Once Again, Business Is Booming in the NBA : The League That Was Considering Folding Franchises Now Plans Expansion

Business is booming in the National Basketball Assn., but problems lie ahead.

The economically resurgent NBA has used a “less is better” television approach, a move toward business-oriented owners and a salary cap to pull itself from a severe recession that threatened at least four clubs four years ago.

However, the renaissance itself may be threatened next year when the current collective bargaining agreement runs out.

“I expect it (the negotiations) to be difficult at the outset,” said NBA Commissioner David Stern. “But I would like to think when we sit down the players will choose to work with us to improve the product.

“What we are looking at is a league whose gross revenues have grown from $120 million when the collective bargaining agreement was signed (1983) to $250 million in the last year of the agreement (1986), where the average players salaries have grown from $260,000 to a projected $500,000 and has gone from looking at folding four teams to expanding possibly (by) three.”

The number of fans attending NBA games also increased for a third straight year and reached 11.1 million last season.

The tough negotiations ahead are an unfortunate byproduct of the league’s successful battle for survival. The struggle reached its critical stage in 1982 when the economically-beleaguered owners of the league’s 23 teams met to decide whether four of the clubs should be folded.

“I don’t know if saying it was bad is strong enough,” Stern said. “We were considering folding four teams and there were two to four teams for sale that could not find buyers at any price.”

None of the franchises folded, but a course was set under then-commissioner Larry O’Brien. Stern was one of the architects of that plan as the league’s general counsel and executive vice president.

One of the first major steps was a unique revenue-sharing plan agreed to by both sides in the 1983 collective bargaining agreement. The plan called for a salary cap on each team’s single season payroll that was determined by taking the league’s total revenue--minus a few items--and multiplying it by 53%.

“I think the bargaining agreement in 1983 was the turning point for the league,” Stern said. “It provided for a salary cap in return for promising the players revenue sharing. It avoided a strike and has telescoped into stability within the league.”

The cap has grown from $3.2 million in 1984, to $4.2 million last year and $4.95 million this season. There are a number of loopholes in the cap allowing teams to pay out big dollars to some veteran players, especially in deferred or delayed payments.

But while Stern says the salary cap has been a key element in professional basketball’s rebirth, Stanford economist Roger Noll, who studies the sports industry, says he believes its role has been overstated.

“I think it played a role initially,” Noll said. “But on the long term I don’t think it is all that significant. I think its removal would have a short run effect of increasing some salaries significantly. But then the market would adjust.”

Noll said he felt the league has only now begun showing signs of recovering from the competitive war for talent waged between the NBA and the rival American Basketball Assn. in the early 1970s. The two merged in June 1976.

“The basketball recession arose from the jockeying for position in the NBA-ABA war,” the Stanford economist said. “It took a while for the league to recover from that. There also has been a big turnover in ownership. People who were successful owners under the old regime found they couldn’t make it in the new environment. Now there is a whole new cast of characters who know how to take advantage of the current conditions.”

Attracting new, business-oriented owners has been a main phase of Stern’s multifaceted plan for league recovery.

“I think we’ve been able to attract new owners who have felt that an NBA team is more than an expensive toy,” Stern said.

The commissioner lined up the Simon brothers--Melvin and Herbert--to purchase the Indianapolis Pacers. The Gund brothers--George and Gordon--took over the financially-troubled Cleveland Cavaliers. This season, Jim Fitzgerald and Dan Finnane--former owners of the Milwaukee Bucks--added the Golden State Warriors to their list of businesses.

The new ownerships have given the league the perception of stability.

“We thought it was a good business decision to get back into the NBA,” Finnane said. “This (the San Francisco Bay area) is an interesting and growing market. We also felt the ownerships in the league were in good hands. They (the other owners) are very business-oriented.”

Stern also took a revolutionary approach toward the exploding television sports market. He decided to implement a “less is better” philosophy and limited the exposure the league received on a national basis.

“It’s wasn’t really a gamble,” he said. “I felt it was an essential thing to do. We were reaching a point of saturation.”

At the time Stern took office, 120 games were being televised on national cable networks. CBS was also broadcasting a number of games on Sundays. The commissioner cut the cable games to 55 and limited them to one carrier--Atlanta Superstation WTBS.

Stern’s actions have paid off big for the league as the NBA’s ratings have continued to climb and last year were up more than 12%.

The improved ratings gave the NBA a strong bargaining position this year when both CBS and WTBS’s contracts came up for renewal. CBS’s prior four-year contract was for $88 million. The recently-signed four-year contract is worth $173 million. The WTBS contract was a two-year, $20 million pact. The new two-year pact is for $25 million.

While the league has benefited from its own “less is better” program, it has also benefited from college basketball’s television glut. This season, college basketball will be seen on every major television network--cable and non-cable.

“There is no question that all the exposure has helped make college players household names,” Stern said. “The glut at the college level has been good for us.”

Two other developments in college basketball have also helped the NBA. The first was bringing back the dunk as a legal play in the late 1970s. The second was expanding the NCAA tournament to 64 teams, thus adding exposure to the collegiate game’s most exciting product.

Stern has nurtured the growth of the NBA’s property division that handles publications, licensing, sponsorships and video sales. When he took the job in 1984, the commissioner said the division had one employee. It currently has 35 people and has become a profitable part of the NBA’s formula for success. Over the last four years, the division has gone from $1 million in revenues to close to $8 million.

One look at the NBA All-Star weekend is enough to show the impact of the beefed up properties department and the sponsors it has been able to attract. Spud Webb won the Gatorade slam dunk contest, Larry Bird won the American Airlines long shot competition and a number of all-time great players squared off in the Schick Legends game.

Then there are the end of the year awards. There is the Allstate NBA Most Valuable Player, the Haggar NBA Coach of the Year, the Edge NBA Rookie of the Year, the Schick Pivotal Player, the MasterLock NBA Defensive Player of the Year, the Starter NBA Sixth Man Award and the American Airlines NBA Comeback Player of the Year.

The public’s perception of the NBA has also been influenced by the league’s tough drug program. A player gets two chances to clean up his act. If he runs into trouble a third time, he is sent packing. Two players--Michael Ray Richardson and John Drew--have been banned. The league’s players also have been active in their communities’ anti-drug campaigns.

In any business environment, when there is a chance for stability, growth and profits, a number of potential investors will appear. That has happened to the NBA this year with six groups--Toronto; Miami, Fla.; Charlotte, N.C.; Orange County, Calif.; Orlando, Fla., and Minneapolis--bidding for an expansion franchise.

“I think the direction of the NBA the last couple years has been straight up with its drug program and improved television revenues,” said Robert Cohl, head of the Toronto expansion committee. “It’s a very attractive industry to a businessman.”

On April 20, 1987, the league will announce expansion of from one to three teams to be completed by the 1990-91 season. The cost of an expansion franchise will likely run between $25 million to $35 million.

After the expansion, where does Stern see the NBA’s growth headed?

“I think we will continue to grow slowly,” he said. “I think there are two areas of potential expansion open to us. Just as McDonalds and Coke view overseas as their greatest growth area, so does the NBA. This year we are selling 35 to 50 games in Italy. We are nearing agreements in France and Spain. By the end of the season, the NBA will have been seen in 25 to 30 countries.

“We also believe we can attract a larger and larger female audience.”