When the King took his “talents to South Beach”, he changed the blueprint on how to build a contender in the NBA. For two decades the blueprint was to have two stars: Jordan and Pippen, Kobe and Shaq, Duncan and Robinson, Kobe and Pau. The strategy worked. However in 2007 the Celtics tested out a new plan, bringing three stars together onto one team, something that hadn’t successfully happened since the Celtics and Lakers of the late 1980s.

Questions were asked: Are there enough shots to go around? Can three stars put their egos aside in order to win a title?

When the Celtics won their 17th title that season, the questions were answered: It can work. The Celtics winning the championship and contending for the next two helped Miami and its new cast of stars shape their contracts and check their egos in order to build a team that will be a contender for the next decade. Couple this with the New York Knicks signing Amar’e Stoudemire, trading for Carmelo Anthony and clearing future cap space to bring in a third star, and the new blueprint is taking over, leaving many organizations without stars and a quality product to give to its fans.

Last year Cleveland had LeBron, Denver had Carmelo, the Suns had Amar’e, and Toronto had Chris Bosh. Now those four organizations are left with Antawn Jamison, Raymond Felton, Steve Nash, and Andrea Bargnani leading their franchises. No disrespect to them but, besides Nash, if one of them is your best player, the team is in deep trouble. These organizations are going to be at a severe disadvantage in this new NBA. As a friend put it, “You get drafted by Cleveland. You get traded to Cleveland. No one goes to Cleveland,” especially now without a star player already there. Now a team with one star is two pieces away from contention and that star is likely to leave before others can be brought in (cite: New Orleans and Chris Paul). If this trend becomes permanent, the NBA is going to become very top heavy and only a few teams each year will have the resources and talent to contend for the title, leaving many markets left hoping to just make it out of the first round of the playoffs.

The lack of a quality product in the many small markets will drive revenues and operating incomes south, losing owners millions of dollars every year just to have a team in the league. With the NBA located in many small markets (Minnesota, Portland, Toronto, etc.), the NBA will be forced to share greater portions of its revenues with these franchises to keep them afloat or contract. Already there are three teams that could be contracted if the NBA chose to go that route: Memphis, Milwaukee, and New Orleans. Each is struggling financially and over the past four years has fiscally performed in the bottom 15% of the league (among the worst four).

For these three organization’s to be labeled “contractable” in this article, they need to meet two of the following criteria:

  • three of the previous four years the value of the organization had to ranked in the bottom 15% of the league
  • the revenue of the organization had to rank in the bottom 15%, and/or its Debt-to-Value (amount of debt held by the organization as a percent of the valuation of the organization) had to rank in the bottom 15% of the league.

Of all the teams that made appearances in the bottom 15%, only Memphis, Milwaukee, and New Orleans were there recurringly.

Since the 2008 season, the Memphis Grizzlies have found themselves with a franchise value below $300 MM, dropping as low as $257 MM in 2009, a decrease of 12.5%. That low in 2009 placed the franchise as the second-least valued franchise in the NBA, and combined with a league worst $88 MM in total revenue, the Grizzlies were in a tough financial position. In 2008 and 2009, the organization had close to $150 MM in debt, over half of the total value of the franchise in each year, respectively. In 2010, Memphis reduced its Debt-to-Value down to 4%, markedly better than its 51 and 58% the two years prior. Although the team is no longer as heavily levered as it once was, the Grizzlies are still very much struggling. In each of the past four years, they have recorded negative operating incomes and attendance has fallen 6.5% to under 75%. The Grizzlies are in dire need of financial help and with the size of their market and the new NBA blueprint, the organization is going to be hard pressed to find that help.

Of the three “contractable” teams, the Hornets are the only one to have cleared the criteria for contraction in 2010. However, that doesn’t mean the team isn’t financially falling apart. From 2007 to 2009, the franchise was losing value and its operating income was falling. By 2010, the operating income of the organization was down 316% from where it started in 2007 and it had devalued by $5 MM. Their Debt-to Value stayed north of 30%, hitting a high of 55% in 2007 and 2009.  Revenues steadily improved, but didn’t hit $100 MM until 2010 and that only put them at 25th in the NBA in total revenue for the year. Another mark against the Hornets is that they’re already owned by the NBA and are being financially supported by the league and its other owners. They are the first team in league history to be owned by the league. Attendance records for the Hornets have remained relatively high, but, with a failing basketball market in New Orleans and no owner, the Hornets are in need of a move or may be the first of these teams to be facing contraction.

Of the three teams that made the “contractable” list, the Milwaukee Bucks are the clear favorite to be contracted. Since 2007, the organization’s value has ranked 29, 30, 30, and 30 in the NBA, devaluing by $6 MM over that time. The organization has ranked 29 in total revenue each year except 2007 when it was 28th worst in the NBA. Attendance for the Bucks has decreased year-over-year by a nearly 7% overall and as of the last two seasons the Bucks have lost a total of $9.4 MM through the basic operations of the team. The Milwaukee Bucks are in the most need of a financial fix, but it’s doubtful any will come anytime soon, making them the most likely target of contraction.

No one wants to see teams contracted, but if the NBA continues to move in this direction it may have no other choice. The overall quality of the NBA’s product will be diminished in many of its markets. The major markets will flourish with this new blueprint, but the small market clubs will be fighting a losing battle. Contraction might be the answer the NBA is looking for in its failing small markets. Fewer teams mean the talent pool will be richer and there will be more good players on each team, which means no one has to start a Ersan Ilyasova, Tony Allen, or Willie Green. The quality of the NBA’s product would improve. Like my friend said, “You get drafted by Cleveland. You get traded to Cleveland. No one goes to Cleveland.” A harsh reality that the NBA has to look at for many of its small market clubs.

~Valuation statistics can be found at Forbes.com~