NBA Needs Stronger Revenue Sharing
The key is getting that wealth in the first place. Since the NBA has a distinct lack of effective revenue sharing, the game becomes focused on location, location, location. You can make money in Indianapolis or Sacramento. But it's infinitely easier to do in, say, Los Angeles.
Ask Donald Sterling, whose Clippers, according to Forbes, turned a $10 million profit last season despite a 19-63 season. Or James Dolan, whose Knicks reportedly rake in tens of millions in profits every season despite not having been competitive since the turn of the millennium.
This isn't to curse Sterling for his brilliant (in a financial sense) move from San Diego to L.A. in the 1980s, or his team's insanely favorable Staples Center deal with AEG. But isn't it quite obviously unfair for Sterling to field a mediocre team for decades and rake in dough, while the Simon family, owners of the Pacers, struggle to turn a profit even in seasons in which they make the Finals? Sterling capitalizes on having a popular product (the NBA) in a massive, rich market. The Simons have a popular product in a smaller, less lucrative market. Sterling can't make money without the Simons, or Sacramento's Maloof family, or Milwaukee's Herb Kohl, or Portland's Paul Allen ... unless you think New York, Chicago and L.A. can handle seven or eight franchises apiece. Some less-than-massive markets are required for the NBA to exist at this size (both in team count and in total revenue). Why shouldn't those less-than-massive market teams get a cut of Sterling's take, given that he'd have a less valuable product without them?
That's the crux of revenue sharing: small market teams have trouble surviving without help, and the league needs small market teams to survive itself. Perhaps the biggest reason so many NBA teams are in dire straits right now is that because the margins are so slim for teams without millions of potential customers, any slip is magnified. The economy, for one, constitutes a serious slip in the ability to make money for any team. But L.A. and New York, with a far larger population that can be served with the live NBA experience on any given night, won't feel local unemployment jumps the way, say, Sacramento will. When these slips -- a bad season or two, a flight of star power, the death of a bandwagon -- happen, the smaller market teams must go to extreme measures to stay afloat. The Kings last season, for instance, left Kenny Thomas, an end-of-the-bench veteran seeing little playing time, home in Sacramento on road trips to save on hotel costs. Do you think the Knicks -- just as bad as the Kings over the last few seasons -- would ever have to resort to that?
Not only can the Knicks, by virtue of their home location, avoid such weird cost-cutting measures, but the team can make money just by existing. How is that fair to teams like the Magic, who made the Finals out of the league's ninth smallest market, but actually lost money on the season due to an antiquated arena and relatively low income from corporate suites? How can a league survive with such a disparity in earning potential among the members? It'd be like capping player salaries by height. Even if you're an MVP candidate, one of the most electric players in the world, but you're 6-feet-tall (Chris Paul?), you can only make $5 million, while 7-footers (Kwame Brown?) make $5 million minimum, upwards of $20 million if they're actually good, because, well, that's how it is. It sounds stupid, because it is stupid. And it's exactly how an NBA without decent revenue sharing works.
What ought to matter more in how much cash team owners take home: where their team is situated, or how well their team performs on the court? In the NBA, market size has a far larger impact on profit than winning percentage.
Using revenue figures from Forbes, winning percentage and net income had a correlation coefficient of 0.17 last season, a small but positive relationship. This could mean winning helps grow revenue, or that teams on track to make money are more likely to be able to put out a good team, or that good teams just happen to be teams which make money for some odd reason. As your auntie has screamed at you many a time, correlation does not equal causation. But winning and making money in the NBA do have a small positive correlation.
So do making money and being located in a large market. Only the relationship isn't as small. In fact, it's double that of the winning-profit relationship. And that counts the New Jersey Nets as belonging to the New York City market, which is a source of logical contention. If you remove the Nets for the equation, the correlation coefficient between 2008-09 net income and market size jumps to 0.46. That's a pretty damn eye-opening relationship.
You'd think owners would be supportive of greater revenue sharing, given the plainly unfair way NBA finance among teams works right now. But the Sterlings and Dolans and Jerry Busses of the league don't want to give up cash. And the revenue disparity serves another not-completely-obvious function for league ownership as a collective: It depresses player salaries. In general, teams with restricted revenue can't bid on high-end players on the open market -- you don't hear much about Chris Bosh heading to Indiana this summer, do you? -- so the market for said players artificially shrinks. And while that won't matter for no-brainer maximum contract players like Bosh or LeBron James, it matters at the next tier, where players like David Lee can't get Oklahoma City or Sacramento to make a decent long-term offer despite each team holding cap space and needing another big man. The owners want to deflate salaries in other ways, but boosting revenue sharing would weaken that project a bit. Suddenly, if Milwaukee has a bit more to spend, maybe the Bucks make a big offer to keep Charlie Villanueva instead of renouncing his rights. Then the Pistons have to pay more for a power forward, and so on, and so on. (As such, the players are big fans of revenue sharing, and union boss Billy Hunter has mentioned it as something players will push for in upcoming collective bargaining.)
A few years back, the owners of the seven teams in the smallest markets wrote a letter to commissioner David Stern pushing the case for better revenue sharing. Seven out of 30. The other 23 owners need to realize its in the league's best interest to keep everyone solvent. That's not going to happen through slashing payroll alone. The rich uncles need to help out the starving kids to make this thing work.