Pacers and NBA and Herb Simon and Sports Business

Pacers seek bigger share of NBA revenue

December 4, 2006

Indiana Pacers co-owner Herb Simon has thrown his support behind an effort to pressure National Basketball Association Commissioner David Stern to implement more aggressive revenue sharing among NBA franchises.

The move, which coincides with declining attendance at Pacers games, is the strongest indicator yet that the local franchise is losing money or is on the brink of doing so.

Simon, who owns the team with brother Mel, joined seven other NBA owners in signing a letter to Stern pleading for more money for small-market teams.

"Small-market teams simply can't afford to make the types of mistakes large-market teams can in the NBA and remain financially viable," said Richard Sheehan, a University of Notre Dame economist and author of "Keeping Score: The Economics of Big-Time Sports." "The situation in a market like Indianapolis is unforgiving, and this letter shows the Pacers are hurting."

The highly paid players who absorb much of the Pacers' payroll aren't producing dividends in the form of better fan support, Sheehan said. With the team struggling, he said, central Indiana's relatively small sports-fan and corporate-sponsor bases may be turning their attention to other sports and entertainment options, including the red-hot Indianapolis Colts.

Pacers officials have remained mum about revenue sharing since the letter and some of its contents were revealed in a Seattle Times article Nov. 19.

Herb Simon and Pacers CEO Donnie Walsh declined to talk to IBJ about the subject. Walsh said in a statement: "We do not comment on topics that may be being discussed at the [NBA] Board of Governor's level."

League officials also declined to comment.

But the letter to Stern indicates there are serious problems brewing in the league's small markets.

"We are asking you to embrace this issue because the hard truth is that our current economic system works only for larger-market teams and a few teams that have extraordinary success on the court and for the latter group of teams, only when they experience extraordinary success," the letter published in the Times states. "The rest of us are looking at significant and unacceptable annual financial losses."

The disparity among the league's 30 teams is largely a product of uneven distribution of revenue from local radio and television deals. Large-market teams, including the Chicago Bulls, Los Angeles Lakers and New York Knicks, net up to $30 million annually from broadcast deals, sports business experts said, whereas small-market teams like the Pacers bring in about $10 million.

In an attempt to raise more cash, the Pacers signed a deal this season to have all games televised on Fox Sports Midwest. Previously, part of the Pacers schedule was televised on WTTV-TV Channel 4, while the other half was on Fox Sports. Just what the Pacers gained from the switch is unknown because details of the deal weren't made public.

Revenue from sponsorships, ticket sales, suite rentals and corporate hospitality sales are also greater in bigger markets.

There is some revenue sharing of the NBA's national TV deals and apparel sales, but that revenue pales in comparison to the cash shared in the National Football League.

"About 25 percent of NBA teams' revenue is from shared revenue," said Andrew Zimbalist, a professor at Smith College in Northampton, Mass., and a noted sports economist. "In the NFL, 70 [percent] to 75 percent of teams' revenue comes from shared revenue. [The NBA's lack of sharing] puts tremendous pressure on small-market teams like the Pacers."

According to the Times, the letter sent to the NBA commissioner was signed by Simon, Portland Trailblazers owner Paul Allen, Memphis Grizzlies' Michael Heisley, Charlotte Bobcats' Bob Johnson, Milwaukee Bucks' Herb Kohl, Utah Jazz's Larry Miller, New Orleans/Oklahoma City Hornets' George Shinn and Minnesota Timberwolves' Glen Taylor.

The letter, dated Sept. 29, states that even well-managed franchises are taking a hit.

"If appropriately managed teams can't break even, let alone make a profit, we have an economic system that requires correction. The needed correction is serious revenue sharing not just modest revenue assistance and we urge you to address this issue on an urgent basis this year," the letter said.

Upon its introduction in 1983, the NBA's salary cap was heralded as a great way to create financial parity in the league. It was thought at the time to be the perfect hybrid of the National Football League's hard salary cap and Major League Baseball's policy of free spending. Now, some small-market owners say it's antiquated.

To further encourage parity, the league enacted a luxury tax in the 1990s, meaning NBA teams over a predetermined player payroll threshold pay the league for every dollar they're over the limit.

But that doesn't help the smaller markets keep up with the large-market teams that can afford to pay over the cap and pay the luxury tax.

The Pacers' player payroll this year is $62.4 million, far behind that of the Knicks, at $117 million, and the Dallas Mavericks, at $91.2 million. The Pacers, which have the 18th-highest NBA player payroll, have a larger payroll than some small-market teams, such as the Charlotte Bobcats, which pay $38 million. Ten NBA teams are above the $65.4 million luxury tax threshold.

Locally, Pacers officials have watched per-game attendance drop from a high of 18,345 during the 1999-2000 season, the team's first in Conseco Fieldhouse, to 16,180 last year. Club seats and suites have also been a tougher sell in recent years, sources said, bringing the team closer to the red than it has been since vacating Market Square Arena. Last year, the team took a hit in popularity after the brawl with the Detroit Pistons and the antics of malcontent forward Ron Artest, who was eventually traded to Sacramento.

According to Forbes Magazine estimates, the Pacers' annual budget is $100 million, and the team's profits ranged from $2 million to $9 million in the three seasons before the 2005-2006 campaign. Making the playoffs, which generates fan support and more revenue, is almost essential this season, sports economists said. An absence would likely assure a financial loss.

The Pacers are hardly alone in their struggle. Minnesota could lose $30 million between the 2005-2006 season and this season, team officials said. Allen expects the Trailblazers to lose $100 million in the next three years. Utah team officials claim to have lost $25 million the past two seasons.

According to Forbes, Memphis lost $15.6 million during the 2004-2005 season, while the Orlando Magic dropped $9.5 million and the Seattle Supersonics lost $7.8 million.

"We need to look into and see what we can do to help all of our teams and not just those that are in the smaller markets," Stern said at October's board of governors meeting.

In recent years, the NBA has tried to use its collective bargaining agreement with players to address parity issues.

For decades, NBA owners and players have wrestled over a formula that will give players a fair share of overall revenue while still allowing teams to remain financially viable and competitive on the court.

But the gap between the NBA haves and have-nots has grown so much that small-market teams simply can't keep up with their large-market counterparts, whose markets are in some cases almost 10 times bigger.

Stern said a new collective bargaining agreement that took effect in 2005-2006 was designed to allay the concerns of small-market teams. While it has added cash to the league's coffers, it left 13 of 30 teams in the red after luxury tax payments, with nearly one-third of league owners reporting heavy financial losses.

With the current collective bargaining agreement with players set to run through the 2010-2011 season, small-market teams like the Pacers could be looking at a rough five years without league intervention.

The NFL is often held up as an example of professional sports prosperity, but it turned to its level of revenue sharing only after former Commissioner Pete Rozelle convinced New York Giants owner Wellington Mara and other large-market owners it would lift the tide for all teams.

"There's been a titanic war of wills over revenue sharing in almost every professional league," said Notre Dame's Sheehan.

Small-market NBA team owners complain the financial disparity is hurting the on-court product, with only eight teams winning the title since the curtain dropped on the Larry Bird-Magic Johnson era in 1979.

Sheehan said the Pacers have proved they can be profitable if they make the right player personnel moves and market the team aggressively. Working in the franchise's favor is the fact it controls operations at Conseco Fieldhouse and gets revenue from non-basketball events there, he said.

But Mark Rosentraub, former IUPUI dean and author of books on professional sports operations, thinks ownership is right to pursue more revenue sharing.

"New York has a market of 17.9 million people and Indianapolis' is 2 million," Rosentraub said. "The Pacers can make money if everything falls just right. But the margin for error is so small, it's unrealistic to think they could do that year-in and year-out."

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