Mysteries of the NBA Lockout - Part 4

The longer the lockout goes on, the more I try to understand it all, the more mysterious it gets. At the most basic level, there's the mystery of whether the league is actually losing money. They say yes, but the closest thing we have to a legitimate outside source (Forbes magazine) says no. But there are other, smaller puzzlements along the way as well. In the absence of almost any other news, I've decided to write a series focusing on the lockout mysteries that currently have me scratching my head.

So far we've covered (not precisely in this order):

Mystery the first - Why Does the League Want a Hard Salary Cap When They Already Have One?

Mystery the second - Where Did the Money Go?

Mystery the second, Part B - Did the Money Go into Training Facilities?

Mystery the third - Why Does David Stern Still Have a Job?

Which brings us to:

Mystery the fourth - Why Hasn't the NBA Addressed Revenue Sharing?

All right, depressing though it may be, it's time to get back to our series of lockout mysteries. Today we delve into the question of revenue sharing.

I'm not an expert on the economic models of the major American sports leagues, and I'm not going to bother to dig too far into the details here. But in broad strokes, the NFL has the most revenue sharing, MLB has the least, and the NBA falls somewhere in between. And in part as a consequence, the NFL has the most parity between teams, MLB has the least, and the NBA falls somewhere in between, though closer to the unbalanced side of the equation.

It's not really rocket science as to why this revenue sharing discrepancy exists between the leagues. The fact is that all of the major sports leagues have figured out that they have to share the revenue from National TV contracts, while other revenues are usually reserved for the team that generates them. So why is the NFL so much more friendly to small markets? Because EVERY REGULAR SEASON FOOTBALL GAME IS ON NATIONAL TV. The national TV contract in football represents a massive amount of money, while local rights are limited to some pre-season games at best. In addition, because there are only eight regular season games in the NFL, there's a relative scarcity of tickets to be sold. The bottom line is that in football, because of the massive national TV revenue which is shared, and generally solid ticket sales, there's relatively little difference between big market and small market revenues.

Contrast that with NBA, where the national TV revenue is nice but much more modest, but lots of games represent a huge amount of content for local TV. Suddenly, whether you're located in the Los Angeles television market or the Sacramento television market makes a huge difference.

While there's some disagreement about whether the NBA is actually losing money in the aggregate, there's little question about one thing - most individual teams are losing money. The best available source for financial data on the teams is the list compiled by Forbes magazine. Of course you'll have to bear in mind that the NBA disputes the numbers and maintains that they are overall too optimistic, but what do those numbers tell us? According to Forbes, in 2010, 13 teams made money while 17 lost money. (According to the NBA, that split is more like 7 and 23.) Of the 13 money makers, nine of them came from the the 13 US Metropolitan Statistical Areas above 4 Million people in the 2010 census, and a tenth is from the largest Canadian market. The other three money makers in 2010 - Oklahoma City, Portland and Cleveland - will have a difficult time remaining profitable year after year. The Okies are in the honeymoon period still, Cleveland still had LeBron James for the reporting period, and Portland has been among the biggest money losers in years past, but happens to be in a low payroll cycle at present because they're loaded with young players on rookie contracts. Is being in a big market a guarantee of making money? No - New Jersey is one of the biggest losers in today's NBA, while Mark Cuban is so profligate that he can't turn a profit even with the NBA champs in the country's fourth largest market. Likewise Philadelphia, Washington and Atlanta have struggled to turn a profit in biggish markets. But while the correlation isn't quite one to one, it's pretty clear that in the NBA, market is the biggest factor when it comes to making money.

The owners have consistently maintained that one of the driving forces behind the need for a new CBA is to enhance the competitive balance in the league - to give the small market teams a chance to compete in both the financial arena and the physical arena. That's one reason for a push to a hard cap - it would allow level the playing field between big and small markets. But at the same time they've insisted that enhanced revenue sharing, while necessary, is completely their business and has nothing to do with the current negotiations.

Puh-lease.

The mantra of the owners has been "You can't revenue share your way out of aggregate losses." That's obviously true, but if the current discussions (if you can call them that) are ostensibly about coming up with a model that makes professional basketball viable in Milwaukee and New Orleans and Salt Lake City, it's absurd to try to solve that problem without knowing what the revenue sharing will look like. I'm not sure what the owners think is going to happen. Do they think they'll get a deal from the players that will give Indiana a positive cash flow - and then add revenue sharing on top of that?

It's worth taking a step back and thinking outside of the box a bit here. I think we can all agree that there's a business model here. With over a billion dollars in advertising revenues from the national telecasts alone, NBA basketball generates plenty of money. The distribution of the money - between players and owners, between stars and role players, between big markets and small markets - is the issue.

Are there simply too many teams? I suppose that's a possibility. From the Forbes data, it seems like four million is a pretty safe number for a market even in the current environment. Unfortunately, there are only 14 of those - and the Inland Empire (Riverside, San Bernadino, etc.) is one of them. On the other end of the spectrum, seven NBA markets (Charlotte, Indianapolis, Milwaukee, Memphis, Oklahoma City, New Orleans and Salt Lake City) are somewhere between one and two million - less than half the audience of the 909. Maybe there just aren't enough markets of enough size in North America.

No one wants to talk about contraction for a lot of reasons - it means a painful decision of taking a team (or teams) away, it means fewer NBA jobs for players. But there's another thing that seems pretty important in 2011 - it means less content. Take away one team, you lose 41 NBA games; two teams, 82 games. And even if you say that relatively few people care about the team that is lost, they always play against an opponent. So Memphis and Oklahoma City may be small markets, but they can still play an important game - or a series of them as they did in this year's playoffs. The point is that content remains wildly important - if anything, it's getting more important. I can't see the NBA losing content at this point.

So it seems fairly clear that we're going to be dealing with 30 teams for the foreseeable future, and the challenge is to make it work with fewer than 30 ideal markets for those 30 teams. And that's where revenue sharing comes in.

The real issue in revenue sharing is local TV. To illustrate the point as starkly as possible, the Lakers - who were already very profitable under their previous TV contract - have just entered into a new TV deal that will pay them $150M (or possibly more, reports vary) per season for the next 20 seasons. That is an order of magnitude higher than any of the small market teams can generate - figure $10M per season or less. Just a little of that Lakers money would go a long way to erasing red ink all around the league.

Jerry Buss is clearly not going to want to give up all that money. The Lakers are his team, their sustained success in a large market is what made that contract a reality, so why shouldn't he keep it? The reality that the big market owners have got to accept is that revenue sharing will happen, whether they like it or not. I like to think of it this way - if the Kings had moved to Anaheim this summer, the Lakers' new TV deal would have taken a hit. There's your revenue sharing right there - you share the market, lose some of your TV money to a new team that moves into town. Why shouldn't the 14 Million people in the LA metro area support three teams rather than the two million in Sacramento supporting one? It certainly makes sense mathematically.

Assuming the NBA doesn't coalesce into just the big markets (five teams in New York, four in LA, three in Chicago, etc.), the big scary question is how to share the money. It will be interesting to see how the owners eventually work this out. (Shouldn't they be working on this now? What else are they doing? They're certainly not negotiating a CBA.) Our old pal Kevin Arnovitz of TrueHoop recently posted an idea originally presented by Bob Costas for MLB's own revenue sharing question, and it actually makes a lot of sense. The gist is that those Lakers games being broadcast don't feature just the Lakers - they also feature an opponent. Lakers games wouldn't be worth $150M per season without opponents, so in a very real sense shouldn't half of every team's local TV revenues be distributed to the rest of the league? Come to think of it, wouldn't there be a legal argument here? Couldn't Blake Griffin (or any other Laker opponent) sue the Lakers for his portion of the TV revenue from a Lakers game? When a network buys a movie from a studio and shows it on TV, the studio has to pay residuals to the actors - all the actors - that appear in the movie. Why should this be different?

If half of all local broadcast monies were distributed among all the teams, it would level the playing field considerably. The Lakers would still be the Lakers of course, but instead of earning 15 times more than the small market teams, now they'd be earning 4 or 5 times more. It helps to make the small market teams viable, and at the same time it has a certain elegance and justifiability as a solution. It's not arbitrary or altruistic or socialist - it's logical.

Unfortunately, I'm pretty certain at this point that we're going to miss regular season games before a finger is lifted to address revenue sharing. The owners believe that division among the players - particularly between the stars and the rest - will force the union to settle for whatever they can get once they start missing paychecks. Then again, division among the owners - particularly between big market and small market owners - may mean that it's the league that blinks first. One thing is clear - of all the problems that need to be solved, this is the most glaring.

Next mystery - If the NBA is such a bad business, why do people keep buying teams?

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