James Dolan, the New York Knicks, and a lesson in economic monopolies and markets

Key Points
  • The Brooklyn Nets' signing of top NBA players Kevin Durant and Kyrie Irving, as well as other major moves to reshape the balance of power in the league, are seen as a blow to the future of the New York Knicks.
  • Madison Square Garden Company CEO James Dolan's heavy hand with the team has been questioned as NBA players assert more power.
  • MSG Company has performed well financially, including ticket sales and investment return on its publicly traded stock.
New York Knicks owner James Dolan reacts to Kevin Knox #20 of the Knicks falling at his feet as he watches an NBA basketball game against the Toronto Raptors from his front row seat on March 28, 2019 at Madison Square Garden Center in New York City. Raptors won 117-92.
Paul Bereswill | Getty Images Sport | Getty Images

The U.S. labor market is hot, with unemployment at a multi-decade low and companies struggling to find individuals to fill skilled job positions. The recent free agent, and sign-and-trade, frenzy in the National Basketball Association is like a hyped-up version of the job seeker's market all over the nation. And on the other side of that equation, having trouble signing top talent, has been James Dolan, executive chairman and CEO of the Knicks' parent organization, the Madison Square Garden Company.

New York Knicks fans love to hate Dolan. Business leaders should take a different lesson from Dolan's ups and downs over the years with the team — less emotional, more focused on how to balance respect and authority, as well as financial duty. For years, the Knicks have been largely non-competitive in the NBA while still managing to enjoy the bright lights of Broadway and play in Madison Square Garden, "The World's Most Famous Arena." And tickets to Knicks games still command a premium. That's the good news.

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It was the recent signings of NBA stars Kevin Durant and Kyrie Irving by the Brooklyn Nets — who play a mere 20 minutes away from MSG in Brooklyn and had reportedly been high on the Knicks' off-season list — as well as the Knicks' lack of major free agent signings as other teams rearranged the championship contender map, that offered a heads-up for leaders of organizations in competitive markets.

Some press reports indicated that among the reasons high-profile free-agent players chose to skip the Knicks was Dolan. The Knicks are not saying anything. The team declined to comment for this article. They have made moves this offseason, announcing the addition of five free agents on Tuesday, and reportedly in the running for another significant NBA player, though these are seen as "plan B" moves rather than big wins.

Leadership at the top

Recent NBA player decisions have economic roots, according to Marc Edelman, a professor at the Baruch College Zicklin School of Business who has written widely on the sports industry and serves as a sports consultant.

"Most sports teams enjoy territorial monopolies from a business perspective. When there is a monopoly, a business can operate inefficiently. The New York Knicks cannot operate as a monopoly because they face local competition from the Brooklyn Nets," said Edelman. "In this unique sports market featuring competition rather than monopoly, leadership at the top becomes substantially more important."

Dolan, who inherited the team from his father Charles, is known for meddling in the Knicks basketball decisions. Among the negative attention Dolan has generated: trying to boss around Phil Jackson during his first few days in charge of the Knicks when the famed coach took over in 2014; forcing the former face-of-the-franchise Carmelo Anthony to apologize to a heckler following a loss, and banning a team legend, Charles Oakley, who played a key role in one of the Knicks' last serious runs at the NBA title in the 1990s.

"They know what's going on. They have more awareness these days, and they can make up their minds on their own," Oakley, who has a lawsuit pending against Dolan, said of current NBA players in a recent New York Times article.

"When he decided to attack a New York Basketball icon, Dolan had to understand, at least for certain players and certain fans drawn to basketball in the New York area, that they had another choice," Edelman said. "If the Bulls ownership group were to have Scottie Pippen thrown out of an arena, they would alienate a significant portion of their fan base. However, they would not have to worry about their fans fleeing to Milwaukee, which would entail travel of over an hour."

Especially in a market where there is not a monopoly, Dolan needs to understand from an economic point of view that he has to be likeable or else potential consumers may choose to purchase from the Nets ownership group.
Marc Edelman
Baruch College professor of law and sports business consultant

Whether a mom-and-pop store, a Fortune 500 company, or the most valuable basketball team in the world, the buck stops at the top, and lack of ability to recruit top talent may ultimately influence won/loss records and ticket sales.

"In this situation, Dolan is not just a leader, he is the owner. Individuals and consumers throughout time have chosen not to engage in business interactions because of dislike for an owner or seller. (Dolan) is the face/chief salesperson for the New York Knicks. Especially in a market where there is not a monopoly, Dolan needs to understand from an economic point of view that he has to be likeable or else potential consumers may choose to purchase from the Nets ownership group," Edelman said.

Knicks' organization instability has not helped: There have been 10 coaches since Jeff Van Gundy left in 2001, and several general managers.

Meanwhile, there is optimism from the Brooklyn Nets that the recent signings will result in record revenue. After the league's moratorium on discussing free agency ended Monday, team owner Mikhail Prokhorov sent an email saying that he expects the team to "surpass our highest revenue marks in franchise history this year."

Meanwhile, Wall Street has been worrying that the short-term future of the Knicks includes less financial leverage over the public. Missing out on the superstars available in free agency means less ability to increase Knicks viewership, which could have increased revenue.

BTIG analysts estimated in May (before the free agent news) that if the Knicks had built a team capable of competing for an NBA championship, it would have an annual revenue impact of $79 million for MSG Networks. Additionally, BTIG analyst Brandon Ross noted that the Knicks could have raised ticket prices, as well as bumped up its revenue from sponsorships.

However, MSG economics don't rest on any single season: a number of MSG revenue streams are contractual and multi-year: local and national media rights deals, as well as a significant portion of sponsorship and MSG arena suite revenue. And the Knicks continue to be among the NBA's top ticket sellers, ranking in the top 10 among NBA franchises every year in the past decade — though the team's rank has slipped. The Knicks were ninth among teams in ticket sales in the 2018 and 2019 seasons, after having been as high as No. 3 overall in the past decade.

Dolan's financial hand has been strong

Whether Dolan will heed the lesson remains an open question. Even with all of the criticism from fans and the press — Dolan has had a very frosty relationship with some members of the New York sports media — his leadership has produced in another important way up to this point: the financial performance of the Knicks' parent company.

The Knicks are part of the larger organization, the Madison Square Garden Company, also led by Dolan. Among its other holdings are the New York Rangers, the Knicks and Rangers minor league affiliates, Madison Square Garden (the arena itself), and several other holdings including prominent theaters and nightclubs. Although the portfolio is diverse, the Knicks — which Forbes values at $4 billion — are the centerpiece.

Under Dolan's leadership, the company has performed well. Since a 2015 spinoff from its television assets, the new Madison Square Garden Company is up nearly 70%. Even though performance on and off the court has been messy for the Knicks, Dolan has made both himself and his investors money.

(The other part of the spun-off enterprise, MSG Networks, has not done nearly as well, with a five-year return of roughly 11%, according to CNBC data as of June 10 (its shares also took a small hit on the day of the recent Nets' signings.)

"The value of the franchise transcends the team performance," said Brett Harriss, a Gabelli & Company analyst who covers Madison Square Garden.

The Knicks also are only one of seven teams that play on MSG Networks.

The New York Rangers, while not winning a Stanley Cup since 1994, last made the Cup in 2014 (the Knicks last made the playoffs in 2013, which was the team's last winning season). The Rangers have been seen as a relatively well-run organization in recent years, with a fan base more supportive — or at least less negative — when it comes to Dolan. The Rangers did not have winning campaigns in the past two seasons, but recently made a major free agent signing with Columbus Blue Jackets winger Artemi Panarin in a $81 million deal.

Lack of a monopoly over the best talent in a market is offset by another key economic concept that has worked to MSG"s advantage as a company: supply and demand.

"The number of sports teams are fixed, while the number of prospective buyers has gone up as well," Harriss said. "The value of television deals also has continued to increase dramatically over the past 10 years and has really been driving the values of franchises."

Dolan, for all his heavy-handedness with this marquee NBA franchise, has benefitted from these trends and been adept at handling the business.

The Knicks ranked in the top three in the NBA for ticket sales in the 2017-2018 season, according to its most recent 10-K annual report, and that has been the case in every year since MSG was spun off from Cablevision in 2010.

"From a capital allocation perspective, the company has done a decent job," the Gabelli analyst said.

The recent assertiveness of NBA players in pressing for trades and putting together their own deals in conjunction with on-court peers — as Kawhi Leonard just pulled off in a move to the Los Angeles Clippers with Paul George — could be a sea change for the future of the NBA talent market, and just how much power traditional management has over moves.

As NBA commissioner Adam Silver recently said in a telling comment to TMZ, the league has for years been moving away from using the term "owner."

Correction: The stock performance of MSG Networks over the past five-year period is roughly 11%, according to CNBC data. An earlier version of this story misstated the stock's return.