Utah Jazz Likely To Receive Significant Revenue Sharing Payments

Remember when revenue sharing was the big topic of debate during the recent lockout? You’ll recall that most small-market ownership groups wanted the new Collective Bargaining Agreement to address the struggle for profitability and wanted a piece of the profits garnered by large-market teams through greater TV revenue and merchandise sales.

A majority of owners agreed, and on the same day they chose to accept the bargain that saved the majority of the 2011-12 season, the owners also voted to enact a revenue sharing plan that would virtually guarantee team profitability. As explained by this article in Sports Business Daily, the revenue sharing procedure fully activates only in the 2013-14 season — next year.

The revenue sharing system is perhaps best explained by Larry Coon’s CBA FAQ:

The basic idea behind the plan is that teams contribute an equal percentage of their total revenues into a common pool (minus certain expenses such as arena expenses), then receive an allocation equal to a 1/30 share of the pool. Small market teams with lower revenues will therefore contribute less than they receive, and will be net beneficiaries under the plan. Large market teams will contribute more than they receive, and will be net payers under the plan.

Overall, $181 million is projected to be distributed between the NBA teams, with two teams receiving over $20 million and seven teams receiving over $16 million. That’s a big chunk of change for the NBA’s struggling teams in their efforts to become profitable.

For most teams, the equal percentage they contribute to the pool is the percentage of league-wide player salaries compared to league-wide revenues. According to the CBA, this has to be about 50%. However (from the CBA FAQ):

Teams in markets with fewer than 1 million TV households do not have to contribute more than 15% of their revenues.

Wait, what?

Teams in markets with fewer than 1 million TV households do not have to contribute more than 15% of their revenues.

No, that can’t possibly be true.

Teams in markets with fewer than 1 million TV households do not have to contribute more than 15% of their revenues.

So whereas the majority of NBA teams are sharing about 50% of their revenues into the pool, the smallest market teams appear to be sharing only 15%. According to the Nielsen TV market size estimates for 2013, there are 5 NBA markets that have fewer than 1 million TV households: New Orleans, Memphis, Oklahoma City, San Antonio, and Salt Lake City. Despite this, each team gets an equal 1/30th share back from the revenue sharing pool. According to my reading of Coon’s CBA FAQ, that means that the Jazz stand to make significantly more revenue sharing money than their bigger-market counterparts.

Now, this is where things get a little bit fuzzy, because of the lack of information the public has about the plan as well as team finances. Forbes estimates the Utah Jazz had revenues of $111 million last year. Obviously, the difference between contributing 15% and 50% of those revenues are huge. But we don’t know a few things:

1. What the “certain expenses such as arena expenses” are for teams around the league, but especially the Utah Jazz. Does the $15 million new Jumbotron project fit in that category? If so, does that lump sum count now, or is the cost amortized over the length of the life of the new screens?
2. What the 1/30th share of the pool returned to the teams would be. In the FAQ’s example, Larry Coon estimates it to be rather large, about $69.1 million (which means a total pool of over $2 billion dollars). I suspect that to be high (especially if 5 of the teams are only sharing 15% of their revenues), but Coon knows more than I do.
3. What team revenues for the Jazz will be next season. Obviously, with the state of the team pointing towards a rebuilding year, whether or not the fans support the team with ticket sales as they have in the past is a significant question mark. Will sponsors stick around for the Jazz during the low?
4. If the Jazz will be profitable before revenue sharing. In the CBA FAQ, Coon says “If a team is profitable without revenue sharing, it receives a smaller or zero payment. Any payments from revenue sharing that would lead a team to have a profit over $10 million are eliminated.” If the Jazz stand to be profitable anyway (definitely possible, especially with a rather low payroll for next season), then this discussion is moot. Again, this comes back to fan support.

Given reasonable estimates for the above, the Jazz figure to be significant benefactors of the NBA’s revenue sharing scheme next season. Indeed, I would not be surprised if Utah turned out to be one of the seven teams projected to receive over than $16 million, due to the disparity between the amount they project to contribute and their fair share of the estimated $2 billion pool. Given the Forbes estimates, the Jazz made about $12 million last year, the true limiting factor may be the Jazz’s profitability: the team will only receive a payment up to the $10 million dollar surplus limit, and no more.

Still, if you were feeling worried about the Jazz’s financial stability in 2013-14, you can probably stop fretting: the NBA’s new revenue sharing plan seems ready to lend a significant helping hand.