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Unclebuck
01-30-2007, 10:25 AM
http://www.msnbc.msn.com/id/16877177/print/1/displaymode/1098/

Forbes: NBA could have revenue sharing in future
Aside from Spurs, small market teams crying poor to Stern
By Kurt Badenhausen, Michael K. Ozanian and Christina Settimi
Forbes
Updated: 7:55 p.m. ET Jan 29, 2007
There is an uprising going on in the National Basketball Association. Owners of small-market franchises are telling Commissioner David Stern that they can’t make money.

“Our current economic system (whereby local television revenue and gate receipts are not shared among the league’s 30 franchises) works only for larger-market teams and a few teams that have extraordinary success on the court,” says a letter sent by eight owners to Stern this fall. Owners from all of the league’s smallest markets, including Charlotte, N.C., Memphis, Milwaukee, Wis., and New Orleans, signed the letter.

There was one glaring absence: Peter Holt and the San Antonio Spurs — the best-run franchise in the NBA. Despite playing in the league’s third-smallest market, the Spurs are worth $390 million, 11 percent higher than last year and $37 million above the league average.

Thanks to the team's on-court success and the first-rate AT&T Center, the Spurs turned an operating profit (in the sense of earnings before interest, taxes and depreciation) of $11.7 million, compared with $6.9 million for the average NBA franchise.

As the Spurs soared, several small-market franchises, including the Grizzlies, Magic and Pacers, posted big losses last year. But red ink in the NBA isn’t solely for the teams that play in small cities. Basketball’s two biggest money losers last year resided in New York and Dallas. The Knicks lost $39 million, and the Mavericks had an operating loss of $24.4 million.

Both teams can blame high payrolls and the resulting luxury tax bill that came along with exceeding the league’s payroll tax threshold of $61.7 million. The Knicks’ tax bill was $37.2 million, and the Mavs clocked in at $17.3 million.


But don’t cry for Knicks owner Cablevision or Mavs’ owner Mark Cuban. The Knicks are the league’s most valuable team for the second straight year, worth $592 million thanks to luxury suites that cost more than $400,000 at Madison Square Garden and one of the richest cable deals in the NBA. Dallas rode its first-ever appearance in the NBA Finals to a 15 percent gain in value to $463 million, third highest in the league.

The posturing that small-market owners are doing by sending a letter to Stern is the same thing that goes in other major sports. Recent labor negotiations between players and owners in Major League Baseball, the National Football League and the National Hockey League have all hinged on revenue sharing.

While baseball cuts $20 million checks to small-market franchises with little accountability for where the money goes, the NBA is taking a novel approach to what franchises deserve a boost in revenue.

The NBA hired business consultants McKinsey & Co. in 2003 to create an analysis of how effectively each team ran its operations. Last year for the first time, a portion of the luxury tax proceeds that were collected were distributed based on this analysis. “The McKinsey analysis is used as a basis for determining eligibility and scope of sharing with a formula that takes it out of the subjective as much as possible,” says Stern.

Stern expects the McKinsey analysis to play a bigger role in the future when determining how revenue-sharing funds are distributed. So if you run your team well and play in a small market, you’re eligible for a check. Run your team poorly and you’re shut out. Stern did not need to hire McKinsey to figure that out. He could have just looked at our NBA team valuations.

© 2007 Forbes.com
URL: http://www.msnbc.msn.com/id/16877177/

ChicagoJ
01-30-2007, 10:36 AM
So the Pacers, who fielded a respectable team in MSA, always lost money.

Then the Fieldhouse opened and they made money, right up until the time that they infected the team with unlikeable characters.

In my mind, "reppin' the Indiana Pacers" is something that is done with both class and high quality basketball.

It seems to me that the fans have spoken quite well about their disgust with the team, and management is responding as quickly as they can.

Only four players remain from the brawl: Dustpan, Harrison, and O'Neal were all invlolved but remained on the court. Dustpan and Harrison were really only involved while trying to exit the court safely. And Foster... does anybody even know where Foster disappeared to during the brawl - I mean we know the guy is quick and likes to avoid contact but good gracious that was one fine disappearing act. :D

Clearly, not every player was moved because of the brawl. Fred Jones just wasn't worth keeping around. Croshere was finally tradeable, much to everyone's surprise.

Is the roster turnover driven by the record in the past couple of seasons? We had similar records during the Isiah Thomas years but didn't totally remake the roster.

Is it a coincidence? I think not. Its a purposeful response to dwindling ticket sales and other forms of falling revenue.

Unclebuck
01-30-2007, 10:46 AM
I think Jeff was injured and wasn't dressed - where did he go - I don't know.


Is the roster turnover driven by the record in the past couple of seasons? We had similar records during the Isiah Thomas years but didn't totally remake the roster.

Isiah's team was in transition until the Artest and Miller trade was made and the team pretty much took off from there. If Isiah didn't "lose the team" during the 2003 season that team would have won 55 games or so.


Edit: Jeff didn't play. He was trying to break the fight up. It is wierd to go back now a report of the game that was done just hours after the incident occurred.

http://sports.espn.go.com/nba/recap?gameId=241119008

arenn
01-30-2007, 12:30 PM
I always take these things with a grain of salt. No one has ever released audited, GAAP compliant financial statements for the Pacers or any other NBA organization I'm aware of. What's more, even these were released, that would not put the franchise in the context of the overall wealth and business structure of the owners. For example, the "team" may be paying money to related parties at an inflated rate to make the performance of the team look worse. Or the franchise might be supplying content to related media properties at a discounted rate.

In the case of the Pacers, keep in mind too that the city and state have granted significant subsidies to the Simon company businesses that I consider effectively Pacers-related payments. Were the Simons not the owners, I do not believe they would have received as many Simon Company subsidies as they have, and that belongs on the revenue side of the ledger for the team. Having ownership of the Pacers gives Simon significant leverege with the city that is valuable for businesses other than the team.

Young
01-30-2007, 12:41 PM
Here is what i'd like to know.

Do franchises like say Pizza Hut, who operate and big and large cities, share profits? I think not. The Pizza Hut in your town, say Indianapolis, doesn't share profits with the Pizza Hut in say Atlanta unless owned by the same person of course.

Now all the Huts pay money to the corporation or whatever it is (in the NBAs case it would be the NBA that teams pay money to) but they don't share money with other franchises as far as I know.

I could be wrong on this but I don't think I am. There is proof out there that small market teams can make money and big market teams can lose money. What is the key to making money? Running a smooth business and putting the best possiable product out on the court as possiable. I think it would be unfair for a greatly ran franchise like San Antonio to have to share it's profits with what seems to be a poorly ran franchise like New York.

wintermute
01-30-2007, 02:56 PM
the simple explanation is that the league needs the small market teams too.

a 30 team league is more competitive than a 22 team league. it makes for a better product, as long as the talent is not diluted.

basically, larger market teams are being asked to share their presumably larger revenue with their smaller market brethen. in principle, it is not unlike the draft, in that the arrangement here is meant to neutralize market size advantage among the teams and hopefully make them more competitive.

i doubt very much that san antonio will be penalized for their financial success. in fact, as a small market team, i'd expect them to benefit from any revenue sharing arrangement.

ChicagoJ
01-30-2007, 03:29 PM
I always take these things with a grain of salt. No one has ever released audited, GAAP compliant financial statements for the Pacers or any other NBA organization I'm aware of. What's more, even these were released, that would not put the franchise in the context of the overall wealth and business structure of the owners. For example, the "team" may be paying money to related parties at an inflated rate to make the performance of the team look worse. Or the franchise might be supplying content to related media properties at a discounted rate.

Let's take that one step further, when I worked on the purchase price/ valuation dispute of Belo (which was a minority owner when Perot owned the Mavericks) v. Cuban, we couldn't officially get access to the team's or league's financials to estimate damages.

But since we did tax valuation work for a number of other NBA teams, we did know what the actual numbers were, we just couldn't enter them into evidence.

And we could plainly see there were frequently big differences beween those numbers and what you'd see published in Forbes or Kagan.

Not only does Forbes or Kagan not know the financial facts (just assumptions), the standard franchise agreement stipulates that minority owners are often legally prevented from seeing the financials. Let alone John Q. Public.

The same was also true on the salary cap database. Let's just put it this way, there are a lot of mistruths in RealGM's data, even if everyone treats it as being "true."


In the case of the Pacers, keep in mind too that the city and state have granted significant subsidies to the Simon company businesses that I consider effectively Pacers-related payments. Were the Simons not the owners, I do not believe they would have received as many Simon Company subsidies as they have, and that belongs on the revenue side of the ledger for the team. Having ownership of the Pacers gives Simon significant leverege with the city that is valuable for businesses other than the team.

True - in this type of valuation you have to uncover enough data to treat these things as "arm's length" transactions. At MSA, for instance, Ogden, the concessionaire, got all the concession revenue and profits and the Pacers received a back-channel subsidy from the city. At the Fieldhouse, the Pacers get the consession revenue.

ChicagoJ
01-30-2007, 03:34 PM
Here is what i'd like to know.

Do franchises like say Pizza Hut, who operate and big and large cities, share profits? I think not. The Pizza Hut in your town, say Indianapolis, doesn't share profits with the Pizza Hut in say Atlanta unless owned by the same person of course.

Now all the Huts pay money to the corporation or whatever it is (in the NBAs case it would be the NBA that teams pay money to) but they don't share money with other franchises as far as I know.

I could be wrong on this but I don't think I am. There is proof out there that small market teams can make money and big market teams can lose money. What is the key to making money? Running a smooth business and putting the best possiable product out on the court as possiable. I think it would be unfair for a greatly ran franchise like San Antonio to have to share it's profits with what seems to be a poorly ran franchise like New York.

The difference is, Pizza Hut franchises are competing locally against Papa Johns, or Little Ceasars, or Dominos, or Wendys, or whatever.

Sports franchises are different.

And the franchisors at Pizza Hut pay a lot of money to corporate to cover "brand advertising." This proposal is, in many ways, a subset of the NBA's "brand" advertising. The more strong, local franchises the NBA has, the more that all owners prosper.

Jerry Jones of Cowboys' fame is famous for fighting the NFL on this type of revenue sharing. Does he (1) not realize how much his team benefits from having "popular" and financially strong rivals such as the Giants and Redskins, or is he (2) just being greedy?

Putnam
01-30-2007, 04:00 PM
I think it would be unfair for a greatly ran franchise like San Antonio to have to share it's profits with what seems to be a poorly ran franchise like New York.

Would that happen, though? The reason New York is a poorly run franchise is that they have a vast local media market, and they spend the money they draw from that foolishly.

Revenue sharing would transfer money from the big markets to the small ones, and let them compete on a basis of smart or stupid management. I don't think it would ever be contrived to shift money toward the big markets. Would it?

arenn
01-30-2007, 05:41 PM
Do franchises like say Pizza Hut, who operate and big and large cities, share profits? I think not. The Pizza Hut in your town, say Indianapolis, doesn't share profits with the Pizza Hut in say Atlanta unless owned by the same person of course.

That's true. But then again, the Pizza Hut franchise in Atlanta doesn't depend on the Pizza Hut franchise in Indy to come down and challenge them to a pizza bake off in order to serve dinner. Sports franchises cannot even present games without having competitors play them.

One proposal I read for baseball (maybe in Slate magazine) said that other MLB teams could get revenue sharing out of the Yankees simply by not showing up to games against them and forfeiting. If no one would play the Yankees, they wouldn't have a product to sell and wouldn't have any profits. Thus the Yankees would be forced to pay, say, the Oakland A's, to compete with them. That would effectively institute revenue sharing.

The leagues force teams like the Pacers to play who the league dictates. Because the Pacers are not free to negotiate their own terms of competition with other franchises, revenue sharing is one option to serve as a proxy.

Eindar
01-31-2007, 01:46 AM
Good discussion. I think that revenue sharing is good for any league, as is a salary cap. I'm not sure how revenue sharing would work with a luxury tax system, however, or I might say, it might make the luxury tax redundant.