NBA AM: Is Expansion In The NBA Next?

Is Expansion Next?:  It’s been long believed that after the NBA reached its new rights deal with ESPN/ABC and Turner that domestic expansion would become possible, or at least that’s the narrative those seeking to obtain a team have been spinning.

While expansion, specifically domestic expansion, isn’t completely out of the question at some point in the future, in the short-term it’s not something that’s going to happen.

As they say, don’t shoot the messenger.

The problem with expansion is that what a new member team/market puts into the pie in terms of an expansion fee and revenues is often radically less than they take out of the pie over a significant span. The NBA has learned this lesson the hard way both in some of its relocation decisions over the last two decades and the expansion into Charlotte.

The NBA just closed a media rights package said to be worth $24.4 billion over nine seasons. Divided among the 30 current member teams, that comes out to roughly $813 million per team. Expand that out to 32 teams and that number drops to $762 million per team. Said differently, each teams loses $51 million from the current nine year deal by allowing two more mouths at the table.

For argument’s sake, let’s say a new team in an expansion scenario costs $1 billion, which is a massive number for a new team, divided out among the 30 existing teams, that’s an expansion fee worth $33.3 million per team.

So, let’s call it two new teams or $66.6 million per existing team in money coming in, in exchange for $51 million per team going out. That’s a gain of $15.6 million per team. Sounds like a good deal right? The problem is that’s $66.6 million coming in one time, but $51 million going out over the span of this current nine-year deal.

Those two new mouths get to eat from the pie forever, obtain players, hire coaches, poach ad dollars and national TV appearances. They’re competing franchises when it comes time to sell your franchise.

Now the argument for expansion is that it would increase the value of the league. Really? The NBA just closed a $24.4 billion rights package and the Clippers sold for $2 billion. The league doesn’t seem to be having a valuation problem.

Would adding a franchise in Seattle be good business? Maybe. A new arena and a renewed fan base that cares about the team could be profitable. The problem is it was not profitable the last time the NBA played in Seattle, so there is no guarantee that it will be this time even with a new amped up owner and the right kind of revenue generating amenities.

Charlotte was the flag pole in NBA attendance for almost a decade, and now that same formerly rabid fan base is ho-hum about the NBA at best. It is getting better, but the belief that Charlotte would return to its glory days with a new owner and an expansion team still has not materialized, even after an ownership change.

Those are just the top line numbers in an expansion scenario, that’s not taking into account the supply of quality players to fill those 30 new roster spots. There has been a long-held belief that the NBA doesn’t have enough star players now, is adding two more teams going to help the competitive balance? Or would the league be inviting in two more lottery teams for the foreseeable future?

Expansion is great to talk about. There are markets like Seattle, Las Vegas, Anaheim, San Diego, Louisville and Kansas City that would love to have the NBA in their market. There are backers and supporters in those markets that would pony up the dollars, but is adding more teams really good for basketball in the long-term?

The answer there is still likely no.

The NBA and its players had a brutal labor fight in 2011 over the economic state of basketball. Twenty two teams were said to be losing money then. Much of that has changed with new the revenue split between the players and owners along with revenue sharing between owners, increasing across the board in the business side of basketball and this new rights deal, but that does not mean the NBA is ready to trip over itself to expand.

If expansion is going to be considered, it’s likely going to happen after 2017, when the players and the owners fight out the next labor deal.

But if expansion is not considered, as the NBA has said time and time again it’s not open to, it’s because they have learned lessons about what new markets mean, and while having a bigger league may sound good on the surface, one-time expansion payments and new markets are generally money losers in the long-term. With $24.4 billion locked in over the next nine years, it’s more likely that the owners pocket most of that cash rather than look for more mouths to feed.

Expansion is not out of the question, it’s just not nearly as likely as some in those would-be markets would like to make out to be.

Flattening The Cap?:  With yesterday’s news of a new massive TV deal, there was immediate speculation on how that new money would impact the NBA both in the short-term and in the long-term.

Yesterday we gave you The Ten Things You Need To Know About The NBA’s New TV Deal.

But our good friend and contributor Larry Coon dropped a fun wrinkle in his break down of the deal for ESPN.

There has been a lot of talk about smoothing the transition from the current salary cap levels based on the current TV deal, to the new much larger cap levels expected when the new TV deal kicks in.

Apparently what’s been suggested and is being weighed by both the Players’ Association and the NBA is rather than one large increase in July of 2016 that some teams may not be able to fund immediately, is to install a more gradual increase in the cap and a possible lump sum payment to all players.

Under the current labor deal the players are guaranteed a fixed percentage of revenues. In their case, given the size of the new rights deal, it would 51 percent of revenue. If the cap were mutually agreed to be “smoothed’ it’s likely that a shortfall between what is paid out in salaries and benefits is less than 51 percent of the new revenue stream. In this case the NBA would be required to pay the balance to the Players’ Association, who would then disperse the shortfall equally to all its members.

There has been some concern that doing a massive increase in 2016 would be problematic, as it might unfairly benefit those players eligible for free agency in 2016 and in essence penalize players who take long-term deals between now and 2016, including players currently negotiating rookie scale extensions.

Any smoothing of this nature would require the Players’ Association’s consent. Allowing the cap to be gradually phased in spreads the free agency benefits equally, while giving every player a bigger chunk of the pie even if they are under contract, by virtue of the shortfall payment.

This far from decided, but it is an interesting wrinkle to the problem.

Stay tuned for more on this as it develops.

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