yardbarker
RealGM Basketball

RealGM Articles
Basketball news gathered from around the net.

An Economic Argument For NBA Expansion

Six years ago the Seattle SuperSonics officially became the Oklahoma City Thunder. While Oklahoma City has proven itself worthy of having an NBA franchise, the circumstances under which the move from Seattle occurred has been a black eye for the NBA. The NBA surely has deep concerns about the black eye, but the black eye remains nevertheless.

Most connected to the NBA agree that Seattle needs to have a team. Emotional arguments for Seattle aside, this article focuses on solely on the financial merits for why expansion makes sense for NBA owners. That’s right, while the fans’ interests theoretically make a difference to the NBA, expansion will only occur if the owners benefit from the additional teams. With that said, let’s crunch some numbers. But before we do this, we need to establish projections for expansion fees and the new TV digital/rights package (going forward, we’ll call this the media rights package).  And yes, we are simplifying here, as in reality there are additional factors involved. But the simplified analysis will sufficiently illustrate the benefits of the NBA owners expanding once the new media rights deal kicks in.

The Math 

High placed rumors suggest that the next media rights package will approach $2 billion per year, which will more than double the value of the existing package. With media rights deals booming across sports, a mind numbing $2 billion per year sounds about right, so that’s the number we will use for purposes of our analysis.  Next, rumors have suggested expansion fees approaching $1 billion per team. If the Clippers can fetch $2 billion, a new team can certainly fetch half that amount. While expansion by only one team is certainly possible, the league would be likely to add two teams. So we’ll go with total expansion fees of $2 billion. 

Now let’s split up the pies. First, the $2 billion expansion fees divided among 30 owners would lead to a one-time payment of roughly $66,667,000 (rounding up for simplicity) to each owner. Next, with two additional teams added (so splitting the pie 32 ways), each team would receive $62,500,000 per year from the media rights deal. With these numbers established, we can also calculate the difference in the amount the existing 30 owners would receive per year from the media rights deal if they choose to add two teams; that number is $4,167,000 less per year. See the table below for further illustration:

Scenario For the 30 Existing Owners

Up-Front Payment (one-time)

Media Rights Payment (per year)

30 Teams, No Expansion

$0

$66,667,000

32 Teams (Two Expansion)

$66,667,000

$62,500,000

So the existing 30 NBA owners would need to decide if receiving an upfront payment of $66,667,000 would justify receiving $4,167,000 less per year from the new media rights deal. Looking solely at these numbers (more in a moment on why we can’t quite do this), it will take 16 years for the payments to even out (i.e. after 16 years, the owners will have taken in $66,667,000 less in payments from the media rights deal, matching what they receive from the up-front payments for expansion).  

Turning right back to the numbers, what are we missing here? Any economist would be jumping up and down with this answer - the time value of money.  In other words, $1 today is worth more than $1 tomorrow. Similarly, $66,667,000 today is worth (quite a bit!) more than $4,167,000 a year for 16 years. How much more? I defer to an economist to provide the TVM coefficient, but we’re talking Brinks trucks here. Sure, the new media rights deal will be shorter than 16 seasons, so the payments towards the back end of our hypothetical would change. How much, we don’t know, but it would be premature to assume that the subsequent media rights deal will blow the upcoming new media rights deal out of the water. This is because…

Bubble

That’s right, with franchise values and media rights packages exploding over the past few years, the onset of a bubble may be fast approaching, if not already knocking on the door. Just as media rights deals may face a correction soon (why do you think the NBA is rushing to finalize the media rights package two years prior to its expiration?), franchise values face the danger of a bubble as well. Very few people would agree that the Los Angeles Clippers, while in the nation’s second largest market and tenants in an arena that prints money, are worth the $2 billion price tag that Steve Ballmer has agreed to pay for them. In other words, they’re not the Lakers. Could the prices for teams continue to rise? Sure, that’s possible, but there’s also a reasonable risk that franchise values will face a correction soon (or at the very least, remain stagnant). Circling back to our example, the $1 billion expansion fee floated around per team may not be available to the owners if they wait too long.

Conclusion

In light of the math, the existing 30 NBA owners would be best served to expand by two teams once the new media rights deal has been negotiated. Sure, the full financial analysis in relation to expansion is complex and entails more than just the expansion fee and the media rights package (such as merchandise sales, revenue sharing projections, etc.), but by looking at these two factors, we have the meat and potatoes of the analysis. In the event that the media rights package comes in at an amount different from $2 billion, the expansion fee can easily be adjusted to make expansion worthwhile to the existing 30 NBA owners. They would just need to find that number. The NBA owners who would least benefit from expansion are those who plan to own their teams in perpetuity, since they could argue that the value of the payments they would receive years down the road (think 20 plus years from now), not being split with two additional teams, would overtake the benefit of receiving an up-front payment from expansion.  However, such an argument remains questionable, and the majority of NBA owners do not intend to own their teams in perpetuity. When considering in the benefits of a substantial up-front payment from the expansion fees (including factoring in the important time value of money principle) and the threat of bubble in relation to team values, it would behoove the owners to reincarnate the Seattle SuperSonics and a second franchise as quickly as possible. 

Neema Hodjat is the fantasy sports writer for RealGM and a frequent contributor across the NBA, NFL and MLB content. He can be emailed at nhodjat@gmail.com and followed on Twitter at @NeemaHodjat.

Loading comments...
 

Basketball Wiretap Headlines

    NBA Wiretap Headlines

      NCAA Wiretap Headlines

        MLB Wiretap Headlines

          NFL Wiretap Headlines

            NHL Wiretap Headlines

              Soccer Wiretap Headlines