Markets Over Owners

Photo by lakpuratravels via Flickr

“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 rest of us are looking at significant and unacceptable annual financial losses.”

Via “How ‘small market’ owners took control” by Brian Windhorst

That’s a mere snippet of an outstanding article by Windhorst detailing the genesis of the current lockout. Small-market owners were squirming back in 2006 for a chance to right the system and prevent any further economic detriment to their teams. And that was during relatively good economic times. Then came the Great Recession and the small-timers buttressed their resolve and were joined by new allies (Robert Sarver and Dan Gilbert, prominently).

For months now, I’ve been racking my mind on a way to really get a feel for what makes a market large or small and what gives it potential for profit. Finally, I’ve come up with something to put my mind at ease for the time being, but it’s by no means the end-all-be-all of a complex subject.

Using data from the Census Bureau and the Bureau of Economic Analysis of the United States and StatsCan of Canada, I was able to sort the two most important factors to market power: population and money. Other factors certainly come into play but those two are the foundation. They amplify, ameliorate, dictate and mollify everything else. Evansville, Indiana may love their hoops far beyond the level that San Jose, California, but San Jose has the size and money to trump the more ingrained basketball culture of Evansville. Random examples, by the way.

As of 2010, approximately 125 million North Americans live in a metropolitan area directly serviced by the NBA and here’s how it breaks down… in pie graph form!

 

Of the NBA’s 28 markets, 14 control 75% of the population. To give a more manageable handle of the situation, I created 4 tiers of markets.

  • 1st Tier – Markets that control 5%+ of the population (New York City, Los Angeles, Chicago, Dallas-Fort Worth)
  • 2nd Tier – Markets that control 4-4.99% (Houston, Philadelphia, D.C., Miami, Atlanta, Toronto)
  • 3rd Tier – Markets that control 2-3.99% (Boston, San Francisco-Oakland1, Phoenix, Detroit, Minneapolis-St. Paul, Denver)
  • 4th Tier – Markets that control 1.99% and less (Portland, Salt Lake City, Sacramento, San Antonio, Oklahoma City, Memphis, New Orleans, Orlando, Charlotte, Indianapolis, Milwaukee, Cleveland)

Here’s how the control breaks down via tier in terms of population and in the total raw income of the various areas, the aggregate total which was $5.616 trillion as of 2009:

So, there is definitely credence to the smaller market plea that they face an uphill economic battle. Certainly in terms of just the raw numbers. Although they account for half of the markets they make up just 17% of the population and, even more worrisome, 14% of the income brought in by the NBA population.

This ostensibly gloomy outlook, just reinforces my belief that markets are indeed more important than owners. A sizable and wealthy market is hard to find. Persons willing to own an NBA team are not. According to HoopsHype, only 17 of the 29 owners2 have been in the league for a decade or longer. And just 7 have been around for 2 decades or more.

Furthermore 12 owners have a net worth at or below $500 million. A study by CapGemini found that there are 36,000 individuals in North America who are worth at least $30 million. That’s a decent pool to form ownership groups capable of buying teams that generally have a price tag between $250 million and $650 million. However, let’s just winnow the pool down just a bit:

The U.S. still has the largest number of millionaire households, with an estimated 5.22 million, representing 4.5% of all American households. That is up from 4.75 million last year [2010] and up from 4.14 million in 2005. Of those, just 2,692 are ultra-high-net-worth households with more than $100 million in assets under management.

Now let’s look at the pool for potential markets. The smallest current market is Salt Lake City with just 1.1 million people. Assuming the NBA can’t be sustained in a metro area smaller than that there are just 54 options for an NBA team in North America  and 28 of them are already taken. So just to reiterate: 30 franchises, 54 possible locations. 30 franchises, 2692 possible owners.

Now, every situation is different and there are mitigating and aggravating factors toward success, but within the past 15 years, the NBA has relocated franchises from Vancouver, Charlotte and Seattle all to locations where, in the raw, it is harder for the league to succeed in Oklahoma City, Memphis and New Orleans.

By my method, Seattle would comfortably be in the 3rd Tier of markets whereas Oklahoma City is the 3rd smallest market ahead of only Salt Lake and New Orleans. Vancouver would be the largest of the 4th Tier markets while its replacement city, Memphis, lurks as the 4th smallest market in the league. Finally, Charlotte, although receiving an expansion team since, saw the Hornets leave its burgeoning market that is still 7th smallest but is the fastest-growing for New Orleans which saw its population decline. Clearly, Hurricane Katrina contributed to that mightily, but even without that horrendous episode, New Orleans’ population had been stagnant for decades.

I’m not suggesting Oklahoma City, Memphis and New Orleans should be stripped of their teams post haste because population and the raw income of an area aren’t the only things that matter in success. You can coax a relatively small, cash-strapped area to spend its disposable (or not-so-disposable) income on NBA products and services if the on-court product is stellar. That comes down to proper management and ownership. However, those are just the tools sculpting, molding and shaping the base materials of demographics and wealth.

The most important step is to identify and maintain the markets with the most potential for success. Secondly, you should identify and maintain ownership groups that are intelligent and savvy about utilizing their market. Clearly, the NBA should dump the Clay Bennets and George Shinns (and Donald Sterlings) of the world from their midst, but the problem is that the Clay Bennets and George Shinns (and Donald Sterlings) are the NBA.

The precedent of choosing a market over an owner would be a dangerous one for the owners to set upon themselves. Better to be absolutely assured of your own safety, even if it’s to the detriment of the league as a whole, than to incur the remote danger of being ousted, even if it’s to the ultimate betterment of the league.

Sadly, that’s the way it works.

 

PS – I plan on using this data for more fun extrapolations in the coming weeks, especially if the Lockout continues unabated.

1 If San Jose were included with San Francisco-Oakland in calculating the Warriors market place, the Greater Bay Area would lunge into the 2nd Tier and further minimize the state of the 4th tier markets. Ultimately I decided to not include San Jose because then I’d have to account for other “greater areas” like Los Angeles and Boston where a team’s appeal reaches across a vast intermediate and even across the country. Therefore, I thought it best to just focus on the immediate metro regions for each team.

2 New Orleans is still league-owned, so there are only 29 current owners.

Seth Carstens