Sparks Watch Day 7: Could this have been prevented?

Kirby Lee-US PRESSWIRE

Seeing Los Angeles Sparks owner Paula Madison walk away from the team shocked fans and anyone interested in the WNBA. This chapter of Sparks Watch asks the question if this outcome could have been prevented.

As we wait for further news about the Los Angeles Sparks, there are many unanswered questions about what happened that made Paula Madison walk away from the Sparks. We know that she had lost money, claiming approximately $12 million in losses over seven years. But we don't know exactly what her profits and losses were, making a diagnosis of the franchise's problems almost impossible.

A question remains - could this have been prevented? Is there any measure that Madison could have taken that would have rescued the team, or even could have made things better and have postponed the reckoning date to some future season?

In order to understand the situation Madison was facing, an observer has to recognize certain disadvantages that are the stock in trade of owning a WNBA franchise, as opposed to the well-subsidized (by city governments and media corporations) franchises of the Big Four sports leagues:

1. Lack of excess demand. Unlike Big Four franchises, there doesn't appear to be an excess demand for WNBA teams. It seems that the goal of the WNBA for the past few years has been to remain stable at 12 franchises. Rumor has had it that the San Francisco/Oakland location was the "hole card" where an existing WNBA team would be relocated if one of the present 12 teams faced a financial crunch. With the Golden State Warriors in talks with the WNBA, that hole card is now missing. Madison couldn't threaten to move the team for reasons that I'll state in the "salary" section below.

2. Lack of public provision. Unlike Big Four franchise owners and the six WNBA teams that are owned by an NBA/NHL team owner, the WNBA franchises that aren't owned by Big Four team owners cannot rely on public subsidies. Madison couldn't go to the Los Angeles mayor's office and ask for some sort of public assistance - like when Big Four sports teams go to cities and ask for a subsidy check (new stadium, stadium upgrade, and so on). The kinds of extortion available to Big Four sports teams aren't available to Madison.

3. Lack of "political support." With the Big Four leagues, cities see some sort of nebulous value in hosting these franchises as an indication that the city is "big time." However, not only does the WNBA not have that kind of clout, but Los Angeles is a special case - the city has been without an NFL city for years and years without any change in the perceived status of Los Angeles as a "big time" city. Is Los Angeles a "bad sports town"? Hard to say, but the Sparks would have had even less clout with the city.

4. Smaller WNBA owners don't own their own facilities, or the benefits. Madison doesn't own an arena, and has to rent it. The problem is that the NBA seems to want small owners to rent big-time NBA facilities. However, I suspect the owners don't get the benefits of concessions or parking that the NBA owners get. This becomes a cost that can't be recovered except through ticket sales.

5. The elasticity of the WNBA product: elastic or inelastic? Elasticity is an economics concept that asks how demand changes in respect to pricing. One option Madison might have had was in raising the prices of Sparks tickets. Of course, the rules state (except for certain special kinds of goods) that when prices go up, demand goes down. The question is, would the gain in revenue offset the loss of business?

No studies have been done on WNBA price elasticity. The best comparison I could think of the WNBA is minor league baseball - in 1982, a study was done suggesting that Minor League Baseball tickets were relatively inelastic. Of course, this study is thirty years old and we're comparing apples (the WNBA) to oranges (minor league baseball). But in general, sports costs are inelastic, meaning that the price charged for tickets is not the price that maximizes profit - the market can bear a price increase.

Of course, it could be the other way around with the WNBA. If the WNBA is elastic instead of inelastic, then any increase in price will be overcome by a corresponding drop in demand for tickets that eliminates the increased revenue.

5. Salary (and budgeting). No one really knows what the budget of a WNBA team is. No team has ever opened their books. I once had a discussion with a person who has been a basketball observer for decades, and we put together a hypothetical profit-and-loss budget for a WNBA team:

We don't know what arena costs are, so let's say they're $20K per night. We also assume that the team has 18 games a season (17 regular season plus one preseason) and no postseason games. Next, we will assume that there is no "marquee sponsor," like a jersey sponsor. Lastly, we'll assume that the WNBA team operates on its own and that all staff work solely for the team.

With these assumptions, here is what an example of what a team's expense could look like:

$20K x 18 games = $360 K in facility costs
$400 K for travel costs and per diem for players
$900 K for player salaries
$750 K for staff salaries
------
$2,450,000 in expenses

Then here are what the team's revenues could look like:

$25 a ticket x around 3,000 in actual paid attendance per game x 18 games
= $1,250 K approximately in ticket sales
$920 K share of ESPN money
$250 K share of Boost Mobile money
$100 K in minor sponsorships
____
$2,525,000 in revenue

Note that a lot of these factors are variable, depending on circumstances unique to location. It could be believed that six WNBA teams made a profit depending on how favorable the factors were.

(* * *)

There really wasn't much [Paula Madison] could do, except to find someone independently wealthy (as opposed to just rich) who could become a co-owner and help absorb some of the losses.

As you can see, there were only a few things that Madison could have done. She could have lowered staff salaries. She might have been able to offload big player salaries - but undoubtedly the players earning the most were the best players, and that would have condemned the Sparks to mediocrity. She could have let staff go. She might have been able to raise ticket prices - or not, depending on how elastic ticket prices are.

It might have been true - I can't confirm this - that the Sparks, as a tenant of the Staples Center, might have been alloted a share of the premium seating money. But this revenue, like that of the ESPN or the Boost Mobile money, would not provide any sort of sudden windfall. Most likely, she didn't share in any of the parking or the concessions.

Madison might have been able to take out a bank loan - but would a bank loan to a limited liability corporation, which - if it went bankrupt - would have left the owners to walk away? The Sparks don't own the Staples Center or have any major assets that could be collateral for a loan.

As you can see from the above, Madison's hands were relatively tied. There really wasn't much she could do, except to find someone independently wealthy (as opposed to just rich) who could become a co-owner and help absorb some of the losses. The WNBA worked with her to keep the Sparks alive, but there was only so much they could do.

Perhaps Madison wasn't the kind of person who should have owned a WNBA franchise. As I wrote earlier in The WNBA and How Leagues Survive:

No one should ever be admitted into the group that doesn't have the money to run the race. The WNBA learned this lesson in a painful way when Les Alexander - the owner of the NBA rockets - sold Hilton Koch the Houston Comets franchise, and he just didn't have the cash to run it. As a result, the league was forced to close the franchise that gave the WNBA its first four championships.

The above proves that sometimes, you can't control who ends up with a franchise. (The reality of the time was probably that the WNBA couldn't do much to stop the sale.) But when new franchises are formed, or franchises are relocated, it's much better to kill the deal now than it is to grant a new franchise or relocation and have the deal killed later with great embarrassment.

Which then begs the question: Can small owners survive in the WNBA? Or do WNBA team owners need millions and millions and millions for a chance of success in the league?

_____

Is there any way that Paula Madison could have saved the Sparks? If you have an answer, share it with us in the comments thread!

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