Pacers and NBA and Herb Simon and Sports Business

NBA set to OK more revenue sharing

February 26, 2007

A push from Indiana Pacers co-owner Herb Simon and seven other National Basketball Association owners is spurring league officials to adopt broader revenue-sharing measures.

But those measures might not be enough to pull the Pacers out of the red.

NBA officials are more than doubling the pot of money given to financially distressed teams--to $30 million annually--and loosening the regulations used for teams to qualify for the funds.

In 2006, $14.8 million was paid out to eight of the league's 30 teams. Though the NBA doesn't disclose which teams get aid, industry observers said the Pacers were likely among the recipients.

"This is an important first step in liberalizing the NBA's revenue-sharing policy, but it won't solve all the Pacers'--or any team's--problems," said Rick Horrow, CEO of Florida-based Horrow Sports Ventures. "There's a belief that is starting to proliferate [in] the NBA that the have-nots need to be protected to make up for their smaller markets."

Not all small-market teams need protecting. San Antonio, for instance, made $11.7 million last year, according to Forbes magazine, which does an annual financial analysis of the NBA and its franchises. But the study shows most small-market teams are taking a beating, with Portland losing $15.2 million, Memphis losing $18.5 million, and Orlando bleeding $20.4 million last year.

Though revenue sharing appears poised to grow, NBA Commissioner David Stern wants a $5 million cap on aid to individual teams, which is far below the $12.5 million Forbes reported the Pacers lost last year.

The Pacers were one of eight teams to lose money last year, according to Forbes. With Pacers attendance still declining this season, the team could be headed for even more trouble.

"Without a deep playoff run, the Pacers could run into heavy financial losses," said Marc Ganis, president of Sportscorp Ltd., a Chicago-based consultancy that works with the NBA, National Football League and their teams.

Pacers officials declined to comment. In December, Pacers President and CEO Donnie Walsh said team officials do not discuss matters being considered by the NBA board of governors.

Aid not automatic

In September, Herb Simon--who, along with his brother, Mel, owns the Pacers--signed a letter urging Stern to broaden revenue sharing. The letter was also signed by the owners of the Portland Trailblazers, Memphis Grizzlies, Charlotte Bobcats, Milwaukee Bucks, Utah Jazz, New Orleans Hornets and Minnesota Timberwolves.

"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," said the letter dated Sept. 29.

In January, the league's 10-member long-range planning committee unanimously approved a plan to expand the league's revenue-sharing formula based as much on market performance as market size.

Jerry Colangelo, chairman of the Phoenix Suns and a member of the committee that crafted the formula changes, said the full ownership board will vote on the changes this spring. He's optimistic owners will support the measure.

Stern has been adamant that revenue sharing not become a welfare system for shoddy organizations.

"I would say that if we don't continue to tweak the revenue-sharing system, that there could be teams that were performing at peak and still having trouble making ends meet," Stern told the Charlotte Observer. "I'm at both ends of this one. I am a proponent, not of blind revenue sharing, but in effect, performance-based revenue sharing based upon how you do against the potential of your marketplace."

Are Pacers deserving?

Sports marketers said the policy will keep Pacers officials on their toes.

Before last season, the Pacers had been profitable since moving to Conseco Fieldhouse. Forbes estimated Pacers' annual profits between $1 million and $10 million between the 1999-2000 and 2004-2005 seasons.

"The market doesn't seem to have fluctuated as much as the Pacers' bottom line these last few years," said Richard Sheehan, a University of Notre Dame economist and author of "Keeping Score: The Economics of Big-Time Sports." "When you look at it, you have to wonder how much of their current financial situation falls on the Pacers management."

One thing sports economists point to is a number of personnel moves that sent the Pacers' player payroll skyward faster than revenue. Player payroll jumped from $59 million in 2005 to $79 million in 2006, while revenue increased only from $108 million to $110 million.

With attendance continuing its downward spiral, from 16,180 last year to 15,519 through 27 home dates this year, it looks doubtful the Pacers will regain profitability without a serious and sudden turnaround. Attendance during Conseco Fieldhouse's inaugural season was 18,345, but has declined five of the last seven years.

With Conseco Fieldhouse still vaunted as one of the best venues in the NBA, and with plenty of revenue-generating amenities, sports business experts said it leaves reason to doubt the team will qualify for much more relief under the league's new formula.

The NBA for several years has used McKinsey & Co., an international business consultancy based in New York, to evaluate teams' performance within their market. The evaluations are based on market competition and conditions, corporate climate, maturation of franchise revenue streams, and extent of sales and marketing initiatives.

League of plenty

The money to be distributed will come from the luxury tax assessed teams that operate above the player salary cap and other common league funds, including national broadcast deals and merchandise revenue.

Even though the NBA doesn't have the massive national broadcast package the NFL has, there is still enough money coming in to at least make sure all teams break even, Ganis said.

Large-market teams like Chicago and Los Angeles have local broadcast deals netting more than $30 million annually, compared to the Pacers, which garner about $10 million, sports business experts said. Gate receipts of $65 million to $70 million in large markets are nearly double what the Pacers bring in.

While the Pacers are struggling to keep their heads above water, Los Angeles and Chicago are scoring profits of $35 million to $50 million annually, according to Forbes.

"There's enough money to go around," Ganis said. "But you have a three-sided battle. You have the small-market teams, large-market teams and the players.

"One thing the Pacers have going for them, is that the league has made a commitment to help loyal, long-standing owners like the Simons who have been with the league in good times and bad."

The revenue-sharing debate will smolder until a new collective-bargaining agreement with players is negotiated following the 2010-2011 season.

"All this will ignite at the bargaining table between players and owners," said Notre Dame's Sheehan.

With the NFL sharing 75 percent of all revenue and the NBA sharing only about 25 percent of its revenue, there is room for more change, said Andrew Zimbalist, a noted sports economist and professor at Smith College in Northampton, Mass.

"The NBA right now is out of balance," Zimbalist said. "The only way to get back in balance is to make sure that everyone--players and owners--are making money.

"Right now, you have to wonder how long some of these owners will want to hang in there."

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