This write-up has been posted in a different thread. There is one reason, and one reason only, to posting it as an independent FanPost, and that is to be used as a reference to future arguments to the very basic element of salary cap.
The state of the art Amway Center is but one part of what adds to the intrinsic value of the team. For the faint of heart in business finance, I caution you not to read through since I do not wish to see a few tl; dr’s. That would be a waste of your time, let alone mine.
I have advocated that salary obligations – whether under cap or above it, hence susceptible to luxury tax payment – is not a single good indicator of measuring financial health of the Orlando Magic. There are two good indicators: 1) bottom line profit; and 2) Team’s overall value. Therefore, if going over the salary cap generates extra revenues which offset cost of salary and luxury tax payment, or adds to the team value, it would be fine. In other words, if the sum of bottom line profit – or loss – and added value of the team turns out to be positive, it would be a healthy situation. The team may or may not show bottom line profit each and every year but may add to the team’s value in amounts exceeding potential losses. As for the expenditure, capital expenditure could not be factored in as simple expenditure. Capital expenditure has to be conditioned in relation to the revenue generated by it. There are a few ways of handling that particular issue which would be beyond the patience of this write-up.
Now there are many elements which go into evaluating a team. There is always the starting point of computing assets and liabilities. Next would be:
1 – The value of leasehold on the state of the art Amway Arena. Orlando Magic pays about $2.75M annually to the City of Orlando for the next 30 years, but collects a lot more by using different amenities of the arena in addition to the ticket sales.
2 – The value of the players in generating the revenue. That would be the trickiest and least scientific projection of all, but there are ways of assessing it which I am not going to get into the details. Here comes the importance of players who could generate extra revenues, either locally, nationally or internationally, or push the team to higher levels in play-offs for added revenues.
3 – Projection of future revenue. This would be done based on the actual revenue of prior year conditioned by positive and negative elements which may push the projection up or down.
4 – Brand value – The Interbrand Consultancy and Citigroup have developed a formula for determining the brand value of many major brands (i.e., Coca Cola, IBM and Microsoft at 66.667, 59.031 and 59.007 billion, respectively, as per September 29, 2008 Business Week). Orlando Magic has a brand value which factors into the overall team value.
There may be a host of other elements going into team valuation which are either not known to me, or would go beyond the patience of this write-up. Pulling all these elements together would constitute the team’s value, which is currently at $385 million, eleventh best in the NBA, according to Forbes. Think of what kind of hit that valuation would get if Dwight leaves?