We have the fix for NBA tanking (and it isn’t the lottery)

Next week, NBA franchise owners are expected to approve draft lottery reforms aimed at decreasing the incentive for teams to lose games. This vote comes at the behest of league commissioner Adam Silver, who refuses to take no for an answer on this particular issue ... three years after taking no for an answer on this particular issue.

Silver is sick of all of us talking about tanking every spring, but he’s also pragmatic and this lottery reform plan represents incremental progress. It merely decreases the benefit of being truly awful — like 20-62 awful — while boosting the hopes and dreams of teams that are simply bad.

This discussion serves as an interesting backdrop to a concurrent conversation about how teams should profit from the league’s popularity.

Zach Lowe and Brian Windhorst reported out a blockbuster story on the NBA’s finances for ESPN.com on Tuesday. According to a confidential report Lowe and Windhorst procured, 14 teams — almost half the league — lost money on a net income basis before accounting for revenue sharing last season. After revenue sharing, nine teams lost money. This, despite the league earning $530 million in net profit on the whole.

What the report boils down to is this: Some teams earn huge profits, and some teams lose huge amounts of money. About $200 million of that $530 million is transferred among the teams based on a whole host of complicated factors. After revenue sharing, almost a third of the league still loses money.

Lowe and Windhorst report that franchise owners will discuss this issue at length at league meetings next week. The question they must collectively answer is this: What is important to the NBA?

No pressure.

Per the report, the Lakers are the most profitable team in the NBA. The Lakers also play in the nation’s second-largest city, have won 16 championships, and have made the playoffs in 60 of 69 seasons all-time. The fact that their record over the past four years is 91-237 seems incidental to their market realities.

The Lakers make so much money in part because of historical excellence — this is why there are millions more Lakers fans than Clippers fans — and because of the size of their market. That their brand can withstand a downturn of fortune and the huge revenue is, for now, a given. (This is literally true in terms of the Lakers’ broadcast deal, a 20-year contract.)

Local broadcast rights are a huge piece of the revenue puzzle, only a portion of which gets shared among the teams. The Lakers have huge local rights deals, while teams like the Grizzlies receive a pittance. This is economic reality. Carriage fees and ad revenue for sporting events broadcast to millions are more valuable than broadcasting to hundreds of thousands.

Should the NBA allow the currently awful Lakers to keep $100 million in profit per year from that TV deal, or force them to share it with the currently good Grizzlies? What role should actual success play in profit?

The Knicks, Lakers, and Bulls — two bad teams and one mediocre club last season — are three of the four most profitable franchises in the league. Success is only marginally related to profit in the NBA. That is a problem.

It’s not just the top of the profitability rankings where mediocrity pays off. The majority of the teams benefiting most from revenue sharing are terrible teams. Seven teams relied on revenue sharing to be profitable, per ESPN’s report: the Charlotte Hornets, Sacramento Kings, Indiana Pacers, New Orleans Pelicans, Phoenix Suns, Minnesota Timberwolves, and Portland Trail Blazers. These teams, per ESPN’s report, had negative net income before revenue sharing, and positive net income after transfers.

All seven teams play in mid-sized or small markets. Phoenix is Nielsen’s No. 12 market in the nation; New Orleans is No. 50. What’s more is that of those seven teams, only Indiana had a winning season (42-40) last year. Portland went .500. The other five teams — who, again, made a profit only after revenue sharing transfers from other franchises — went a combined 157-253.

Lowe and Windhorst report that 10 teams pay the combined $200 million in transfers. Those payments are the reason this collection of average-at-best franchises could turn a profit last season. The Suns, who made little effort to hide their intent to lose games all year, are an especially egregious name on that list.

In Silver’s NBA, five bad teams profited simply through internal league transfer payments. In Silver’s NBA, two of the four most profitable teams have been awful for years. If teams can turn a profit with a record of 32-50 or 24-58, what’s the point in spending more money than absolutely necessary on players, staff, or growing the business?

Spencer Hall wrote eloquently about the NFL’s complacence this week and how rentier capitalists have lost touch with their customers’ needs and desires. Major League Baseball has dealt with this in the past, as well. When you have a system that allows some to profit simply by showing up, they are going to take advantage.

The NBA already experiences this with the damn Knicks and dealt with it for decades with Donald Sterling’s Clippers. Its revenue sharing system should not simply shave the top off the most profitable teams to keep the stragglers afloat.

This is a difficult dance, but there’s an opportunity here for the NBA to create a financial system that rewards effort and penalizes persistent mediocrity.

The solution: Tilt the revenue-sharing system toward a scheme focused on rewarding success. No playoff team that manages expenses appropriately (including player payroll) should lose money while the third-worst team in the league turns a $100 million profit. Take more revenue from the highly profitable but lousy teams. This will encourage profitable teams like the Knicks to not just grow profits by raising ticket prices and expanding marketing, but to actually make smarter basketball decisions.

Meanwhile, the NBA can tweak the payment system to avoid offering payments to mid-market or small-market teams who are consistent losers. The Kings and Timberwolves, each more than a decade removed from the playoffs, shouldn’t be rewarded with profitability just by virtue of existing. Similarly, Memphis — with seven straight years in the playoffs — should have an opportunity to profit despite being in a tiny market.

This isn’t to say the Lakers shouldn’t still profit when they are in a downturn, or that teams like Minnesota should be financially abandoned during stretches of basketball failure. But the system can skew way harder toward rewarding success than it does.

Tweaking the lottery can help convince teams to try only so much given the importance of the draft. Let profit sharing do most of the work to achieve competitive balance by forcing teams to fight hard every year in order to maximize profits. The NBA has the power to fix tanking, and revenue sharing is the mechanism.