Should Owners Be Able to Profit on Poor Performance?

News that the Donald Sterling is earning an annual profit from the LA Clippers, while Mark Cuban is losing boatloads of money with the Mavs raises a question about the system – does ineptitude warrant revenue sharing?

Though each sport handles revenue sharing differently, the question arises on if the lower revenue teams are simply pocketing profits or actually plowing it back into the team to improve competitive balance, the real purpose of salary cap’s and luxury taxes. On one end the owners are running a business, and the goal in a capitalist society is to make money. On the other hand, some owners are sharing the money they earn for the better the game, how does the sport protect them from having other owners simply pocket that money and not invest in the product?

Using wins and losses as a measuring stick is difficult because of the numerous variables that come into play. Teams can invest in the product and still not recognize success, so that can’t be used as a measuring stick. The NHL mandates that revenue receivers show operational improvements in the form of improved ticket sales and revenue generation, which Nashville had to fight to the end to maintain eligibility this season. However, success impacts those metrics as well.

I don’t claim to have the answer, but I do feel the league revenue models need to become more granular and reward good business and team management, not simply low income teams. This would prevent an owner with a poor track record like Donald Sterling from profiting off his team – and staying the league for 28 years, despite an ineptitude that would never suffice in any other business arena. It would also help weed out the teams that are not sustainable earlier in the process – hopefully preventing a Phoenix Coyotes situation before it reaches this point. Maybe contraction is necessary, or moving to new markets, or changing owners. Today’s system masks inherent problems.

Two components I would reassess are national television revenue sharing and ticket sales. Rather than simply share national TV rights fees evenly among all the teams, allocate it based on a merit. Institute a system similar to what the NBA has tried that forecasts team revenue based on market size, and use this relative benchmark to rank teams. Incorporate on field success into the equation, again using a relative market size figure, talk into account player development statistics relative to draft position, again a relative measurement that is not impacted by the cash available to invest in the team. Add other factors as necessary to create a scoring system. Any teams not scoring at the level they should, do not receive the full share of revenue. Those at or above the benchmark receive the full share. The excess revenue not allocated can go into escrow, or allocate it to the highest ranked teams in this system.

Performance directly affects ticket sales, thus even a well-managed team that simply does not have the resources to compete will not sell tickets. Create a system with shared gate receipts, 70-80% (compile ana analysis to find the right number) to the home team, the rest to the visitor. Some ticket price normalization is required to equitably handle teams that charge higher prices. The best teams don’t lose out on revenue because they are likely the best road draws. However, some quality teams that struggle to draw at home – Tampa Bay Rays, Minnesota Twins – will benefit from the bigger road crowds they can draw, rewarding management’s ability to build a quality product. Teams that invest in stars also reap rewards from the buzz they generate on the road. It’s an idea to add another variable that will smooth out the variance between have’s and have not’s, but incorporates the quality of the product.

Overall, leagues should revamp the system to prevent low budget ownership from benefiting off a system designed to help the sport. More granular sharing of national revenue based on a meritocracy that rewards teams who best apply the resources they have available – both in running the business and the team – will lead to appropriate competitive balance. An ancillary benefit is the self-segmentation of ownership, as only owners committed to winning and focusing on team operations will be part of the system, while owners hoping to skim profits get weeded out.