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The Rise of the National Basketball Association

The Rise of the National Basketball Association

by David George Surdam

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Today's National Basketball Association commands millions of spectators worldwide, and its many franchises are worth hundreds of millions of dollars. But the league wasn't always so successful or glamorous: in the 1940s and 1950s, the NBA and its predecessor, the Basketball Association of America, were scrambling to attract fans. Teams frequently played in dingy


Today's National Basketball Association commands millions of spectators worldwide, and its many franchises are worth hundreds of millions of dollars. But the league wasn't always so successful or glamorous: in the 1940s and 1950s, the NBA and its predecessor, the Basketball Association of America, were scrambling to attract fans. Teams frequently played in dingy gymnasiums, players traveled as best they could, and their paychecks could bounce higher than a basketball. How did the NBA evolve from an obscure organization facing financial losses to a successful fledgling sports enterprise by 1960?   Drawing on information from numerous archives, newspaper and periodical articles, and Congressional hearings, The Rise of the National Basketball Association chronicles the league's growing pains from 1946 to 1961. David George Surdam describes how a handful of ambitious ice hockey arena owners created the league as a way to increase the use of their facilities, growing the organization by fits and starts. Rigorously analyzing financial data and league records, Surdam points to the innovations that helped the NBA thrive: regular experiments with rules changes to make the game more attractive to fans, and the emergence of televised sports coverage as a way of capturing a larger audience. Notably, the NBA integrated in 1950, opening the game to players who would dominate the game by the end of the 1950sdecade: Bill Russell, Elgin Baylor, Wilt Chamberlain, and Oscar Robertson. Long a game that players loved to play, basketball became a professional sport well supported by community leaders, business vendors, and an ever-growing number of fans.

Editorial Reviews

From the Publisher

"A fascinating story about the evolution of the NBA. Surdam's command of the economic history of the formative years of the NBA is flat- out impressive. He tells a very compelling story of the role of a small group of owners who stayed with the sport and the league when it was always on the verge of financial collapse and then began to cash in when the league caught on in the 1960s, a long-shot gamble that paid off big."--James Quirk, coauthor of Hard Ball: The Abuse of Power in Pro Team Sports
Library Journal
Basketball fans need only read the first sentence of Surdam's introduction, in which he explains what the National Basketball Association (NBA) is, and see that the last third of the book is made up of tables, notes, and bibliographic references, to get the drift that this is not aimed at them. Rather, Surdam (economics, Univ. of Northern Iowa; Wins, Losses, and Empty Seats: How Baseball Outlasted the Great Depression) utilizes a tremendous amount of data to examine how the nascent NBA survived its early lean years. He concludes that the league owed its success to owners' willingness to innovate (e.g., with the introduction of the 24-second shot clock, the forcing out of small-market franchises, rapid albeit belated integration, allying with television broadcasting, etc.) despite absorbing large financial losses. It is a shame that his analysis includes only the NBA's first 15 years, ending in 1961, well before the arrival of Larry Bird and Magic Johnson, who, conventional wisdom holds, revived a league that was moribund during most of the 1970s. VERDICT The eyes of academicians might light up at this study, but those of average sports fans may glaze over. Recommended for its appropriate audience in the business of sports.—Jim Burns, Jacksonville P.L., FL
Kirkus Reviews
An unrelentingly dry look at the NBA's early growing pains. Rigorous analysis of reams of data has become de rigueur in sports circles; there is a limit, however, to the stories numbers alone can tell. Surdam (Economics/Univ. of Northern Iowa; Wins, Losses, and Empty Seats: How Baseball Outlasted the Great Depression, 2011) ultimately draws some interesting conclusions: Early NBA owners' willingness to experiment with rule changes was a major factor in the fledgling league's ultimate success; the advent of the 24-second shot clock increased scoring, but was not, as is often assumed, solely responsible for higher point totals; travel logistics were primary determinants in assessing whether or not a city was a viable location for a new (or relocated) franchise. To get to those conclusions, however, the author wades through an endless morass of regression analysis, ticket-price statistics and attendance figures. The book's target audience is unclear. The limited time period covered (1946-1961), heavy focus on numbers unrelated to performance on the court and academic tone make it too esoteric for a general audience, and the nature of Surdam's thesis--that the league struggled to survive in its infancy and succeeded primarily because of team owners' willingness to take risks, integrate the league relatively quickly and persevere in the face of economic adversity--does not allow for more analytical readers to extrapolate many lessons that would apply to a sports league that did not face the NBA's particular set of circumstances. Makes watching a replay of the lowest scoring game in NBA history--a 19-18 contest between the Minneapolis Lakers and Fort Wayne Pistons in 1950--seem exciting in comparison.

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The Rise of the National Basketball Association



Copyright © 2012 Board of Trustees of the University of Illinois
All right reserved.

ISBN: 978-0-252-03713-9

Chapter One

Economics of Sports Leagues

Owners in professional team sports leagues enjoy advantages that other business owners do not. The league owners are, in a sense, a cartel. Cartels are usually against U.S. antitrust laws. All professional team sports leagues have partial or full antitrust exemptions, thanks to the courts and to congressional legislation.

Not all cooperation between firms violates antitrust laws. The league owners must have a minimal amount of cooperation in setting schedules, arranging playing rules, and determining champions. These minimal activities, denoted by economists as single-entity cooperation, are permissible because they make competition possible and therefore benefit fans.

The owners are not content with minimal cooperation, however; they also seek actions that boost collective profits. These actions include granting territorial rights, fixing minimum prices, establishing a reserve clause and a player draft, and negotiating national TV contracts; economists call these actions joint-venture cooperation. Antitrust authorities would usually consider such activities to be beyond the pale of acceptable behavior. Thus, the owners and their appointed commissioners must persuade legislators and antitrust authorities to countenance such blatant violations. Sports league officials have generally relied upon an argument that such actions prevent ruinous competition and foster competitive balance, the latter being beneficial for fans.

In the early days of the NBA, owners' joint-venture cooperation manifested itself in two primary ways. Because leagues conferred territorial rights that limited direct competition from other teams, or franchises, in the same region, owners had greater discretion over prices they set for their product; this price-setting power often generated greater profits than owners would have earned under more competitive conditions. Owners often stipulated minimum ticket prices as a backstop, lest some desperate owner slash prices unilaterally. The reserve clause and player draft bound a player to a single team. Under the reserve clause, the owner could trade, sell, or release a player at will. This power gave owners disproportionate bargaining leverage over players and generally suppressed salaries relative to what employers facing a more competitive labor market would pay. But there were limits to how far owners could slash salaries.

The distinction between single-entity cooperation and joint-venture activities is not without ambiguity. Tampering with schedules and playing rules were not always single-entity activities, as they both could be manipulated to generate additional revenue and profits. However, these manipulations were not necessarily joint-venture cooperation either, in the sense that, say, controlling players was. The manipulations of the schedule and playing rules often benefited the owners only by pleasing fans, whereas the reserve clause primarily benefited just the owners.

The NBA's turbulent birth as the BAA demonstrated that professional sports team owners' twin advantages of price-setting power over ticket prices and enhanced bargaining power over players were not sufficient conditions to ensure profitability. Price-setting power without sufficient demand could still lead to losses. The challenge was to increase demand, which would have led to higher ticket prices, more attendance, and greater revenues and profits. Greater profits would have enabled owners to pay higher salaries and to improve conditions, helping to erase any fly-by-night image.

To generate sufficient revenue, owners might have tried to create greater demand for their product by avoiding that bête noire of professional team sports: competitive imbalance. Some observers argued that basketball owners should have promoted competitive parity, not only through their draft of college players, but by using gate sharing (the sharing of only gate receipts) to shift badly needed revenue from the New York Knicks to owners of teams in smaller cities. Then again, as in many new industries, pro basketball owners may have decided upon a rugged individualist approach of winnowing weak teams. The basketball owners, similar to their brethren in Major League Baseball and the National Football League, found that relocating moribund franchises to cities with stronger demand for their product was a better tactic than sharing revenue from various sources.

The owners could have tried to create more demand by improving their product through innovations in rules, or by tapping a new pool of talent, such as African American players. Owners might have hoped that a new technology—television—might expand their market and fan base.


Similar to their peers in baseball and football, pro basketball owners are loath to reveal profits and losses. They are more likely to divulge losses, though, when they want the public to ante up funds for new stadiums. The pioneering NBA owners had yet to aspire to such bold actions as agitating for new stadiums, but their losses were real enough.

A congressional committee studying antitrust issues in 1957 requested owners of all professional sports teams to supply financial data for the mid-1950s. While all profit and revenue figures provided by owners should be viewed with skepticism, in this case there were some built-in checks. First, the owners may not have wanted to supply falsified information to a congressional investigation, especially since they hoped to gain approval of antitrust exemption. Second, the NBA owners lacked some of their owner peers' ability to camouflage profits. The original owners had not paid anything but a nominal membership fee when the league was formed. This meant they could not "depreciate" the value of their player contracts, a tactic pioneered by baseball's New York Yankees (although Bill Veeck of the Cleveland Indians took credit for figuring out the tax loophole). Subsequent owners of existing franchises could depreciate the value of the player contracts they obtained from purchasing their franchise. Given the relatively small franchise values of the early 1950s, this depreciation allowance would have been minimal. It was not until the later 1950s and early 1960s that franchise values appear to have reached the level of hundreds of thousands of dollars, much less than the millions of today. Even accurately reported financial data was not definitive evidence of profitability or of losses. Owners who had other business ventures could often decide to which venture to charge some expenses (and sometimes revenues). These owners had additional discretion over how much profit or loss to report.

The question of whether owners of professional sports teams are "profit maximizers" is an intriguing one. Owners often portray themselves as "sportsmen" (being, with rare exceptions, men) or "civic-minded." Undoubtedly the owners receive some satisfaction from fielding a championship team and may be willing to jettison some profits in order to do so. Owners might also accrue benefits for their other business ventures by creating goodwill via providing a city with professional basketball. League president Maurice Podoloff tried to allay congressional concerns that the owners were strict profit maximizers:

Professional sports is not a business; professional sports is not a business, because if you look at these—if you look at these gate receipt reports and see the money they have lost, you must be an addict and a bit of a lunatic to stay in professional sports. It is something unusual.... And if we produce sports, we want to have an audience, and the receipts are a measure of our success. But I will tell you one thing; I have seen more than one team owner and manager come off the floor on the verge of tears. He didn't moan and groan because he had lost money. He moaned and groaned because he lost the game.

Some basketball owners probably shed real tears over the losses they incurred.

Since many of the early NBA owners were poorly capitalized, even if they were not profit maximizers, they were undoubtedly forced to pay close attention to their ledgers. Owning a professional basketball team was not for the faint of heart.

Franchise values provide another clue regarding profitability. When an owner sold his team, the prospective buyer weighed the team's past profitability and its expected future profitability. If owners chronically experienced losses, they could either get out entirely or sell their team, possibly at a loss. If franchise values were rising, though, then the owners were probably making or increasing their profits.

Player Salaries

When businesspeople are losing money, they often look to trim costs. Like owners of other professional sports teams, basketball owners tried to keep player costs low. BAA/NBA owners held a major advantage versus their Major League Baseball and National Football League peers. They employed only ten to twelve players, a coach, and perhaps an assistant coach or trainer. Their entourages, therefore, were much smaller than those of baseball or football (which had thirty or more players and coaches). Even with the smaller rosters, BAA/NBA owners experienced difficulties in meeting the payroll for their twelve to fifteen employees. Unlike Major League Baseball, however, with its salaries in the tens of thousands of dollars, pro basketball owners were severely limited in how much they could reduce team payrolls, which had never been munificent.

In a competitive market for labor, employers must pay their employees "what they are worth." In economic terms, an owner estimates how much additional revenue a player will bring to the team, which, in turn, depends on the demand for the team's games. Such calculations, of course, are at best impressionistic. However, market forces tend to compel owners to comply roughly with this concept of paying market value.

Fans think high salaries drive higher ticket prices, but in reality it is higher demand that tends to lead to higher ticket prices. Salaries in basketball generally followed demand for the final product. If the league prospered, then player salaries would rise, even under the reserve clause.

Because of the reserve clause and the player draft, owners had salary-setting power over their players and could exercise discretion in how much they paid the players. Fans and envious sportswriters, though, often saw athletes as overpaid. Many pro basketball players earned more than the average American. Then again, pro basketball players were not average Americans. Few people would pay money to watch the best plumber at work, but thousands, and eventually millions and billions, would pay to see a top basketball player.

Basketball owners, though, were unable to reduce salaries too much, even with the reserve clause. All workers have a reservation salary, the minimum necessary to induce them to work at a particular job (or for a particular employer), so if an owner cut salaries too deeply, his players might opt for their best alternatives.

If owners were constrained in trimming salaries, they could have limited the number of players permissible on a roster. This tactic, of course, was restricted by the necessity of fielding five starters and at least a handful of substitutes, lest quality of play suffer. In addition, a tight limit on roster size typically meant cutting lower-paid players, resulting in minimal savings. Having a limit on the number of players, however, not only prevented owners of wealthy teams from stockpiling too many players; it also helped owners resolve the problem of being the first to trim a roster in times of financial duress and suffer from a competitive disadvantage from having done so.

Players generally benefited when there were rival leagues, such as baseball's Mexican League and football's All-America Football Conference (AAFC) during the late 1940s. Just a little competition could spur owners to suddenly find the means to significantly boost salaries even with a reserve clause. I discuss later how competition from non-NBA teams affected salaries.

Players could respond to the owners' actions by forming a union. While players clearly differed in productivity and popularity with fans, precluding the desirability and the feasibility of a uniform salary, they could create a monopoly of labor by uniting. By doing so, their negotiating strength would increase. When owners possessing monopsony power confronted a monopoly of players, the outcome would be indeterminable and would depend upon the bargaining strength of the opposing entities. This indeterminacy is one of the reasons negotiations between players and owners are often protracted and acrimonious.

Despite low pay relative to other professional athletes and a grueling travel regime, BAA/NBA players were hesitant to make significant demands until the mid-1950s.

Competitive Balance

Today's NBA fans take the league's superiority for granted. America's "Dream Team" of 1992, comprised of NBA stars, destroyed international competition in the Olympics. Although subsequent U.S. Olympic teams have suffered misadventures in international competition, no one seriously doubts the superiority of the NBA's best teams (in part, because they are comprised of the world's best players and not just the best American players). But the league's superiority wasn't always so pronounced.

In addition to establishing a reputation for having the highest-quality teams, sports leagues also battle the scourge of competitive imbalance. Did the NBA suffer from competitive imbalance, which might have adversely affected profits, as did many professional sports leagues? While sports economists have difficulty estimating the cost from competitive imbalance, the New York Yankees' penchant for running away with pennants during the late 1930s provides an example. The Yankees tended to squelch gate receipts by clinching the pennant early. After the pennant was decided, gate receipts fell for the remaining games.

Although people discuss competitive imbalance, few have a precise definition of the concept. If the New York Yankees were not so successful, then much of the interest in the issue would vanish. People often dislike the Yankees' dominance of baseball, even though such dominance has waned somewhat despite the largest payrolls in the game, because it exemplifies the advantage a team playing in a large market has over, say, the Kansas City Royals. Indeed, the Yankees became the "gold standard" and the reference point for dominance in professional sports.

Sports fans can think of competitive imbalance by looking at the standings at any given time. What is the gap in winning percentages between the top and bottom teams? How many games back are the second-place or the last-place teams? In this era of many divisions with a handful of teams, these numbers are becoming less useful.

Sports economists use the statistical concept of standard deviation to measure competitive imbalance. The idea is simple enough. Suppose you invited some friends over for an exciting evening of flipping coins ("heads you win; tails I win"). You play an eighty-two-game schedule. On any given toss of the coin, you would have a 50 percent likelihood of winning, assuming you are tossing a fair coin and ignoring the highly unlikely event of the coin landing on its side. Over eighty-two tosses you probably would not win exactly forty-one games, but you would have a strong likelihood of winning "around" forty-one games. The standard deviation is a way of measuring the spread around the expected number of wins. For the NBA's current eighty-two-game schedule, the expected standard deviation would be about 4.5. In other words, a range covering one standard deviation would be 36.5 to 45.5 wins (or .445 to .555 in terms of win-loss percentage). Two-thirds of the teams in your coin-flipping league should have records within this range. About 95 percent of the teams would be within two standard deviations of the mean: .390 to .610. This is not too far from actual league standings, so a coin-flipping league approximates a real league.

Not all sports teams are, of course, created equal. When the Los Angeles Lakers play the Toronto Raptors, the odds are rarely even. By comparing the actual standard deviation with the coin-flipping standard deviation (which I will denote as the "idealized standard deviation"), economists can measure the imbalance both within the NBA and across professional sports leagues by calculating the ratio of actual standard deviation to idealized standard deviation.


Excerpted from The Rise of the National Basketball Association by DAVID GEORGE SURDAM Copyright © 2012 by Board of Trustees of the University of Illinois. Excerpted by permission of UNIVERSITY OF ILLINOIS PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author

David George Surdam is an associate professor of economics at the University of Northern Iowa and the author of Wins, Losses, and Empty Seats: How Baseball Outlasted the Great Depression.

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