The True Value of Linsanity

By Michael Carter - July 22, 2012 | Tickers: ADDYY, MSG, TM | 0 Comments

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In the 2011 NBA season, the New York Knicks ranked 6^th in the NBA in attendance at 19,728 fans on average per home game.  In the 2012 NBA season, and with the Linsanity running wild behind Jeremy Lin’s rise to stardom, the same Knicks ranked 5^th in the NBA in attendance with an average of 19,763 fans per home game.  Both seasons they sold out nearly 100% of their seating capacity.  Before we see how Lin leaving the Knicks affects Madison Square Garden Co (NASDAQ: MSG), let’s first look at their NBA attendance for the past decade during the coming and going of several big name superstars:

Note: Data taken from attendance report totals from NBA database.  Sometimes sports teams are able to average over 100.0% by seating above stadium capacity like the Knicks did in 2005.

Looking at the table above, has anything dramatically changed with the addition of Lin?  That 0.2 percent increase from 2011 to 2012 seems pretty insignificant if that is all the change that Lin brought to the Knicks.  Before we look at where the value of Linsanity really is, or if it exists at all, let’s examine first the basic concept of owning a sports team.

Why Championships Matter

A big win or a championship can increase a fan base significantly.  By increasing the fan base, you increase not only attendance and ticket prices, but merchandise sales, television contracts, and advertising.  An owner of a team can only hit a certain number for attendance given the obvious limitations of a home stadium’s seating capacity so they will often increase ticket prices. 

You could make an analogy that the team competition in the NBA is similar to that of the automotive industry.  The automotive industry is filled with several brands (teams) and they all compete yearly in order to attract the most customers, and to come out with the best car that will generate the most sales.  Toyota (NYSE: TM), for example, introduced the Scion brand in 2002 and for the past 10 years has seen its stock price follow a much higher share price average than in previous decades.  The Scion somewhat ‘raised the bar’ and expectations for the entire Toyota team.  That is what a championship does for a sports team.  It raises the bar, generates more sales to the franchise, and the positive impact lasts for years, if not decades.

However, if you have someone that can bring you these results before winning titles, then you might be able to do very well as a team owner bringing in revenue and profits to the bottom line.  You would also have to have a very good reason as to letting this someone go elsewhere.

Madison Square Garden Company

MSG, the company, is a diversified holding and leasing company of the following entities under the three segments of MSG Media, MSG Entertainment, and MSG Sports:

The Knicks only play 41 regular season games in Madison Square Garden Arena.  However, the potential for serious revenue comes during the playoffs due to the games being broadcasted nationwide and sometimes worldwide.  Additionally during the playoffs, merchandise sales increase as well as ticket sales because the demand is even higher than it is during the regular season.  This past NBA season, Lin helped bring the Knicks record over 0.500 and set them on a course to make the playoffs before getting injured.

The Yao Effect

When Yao entered the NBA in 2002, it opened up an entirely new, and much larger fan base for not only the Houston Rockets, but for the NBA overall.  His all-star voting numbers also show how influential Yao was to his team and NBA when he broke Michael Jordan’s record in 2005 with 2,558,578 votes.  Yao did more than improve attendance at Rocket’s home games.  He brought basketball to over 200 million television fans in China during his peak years.  That number is 40 times higher than a regular NBA basketball game and over 100 million more viewers than the typical Super Bowl. 

With the addition of nearly half a billion eyeballs around the world just to watch Yao Ming play in a regular season game, that is enormous potential for advertising, merchandise, and sponsorship revenue.  This isn’t just revenue to Yao Ming, but to his teammates through endorsement deals from companies like Nike and Reebok, the city through development and jobs, and the league overall. 

Real Returns

The 4 major categories of revenue for a sports team are ticket sales, media revenue, facility revenue, and brand revenue (mainly merchandise and trademarked products). 

Ticket sales and facility revenue aren’t going to change much with or without Lin.  Despite what people will say about supporters of Lin boycotting games or events, they really won’t be missed.  The Knicks have sold out easily or come close, even when they weren’t such a great team record-wise. 

In the latest quarterly filing for stock MSG, revenues for the three months ending March 31, 2012 increased 37% to $216,131,000.  This increase came from regular season ticket-related revenue, merchandise sales, sponsorships, and broadcast fee decreases as well as other categorical income.  Keep in mind that the NHL hockey team, the New York Rangers, made it to the Conference Finals this past season also and contributed to the bottom line.  Nevertheless, Lin’s popularity fueled jersey sales, and other merchandise during his star run made a sizable contribution to the net income of MSG.  On April 11 2006, Adidas (NASDAQOTH: ADDYY) announced an 11-year deal to become the official NBA clothing provider.  Therefore, Adidas should be a stock to look at in the coming years as they will also benefit from increased jersey sales globally for Lin.

Media contracts are where Lin’s influence will really take off.  Being able to market and advertise globally to a continent of over one billion people and growing is immeasurable.  Additionally, this seems like the perfect right place-right time scenario since Yao Ming recently retired in 2011 and China’s interest in the NBA has somewhat dropped off slightly without a star Asian influence, although top stars like Lebron James will always be followed globally just like Michael Jordan was during his basketball playing days.  The Lin Effect could even exceed the Yao Effect if Lin can take a team to the playoffs which would bring in even more revenue and put the Knicks near the top of the list of teams in the NBA.

In the end, MSG will move up or down just like any other stock, by supply and demand.  Although the potential of a quarter billion viewers in Asia might not have direct influence on the stock price, they do influence the demand in being able to watch the Knicks on television.  This eventually corresponds to more merchandise and sponsorship if Linsanity is anything like Yao Ming’s effect on the NBA last decade.  This fact is undisputed. 

Whether Lin can prove to be worth his relatively high salary, help the Rockets, and be a legit player in the NBA, those are just icing on the cake.  It would be wise to pay attention to the various sponsorship deals Lin can get while in Houston.  Yao Ming was able to get sponsorship deals from many big companies unrelated to basketball like Apple, McDonald’s, and Coca-Cola.  I wouldn’t be surprised if these global companies and others reach out to Lin in the coming years.

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