Seattle Is Frustrated By the NBA’s Command Economy

For 41 years, the city of Seattle enjoyed NBA basketball.  And then the Sonics moved to Oklahoma City and became the Thunder.

Across the past year, though, there was hope that the NBA was returning to the Emerald City.  Sure the team was the Kings, a team that has lost at least 65 percent of their regular season games in each of the past five seasons. But if the Kings came to Seattle, other NBA teams would have to come as well (hey, the Kings-SuperSonics have to play someone).  And since the prospective owners (a group led by Chris Hansen) of the “Seattle Kings-Supersonics” offered a purchase price equivalent to an enterprise value of $625 million – more than anyone else (and more than anyone has ever offered for an NBA team) – it seemed likely that in a market economy (where the highest bidder tends to get the product) that the NBA was coming back to Seattle.

Unfortunately, Seattle learned this past week that the NBA doesn’t quite follow the rules of a market economy.  For Seattle to get the Kings, the other 29 owners had to approve the deal.  And when the dust settled, a majority of those owners thought an inferior bid from another group that wanted to keep the team in Sacramento was preferred.  Consequently, Seattle has been frustrated again.

Why did the owners prefer to keep the Kings in Sacramento?  Well, it is a bit difficult to figure out the owners’ motivation.  It is possible that the owners really prefer franchise stability.  And given that preference, it seems obvious the owners would want the Kings in Sacramento. 

Of course, just a few years ago the owners allowed the Seattle SuperSonics to depart for Oklahoma City.  And the New Jersey Nets just moved to Brooklyn.  So franchise relocations are not exactly uncommon in the recent history of the NBA.

And that brings us to a more cynical view (and economists love to be cynical!).

Here is how Ira Boudway of Bloomberg BusinessWeek described the owners’ motivation.

More than anything else, the Sacramento saga is about public funding for arenas. The NBA, like the NFL and MLB, wants to reward cities that help pay and punish those that don’t. Seattle lost its team in 2008 because it refused. When Sacramento Mayor Kevin Johnson came up with a promise to secure $258 million in public funds for a new arena, the league felt bound to keep up its end of the deal. “You’ve got to match the offer, have a building, and get a good ownership group that can make it happen, and it happened,” Commissioner David Stern said at the press conference yesterday. The Kings, of course, already have a building. Stern meant a new building, replete with lots of luxury boxes subsidized by taxpayers.

So the NBA, according to Boudway, chose the Sacramento offer because it wishes to continue the flow of public funds to the NBA. As Robert Baade and Victor Matheson note, in the past 20 years we have seen more than $3 billion of public money spent on NBA arenas. Consequently, Hansen’s offer might have been crippled by the fact Seattle’s arena did not require any public funding that wasn’t generated directly by the new arena (and the fact that Seattle lost its team back in 2008 because it did not provide public funding for a new arena).

It is really not possible to know if the NBA owners are keeping the Kings in Sacramento because of how Sacramento funding its arena. What we do know is that for Seattle to get a team in the future, the owners in the NBA are going to have to bless such a move. And that is because the NBA is really a command economy.

There is, though, a different approach (as I once discussed in this forum in 2011).   Consider how Cardiff City and Kingston upon Hull have acquired an English Premier League (the top division in English soccer) team for the 2014 season.  Each city had a team in the Football League Championship league (the second division in English soccer).  And when these teams finished first and second in 2013, Cardiff City and Hull City were promoted to the English Premier League (the winner between Watford and Crystal Palace on May 27th will yield a third promoted team).

To make room for these teams, Wigan, Reading, and Queen Park Rangers will be relegated from the Premier League. This is what losers get in the English Premier League.  Losers don’t get draft picks or revenue sharing.  Losers in the English Premier League are punished, as losers in any competitive market system tend to be treated. 

The mobility in this system is quite interesting.  Stefan Szymanski, co-author of Soccernomics (both the book and the blog),  graciously provided data on what teams were in the top four divisions of English soccer since 1960 (as noted, the names of these divisions has changed over time).  What follows are all the teams who have played at least one season in each of these divisions in the past 53 years. 

Teams

Premier

League*

Football

League

Championship*

Football

League One*

Football

League Two*

Wolverhampton Wanderers

25

24

2

2

Fulham

20

16

14

3

Bolton Wanderers

20

21

11

1

Sheffield United

17

29

6

1

Burnley

16

19

11

7

Wimbledon

14

5

3

4

Crystal Palace

13

32

6

2

Luton Town

12

20

13

5

Blackpool

10

14

22

7

Watford

8

26

15

4

Portsmouth

8

37

6

2

Wigan Athletic

7

2

17

8

Notts County

4

13

21

15

Brighton & Hove Albion

4

18

24

7

Bristol City

4

24

23

2

Swansea City

3

12

20

18

Oxford United

3

18

15

10

Oldham Athletic

3

20

24

6

Bradford City

2

11

18

22

Cardiff City

2

31

10

10

Hull City

2

24

17

10

Reading

2

14

29

8

Huddersfield Town

2

23

22

6

Preston North End

2

26

20

5

Millwall

2

28

19

4

Carlisle United

1

15

16

20

Leyton Orient

1

18

19

15

Barnsley

1

26

16

10

Swindon Town

1

18

28

6

Northampton

1

3

4

6

*- these are the current names of these divisions.  Over time, the divisions in English soccer have had different names.

The top team on the list – the Wolverhampton Wanders, with 25 seasons in the top division – spent 2013 in the Football League Championship division.  But a poor performance means this team will be playing in League One in 2014.  A similar fate awaits Bristol City (like the Wolverhampton Wanders, Bristol City has also played in each of the top four divisions).

Such a demotion, though, is not a death sentence.  In fact, the above table makes it clear that whereever a team is currently, better performance (or worse performance) can change a team’s league in the future.

It is important to emphasize that all this movement doesn’t require any appeasement of the existing owners in the league.   Teams rise and fall based on their performance on the field of play.  The wishes of the other owners are simply not relevant.

The system of promotion and relegation is seen throughout European sports.  And that means that in European sports, success is rewarded and failure is punished.  Again, much like you would expect in a market system. 

In contrast, the U.S. system rewards failure.  Despite being losers on the court, the Kings sold for a record amount and the team has been rewarded with high draft pick in the 2013 NBA draft.  In addition, the NBA is a command economy where the owners decided which cities get to have teams.  And how much people are willing to spend on a team is not necessarily the deciding factor.

If Phil Jackson is a good judge of owners (and Jackson, with 11 NBA titles, might know something), Hansen has a good chance of being a successful NBA owner.  But despite having the money and desire to purchase an NBA team, Hansen is not going to be allowed to compete in this market.   And that is because the NBA is only about competition on the court (and they don’t have much of that – but that is a story for another day). 

CORRECTION: An earlier version of this post incorrectly stated that Seattle’s arena had 100% private financing. Seattle’s arena proposal stated that taxes generated by the proposed arena would be used for the project.

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  1. Joe Konstan says:

    Another possible explanation is that owners would prefer to have larger markets lined up to pay for expansion teams. If they allow Seattle to create a new team in the future, it will almost certainly mean a large windfall (through expansion fees) for each current owner. That would create a strange incentive to allow teams to move to smaller markets (e.g., Seattle to OKC), but not to larger ones (e.g., Sacramento to Seattle). I personally think Brooklyn is viewed as a special case — moving arenas within the same media market.

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  2. MarkG says:

    I am afraid your assertion that the losers (ie relegated teams) get punished is so wrong. They get GBP 23million, then GBP18 million, then GBP 8million, and GBP 8million (TOTAL USD 72million) over the next four years.

    The other clubs in the Championship get “solidarity” money of GBP 2.3million each (USD 3.6MM) per year. So the relegated teams are substantially better off than their competitors, even if they do have players still on higher wages from when they were in the Premier League.

    Also it is wrong to say the teams “acquired” a Premier League space. It is performance on the pitch that determines who goes up or down (unless there are points deductions for financial irregularities). Cities can’t just acquire another club’s league place anymore, and after this happened several years ago, the rules were changed to prevent this.

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    • RicardoB says:

      Losing a potential reward–e.g. missing out on EPL money–is by definition a punishment. Literally, psychologically it is a punishment.

      Promotion rewards you with higher income for multiple years while relegation punishes you with a ceasing of that additional money. How long the reward lasts is incidental to the rewarding aspect of it.

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    • teh_drewski says:

      The Premiership “losers” might be better off than other Championship clubs, but they’re still being punished compared to their former rival Premiership clubs. The difference in prize money for a club between every position in the Premiership is millions of dollars – without taking into account the hundred million dollars or so a “loser” 18th placed club will miss out on compared to a 17th placed club who doesn’t have to play in the lesser division the next season.

      Solidarity payments of $3.5m to a Championship club are a pittance compared to the $100m of TV money you’ll get under the new Premiership TV deal just for being the worst club in the higher league.

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  3. Bob says:

    Oh, now that’s real cynical. I’d love to find out if that’s the actual reason, and I’d hate to find out that the NBA really doesn’t want owners to 100% finance stadium construction.

    And of course, by NBA I mean owners of every franchise.

    Looking at it that way, now I can get really cynical. Of course the owners won’t allow a 100% privately-financed stadium. If Seattle were allowed to get away with it, think about what kind of precedent that would set. Why should a city foot the bill for a stadium to the tune of $100M when they see that ownership is perfectly capable of paying for it themselves?

    If it costs the owners money, it’s not gonna be approved. I just wish city governments would wise up and stop wasting money on sports teams, and lining the pockets of ownership. Just look at the Miami Marlins for an example of terrible waste of taxpayer money. Let these franchises and their cheapskate owners live and die depending on whether people really want it, don’t keep them on life support with taxpayer funds.

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    • Seth says:

      I think you are exactly right… the current owners don’t want to set a precedent of paying for stadiums.

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      • Arthur Bork says:

        I cannot agree more. And it’s not at all cynical to impute these motives to NBA team owners. The sheer volume of money that taxpayers have been forced to give directly and indirectly to sports team owners over the past few decades is an abomination to the notion of capitalism, markets, and good governance.

        Note that in nearly every case where taxpayers have been forced to give their money to sports team owners, the deals have been done by the mayor, by selected city councilmembers or county commissioners, and almost always with backroom deals.

        In nearly every case where taxpayers have been asked to vote directly on the question of whether they’d like to give their money to team owners for new stadiums, the taxpayers have resoundingly said no.

        Neil deMause and Joanna Cagan’s excellent 2008 book, “Field of Schemes”, goes into helpful detail on the ways in which the normal methods of city governance are continually subverted by sports team owners and their economic cartels (like the NBA and the NFL) to fleece the public. (http://amzn.com/0803260164/)

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      • SeaGuy says:

        The problem here is that Seattle’s arena plan is not 100 percent privately financed. As has been the case for a year now, the plan for Seattle includes up to $200 million in public contribution through bonds to be paid off by existing taxes on arena operations and by future team rent. The arena is expected to cost about $490 million, so construction would be about 60 percent privately financed. Here is just one of many, many sources of that fact: http://www.seattlepi.com/sports/article/City-Council-approves-financing-plan-for-Sodo-3890563.php

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    • Mike says:

      Regarding precedents, I believe one has already been set, regardless of the NBA’s decision on the Seattle – Sacramento deal. The arena financing in Seattle was agreed upon by both city council and county council and likely would have worked out for everyone, so other cities can cite Seattle’s plan as a blueprint if they are unwilling to subsidize arena’s for their teams.

      Also, it wasn’t the NBA’s money that would’ve paid for this, so there’s not really a direct financial impact on them. At the end of the day, its the price of admission for a city and ownership group, so market conditions will dictate how the next owner and city finance an arean. If the city wants it bad enough and has competition from other cities, they will still provide some level of financing. If not, the owner may have to follow Hansen’s plan.

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  4. SFBear says:

    I’m a soccer fan and I prefer the promotion/relegation system.
    But let’s not forget that the North American franchise system has one important advantage: parity. Most European soccer leagues have been dominated by the same elite teams for decades. It’s impossible in North America because of the salary caps, but also because bad teams are not relegated, but rewarded with high draft picks.

    Other than that, the promotion/relegation system is superior:
    - Market forces decide which teams play in the top division
    - There are 24 levels of the soccer pyramid in England with 7000 teams. In theory an amateur club from the bottom level can rise all the way to the Premier League.
    - Fans support the same teams for generations – clubs don’t relocate to the other end of the country. That promotes long-lasting rivalries, and that’s great for the sport.
    - Owners don’t have any leverage over cities and can’t extort money for stadiums

    Speaking about taxpayers financing stadiums – NFL just rewarded Santa Clara with Super Bowl L for financing the 49ers stadium and punished Miami for refusing to pay for reconstruction of the Dolphins stadium.
    It was estimated that taxpayers subsidize these very profitable enterprises to the tune of $2 billion per year via funding for stadiums. I don’t know what would have to happen for this extortion to stop. Perhaps it would take some sort of an agreement between mayors of all major cities, although I doubt even that would work.

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    • Bob says:

      In theory, rewarding with high draft picks would mean bad teams are not relegated, but you just have to look at the Miami Marlins and Houston Astros to see that it doesn’t mean bad teams will become good teams, in the case of MLB. In fact, with the current system of revenue sharing, bad teams might even have incentives to stay bad, and generate more money for their owners, rather than pay to become good teams and generate less money for their owners.

      What would have to happen for this extortion to stop is for the people to become aware, and demand that city governments stop doing financing the stadiums of very profitable teams.

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    • Dwight K Schrute says:

      to take that a step further, with basketball, hockey and football (american football that is), there are salary limits and preferential draft choices to the poorest performing teams. in essence, in these sports, you really have to try hard (or be incompetent) to be consistently bad. to be consistently good, requires extraordinary talent (or video taping – sorry patriot fans:)
      in baseball, you can make money (luxury tax payments) by being bad and not spending on talent.
      i wouldn’t mind relegation of baseball teams as perhaps toledo or buffalo may get major league teams and the mets and marlins relegated to AA
      just sayin’

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    • RicardoB says:

      The contribution of draft picks for being a bad team depends on the value of the draft picks. Toronto has been awful in the MLS but their high draft picks have yielded little since few of the superstar players in soccer come from drafts. Similarly, now that Europeans enter the NHL through the draft, draft picks have more value to contribute to parity.

      Similarly, a salary cap’s value to parity depends on how much it minimizes variability. Soccer will get more parity as salary controls come in place–Financial Fair Play is gradually improving the health of FIFA. Similarly, the luxury tax in baseball (which is like a salary cap with softer penalties) has been ineffective towards parity since it’s so soft.

      Bad teams in North America still need to balance the value of draft picks with the cost of a rebuild to the fanbase. The Maple Leafs’ fan base can apparently endure a decade of bad play but the Atlanta Thrashers could not.

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    • Mike B says:

      The Promotion Relegation system only works where fans can be counted on supporting their “local” team no matter what level it is playing. In North America the draw to any professional sporting event is the level of play, not just tradition. The Cubs may not have won a World Series for over 100 years, but you can still show up and see championship teams and star players trounce your guys. If being bad meant that your team might be drummed down to the minors…or worse a large majority of the fans would simply stop attending and give up. It would take a deep pocketed owner to purchase top level talent to then “punch above their game” to make it back into the top level of competition.

      Top level professional sports teams are seen as a regional amenity, which is why they so often draw public support. People want to see an NBA, or MLB or NFL game…they really don’t care about who is playing, although they will tend to root for the home team unless they have some sort of long standing history. Ask people who they root for and you’ll get a long list of “well I currently support X, but I grew up supporting Y and my wife likes Z and of course I hate the Yankees”

      Don’t dark side to the relegation system is that the usual result are a small number of “elevator teams” that simply go up and down, over and over…too good for the lower league and too bad for the upper league. Also it increases the likelihood for match fixing in games that would otherwise have no consequence late in the season.

      Relegation in the United States would only serve to destroy franchises. If people want to root for teams that don’t move that’s what college and high school sports are for.

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  5. chuck says:

    In reply to MarkG: Parachute payments to relegated teams can just as equally be seen as part of the reward for success (making it into the premier league to begin with earns you the parachute payment if and when you drop) as a reward for failure (being relegated).

    I’m not sure why SFBear and others insist that “parity” is a good thing in sports. Can you think of another industry where parity is celebrated? Parity is the rallying cry of the subpar, the underfunded, the undersupported, and the uncreative.

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    • SFBear says:

      In Spanish La Liga Real Madrid and Barcelona won 25 out of 29 last titles.
      In English Premier League Manchester United, Arsenal and Chelsea won 19 out of 21 titles.
      In German Bundesliga Bayern and Dortmund won 21 out of 29 last titles.

      These are very top-heavy leagues. While it was fun to be supporter of one of these clubs, I don’t think it’s good for the sport in general. Parity certainly has some advantages.

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    • RicardoB says:

      Sports aren’t like a traditional industry. The product (entertainment) is produced when competitors interact–the more parity (to a point), the more entertainment.

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  6. Bas Lamfers says:

    One of the disadvantages of the relegation promotion process in soccer is that the stronger teams will always stay stronger. They finish high in the league and get more money (Champions League, sponsors etc.) As a result of this system in the past 30 years the number of teams that won the Dutch soccer league is only 5. And even worse in the past 30 years there were 25 seasons were either Ajax (11 times) or PSV (14 times) won the league. Most teams never won and never will win the league.

    In the NBA you’ve had 9 different champions and no team won it more than 8 times (LA Lakers followed by the Bulls with 6). With many teams coming close (Cleveland in the LeBron Era)

    So I understand that is strange to help the losing team with high draft picks but it also gives each and every fan a chance to see their team succeed.

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  7. Sam Deed says:

    You’re wrong about the private financing. Chris Hansen said “We have 100% of our private financing for the Arena committed and in place”, not that the arena will be 100% privately financed. I think the public commitment was about $200 million.

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  8. CdrJameson says:

    Also, football teams don’t have ‘the’ in front of them, no matter how much their name seems to suggest it. ‘Wolverhampton Wanderers’ are just that.

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