Why the NBA Doesn't Make Sense

Update: Looks like I beat ESPN.com's Mark Kreider to the punch by about 12 hours.  His article, posted today, does a good job of explaining how the new CBA failed to fix the league's fundamental small market problems and points out that the deal "did not lay a foundation for a future in which smaller-revenue teams have more equitable chances to compete for the biggest prizes."  I think he misses the mark a bit on revenue sharing - the NBA doesn't have the cumulative profits to do what the NFL does - but his overall point is correct; the NBA system doesn't work.

By now, you've likely heard all about the Chris Paul trade that wasn't.  In short, the league nixed a potential Paul-to-Los Angeles trade because a number of small market owners argued that the league - which owns Paul's current team, the New Orleans Hornets - was unfairly trading one of the game's biggest starts to a larger market.  Never mind that, as J.A. Adande points out, the Hornets were set to receive a pretty good haul for a guy who is all but certain to leave New Orleans for free agency after this season (if he makes it that far).  As far as the NBA owners were concerned, this was just another example of the league's large market vs. small market struggles.

Every league, whether it be the NBA or NFL or MLB, has small markets, so why is it that the NBA always seems to have problems with its weaker franchises while the NFL and MLB don't?  To me, it's a simple matter of economics, and the recently ratified NBA labor agreement unfortunately does nothing to address the NBA's most fundamental problems.  Unlike the NFL and MLB, the NBA has a critical misalignment between franchise revenues and expenses that threaten to continue to cripple the league.  Allow me to explain using the simplest terminology possible.

In the NFL, most of the money is earned at the league level and split evenly among the 32 franchises.  While each franchise controls its own ticket sales and local sponsors, most of the money comes from the national TV contracts and national sponsors, and as a result large and small market teams generate approximately equal revenues.  The NFL has paired its more or less equal revenues with a hard salary cap, so that all teams are spending roughly the same amount on players (the largest expense line item for any professional sports team).  So, NFL teams are making and spending about the same amount of money, regardless of market - this is why teams in Indianapolis and Pittsburgh and New Orleans can compete, both financially and athletically, with the ones in New York and Boston and San Francisco.

The MLB works in almost the exact opposite way.  In the MLB, the majority of revenue is generated locally - local TV deals with regional sports networks, ticket sales and local sponsorships provide a team with the bulk of its cash inflows.  At the same time, the league has no salary cap, so each franchise can spend what it wants on players.  This way, large market teams like the Yankees can choose to spend a lot of money to make a lot of money, while smaller market teams like the Pirates can spend wisely and still have their modest revenues exceed their expenses.  Every team has a chance to earn a profit, and while this system certainly won't have the competitive balance that the NFL has, at least all of the franchises can remain financial viable.

The NBA has mixed elements from the NFL and MLB collective bargaining agreements, effectively creating a "worst of both worlds" situation.  On the revenue side, the NBA is more like the MLB - large market teams like the Lakers have huge local TV and sponsorship deals, while smaller clubs like the Milwaukee Bucks struggle to find media and sponsorship partners.  But while large and small market NBA franchises have vastly different revenue levels, the league's soft cap system leads to closely-clustered player expenses, more like the NFL.  As a result, you have 30 teams spending roughly the same amounts of money despite earning wildly different revenues.  This is why small market teams, like the Hornets, don't stand a chance; the cap floor forces them to spend nearly as much as the Lakers do, despite generating only a fraction of the revenue.  In theory this could be rectified through revenue sharing (where large market teams transfer money to small market teams to cover their losses), but even the new NBA CBA won't get the league to cumulative profitability and thus there won't be enough profits to go around.

This, in simple terms, is why the NBA's financial structure makes no sense and has never made sense.  As long as this system remains in place, expect small market teams to continue to complain.  While having Chris Paul go to Los Angeles could have benefitted NBA fans in both Los Angeles and New Orleans (not to mention Houston, the third team involved in the deal), the small market owners did what they do best; distracted NBA fans from the game of basketball and shined the spotlight on the league's financial problems.