Subsidies to Billionaires Keeps the NBA Afloat

Nearly half of NBA teams were losing money in fiscal 2016-17 before they were given a handout. Much needed cash via revenue sharing helped balance the books of teams in small markets.  Revenue sharing is an entitlement program Robin Hood would love. It takes from the rich (Lakers, Warriors) and gives to the poor (Milwaukee, Memphis). The numbers documented in a confidential report and first noted by ESPN’s Brian Windhorst and Zach Lowe stated the obvious: the Lakers are the NBA version of Bill Gates. They have more money than just about everyone. No Phd needed to figure out why. They play in wealthy and population rich Los Angeles, and they had the intellect and perseverance, and more importantly, the acumen, to create their own revenue stream by way of Spectrum SportsNet. Before gate receipts or parking or concession is added up, the Lakers take in $150 million. Even with a suspect product the last three years, the Lakers profits are extraordinary and exhaustive. But even as capitalism self defines as an industry of private owners for profit, there is something troubling about a team that cannot even make the playoffs and rakes in all that money while a team like Memphis, that fielded a playoff team during the same three year window, is struggling. Unless you accept that capitalism and supply economics is preferential in every American business model. Capitalism doesn’t reward meritocracy.

Capitalism aside, this economic rich vs. poor truth seems to eviscerate the talking points about the new television package that was supposed to fix this. The 2011 lockout was a fake bill of goods intended to address the financial dominance of teams like the Lakers. What happened?

Well, not much besides the Lakers having their own television station that lines their pockets. Unlike the NFL, the NBA doesn’t share local television revenue. What the Lakers make locally they get to keep. What the Thunder make locally they get to keep. What the Nets make locally, they get to keep. That creates an imbalance where the Lakers and Warriors are forced to compensate for the economic realities of smaller, less lucrative markets they didn’t create. They are their brother’s keeper and for the most part they don’t really like it. (Who likes being forced to give away their earned money?)

It is not fair and yet it is fair. The NBA is a collection of owners with shared goals. There is an interdependency that reflects their business model which is why they could run Donald Sterling out the league. At the same time, there is shared responsibility for teams that are struggling to make payroll. The NBA is nothing more than a private club of rich white men and Michael Jordan. Ironically, the new television package makes the struggling teams in the club more desperate for hand outs.

The salary cap is based on league profits. So even if there is more money to go around, the spending goes up as well; all arguments for or against are moral relativism. Only nine teams are below the $99 million cap in 2017-18. None of those teams are expected to make the playoffs.

The increase of money only increases the fiscal burden so we are back where we started in the lockout of 2011. Or as someone told me, if you have a billion dollars and you spend a billion and one, baby you need welfare.

So how then do we keep large markets from creating an economic pyramid?

“Losing money” is based on revenue and paying the luxury tax. The luxury tax was designed to punish big markets, to keep their spending in line. The damage has hurt the lower middle class,  thrusting small markets that can’t afford payroll into financial tsunamis. So it is a paradox. You increase your chance of winning by signing talented stars. Talented stars require max contracts. The consequence for max salaries are severe.  You take a loss because you have to pay the luxury tax and the progressive repeater tax. So what is a championship worth these days in real costs?

The Cleveland Cavaliers were one of 9 teams that lost money after revenue sharing. They were thrust into no-man’s land because of luxury tax payments. The contracts of LeBron James, Kyrie Irving and Kevin Love, not to mention the obscene salaries of Tristan Thompson and J.R. Smith, flung them into deep waters; they drowned and didn’t get a title out of it either. As one owner put it, “national revenues drive up the cap but local revenues are needed to keep up with players salaries.”

The league will address this inequity next week in an owners meeting. Both sides have complaints. The rich teams aren’t exactly thrilled to fork over money they rightly earned. That sounds like socialism or an entitlement program. The teams losing money want a way out of this hole. One way is expansion which would net the owners one billion dollars in an expansion fee which the owners do not have to split with the players. Each team would get close to $33 million, which is 30% of what the Lakers made this year after revenue sharing.

The rich owners don’t have much empathy for the have nots. If you ‘re losing money in your market, then move. It’s callous but appropriately capitalistic. Your market cannot afford you.

The Lakers, who looked the other way as they were losing in 2016-17, raked in $115 million in profit after giving money to the have-nots. The Warriors came in second at $91.9 million in profits after giving away revenue money. One team won the title. One team nearly won the lottery.

According to Brian Windhorst and Zach Lowe, 10 teams forked over $201 million; 15 teams needed the help. 71.5% of the money or $144 million was a direct result of the Lakers, Bulls, Warriors and Knicks. The Warriors are the only team in that group of the upper class that is not a large market but they are a championship juggernaut.

The problem the NBA has to deal with is that every team has to spend the same amount of money to be competitive. But the large markets make more money just because of supply, demand, market size and history.

The union disputes the owners crying poor. Not included in their profit and loss statements are teams that own their own buildings and profit all year long, in basketball season and out. But bickering aside, what the NBA is dealing with is what every business deals with. How do we manage a system of financial oligarchy? Empathy for all, profits for a few. Because only a few have financial power, it suppresses the product as a whole.

But excellence is the American mantra, just as money is. The Warriors and Lakers and Bulls and Knicks have every right to make as much s they can make, irregardless if they win or lose. It is the Commissioner’s job and the teams beneath them to manipulate the system so many can survive.

All of it feels very familiar. Ordinary American life dictates that 80% of the wealth is owned by 20% of the population. The NBA is worse. 12% of the teams are responsible for nearly all the wealth. On paper, as a collective, the NBA cannot survive with such lopsided inequity. But the NBA is not played on paper.

The product still thrives.

 

photo via llananba