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Why the Best Competitive Balance Solution Won't Fly


You often talk about revenue sharing as the best competitive balance option for the league but also dismiss the possibility of it happening to fullest extent. Why? Why not adopt an NFL style system if it would improve the league? If the big owners objected couldn't the rest outvote them?

Before we get into that, let's recap briefly why revenue sharing evens the field more than the luxury tax.

The new CBA is going to curtail spending for everybody. Even the richest teams will think twice about plumbing the multiplicative depths of Luxury Tax hell. But no matter how steep you make the penalty it's still based on revenue spent, not taken in. The inequality is obvious. Both the Blazers and the Lakers may incur $10 million in extra tax payments but that money is going to hurt the Blazers with their $25 million per year TV contract far more than it hurts the Lakers with their untold millions. Both teams would spend to get an optimal player but the Lakers can afford to make many more chances or buy many more insurance players over time than the Blazers can. If the Lakers guess wrong or just need another player it's a small fraction of their total revenue. The same move for the Blazers consumes the entire pie.

The only way to avoid this is to start with nearly equal revenue, thus full revenue sharing. When each team has the same amount of dollars to spend all you have to worry about is rogue owners who want to put in their own money on top. That rare occurrence would be interesting and should be allowable. It wouldn't imbalance the game that much and it would make one heck of an interesting story.

Why won't that level of revenue sharing ever happen? You've already mentioned the obvious answer. The big market owners would have a cow, eat it, and have it again. They paid top dollar for those franchises in part because the revenue streams were so deep. Split revenue equally and you just shafted them.

Each market negotiates its own TV deal. The Buss family finalized the Lakers' enormous contract, not the NBA. They're going to wonder why folks who didn't have any hand in the negotiations get to benefit from their hard work. What's to prevent Jerry or one of his kids from tearing up the contract and selling the next six years of TV rights for a penny a year, saying, "You have suckled on our teat long enough. Now we'll live off of you guys for a change!"? Sure they'd get less money, but if revenue sharing is complete they're only getting 1/30th of what their market produces anyway. They might well take the loss to prove the point. More to the point, the other league owners are not going to force them into that situation.

The lost TV revenue in major markets isn't the only issue either. Remember how we said a few days ago that the ultra-rich don't carry around enormous suitcases of cash, that their money lies invested in various projects? NBA teams are one of those investments. For years the pattern in the league has been "operate on a thin margin annually, or even at a loss, then make your money back when you sell the team". As soon as you remove the revenue from the major markets the resale value of those teams deflates. You wouldn't just be siphoning off TV revenue from Buss and the other major market owners, you'd instantly take hundreds of millions of franchise value (and thus their investment money) out of those owners' pockets, just as if you had stolen it from those hypothetical suitcases.

Now consider this: What's an NBA franchise really worth? Yes there are books with ink red and black, but the price tags dangling from these teams are a matter of perceived value as much as anything. Let's pretend that under the current system the Lakers and Knicks would sell for $600 million, the Trail Blazers would sell for $400 million, and the NBA could ask $300 million for their next expansion franchise. What would happen to the perceived value of the Blazers and that new franchise if you took those enormous revenue streams away from the Knicks and Lakers and all of a sudden they're only worth $400 million? Maybe you could sell the Blazers for $300 million now? $275 million? Do I hear $250 million? The expansion franchise is down to $200 million or lower. Through one change in policy devaluing your flagship brands you've devalued all your brands accordingly, potentially costing every owner millions even though you've made the books and on-court product look better for most teams. Forget this summer's CBA fight...THAT would be the nuclear winter the NBA fears most. They'll never, ever risk that kind of financial armageddon even if avoiding it means the Lakers and Knicks winning titles every year.

"But," you say, "other teams would fare better from the windfall of big-market money! Wouldn't that make their value go up?" Perhaps, but only incrementally. Let's say reports of the Lakers' 20-year, $3 billion TV contract were true. That adds up to a hefty $150 million per year for their franchise. Now divide that amount by 30 teams. Every team would get $5 million per year off of L.A.'s contract. Even with that number multiplied by several big-market teams the appreciation in average franchise value wouldn't balance the depreciation in response to the flagship franchises getting devalued. Simply put, that $150 million in L.A.'s pocket is perceived to do more good for the bottom line than $5 million in everyone's pocket would. If this seems unfair remember again that NBA bones haven't been made through yearly profits but through selling your franchise for six times the price at which you purchased it. This may change at some point, as common sense says that a team bought at $400 million will never be worth billions. In fact part of the struggle between owners in the current CBA could be simplified down to the "marginal profit" versus "resale value" folks. But even if that debate remains alive the system is not likely to change overnight, especially under the watch of people to whom this pattern has brought such prosperity...including plenty of owners plus the commissioner whose name will forever be associated with it.

The United States Declaration of Independence declares that among the inalienable rights of human beings are life, liberty, and the pursuit of happiness. Notice that happiness is not itself guaranteed, just the ability to pursue it. For hundreds of years this has been enough for Americans. We will live with the idea of some achieving their goals and some not as long as everybody is perceived to have a chance. (This explains why lotteries are so darn popular despite the enormous odds against actually winning. As long as someone wins and it could be us someday, we're in.) The NBA works on a similar principle. They want enough competitive balance that fans of every franchise perceive they have a shot. At the same time the ideal would be major teams winning most of the titles, thus earning the most viewers and prestige per trophy awarded. They're not going to let the balance get so bad that fans give up in frustration. Neither do they want balance so good that their marquee teams lose advantage. That's the formula of the modern era that, when measured in its entirety, has brought unprecedented wealth and exposure to all the league's investors. That's why you're seeing a system of limited revenue sharing and maxed-out luxury taxation instead of the inverse. It's not just about the balance, it's about the Benjamins.

--Dave (