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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.

Finding Terrence Jones In Morey's Disappointing Offseason

Things didn't exactly go according to the plan for the Houston Rockets this offseason. In the span of a weekend, they went from having Chris Bosh and Chandler Parsons to neither, all while clearing out their bench. After a disappointing first round exit, the Rockets lost Parsons, Omer Asik and Jeremy Lin and have only Trevor Ariza to show for it. With Daryl Morey's hot streak the last few offseasons coming to an abrupt halt, the Rockets seem like a prime candidate to regress.

Losing Parsons is a blow not only to their chances next season, but to the odds of getting a third star like Kevin Love. The mechanics of trading his contract would have been difficult, but he's exactly the type of young piece a team like the Wolves would want in a trade. Without Parsons, the Rockets don't have much room for internal improvement left on their roster. They have only one young player they can dream on - Terrence Jones. The good news for them is that he can really play. 

Jones has slipped under the radar ever since his sophomore season at Kentucky, when he took a backseat to Anthony Davis and Michael Kidd-Gilchrist on a team that won a national title. With his stats depressed in a smaller role, he fell to the Rockets at No. 17 in 2012, the last in a long line of young PF's they drafted in the first round. After barely playing as a rookie, he carved out a spot for himself in the starting line-up as a second-year player, averaging 12 points and 7 rebounds a game on 54% shooting.

Those numbers hardly forecast future stardom, but they were excellent when you consider the role that he had on the team. Jones was the fourth or fifth option on the floor, playing behind Dwight Howard, James Harden and Parsons. As a result, he rarely got to play with the ball in his hands - most of his points came from cutting off the ball, crashing the offensive glass and running the floor. If Parsons had stayed, Jones would never have had the chance to be anything more than a role player in Houston.

If Morey had signed Bosh and pulled off a Big Four, Jones would have been fighting for minutes on the second team, if not shipped away in order to clear salary cap space. Instead, without either Parsons or Lin, there's a huge role in the Rockets offense that will need to be filled. Those two averaged almost 24 field goal attempts a game and Ariza only averaged 11 in Washington last season. Jones, who averaged 9 a game last season, is a logical option to soak up more possessions. 

At 6'9 250 with a 35' max vertical, Jones has the physical measurements and athleticism of a lottery pick. If he had come out after his freshman season of college, he likely would have been taken in the Top 5, which would have dramatically altered the perception of him around the league. His numbers as a freshman weren't much different from those of Julius Randle. Jones has elite ball-handling ability for a player his size, a quick first step and the ability to finish at the rim or find the open man off the dribble.

Jones is more of a combo 4 than a stretch 4, so he's not a natural fit with a center like Howard who wants the ball on the block. At the same time, the two form one of the longest and most athletic frontcourt duos in the NBA and they are more than skilled enough to figure things out on the offensive side of the floor. There should be plenty of opportunities for Jones to push the ball in transition as well as attack the lane with the other three perimeter players spotting up on the three-point line. 

As is the case with most young players, Jones has a lot of room to grow on the defensive side of the ball. That was made clear in the playoffs, when LaMarcus Aldridge tore him up in their first two games, averaging over 40 per night. Jones isn't quite as long as Aldridge, but he still has a 7'2 wingspan, so he's more than capable of holding his own at the PF position. Along with Howard, he gives the Rockets two big men capable of defending the two-man game, a huge advantage in a spread pick-and-roll league.

Just as important as any maturation on defense, Jones should have the opportunity to attack guys like Aldridge on the other end of the floor next season. That's one of the best ways to go at a big-time scorer - attack his legs and make him work on defense. With Jones hardly ever being featured in the Rockets offense, Aldridge didn't have to work all that hard against him. People tend to confuse opportunity with talent, especially with young players. There's only so much a guy can do with a usage rating of 18.

If Jones can handle a role as a third option and a featured player on the second unit with a usage rating of 22-23, there is a scenario where the Rockets end up improving without Parsons. With Ariza giving them a second lockdown defender on the perimeter, they would have four elite athletes around James Harden, all on the right side of 30. The bench is an issue, but one of the strengths of Houston's front office has been their ability to unearth NBA-caliber players from all types of unlikely places 

For all the hubbub around Morey's philosophy and approach to roster building, few can doubt his eye for talent. While it looks like he outsmarted himself this summer, his ability to find guys like Patrick Beverley in Europe and Terrence Jones in the end of the first round has left him with room to maneuver. That could end up being the great irony of the Rockets seemingly fruitless search for a third star - they've been frantically looking under every rock when that player has been on hand the whole time.

How Lance Stephenson Will Make Everyone In Charlotte Better

Lance Stephenson's new contract wasn't one of the bigger ones handed out this offseason, but it was one of the most important. Stephenson signed a three-year, $27 million deal with the Charlotte Hornets, a number that was closer to Jodie Meeks (3-years, $19 million) than Chandler Parsons (3-years, $45 million). Nevertheless, he was one of the best all-around players available in free agency. The Indiana Pacers are going to have a tough time replacing him and the Hornets look like a team on the rise.

Over the last four seasons, Stephenson went from second-round draft pick to integral part of the Pacers core. As he has gotten better, so has Indiana. He was a benchwarmer on a 37-win team, a fringe player on a 42-win team, a starter on a 49-win team and a featured player on a 56-win team. His emergence allowed them to survive the loss of Danny Granger, the best player on their team four years ago. This time around, they don't have anyone in the pipeline who can replace Stephenson.

The Pacers built an elite team through the draft - three of their starters (Stephenson, Paul George and Roy Hibbert) were draft picks and the fourth (George Hill) was traded for one. However, as they have dropped lower in the first round, the pipeline has dried up. They have almost nothing to show for the last three drafts - they dealt their first-round picks in 2012 and 2014 for Luis Scola. Solomon Hill, their first-round pick into 2013, was a senior without a high ceiling who didn't get a lot of minutes as a rookie.

It's tough to sustain a run at the very top of the conference without a transcendent player like LeBron James. A team like the Pacers needs all five starters pulling in the right direction, which is hard to maintain over 4+ seasons - someone gets hurt, someone gets a bigger contract with a new team, someone gets old. Paul George is on the upswing, but Roy Hibbert and George Hill seem to have peaked and David West is 34 next season. They are going to need more from the SG position next season, not less.

Stephenson only had a 19.4 usage rating last season, but his departure leaves a giant hole in their offense. Despite being tagged as a selfish player, he was their best playmaker, averaging 4.7 assists on 2.7 turnovers a game. Without him, they will have a much harder time moving the ball and creating open shots, especially when you consider how poorly they space the floor. Stephenson is one of the only SG's in the league who can shoot 3's, create his own shot off the dribble and run point.

Going forward, he was also one of their only areas for internal improvement. With West aging, Stephenson could have picked up a much larger share in the offense over the next few seasons. Instead, they will have to depend on Hill and Hibbert, neither of whom has shown much of an ability to assume a bigger role. George is only 23, but the team is getting older around him, is in a market that has never attracted free agents and doesn't have many assets they can turn into another elite player.

The Hornets, after making the playoffs for the first time in four years, now look like a perennial playoff team in the East, for whatever that's worth. With Stephenson and Al Jefferson in place, they have two foundational pieces to build around as well as wealth of young talent that can develop in small roles on a good team, much like Stephenson did in Indiana. They won't win the Eastern Conference overnight, but they have a good young core that should grow and improve together over the next few seasons.

Stephenson takes the spot of Gerald Henderson, a solid player who was probably stretched in the role of a starter on a good team. Henderson has the size and athleticism of a starting SG, but he's a limited offensive player who doesn’t shoot 3's or create shots for anyone else. Replacing him with a player who can shoot, create and pass like Stephenson has a domino effect on the rest of the line-up - there is more space on the floor for everyone else to attack and more opportunities for them to get open shots.

He will make everyone in Charlotte better. His presence will relieve some of the ball-handling and playmaking pressure from Kemba Walker, who shot 39% from the field and was stretched as a primary option. It will create more opportunities for Michael Kidd-Gilchrist to get out and run, as he and Stephenson should form one of the most athletic wing duos in the NBA. Stephenson can run pick-and-pop plays with Marvin Williams and Al Jefferson and get them easy shots, just as he did with West in Indiana.

Charlotte is a great situation for him, on and off the court. It's a fresh start where he can play unencumbered from some of the baggage he picked up in Indiana and they play a four-out system which better suits his talents. Williams, after shooting 36% from 3 on 3.5 attempts a game in a similar role in Utah, should be able to step in and fill Josh McRoberts role as the stretch 4. Instead of playing in a two-post system without any driving lanes to the rim, Stephenson will be able to play in space.

And rather than everyone around him getting worse, Stephenson will be on a team where everyone is getting better. Jefferson is one of the only Hornets players in his prime - Kemba is 23, Cody Zeller is 21, MKG is 20 and Noah Vonleh is 18. It's unclear exactly what any of those four will end up being in the NBA, but they've all shown flashes of high-level talent and they all still have a lot of room to grow. Unlike many lottery picks, they won't be asked to do too much too soon in Charlotte 

Stephenson is only signed to a three year contract, but three years can be a really long time in the NBA. Three years ago, Indiana looked like they would be permanently in the shadow of Derrick Rose and the Chicago Bulls. In three years time, they are likely to be worse than they are now and there's a good chance the Hornets will be one of the teams they are looking up at. At some point in that process, they might face Lance Stephenson in a seven-game series and wouldn't that be something.

Daryl Morey, Major Markets & The Fierce Urgency Of Now

Daryl Morey and the Rockets created a good but not perfect enough situation to lure Carmelo Anthony or Chris Bosh. His strategy of flexibility and asset accumulation would work in one of the NBA's major markets.

Grading The Deal: Carmelo Decides To Stay With New York

The presence of Carmelo Anthony is unlikely to bring a star from the younger generation to the Knicks. Despite his status as a famous and talented player, a franchise in a massive market should have understood the gigantic advantages given to them in the current CBA and aimed higher to build a championship foundation.

The Most Mutually Beneficial Loan Of All-Time

LeBron James needed to leave to win a title and the Cavaliers needed that departure for him to return to win one for Cleveland. Nothing is mapped out for LeBron right now as it was when he joined the Heat, but he returns unburdened with two rings and with youth around him.

Buying Low On Meyers Leonard

The NBA is full of 7'0 who didn't start to blossom until their mid 20's with Tyson Chandler as their patron saint, which is why it is too early to give up on Meyers Leonard.

Re-Signing Kyle Lowry As The Final Piece For Toronto

With Kyle Lowry under contract for the next four years, the Raptors have every one of their two-way playing starting five locked up for the indefinite future. This is a team on the rise, regardless of how much star power they have.

Grading The Deal: Warriors Sign Shaun Livingston

In signing Shaun Livingston, the Warriors fixed their single largest flaw from last season with a player who makes complete sense with their best player.

Team-By-Team Analysis Of The 2014 NBA Draft

With the new CBA magnifying the importance of the draft and one of the most talented groups of prospects in recent years, what happened on Thursday night will have significant ramifications on the balance of power in the NBA for the next decade.

Leroux's 2014 NBA Draft Review

Breaking down which teams had Great, Good, Enh and Bad drafts with Andrew Wiggins, Jabari Parker and Joel Embiid going in the top-3.

2014 NBA Draft: The Underrated

The key to finding sleepers once you are out of the lottery is identifying players with the ability to do multiple things, which allows them to impact the game without the ball in their hands. That means guys with the physical tools to be impact defenders or the all-around offensive games to contribute in a variety of roles on offense.

2014 NBA Draft: The Overrated

Doug McDermott, James Young, Jerami Grant, Mitch McGary and Cleanthony Early are five players we expect to be selected too early relative to the value of their contributions in the NBA.

Top-13 Of The 2014 NBA Draft

The 2014 class could end up rivaling 2003 based on its depth. If the Top 3 players in this year’s draft ever got on the same team, it would be something.

Draft Report: Aaron Gordon Of Arizona

Aaron Gordon might never be a guy who averages 18-20 points a game, but he does everything else on the court that helps you win. He’s the ultimate teammate, a guy who plays elite defense at multiple positions and moves the ball on offense.

The Tough Trade-Off

Specialists have recently had a bigger role in the NBA. An underlying factor behind these shifts could end up coming to the forefront with the 2014 draft class: the player’s impact has to be high enough to justify coaches and other players working around their flaws.

Tim Duncan Carries Spurs Through Generations, Leaves Robinson Hoping He'll Continue

Five championships later, yes, you don’t hold back Tim Duncan. You set him free on the league, and reaped rewards come for Spurs players across the generations.

Why The Warriors Should Trade For Kevin Love This Summer

The Warriors stand out in the Kevin Love derby because they possess the pieces to make a move without sabotaging their present or future, while also fitting his strengths and weaknesses with their remaining roster.

Marcus Smart: Why College Coaching Even Matters For Top-5 Picks

Marcus Smart just lived through the worst possible timeline at Oklahoma State, but he's an ideal player for a rebuilding team because he can be successful next to any type of guard.

Kawhi Leonard Delivers Spurs The Present And Future

Kawhi Leonard is the connector of present and future on the Spurs’ legendary dynasty of championship contention. Gregg Popovich has persistent belief, they all do around the Spurs: One day, Leonard will grow out of his role as a foundational part – and become the foundation.

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