SBJ/Feb. 14-20, 2011/Leagues and Governing Bodies

NBA owners wrestle with revenue sharing

As NBA owners figure out how much revenue they are willing to split with today’s players, a difficult and sometimes fractious set of internal negotiations must be completed as ownership tackles a major new business strategy: how to split more revenue among themselves.

For months, the NBA’s 10-member planning committee, led by Boston Celtics owner Wyc Grousbeck, has been addressing ways to align a new revenue-sharing system with a new collective-bargaining agreement.

Yet, as the clock ticks toward the June 30 conclusion of the current CBA, owners continue to wrestle over a new revenue-sharing structure that NBA Commissioner David Stern has said is on a dual — but separate — track with a labor deal. Stern believes that the league must have a more equally distributed business model aligned with how funds are shared with players. The goal is to move more money through revenue sharing to help make all teams profitable. It’s a seismic shift given the NBA’s current revenue-sharing system, which unlike other leagues, doesn’t share a dime of local revenue among the 30 owners.

Further challenging the league is that at least half of its teams lose money, while there is a widening revenue gulf between large- and small-market teams. Consider the disparity in team revenue, where large-market teams like the New York Knicks and Los Angeles Lakers generate annual revenue of around $250 million compared with small-market franchises like the Memphis Grizzlies and New Orleans Hornets that generate around $100 million.

Combine that revenue disparity with individual owners unaccustomed to sharing earned dollars, and it makes for a complicated, protracted set of negotiations.

No formal plan on changes to the current model have been presented to the league’s board of governors and there likely won’t be any specific plan presented to the league or union during this week’s All-Star break in Los Angeles. The hope is that owners will settle on a revenue-sharing model this spring.

Until then, Grousbeck, who declined to comment, and the planning committee are running model after model with permutation on top of permutation, trying to create a system that will win support of all the owners.

NBAE / GETTY IMAGES
“Because of the wide revenue disparity among teams, which is mainly a function of market size, you will always have some teams that will struggle to make a profit if they want to be competitive.”
Joel Litvin
NBA President of League Operations
“There is a broad consensus that the current revenue-sharing structure ought to be changed,” said Joel Litvin, NBA president of league operations and a key executive involved in the revenue-sharing issue.

But the mechanics of change present huge obstacles to ownership, as teams confront an age-old question: how to redistribute wealth among those who aren’t predisposed to increased sharing.

While it helps to have big-market teams like the Lakers and Knicks endorse the effort, the reinvention of how owners do business is contentious.

“The large markets have bought in, but this is a league run by a bunch of entrepreneurs who have never shared with their competitors,” said one source familiar with league finances. “There has been zero revenue sharing on tickets and none on the local media level, so this represents a sea change in how the league is run.”

Part of the NBA’s current revenue-sharing structure mirrors other leagues in that it calls for its 30 teams to equally share national television revenue. Estimates this year have that total at $900 million, which this season will bring each franchise around $30 million. But unlike other leagues, the NBA has a local performance metric tied to another smaller component of revenue sharing. The amount of revenue to be shared from that pool is calculated by the amount of luxury tax assessed to teams that spent over the salary cap. But the pool from those sources became underfunded as fewer teams exceeded the salary cap, which this year stands at $58 million per team.

For the 2008-09 season, the league recognized the dwindling revenue-sharing pool and boosted the pool to $49 million up from $30 million. Seventeen of the NBA’s 30 teams received a portion of that revenue-sharing pool, with some franchises receiving a very small amount, and just five receiving a maximum payout of $6 million.
While the league is still computing payouts for the 2009-10 season, the pool is expected to be around $60 million, with 10-15 teams receiving the shared revenue.

The amount of the payouts to teams from this fund are determined by a formula created by business consultants at McKinsey & Co. It calls for teams to meet certain business performance benchmarks, including specific amounts of local advertising and sponsorship revenue based on market size. This was set up to safeguard teams from not fully maximizing local revenue opportunities while still receiving revenue.

So in the current system, teams receive a base of $30 million in national television revenue along with potentially another $6 million or so from the McKinsey formula.

But many teams, particularly small-market franchises, feel that’s not enough and oppose the structure because its limited payout doesn’t close the gap between higher-revenue teams. Their belief is there is not enough revenue distributed no matter how efficient they operate in their respective markets and they want a greater upside provided for smaller-market teams.

“It is extremely complicated and most of the owners are looking to change,” Litvin said.

“Because of the wide revenue disparity among teams, which is mainly a function of market size, you will always have some teams that will struggle to make a profit if they want to be competitive,” Litvin said.

Now, the league is studying new revenue-sharing systems, particularly the pooling of local revenue that assists low-revenue teams and creating a more financially competitive approach in how its teams do business. Possibilities include taking a portion of each team’s gate and local broadcasting revenue and redistributing it to the neediest teams.

“The universal challenge is how do you fill the growing gap between the very top and the very bottom,” said Andy Dolich, former president of business operations for the Memphis Grizzlies. “In markets where there is a lack of eyeballs and available wallets, the question is how to equalize it. It has to be in an increased revenue share.”

The union has not been involved in the league’s work to restructure revenue sharing and does not know of the owners’ plan, said Jeffrey Kessler, outside labor counsel for the union. “They just told us they are studying it and they are working on it, and that is all we know,” Kessler said.

The NBPA has proposed that more local revenue, specifically, be shared among teams, as opposed to national revenue, Kessler said, because “in the NBA, unlike the NFL, the profitability is driven by the individual local revenues.”

Kessler added that the players have asked that in any revenue-sharing plan the NBA adopts “that there be clear rules” that the teams that receive the revenue either spend it on player compensation or on ventures that actually increase revenue.

“The players would be willing to sit down and negotiate the exact parameters” of revenue sharing with the owners, Kessler added.

While Stern and the NBA’s labor committee, chaired by San Antonio Spurs owner Peter Holt, will increase the frequency of talks with the union for a new CBA, the league isn’t yet sharing specific details of its revenue-sharing approach as it considers a new structure.

“There are so many ways to go at it,” said a source. “The [planning committee] is as down in the weeds as it can be.”

Staff writer Liz Mullen contributed to this report.

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