If You Can make Something Worth $5,000,000,000 for $0, Why Would You Only Make Two?

On NBA Expansion -- or lack thereof

The National Basketball Association (NBA) is likely to expand this summer, adding expansion teams in, it seems, Seattle and Las Vegas. Owners of these new teams are expected to pay existing NBA owners between $2.5 to $7.0 billion for the right to join the league. This begs the question: if you can make something for effectively nothing that people are willing to spend upwards of $5 billon for, why would you only make two? Why doesn’t the NBA expand by 5 or 10 or 20 or 100 teams?

Owners of NBA teams have used anticompetitive business practices to make themselves obnoxiously rich. Wealthy people the world over are willing to pay for the status of owning a professional sports team — owning an NBA team is a thrill. Team owners should, per basic economics, lose money over the long run in an amount equal to the status benefit they get from owning the team (or more, depending on how much money they are willing to spend to win). This is exactly the outcome we see in leagues that do not engage in anticompetitive collusion, including England’s Premier League (see The Swiss Ramble Substack for awesome content on soccer finances). But not in the NBA.

NBA owners, in partnership with the National Basketball Players Association (NBPA), have bylaws that ensure team owners do not lose money. The collective bargaining agreement allows teams to pay players a maximum of 50 percent of the league’s collective revenue. Teams that cannot cover their operating expenses with the balance of the revenue benefit from revenue sharing, most notably from media rights. Revenue sharing is viewed as fair, among NBA owners, because teams that play in smaller markets, say San Antonio, are prohibited from relocating to larger markets, say, Los Angeles. Teams that play in Los Angeles benefit from this arrangement via higher ticket prices and advertising revenue — sharing some revenue with San Antonio is worth the monopoly rights to the Los Angeles market. NBA owners get to have their cake and eat it too: they benefit from the status of owning an NBA team without paying for it.

This is not to say that the NBA’s leadership, the NBPA, and owners of NBA teams have not done a great job running the league. The NBA’s current success was not guaranteed. But it is helped enormously by the ability to engage in anticompetitive practices. The financial markets have recognized what a great hustle the NBA has going. Forbes estimates the Golden State Warriors, New York Knicks, and Los Angeles Lakers are each worth more than $6 billion. The Boston Celtics, which Forbes had valued at $6 billion, recently sold for $6.1 billion. Wyc Grousbeck led a group of investors that purchased the Celtics in 2002 for $360 million. Joe Lacob and his business partners purchased the Warriors in 2010 for $450 million. The value of the Warriors has increased 10x in the past 15 years; the Celtics increased by 16x during the 20 odd years the Grousbeck group owned the team. This type of return is common. The NBA recently added rules against private equity owning majority stakes in teams. Had they not, the entire league would likely be owned by private equity: legal monopolies are a great investment.

Though soccer is a more popular sport globally than basketball, Forbes estimates that the most valuable NBA teams are more valuable than the most valuable European soccer teams, including Real Madrid, Manchester United, and FC Barcelona. NFL and MLB teams are also on the list of most valuable sports franchises. These teams are more valuable than their soccer counterparts because they have almost no downside risk. They do not allow direct competition in their cities or regions; they cannot be relegated or kicked out of the top league; and revenue sharing ameliorates the risk of potential losses due to weak ticket sales and/or advertising revenue and/or poor management. The biggest practical downside financial risk for NBA teams is antitrust litigation or regulation.

Of the three major professional sports leagues, it would be the easiest for the NBA to reform. Basketball has grown popular, as illustrated by the multi-billion dollar valuations of NBA teams. The NBA and NBA players can therefore take chances with large scale expansion that would have been risky in previous decades. College basketball brings in significant revenue for universities and would therefore resist changes to the NBA. But resistance from universities reliant on basketball revenue would be orders of magnitude less than from universities reliant on football revenue. The NBA has already dipped its toe into a minor league system with the G-League with little objection from the college basketball community.

Another reason for the NBA to seek reform is that it is easier to identify promising young basketball players than it is MLB or NFL players. Children who are unusually tall become adults who are unusually tall. And unusually tall adults are more likely to play professional basketball than adults of average height. While we do not have good data on the number of people taller than 7 feet in the US or globally (the tallest category in surveys is generally 6 feet, 6 inches or taller), the best estimates suggest that if you are an American male age 18 to 34 who is at least 7 feet tall, you have about an 8 percent chance of playing in the NBA. This is astonishing. It would be a trivial expense for the NBA to find the few dozen 13, 14, or 15 year olds likely to be 7 feet tall and train them to be outstanding pros. Instead, the NBA ignores these kids until the age of 19, leaving them to be trained instead by parents or whatever semi-competent coach lives nearby.

What would meaningful reform look like for the NBA?

The NBA could collectively generate much more revenue by expanding by dozens of teams, rather than two or three. But expanding by dozens of teams would require introducing a tiered system, similar to English soccer, with multiple leagues. The best 20 or so teams would play in the “NBA Premier” league; the next 20 would play in “NBA Elite”; and the next 20 in “NBA Rising” — or some such names. This would result in more live events, which means more ticket sales and more media rights. The obvious objection to such a plan would be from current owners. While most owners purchased their teams sufficiently long ago that they are way ahead in regards to return-on-investment, recent owners purchased teams with the implicit understanding that expansion would happen slowly, say at a pace of two teams every twenty years. These owners would be unfairly harmed by rapid expansion. Other owners would not be comfortable competing in a league in which true losing — meaning relegation to a lower tier league — is possible. Current NBA owners would therefore need to be compensated with equity in the expansion franchises to protect themselves from the downside risk of being relegated to the “NBA Elite” or “NBA Rising” leagues.

After paying the vig to existing owners, the NBA could first create a second tier (NBA Elite), setting up a league of 24 clubs. Individuals or entities interested in owning a club would need to meet some minimum set of standards, e.g., access to an arena of sufficient size, a capital reserve, agreement from a host city. Most second tier teams would choose to locate in heavily populated regions, such as Los Angeles, Chicago, Houston, Dallas, or New York, as they have larger upside potential, but a wealthy individual could choose to locate a team in a smaller city. The NBA currently has a team in Oklahoma City for this reason: an owner from Oklahoma purchased the Seattle Supersonics and, economics be damned, moved the team.

In parallel to starting up a second tier league, the NBA draft would be eliminated, as would restrictions on roster sizes. The 19 year old minimum age restriction would need to be lowered to 14. Restrictions on salaries — minimum, and/or maximum, and/or total — could (but need not) continue to be an outcome of collective bargaining. With these changes in place, first and second tier NBA teams could choose whether or not to form under-18 and under-16 teams. Most would create junior teams, as it would give them a chance to develop their players. These junior teams could play against large high school or even college teams, as well as against each other.

Over time, the NBA could establish third (NBA Rising) and fourth tier (NBA Beginnings?) leagues, putting in place rules for relegation and promotion. And professional basketball in America would start to look a lot like professional soccer in England.

One delightful feature of English soccer is the Football Association (FA) Cup. In 2024, over 700 teams competed in the FA Cup, which is a knockout tournament. The killer feature of the tournament is that teams compete across tiers. At the beginning of the tournament, teams from the lower tiers compete with each other. This whittles the field down to 32, at which point the higher tier teams enter the competition. Because each round involves games played at each team’s stadium, some number of lower tier clubs host Premier League clubs — and some win. Histories of Ryan Reynolds’s and Rob McElhenney’s Wrexham Football Club highlight their successful runs in the FA Cup, including victories over higher tier, famous teams.

The NBA tried to replicate the FA Cup with their own midseason tournament starting in the 2023-24 season. The tournament was a welcome distraction from the tedium of the NBA’s too-long regular season, but because the NBA lacks lower tier teams, it can only include NBA teams. This misunderstands why the FA Cup is so much fun. There were no meaningful underdog stories or upsets. No small arenas in small cities hosting the Lakers or the Knicks or the Bulls. It was just like all the other games. The only reason you would have known it was a mid-season tournament game is because the NBA branded the courts differently, with dramatic, high-contrast paint. With a series of tiers, it would be possible for the NBA to have a true FA Cup-like tournament.

While these reforms may seem far fetched, like a pipe dream, this is only because a small number of billionaires are willing to deprive Americans of a thriving, large system of professional basketball so that these billionaires can, over time, add another billion to their net worth. And maintain their status as owners of teams in the highest tier of professional basketball and, for the less competent among them, retain an outside chance at winning an NBA championship. But when viewed through the lens of an English soccer-type league, an NBA championship is a minor accomplishment. The NBA is designed so that every team has roughly the same chance, over time, to win. And no team can truly lose: poor performing teams are granted high draft picks and revenue from successful teams. The goal is mediocrity.

While a business arrangement more like English soccer would improve professional sports in America, owners of European soccer clubs are keenly aware of how good their American counterparts have it. In 2021, a collection of European clubs, including six Premier League clubs, announced it would form a “Super League”. Unlike English soccer, the proposed league would have been closed: a fixed number of the wealthiest clubs in Europe would play each other each year. The high quality of play would draw fans and the quality of the teams would lead to “competitive balance”.

Within two days of being announced, teams began withdrawing from the proposal, in response to outrage from their fans. The primary objection of fans was the lack of a promotion and relegation mechanism, which would take away what makes English soccer so wonderful: that, at least theoretically, thousands and thousands of clubs can make their way through the pyramid and maybe, just maybe, play in the Premier League. The famous Spanish soccer coach Pep Guardiola summed up the proposal as follows: “It is not a sport if success is already guaranteed. It is not a sport if it doesn't matter if you lose.” The NBA is entertainment; it is not sport.