The End of Fundamental Basketball As We Know It

Unfortunately for NBA fans owners and players are gearing up for a lockout in 2011.  David Stern may very well be the best Commissioner in North American pro sports, but that may be due more to his competition (MLB’s Bud Selig is weak and conservative, NFL’s Rodger Godell is over zealous and power drunk, while NHL’s Gary Bettman is incompetent) than his own prowess.  There is no doubt that the economic environment has drastically altered the sporting world, but most of the financial problems in the NBA are self induced wounds inflicted by incompetent management.  Last season twelve teams lost money, and according David Stern at least half of the league is projected to lose money this year, and almost all of the teams are carrying debt.  The basic problem is that NBA teams are unable to generate enough revenue to support the exaggerated cost of operating an NBA team.  The largest slice of operating costs are player salaries, which will be the main target of the owners in the negotiation for a new CBA (Collective Bargaining Agreement).  However, the main problem is the revenue, even if the players are willing to accept reduced pay, many teams are still going to be unable to turn a profit.  These teams fall into two categories, horribly mismanaged franchises that lose and lose year after year, and small market teams that are simply unable to compete financially.  Market size is the largest factor in the financial viability of a franchise, Los Angeles, New York and Chicago routinely top Forbes’ NBA team valuations every year because those teams have access to the biggest markets in the US.  Last year Forbes’ bottom three teams were small markets, Milwaukee, Memphis and New Orleans.  New Orleans made the playoffs in back to back seasons, and has an All-NBA player in Chris Paul, but is was only able to generate $28 million in gate receipts last season, and the team is barely able to generate a profit despite having one of the most streamlined operations in terms of cost.  Meanwhile, the Lakers were the most profitable team last year, generating $95 million in ticket sales on the back of the highest ticket price in the NBA, enough to cover their $83 million spent in player salaries, not to mention the millions more generated in sponsorship deals and merchandise sales.  In total there is more than $100 million difference in revenue between Los Angeles and New Orleans, and yet there is only a $15 million difference in team payroll.  It is impossible for a small market team to be consistently competitive when operating at such a huge financial disadvantage, the fan base is not necessarily to small in these cities, but they lack the depth to absorb exorbitant ticket prices, and more importantly small markets lack enough fortune 500 companies to ensure the pricey luxury suites are bought up, and that everything regarding the team is sponsored and branded.

Player Contracts

Player Salaries have rocketed in the past decade, in 2000-01 the salary cap was $35.5 million, this season the cap is almost double that at $60.7 million, Tracy McGrady, the highest paid player in the NBA this year, is making $23.2 million, much of which he earned while deactivated.  This summer the salary cap will shrink for the first time since 2002, and projections show the cap continuing to shrink.  This alone will help reduce the max contract salaries, which are tied to the size of the cap.  NBA general managers have become accustomed to being able to spend like crazy, just like every other business in this country, NBA teams were addicted to the cheap credit available over the last decade.  The result were expensive long term contracts for role players, teams over paying for players just to appease agents and re-signing players to lucrative contracts who have no other suitors.  To solve this problem, the owners are going to look to eliminate guaranteed contracts, but how can the owners blame players for singing the contracts that are being offered to them, and since there is no rule that a player has to be signed for five years, the General Mangers should know better than to sign Tim Thomas or Jason Maxiell to long term contracts.  The NBA already has the  rookie salary scale that is cost effective for the owners, and NBA players have to play at least six seasons before the are eligible for the really big contracts, there are effective rules in place, they just aren’t being used effectively.  General Managers got really sloppy, and owners did not hold them accountable, despite many poor performers, a General Manager being fired is relatively rare compared to the turnover rate for NBA coaches.  However, as bad as many General Managers are, running a small market team makes the decisions much tougher, and their mistakes are understandable.

Superstars Needed

In 2005 the Milwuakee Bucks signed Michael Redd to a max contract, the largest available contract under the salary cap rules, he was the Bucks best player, coming off of back to back 20+ point seasons, but he wasn’t worth 25% of the team’s entire payroll.  The six year $91 million contract will expire next season, paying Redd $18.3 million to likely sit out due to injury, while the Bucks only collected $21 million from gate receipts last year.  Larry Harris, Milwaukee’s General Manager at the time of Redd re-signing, made many poor decisions that led the Bucks into the basement of the Eastern Conference (signing Bobby Simmons to a 5 year $47 million contract, which is paying him $11 million to sit on the bench in New Jersey this season, and the drafting of Chinese star Yi Jianlian despite his refusal to play in such a small market, which also landed him in New Jersey), but re-signing Redd wasn’t necessarily one of them because Harris didn’t really have a choice.  Redd was in high enough demand that if Harris only offered market value, Redd would have certainly elected to play in either a larger market or with a star player on a winning team, and even then, at the time every player’s market value was inflated.  While losing Redd would have made financial sense, it would have left Milwaukee cap space with no relative talent to use it on to replace Redd, the team would lose the face of the franchise and all the marketing opportunities Redd provided on a team of relative unknowns.  Harris was gambling that the revenue that Redd could generate would offset the exorbitant cost of retaining his services, but the injury plagued jump shooter was a bad investment, one that can haunt a small market team for multiple losing seasons.  Under the current structure every NBA team can afford at least one max contract player, but honestly there are only a handful of players that have a balance of basketball production and marketability that deserves max contract money (LeBron James, Kobe Bryant, Dwayne Wade, Kevin Durrant, etc.), but there is a group of second tier players that can squeeze inflated contracts out of smaller market teams simply because they have the cap space and they have to sign someone.

Enter Prokhorov

The New Jersey Nets represent the worst case scenario for the NBA, a team that is essentially a small market team, but sitting on the fringe of New York City has tried to operate like a big market team.  The result is a team that needs a bailout more than the Detroit automakers, the Nets are more than $200 million in debt, and are being kept afloat by creditors and the NBA itself.  The NBA has been desperately pushing Bruce Ratner to sell the team, but with the franchise on such rocky footing, and a costly  proposed move to Brooklyn up in the air, no one was particularly interested in buying the team.  In steps Russian billionaire Mikhail Prokhorov with enough money to ease the Nets financial distress, David Stern would like to avoid the foreign investment, but with no other solution available, the NBA will soon be introducing its first Russian owner.  It sets a dangerous precedent, which already has a parallel in European Football, of owners falling deeply into debt, and then selling their clubs to foreign billionaires including the now deposed Prime Minister of Thailand, today less than half of the Premiership clubs have an English majority owner.  The Nets are in the worst shape by far, but four other teams (Washington, New Orleans, Charlotte and Memphis) are severely leveraged already, and Charlotte is in the process of being sold Michael Jordan, which will only leverage the team more, making the sale to Jordan a dubious decision for David Stern.  Beyond that there are another nine teams that are carrying significant debt (Orlando, Portland, Sacramento, Toronto, Cleveland, Boston, Phoenix, Miami and Oklahoma City), Cleveland owner Dan Gilbert is currently seeking to sell a portion of the Cavs to Chinese investors, and in all likelihood the NBA is going to need more foreign investment to escape the burden of debt.  Just like the housing market, the sports franchise market became incredibly over valued, and while NBA franchises are starting to devalue, they still are not a particularly enticing enterprise to invest in, unless you are an oil tycoon who doesn’t care about absorbing a lot debt, and possibly losing money for the foreseeable future.  Furthermore, while the Nets move to Brooklyn will infuse that franchise with a new audience and many new marketing opportunities, buying a small market team like New Orleans or Memphis is not going to have same allure to a foreign billionaire.

The Worst Is Yet To Come

The NBA’s current economic situation has definitely alarmed David Stern, but the uncertainty of the future must be far more terrifying.  As the economy continues in this protracted recession attendance will fall off, and more importantly corporate sponsors are going to be less willing to throw eight figures at a team for naming rights, so they can brand everything they can slap a logo on.  Television ratings will increase as more people elect to stay home instead of buying pricey tickets, even franchises that struggle to sell more than 70% of their tickets still have average ticket prices around $50, not to mention the increasingly expensive concessions.  NBA teams need to be more effective in their use of the internet and other media to generate more revenue, Cavaliers.com should be best resource for Cavs information and programing, but it’s less useful than the plethora of bloggers following the Cavs, hire those guys for the Cavs site, and every team should be producing as much original content as possible from player reality programing to tutorials explaining the complexities of the game.  Advertising on uniforms is certainly on the way, and a corporate sponsor for the Larry O’Brien Trophy is probably already being arranged.  The big market teams will have a much better chance of survival, the local economies of the small market teams like the Pacers are terrible, the Pacers have asked for help from the local government, which runs Conseco Fieldhouse, but since it is already running at a deficit, and already pays out to the Pacers for non-basketball events, there simply isn’t any help to give.  Lenders are hesitant to hand out cash like they have in the past, and with a lockout looming and franchises no longer increasing in value, there isn’t any reason they will change their stance, making it harder for teams to refinance the debt they carry.

The Los Angeles Clippers

No team catches more flak for inept management than the Los Angeles Clippers.  The Clippers have been perpetually trapped in the Draft Lottery, seen a series of talented players fail to develop, and free agents who fail to earn their contracts.  Its not so much that there is a culture of losing, but there is attitude of fiscal responsibility that pervades the entire organization from the owner on down.  Winning simply is not the highest priority, management knows it, so do the players, and the on court product suffers, so do the fans.

Contraction Through Expansion

The small market teams are struggling to compete with the larger markets, and as the NBA waits for the economy for turn, it’s only going to get tougher.  Contraction is last thing that David Stern wants to have on his resume, but there is a unique solution to this problem.  Take the twenty best markets, as league one, then the remaining ten paired with ten new markets for league two (there are 12 markets that support a NFL team, but do not have a NBA team).  League one would play an eight team playoff for the NBA title, with the bottom two teams being relegated to league two.  League two would play a four team playoff with the winner and the team with the best regular season record moving up to league one.  League one would have a soft cap around $50 million, and a hard cap at $60 million, while league two would have a soft cap at $35 million and a hard cap at $45 million.