Owners Aren’t Wanted Here

Photo from yewenyi via Flickr

In the pointless PR war that the NBA and its players’ union insist on having, there are very clear cut winners. To the casual fan, the players are a greedy bunch who are refusing to play unless they can maintain their irrationally high share of the pie; to the hardcore NBA freak, owners are being unreasonable in expecting that the players and the players alone be responsible for creating an environment that guarantees profitability. This is obviously not a clean split – I’m sure several casual fans are mad at the Gilberts and the Sarvers of the world, and that many people whose ideal mid-January Tuesday night involves a date with the Bobcats and the Timberwolves are blaming the hard-headedness of Derek Fisher’s constituents – but this is generally how things go.

One thing is for certain, though: regardless of the prism through which you’re viewing the current labor dispute, NBA owners are a problem. A problem that is rarely spoken of, due to the mysterious cloud behind the NBA ownership club. The 30-party institution does extensive, secretive background checks on its future members – remember the Mikhail Prokhorov saga? – but once anybody becomes an NBA owner, he’s pretty much granted a free pass. Are you a convicted racist slumlord? Do you pop out horrendous atrocities whenever you’re bored? It’s all right, dog! You’re one of us! Just sit down in that couch, grab a beer and join in on the Billy Hunter jokes. Today’s focus is “how funny his hair looks”.

It’s not that terrible owners are exclusive to the NBA, or as if their existence is in any way surprising. Owning a sports team is one of the highest status symbols available in modern society, and regardless of how business savvy you have to be to afford such a distinction, sometimes it gets to your head. Just look at the Blazers’ Paul Allen, one of the richest men alive, who, despite being a major part in the success of an international giant, has too much ego to admit that “hey, maybe Kevin Pritchard and/or Rich Cho know more about evaluating NBA talent than I do”. Or look at Michael Heisley, whose net worth is estimated at 1.5 billion according to Forbes, and yet he admitted last summer that he hadn’t read what was then the league’s collective bargaining agreement.

What is surprising is how little the league does to prevent bad owners from driving their teams into the ground. The ousting/buying out of George Shinn from New Orleans last season gives us a recent example of the NBA washing its hands from an owner who was nothing but bad news, but we must remember that it was virtually unprecedented; meanwhile, in another part of town, the Maloofs probably can’t even afford a nice bottle of wine to drown their sorrow in, and yet they still hold the right to move an entire franchise if the city of Sacramento can’t draw up a plan to build them a new arena. Player salaries may or may not have created a $450 million loss for the league last year, but shouldn’t a league crying poverty try to maximize every single asset it has? Like, for instance, not letting Donald Sterling destroy the viability of what should be an incredibly profitable large market team (somehow, the Clippers still make money while being more of a punchline than a basketball team, but the potential for more revenue is being severely wasted), or telling Robert Sarver that it’s all right if he can’t afford to pick a late first rounder, but if that is the case, could he please leave?

It’s for these reasons and more that fans complain about their owners loud and often. And nowhere is this more prevalent than during this mess of a lockout. Millions of fans want to watch NBA basketball, and are being prevented from doing so. How much the players are to blame for this is irrelevant – NBA players can’t be replaced with other basketball players without seeing a dramatic drop in the quality of play. NBA owners, though? The very notion that owners are playing even the slightest part in this lockout means that they are outliving their usefulness. There may be less billionaires available than world-class basketball players, but there are still enough billionaires to give us 30 that don’t get in the way. The owners are nothing but a middle man, an unfortunate necessity on the way to what we truly desire.

But are they even a necessity at all?

Lemonade Stands Selling Sports Teams

My favorite sport is basketball. As such, my favorite sports league is the NBA. But my favorite sports team has nothing to do with lockouts and BRI splits. My favorite team comes from the city in which I was born, raised, and currently live in: Hapoel Jerusalem. And Hapoel Jerusalem’s soccer team provides an interesting case in sports ownership.

The club’s soccer team has been, for quite a while, pretty terrible. Last relegated from the top-tier Israeli soccer league in the 1999-2000 season, the team was mired in an ownership fiasco that would put the Atlanta Hawks to shame. For years on end, there was an ongoing dispute between owner Yossi Sassi and former team director Victor Yona over who deserves full control of the team. As the litigation progress dragged on and on, it sucked the life force out of the squad both on the soccer pitch and off it. Neither side was willing to invest more than the minimum on player costs, and neither side was willing to sell his share, determined to prove more his resolve is stronger than that of his opponent, rationality be damned (sound familiar, locked out NBA fans?).

For years, desperate Hapoel Jerusalem fans scoured the country for potential buyers who would relieve both disputing sides of their harmful fight. For years, these fans’ attempts were thwarted. As a result, Hapoel alternated between the second and third tier Israeli soccer leagues as fans alternated between weeping to the heavens and losing hope.

Until finally, they could take no more.

In the summer of 2007, an extraordinary initiative was born. A group of fans banded together, intent on buying the team. When no agreement could be made with Sassi on a purchase, the fans didn’t give up. They turned instead to another, smaller club called Hapoel Mevasseret Zion/Abu Gosh (named after two Jerusalem suburbs in which it played), then of Israel’s 4th-tier league. The fans bought the club, and changed it’s name to Hapoel Mevasseret/Katamon – Katamon being a neighborhood in Jerusalem, which was the venue of Hapoel’s home games was from the mid-fifties and into the eighties.

As a team that belonged to the fans, ownership was open to everybody who wanted. All one needed to give was proof of his fandom and 1000 Shekels (about $250 back in 2007 rates), and he was given a share. In my neighborhood’s commercial center (and others as well, I assume) a small stand was formed, behind which two people dressed in red and black shirts and scarves spoke to passersby, explaining the situation and their plight. The old “Hapoel Jerusalem” was abandoned as a corrupt entity void of spirit; for all intents and purposes, Hapoel Katamon was now Hapoel Jerusalem. Chants sung by fans during games said as much.

The project was as controversial as it was original. Many accusations of disloyalty were launched at Katamonites. “True fans don’t leave a team because of crappy owners”, it was said. It didn’t matter. Despite playing virtually anonymous teams that bordered on amateurism, the team drew thousands of fans each game, more than some first-tier Israel league games.

After two years, the agreement with the Mevasseret side of Mevasseret/Katamon blew over and fell apart. The club was re-instated as Hapoel Mevasseret, and Katamonites instead founded a completely new institution in the lowest-tier Israeli league available, under the name “Hapoel Katamon Jerusalem”. Despite the setback, the passion remained. Today Hapoel Katamon plays in the third-tier league and has ambitions of advancing to the second – which just happens to include the old Hapoel Jerusalem, still playing under their original fan, now with Sassi as its only owner.

Perhaps more than that, Katamon set a precedent. Shortly after Katamon was founded, fans of Hapoel Tel-Aviv’s basketball team, which was similarly decimated by troublesome ownership, created a new squad called Hapoel Usishkin – named after Hapoel Tel Aviv’s legendary Usishkin arena, which was controversially torn down. Hapoel Usishkin was eventually renamed Hapoel Tel Aviv – thus re-instating the lost squad, under fan ownership.

Different Scales

Could Hapoel Katamon and Hapoel Usishkin serve inspiration to fan-owned basketball franchises?

Well, hardly. Katamon and Usishkin have, at the very least, risen to the point of recognition as viable sports teams, but both have yet to even advance to the top-tier league of their respective sport (though Usishkin was close last year), and both are on a completely different financial scale as the NBA. Forget the problematic idea of an NBA team’s directory being chosen via election amongst share-holders and focus on the preliminary act of actually buying a team: say, if the residents of Arizona decide to oust Robert Sarver by reimbursing him on his $400 million investment from 2004, then using the Katamon method of $250 per share, you have 1.6 million shares to sell. Then, assuming you found enough excited Suns fans to raise such amounts, you need money for everyday operations, which I somehow imagine are slightly more expensive than those of a third-tier Israeli soccer club, even when accounting for the far vaster income of revenue.

So while these moves were unprecedented in the Israeli sports world, they are also impossible to project upon NBA levels. A more viable model is probably that of European soccer, where fan-operated clubs are hardly a scarce breed. The world’s most successful soccer club these past years, FC Barcelona, is a fan-owned club, as is its bitter rival and fellow heavyweight, Real Madrid. Both clubs use membership-based systems. The official site of FC Barcelona, for example, lists under the advantages of it’s membership zone the ability to vote for both the club’s president and it’s annual delegates assembly.

Perhaps even more interesting is the case of the Bundesliga, Germany’s top-flight soccer league. In 1999, the Bundesliga instituted what is called the 50+1 rule, which dictates that the majority of a club’s shares – 50%, plus one share – must be held by its club members. The idea behind this rule is to abolish situations in which an investor buys a team for his own personal financial gain, sends it tumbling towards bankruptcy and walks out the door. The only exception to this rule is that an investor who has been linked to a team for over 20 years is allowed to hold a majority share – under the assumption that 20 years is an adequate amount of time to prove that said investor is serious about his commitment to the team, and is financially capable of supporting it without leading to its eventual demise.

This comes in sharp contrast to other European soccer leagues, in which oligarchs and tycoons often purchase teams and do as they please with them. In the English Premier League, for example, Chelsea rose to prominence in the early 2000s behind the financial dominance of Roman Abramovich. Similarly, Manchester City has spent with frightening exuberance since being purchased by an Abu Dhabi based group in 2008. But those are just successful examples: on the other, sadder end of the dollar bill, one would find Portsmouth, who has suffered dire financial problems as well as relegation since the purchase of the team by Alexandre Gaydamak and the subsequent frivolous spending sent the club into a tailspin. The 50+1 rule is meant to prevent such situations – nobody wants to be optimistically drawn into a new era of ownership, only to see their team crash and burn under the financial distress that follows. We’ve seen this too many times – in the NBA as well.

Paying For The Right To Pay

Of course, we must once again remind you that life is not that simple. The NBA and European sports are dramatically different, with the largest difference being – obviously, since this is a lockout piece – the CBA and all that it entails. Specifically, its effects on the transfer market.

In European soccer, if a team wants to acquire a player who is under contract with another team, they may buy him outright as long as the other team is aptly compensated. Compensation is then negotiated between each two teams for every transfer that is not the signing of a free agent.  For example, when Cristiano Ronaldo moved from Manchester United to Real Madrid, not only did Real agree to give him €11 million per year – they also gave Manchester £80 million. Could you imagine this happening in the NBA? Teams could probably pay for their entire rosters just by selling a single player to James Dolan.

This creates a situation in which major European squads not only spend boatloads of cash in compensating their players, but they do so also to compensate each other, creating massive debts along the way. Almost every major soccer team has debts that are measured in tens, if not hundreds of millions. For example, ESPN reported this June that Barcelona – again, the best soccer team in the world the past 3 years, a lean, mean, revenue making machine, and the magical flag bearer of sports socialism – has a “gross debt of around €483m” and that the ”net debt is at €364″… and this is actually an improvement over last year.

Under a system that allows for unlimited spending both for the right to pay players and for the actual payment, teams spend much more than they actually have. This could never happen in the NBA – teams can spend a lot of money on players, but there is a self-imposed limit, even if it is a loose one.

For the 50+1 Bundesliga, this creates a problem. With the majority share of every club being held by the fans, German teams lack the financial fortitude to make major, Ronaldo-esque purchases, thus preventing them from buying the top players in the world, inevitably costing the league in quality. Indeed, the last German squad to win the Champions League was Bayern Munich in 2001, and since Germany has produced only two Champions League finalists.

This isn’t the only place where the German 50+1 rule acts as a double-edged sword: it scares investors away. Because if you’re putting your money into a soccer team, you probably won’t be very happy if a bunch of brats can veto your every move. A system in which all team-created revenue goes right back to funding the team is all nice in theory, but that revenue isn’t necessarily sufficient for funding the team all on its own. You still need the investors, only the investors lose incentive once they lose the prospect of control.

On the other hand, the 50+1 rule enable teams conserve to their identity without running the risk of being reduced to dollar signs in jerseys. A fan-owned, fan-operated team will always remain close to the fans: otherwise, they’ll run things differently. The rule is not a clear-cut win, and it’s not a clear cut loss, but when Hannover 96 president Martin Kind moved to get rid of the rule in past years, he was incapable of gathering the two-third majority needed to do so. In the fight between fans and would-be owners, Germany chose the fans.

Projecting Unto America

The example of a community-based franchise that operates under the rules closest to the NBA’s would be the NFL’s Green Bay Packers. The Packers  are officially recognized as a non-profit organization, with almost 5 million stocks being held by almost 112,000 fans. As in European soccer, this “ownership group” elects a president and executives, and all profits are either thrown back into the large cookie jar from which money is taken to fund the team, or given to charity.

Of course, the amount of revenue that the NFL grosses is incomparable with that of the NBA. The same things that make NFL teams so profitable also bond to make the idea of a non-profit NFL team viable; in the NBA, where 22 teams are claiming to lose money and revenue isn’t nearly as high, this would obviously be a problem. And no mention of the Packers’ unique situation can be made without pointing out that corporate membership is, in fact, illegal in the NFL – the Packers are only exempt because they are operated in such a manner since 1923, well before the corporate membership rule was passed, and as such, they were grandfathered in.

Which sends us back to the question that started the entire lockout in the first place: how much money are the owners really losing? If we look at the old 57-43 BRI split, and hypothetically replace all NBA owners with well intentioned fan groups, thus entirely eliminating the need for profit going to any kind of ownership groups, and creating a self-funding organism, is the ordeal functional? (Note: I know very little of finances and may be completely losing touch with any semblance of reality, even for something defined as a very, very hypothetical situation. If this is indeed the case, I apologize).

Once you eliminate all revenue that goes towards player salaries, you are now left with 43% of all BRI, plus all non-BRI profits, as money that goes towards running the league’s every day cost. Assuming BRI is set at $4 billion, that gives you $860 million plus non-BRI to run operational costs. Is this enough? I don’t know. If you believe current NBA owners, then not really. Then again, I’m not sure that I do.

I have no idea how much it costs to run an NBA team once player salaries are accounted for, and I have no idea how much non-BRI revenue the league rakes in. Without ownership groups that own arenas, you now need to pay for venues. You need to pay for charter planes and hotel rooms. $860 million is a lot of money, but running the entire NBA is also a lot of money. Perhaps more money than what can be raised with no investments other than the love and passion of membership owning fans.

Regardless, an NBA team under total fan ownership is an extreme that is neither achievable nor desirable. Wax poetic as we may on the sentimental purity of sports, there is too much money involved in the ordeal to turn an entire league into a non-profit organization. The owners of the 8 profitable NBA teams, as well as most if not all of the owners of the self-described 22 money-losing teams, would  laugh in your face if you offered them the prospect of getting bought out of the game at a break-even price, and not just because of the social perks that come with being an NBA owner – it’s a golden business opportunity if you do it right.

Doing It Right

The problem is that the NBA isn’t insistent enough on doing it right. Both with making business decisions that will help themselves, and with actually caring about the fans that they supposedly represent. NBA owners are given too much of a carte blanche with their NBA teams, with complete disregard for their communities’ role in what those teams actually represent. Even if your team gets lucky enough to draft a hall of fame power forward, you never know if you’ll be lucky enough to root for Peter Holt or Glen Taylor – and no matter which team you’re for, you’ll get both owners on your labor negotiations committee.

Fan-owned teams are the very definition of being just with one’s fanbase – but as mentioned, it is implausible. Most examples of fan-based operations fit in one of three categories: either a small-scale start, with the Packers serving as a prime example of possible growth, and Israeli sports an example of, at least in present times, remaining small; being part of an age-old tradition that was just transferred into modern times, such as the Spanish soccer teams; or the result of litigation, such as the 50+1 Bundesliga rule. The NBA surely misses out on the first 2 groups; meanwhile, litigation in the name of distributing sports teams among the people is incredibly unlikely.

As for viability, though? I wouldn’t rule it out. While teams that are owned solely by fans require a certain level of profitability that may be out of the NBA’s reach, the Bundesliga’s model is one that I believe could translate to the NBA. With the NBA serving as the consensus top basketball league in the world, as well as the richest one by far, it doesn’t run the risk of failing to attract the world’s best players, and it doesn’t run the risk of bidding wars; and even though allowing only limited shares and thereby limited profits to investors will deter many potential buyers, the glamour of being a part in as unique an operation as an NBA team would still attract businessmen. And in adopting a variation of the 50+1 rule’s 20 year provision, the NBA could grandfather in iconic owners such as Jerry Buss, with the potential to pass on the team to Laker Nation in due time (of course, Donald Sterling would also be eligible for grandfathering, but we could just get rid of him instead). At the very least, basketball starving communities who have the necessary fan support to pull this sort of thing off can stop being held hostage.

But perhaps the greatest supporting argument for fan-ownership can be found here, in an extensive historic review of Boston Celtics L.P., the limited partnership that acts as the operator of the (you guessed it) Boston Celtics:

Following Stern’s suggestion, [then Celtic owners – N.S.] Gaston, Dupee, and Cohen formed a master limited partnership named Boston Celtics L.P. that enabled the three owners to avoid paying a substantial percentage of taxes on revenue the franchise generated and provided for the distribution of shares of Boston Celtics stock to the public, a first for a professional sports franchise. In 1986, 2.6 million Celtics shares, representing 40 percent of the team, were offered to the public at $18.50 per share, from which the three owners earned $44.74 million in proceeds. After the public offering, Gaston owned 32.5 percent of the Celtics, Dupee owned 14.7 percent, and Cohen owned 11.8 percent, more than enough to continue with their ownership unchallenged by all others.

via Boston Celtics Limited Partnership: Information from Answers.com.

Unlike other examples, I couldn’t tell what power, if any, was given to public Celtic “shareholders” (I assume that not much, since the entire point in selling only 40% of the team was to keep a majority share), or whether this is still in any way relevant to the current makeup of the team. However, two things stand out in this paragraph:

1. The Celtics sold shares to fans, and made money off it. At the very least, fans in ownership groups has a precedent.

2. There was once a time when David Stern gave his owners creative ideas regarding how they can run their teams. Funny how that works.

The way I see it, if fan ownership is good enough for some of the world’s biggest sports leagues, it’s good enough for the NBA. The only problem is that whether it comes in the form of agreeing to sell or agreeing to be a minor investor, it requires NBA owners to play along. And if NBA owners had played along, we wouldn’t be in this mess in the first place.

Many thanks to Tim Donahue and Brett Koremenos for helping with the research leading up to this piece.

Noam Schiller

Noam Schiller lives in Jerusalem, where he sifts through League Pass Broadband delay and insomnia in a misguided effort to watch as much basketball as possible. He usually fails miserably, but is entertained nonetheless. He prefers passing big men to rebounding guards but sees no reason why he should have to compromise on any of them.