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MONEY

The NBA's Real Business Problem: Excess Capacity

Professional basketball is run by smart businesspeople. So why do they think they're exempt from the law of supply and demand?

Willie Green #33 (left) and Chris Paul #3 of the New Orleans Hornets

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The NBA lockout came about because the league won’t admit that it has the same problem as football, hockey and baseball: Too many teams for the customer base to support.

Despite being owned by some very smart businessmen, sports teams seem to think the law of supply and demand doesn’t apply to them. This isn’t so. Sports leagues can have excess capacity just like any other business. Maintaining capacity without demand costs money and drags down value. That is why companies shut down factories.

The NBA lockout can be boiled down to this: The owners wanted to share less money with the players so teams that weren’t doing as well would get more. The lockout ended after 149 days thanks to a (tentative) agreement so complex it makes U.S. tax law look easy.

How complex? Here’s how ESPN’s Ric Bucher explained part of it:

Teams under the salary cap now will be allowed to go as far as $4 million over the luxury tax threshold without restrictions to utilize the $5 million mid-level exception. For example, if the luxury tax is set at $70 million and a team's payroll is at $68 million, they would be allowed to use the full $5 million.

However, if a team is at $69.5 million in allotted payroll, they can go as far as $74 million and thereby use only $4.5 million of the exception. In the previous offer, the owners wanted teams below the cap to be required to get back under the limit by Oct. 15 of the following year if they used an exception to go over.

Got that? (There’s also something called a “a mini mid-level exception.” In order to cover sports these days you have to have a minor in Chinese algebra.)

One result of all this is to make it easier for the NBA to sell the New Orleans Hornets, which it bought last year. Sell it? How about folding it?

The NBA has 30 franchises (that’s counting the New York Knicks – technically still a basketball team). Last season, the Chicago Bulls lead the league in average home attendance with 21,700 people per game. At the same time, the Sacramento Kings and Indiana Pacers couldn’t even break 14,000. That lousy drawing power hurt other teams as well when the Kings and Pacers (to name just two) went on the road. Games against unpopular teams also deprived franchises of more games against popular teams.

Getting rid of underperforming teams would increase the value of the remaining franchises. Less money would have to be spent supporting that don’t draw enough fans either in person or on TV. This won’t end lockouts, it would just end this particular reason for them.

IMAGE: djbelc01 via Flickr
Last updated: Nov 30, 2011

CONSTANTINE VON HOFFMAN is a writer and sometime standup comedian. His work has appeared in Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, and Boston Magazine.
@CurseYouKhan




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