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David Stern, Commissioner of the National Basketball Association(NBA), scanned the arena from his courtside seat at the sold outToyota Center in Houston, TX during the 2004 Western ConferencePlayoffs game between the Houston Rockets and the Los AngelesLakers. The video commercials and fan-response prompts he viewed onthe high-tech scoreboard reminded him of how far technology hadprogressed since he first took the helm of the league in 1984. TheNBA’s tremendous growth that stemmed from increased revenueopportunities through state-of-the-art facilities had begun totaper off since there was only one team left in the league that hadyet to move into a modern arena. Now, the NBA leadership team spentmuch of its time pondering ways to offer fans alternative optionsto experience the NBA using cell phones, video games, and otherinnovative media channels of communication. While Sterncontemplated how the league would continue to benefit from newtechnological advances, he noticed fans waving pictures of YaoMing, a 7-foot 6-inch player from China. Stern’s global vision ofthe NBA was slowly coming to fruition through the recent influx ofinternational players and the NBA’s initiatives to broadcast andmarket games internationally, yet he believed there was a muchgreater potential to be realized. Stern still had a few months toprepare for the annual Board of Governors meeting. In front of theNBA’s owners, Stern would deliver a “state-of-the-league” addressand unveil a plan for confronting the league’s challenges andsystematizing recommended changes across the league’s 30 teams.While the league was healthy on most fronts, team owners wererecently alarmed after receiving reports indicating that revenueswere down even though overall attendance had increased during the2003- 04 season. Additionally, the league had just withstoodseveral public relations disasters involving a few high-profileplayers and was facing the perception from many fans that thequality of play had diminished. Stern reflected on the competingdemands and wondered how to prioritize and sort them out. Thefollowing morning, Stern would meet with Russ Granik, DeputyCommissioner and COO, and Adam Silver, President and CEO of NBAEntertainment, to begin thinking through a strategy. Just as Sternturned to Granik to remind him of the meeting, the crowd erupted asYao Ming scored a last second shot to send the game into overtime.By 2003, the NBA had grown to include 29 teams, and had plans toexpand to 30 teams in 2004.8 Each team was independently owned,either by an individual or by an ownership group. The NBA’s leagueoffice intended to work “for” the owners and was primarilyresponsible for operating the league.9 Revenue and costs for theleague were largely driven by collective individual team activity.In 2002, 41% of the league’s revenue came from each team’s gatereceipts, 45% from the league’s television contract with nationaltelevision networks to broadcast NBA basketball games, and 12% fromother sources including sponsorships, licensing partnerships,concessions, and preseason promoter fees.10 Of the league’s costs,over 63% were due to player salaries, which had escalatedsignificantly over time (see Exhibit 1).11 The remainder of theleague’s costs was split evenly among team basketball operations,promotions, arena rentals, and general & administrativecosts.12 The league office was funded by 6% of each team’s gatereceipts, and all other gate receipts were kept by each individualteam.13 All national revenue—including licensing and national TVdeals—was split evenly amongst all 29 teams.14 However, each teamretained any local television revenue it generated.15 Over theyears, the league had implemented a number of measures to controlcosts and distribute money equitably across the league. Thesemeasures were captured in a collective bargaining agreement (CBA),which is negotiated between the owners and players. In 2004 theleague had a salary cap in place that attempted to “cap” the amountof money that each team spent on player salaries, generally at 55%of Basketball-Related Income (BRI, or the sum of gate receipts andnational television revenue).16 However, there were numerousexceptions that enabled teams to exceed the cap in order to retainplayers. Although the league had numerous sources of revenues andcosts, there were a handful of critical factors that drove thefinancial success of the NBA. The overriding factor, according tosenior league management, was the quality of play and theexcitement generated over the 82-game regular season and thepost-season playoffs. Granik noted that “the key to this league isthe public perception of our product, the quality of the gamesbeing played on the court, the level of competition between theteams, and the expertise of the athletes involved.”17 Mike Bantom,Senior Vice President of Player Development, summed up the league’scritical success factor as “exciting, competitive basketball gamesthat would effectively compete against other entertainment optionsfor the consumer.”18 Others tied the success of each team to itsrespective win-loss record. Bob Criqui, the league’s SVP ofFinance, noted that “even more importantly than the win-lossrecord, a team must inspire hope among its fans. If a team’s fansbelieve that the team will be successful, the fans will activelycheer for the team, and come to watch the team’s games.”19 Allmentioned that it was difficult to quantify or measure thiscritical success factor, but agreed that the excitement of the gametranslated into strong attendance, TV ratings, and scoringaverages. Exhibits 2 and 3 present recent attendance levels and TVratings for the league. Another success factor often cited byleague executives was the image of its players, both on and off thecourt. Granik noted that “how people perceive our players iscertainly an issue for us.” NBA League Office Overview The NBAleague office, headquartered in New York City and Secaucus, NJ,consisted of five main entities—NBA League Operations, NBAEntertainment, NBA International, the WNBA, and the NBDL—which allreported to the Commissioner’s Office, led by Stern. Exhibit 5presents the NBA organizational structure. NBA League Operations,headed by Granik, governed the basketball side of the league,including game scheduling and officiating, and oversaw leagueadministrative duties, such as finance, human resources, andsecurity. Other divisions, such as Player Development, workedclosely with NBA teams to promote best practices and to ensure thatteams adhered to league guidelines. NBA Entertainment, led bySilver, housed all revenue-generating properties at the leaguelevel, including the NBA Store and NBA TV. NBA Internationalconsisted of satellite offices situated to maximize revenue andmarketing opportunities abroad. Similar to NBA League Operations,the WNBA and the NBDL offices served as governing bodies for theirrespective leagues. WNBA In the fall of 1996, the NBA launched theWomen’s National Basketball Association (WNBA) as a wholly-ownedsubsidiary of the league so that the eight WNBA teams would becollectively owned by the NBA’s 29 owners, unlike NBA teams whichwere franchised individually to owners. Eight inaugural teams wouldbegin play during the summer season of 1997 in the following NBAteam cities: Charlotte, Cleveland, Houston, New York, Los Angeles,Phoenix, Sacramento and Utah. Although the WNBA league officemanaged many aspects of WNBA team operations such as negotiatingplayer contracts and disbursing player salaries, the affiliated NBAteams were responsible for using existing resources and/or hiringemployees to fulfill the league’s mandated operational and salesrequirements. Within four years, the WNBA had expanded to 16 teams,all of which were affiliated with existing NBA teams. After the2002 season, the league decided to shift WNBA team ownership fromthe NBA to each affiliated team. At this point, NBA owners weregiven the option to purchase and gain full control of theircorresponding WNBA team. All the owners accepted the league’s offerwith the exception of those in Portland, Orlando, Utah, and Miami.Subsequently, two of the teams relocated to other cities withowners who wanted a WNBA team, while the other two teams dissolved.Beginning in the 2004 season, the WNBA consisted of 13 teams.National Basketball Development League (NBDL) In the fall of 2001,the NBDL, a minor league wholly-owned by the NBA, became theleague’s official training ground for team staff, officials, andplayers who met the minimum 20 year age requirement. The NBDLtipped off with teams in Asheville, NC; Charleston, SC; Columbus,GA; Fayetteville, NC; Greenville, SC, Huntsville, AL; Mobile, AL;and Roanoke, VA. NBA Board of Governors Major strategic decisionsfor the league were approved by the NBA’s Board of Governors. TheBoard of Governors comprised the owners of all 30 NBA teams, eachof whom controlled a vote. David Stern was the Chairman of theBoard, and the Board met twice annually. As the league becameincreasingly successful, the nature of the Board of Governorschanged as team ownership changed hands. New owners such as HowardSchultz (Owner of the Seattle Supersonics and Chairman of StarbucksCoffee), Mark Cuban (Owner of the Dallas Mavericks and co-founderof Broadcast.com and current CEO of HDNet), and Joe and GavinMaloof (Owners of the Sacramento Kings and Co-CEOs of Maloof Sportsand Entertainment) began to take a more proactive approach to themanagement of their teams and their role on the Board of Governors.As Silver explained, “the biggest difference with the current Boardof Governors is that we have much more substantive discussionsabout the business decisions of the league, which David actuallyencourages. We still have a ‘strong commissioner model’, we justhave a much more active board. We now have owners on the board whospent $10 million on their team, and owners who have spent $300million on their team. There is clearly going to be a difference inthe demands from these two different sets of owners with regards tothe direction of the league.” National Basketball PlayersAssociation (NBPA) The NBPA was the NBA players’ union thatnegotiated the Collective Bargaining Agreement (CBA) with the NBA.The CBA defined the rules of interaction between the players andthe league on multiple fronts, including player compensation,conduct and appearances. As such, the NBA’s major productimprovement and development recommendations were typically subjectto approval by the NBPA, whose interests were not always alignedwith the league’s and team owners. For instance, the league’sattempt to impose a harder player salary cap for purposes ofincreasing competitiveness across teams was met by extremeopposition from the NBPA during the 1998 collective bargainingperiod. This dispute, among others, ended after the longest everNBA lock-out (strike). Consequently, the league sufferedconsiderable financial losses from having to cut the regular seasonfrom 82 to 50 games and sustained substantial brand damage fromnegative media coverage. The NBPA provided its own set of programsand services to the players and, on occasion, would join forceswith the NBA’s Player Development department to administer certainprograms. All NBA league-mandated programs and appearances in whichplayers participated were negotiated as part of the CBA. SuperstarTurnover Much of the NBA’s popularity in the 1980s and 1990s wasbuilt on a handful of superstars. The NBA encouraged this byactively promoting its superstars, and turning their burgeoningpopularity into booming ratings and attendance figures. MichaelJordan of the Chicago Bulls – perhaps the game’s greatest playerand certainly its most popular player – joined the league in 1984and continued playing until 199827 , after which returned to theleague for 2 more seasons with the Washington Wizards in 2001-2003.The contests between Magic Johnson’s Los Angeles Lakers and LarryBird’s Boston Celtics in the 1980s became one of sports’ greatestrivalries, as these two teams combined to win 8 of 10 NBA titlesduring the decade. Other charismatic superstars – such as CharlesBarkley, Isiah Thomas, Julius “Dr. J” Erving, Dominique Wilkins,and Hakeem Olajuwon – propelled the NBA and created an excitingidentity for the league. However, as these superstars began toretire in the early 1990s, the league struggled to identifycomparable superstars to capture fans’ imagination in the same way.Fans constantly searched for the “next Jordan”, and throughout the1990s players like Harold Miner, Jerry Stackhouse, Grant Hill andVince Carter attempted to fill Jordan’s shoes only to fail.Although the NBA had its stars in the late1990s and early2000s—including Shaquille O’Neal, Tim Duncan, Kevin Garnett, KobeBryant, Tracy McGrady, Allen Iverson and Jason Kidd—many fans wereunable to connect to these players in the same way as thesuperstars of the 80s and early 90s. Was it just a matter of timeuntil these players blossomed into the same types of superstars asthose of the days of old, or did the existence of these new playersrequire a different approach for the league? Negative Off-the-CourtImage of NBA Players The league suffered incalculable damage to itsimage during a 6-month long work stoppage (better known as a“lockout”) of the players that eliminated 32 games from the 1998-99NBA season as a result of contentious negotiations between theleague office and the NBPA. After the lockout was finally settled,many felt the NBA as a whole had lost. Utah Jazz guard JeffHornacek said “I wouldn't blame the fans if they didn't comeback…neither side is coming out of this thing looking good.”1 Allin all, players lost $500 million in salaries, the NBA’s importantcorporate partners lost significant revenues (Nike reported a 50%drop in fiscal second quarter earnings and a 15% drop in revenuesin December of 1998) (Motley Fool), and the NBA’s goodwill amongstfans and the general public was at an all-time low. As one fanstated in a Detroit News article in March 2000, “I hate the NBA andI'm not really a Pistons fan anymore. I'm sick and tired of thebitching players and owners. They're a bunch of big millionairebabies and I'm not going to pay to see them” (Detroit News). Othercritical source for this section: The NBA continued to face imageproblems in 2003, when an ESPN poll revealed that the number one“problem” with the NBA, as perceived by its fans, was “playeroff-court behavior.” 39 A summary of the poll is presented inExhibit 10. There were certainly a number of negative off-courtincidents involving NBA players in the late 1990s and early 2000sthat couldn’t be ignored, including: • All-Star Latrell Sprewellchoking and threatening his coach, P.J. Carlesimo, during apractice in December 1997.40 • A scathing 1998 Sports Illustratedarticle revealing the significant number of paternity suits andout-of-wedlock births among professional athletes. The articlementioned several NBA superstars by name, including Larry Johnson,who was supporting five children by four women, and Shawn Kemp(drafted shortly after his high school graduation), who hadfathered seven children out-of-wedlock. Other players highlightedin the article included NBA superstars Patrick Ewing, Juwan Howard,Scottie Pippen, Jason Kidd, Stephon Marbury, Hakeem Olajuwon andGary Payton, Larry Bird, and Isiah Thomas. Kobe Bryant—three-timeNBA champion and mega-superstar, high school draftee, marriedfather with a young daughter—was arrested and charged with thesexual assault of a young woman at a hotel in Colorado during the2003 off-season. In 2004, David Stern openly discussed plans toexpand the league to Europe, noting that “it is not out of therealm of possibility that the NBA could have teams in Milan,Munich, Barcelona and London within a decade.” Many in the leagueoffice were excited at the possibility of brand-new revenue sourcesoverseas—including international gate receipts, increasedsponsorship and merchandising revenue from international companiesand consumers, and a new source of television rights fees (orpotentially broadcast-related revenues from NBA TV internationaltelecasts). To many this expansion only seemed natural, and in somecases necessary. Stern noted “90% of our buildings are full at anygiven NBA game in the U.S…90%! Expansion overseas is the only wayto grow this revenue source.” There was already cross-fertilizationbetween the two markets, such as the increased number ofinternational NBA superstars and the burgeoning popularity of NBAplayers and games in European and Asian markets. The NBA wasalready working on “seeding” these markets by holding exhibitiongames in international markets like China and Russia and expandingthe presence of NBA TV, which was already in 30 countries in early2004. Another open question was the future of the NBDL. Whileinitially launched as a “training ground” for team staff, officialsand players, many saw the opportunity to transform the NBDL into atrue “minor league” for the NBA, which would operate similar to theminor leagues in Major League Baseball. Under this system, eachNBDL would “belong” to one or two NBA teams, and the NBA team wouldhave the ability to send a player down to their minor league team,or call them up when they needed a player, all the time retainingtheir contractual rights. Many saw this as an attractive option inorder to handle the increasing number of high school andinternational players into the league. Upcoming CollectiveBargaining Agreement Discussions Looming in the distance was a newcollective bargaining agreement (CBA) to be negotiated with theNBPA. The current CBA was scheduled to expire after the 2004-2005season, and all parties wanted to avoid a repeat of the lockout of1999. Issues on the table included the percentage of revenues to beallocated to players and owners, the salary cap, the luxury tax, apotential age limit or a NBDL minor league, and any other issuethat would have a direct impact on players. One NBA team presidentnoted that one of the most important issues for the league goingforward was “to find labor peace without bloodshed, so everyone isa little better off and teams have a chance to make money.”Decisions, Decisions Tomorrow, Stern, Granik and Silver would meetto begin planning for the upcoming gathering of the Board ofGovernors, where they would present the league’s strategic plan andthe organizational requirements to support these strategic goals.As such, the three needed to discuss the competing priorities ofthe league’s stakeholders, and determine whose issues were mostimportant to the future of the league. On the one hand, the triowould have to grapple with the serious issues that were underminingthe league’s short-term vitality with certain segments of its fans.They would also have to address the concerns of the league’sownership group and players association. Finally, Stern was eagerto build consensus for his growth agenda. But how would the ownersreact to this proposal? How would this translate into the upcomingCollective Bargaining Agreement negotiations with the NBPA? Andwhat systemic organizational changes were required to ensure thatthese recommendations would take root and sustain themselves acrossall 30 teams in the league?-------------------------------------------------------------------------------------------------------------------

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