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
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