SBJ/January 23-29, 2012/Leagues and Governing Bodies

Inside NBA's revenue sharing

How complex plan will shift $140 million to needy teams

The NBA’s new revenue-sharing plan was years in development and today represents a staggering shift in league policy as the NBA redistributes wealth among its teams.

It was fueled by a plea from eight small-market teams in 2007 and grew into one of the league’s most contentious issues, running parallel with the league’s collective-bargaining agreement negotiations.

When fully phased in by the 2013-14 season, it will see a stunning $140 million in additional revenue sharing coming into play compared with last year, moving money through a complex formula that shifts some of the financial wealth of big-market NBA teams to the league’s neediest teams, each of which could receive up to $16 million a year as part of the plan.

Some team executives said that while the system does not completely close the financial gap between high- and low-revenue teams, it is the most progressive form of revenue distribution in the league’s history.

“Whenever you have 30 teams in 30 different markets, you have 30 different goals and needs,” said one team executive, addressing the sensitivity of the issue among owners. “It’s not perfect, but I think it will show that it will be a success.”

Photo by: NBAE / GETTY IMAGES
The plan was developed, overhauled and fine-tuned by the NBA’s 13-member planning committee, chaired by Boston Celtics owner Wyc Grousbeck, and is a marked shift from a previous plan that relied on luxury tax revenue to fund the limited revenue sharing.

Instead, the new plan is rooted in a philosophy of including locally generated dollars from the big-market, high-revenue teams to be spread among the low-revenue teams.

The planning committee did not follow any other league model, but instead tailored a new plan specifically to address NBA team needs.

“The process of designing and adopting a new revenue
assistance plan was based on establishing the goals of the plan, first and foremost, to work with the new collective-bargaining agreement to enable our league to be more competitive and more financially sound,” Grousbeck said. “The 13 teams represented on my committee were drawn from a wide range of markets, and, in addition, we regularly reported to and met with all 30 teams to get broad input and reaction.”

Sources said that the core of the plan calls for all teams to contribute an annually fixed percentage, roughly 50 percent, of their total annual revenue, minus certain expenses such as arena operating costs, into a revenue sharing pool.

Each team then receives an allocation equal to the league’s average team payroll for that season from the revenue pool. If a team’s contribution to the pool is less than the league’s average team payroll, then that team is a revenue recipient. Teams that contribute an amount that exceeds the average team salary fund the revenue given to receiving teams.

There are limits built into the new plan to protect high-revenue teams, such as the Celtics, Chicago Bulls, Los Angeles Lakers, New York Knicks, and Orlando Magic, with no team to contribute more than 50 percent of its total profits into the revenue-sharing pool. As is the case in calculating league revenue to determine the salary cap, audits are used to determine team revenue.

For example, one high-revenue team could contribute 50 percent of its total revenue, minus certain expenses, for a total of $70 million put into the pool. A low-revenue team could contribute total revenue of $45 million. After allocating to both teams the average team payroll of $58 million, the low-revenue team would receive $13 million in revenue sharing to make up the difference between its pooled revenue from the league’s average payroll. The high-revenue team would be contributing $12 million to be distributed among receiving teams, adding financial balance between the markets.

Each team’s total top line revenue already includes shared national revenue from TV and sponsorship at roughly $30 million for each team. So, obviously, teams with high local revenue will contribute the most into the new system as the amount of shared revenue grows from $60 million last season to roughly $200 million when the plan is fully implemented.

Under the new formula, the Lakers stand to contribute the most, with reports putting the Lakers’ projected revenue sharing contribution at roughly $50 million annually, though team officials would not confirm any specific amount to be paid into the system.

“Any business operator wants to keep their revenue,” said Jeanie Buss, executive vice president of business operations for the Lakers and a member of the NBA’s planning committee charged with creating the new plan. “That’s the nature of the business, but we also understand the bigger picture and we want a league with teams that are economically viable so that every team has the opportunity to compete. It makes for a healthier league.”

League projections call for about 15 of the league’s 30 teams to receive payments from the new revenue sharing plan, with seven of the 15 neediest teams, such as the Milwaukee Bucks, Memphis Grizzlies, Charlotte Bobcats and Sacramento Kings, to receive a distribution of roughly $16 million after the new system is fully phased in, up from the nearly $5.8 million maximum that teams could have received this year.

A $16 million payout, based on this year’s salary cap of $58 million, represents about 25 percent of the cap.

“For us, being a small-market team, we have the same goals and aspirations of large-market teams to compete for a championship, and the new plan gives us a chance,” said Fred Whitfield, president and COO of the Charlotte Bobcats. “It gives us a chance to put a talented team on the floor and be able to break even or make some money.”

Similar to the previous system, the new revenue-sharing plan also holds teams accountable in meeting expected local market revenue standards.

“We are outperforming in our market and we are not going to be a [revenue-sharing] receiver,” said Alex Martins, chief executive officer of the Magic, which last year had the seventh highest revenue in the 30-team NBA. “Nonetheless, it’s a partnership between the large markets to the extent that they are going to share their revenues with small markets.”

While the NBA has done away with its old system of requiring teams to meet a set of business performance benchmarks developed by business consultants McKinsey & Co., the new plan calls for small-market teams to generate at least 70 percent of the leaguewide average in total team revenue in order to receive full revenue-sharing benefits. Large-market teams must generate 130 percent of the leaguewide team revenue average. Should a team fall short of its expected revenue, it must make up the difference in its level of contribution.

Cuban wonders whether the plan will collect enough from teams like the Lakers.
Photo by: GETTY IMAGES
The major difference is that teams must meet an overall expected revenue mark in the new plan compared to the old plan, which broke out expected revenue into specific amounts of local advertising and sponsorship revenue based on market size.

One team source said that objections to the plan from high-revenue teams were offset by the fact that their massive team revenues in part are responsible for driving up the player’s salaries, given that under the new CBA, the players get 50 percent of the league’s total revenue, which last year was about $4 billion.

The plan, which runs concurrently with the league’s new collective-bargaining agreement, has drawn its share of criticism from some owners.

Though approved along with the new CBA in late November, the new plan remains such a hot-button issue within league circles that many top team executives refused to comment.

But Dallas Mavericks owner Mark Cuban said he wonders whether the plan will collect enough revenue from teams like the Lakers, who signed a new 26-year blockbuster deal with Time Warner Cable reportedly worth $200 million per year.

“[The new revenue-sharing plan] certainly helps level the playing field,” Cuban said in an email. “The question is whether it is enough to overcome the growing disparity in media rights fees.”

Miami Heat owner Micky Arison has said publicly that he opposed the plan.

NBA executives have heard the complaints, but said they are confident that the plan will bring more financial balance the league.

“It is fair to say that every team had a full hearing in terms of expressing its views on revenue sharing,” said Joel Litvin, NBA president of league operations, who helped spearhead the creation of the new revenue-sharing plan. “It generated a significant amount of spirited debate among the teams. But the planning committee, led by its chairman Wyc Grousbeck, was ultimately able to forge a consensus that didn’t leave everybody happy, but struck as fair a balance as you can strike on a difficult subject.”
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