Thursday, October 21, 2010
Share revenue, but not too much
By Henry Abbott
Every team profitable.
Commissioner David Stern spoke, for a few moments at the conclusion of the NBA’s Board of Governors meeting Thursday, about revenue sharing to the point that every NBA team would have a shot at being profitable.
"Right now," explains Stern, "we would just be sharing losses. If we can move to a profit situation, but there are teams towards the bottom that nevertheless have a problem, we've got to find a way, assuming their capability of generating a certain threshold, of adding to that so they can compete and be profitable."
In the past, even in good times plenty of NBA teams struggled financially. As the league has pointed out several times, these are not good times. So even suggesting that every team might one day soon be in the black ... that's new, and bold. And I'm not entirely sold.
Some teams are hobbies, not businesses
Sports owners sometimes spend in ways that defy business sense. Their lavish cash is a major revenue stream in all professional sports, in fact. For example:
- A minority owner of the Mavericks, for instance, claimed in a lawsuit last spring that Mark Cuban had been doing that for years, putting the team hundreds of millions into debt. Cuban denied the totals, and said he earn every penny back and more, but acknowledged that he had been spending in the red.
- The late Larry Miller was frank that he bought the Jazz not to make money, but because he knew that if he didn’t, they’d leave Salt Lake City forever and no NBA team would ever come back. His son Greg, who runs the team now, says the purchase was "almost entirely altruistic." The business analysis, you see, is that there ought not be a team there. There aren’t enough Fortune 500 companies, deep-pocketed paying customers, people watching TV to advertise to etc. So that’s a market the NBA would rightly ignore, if not for Miller's millions and passions.
- Former Duke player, and current real estate developer, Brian Davis once tried to buy the Grizzlies, not strictly to make money from the basketball team, but to help revitalize the city and bring in hotels, condominiums and the like.
So you see here a blueprint for three teams that may well lose money, but they are all coupled with owners who are willing to cover those losses. Other than a minority owner here or there, who could be upset by this? It’s a free country, especially if you’re a billionaire, so people like Miller get to pledge their cash, buy teams, and cope with whatever losses may arise.
In the decades after the purchase Miller noted that it was among the worst of his investments, in terms of cash, although it brought him great personal satisfaction.
At the moment the league has something like $54 million in annual revenue sharing. Not all that much, in a league that spends about $2 billion a year in player salaries. Essentially the league has said, to people like Miller: If you want to put a team in Salt Lake City, that’s your business. Literally. Your money to lose, or your money to gain. But don’t expect the busy concession stands in New York, Los Angeles and Chicago to supply the cash to rescue you if things take a bad turn.
I have heard people say that by conventional analysis, New Orleans does not have the wherewithal to support an NBA team. Sacramento is wrestling with arena issues. There have been worries in the past about places like Oklahoma City and Memphis. Teams have failed, of course, in Vancouver, Seattle and elsewhere.
Nobody is saying those cities should not have NBA teams. But the de facto model has been: Find yourself an eccentric billionaire who is ready to spend beyond all sense. Then you might have a chance.
And it seems to be working, as a way to get basketball in front of people outside the biggest cities. The NBA is present in plenty of mid-size markets, and teams like San Antonio and Oklahoma City are competitive, with a shot at profitability.
But the moment big-market owners are seriously on the hook to cover the losses in small markets, aren’t those owners – the ultimate sources of power in the NBA – going to get very choosy about where the NBA has teams? Wouldn’t that be the final nail in the coffin for cities like Kansas City and Seattle, that have so-so financials, who are trying to get in on the action? Oklahoma City appears to be a success story, thanks to a rabid fan base, but would a team ever get approved in a market that small in a world where the other owners had to cover losses?
Owners should feel the heat
I don’t know if you have followed any of the extensive commentary surrounding Wall Street bailouts. But one of the major themes is that there’s "moral hazard," and bad business, in relying on businesses that are “too big to fail.” Little regional banks feel the heat to keep their balance sheets in check, and so many of them acted conservatively and did not need bailing out. But the biggest banks in the world gambled recklessly with other people’s billions, safe in the knowledge that the government could not afford to destabilize the economy by letting them fail.
As you can imagine, that creates an environment where people don’t do their best work. If you’re staying in business – and handing out bonuses -- no matter what, who cares if you mail it in? Who cares if you make bad decisions? Who cares if you run your business poorly?
Nobody likes seeing businesses fail. But the reality is that the threat of failure hangs over every business every day, and it’s no small part of what keeps them working hard.
Similarly, nobody likes car crashes, but the threat of them keeps drivers’ eyes on roads and hands on wheels.
There was a big brouhaha lately after Deadspin published financials from several baseball teams. Baseball has generous revenue sharing, where small-market clubs get a fat chunk of change from the big boys. But in Pittsburgh, for instance, it turned out the Pirates were crying poverty as they trotted out crappy cut-rate teams year after year, even as the league continued to reward the Pirates with truckload after truckload of cash, much of which went straight into the owners' pockets.
If an NBA owner says “screw the fans, screw the winning, I’ll keep the money” year after year, we should want that guy to go out of business, or at least feel financial pressure to sell so someone else can give it a try. That’s good for us, as fans.
Owners should also be at risk to lose a lot of money if they run their businesses poorly. I’ve heard about owners blowing off their hoops staff in the draft war room to select somebody they like the look of, or somebody who went to college with their son or whatever it is.
Again, my feeling is that’s fine, you can run your business like that if you want, so long as you can foot the bill when things go south.
But if the league is stepping in to cover the losses that come from being a bonehead, that's where things get complicated.
Not black and white
This is, of course, not a question of whether to revenue share, or not. It has been happening, and Stern says there is unanimity among owners that it will happen more.
Instead, it’s a question of degree.
How much is the right amount?
Certainly not so much that the market won’t force the worst owners out of business. For the sake of the fans, it’s essential that owners feel daily pressure, like all business owners, to perform at a high level. When they do that, they're making this whole thing worthwhile for fans. When they don't ... it's a rip-off.