Revenue-Sharing Isn't Needed to Make NBA Small-Market Teams Competitive

(Photo: Keith Allison)

According to the Sports Business Journal, the NBA is going to fully phase in a revenue-sharing plan in 2013-14 which:

• “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.”
• will shift $140 million around the league
• will allow a single team to receive up to $16 million (this year the most any team could receive was $5.8 million), a mark that is about 25 percent of this year’s payroll cap

All of this will — according to Jeanie Buss (Executive VP of business operations for the Los Angeles Lakers) — allow teams to become “economically viable so that every team has the opportunity to compete.”  And according to Buss, this will “make for a healthier league.”

As the article notes, Buss served on the committee that created this plan.  And as the article also notes, Buss and the Lakers will contribute the most revenue.  Unfortunately, it seems unlikely that this plan will dramatically change the level of balance in the league.

To understand this point, let’s talk about LeBron James and the Cleveland Cavaliers.

In April of 2010 — or less than two years ago — the Cleveland Cavaliers finished with the best record in the NBA.  Less than three months after this season ended, though, LeBron announced that he was departing Cleveland for the Miami Heat.

One might think this was a classic case of a larger market simply using its revenue advantages to take talent from a smaller market.  After all, the Miami metropolitan area has more than twice the population as Cleveland.  Such disparities suggest Miami has a much bigger source of revenue, and in a bidding war for talent with Cleveland, Miami is likely to win.  Given this reality, if the NBA truly wanted every market to be competitive, something would have to be done to reduce the revenue disparities we see across markets.

Although such an analysis might seem to fit the facts, it ignores a crucial element of the NBA’s labor market.  Back in 1999, the NBA implemented the first salary cap in North American history.  Yes, the NFL and NBA had payroll caps — or limits on how much a team could pay all of its players — well before 1999.  But prior to 1999, no league had placed a limit on how much any team could pay any single player.

Starting in 1999, though, the NBA did limit the pay to their stars. As a consequence, it is still the case that the highest salary paid to an NBA player in a single season was the $33.14 million the Chicago Bulls paid Michael Jordan in the 1997-98 season. And with the pay of star players restricted, it appears that these players are now producing far more revenue for their teams than teams have to pay the stars in salaries.

Here is a back-of-the-envelope calculation that illustrates this point.  Back in 2009-10, the NBA paid about $2.1 billion to its players in salary.  And these players produced 1,230 wins.  That means the NBA paid about $1.7 million per win.  In 2009-10, though, LeBron James produced 21.6 wins for the Cleveland Cavaliers. Had Cleveland paid the average price per win to James, they would have had to pay more than $36 million.  Mr. James, though, received less than $16 million in salary that season. So according to this fairly crude calculation, the Cavaliers were able to pocket more than $20 million from LeBron.

After the 2009-10 season — according to the NBA’s rules — Cleveland could have signed LeBron to a 6-year contract for $128 million.  In contrast, without a sign-and-trade (which ultimately did happen) Miami could only offer $99 million over five years. LeBron, though, decided to take less money to sign with the Heat.  In response, owner Dan Gilbert of the Cavaliers … well, he expressed some unhappiness.

This unhappiness, though, wasn’t motivated by a system that allowed large market teams to pluck the best talent from the small market teams.  Again, the Cavaliers could pay more than anyone for LeBron.  And even at this higher wage, the Cavaliers were still going to collect millions in additional revenue.  One suspects that the true motivation behind Gilbert’s unhappiness was that when LeBron left Ohio, millions of dollars also left Gilbert’s pocket.

We can see this when we examine the recent history of revenue sharing in the NBA. Tom Reed of the Plain Dealer reported the following in a story announcing the NBA’s latest revenue-sharing plan:

During the final few seasons of the LeBron James era, the Cavaliers were winning playoff games and writing checks to the league’s revenue-sharing plan. They had robust attendance, excellent sponsorship and one of the league’s top-10 local cable deals — 10 years at $25 million per from Fox Sports Ohio, which began in 2006.

And now that LeBron has left, Reed expects Cleveland to be drawing money from the NBA’s newly enlarged revenue plan.  So what happened? Obviously Cleveland didn’t just become a small market team.  Two years ago — if we look at population — Cleveland was clearly one of the NBA’s smallest markets.  But because they had a star producing much more revenue than the Cavaliers were required to pay the star in salary, the Cavaliers earned so much revenue that they were treated like a large market team.

Despite this evidence, here’s what Len Komoroski — president of the Cavaliers — had to say about the new revenue-sharing plan:  “The new revenue-sharing model clearly helps create a better competitive balance across the league. We think the new model is not only good for the Cavaliers, but good for the entire league.”

One wonders why Mr. Komoroski reached this conclusion.  Will this new revenue-sharing plan cause LeBron to come home?  Will it cause future NBA stars to take the money Cleveland clearly has to pay its superstars?

Again, LeBron didn’t leave Cleveland because the Cavaliers couldn’t afford him.  Clearly – because of the NBA’s salary cap established in 1999 – LeBron was a huge bargain for the Cavaliers. So one wonders how anyone would conclude that transferring money from the LA Lakers to the Cleveland Cavaliers would stop a scenario like the LeBron story from happening again.

And in fact, it doesn’t.  We just saw the same story take place with respect to Chris Paul and the New Orleans Hornets.  Like James, Paul produces more revenue than he can be paid by NBA rules (Paul produced 18.4 wins for the New Orleans Hornets last season).  But the Hornets — who are owned by the NBA — felt compelled to trade Paul to the Los Angeles Clippers because Paul indicated he would not re-sign with the Hornets.  Once again, it wasn’t because the Hornets couldn’t afford Paul.  The trade appeared to simply reflect Paul’s desire to leave New Orleans.

Of course, the stories of LeBron James and
Chris Paul are just anecdotes. Such stories, though, are supported by a paper Martin Schmidt and I presented last summer on the link between salary caps, payroll caps, luxury taxes, revenue sharing, etc. and competitive balance. Our research indicates there isn’t a link.

In the end, what all these plans do is transfer the money the league generates.  In general, that transfer runs from players to teams.  It also — as we see with the NBA’s revenue-sharing plan — transfers money from large market teams to small market teams.  What it doesn’t do is change the competitive landscape of the league.

So if you are concerned that your favorite small market team isn’t winning enough, don’t expect this revenue-sharing plan to change that reality.  That reality really won’t change until the people running your favorite team start making better decisions and, consequently, doing a better job of convincing the stars they land that they will ultimately win (like Tim Duncan in San Antonio) in a small market.