. No legal lotteries are available in the United States. None. Nada. Zilch. So is it really fair to expect that the Wire Act would be concerned with lotteries?
That’s why we will almost always favor contextualism over textualism. From a pure textualism perspective, maybe the Wire Act does not cover lotteries; that’s debatable. The question that is more relevant: why should the Wire Act cover lotteries? Why would Congress be worried about passing a new law to criminalize something that does not really exist in the first place?
Perhaps one can argue that lotteries still existed in some form and they were just illegal, yet Congress decided, on purpose, to not use the Wire Act as an enforcement tool against lotteries; that could be one position. The more likely position is that lotteries were out of sight, out of mind, at least relative to sports betting. Sports betting was already legal in Nevada, so it was very much in the public consciousness.
Our take: the REAL purpose of the Wire Act was to criminalize gambling that was crossing state lines. That happened to be mainly sports betting at the time, that was the hot ticket at the time.
To the extent Congress considered lottery-type offerings (e.g. numbers games), it was pretty clear that it was not a concern, because it did NOT cross state borders. This exchange says it all (emphasis added):
SENATOR KEFAUVER. The bill [S. 1656] on page 2 seems to be limited to sporting events or contests. Why do you not apply the bill to any kind of gambling activities, numbers rackets, and so forth?
MR. MILLER. Primarily for this reason, Senator: The type of gambling that a telephone is indispensable to is wagers on a sporting event or contest. Now, as a practical matter, your numbers game does not require the utilization of communications facilities.
Source: 2011 Department of Justice Memo (footnote 7 on p. 10) (.pdf)
Ballgame. Congress did not need to contemplate lotteries. They neither existed (legally) nor did the types that did exist cross the state lines. That doesn’t mean Congress was not concerned about gambling that crossed the state lines, it just means only a subset of gambling activities crossed the state lines at the time.
The broader point is this: A purely technical discussion of the statute without discussing the historical context will almost always fall short. Discussing the history may or may not have made a difference in this case, but it would have certainly improved the Court’s analysis.
Sporting Event = Contest?
We believe the Department of Justice may have conceded too much in its 2011 opinion when they argued that the word “sporting” modified not just an “event” but also a “contest”. See footnote 11 on p. 12) (.pdf)
Why? Let’s go back to the excise tax laws, which is one of the major pieces of legislation that came into existence within a ten-year window of the Wire Act.
We argued why the IRS would be correct in imposing an excise tax on the DFS industry here. The piece that is relevant for this discussion is that the Treasury clearly believes that sporting events and contests are two entirely different things. The terms have separate definitions in the regulations, which were made effective January 1, 1955.
So … is it really unreasonable to think that Congress thought of sporting events and contests as two different things? Example: election contracts; under the Treasury’s interpretation, they would come under the purview of the Wire Act.
Are lotteries contests? That’s an altogether different question, but we are convinced that, at a minimum, the Wire Act covers all gambling claims, not just sports gambling claims.
Implications for Sports Gambling Today
The First Circuit was pretty clear that lotteries cross state lines in a myriad of ways. For example:
All of the NHLC's lottery-related activities use the internet or interstate wires.
For its brick-and-mortar operations, the state lottery relies on computer gaming and back-office systems that manage lottery inventory and sales, which in turn depend on out-of-state backup servers.
Via its website and various social media platforms, the NHLC communicates draw results, advertises lottery games, and provides general information.
While the players themselves must be physically located in New Hampshire for the entirety of the transaction, intermediate routing of data or information ancillary to the transaction may cross state lines.
In sum, it is pretty clear that the Court is not challenging the fact that the lottery operations cross the state borders. The lottery is saved not because it is not interstate, but because the Court believes it is outside the four corners of the Wire Act.
What does all this mean for sports gambling today? It means the following activities are quite likely caught up in the Wire Act’s net.
Daily Fantasy Sports
Practically any form of traditional sports betting delivered via mobile
Traditional sports betting that happens within a state at brick-and-mortar locations
In our opinion, there is simply no way around this. An entire industry (sports gambling) is flourishing with no clear rationale as to why it is not violating the Wire Act and we don’t quite understand why it is being allowed.