What are these ‘challenges’ the Thunder face?

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When David Stern visited Oklahoma City on Christmas to open the Thunder’s 2011-12 campaign last season, he didn’t sugarcoat the situation.

“People are saying to Miami, ‘Well, you’re going to have a decision to make with respect to one of your big three.’ And they may say the same thing to Oklahoma City, and that’s a good thing. That means you’ve arrived and you’re out there being competitive.”

Stern essentially was making the statement that the Thunder weren’t going to be able to keep their core under the new collective bargaining agreement. He spoke about “player sharing,” meaning the league’s talent gets passed around as much as the money.

The idea behind the more punitive luxury tax was that it would even the playing field some, limiting big market teams like the Lakers, the Knicks and the Nets from spending large amounts of money to compete.

“The idea that the luxury tax hurts small markets is ludicrous,” Stern said in December. “It may impact a small market that’s a great team and has to raise its payroll. But at the bottom, it’s designed to eliminate the ability of teams to use their economic resources to distort competition.”

Except in the Thunder’s case, it very clearly is hurting them. The new CBA appears to be backfiring as the Lakers are ignoring a future hefty tax bill after acquiring Dwight Howard and the Nets are set to pay some $60 million in penalties in 2015. The system that was supposed to aid teams like the Thunder isn’t at all. We know the situation with James Harden well, and it seems pretty obvious that if the Thunder were located in Los Angeles or New York, Harden would’ve been re-signed months ago. Obviously this situation is kind unique to the new CBA, but it seems that building in the so-called “Thunder Model” may not be the best approach in this new environment.

Stern was asked about teams just paying the tax. And in December, he seemed more than confident nobody would go very far over.

“They could, but they won’t,” he said. “There are going to be very few circumstances where someone is going to go $20 million over to pay $65 million in total unless they’re sure this is their time and they’re going for it once.”

Something is inherently different in OKC and LA’s situations. And it’s the “challenges” that Sam Presti has talked so much about. The Thunder organization hasn’t shied away from acknowledging the issues facing them in a small market like Oklahoma City. But what are they exactly? I mean, we know OKC doesn’t have as many people in it as Los Angeles, but it’s deeper than that.

David Aldridge of NBA.com laid it out beautifully:

Two, while OKC sells out Chesapeake Energy Arena, and does an excellent job producing revenue in the NBA’s 28th-largest market, it still doesn’t have the financial firewall to protect it that the bigger-market teams do. This is the difference between producing revenue and being profitable.

According to Forbes Magazine’s most recent evaluations of NBA franchise wealth, OKC had the fifth-highest amount of operating income — the club’s earnings before interest, taxes, appreciation and amortization — in the league, at $24.9 million. Only the Knicks ($74.9 million), Bulls ($59.4 million), Cavaliers ($32.9 million) and Heat ($26 million) did better. And Forbes rated the Thunder as the NBA’s 15th-most valuable franchise, worth an estimated $348 million. At first glance, it’s all good.

But OKC has limits to what it can produce. With a base of tickets holders that is the second-smallest of any city in the country with a pro sports team, the Thunder cannot gouge its fans for season tickets, or charge its corporate sponsors exponentially more year to year for suites or signage.

What continues to separate the NBA’s haves from its have-nots is the gaping, Grand Canyon-like separation in each team’s local television deals.

The Lakers’ new deal with Time Warner that will create two local TV channels in L.A. — one in English, one in Spanish — that will broadcast Lakers games for the next two decades is, again, worth $4 billion over the next 20 years. Four billion. The entire league generated about $4 billion in revenue this past season. That is $200 million per year that the Lakers will get just for their local TV deal, 10 times more money than the Thunder are believed to get from their local TV deal.

It’s a sobering reality. The Thunder have two things working against them right now: Their inherent challenges of operating in a small market, and the league’s system.  Strike one, strike two.

Behind some fairly brilliant management and a hefty amount of luck though, the Thunder are still thriving. They nearly won an NBA championship last season and will positioned for another strong run at one this season. And whatever happens in the future with Harden, OKC still possesses a core of Kevin Durant, Russell Westbrook and Serge Ibaka, which is definitely enough to remain atop the NBA contender pile.

But it’s the TV dollars the Thunder don’t have. And while you may succeed in gate revenue and merchandise, the gap in TV money isn’t close. Yeah, there’s revenue sharing, but the Thunder are in another unique place there. The way the model is built the smallest revenue producing teams are supposed to receive around triple of what they got under the last CBA, something around $16 million annually. Except again, the Thunder weren’t a have-not this season. It’s likely the Thunder actually might be payers in revenue sharing because of their success.

Doesn’t feel right, does it?

And it doesn’t feel right that this new system that was supposed to even things out and give franchises like the Thunder a level playing field is actually doing the opposite. The big boys appear to remain unaffected by the more punitive tax while the Thunder are extremely aware of it and are operating entirely under the cloud of it. If anything, it seems that the new system has might strengthen the league’s middle class, but create an even wider gap between the top dogs and the smallest markets.

Again, let’s not act like this is some woe-is-me situation. The Thunder have it very good. VERY VERY good. This is a wonderful organization that has built a sustainable model of long-term success. The Thunder aren’t a flash-in-the-pan team that made a miracle run. They’re positioned to be in the championship conversation for many years to come. The system might be biased and the Thunder absolutely have different challenges to overcome, but clearly, nothing is insurmountable.

One last quote from Stern from December: “You’ll see. It’s beauty. It’s all going to happen and then we’ll look back at it rather than prejudge it. I happen to think it’s going to be good for all of us, and it’s going to hit small market and large market teams alike.”

The new luxury tax is an equal opportunity system, at least in theory. But we all know the NBA is a class system. It’s the way it’s always been and it’s the way it’ll always be. No system or structure will ever change that.