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Wednesday, April 29, 2009

NBA’s Small Market Dilemma, circa 2009

As a business strategy, to be the only game in town is a legitimate one. Ask Walmart. The NBA has been trying that strategy for a few years now and with mixed results; abandon large markets that have NFL/MLB/NHL franchises, for smaller towns like Salt Lake City, where they are the only pro sports game in town. The theory is that there will be no competition for the sports dollar. Utah is a success story, but looking deeper tells the story.

The Jazz moved to SLC in 1979, even though it was a smaller market than New Orleans. In SLC’s defense, they had proven they could support a pro basketball team when they hosted the ABA’s Utah Stars from 1970 to 1976. The Stars were popular in SLC, but financially collapsed in their last two seasons, folding in December 1975 after playing only 16 games of what was ultimately the ABA's final season. Jerry Sloane came on board in 1988 and under his tenure they have been a consistent contender, reaching the playoffs in 18 of 20 seasons, including five trips to the conference finals and three to the NBA Championship. They also were lucky enough to have John Stockton, Karl Malone (combined to play 35 of their 36 seasons in Utah; Malone spent his last with the Lakers) and Sloane’s style of play to perfectly compliment their talents and discipline. It was a unique and wildly successful situation. It’s rare that an athlete or a coach stay in one place that long in sports any more. I would consider Utah to be the exception to almost every rule. The NBA flourished under Bird, Jordan, Malone and Barkley. Vancouver, Charlotte, Miami and Orlando hosted franchises as the NBA exploded in popularity.

Flash Forward to 2009.

Vancouver left for a doomed marriage to Memphis. The Charlotte Hornets went to New Orleans and then Charlotte got another team, to replace the team that left to fill the void the Jazz created when they went to SLC in 1979. We’ve come full circle! Oh, and somehow Seattle, a large market team with 41 years of history, was carted off to Oklahoma City because 10 years after giving the Coliseum a $150 million dollar face lift, the City, under pressure by Stern, refused to do it all over again.

How will small market teams be affected now that we’ve entered the age of the recession? Let’s take a look at the new landscape and theorize future affects.

Personal Expenditures during a recession.
These always drop, which means fewer tickets, hotdogs and merchandise. Economics affects expenditures on non-essential items during lean years. More guns = less butter: its econ 101. When you have a smaller pool of potential tickets purchasers, and you have a drop in interest due to recessed economy – you are likely to get hit harder in a small market. In New York where you have 15 million potential ticket buyers and the economy drops – let’s assume you eliminate 50% of you potential sales targets – that still leaves you with 7.5 million potential targets. Now, if your target base is 200,000 and you lose 50%...that is a harder hit, especially in an isolated market. This likely will result in lower ticket sales, which means less concessions and merchandise sales – the primary revenue streams.

TV ad revenue.
This once drove the league. Now, as advertising revenues shrink, networks cannot afford to pay top dollar. The proliferation of cable television helps offset that as there are more local and regional distributors, BUT local distributor means local market value - meaning much less money outside of the top markets. Ad rates are based on market size – so do the math. Even radio revenues are dwindling and that equals shrinking ad rates. If you are in a small market you are already receiving a lesser rate than the top markets – so this squeezes small market teams’ bottom line even more. Larger markets have a much larger revenue stream from local tv and radio.

Twitter Culture!
In our current ‘instant gratification' era, fans have a thousand distractions to deal with. This puts the pressure on entertainment to produce immediate results to an attention-deficit culture. Win now or fans lose interest and move on to the next shiny object vying for their attention...there are so many other things vying for consumer's time and money - a better value can be found elsewhere quickly.

Few of these can be blamed on the NBA – except over expansion. Few saw the recession coming. Where is the NBA headed? Only time will tell for sure. It seems plausible that some teams will fold. Memphis, Indiana and Sacramento are few potential candidates, who are losing big money. I am sorry to disagree with David Stern, but fancy new arenas for bad teams will not turn them around. No one ever got richer because they moved into a big new house. The NBA has a $180 million in loans it can dole out to teams in financial trouble and at least a dozen teams were vying for that money. Surely that figure will grow as financial losses pile up during this tough time.

All of these factors will make it hard for the NBA and small market to sustain, let alone grow. In these incredibly lean times, it’s going to be very interesting to see how the little guys try to stay afloat while the league drowns in debt. It’s tough to own a losing, small market franchise in any economy. In a recession, it may be impossible.

5 comments:

Anonymous said...

wow, great post, auroraave! you hit the nail on the head. You should post this on the OKCnews! then again, too many big words to confuse them. Especially stuff like 'conference championship'. They'd never understand.

JAWA said...

I agree with Anonymous #1. Awesome job!

Anonymous said...

Great post!

http://www.ehow.com/members/stevemar2-articles.html said...

You make several outstanding points. It's amazing how many cities have an NBA team but nothing else in the three other major sports leagues. The NBA is the only game in town in Orlando, San Antonio, Memphis, Portland, Oklahoma City, Salt Lake City, and Sacramento.

Anonymous said...

Wow. You're right. We're all just a bunch of idiots in OKC. We're obviously not as good as any of you. Keep in mind, the people of OKC did not take your team away - it came here via David Stern, Clay Bennett and his crew, and your politicians. You want to insult someone, insult them. But don't take your misguided anger out on the people of OKC, call them names, and feed into inaccurate perceptions of OKC.

In other words, don't be the jerks you all have been. I'm in Seattle quite a bit for work, and have met nothing but great people who live in the most beautiful city in the states.