The Indiana Pacers got an assist recently from other National Basketball Association owners that could push the team out of the red.
In April, the league’s board of governors approved a 63-percent increase in the amount of revenue shared among teams after a letter signed by Pacers co-owner Herb Simon and seven other small-market teams urged the change.
The revenue challenges faced by small-market teams can no longer be ignored, said the letter signed by Simon in late 2006.
Though the vote tally was not revealed, Joe Litvin, NBA president of league and basketball operations, said, “This is a subject without true consensus.” Litvin added that most teams “were satisfied, but not happy, with the outcome.”
The vote passed by a “comfortable margin,” among the 30 team owners, league sources said. Pacers officials declined to discuss the matter.
The money handed out to deserving teams in need will increase under the new plan from $30 million to $49 million annually.
Under the three-year plan, the maximum a team can qualify for is $6 million the first year, escalating to $6.6 million during the third year. Under the old plan, the maximum a team could get was $5 million, though that was rare.
“This is an important step in liberalizing the NBA’s revenue-sharing policy, but it won’t solve all the Pacers’—or any team’s—problems,” said Rick Horrow, CEO of Florida-based Horrow Sports Ventures.
After moving into Conseco Fieldhouse for the 1999-2000 season, the Pacers had a string of modestly profitable years, according to studies by Forbes magazine.
But in 2006, the team lost about $12 million as attendance plummeted. Only after the Pacers cut player payroll from $79 million to $67 million did the team stem its losses to $1 million in 2007, according to Forbes. Those losses are figured before any revenue sharing.
Now that average attendance has hit a 22-year low of 12,016—last in the league—sports business experts expect the Pacers to fall further into the red.
While the Pacers generated $107 million in revenue in 2007, according to Forbes, the New York Knicks brought in $196 million and the Los Angeles Lakers $170 million. The revenue disparity comes primarily from television and radio deals that large-market teams can make that small-market teams can’t. Revenue from larger arenas, including luxury suite sales and concession and parking revenue, widen the gap between large- and small-market franchises.
“One thing the Pacers have going for them is that the league has made a commitment to help loyal, long-standing owners like the Simons who have been with the league in good times and bad,” said Marc Ganis, president of Sportscorp Ltd., a Chicago-based sports business consultancy.
In September 2006, Herb Simon—who, along with his brother Mel, owns the Pacers—signed the letter urging NBA Commissioner David Stern and other team owners to broaden revenue sharing. The letter also was signed by the owners of the Portland Trailblazers, Memphis Grizzlies, Charlotte Bobcats, Milwaukee Bucks, Utah Jazz, New Orleans Hornets and Minnesota Timberwolves.
“If appropriately managed teams can’t break even, let alone make a profit, we have an economic system that requires correction. The needed correction is serious revenue sharing, not just modest revenue assistance …,” the letter said.
In early 2007, NBA team owners agreed to increase shared revenue from a paltry $14.8 million annually to $30 million, but some small-market owners said the increase wasn’t enough.
“About 25 percent of NBA teams’ revenue is from shared revenue,” said Andrew Zimbalist, a professor at Smith College in Northampton, Mass., and a noted sports economist. “In the NFL, 70 [percent] to 75 percent of teams’ revenue comes from shared revenue.”
The new plan is based on market performance, with the amount of shared revenue a team receives calculated by a complicated formula designed by McKinsey & Co., a New York-based business consultancy hired by the NBA.
Among the performance criteria are the size of a team’s media deal in relation to market size and sponsorship revenue in relation to the size of the local corporate base. Teams that lose money but don’t meet the market performance criteria will receive little or no shared revenue.
NBA officials do not divulge which teams receive what amount of money from the pot. The money for the shared revenue pool comes from the luxury tax assessed to teams that exceed the player payroll cap, an escrow fund defined by the league’s collective bargaining agreement with players and funds from each of the league’s 30 teams based on the amount of local revenue each team generates. The range of contributed revenue will be $270,000 for low-revenue teams like the Pacers to $1.1 million for high-revenue teams like the N.Y. Knicks. •