NBA Lockout: Revenue Sharing As Profit Equalizer, Not Competitive Balancer

By Tom Ziller - NBA Editor

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Oct 26, 2011 - Revenue sharing has long been a prickly subject in basketball, just as it has in baseball. In Major League Baseball, some teams have taken advantage of revenue sharing, profiting handsomely while remaining uncompetitive by keeping payroll low. This -- the Pittsburgh Pirates scenario -- is the first example every revenue sharing skeptic brings up. If you institute stronger revenue sharing in the NBA, you could have situtations where high-revenue teams subsidize small-market teams who remain uncompetitive and are unwilling to spend.

TrueHoop's Kevin Arnovitz goes deeper on this skepticism, presenting a hypothetical situation in which a well-run, profitable team essentially subsidizes a poorly run, unfortunate club. It's a compelling argument. But let me present its evil twin.

Let's say you're the sports world's next great owner-innovator. You're from New Orleans, or Sacramento, or Memphis, and you want to save your city's NBA franchise, so you buy in. You make extraordinary efforts to build the customer base, to broker deals with all of the region's biggest companies and to build a great basketball team. You get lucky in the NBA Draft, you make shrewd deals in free agency and on the trade market. You are competitive on the court, riding success into the playoffs every season. Maybe you even win a championship or two.

And you can't make a consistent profit. In seasons with shorter playoff runs, you actually lose money, despite winning 50 games and having a strong fan base. The costs of payroll are high, even though you don't often step into luxury tax territory. Other expenses have risen -- coaches are suddenly making a few million dollars a season, and it's not cheap to keep your general manager and his top deputy -- but the vital revenue streams (local TV, gate) are slow to grow. You've been maxing out attendance (or coming close) for years; you can't just start raising ticket prices willy nilly. You're locked into your local TV deal for another decade, so you can't yet capitalize on that growing revenue stream.

You're doing everything right, on the court and off. But because of where your team is located, you can't count on making a buck.

Meanwhile, down the freeway, a team is a bit more reckless with the pocketbook, spending well over the tax threshold every season. Despite this, the team stinks. It has incredible revenue streams from decades-old sponsorships, a fat TV deal in the nation's biggest market and consistently high attendance (with high ticket prices) because of its city's love affair with basketball and massive size. 

And the team makes money hand over fist every season. It does everything wrong on the court and off, and makes big profit because of where the team is located.

This, I think, is what revenue sharing is supposed to correct. It's supposed to put the New York Knicks of the league and the New Orleans Hornets on the same footing.

It's not salvation for competitive balance issues: Henry Abbott has exposed that myth fully. But revenue sharing can work to correct profit disparity. There's no reason that, assuming that the NBA needs to be in some markets outside the top-10, teams like the Knicks, Lakers and Clippers should be able to hoard the majority of their profits while teams like the Spurs, Jazz and Hornets fight to stay out of the red. By fixing that disparity -- or at least shrinking it substantially -- the NBA can ensure that smart owners in small markets find a reason to stay in the league.

Consider the Spurs. They really have done everything right. Getting Tim Duncan was a gift from on high; matching him with Tony Parker and Manu Ginobili was a masterstroke. The Spurs are consistently competitive, and this era of Spurs basketball will go down as one of the greatest by any team.

But, as Spurs owner Peter Holt complained last Thursday, the team has lost money in each of the past two seasons. Meanwhile, the Knicks just rang up the team's first winning season in a decade, resulting in four-game playoff sweep. And the Dolans made money hand over fist, and raised ticket prices 49 percent, and will still see sell-outs. That's not right, is it? The Spurs, successful as they have been, should not be losing money while the Knicks, for a decade the model of inefficiency, earn huge profits.

Holt and other owners want to change that by extracting $280 million worth of flesh from the players' union. But that doesn't change the structural issue at play. Without more robust revenue sharing, a new revenue split will only serve to shift the conditions a little: teams like the Spurs will make a couple million in profit or break even, the Knicks will make even more money. It's still not fair or productive. It still doesn't incent the pursuit of excellence for small markets.

The key is not to reward small-market teams for their circumstances, but to allow them to survive and thrive as businesses. There is no league without them -- there's a reason David Stern sought to expand the NBA into America's breadbasket instead of approving a third New York or L.A. team or second Chicago squad. 

In July, Arnovitz revisited Bob Costas' thoughtful revenue sharing plan for baseball, where half of all teams' "circumstantial income" (my phrase) is combined into a pot and then spread evenly. This is essentially local TV revenue and gate. The principle is that without the visiting team, there is no game, so you've got to split the income derived directly from the game with the visitor. The question is where you draw the line -- you wouldn't include arena signage or concessions, would you? That's for the owners to figure out. But the Costas plan is something based on principles that I think it's difficult to find fault in.

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