Tuesday, October 25, 2011
The problem with revenue sharing
By Kevin Arnovitz
Let’s say you’re the sports world’s next great owner-innovator. You identify a franchise in a comparatively healthy market you’re certain is a sleeping giant. This turnaround won’t be easy. It will require a lot of innovation, sweat, persistence, political gamesmanship, investment and a couple hundred million dollars in debt financing, which you’ll have to raise.
This reclamation project has a lot of moving parts, but it’s doable -- and you are the person put on this earth to make it happen.
When the process is over, all your hard work has paid off. The team plays in a new, privately financed jewel box in the heart of downtown. The fan experience is infinitely more fun and compelling. Money, managed by the smartest and best-compensated people hand-chosen by you, is spent on a premium roster built to play into late spring every season.
Because the product is so much better thanks to your management and commitment, new revenue streams emerge and the existing ones grow more profitable. Demand for tickets skyrockets, which means there’s now a lot more money at the gate. Sponsors are knocking at the door of your sales team because they want to get in on all the fun. Local broadcasters have taken notice and want to ink a lucrative deal with the team.
While you’ve been toiling away on your multi-year makeover, a rival owner in your division has done nothing to better his franchise over the past decade. It’s not the most profitable of markets, but he’s done very little to maximize his few assets. Truth be told, he’s only in this market because the city lured him with a cheap arena deal on a publicly-funded facility. Thinking only of the short-term benefits rather than the long-term prospects of the market, the owner began to hemorrhage money after a few years, and now he’s pleading poverty. How can he possibly compete at such a disadvantage? Look at the money he’s losing.
You appreciate the cooperative nature of leagues -- but isn't cooperation a two-way street? Every franchise may not be on equal footing, but doesn't each ownership group have the responsibility to the other 29 to invest wisely and find smart ways to make this enterprise work? That's what a cooperative is, but your rival owner seems to answer the call only when the Board of Governor's planning committee meets and it's time to talk redistribution.
By instituting revenue sharing, we’re telling you to fork over large sums of money to this guy. It doesn’t matter that he assumed none of the risk and performed none of the hard work you did. In fact, it’s precisely because he sat on his tuchus while you poured everything into building a laughingstock into a model franchise that you must now cut him a check.
And even though he’s receiving a healthy bundle of your money, you have no right to tell him how to spend it, beyond setting a payroll floor. He’s free to mismanage that cash to his heart’s content, at least until he writes up an offer sheet for the dynamic All-Star point guard you snagged with the No. 18 pick -- using your money as bait, of course.
Since you’re essentially sentenced to underwrite the losses of this team every season, you’ve taken an interest in what you ironically call your “investment.” (In fact, your rival’s team is referred to in your franchise’s executive offices not by its official nickname, but only as “The Investments.”)
After a hard look, you’ve determined it would take a perfect confluence of luck and intelligence to break even in this market -- and that’s only if ownership was competent. Still, no one will entertain a serious discussion about the possibility of dissolving this team that everyone agrees isn’t viable unless you subsidize it. The worse it gets for this franchise and its market, the louder the call for you to transfer even more of the money you generated from the master plan you executed beautifully.
One day, another NBA franchise is on the block. It’s a real mess, but with some creativity and risk -- along the lines of what you applied -- it can eventually be a juggernaut. The league calls to see if you know any parties who’d be interested in buying. You’re an innovator, so you’ve probably encountered people who you share common interests, passions and success.
You know the perfect investor, someone who’d make a super 21st Century owner.
But if the best-case scenario is all giving away a fat chunk of hard-won profits, can you really, in good conscience, recommend the deal?