Third of a series.
The question arises often in the course of discussing the NBA lockout: Are the owners emboldened enough to kill a season in order to get the concessions they want from the union?
I'll put the question to you a little differently: Are the big-market owners who are doing well committed enough to the league's current negotiating strategy to lose some of their best players and essentially pay small-market teams to employ them?
In its simplest form, that is what the owners want: Massive salary rollbacks, a hard cap set so low that it causes glamour teams to lose players, and a tripling of revenue sharing to provide the have-nots with the money to sign the players the big-market teams would have to lose. Imagine the Lakers, who paid a league-high $93 million in salary last season, having to waive Lamar Odom -- only to watch him get scooped up by the Kings, Timberwolves or Hornets, who would pay Odom's freight with revenue-sharing money they've received from the Lakers and other big-money teams.
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It's a socialist nirvana that Lenin and Marx would love, not to mention Maloof, but I'm not so sure about Dolan, Buss and Arison.
The debate that has been raging over the NBA's stated losses -- whether they're real operating losses or phony accounting losses -- is a discussion for another day. Whether or not you take the NBA's claim that its teams collectively lost a total $300 million last season at face value, it's pretty clear the NBA's revenue-sharing model is inadequate.
As long as the Lakers are making in excess of $1.9 million in gate receipts per home game, and keeping all but a minuscule amount of that revenue -- plus, all of the 20-year, $3 billion local broadcast deal they recently inked with Time Warner Cable -- then teams like the Grizzlies ($322,105 in gate receipts per home game), the Timberwolves ($350,118) and Bucks ($415,450) have no chance.
Those figures are from the 2008-09 season, when the NBA states it lost $370 million. No wonder! I'm not an accountant, but even I can tell that when the richest team is bringing in $1.9 million in ticket revenues per home game and paying $93 million in salary, while the poorest team is trying to get by with $300,000 per home game and paying its players less than half what the Lakers pay ... then Houston (and Memphis, Minneapolis and Charlotte), we have a problem.
But you knew we had a problem. That's why the owners imposed a lockout on July 1, and why there's been no bargaining since and no bargaining sessions scheduled. So what's the solution?
Revenue sharing can't be done in a vacuum, but neither can the players be expected to accept a lower percentage of basketball-related income (BRI) and/or a hard cap without revenue sharing. Why not? Because running a sports league is not a zero-sum game, and also because revenue sharing is not the great cure-all for competitive imbalance.
In the static world where the NBA wants us to live, it is technically true that revenue sharing alone cannot erase $300 million in losses. In their most strident and private moments, league officials say the current system gives the players 57 percent of BRI and the owners 0 percent. Why zero? That's a generous assessment, they say, because when expenses are paid and the owners end up with negative-$300 million in the aggregate, the NBA's current business model is a losing proposition for them.
This is the nice, tidy little rhetorical box in which deputy commissioner Adam Silver's frequent comment about revenue sharing lives: "We can't revenue-share our way out of a $300 million loss."
Ah, but what if we gave the owners two years of cost-certainty and a greater cut of future revenues (as in Part 1 of my plan)? What if we gave general managers the tools and flexibility they need to turn over their rosters faster to become or remain competitive and so money is spent on players who deserve it (as in Part 2)? And what if we then increased the NBA's current revenue-sharing pool from the meager $60 million to be distributed from last season to a multiple of that -- a figure that would mute the advantages of being an owner in New York, Chicago, Boston or Los Angeles and make it viable to be an owner in Memphis, Charlotte or New Orleans?
If we did that, we would be getting closer to a world where all 30 teams could actually compete, which is one of goals the NBA's negotiators have put forth when the bargaining process began more than two years ago. More compelling, more competitive teams in more markets would mean more revenues for everyone. There would be a return on that investment that would make some, though not all of those alleged losses go away.
We would never get to such a world, because it doesn't exist. And given the record TV ratings and astronomical fan engagement the NBA achieved last season, the Year of the Glamour Market Super Team, it's not clear that's what the NBA should want, anyway. But here's how we could start:
1) Eliminate the luxury tax: Approximately $70 million in luxury tax transfers will be made for the 2010-11 season, according to official salary data confirmed by league sources. Of that, $53 million will be distributed to the 22 non-tax-paying teams and $17 million will go into the aforementioned $60 million revenue-sharing pool. Much of the $53 million is badly misallocated and a waste of time. Why? Teams like the Knicks, Bulls and Heat -- all in glamour markets, and all making millions in profit -- will receive luxury tax checks totaling about $2.3 million each.
Why should Madison Square Garden chairman James Dolan get a $2.3 million check, some of which comes from the tax-paying Hawks, when his team and arena print millions for him and when his roster includes Amar'e Stoudemire and Carmelo Anthony, who will make almost as much combined next season as the Kings' entire roster? Why should the Heat, of all teams, get a $2.3 million check after running the table in free agency last summer and enjoying the financial windfall and Finals appearance that came with it (not to mention perfect weather)?
Even Silver admits that the luxury tax has been a failure.
"We had predicted the tax would be more of a drag on salaries than it's turned out to be," Silver said. "It became business as usual to pay the tax, and therefore it created a league of haves and have-nots, where you have the Lakers at $110 million and Sacramento at $45 million."
So, scrap the tax. As laid out in Part 2 of my plan, we'll have a small-market reinvestment plan funded by a dollar-for-dollar investment by teams that choose to exceed by second-tier cap of $67.5 million in the first two years of the new CBA. This money, which would be $43 million next season based on last season's payrolls, would be targeted to the teams that need it the most -- an immediate infusion of cash for the teams that the NBA's own audited financial statements say lost the most money for the past two years.
2) Change the revenue sharing formula. What has been the NBA's approach to dealing with the discrepancy in local revenues among its big- and small-market teams? The same as our government's approach to dealing with our massive debt: Do nothing and hope it goes away. That's right, NBA teams do not share local gate or broadcast revenues, and that has to change. The NFL's model of a 60-40 split of ticket revenues, with the home team getting the larger percentage, is a good starting point. That way, the Bobcats don't come away empty-handed when they play at Staples Center; without the Bobcats or Timberwolves to kick around for a few nights a year, the Lakers wouldn't be able to sell any tickets for games that don't exist.
The local broadcast issue is a trickier one, but clearly that has to be addressed, too. The Lakers' local TV deal for $150 million per year totals more than a handful of teams generate in total revenue, according to a person familiar with league finances. One season of the Lakers' deal is more than 10 years of Trail Blazers games on local TV; Portland has a 10-year, $120 million local broadcast deal.
That's because the Lakers are the Lakers, and they're in Los Angeles -- and every other team is not. Fair or not, it's a simple fact of geography, population and demographics that can't be changed. But it can be made more equitable. Teams that have a clear competitive advantage simply based on the market they play in must transfer some of that revenue to teams that do not enjoy that advantage -- if the NBA wants a world where the Kings and Timberwolves pay tens of millions more in player salary that they don't currently have.
So in addition to all teams splitting gate receipts, the teams with the biggest local revenues should share a percentage with a comparable number of teams with the lowest local revenues. If the NBA ever publicly divulged such figures, I'd be interested to see how much that combination would increase revenue sharing from its current level of $60 million.
3) Make a portion of revenue sharing performance-based: The NBA already distributes a portion of luxury-tax payments based on a market size/performance model developed by business consultant McKinsey & Co. The model evaluates how teams should be performing based on their market size and local revenues, and rewards or penalizes them according to the results. It's an attempt to level the playing field when it comes to transferring wealth from high-paying teams to those that are performing as well as or better than can be expected given their market disadvantages.
This has to be expanded to reward many of the teams that are caught in the middle of the NBA's haves vs. have-nots model. In many ways, that's the worst place to be. The Blazers, for example, spend money on players, trade and draft well (Greg Oden notwithstanding) and make the playoffs, yet lose money. The Thunder had one of the lowest effective payrolls in the league last season yet advanced to the Western Conference Finals. A portion of the enhanced revenue sharing pool should go to teams like that -- not just the teams that need to be propped up just to survive, regardless of what personnel decisions they make.
If done right -- and I don't pretend to have the method behind this madness figured out yet -- such a mechanism would have an unintended but quite positive side effect: it would discourage tanking. If you're a middling team thinking about dumping salary at the trade deadline, you'd think twice if missing the playoffs meant sacrificing a significant chunk of the revenue-sharing pie.
These would be workable and useful improvements to the NBA's current revenue sharing model, which needs to be enhanced. But can the NBA solve its competitive balance issues and turn unprofitable teams in woebegone markets into the Lakers or Celtics simply by moving money around? Hardly. What's to prevent Donald Sterling from taking his newfound revenue sharing wealth and putting it in his pocket as opposed to signing better players? Who told Michael Heisley it was a good idea to give Rudy Gay $80 million, or forced the Hornets to trade for Jarrett Jack or Trevor Ariza?
But the larger point is that the Knicks and Bulls writing more checks to the Grizzlies and Hornets isn't a viable solution any more than asking Chris Paul and Dwight Howard to accept 40 percent less on their max contracts than LeBron James and Chris Bosh got last summer. It's the essential, dual-edged debate of this lockout: It can't be all on the backs of the players, and it can't be all on the backs of the successful teams -- because when all is said and done, the Bobcats will still be in Charlotte and the Bucks will still be in Milwaukee.
Or will they? This will bring us to the fourth and final part of the Berger Plan for fixing the NBA, and it might just be the most viable option: contraction.