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I was having a discussion recently with Ethan Sherwood Strauss, the writer for WarriorsWorld and HoopSpeak, and he compared revenue sharing and players making sacrifices for the financial stability of the NBA with subsidizing operating losses for bad markets or poorly run teams.

His position was that giving the SMOs (small market owners) an equal share in league generated revenues might be good for a platonic ideal about what a league should be, but its not necessarily great for biz in the aggregate.

Thats an interesting position. How would it not be good business in the aggregate for all teams to be profitable and able to compete on an even field each year? Definitely it wouldnt be as good a deal for the Lakers, Bulls, and a few other teams to make smaller profits on their teams but when the league states that 22 of the 30 teams in the league lost money last season wouldnt it be best in the aggregate to rework the system so that more like 22 of 30 team made a profit instead?

Maybe I am just thinking in ideal situations but when over two-thirds of the teams in the league are not profitable then platonic idealism looks a lot more like practical business planning to me than maintaining the status quo. So would it be good for the profitable teams in the league to assist the less profitable teams or unprofitable teams?

I suppose it depends on how you see the league. Is the NBA 30 individual and competing business operating in the same field or is it more like 30 divisions of one company competing for assets but basically all working for the same common goal of the main company? I believe that the 30 teams in the NBA are all part of one large multi-national corporation called the National Basketball Association.

You could ask why they havent changed the name to International Basketball Association since there is a team in Canada but that isnt what we are talking about today.

The NBA competes with the NFL, MLB, NHL and even Hollywood for the fans entertainment dollars not each other. They only compete against each other in the standings. After all, the leagues owners get to vote on who owns each team and whether or not they can move their headquarters. They share equally in the profits from national TV contracts. Where in the real world of competing business does that happen?

The answer is simple. It doesnt.

Any argument that implies the teams in the NBA are competing businesses fails the most basic test. So the profitable owners arent subsidizing poorly run competitors. They are in fact reallocating assets produced by all 30 teams participating in the league. That is a normal business arrangement. All multi-national corporations take profits from one division of the business to fund other integral, but not financially profitable, divisions.

Let me give you an example. Most people who work for any size corporation know there is something called the IT department. These people dont make profits for the company. They enable other divisions to make even greater profits. Likewise, teams in big markets are able to make outsized profits not because they exist as individual entities. They make money because they draw fans to watch them compete against other teams that may not be in as profitable markets.

The NBA as a whole is able to make more income and therefore greater profits by enlarging their fans footprint beyond simply the largest and most profitable TV markets. To do that means having teams in cities such as New Orleans, Oklahoma City, Milwaukee and Memphis despite their smaller TV markets. Locating teams in these markets creates a larger national footprint of support for the league.

Is it going to create a more balanced and competitive league by shifting these assets around?

That is a far more difficult question. It is posited that greater economic equality would produce greater equality on the court, i.e. evening out the money will make for a more competitive league and the theory is that a more competitive league would generate more interest in the league overall.

People dont enjoy following local teams that arent successful. That is true in Los Angeles just as it is in Memphis. After all, while the Lakers have been one of the most popular teams in the league, the Clippers consistently languish in the bottom of the rankings despite sharing the same arena to play home games in. So having the fans believe there is an opportunity to compete for a championship would seem to be a necessary condition to drawing fans.

Does equalizing the revenue structure guarantee a more competitive league? Not according to the most recent research. As Dave Berri, author of the Wages of Wins, explains:

In a world where a maximum individual salary cap exists (such as the NBA), the answer seems to be no. Thetalent in the NBA is not equal.About 80% of wins are produced by about 20% of the players. If you makeit so thatteams cannot bid more for a player’s services– which is what a salary cap and revenue sharing is designed to do — the top players will need to find another reason to sign with teams. One good reason — as we saw in Miami — isa collection of top talent can win many games. So what top players will do is gather together on one team. This means that teamswhoemploy the multiple starswill be very good.

From the perspective of the teams… if we try and make payrolls equal you will see some teams — like Miami — take their player budget and spend it on many stars (and fill in the rest of the roster with minimum wage players). Even if Memphisspent the sameamount on players, they would tend to lose to the multiple-star team because there simply are not enough stars for everyone to employ three major talents.

Soequal revenues and equal team payrolls do not lead to competitive balance in basketball. The nature of the talent employed indicates to me that competitive balance is not something the NBA is going to see. And it doesn’t seem to me — given the growth in the game’s popularity over the past few decades — that fans really care.

So if equal revenue doesnt equate to balanced competition why are the SMOs striving so hard to get it?

The answer is simple. Fans dont believe the statistics. They believe that greater revenue streams do equate to more wins. Not only that but owners expect to make a profit and even if more equal revenue streams dont equate to a more balanced league it does give the SMOs a greater opportunity to not lose money. The bottom line is the SMOs desire an opportunity to win but they are demanding an opportunity to make a profit.

So if profit is the bottom line and no deal can be reached in forcing the players to accept cuts to pay for it what is the solution?

Michael Heisley made it clear that he knows how to make money with a team in a small market but it wasnt what the league wants their teams to do. Donald Sterling has made money as well despite never fielding a competitive team for more than one season at a time. What the league needs to avoid is not only not having these two owners run their teams in this fashion going forward but to eliminate the incentive to have other small market owners run their teams in like fashion.

Consider the Grizzlies team when the owner was running it profitably. The Grizzlies eliminated their scouting department. They traded away any player making more than rookie scale money. They facilitated trades with other teams where they received expiring contracts and cash and then bought out the veterans contracts to save even more money. The team was profitable but the team wasnt competitive. Greg Poppovic described the franchise as a AAA minor league club and even suggested that trades like the Grizzlies made should be reviewed by a panel to determine the effect on competitive balance in the league.

Now imagine if not only the Grizzlies but 5 or 6 other teams in the league tried to do the same thing. You would have a bidding war to see who would accept the least for the talent on their teams.

So in the end whether or not revenue sharing and cutting player salaries makes the league more competitive or not on the court isnt nearly as important as making sure that teams can make money so the integrity of the league can be upheld.

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