2011 NBA Lockout: The Deal of a Lifetime and What It Means for Competitive Balance

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One of the fun things about covering the NBA and having the opportunity to explore the studio space is that with each others' help, be they pros, bloggers, or commenters, we discover all these little tributaries of interest that we can explore. The best part is when they might actually have something to do with the larger issues at hand.

In our analysis of national TV and local TV revenue, specifically in how it impacts the New Jersey Nets, we were tipped to the fact that the revenue distribution is not uniform across the league. The Nets actually receive a little bit less than most other teams, which puts they and three other teams at an inherent disadvantage when it comes to earning their keep. You see, there are two brothers who were part of a league that has not existed in over three decades. Every year for 35 years, the Nets have to cut a multi-million dollar check to these two fellows, and these brothers don't have anything at all to do with the NBA or pro basketball in general.

Let's take a quick look at how this all transpired, examine the money that has steadily changed hands, and lastly, what it means for competitive balance. If you would like a more in-depth view of the story, you can go here:

Revisiting the Greatest Sports Deal of All Time | Forbes

  • The players: Ozzie and Daniel Silna, two successful New Jersey businessmen who decided to get into the game of owning a professional basketball team. The brothers were joined in their endeavor by their lawyer, Donald Schupak. They purchased a pro franchise in 1974 and named it the Spirits of St. Louis.
  • The teams: The Spirits of St. Louis, Virginia Squires, Kentucky Colonels (owned by KFC owner John Y. Brown), New York (later Jersey) Nets, Denver Nuggets, Indiana Pacers, and San Antonio Spurs.
  • The league: the American Basketball Association (ABA), and then later the NBA
  • The back-story: In 1976, the ABA, a rival professional basketball league that tried do do things a bit differently, was on the verge of folding. The league consisted of seven teams, and the better organized and more stable NBA wanted to merge the ABA into the NBA through team acquisition. One team immediately folded (Squires), two were left out of the purchase (Spirits, Colonels), and the NBA agreed to purchase the four remaining teams from the ABA - the Pacers, Nets, Spurs, and Nuggets. For the two remaining teams, the Colonels and Spirits, the NBA offered $3 million each for them to fold. The negotiation process that came out of this offer led to one of the most ridiculous deals in basketball and business history.
The Deal
The owner of the Colonels, John Y. Brown, took the money (I guess he didn't want to double down). The Silnas did not. Why not? Who knows. Perhaps they were friends with Biff Tannen. Instead of taking the $ 3 million in cash (and that would be $3 million in 1976 dollars, which in today's dollars would be a hair under $12 million), the Silnas decided to get a little bit creative and trust their judgment on where pro sports entertainment was headed. Here is what the Silnas negotiated:
  • A buyout of any Spirits player the NBA acquired, which led to about $2.2 million in the exchange.
  • They would receive 1/7 (14.3%) of each of the four remaining ABA teams' NBA apportioned visual media rights each year. The reason why the ratio is 1/7 is because there were seven teams remaining in the ABA at the time, and they thought it would make sense that for any team that got left out of the NBA merger, they would still get a piece of the future revenue of the teams that did make it in.
  • In a second bit of prescience, the Silnas mandated that the percentage that they would receive should be derived off of a 28 team league, in order to protect their investment from dilution.
  • The duration of the deal: in perpetuity, or in other words, FOREVER
The net result: each year, the four remaining ABA teams - the Pacers, Nets, Spurs, and Nuggets, must make a payment to the Silna brothers in the amount of 1/7 of their respective NBA national TV contract. 

While this arrangement yielded precious little in the late 1970's and most of the 1980's when the league was still establishing itself, things began to radically turn for the Silnas once Larry Bird, Magic Johnson, and Michael Jordan raised the game's popularity to national conscience. The ascendance of the NBA as an intimate and fast moving form of entertainment made it extremely TV-friendly, and the national TV deals that the NBA began to procure reflected the shift. In 2002, the NBA signed a national TV deal with CBS/ESPN/TNT worth $4.6 billion (about $765 million per year) and then re-upped that deal in 2007 for about $7.4 billion ($930 million per year). 

Given these numbers, what is the Silnas' yearly take? Here is how we calculate it:
  • The contract only applies to the league's TV rights, so we use the $930 million number and ignore local TV revenues. 
  • For the Silnas' purposes, to calculate each team's share of the TV revenue, divide that $930 million by 28 teams. Why not 30 teams? It is because of that clause in their contract that stipulates that their percentage assumes a 28 team league, regardless of how many teams there are. That calculations gives you a per-team share of about $33 million. 
  • For the Silnas' purposes, each of those four ABA teams received $33 million from the league, and now the Silna brothers are entitled to 1/7 of it from each of those four teams. So the Pacers, Nets, Spurs, and Nuggets all must pay the Silna brothers about $4.75 million, or in aggregate, around $19 million.
  • Behold, the sweetest deal in sports business - the Silna brothers will receive this amount every year until 2016, which is when the NBA is set to sign a national TV extension. Which means in 2016, the Silna brothers will take in even more money than they do now. According to the Forbes article above, their total accumulation over the past three decades is around $237 million.  
  • This yearly payment will never cease.
Now, put aside the thoughts of whether this deal the Silna brothers signed is fair, if it was what the original contract was supposed to be, or why the NBA would allow it. I'm sure that the league has already wasted millions in litigating this contract, and so far it has stood strong for three decades.

Rather, think about it in a competitive context. For three decades, four NBA teams, before a single ticket is sold, game is played, or player is paid, have started their fiscal year millions of dollars behind everybody else. If you consider the NY metro area, the Knicks will be receiving about $31 million in national TV revenues every year under the current deal. The Nets, on the other hand, will in effect only be receiving $26.25 million because $4.75 million of that portion has to go straight out the door to the Silna brothers. We discussed how woeful the Nets are anyways in terms of their overall broadcast revenue, but now here is something else which the organization has no control over, which puts them even further behind. In fact, take a look at all four of these former ABA teams:

Team Franchise Value ($M) Operating Loss ($M)
Nets 312 -10.2
Pacers 269 -16.9
Spurs 404 -4.7
Nuggets 316 -11.7

Source: Forbes.com

To conclude, I have to wonder why this simple, silly thing doesn't show up on more peoples' radars when we talk about the idea of "competitive balance" in the NBA. Revenue sharing is a hot buzz word, as is this nebulous phrase "profit certainty." I have to believe that enough people know about the Silna deal to care about it, especially if one is associated with the four ABA teams. I know the guys at SB Nation's NetsDaily site know about it, but for the most part it seems to be a deal that operates on the periphery as a silly glitch in the system, an "aw shucks, you got us good, boys!" kind of thing. 

However, if you look at the teams above that are impacted, I am rather surprised that the league has continued to allow them to operate with a built in disadvantage, especially since each of the four are already in smaller markets and don't even have the built in media revenue protection of an LA or NY. It also isn't like this arrangement has crept up on anybody; the Silnas have been the suckerfish on the NBA for over 30 years. I've read everything I can find on the subject, and it seems conclusive that these four teams are the only ones who pay; the league has never worked to spread out this league cost across all 30 teams to level the playing field.

P.T. Barnum notably said, "There's a sucker born every minute." How tragic it is then that the league has essentially said to these four teams, "And you guys are the sucker."
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