Some interesting NBA action happened in Louisville last week, and it had nothing to do with pro prospects on Rick Pitino’s team. It did have to do with the pro prospects of the city of Louisville itself. The city’s Metro Council passed a resolution announcing its interest in playing host to a new NBA franchise.
Louisville has a long list of challenges to hurdle before making itself a real contender for an NBA team, and there is also the matter of the NBA, within the past month, flatly denying that it is considering expansion. But the chatter about expansion has been rampant, increasing in volume since the NBA and its players’ union reached a new collective bargaining deal early.
Louisville isn’t the only city waiting with bated breath. Seattle, Kansas City, Virginia Beach, Anaheim, Mexico City, Las Vegas, and San Jose have all been mentioned in previous expansion or relocation rumors.
Seattle, which hosted the Sonics for almost four decades before Clay Bennett moved to the team to Oklahoma, nearly nabbed the Sacramento Kings in 2013. Since then, potential relocation candidates like the Milwaukee Bucks have locked up new arena deals. The New Orleans Pelicans aren’t going anywhere for at least six more years, and the NBA has shown a lasting dedication to Louisiana after Hurricane Katrina. There are no real relocation candidates in the league at the moment.
If the NBA wants to get back into Seattle or exploit a new market, expansion is the only route. It’s worth considering what incentive the NBA would have to expand from 30 teams to 32. And incentives in businesses of this size all come down to money.
The cash influx
Imagine what an expansion fee would run these days.
The NBA last expanded in 2004, when the Charlotte Bobcats entered the league. The expansion fee for Charlotte was $300 million, which was roughly the going rate for NBA franchises that changed hands at that time. The going rate is a bit higher now: the last five teams sold cost an average of $867 million. The Clippers’ $2 billion sale blows that average up a bit. But the Hawks were the last team sold, and they went for $900 million. The Hawks!
That expansion fee gets split among the other 30 clubs. Add two teams at even a low-ball $750 million apiece, and the 30 current NBA franchises will each receive $50 million. If they go for $1 billion apiece, we’re talking about a $66 million payout for each incumbent franchise. That’s one heck of an incentive to vote for expansion.
Keep in mind, too, that the NBA’s new collective bargaining agreement explicitly states that expansion fees are not included in basketball-related income, which means that players do not get a cut. This is pure revenue straight into franchise coffers for the 30 NBA owners.
The new teams will also likely contribute to the NBA’s overall bottom line, depending on where they are placed. One imagines expansion teams will be prevented from collecting from the revenue sharing pot for a set amount of time. This happened when the Kings’ new owners negotiated to remain in Sacramento. You can imagine huge local revenue in Seattle and massive marketing deals for a Mexico City team. A rising tide raises all boats.
NBA teams would financially benefit in the immediate term from expansion. But adding two new teams would chop down on individual franchise shares of league revenue.
The biggest chunk of that comes from the national TV broadcast rights, which bring $2.6 billion per year to the league. Right now, each team picks up roughly $87 million per season under the deal. If you add two teams, that share goes down to $81 million. After about a decade or so, the losses from the decreased TV deal share offset the massive expansion payment. By that point, you’re betting the new teams have added more to the bottom line.
There’s also a cost in players. Few good players will be made eligible for an expansion draft — that’s not the issue. But there will be more competition for free agents, and whatever talent dilution exists will be fortified. (This does not seem to be a major concern these days, but it was about 10 years ago when prominent NBA voices were calling for contraction.)
The league’s player count would essentially expand from 450 to 480. They’d still be paid from the same pot, but again, competition for the best of those players would be stronger. Depending on which markets get picked for expansion, this could hurt the ability of smaller-market teams to keep their best players.
Expanding the league also dilutes the power of each individual team owner. Instead of being one of 30 votes on the NBA Board of Governors, you’re now one of 32. This is a minor issue compared to the money talk, but it’s an issue nonetheless.
The most important questions
The financial gymnastics behind expansion is fascinating because the numbers are so big. But a more important consideration is how expansion would affect the game and the league.
Is talent dilution real? How many years will it take for the expansion teams to become respectable? Will free agents avoid expansion teams like the plague? How will the addition of two (likely) bad teams affect other franchises’ tanking plans? Will travel issues become better or worse? Will the league realign the conferences, or kill the conferences? Will it become harder to make the playoffs in the long run? Will expansion lead to any current owners cashing out and selling? Will taxpayers build these new teams new arenas?
Commissioner Adam Silver has shown a deep interest in assessing how decisions affect the sport, not just the bottom line. No doubt all these issues are being investigated and will be fleshed out before the Board of Governors makes a decision. And there’s no doubt each candidate market will be vetted to the extreme and squeezed of every concession.
There’s a reason so many cities want to be considered for expansion. The NBA is in a special place right now, and everyone wants a piece. The league will find a way to make that interest work for it, as it always seems to do.