NBA Unlikely to Take Contraction Plunge

With a number of franchises stuck in the red and critics complaining the game is watered down, the National Basketball Association may consider the nuclear option: shrinking itself.

NBA Commissioner David Stern has said contraction, which would eliminate at least one struggling franchise, should be “on the table” and last month superstar LeBron James appeared to support the idea, before retreating.

The concern is that the NBA’s financial health is being threatened by its weakest franchises and the fact that the lion’s share of its revenues go towards player salary.

But a careful balancing of the pros and cons show the NBA, which is still thought to be relatively strong financially, is unlikely to take the contraction plunge.

To be sure, the NBA will have lots to consider while trying to hammer out a new Collective Bargaining Agreement after the season ends. The central focus as a new contract is negotiated will be on rising player salaries and how to better redistribute local revenues from ticket sales and television deals.

The National Football League’s model allows revenues generated collectively by the league and clubs — estimated to be $6.8 billion in 2010 — to be distributed in a more equal basis than the NBA’s model, partially explaining football’s relative parity.

After expanding broadly in the 1980s and 1990s, the NBA was left with 30 franchises, most of which have seen their values soar.

However, some franchises have seen their values decline in recent years, led by a 9% decline in the Forbes estimated value of the Milwaukee Bucks to $254 million and a 13% slide for the Memphis Grizzlies to $257 million. Those compare to the estimated $604 million price tag on the Los Angeles Lakers, the league’s most valuable team.

Yet at the end of the day NBA owners and the player’s union are arguing about “sharing a marvelous pie” from what is a “very, very healthy league,” said Rodney Fort, a consultant and sports economist at the University of Michigan.

After all, ownership groups over the past year have paid record bounties worth nearly $1 billion combined for the struggling Washington Wizards and Golden State Warriors.

“You are talking about assets worth hundreds of millions of dollars even if they are the worst teams in the league,” said Fort.

According to Forbes, 10 NBA owners are billionaires, led by the New Jersey Nets’ $13.4 billion man Mikhail Prokhorov.

And in 2007, the NBA signed an eight-year TV deal with Walt Disney (NYSE:DIS) and Time Warner (NYSE:TWX) worth $7.5 billion, a 22% rise in annual payout from its previous deal.

“They ought to be able to figure out how to share the wealth in a manner that allows everyone to be competitive both on and off the court,” said Marshall Glickman, CEO of G2 Strategic and a former president of the Portland Trail Blazers.

The NBA and the player’s association did not respond to a request for comment.

Addition by Subtraction?

While he backed away from his initial comments, James alluded to one of the biggest potential benefits of contraction: an improved product on the court that could boost attendance and TV ratings.

“Hopefully the league can figure out one way where it can go back to the ’80s where you had three or four All-Stars, three or four superstars, three or four Hall of Famers on the same team,” James said. “The league was great. It wasn’t as watered down as it is [now].”

Contraction would also shrink the “marvelous” pie the players and owners eat from, meaning they would all stand to take in more money. At the same time, shrinking could be addition by subtraction because it would cut off the weakest links like the New Orleans Hornets, which the NBA was forced to take over earlier this year.

“The NBA hopes to better match risk and return.  While there is no doubt the players risk injury and long term loss of income, the owners are the ones taking the brunt of the financial risk,” said David Carter, a sports business professor at USC and author of Money games.

Contraction Drawbacks

But shrinking the NBA could also end up doing more harm than good.

First of all, contraction inherently holds some risks because there is no guarantee the on-the-court product and league finances would improve.

Shrinking the NBA would also be difficult because most franchises have legal obligations to the cities where they play in and sometimes the venues as well.

Since each team eliminated would equal 15 fewer roster spots, contraction would also likely be opposed by the player’s association, which derives most of its power from small to mid-level players.

“Contraction should scare the bejesus out of the players because it cuts jobs,” said Robert Boland a sports business professor at NYU and former agent.

That’s not even counting the executives, coaches, and staff members that work behind the scenes who would also lose their jobs.

The NBA would also face a potential backlash from the markets deemed not worthy enough to continue hosting a franchise.

“It’s not the NBA’s policy to just turn their backs on communities and fans. That’s a bad policy and it’s not their policy,” said Glickman.

Also, contraction in any of the pro sports leagues could raise questions in Congress, which could consider revoking the league’s anti-trust status.

Fort said the commissioner of any league deciding to contract “better look forward to explaining it to members of Congress” through “endless hearings.”

Another key drawback is franchises slated to be eliminated would likely be mired in a “lame-duck status” where it would be very hard to sell tickets, luxury suites and draw viewers.

“How do you sell tickets for a team that will cease to exist?” said Glickman.

Relocation Ahead?

For all of these reasons, sports industry insiders believe contraction likely isn’t in the cards in the NBA, at least not any time soon.

More likely, the league will look to ship one of its struggling franchises to a more viable market, with the Hornets being one of the leading contenders and Kansas City and Seattle frequently mentioned as landing spots.

Boland said the NBA, which has long coveted international expansion, could also decide to trade one of its more marginal markets in the U.S. for a first-rate city in Europe, such as London, Paris or Madrid.

He proposed allowing an existing franchise to go bankrupt and then “resurrecting it” on the other side of the Atlantic.

Whichever option the NBA chooses, it seems destined to exit the CBA talks with at least the same number of franchises it entered with.

By: Matt Egan (Fox Business)

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