Monday Media: The Short-Sighted Free Arena Problem, and how David Stern Seems Powerless to Stop It

Last week Zach Lowe wrote a great piece about the Oklahoma City Thunder and “the inescapable legacy of the James Harden trade”. Buried within was a nugget of information I found even more interesting than the most compelling retelling of the Harden trade yet:

[Oklahoma City] is a team that makes about $15 million from its local television deal; the Lakers make $250 million per year from theirs.

Stop me if what I am writing is old news, but the Oklahoma City Thunder were once known as the Seattle SuperSonics. In 2008, after the city of Seattle refused to build owner Clay Bennett a new arena, he threw his toys out of the pram and up and moved the team to Oklahoma City (and its $220 million publicly financed arena). According to Nielsen Oklahoma City is the 41st biggest television market in the country, with 718,770 “TV Homes”. Seattle-Tacoma is 12th, with 1,812,040 TV Homes. Seattle’s market—the same market that Clay Bennett voluntarily moved his team from—is 2.5 times bigger than Oklahoma City’s.

The crazy thing is that this type of move isn’t an anomaly. With 29 American NBA teams and two apiece in New York and Los Angeles, you’d expect that the NBA would field teams in the 27 largest television markets. Television market size is only slightly different than city size: it makes the most economic sense to have teams in the areas with the largest amount of people to watch them play both in person and on TV.

But that’s not where NBA teams are. There are no NBA teams in Seattle (12th largest TV market), Tampa Bay (14th), St. Louis (21st), Pittsburgh (23rd), Raleigh-Durham (24th) or Baltimore (27th). Instead, there are teams in Salt Lake City (33rd), Milwaukee (34th), San Antonio (36th), Oklahoma City (41st), Memphis (49th) and New Orleans (51st). Salt Lake City, Milwaukee and San Antonio may have a long history of professional basketball, but Oklahoma City, Memphis and New Orleans only acquired their teams in the last fifteen years. Why were these three small markets able to acquire NBA teams?

In 2000 Michael Heisley bought the then Vancouver Grizzlies and investigated possible relocation prospects. In the end he chose Memphis: a city that didn’t even have a suitable basketball arena at the time, so one was built to the tune of $250 million in public funding. In 2001 then Charlotte Hornets owner George Shinn demanded the city of Charlotte build him a new arena. It first refused before finally relenting, but a referendum on the issue failed. The NBA eventually approved of a complicated deal where Shinn moved the team to New Orleans and Charlotte was promised an expansion team (if they secured public funding for an arena, which they did). The Oklahoma City saga has already been told.

For the past twenty years, the NBA—like every other sports league and major corporation alike, I might add—has pursued a strategy of bullying cities into providing major public funding for new arenas. With fifty markets wanting a team and only thirty available, it’s almost a given that the NBA will win every single one of these confrontations. But what the league doesn’t realize, or chooses to ignore, is that this isn’t necessarily a winning long term strategy.

In the short term, market hopping for free arenas makes sense. Instead of working to rebuild a sagging Vancouver fan base, Heisley leveraged cities against themselves to the tune of a $250 million state-of-the-art arena. In the long term, however, he left what would be the 19th biggest TV market for the 49th, all the while declining to move the team to Anaheim (2nd largest TV market) or St. Louis, among other suitors. In the long term, I’m not so sure that move makes sense.

With two exceptions, the oldest NBA arenas were all built in 1988. All three of the teams with arenas built then—the Milwaukee Bucks, Sacramento Kings and Detroit Pistons—have started making noise about needing new arenas. It seems that the lifespan of an NBA arena is about 25–30 years. Over that timeframe, Clay Bennett would have only needed $9 million more a year from his TV deal to make up for the free arena Oklahoma City gave him. This is also ignoring the additional revenue from his slice of what would be a larger national TV deal as well as having a wealthier season ticket base. If Clay Bennett planned on holding onto the team for 25–30 years, it probably made more sense to work out a deal with the city of Seattle instead of moving to Oklahoma City.

Therein lies the rub. Only seven NBA teams have been owned by the same group for 25 years or more. Nine teams have been sold in the last five years. The reason the NBA has teams in too small of TV markets is the same reason global warming solutions have been glacially slow to be implemented: it’s a collective action problem. It would be better for all owners if teams were only located in the biggest North American TV markets, but for any individual owner that doesn’t plan on owning a team long term, not having to pay for a brand new arena is much more important.

David Stern is often described as a visionary commissioner, and I think in a lot of respects this is an accurate portrayal. The NBA is far ahead of its peers on issues like worldwide presence, job opportunities for women and minorities, and marketing its star players. He’s also able to whip the owners into shape and force through pretty much anything he wants to: witness the Kings staying in Sacramento instead of moving to Seattle. But for whichever reason—I’m not sure if he doesn’t see it or if he just doesn’t have the power to stop the owners—there are just as many teams in Oklahoma City as there are in Chicago, and one more than there is in Seattle.

For the future money-making potential of the NBA, that’s not a good thing.

About Kevin Draper

Kevin “Franklin Mieuli” Draper was born and raised in Oakland, California, and loves it more than you can possibly imagine. Follow him on Twitter @kevinmdraper
This entry was posted in Monday Media. Bookmark the permalink.

9 Responses to Monday Media: The Short-Sighted Free Arena Problem, and how David Stern Seems Powerless to Stop It

  1. Kaosso says:

    got here from Zach Lowe’s Twitter, and i liked the article, but Seattle’s TV market isn’t 250 % bigger than OKC’s, it’s 150% bigger. If something is 100% bigger than something else, it’s double as big, so if it’s 2.5 times as big it’s only 150% bigger. Just hoping to help out there.

  2. Kaosso says:

    Thanks for reacting to my comment, but i believe this is still wrong, it’s 2.5 times as big which equals being 1.5 times bigger. if it were 2.5 times bigger, it would be 3.5 times as big.

    • MV says:

      Kaosso- this issue isn’t as clear cut as you would have us believe. Common usage (at least here in USA) tends to see the two phrases (“x times as big” and “x times bigger”) as equivalent. While you’re right from a logical standpoint, the majority will intuitively disagree with you. Good luck swimming against the tide on this one.

  3. AJ says:

    This is good analysis. One additional thing to note in the overall calculation (which puts a slightly different spin on this) is that Heisley/Bennett own these teams as vanity projects/toys. Yes, profitability is important, but ultimately secondary to main goal of vanity/enjoyment. Bennett didn’t care about the size of the TV market as long as he wasn’t losing money hand over fist. And who wants their toy over a thousand miles away in Seattle? Not Clay.

  4. Otter says:

    This was really good. Never thought of it as a collective action problem, but you’re totally right. On one hand, it is always surprising with the middle-sized cities let teams move to smaller metro-areas as that negatively impacts their bottom line; however, the threat of moving is more powerful from a leverage perspective for the owners which is probably why they let teams move*. As you say, the fact that owners don’t end up owing the team all that long means that having the leverage to move is greater than the extra millions they could make via TV contracts (local and national).

    *Baseball, interestingly enough, has effectively given up this leverage and no city on Earth should build a publicly financed stadium because of it.

  5. Lou says:

    Great post. FWIW I think Bennett/McClendon would have defaulted on the arena if they were on the hook for $200 million once the recession hit.

  6. Dan says:

    Interesting post. I think your numbers overstate your a case a bit though. Depending on the discount rate you use, TV revenues would have to be $15-20m higher per year (not $9m) to offset the $250m arena. Given that most (thought not all) of these owners are very sophisticated businessmen, your argument is much stronger where it focuses on the impact on the league. Generally speaking, rich guys know their money better than you do.

  7. bill says:

    Good post. Another item to note might be that franchise value is also connected to market size, so a franchise in in NYC with an old building is still worth way more than a franchise in Memphis with a brand new arena.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Current [email protected] *