Digging deep to share revenue
September, 13, 2011
By Henry Abbott
Andrew D. Bernstein/NBAE/Getty Images
Lakers owner Jerry Buss is being asked to contribute as much as $50 million a year.
The ongoing labor talks in New York City are just one of the tenacious negotiations David Stern has on his hands.
Another -- between owners, over the delicate issue of revenue sharing -- awaits the commissioner in Dallas, at Thursday’s board of governors meeting.
The talks with the players are over billions, revenue sharing concerns mere hundreds of millions. But the politics are heated, personal and far-ranging.
The conversation starts with two ideas:
- That a dramatic increase, perhaps even tripling the league’s current $60 million in assistance to weaker teams, will make the league more competitive.
- That without help, the poorest teams might experience the kinds of embarrassing financial troubles that would hurt the whole league.
In other words, if the owners of the teams projected to collect the most from revenue sharing, led by the Grizzlies, Pacers, Kings, Hornets, Bucks and Bobcats, are losing their wills to compete in a system that favors teams with bigger revenues, they may start making decisions -- like selling at lousy prices -- that would hurt the league’s brand and every owners’ resale values.
It’s time for the rich teams to kick in. But how much, and by what formula?
Although the Lakers, Knicks, Bulls, Celtics and Raptors are expected to be the biggest paying teams, all eyes turn to Lakers owner Jerry Buss, who -- in some proposals under consideration -- would be asked to share as much as $50 million next season alone. That puts him at the top of the list, followed by Knicks owner James Dolan, with no one else close.
Sources are conflicted about whether or not Buss is actually prepared to contribute at that level.
Some say he recognizes that he reaps big rewards from a healthy NBA. Others say that he’s well aware that while his basketball business does well, basketball is his main business, and it’s not nearly as lucrative as what many other owners do outside of basketball. Plenty of NBA owners have far deeper pockets in the big picture, and, thanks to their non-basketball assets, can afford to contribute far more than they have in the past.
If Buss is willing to contribute anything like $50 million a year, then he is undeniably a generous man. If he is unwilling, then where is that money going to come from? A peek around the league shows how tricky it is to find candidates, and how difficult it is to come up with a revenue-sharing plan with the feeling of fairness:
The two biggest markets: New York and Los Angeles
The Lakers and Clippers don’t just play in the same market. They play in the same stadium. The Knicks and Nets also share markets. By any market-sized program, you’d expect the Lakers and Clippers to kick in identical amounts. Yet, clearly that’s a bad model; the Lakers and Knicks are the best businesses in the league, while the Clippers and Nets have middling balance sheets with little prospects of winning titles anytime soon. And yet, if you do the obvious thing and take huge sums from the Lakers and Knicks but not from the Clippers and Nets, aren’t you punishing the best-run teams in the league, specifically for being well-run?
The Thunder play in the 45th-biggest "designated marketing area" in the U.S. Only the Grizzlies and Hornets play in smaller markets. When the Sonics were threatening to move, Mark Cuban was openly skeptical, saying such a small market would hurt the strength of the whole league, simply because it would be very hard to make money there.
And yet, sources say, thanks to skillful management, a dedicated ownership group and, to be honest, huge contributions from players still on below-market rookie deals, the Thunder are profitable and competitive. As Clay Bennett and his colleagues go to incredible lengths to woo the local business community, must they share the wealth with owners who get worse results in better markets?
Big cities with bad revenues
Philadelphia, Atlanta and Washington D.C. are all top 10 U.S. media markets. Yet at the moment, none of those teams has great revenues, and none is likely to contend. So … would you have those owners pay into your revenue sharing plan? Receive? Be neutral?
Thanks to winning the lottery twice, and running the team about as well as possible, the Spurs have managed to turn the nation’s 37th-biggest market into a profitable NBA business. But David Robinson has long since retired, and Tim Duncan won’t play forever. So if the Spurs make a bit of profit next year, would you have them save that money for an inevitable rainy day, or write checks to the Grizzlies and Kings?
Joe Lacob and Peter Guber just spent a fortune -- far more than Forbes thought the team was worth -- purchasing the Warriors. They did that in no small part because the Bay Area is the nation’s sixth-biggest market. Thanks to the tech industry, there are plenty of people to buy tickets, and local TV deals and endorsements are good with the potential to be great. They paid former owner Chris Cohan for the right to reap the rewards of that. Is it fair for the league to now come along and say, hey, you have to share the benefits of that big market with your competitors?
Of course, the money that some hope will come from Buss could also come from the players, in the form of reduced future salaries.
Along this line of thinking, Stern's complicated set of negotiations can be made to look simple.
Every owner in the league has projections of their bottom line, as in what their profits and losses would look like with various different levels of player costs. So, for instance, Herb Simon of the Pacers can see that if the players end up with 50 percent of BRI, he’d be expected to lose a certain number of dollars per year. He can add to that total another annual lump sum from revenue sharing.
If those two incomes add up to make Simon happy, it’s a good bet he’ll give the league his full support, without much caring how many of the dollars come from owners or players.
Thirty owners get to do this kind of math. So, in conjuring revenue-sharing formulas, the league’s task is not so much to make something that’s perfectly rational. It’s to make a system that satisfies a large number of owners. Every dollar the owners can get out of players is a dollar they don’t have to get out of Buss, Dolan, Jerry Reinsdorf, et al.
The league’s proposal
NBA owners have discussed various plans to make revenue sharing work. Serious consideration is being given to a model that seems to have the potential to address the big market/small market/well run/poorly run issues.
Instead of simply taking from the owners in the biggest cities, or from the moneymaking teams -- both schemes would punish owners who run their teams well, while rewarding the clueless -- the NBA has discussed assigning each market an expected level of annual revenue. Teams that fall below that threshold would in essence be punished for underperformance.
In other words, they’d say the Denver market, based on size, wealth, history and the like, can reasonably be expected to generate a certain level of ticket, local TV and sponsorship dollars. If the salespeople in Denver generate less than that -- in other words, if the business is not well run -- then tough. The Nuggets would contribute or receive money from the revenue sharing formula as if they had made this minimum number.
And to the extent they made more than their expected revenue, they could expect to share the wealth.
An important element of the plan is that it puts pressure on owners to run their businesses well -- some teams struggle because they face long odds, and there’s an appetite among owners like Buss to help those owners.
But nobody wants to help owners who simply aren’t running their businesses seriously.