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The NBA and “the greatest deal known to man”
February 15, 2014 Successes & Messes

When we think of our worst negotiation disasters, they tend to be the blunders that are freshest in our minds. But what about mistakes whose repercussions accumulate over years, even decades? Those are typically the most significant negotiation messes of all.

An agreement reached in 1976 in the realm of professional basketball illustrates how carelessly negotiated deals can lead to unforeseen losses and long-term headaches.

A short season for the ABA
In 1974, brothers Ozzie and Daniel Silna, Latvian immigrants who were the owners of a thriving New Jersey textile company, purchased the Carolina Cougars, a team in the American Basketball Association (ABA), for $1 million. The ABA had sprung up in 1967 as a scrappy challenger to the National Basketball Association (NBA).

Daniel Silna had been a basketball fanatic since his youth, but he was too small to be a strong player. “I kept saying that if I can’t play, the best thing to do is own a team,” he told Monte Burke of Forbes.

The Silnas moved their team to St. Louis. The renamed Spirits of St. Louis had a decent first season, but in 1976, the NBA began negotiations to buy out the ABA. The NBA acquired four ABA franchises but was uninterested in the remaining three, including the Spirits.

The Silnas rejected a $3 million offer from the ABA as compensation for folding their team. The brothers had sunk close to that amount on the Spirits and hoped to do better.

A full-court press
The seven ABA team owners met to plan their strategy. Ozzie Silna suggested that any team not taken by the NBA should be granted a one-seventh share of the TV revenues of the four teams that were being admitted, namely the Indiana Pacers, the Denver Nuggets, the San Antonio Spurs, and the New York Nets. All the owners agreed, Daniel Silna told Burke. For various reasons, however, only the Silnas made this demand.

Eager to wrap up the merger, the ABA agreed to the Silnas’ terms. The brothers were paid $2.2 million for Spirits players drafted by NBA teams. They were also granted the TV rights they requested, expressed in the contract as “visual media” rights—
crucially, not for a set period of time, but “for as long as the NBA or its successors continues in its existence,” as the contract was worded.

At the time, the NBA had little to lose from this promise. Its regular-season games were rarely seen on TV; playoff games were broadcast on tape delay after the nightly news.

Getting in the zone
After three years, the four former ABA teams began earning revenues from TV broadcasts and sharing their profits with the Silnas. The brothers received about $200,000 in 1979.

Then, in the 1980s and 1990s, everything changed. First came Magic Johnson and Larry Bird. Then Michael Jordan. Interest in pro basketball exploded, and revenue from the NBA’s TV rights skyrocketed. In 1997, the NBA negotiated a $2.6 billion deal with NBC and Turner Broadcasting. In 2002, the league signed a $4.6 billion contract with ABC/ESPN and TNT.

By 2007, the Silnas had raked in an estimated $180 million in royalty payments. They have been paid about $57 million since 2010 and are expected to make another $95 million from 2014 to 2019.

As if their TV deal weren’t enough of a cash cow, the brothers took the NBA to court in 2012, arguing that the “visual media” stipulated in their contract should include international broadcasts, Internet rights, and the NBA cable network. A federal judge agreed, ruling that the NBA would have to pay incremental revenues from recent years and increase future royalties. No wonder the president of the New York Knicks called the Silnas’ agreement “the greatest deal known to man.”

Unmotivated players
The NBA has tried repeatedly to buy the Silnas out of their contract, with no success. This past November, talks started again. Given the Silnas’ lack of motivation to settle, agreement seems unlikely. As Daniel Silna has said, “I believe our contractual rights are solid.”

Losing strategies from the NBA’s playbook

¦ Use imprecise language. The NBA might not have been able to foresee its future success or the invention of the Internet, but it and its lawyers should have known to replace the vague phrase “visual media” with the specific word “television.” In contracts, precision is often essential.

¦ Agree to a long time horizon (such as forever). There is rarely a good reason to sign a contract that lasts in perpetuity. A finite contract gives you opportunities to renegotiate better terms or move on in the face of unforeseen future events.

¦ Make the same mistake twice. In 1982, the NBA offered to buy the Silnas out of their contract for $5 million paid over five years. The Silnas countered with $8 million over eight years. The NBA refused. Its teams have paid the brothers well over $200 million since then.

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