Making Money In The NBA

Dallas Mavericks’ owner Mark Cuban made a quote once I consider the ultimate truism about professional sports owners:

There are two types of owners — owners who can’t stand to lose and owners who can’t stand to lose money.

That quote came to mind today when the Los Angeles Times published the Forbes Magazine list of the worth (and revenue) of NBA franchises. There is no better example of Cuban’s axiom — and the flaws with the current NBA financial structure and system — than to look at the two teams that call Staples Center home.

For the record, the Lakers are worth an NBA-leading $510 million on annual revenue of $170 million, and the team’s payroll this season is about $60.7 million. The Clippers franchise is worth $224 million on revenue of $77 million, with a team payroll of $44.1 million.

With all that revenue streaming in, you’re first thought is that the Lakers must be the more profitable squad. You’d be wrong.

I quote now from the best published research on the NBA finances and the effect of its revenue sharing and luxury tax, a paper by Dan T. Rosenbaum called, “The Brave New World of the NBA Luxury Tax.”

Most recently, the NBA introduced a tax system on players and high-spending teams that redistributed more than $300 million in salaries and benefits in the 2002-2003 season. The NBA’s tax system dwarfs that of Major League Baseball (the only other professional sports league with a tax system), where taxes have totaled less than $50 million combined in their four years of existence.

Interestingly, prior to the institution of this tax system in the NBA, low-spending and high-spending teams were about equally profitable, on average. But the tax system changed the profit structure dramatically. In the 2002-03 season, low-spending teams likely earned about $300 million in profits, while high spending
teams about broke even. (emphasis added)

I believe that this is at the heart of why we saw the Laker dynasty broken up last summer — Buss has never been an owner looking to turn a huge profit, but he doesn’t want to lose money either. Keeping Shaq for another three years at $30 million per (or in that ballpark) would have meant losing money, followed by a long rebuilding process.

The rumor I’ve read is that Buss wants a Laker payroll in the $55 million range — that is over the “cap” number but would keep the team in the black. In reality almost every team is over the soft cap when you count in keeping their top free agents. (As a side note, I think this is smart business by the NBA, offering an incentive for top players to stay in once city, if the ownership wants them. Fans want to root for more than laundry, and I like the idea of Kobe always being a Laker or King James always playing in Cleveland. I think it’s good for the league.)

The Clippers generate only about 45% of the revenue the Lakers do, but thanks to the luxury tax millions of dollars are kicked down to the team each season ($14.7 million in the 2002-03 season, for example). Theoretically, that money should be poured back into the team, creating a better product. In the case of the Clippers, estimates are that owner Donald T. Sterling will earn an eight-digit profit (maybe more than $30 million this seasn thanks to expansion fees paid the owners for the new team in North Carolina).

Buss hates to lose. Sterling hates to lose money. It’s that simple.