This article was featured in our Spring 2013 Issue of the CER Journal.
On Friday, November 6th, 2009, the New York Knicks played the Cleveland Cavaliers. Madison Square Garden was packed and the energy was reminiscent of the 1990s when Ewing and the Knicks battled Jordan and the Bulls. Although the Knicks 2008-2009 season resulted in a 39 percent win rate, only slightly better than the Eastern Conference’s worst team, the Washington Wizards, this game held far greater weight than any early November regular season game had in decades: it was a mere 236 days before Lebron James would become a free agent.
The hope that at the end of the season Lebron would wear the blue and orange was on everyone’s mind. Local fans were rooting for the home team and an opposing player. Each time Lebron touched the ball, the crowd held its breath, and each time he scored, increasing the Cavalier’s lead, they released exultant cheers. There was no denying Lebron’s effect on Madison Square Garden, but how far would his impact extend? What would be the ripple effect of Lebron’s decision on the NBA?
Superstars in the NBA
The structure of the game of basketball lends itself to the creation of superstars. Consider the NBA in comparison with the four other primary sports leagues in the United States. In the NFL, the best players only play half the time. Their physical appearances are mostly covered by equipment, and, for the most part, the only identifiable characteristics are the names on the backs of the jerseys and their numbers. In the NHL, players are equally obscured by protective gear. In the MLB, a player may be out of view for almost half the contest and, when seen, performs for brief moments and at a great distance. Lastly, the MLS incorporates increased visibility of players for greater periods, but it has more players on each team playing at even greater distances from the fan, with their efforts often resulting in few goals and many ties. All of this limits the ability of American soccer players to demonstrate their talents, yet superstars of European football share a level of notoriety similar to that of NBA stars.
A superstar’s presence can have a ripple effect and increase the revenue of both his team and the opposing team in three primary ways. First, he can increase the overall quality of his team based solely on his performance. This increase in the team’s performance can strengthen and increase the fan base. Second, his talent demands additional attention from the opposition, enabling his teammates to perform at a higher level – this can be considered a positive externality. Third, the superstar’s appeal, controlling for an increase in performance quality, draws additional attention from fans. This is evident when two players with almost identical statistics and playing styles have different levels of popularity. In terms of the opposition, a superstar can increase gate revenue, television ratings, and the sale of NBA merchandise. The NBA does not share any local revenue (gate, local TV) but it evenly distributes income derived from the sale of merchandise and from national television contracts with the teams.
The question remains, how influential are the top superstars, and how large is the ripple effect? To answer these questions, I examine the case of Lebron James.
Lebron James
With the advances in media technology and increased media coverage, no player has ever matched the attention received by Lebron James. Lebron’s superstar status began before he took the SATs. In his junior year, he faced eligibility questions and appealed to enter the NBA draft early. Having his appeal rejected only served to increase his popularity. Lebron made the cover of Sports Illustrated before his senior year of high school under the headline “The Chosen One”. His high school team’s practices were forced to move to the local university because their gym was exceeding its capacity. ESPN 2 and Pay-Per-View televised his high school games, which were attended by celebrities like Shaquille O’Neal, with whom he later played.
Lebron was the driving force behind the success Cleveland achieved following his entry in the league. He played for Cleveland for seven years; in five of those years not a single team member was declared an All-Star. In two of those years, he played with only one other All-Star–Zydrunas Ilgauskas, who had only made one other All-Star game prior to Lebron entering the league, and Mo Williams, who never before nor would ever again, play in an All-Star game.
Lebron’s Effect on the Cavaliers’ Home Attendance
In the summer of 2010, Lebron became a free agent, and there was significant speculation on which team he would choose. Lebron James, over the course of 7 seasons, increased Cavalier attendance by an average of 71.75 percent compared to the year prior to his arrival[1]. Before Lebron, in 2002-2003, the average attendance at a Cleveland Cavaliers game was 11,496. During his tenure, they averaged 19,745. This translated into 131,745,626 million dollars of increased revenue[2]. Their average league rank in attendance improved from 29 to breaking the top 5.
In terms of home attendance, a lag effect existed upon Lebron’s departure. The year after he left, the team only dropped from 2nd in attendance to 3rd. It was only the year after that they dropped to 19th, despite drafting another number 1 draft pick and potential superstar, Kyrie Irving. It was well documented, and a prominent topic in the Cleveland press, that season ticket holders had to opt to pay for the first season after Lebron’s possible departure and well before the date of his “decision,” thus accounting for the “lag”. Nevertheless, this maneuver only benefitted the Cavaliers in terms of attendance and not teams hoping to see Lebron as a visiting player. Moreover, in terms of TV receipts, the NBA does not share any local revenue.
To evaluate the incremental revenue Lebron creates for his opposition, I evaluated the 2009-2010 season (the year prior to Lebron’s departure) and then compared this to the 2010-2011 season (proxy for unobserved variable).
Lebron’s Effect on Opponents Attendance
Over the course of years, as a team improves, it is unsurprising that attendance increases. There is an obvious, but not perfect correlation, between winning percentage and attendance. While Lebron was on the Cavaliers, they performed extremely well. Thus, one could argue that when the Cavaliers visited another well-performing team, the increased attendance was a consequence of the uncertainty hypothesis (doubt of outcome), resulting from the competitive balance in the league. Adhering strictly to this line of reasoning, assuming that competitive balance is the primary driver behind demand, we would have anticipated that attendance would not increase appreciably when the Cavaliers were “expected” to win (when they were playing the lower ranked teams in the league). Less doubt surrounding the outcome of a game should result in lowered attendance if competitive balance is the dominant factor in determining game attendance. This is far from reality.
In the 2009-2010 season, Lebron’s positive externality resulted in increasing opponents’ attendance by an average of 13.42 percent. The average capacity at an away stadium was 100.54 percent. Stadiums with “fixed” arena sizes increased in capacity when Lebron visited. Ownership created additional seating to capitalize on the increased demand (e.g. fold out chairs or standing room). In Tables 5-7, we can see that if a team’s average attendance was low, the percentage increase in attendance resulting from a visit from the Cavaliers rose significantly. In fact, the 76’ers saw an average 43.4 percent increase in their attendance (for 2 games) when they played the Cavaliers at home. This increased income represented 2 percent of their entire season’s revenue from gate attendance[3]. Hence, it was not the total attendance of the game that resulted in 2 percent of their entire season’s gate revenue, but exclusively the additional attendance (above average without Lebron) that netted over five hundred thousand dollars.
In total, Lebron’s incremental revenue equaled 4.3 million dollars. This represents just under a half of a percentage point of the league’s revenue. Lebron’s incremental revenue from away games accounted for 1/250 of all league gate revenue. This may not seem like a large fraction, but consider that there are 30 teams, 82 games per season, and 1230 regular season games. Lebron’s marginal revenue accounted for, on average, 11.69 percent of the revenue for all away games (lower than average attendance increase because teams with lower ticket prices had higher average attendance). Overall, seventeen of thirty stadiums were above capacity when Lebron visited.
The Big Three’s Effect on the Heat’s Away Attendance
In July 2010, Lebron James appeared on national television and announced that he would be taking his talents to South Beach. When the Lebron, Wade, and Bosh joined forces on the Heat, the effect on attendance was large and reminiscent of the impact witnessed with Lebron on the Cavaliers. The overall incremental revenue decreased, but this can be attributed to a slight reduction in the average ticket price[4]. The Big Three slightly outperformed Lebron in terms of average percentage increase with an average of 13.93 percent. The number of stadiums above capacity was slightly higher and accounted for an average of 9.9percent of revenue for that game. Comparing each statistic, which is broken down in Table 10, key insights can be identified. The trends remained, but the percentage increases were not significantly higher than the increases seen with Lebron alone (Table 14-16). Lebron, singlehandedly, was able to generate about the same incremental revenue when visiting opposing teams as Lebron, Wade and Bosh combined. There seems to be a point of diminishing returns with the coalescing of the top talent.
Why was Lebron able to generate almost the equivalent amount of revenue as the Big Three? Even if the excitement was tripled, or even exponentially expanded, with the combination of the individual superstars, teams were unable to recognize proportional incremental benefit given the lack of dynamic pricing and the limit on the size of stadiums.
Net Effect on Attendance – Cavaliers vs. Heat
The net effect, in terms of home attendance, is the net incremental revenue received by both the Cavaliers and the Heat following Lebron’s decision. As discussed before, the Cavaliers experienced a clear lag affect after Lebron’s departure in the 2010-2011 season, probably due to the exercise of season ticket options before “the decision.” However, even after acquiring Kyrie Irving (#1 draft pick), the Cavalier’s home attendance dropped significantly in the 2011-2012 season. The calculated lost incremental revenue is $4,517,796. This number would have been higher if the 2011-2012 season was not shortened by a lockout.
The net effect, in terms of away attendance, is the net incremental revenue received by all teams, except the Cavaliers and the Heat, following Lebron’s decision. This number totaled a loss of $5,410,455.48. It is larger than the net revenue on home attendance, and it only considers Lebron’s final year on the Cavaliers and first year on the Heat. The effect is dramatic. The Cavaliers with Lebron were the second best traveling team in the league, averaging an attendance of 19,200 during their away games. During their first season without Lebron, they dropped to the worst traveling team. No team had a lower average away attendance than the Cavaliers in the 2010-2011 season. On the other hand, the Heat became the number one traveling team with an average of 19,447 (247 higher than when Lebron was on the Cavaliers). Notably, the Heat, prior to Lebron’s arrival, had the fourth highest average away attendance, which limited the incremental revenue that Lebron could create.
Dwyane Wade was able to draw crowds by himself, as was Lebron in Cleveland. Nevertheless, stadiums have a finite capacity, and the NBA has only recently started to implement dynamic pricing; thus, the incremental revenue created, in terms of gate revenue, is far less when superstars, who were able to draw significant crowds singlehandedly, join forces. The combination of superstars may have significant deleterious effects. Not only is the competitive balance of the league altered, but also the small market teams, who may have depended on playing both Lebron and Dwyane Wade (remember their incremental revenue contributed 2 percent and 1 percent of a teams season gate revenue, respectively), now lose a significant source of income. This could create a vicious cycle.
If these players are more concentrated, then fans may have a greater desire to see those teams play, but they will be interested in seeing fewer games. Given the limit on stadium seating, the home team suffers.
Implications of Results and Future Research
After calculating the net effect of the home and away attendance for both the Cavaliers and Heat, it was noted that the NBA was losing money due to Lebron’s move. This is because Lebron and Wade were able to attract fans to the arena separately that was not matched by what they could do together. When they combined forces, although they were able to achieve an average attendance that exceeded Lebron’s margin, it was not nearly enough to compensate for the decrease in attendance that resulted when the Cavaliers traveled without Lebron. A stadium has a finite number of seats (for the most part), so if Lebron would sell out a stadium on his own, the addition of Wade would only increase the excitement but little else: the gate revenue would remain static. The resale of tickets may reflect the additional revenue that a team would have received if they could increase supply to reflect demand at the average original ticket price, or it could represent the price a ticket could fetch with the institution of dynamic pricing.
It is apparent that the combination of superstars reduces the revenue received by the league, solely considering gate revenue. However, this information alone is insufficient to state that the league does not benefit as a whole. It simply raises the question: does the exponential effect created by the combination of a superstar’s impact on TV viewership and the expansion in NBA merchandise sales outweigh the loss in attendance? The difficulty is that these numbers are not easily accessible. However, the NBA would be able to calculate this and the result has massive implications. If the combination of superstars resulted in an increase in revenue through television and merchandise that outweighed the loss to the league in attendance, then one could argue that the concentration of talent has the potential to be better for the league, even if it comes at the expense of achieving a more competitively balanced league. This is a short-term benefit that may or may not outweigh the potential long-term harm the loss of competitive balance may have on the league.
Sustainability is a key issue. If superstars are concentrated in particular teams, their combined star power will create a positive effect on revenue. However, increasing the concentration of stars per team decreases the variance of the number teams that have a realistic chance to win the championships. This, in turn, creates a negative effect on revenue. Thus the magnitude of each effect will determine whether or not concentrating stars is beneficial to the league in the long run. The league must consider this when establishing its new collective bargaining agreements (CBA). However, there may be a limit to the extent to which the league can control for these factors.
Lebron James, Dwyane Wade, and Chris Bosh all agreed to take a decrease in compensation in order to accommodate each other’s salary and not violate the league mandated salary cap. As a result, Udonis Haslem, Mike Miller, Shane Battier, and Ray Allen all accepted smaller contracts in order to play with the “Big Three.” The salary cap, a mechanism used by the NBA to achieve competitive balance, does not appear to have had its intended effect. It was noted that basketball lends itself to the creation of superstars because of the inherent traits of the sport: players are far more visible, they play a greater proportion of the game, they are a greater percentage of the team on the court, the fans are extremely close to the action, and one player can dominate the game as in no other team sport. All these factors contribute to the level of fame achieved by these players; this is particularly evident in their ability to acquire sponsorships.
Herein lies the difficulty for the NBA. Michael Jordan’s annual salary, early in his career, was approximately $3 million. However, he earned a total of approximately $30 million dollars in the same year. The majority of his income resulted from off-the-court compensation. With the increase in technology, the expanding capacity of advertisers to access and to communicate with potential customers, and the growing awareness about the ways potential customers establish their brand preferences, superstars have the capacity to earn far more off the court than ever thought possible.
There exists an ecosystem in which the salary that a team is able to provide no longer serves as the strong incentive it once was in determining where stars play. Meaning, all of the rules intended to allow smaller market teams to keep their players by allowing them to increase player salaries have decreased in importance. Where it was once thought that players could be counted on to follow the money offered by teams, it now seems that financial forces beyond the control of owners and the league are in play. Players have the ability to work among themselves to craft situations that they perceive could deliver benefits that outweigh the losses sacrificed in diminished salaries. If those forces conspire to weaken competitive balance or to diminish the value of the sport and the teams in the long run, then any new CBA must quantify those elements and create compensatory responses.
Competitive balance, to a certain extent, is a necessity for a sports league. However, as we have shown, an individual player can have a dramatic effect on demand. To what extent the league is dependent on either is up for debate, but this debate is the key to achieving long-term prosperity for the league. The closer we can come to finding what environment strikes the appropriate balance, the closer we can come to maximizing the full potential of the NBA.
[1] *Seasonal attendance data was from espn.com and individual game attendance data was from yahoo box scores
[2] * All ticket prices were retrieved from Forbes’s NBA valuations – http://www.forbes.com/nba-valuations/
[3] Estimated based on own calculations
[4] Calculated using the average ticket price and attendance (not simply price)
Samantha Raider says
Very cool! I didn’t realize econ can give insight on stuff like this