Expanding The NBA?
In what has become an annual off-season obsession, the topic of expanding the NBA beyond its current 30 teams has surfaced, again.
There is little doubt that the top-level concept of more NBA teams is fun to contemplate, mainly because there are major cities without teams. There is almost no one that wouldn’t want to see the Seattle market get their Sonics back, or Las Vegas complete their pro sports team trifecta by adding an NBA team to their exploding local sports market. Kansas City has long been talked about as an appealing basketball market, along with Louisville. There is a growing swell of renewed support in Vancouver for another run through the NBA, and Mexico City continues to host massive crowds during the now annual regular season NBA games held there.
So why not pull the trigger on one or two of them if local ownership groups can pony up the expected $1 billion or more expansion fees?
There are a number of issues with expanding the NBA. Here are a few of them:
The biggest hurdle facing NBA expansion is revenue sharing. Currently, the biggest NBA cash markets are contributing serious dollars to the lesser markets to create a more balanced playing field for the league as a whole. While that’s evened out some things economically, there are still more than a handful of NBA teams that would be money losers if revenue sharing were backed out of the equation.
Equally, the NBA salary cap system is based on total revenue generated by the league, which does not take into account local market inequities. For example, the teams in LA have local television deals worth almost three times that of say Milwaukee or New Orleans. Those teams still have to pay out salaries and compete in a salary and expense landscape of teams sometimes generating twice their local revenue. Revenue sharing helps make that work, but adding new teams, that may or may not compete economically is a tough sell, especially to ownership groups that are already sharing dollars with other teams.
Proponents of expansion point to an easy fix, by not allowing new teams to participate in Revenue Sharing for a fixed amount of time but is that really a reasonable long-term answer? Adding a new team or teams and then immediately handicapping them economically for the first years of their existence?
Some would say that problem would simply have to be factored into an expansion agreement, and new owners would have to shoulder that risk as part of gaining entry into such an exclusive ownership club, but is that really good for competitive balance and solidarity of the business?
The TV Deal Isn’t Forever
Currently, the NBA is swimming in a record-setting media rights deal that has ballooned franchise valuations and NBA payrolls dramatically.
The problem with the current rights deal is the shifting and changing landscape of broadcasting. With traditional cable services dying out, and new “Over The Top” media players coming into the sports rights market, there is a sense that maybe the next round of rights negotiations could see the NBA eclipsing the current deal, and that would be a second windfall of dollars current NBA owners would have to share with new owners.
There is also the risk that with subscribers defecting the NBA current partners in droves, that broadcast rights could become less valuable by the end of the current agreements or far more complicated than the current two-partner model that’s in place now.
There was talk the last time around that Google and Facebook, the titans of the digital world, wanted in on NBA rights. That could be a good thing for preserving the value of rights related revenue streams, but its far from a given that NBA games will be consumed the same way they are being consumed today inside the next five years. That is a variable that has a huge impact on the appeal of expansion.
Is There Enough High-Level Talent?
The biggest on-court hurdle for expansion is the lack of star talent. Ask any NBA fan to name the top 20 NBA players, and you’ll find the talent pool flattens out pretty fast outside the top ten or 15 players.
Current NBA teams are struggling to find franchise cornerstones now. Would adding more teams really help competitive balance, especially with current stars opting to play together when they reach unrestricted free agency?
There is little doubt new expansion teams could field rosters, there are plenty of talented players that could populate a team. But the last time the NBA allowed expansion, the new teams were restricted from landing the top overall picks in the draft. How do those new teams compete?
Pay Once Eat Forever
The idea of a $1 billion expansion fee on the surface seems enticing. Especially given that the bulk of that fee would go to existing owners. Let’s assume that the NBA allowed two new teams, that’s $2 billion in expansion fees, divided by at least 30 teams (the NBA historically has taken a piece of those fees to cover operating costs), but for the sake of discussion, let’s say $2 billion paid out to 30 ownership groups, or roughly $66.66 million per owner.
Is a $66.6 million per team worth a slice of the NBA pie in perpetuity?
Let’s take the current $24 billion TV deal that breaks out to roughly $800 million per team over the life of the deal. Let’s say the next deal is $28 billion, that’s $933.3 million per team. If two more mouths are added to the table, that reduces the per team share down to $875 million, or $58 million less per team.
So, is getting paid a one-time team fee of $66.6 million now worth $58 million less in a new rights deal later?
Sure, there are caps and limitations that could be imposed on new ownership groups as part of expansion agreement, which lessens that impact on the current individual teams, but the biggest argument against expansion is that new teams don’t raise the revenue waterline enough to justify the slice of the revenue pie they get forever.
From a fan perspective, more teams sound like a great idea, especially in markets with rabid fan interest, but the reason expansion hasn’t been actively explored is because of many of the items listed above. That’s not to say those obstacles can’t be overcome, but when you hear NBA commissioner Adam Silver really downplay expansion, there are a lot of reasons for that, and most of them are simply that the current owners don’t want to see their golden goose diluted any more than necessary.
Expanding the NBA isn’t a dead issue, it’s simply not one the NBA seems overly eager to start chasing.
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