The NBA is not McDonald's

Contrast these two classic stories that pop up in the news every so often. In one, a major chain like Walmart or McDonald's is trying to open up in a small town. The town gets upset and attempts to stop it, claiming that big business will ruin mom and pop stores. Contrast that with what happens when a major sports team threatens to leave a small market. The city and its residents rally to keep the team, because everyone knows that the team brings the city jobs, community spirit, and other great things! (Editor's note: in case you didn't pick up on it, the preceding comment is sarcastic. It turns out that, like most of big-money sports, NBA teams don't really help local economies)

The first lesson here is that the same "business people" who are hated when they run large companies can easily become adored just by owning a professional sports team. However, a more important lesson is the difference in the classic franchise model and that of a major sports league, particularly the NBA. McDonald's makes money in two ways. The first way is that they have a brand. No matter where I go, I recognize the yellow arches. I know the food won't be great, but I know it will be cheap, and I know what I'll be getting. The second is to mark up cheap materials. The way I know what I'll be getting is that the McDonald's company makes every individual franchise buy directly from them, and that means that the ingredients are the same. A company like McDonald's uses the power of its brand to give value to cheap ingredients. This is powerful because it means that it's easy to put McDonald's anywhere. The labor is also "outsourced". Various small business owners pay the parent company for the right to run an individual restaurant, pay for the marked up ingredients, and sell the same food, and they do this all over the world. Let's contrast this with the NBA.

The first major difference in the NBA is the ingredients. Every basketball team needs players. And as we know, not all players are created equal. In fact, the difference between the best players and the average players is vast. There are not enough legitimate superstars in the NBA to arrange it so that every team gets one. By contrast, there are enough cheap fast food ingredients to go to each of the 14 000+ McDonald's in the US. 

A second major difference is the required population for a sports team. If you walk into your local McDonald's, the fire code will probably say it can have under 200 people in it at a given time. It only takes a few minutes to get in and out, and the food is relatively cheap. Almost any town can sustain that! An average NBA stadium seats close to 20,000 fans! The cheapest average tickets in the NBA are close to $30 a game, and most teams are more expensive. Basically, unlike a McDonald's, an NBA team requires a lot of people who have a significant amount of disposable income.

These two factors mean that NBA should behave much differently than it does. First, the NBA can't afford to waste its "ingredients". With guaranteed multi-year contracts, a player in the wrong market is wasted. If McDonald's opens a franchise in an area that doesn't work, it will not impact the success of other McDonald's restaurants, and the failing restaurant is closed. But things are different in the NBA. Just look at Chris Paul's career. For years, Paul's talents were wasted in a small market. But as soon as he landed in Los Angeles, he helped to turn the NBA's perpetual laughingstock franchise into a successful team. Since the team plays in the country's second biggest market, this is very valuable to the NBA. Second, the NBA shouldn't even be in small markets to begin with! In the ideal scenario, the NBA can get a really good team in a small market and they can be sort of successful. Case in point: the San Antonio Spurs are ranked as the 10th-most valuable franchise by Forbes. They're the only franchise in the NBA to have gone seventeen (and counting) straight seasons with a 60% win rate! And yet the Spurs still rank below the Warriors and the Nets in terms of franchise valuation. The most consistently succesful NBA team in NBA history barely cracks the top ten in value? That's absurd!

The problem many have when analyzing the NBA is treating it like a normal franchise system. Isn't it a good thing to expand the NBA to smaller markets? Don't fans in New Orleans deserve Anthony Davis? The answer is no! When you have a limited supply of valuable resources, how you allocate them is important. The NBA's current model is basically to put teams in cities that are willing to offer a discount on stadiums. This method ends up excluding major cities – like New York and Chicago – that already have teams, but could easily support more. And the NBA is willing to put the best up-and-coming talent on poorly run teams. Neither of these strategies is ideal for success.

Like many success stories, the NBA is thriving in spite of itself. However, in the field of sports things can change quickly, and if the NBA keeps acting like McDonald's, it may find itself being viewed as a much cheaper product than it should be.