NBA, NHL Need Better Economic Models

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Spring and early summer is the busiest time of the sports calendar. A new baseball season opens, the NFL Draft happens, and the NHL and NBA playoffs occur. Amidst this flurry of action it is worth stepping back to evaluate how effectively each league does business, and its impacts on competition.

MLB is once again demonstrating the virtues of fluidity. The winter’s biggest spenders, the Toronto Blue Jays and Los Angeles Dodgers, are laboring below .500, while the Kansas City Royals may become the next failure-to-success story. Hope is in the air in long dormant and vibrant baseball cities alike. It is still early, but MLB is primed for a fun summer.

The NFL, as usual, employs its formidable PR machine to garner attention. Whether it is the release of the league schedule or the NFL Draft, any football activity in the spring or summer becomes an event. Why else would anyone watch NFL Live months after the season ended or care about college players’ workouts? Whether or not the Detroit Lions or Cleveland Browns have a chance at a winning season is debatable. But, style trumps substance in football’s case. The NFL has successfully convinced people they need its product even if the on-field results do not always match the rhetoric.

The NHL and NBA follow a different business model. Both rely on passionate fans to fill stadiums and follow the sport. Without the kind of coverage NFL gets from ESPN (really the second NFL Network), the NBA and especially the NHL are forced to provide a product that people will keep purchasing. But, the business approach of cultivating hardcore fans is a double-edged sword. 

Hockey and basketball teams that sell out their arenas make money. This is doable since most NHL and NBA stadiums seat approximately 20,000 people. However, developing and maintaining a fan base is a difficult endeavor because it requires winning and building a brand. There is a reason the Phoenix Coyotes, rather than the Detroit Red Wings, went bankrupt. Despite its issues, Detroit remains Hockeytown because the Red Wings are an Original Six team, and reward their fans’ loyalty with annual playoff berths (22 consecutive and counting).

The benefits of cultivating diehard fans are obvious during the playoffs. Fans really get into the game. The crazed chants at Madison Square Garden or earsplitting noise inside Chesapeake Energy Arena are great examples of the passion hockey and basketball fans bring. Add in long history or recent success, and good results follow. Fans will pay to watch winners, or at least teams that are a regional institution.

However, a problem exists. Both leagues, through bad policies, are impeding growth in popularity and revenue because they have asked the wrong question. The NHL and NBA must seek to strengthen franchises, and not the league in aggregate. This means recognizing a simple fact: Hockey and basketball clubs are the NHL or NBA. Strong franchises playing a high quality game against each other will make money for all involved. The commissioners just need to stand aside.

Seen this way, the NHL’s labor struggles make more sense. Updating the rules, while important, should not conceal the disputes over money or why they erupted. The NHL faced a real possibility in 2004 that some franchises might go out of business. But, Commissioner Gary Bettman did not address the real cause in 2004 or 2012. He blamed the players’ rising salaries instead of looking south to floundering expansion franchises in warm weather cities. 

Consider the Atlanta Thrashers.  Hockey had already failed once in Atlanta when the Flames headed to Calgary in 1980, after opening in 1972.  Amidst the economic bonanza of the 1990s, the NHL returned to Atlanta in 1999.  Twelve years and one playoff appearance later, the Thrashers became the second incarnation of the Winnipeg Jets in 2011. For those keeping score at home, hockey failed twice in Georgia, Winnipeg lost its franchise in 1996 to Phoenix, the Coyotes declared bankruptcy in 2009, and Winnipeg received the failed Thrashers as consolation. No wonder the NHL is in difficult financial straits.

Under normal circumstances, failed expansion would have cost Bettman his job.  He did not heed the market signal of poor attendance and cut bait. The NHL owners must let the correction occur: failed warm weather teams should relocate to markets hungry for hockey.

The NBA is a different case. It suffers from misunderstanding why franchises fail or succeed. The answer in a star driven league is, unsurprisingly, elite talent or its absence. Or as coach Gregg Popovich of the San Antonio Spurs told New York Knicks coach Jeff Van Gundy after the 1999 NBA Finals, “the difference is I have Tim Duncan and you do not.” Star power largely separates winning, and thus financially solvent, basketball clubs from bankrupt losers.

In that context, the path to success is identifying, acquiring, and building on premium players. Unfortunately, Commissioner David Stern has made obtaining topflight talent difficult under the guise of protecting small-markets. Stern seems to think he can create future outcomes to improve the NBA by obstructing or dictating where talent goes.

The salary cap and max contract provisions are well-intentioned policies that backfired. If money is not the primary incentive for players to switch uniforms, small-market teams with rich owners lose a major draw for free agents. Moreover, an artificial ceiling on pay handicaps squads who lack inducements besides money, such as location or premier teammates.

The draft lottery is just an awful idea. One of the purposes of a draft is helping bad clubs, through providing top picks, cheaply acquire players who may become the foundation of a future winner. Instead, the lottery makes this process chaotic and unfair. Teams that had a down season, rather than being legitimately bad, can acquire impact talent and get their prime years because of luck.   

Consider the aforementioned Spurs, who finished 20-62 in 1996-1997, obtained a top pick, won the lottery, and drafted Duncan. What goes unmentioned is the Spurs had won 59 and 62 games the previous two seasons. Injuries ruined their 1996-1997 campaign, but they were not a bad team. By a stroke of luck, San Antonio acquired Duncan and rewrote NBA history. Fans in Phoenix, Utah, and elsewhere out west still suffer from that draft 16 years later.  

The NHL and NBA can easily grow in popularity and revenue. They need to make necessary changes that facilitate the creation of passionate fan bases in non-established cities. The NHL should move failing teams to markets more receptive to hockey. Cold weather cities are, and will remain, a better fit for NHL franchises than Florida or Arizona. The NBA should abandon its tendencies to centralize decision making once David Stern retires. Make talent acquisition easier and competition will improve. Small-markets are not done any favors by the salary cap, max contracts, or the draft lottery.

The NHL and NBA have great fans as the playoffs are showing. For the sake of growth outside of traditional bastions, Bettman and Stern should stand aside. Individual franchises have an incentive to build a winner, and the fans will happily reciprocate. The results are better competition, higher profits, and thrilling theater.

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