NBA Expansion 101: How adding new teams could help solve league’s current financial crisis due to corona virus

The NBA is a 30-team league. It has been a 30-team league for almost two decades, and if Adam Silver is to be believed, it planned to remain a 30-team league for the foreseeable future. Note the past tense of the word “planned,” there, because nothing wrecks plans quite like pandemics.

The NBA is absolutely bleeding right now. March estimates suggested a potential billion-dollar loss for the league based only on the coronavirus’s impact on this season. If the pandemic stretches on without a vaccine, billions more could be lost in future gate and television revenue. As Silver himself has said, the NBA’s financial infrastructure is not built to withstand a prolonged pandemic. Making it through this is going to require cash that the NBA may not have, or may not have the ability to generate through traditional means.

Which brings us back to the league’s commitment to a 30-team model. If the NBA is willing to be flexible on the number of teams it puts on the floor, expansion could solve many of its short-term financial issues. With that in mind, let’s dive into everything you need to know about expansion both on and off of the court, starting with the enormous economic ramifications of adding new teams.

How does expansion work, and how much money could it raise?

The simplest way to view expansion, from an economic perspective, is to think of it as the sale of a team that does not exist yet. A buyer or a group of buyers purchases a team not from an existing owner, but from the league itself. As the league is nothing more than the 30 teams that make it up, the sale price is split evenly among those 30 teams, and because it is not considered basketball-related income, the teams keep every cent of that money for themselves. Players see none of it, and they have no say in whether or not the league can expand.

The price of an expansion team is not set in stone. Typically, it is slight inflation of the perceived value of a team in a similar market. The Charlotte Bobcats paid a $300 million expansion fee in 2004. Based purely on potential profit, this was a slight overpay. The Dallas Mavericks were sold for less than that at $285 million only four years earlier despite existing in a stronger market, and the Boston Celtics, one of the league’s crown jewels, fetched only $360 million in 2002.

Setting a market price in 2020 comes with some complications, though. Obviously the coronavirus pandemic’s impact on the global economy has been pronounced, but the complications surrounding expansion pricing extend further than that.

The last three teams that have changed hands were sold at market-shattering prices. The Los Angeles Clippers and Houston Rockets both sold for at least $2 billion, but perhaps more telling was the $850 million prices that the Atlanta Hawks garnered in a relatively modest NBA market. Four years earlier, the Philadephia 76ers fetched only one-third of that price at $280 million with a nearly identical metro population and more concentrated wealth. Five years ago, the NBA was in the middle of a valuation boom, but television ratings have since declined and the pandemic has put the league in a vulnerable position. They certainly wouldn’t settle for those early-decade prices, but buyers wouldn’t be willing to pay the premium that Steve Ballmer (Clippers) and Tillman Fertitta (Rockets) did, either.

Even given the current economic state of the world, interest is so great that the league would likely draw hefty fees. While the $2 billion figure an anonymous owner gave The Athletic’s David Aldridge in 2017 is likely far-fetched, it is not a stretch to suggest $1.5 billion as a starting point. At that price, each team would get a $50 million payout to do with what they saw fit.

What are the downsides for the league?

Remember that slight inflation of the market value I mentioned earlier? It comes because of the mere presence of a new team lowers the value of any existing ones. Why? Television. Adding a new market adds very little value to the league as a nationally televised product because the primary drivers of ratings, such as the existing big-market teams and the postseason, remain unchanged. But because national television revenue is shared evenly among all teams, those new teams cut into the income every other team would generate even if they aren’t creating more of it. There are other revenue streams that are affected similarly, but television is the most important. Think of the new owners as angel investors buying stock in the league as a whole. It infuses cash into the business immediately but dilutes the long-term earnings for any previous investors.

And then there’s the invisible cost of leverage. Leagues prefer to keep a deep stable of possible relocation markets in their back pocket to hold over their existing cities. If one of those cities doesn’t want to play ball in a new arena, the NBA can merely point to what happened to Seattle as proof that it isn’t bluffing when it threatens to move a team. Filling in the best available markets takes them off the board as leverage. Sending a team back to a preexisting market greatly weakens the league’s negotiating power as a whole. What’s the harm in losing a team if you can just get a new one in a decade or two?

How would expansion impact the product on the floor?

Cover your ears, children; it’s time for the dreaded “D” word. Adding new teams does not expand the existing player pool, so more teams wind up sharing the same amount of talent. That means inevitable talent dilution. Accumulating top players becomes harder for teams when newer competitors for those players arise, but that distribution tends not to be even. Expansion teams tend to serve as roadkill for their contending counterparts. The 1995-96 Chicago Bulls won 72 games but did so at a point in which six new teams had been added to the league within the previous seven seasons. Servicing all of those new markets wound up fattening the league up for slaughter at the hands of Michael Jordan.

There’s also the prospect of realignment. The NBA currently has 30 teams. For the sake of balance, it cannot add a single team. It would be unfair to one conference if the other had fewer competitors, therefore, any expansion plan likely has to account for two new teams. Where those teams fall geographically means quite a bit. As we’ll discuss, most of the best expansion markets would make more sense in the Western Conference. To compensate, that could allow for a current Western Conference team to switch over to the East. Minnesota and Memphis both make geographical sense, and moving one of them would cut down on travel time for both themselves and the rest of the league.

And then there’s the matter of the schedule. The current system pits each team against their divisional opponents four times, their non-conference opponents twice, and then splits up the remainder of their conference opponents so that they play six of them four times and the remaining four three times. That math falls apart with two more teams.

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