You need revenue before you can share it

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“The NFL [labor debate] is completely different than the NBA debate because of the strength of their business.”

As his fellow panelists nodded their heads, Tom Penn, an NBA analyst for ESPN and the former assistant general manager of the Portland Trailblazers, went on to explain that, while nearly every NFL franchise is profitable, the vast majority of NBA teams — all except six or seven — lose money.

This stark fact dominated the conversation at the MIT Sloan Sports Analytics Conference’s panel on sports and labor relations Friday morning. Common debates such as whether or not players’ contracts should be guaranteed or what percentage of revenue they should receive — questions that might have received further consideration had there been a players representative on the panel — were overshadowed by the question how does the entire NBA, and not just an elite group of teams, return to profitability?

Although he never said so explicitly, Andrew Zimbalist, an economics professor at Smith College, appeared skeptical that they could, pointing out that both television revenue and ticket prices have begun to flatten out, even in the NFL.

“How do you expand over time,” he asked, “other than having growing popularity?”

Zimbalist said one of the few ways the league could increase revenue in the short term was by contracting. However, Zimbalist was strongly opposed to contraction, which he called “anti-consumer.” But, he said, it’s common for monopolies in sectors other than professional sports to reduce output relative to demand in order to increase prices.

Former Houston Rockets President George Postolos said Zimbalist was approaching contraction in the wrong way. “I don’t think people are talking about contraction in New Orleans is because they want to raise prices in L.A.,” he said.

During a question-and-answer session, I asked the panelists, which also included former NBA Deputy Commissioner Russ Granik and Sports Illustrated legal analyst Mike McCann and was moderated by ESPN’s Jackie MacMullan, if revenue sharing could actually lead to greater revenue.

Earlier Granik said that, if the league is losing money overall, revenue sharing amounts to little more than spreading out those losses around the league.

I suggested that revenue sharing might increase parity and competitiveness in the league, generating great interest in smaller markets and then, hopefully, more revenue.

Postolos agreed with my suggestion, pointing out that the NBA, which has a minor degree of revenue sharing when compared with the other major sports leagues, is also one of the least competitive (i.e. the same teams tend to make the playoffs and win championships year after year). He noted that Major League Baseball began sharing more revenue among the franchises a decade ago. Since then traditional powerhouses such as the New York Yankees, although still very successful, have not dominated the sport as easily. (The Yankees won four World Series between 1996 and 2000, but have won only one since.)

Zimbalist, who earlier said he supported a form of revenue sharing that encouraged owners to remain “entrepreneurial,” agreed that revenue sharing could lead to greater profitability, but it would be difficult to calculate the degree to which it would.

Postolos pointed out that issues like revenue sharing, which is hotly debated amongst the owners, can handicap the owners’ bargaining ability. Focusing on the disagreements they have with one another can distract from the disagreements they have with the players. Although, as Zimbalist pointed out, their disagreements with the players can also be what enables them to put issues like revenue sharing temporarily aside.

“When the owners can’t agree on things like revenue sharing, they can agree they want the players to have less,” he said.

The conversation focused so directly on the question of the profitability of franchises partly because the players didn’t have a true representative on the panel. Former league-wide and franchise executives, although incredibly well versed in the issues at hand, aren’t necessarily the best at honestly addressing what is troubling the players. Although the overall profitability of the league is certainly something the players union is concerned with, there are most likely other issues a players representative might have raised.

Then again, I’m not sure what I expected: Go to a panel on labor relations at a business school, and you’re almost certain to get a discussion that slants in a pro-business direction. That’s not to say the panelists were hostile towards the players union or dismissive of their concerns. They just weren’t especially attentive to them either.

  • Hobson13

    I have a question: The central issue around this argument is the fact that the owners say they are losing money, but the Players Union says this statement is nonsense. Perhaps this more finance/accounting than we would like to get into, but what exact numbers are in dispute? What are the arguments for and against each disputed number?

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  • Judd

    Just wanted to thank you for a very insightful article. Sounds like you asked some great questions, and had some nice comments. Sports fans love to talk the hot topics and dismiss news about bargaining agreements and whatnot, but business is what drives sports, and fans must realize and pay attention to such matters. This is more apparent now than ever.

  • BlaseE

    If the league was willing to do something as drastic as a major contraction, I think there are other options that could be equally drastic they should attempt first.

    One idea (not mine) that I discussed with a friend is going to a Premiership like system (which I’m honestly not that familiar with) with tiers. If Philly and Indiana are playing for the right to be in the top tier, the game is much more important than competing to be first round fodder. An Upper and Lower Tier of 15-16 teams each with three 5 team divisions or four 4 team divisions each where teams rotated in and out based on performance where the bottom team in each Upper division is replaced by the top team from its Lower division.

    You go to two 8 team playoffs so the same number of teams compete in the playoffs but more teams are able to compete to play more games.

    If we stay at 30 teams and want to stay around 82 game seasons:
    Home and Away with every team: 29 teams x 2 = 58 games
    Play your Division 2 extra times: 4 other teams x 2 more games = 8 games
    Play every other team division at your level once: 10 more games
    Play the teams in your linked division an additional time: 5 more games

    Total: 81 Games

    Teams in the lower division would play against the lower division more which would drive their records up and the opposite would occur for the top teams. You basically create parity by allowing worse teams to play worse teams more often and good teams to play good teams more often.

  • TD = Best EVER

    Unfortunately Parity just doesn’t work in the NBA, and never really has. What does work is winning. When the big market teams have a ton of star power and the Old Celtic/LA rivalries heat up. SO does the common NBA fan interest. Small/mid size markets have to be very careful with their money until they truly get a franchise player. And then build wisely. Also if you are going to lose a player, do it the way Denver did, that way you can still make money by saying our team is now you and up and coming. But basically FO’s have to do a better job of scouting/drafting and then give out better contracts.

  • Ravi

    Can someone please explain the current financial model in the NBA, with regards to ‘revenue sharing’, if there is any??

    I know that approx. 57% of league revenues have to be spent in player salaries, as per the last CBA. And the crux of the current discussions, is that NBA is trying to reduce the % of player salaries…

    What happens, when a new team comes into the league (i.e. – Charlotte Bobcats)? What happens to their franchise fee – is it shared between the NBA and all the existing franchises?