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Tuesday, October 11, 2011

The Real Deal About the NBA Lockout

In a February 27, 2011 article, I predicted that there would be "a lockout that continues until the owners and players agree to fundamentally restructure the league's failing business model." That is all you really need to know about the NBA lockout in general--the specific details will be filled in once the lockout is over, which will happen after the players eventually give in and accept the reality that the owners will do whatever it takes to fix the NBA's broken business model.

Much of the mainstream media coverage of the lockout has been pathetic and misinformed. Chris Sheridan gained some credibility for himself by leaving ESPN but then he immediately squandered it by trying to draw attention to his new website with the absurd assertion that the lockout would be settled quickly. Sheridan prides himself on being an NBA insider but if he really understood the inner workings of the league and/or had the well-placed contacts he brags about having then he would have never misled his readers into believing that the lockout would be settled quickly.

Some "stat gurus" and some fools like Henry Abbott assert that the NBA's real problem is that the supposedly incompetent owners keep overpaying players and that instead of asking the players to accept a smaller percentage of the league's revenues the owners should simply run their teams more intelligently. This way of thinking betrays a fundamental misunderstanding of how the NBA works specifically and of how business works in general. Microsoft and Apple would each like to drive the other out of business or at least grab the lion's share of the marketplaces over which they are competing--but the 30 NBA teams will only achieve maximum financial health if the league itself is financially healthy; if a few teams drive most of the teams out of business the league will not be more powerful or wealthier. It is easy to say that owners should not overpay players but the NBA's current financial system all but ensures that players will in fact be overpaid: long-term guaranteed contracts for depreciating assets--and players who are subject to age, injury and possibly decreasing motivation after becoming set for life are most certainly depreciating assets--are standard operating procedure in the NBA; in contrast, the signing bonus is the only guaranteed money in an NFL contract, meaning that NFL players must stay healthy and productive in order to get paid.

If NBA teams actually did what Abbott and some "stat gurus" suggest--namely, collectively stop offering huge contracts to so many players--then the Players Association would file a lawsuit alleging collusion, and, based on the current NBA business model, the players would undoubtedly win such a suit: the precedent has been set for contracts to steadily increase and if the owners unilaterally act to prevent that from happening without signing a new CBA with the players then the owners would in fact be guilty of collusion.

Contrary to what Abbott and some others have asserted, it is irrelevant how much money the NBA owners may make in other businesses, just like it is irrelevant how much money many NBA players make via endorsements; the NBA owners would be wrong to ask LeBron James to take a pay cut just because James also receives money from Nike and the players are wrong to suggest that because NBA owners have other revenue streams it is OK that several teams are losing money. Can you name another business in which the employees receive 57% of the revenues? That is a very unusual deal, particularly considering that several franchises are losing money.

Owning a team represents a significant investment and owners should have the opportunity to get a return on that investment. If the players think that the owners are so easily replaceable then the players should put their own capital at risk, build 30 arenas, negotiate television deals and establish their own league. I say that half in jest because any logical person realizes that this is an absurd proposition but if it is true that "stat guru" Dave Berri has seriously suggested this then perhaps he should be the first commissioner of this hypothetical league and thereby subject his unfounded theories to a real world test. It is certainly true that the NBA players are very talented and they deserve to be well compensated for their talents but without the infrastructure provided by the owners the players would be playing in the And One Mix Tape Tour (or whatever it is called now).

Several decades ago, the various sports leagues and team owners had too much power; men like Curt Flood and Spencer Haywood sacrificed a lot to enable players to have more control over their lives--but in recent years the pendulum has swung too far in the other direction: the NBA cannot survive a scenario in which star players collude to leave good, solid franchises in order to build a handful of super teams. Players should of course have the right to become free agents after a certain term of service but the NBA should be set up to reward stability and to give well-run franchises the opportunity to retain the star players that they developed. In other words, if someone wants to leave the Clippers he should be able to do so but it should not be quite so easy to leave professional organizations like the Cavaliers, the Nuggets or the Jazz; it would not be a bad thing for the NBA if someone bought the Clippers from Donald Sterling but if it turns out that it is impossible to keep a star in Cleveland, Denver, Utah (and possibly New Orleans and Orlando) then the NBA will rapidly shrink from a 30 team national league to a five team league that is only followed regionally.

High profile, high paying careers often require certain sacrifices. Doctors and lawyers work long hours with high levels of stress; other jobs necessitate frequent travel or backbreaking physical labor. NBA players earn a lot of money and they receive other perks but they should understand the sacrifices they must make to keep those jobs: in addition to the obvious and expected mental and physical demands resulting from training, from traveling and from playing a long season the players have to balance their individual desires against what is good for the league overall. In other words, total unrestricted free agency with no salary cap may seem like a dream scenario for players (and their agents) but it would kill the NBA by concentrating all of the sport's stars on a handful of teams (I know that the players are not asking for total unrestricted free agency but my point is that granting the players most or all of the individual "rights" that they think they are entitled to would actually destroy the sport and thus not serve their best interests at all). Yes, the average person can give two weeks notice and go to work for another employer but the average person also does not receive the guaranteed salary (and numerous perks) that come with being an NBA player. If any player thinks that the NBA's proposal for a new business model is simply too onerous then that player is free to choose another less glamorous profession or to play in another league whose business model better suits him--but until the players collectively understand that they must work with the owners to keep the NBA afloat the lockout will not end.

It is funny--and yet sad--that instead of discussing the substantive issues mentioned above we witnessed a parade of highly paid TV and print "journalists" breathlessly recounting the confrontation that allegedly happened recently between David Stern and Dwyane Wade. I have no idea if Stern wagged his finger at Wade or if Wade responded by yelling at Stern but the idea that Wade earned some kind of "street cred" in that encounter is as ludicrous as the idea that Wade is a better player than LeBron James (a myth pumped up by many of the same "journalists" who are now betraying their complete lack of understanding regarding the NBA lockout). Are we supposed to believe that Wade's next move will be pulling out a gun and forcing Stern to give the players what they want? Will the lockout be settled based on who has the most "street cred"? On the court, I'll take Wade over Stern every day of the week but in a boardroom the matchup is just as lopsided in the other direction, something that Wade will have plenty of time to ponder as Stern and the owners refrain from paying Wade and the other players for an extended period of time.

No matter what Henry Abbott, the "stat gurus" or Chris Sheridan say, the lockout will continue until the players consent to a fundamental restructuring of the NBA's business model--and the players have likely passed up the best offer they will receive; subsequent offers will be reduced by whatever amount of revenue the owners lose from cancelled games, starting with the first two weeks of the regular season that were officially wiped out just a few hours ago. Commissioner Stern stated all of this very clearly a while ago but apparently the players--and many media members--simply were not listening. Two other points are worth keeping in mind: (1) the previous lockout ended when Commissioner Stern stated that if the players did not immediately accept the offer on the table then he would not only cancel the rest of the 1998-99 season but that in the 1999-00 season the league would hire replacement players; (2) Commissioner Stern has stated that, unlike in 1998-99, he does not plan to repeatedly cancel games in small chunks but that at a certain (publicly unstated) date he will simply cancel the remainder of the season--meaning that players could rapidly go from losing one or two paychecks to losing an entire year's worth of paychecks (that amounts to roughly $15.5 million for Miami's "Mr. Street Cred," which is a lot of money to pay in exchange for the short-lived satisfaction derived from yelling at Commissioner Stern).

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posted by David Friedman @ 4:30 AM

29 comments

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29 Comments:

At Tuesday, October 11, 2011 7:29:00 PM, Anonymous boyer said...

David, I guess I'm just not buying it or seeing that this is the players' fault. You're usually right on nba matters, so please help me to better understand.

Stern's acting like a tyrant and won't cut a deal if he doesn't get his way. I think to have a lockout is ridiculous. The games should go on. This is just stupid, and that's Stern's doing.

The last CBA was indicated as a victory for the owners, and now that the league is as successful as ever, why are so many teams supposedly losing money? It just doesn't make sense. Even with the large salaries, there are lots of generated revenues. Where is this money going? And why don't the owners let everyone see their books, so we can all see if they're telling the truth about their losses? It just doesn't add up. If they're telling the truth, then show us the evidence, they have nothing to fear then.

The nba has never been about parity, and this works for the nba. There's only 1 Kobe, 1 Howard, etc. It's a player's league. I don't know if all this lockout stuff is mainly about parity or not, too hard to tell what's really going on. The players are already giving up a lot as compared to the last CBA. The changes the owners wanted were drastic, what do they expect if the players aren't accepting them, and why should the players accept the deal? I see what you're saying about all the other perks, which I agree with. The players are spoiled some, as are the owners.

But, what should we have: a few players making megabucks and everyone else making the minimum, or a sliding scale? I guess I don't know, but it seems like the stars sacrifice the most right now. I mean, if Kobe really made $70mil/year, that's more than 1/2 the teams probably. How could that work? But, that's what he's worth, and he only gets about 1/3 of that.

I'm not sure exactly what happened with wade and stern, but I think both were equally ridiculous.

The players are already conceding a lot. Why was this model working before, and suddenly it's not, even though the league is doing as well as ever? I don't get it.

Does some of this have to do with the heat fiasco, melo, etc., last year? Probably. Are owners scared of that? The league could afford to dump a few teams, that would help some. Contract lengths should be shortened some, sure, and some other measures could be taken, that would help a lot. But, to have a limit on a player's conract is ridiculous. There shouldn't be max deals. Players should be allowed to make as much as a team is willing to spend on them. But, that's what the owners got last time to help them out a lot, but I guess it's not enough. I mean, how much is going to be enough for the owners? But, that's not the real issue here, I think. It seems it's more to do an escape clause for stupid decisions by owners/GMs. They don't want to give out long guaranteed contracts, which I guess is good. I think the players would go along with some of this stuff, if the owners would work with the players on the BRI some. It shouldn't be this hard. The nfl got things straightened away fairly quickly. Get somebody in here for the nba, and get a deal done already.

 
At Tuesday, October 11, 2011 8:01:00 PM, Blogger David Friedman said...

Boyer:

My take may seem harsh but simply compare what I have said and what I am saying to what actually has happened and it is obvious that I understand this situation a lot better than Abbott, Sheridan et. al. The bottom line is that my predictions have been right and my analysis is in line with what has happened and what is happening (and I am confident that what will subsequently happen will be along the lines of what I have predicted). One reader called this article "arrogant" but what matters--or what should matter--is whether or not my analysis is logical and correct. Abbott and Sheridan are not only more arrogant in their presentations/dismissive of other points of view than I am but--most importantly--they are wrong!

I am not assigning blame or saying whose "fault" the lockout is as much as I am simply laying out the reality of the situation. I predicted a long lockout back in February 2011 for the reasons I stated in my previous article on this subject and so far everything has played out exactly as I predicted (and much differently from what Sheridan predicted and what Abbott/the "stat gurus" assert should have happened based on their take on the league's economic situation). My final prediction about this matter is that the lockout will not end until the players essentially capitulate to a major restructuring of the league's business model; I am not sure when this will happen but I do not think that it will be soon. If I am right, games will not be played until the league's financial structure is fundamentally changed. Sheridan has already been proven wrong--the season will not start on time despite his repeated assurances otherwise--and Abbott et. al will be proven wrong if the eventual deal results in major changes (Abbott et. al insist that the parties are not far apart and that a deal is within reach even if it will require some "face saving" p.r. so that both sides can say they have won).

Stern is not "acting like a tyrant." He works for the owners, many of whom are losing money. When it costs owners less to lock out their employees than to run their business at a loss then something is wrong.

People who blame the problem on stupid owners are wrong. Yes, there are some stupid owners but the Spurs are a model franchise that struggles to make money despite being run extremely well and despite perennially contending for titles.

Like most financial figures, the NBA's profit and loss numbers can be sliced and diced in various ways but the fact that the owners are willing to lose the revenues from regular season games rather than continue to operate with a broken system is quite telling.

 
At Tuesday, October 11, 2011 8:04:00 PM, Blogger David Friedman said...

Boyer:

The players are not automatically and perpetually entitled to receive at least as much revenue as they received in the previous deal plus having guaranteed contracts, etc. The league's current business model inevitably results in rising salaries even when players are not productive and the various exceptions/salary cap loopholes resulted in last year's LeBron/Melo/Dwill fiascoes plus the looming threat of Howard and Paul fleeing small market teams.

The league is one entity with 30 franchises and to be successful it has to operate in a way that is fair to all 30 franchises (and the players).

No one player is irreplaceable or is worth $70 million/year; legends retire and new legends replace them.

The NFL has a completely different financial structure than the NBA and that is why it was predictable that the NFL lockout would be easier to settle; to cite just three differences, the NFL has much larger revenues than the NBA, the NFL players never received (or demanded) 57% of those revenues and the NFL does not have guaranteed player contracts. It is easy to say that various NBA players are overpaid and the owners should stop overpaying them but when the contract structures stipulate long term, guaranteed deals with automatic increases then just about everyone who does not have Kobe's work ethic will eventually be overpaid, because their performances and durability will not keep pace with the terms of their contracts. Frankly, even Kobe may end up being overpaid by the end of his current deal, because he is not likely to be worth over $20 million per year by the time he reaches his mid-thirties, though in his case one could argue that those last payments are a lifetime achievement award, something that could not be said of the final, bloated years on Gilbert Arenas' contract or the final, bloated years of many other players' contracts; even if a player is not overpaid at the start of his deal he is often overpaid by the end of his long term, guaranteed contract.

 
At Tuesday, October 11, 2011 11:56:00 PM, Anonymous boyer said...

Ok, I see what you're saying. I'm just really confused as to why the last CBA in 1999 was a win for the owners, and now 12 years later, the league is doing extremely well in revenues earned this past year, and the nba has become a failing business model. I just don't understand it. Was the nba business model worse before 1999 as opposed to immediately right after 1999?

Where is all this money going? The spurs are pulling in a lot more money than the players/coaches salaries. They sellout every game. Where is all this money going? Is reducing the player's salaries really going to help that much and/or is there something else that can be done? Let's just say the average team salary is $65mil. What is an acceptable average team salary then? $55mil? $50mil? Ok, the guaranteed contracts probably need to change. Have the revenue sharing and luxury tax, sure, that's all good. But, should there be a limit on how much a team wants to spend on its players?

I understand that the players aren't entitled to X amount of dollars, but the current deal offered by Stern is already substantially worse as opposed to the last CBA. If they players accepted it, it would be a major change. It's unfortunate that even more major changes have to be accepted. But, I don't understand the nba's business model. Have they been losing money for years and lots of it, or is this very recent? And why won't they share their books with everyone? That seems very fishy to me. So, if the players split it 50-50, will it get done, or is there a lot more to it? Do the owners actually save money or not lose money by not playing the games?

 
At Wednesday, October 12, 2011 2:40:00 AM, Anonymous Yogi said...

Thank you David - again, you a voice of sanity when almost all the journalists are pandering to the players and to their own economic ignorance.

I find the players attitude insufferable and entitled and I can't wait for them to come to their senses. Contracts have to be shorter, smaller and non-guaranteed. Then perhaps we'll have a league worth watching, instead of a collection of uncoachable ego-maniacs with a basketball, which is the case for many teams.

 
At Wednesday, October 12, 2011 3:20:00 AM, Anonymous Yogi said...

I just read your post from February predicting the lockout - pretty amazing that you thought about this scenario back then.

Interestingly, the players have said that they have been preparing for this scenario for about 2 years - even before the Decision. I am getting the feeling that both sides have understood for quite some time that the current model is inevitable and must change and that the transition will not be easy.

Still, I don't blame people for not predicting the lockout - it's like predicting the end of the world for most of the journalists involved - you just don't want to believe that it will happen. I know that I couldn't believe it either, until it actually did happen. Perhaps most of us are guilty of a bad case of wishful thinking...

 
At Wednesday, October 12, 2011 2:55:00 PM, Blogger David Friedman said...

Boyer:

Regardless of what kind of deal the 1999 CBA was considered to be at that time, it is clear that the NBA's current business model is not working--many teams are losing money and stars are fleeing "small market" teams (Cleveland, Denver, Utah and possibly Orlando and New Orleans), threatening the overall financial health and competitive balance of the league.

Revenues and profits are not the same thing; the NBA's revenues are up but so are the NBA's expenses and the league was locked into a deal that paid the players 57% of the revenues in the form of long, guaranteed contracts. There have been--and probably still are--many players who were not even in the league who were still collecting big paychecks (for instance, a few years ago Shawn Kemp made $15 million even though he was no longer an active player).

The NBA is under no obligation to open up its books to the public; the league presented all of the financial data to the Players Association quite some time ago and the Players Association acknowledged that the league lost money--though the PA disputed the amount of the losses--but essentially said that this is the owners' problem, not the players' problem. The owners' natural response has been that they will lose less money by not having any games than they will by continuing to play games under a broken system.

According to data published by Forbes earlier this year, the Spurs are the ninth most valuable franchise in the NBA and yet they lost $4.7 million in the 2009-10 season; the Spurs' major expenses were stadium debt and player salaries. The Spurs may be the best run franchise in pro sports--certainly they are right up there with the Patriots and a handful of others--and if they cannot make a profit in the NBA then it is obvious that the NBA's business model is broken.

It is fallacious to assert that the players have given ground while the owners are being stubborn. The NBA's business model is broken and the owners have made it clear that it has to be restructured; until the players understand and accept this reality they will receive no paychecks, which is a lot worse than receiving 45% or 47% of the NBA's revenues in the context of a new business model.

 
At Wednesday, October 12, 2011 3:02:00 PM, Blogger David Friedman said...

Yogi:

I am not blaming anyone just for making an incorrect prediction; I have certainly made incorrect predictions before and will undoubtedly make incorrect predictions in the future (though I have been right much more often than I have been wrong)--but Sheridan was not just wrong, his take was completely divorced from reality even though he said that it was based on the contacts he has forged as an NBA insider. He just seems to have no clue what he is talking about and then after he was proven wrong he refused to admit his mistake but instead blamed the lawyers, as if the owners and players were ready to make a deal but the "evil" lawyers stopped them.

Abbott is continuously wrong about many issues because he has completely bought into not just "stat guru" thinking in general but the thinking of a particular "stat guru" who is not even well regarded by other "stat gurus." Abbott thus believes that most owners are idiots who don't know how to run their teams, that coaching does not matter and that field goal percentages on shots taken with an arbitrarily small amount of time left in the game are inordinately significant. When one's "ideology" is that mixed up it is inevitable that one will reach bizarre conclusions--and this explains much of what Abbott says about Kobe Bryant, LeBron James, the lockout and just about any other NBA subject.

 
At Wednesday, October 12, 2011 3:21:00 PM, Anonymous Anonymous said...

Sharp

This article gave me a different perspective on the lockout.

It also reminds me of a passage from Sam Smith's book "The Second Coming," about Michael Jordan's return from baseball. This is from a part of the book discussing Jerry Reinsdorf's contract negotiations with Horace Grant prior to Grant leaving for the Orlando Magic.

"[Reinsdorf] had always bristled about the insanity of sports economics and the partnerships he was forced into, such as his uneasy alliance with the other NBA owners, whom he essentially had to sue to keep his television deal with superstation WGN. He couldn't believe that Charlotte, for instance, had given Larry Johnson an extension to make $84 million over twelve years, even when he had several years left on his current contract. And now, such deals were becoming, in effect, 'market value.' Reinsdorf wondered why he should have to pay whatever his dumbest competitor paid."

That deal meant LJ would make $7 million per season, which was $3 million more per season than Michael Jordan was paid. Obviously the players need a bit of a reality check after 12 years of inflating salaries. But at the same time, some of these owners have dug their own graves out of incompetence (i.e. George Shinn).

 
At Wednesday, October 12, 2011 4:28:00 PM, Anonymous boyer said...

Really, I am just really annoyed and frustrated that possibly an entire season will be lost. Preseason's one thing, even 2 weeks is one thing, but after that, come on. I just don't agree with having a lockout. Just get it done. The owners finally backed off some of their ridiculous offers, and now their offer is somewhat reasonable, players need to take it. With the current last offer, both sides will lose money if it's not accepted immediately.

I understand everything you're saying. And I don't like seeing the some of the stars of the game leaving for supposed better chances of winning or playing in a 'better city.' But, it's their choice, isn't it? Melo thought denver would be decline and couldn't resign a lot of his teammates in the next few years. I don't like how he handled it, but he's going to NY, understandable, and playing with another AS, understandable. It's not like he held denver under hostage like Lebron did to cleveland, and denver got several guys in return and were actually better after the trade.

And what about Paul? He could've already left NO, but resigned with them a few years ago, and then their team/org. is in shambles. I mean, we can blame him for not realizing this and now demanding a trade after resigning with NO, but then should we also blame him for eventually leaving NO as well? I just don't agree with that. I"m not that high on Paul as most people are, and he's not a franchise player, but he's a good player and an AS. NO is a wreck, they don't have an owner, well, I guess it's Stern. Why can't the stars change teams? Role players change teams all the time.

Ok, the current business model isn't working. Does it matter why? No, it doesn't really matter. The owners will always win. Before FA, players really got the shaft. I just don't understand why it's not working. The owners basically got everything they wanted in 1999, and now the system they created is in shambles, and we're supposed to believe it's the players' faults? I mean, maybe the players deserve some blame, but forgive me, it's kind of hard to believe. Sure, players' salaries are always going to be one of the major team expenses, but what about all the other expenses? I just don't understand where all this money is going to. What are the teams spending all their revenue money on other than players' salaries? I guess it doesn't matter now. Whoever you believe, the owners will eventually win, just accept the deal, and then you can actually play. I guess someone like Kobe could end up making $15mil+ in europe, and it's not like he doesn't have that much money right now, it's most of the rest of the league that has to worry about their finances.

The owners created this broken system that they wanted, which is why I can imagine why it's so hard for the players to accept such drastic changes as opposed to the last CBA. It doesn't seem right, but that's the way it is. I hope the players come to their senses and realize they'll be much worse off if they don't accept the current offer.

I always find it humorous when you bash guys like Abbott. Is he really that clueless? When it comes to players and such, it's obvious to see how clueless he is, especailly when he's trying to use advanced stats. But, everything else he talks about, is he really that much misinformed? How did he get to be the top guy for espn nba, and have so many followers?

 
At Wednesday, October 12, 2011 4:53:00 PM, Anonymous Yogi said...

I don't read Sheridan so I can't comment, but Abbot is terrible.

He has a very obvious agenda in nearly everything he writes and it really takes the fun out the entire Truehoop site. I feel like I'm reading a political site instead of reading about sports. It's too bad - I thought he was quite enjoyable before he joined the WWL.

 
At Wednesday, October 12, 2011 5:43:00 PM, Anonymous Anonymous said...

This article seems to lay heavy blame on the players, and lets the owners and the league off the hook. I'm very surprised the Spurs are losing money, but I'd really like to see exactly how that's happening before I can decide. If stadium debt is part of the issue, how is that the players fault?

If a business isn't making money, it should close, cut expenses, or operate at a loss. Maybe there are too many teams in the league if they are in as bad financial shape as they say.

Life is not fair. The Knicks suck, but they still make money. I can see why Utah and Milwaukee are unhappy, but then again, you're Utah and Milwaukee. Deal with it.

A smaller league would hopefully have more competitive games and better coached teams and still generate a lot of interest.

How can the league complain about losing money when the TV contracts, the merchandising sales, ticket prices, go up every year? If no one wanted your product, you couldn't raise prices. The league has extended the season considerably, and now it's a global game, so there's certainly more revenue streams than before.

But some still can't make money? Sterling may not be good for the league because he's more concerned about making money than winning, but I can find a lot of teams that claim to be all about winning and screw up every year despite getting 1st round picks, hiring good coaches, etc.

Some owners have no business running a team, but they can because they have the money - money they made outside of the NBA. In the real business world, they would not stand a chance with an inferior product.

I'm all for making sure the Shawn Kemps and Eddy Currys earn their keep, or receive contracts that reflect their effort, but I'd also like to be sure that the owners and their management are as savvy about basketball as the greatest players in the league.

 
At Thursday, October 13, 2011 1:23:00 AM, Blogger David Friedman said...

Sharp:

The LJ deal you mentioned is somewhat analogous to the deal Atlanta made with Joe Johnson. No one--including the Hawks--thinks that Joe Johnson is better than LeBron James or Dwyane Wade but JJ is Atlanta's best player and sole perennial All-Star; if the Hawks had not offered JJ a max deal then some other team would have done so, leaving the Hawks bereft of their best player and likely relegated to being a .500 team that could neither contend for a title nor sink low enough in the standings to have a realistic chance to get a top five pick. This is precisely one of the things I am talking about when I say that the system is broken; it inherently leads to overpaying players--and not because owners are necessarily stupid. If no one offered perennial All-Star Joe Johnson a max deal then the Players Association would contend that the owners are deliberately colluding to keep salaries down.

There is no denying that some owners are savvier than others; this is true in any profession. However, the idea--propagated by "stat gurus" like Dave Berri and then parroted by fools like Abbott--that the owners collectively are idiots simply betrays a failure to understand how the NBA operates.

 
At Thursday, October 13, 2011 1:38:00 AM, Blogger David Friedman said...

Boyer:

I am not sure why you called the owners' offers "ridiculous." Why is it "ridiculous" to attempt to run the NBA at a profit as opposed to a "loss"? This negotiation process has been falsely characterized by Abbott, Sheridan et. al. as a story about which side is more willing to "compromise" but that is a misinformed take on the situation; the NBA's business model is broken and the owners are insisting that the players accept this reality and sign a new CBA that reflects such an understanding. As I predicted back in February, the lockout will last until the players understand and accept that reality.

LeBron had the right to leave Cleveland and go to Miami. I thought that he should have stayed in Cleveland but I never said he had no right to leave; I criticized him for the way he left and then later I criticized his failures in clutch situations. However, the way that LeBron, Wade and Bosh apparently colluded to team up in Miami directly led to Melo talking his way out of Denver, DWill talking his way out of Utah and, possibly, D. Howard and Chris Paul following suit as well. If it is impossible for "small market" teams to retain the services of their stars then the league will collapse and thus it is necessary to restructure the league's business model to make it more likely/desirable/possible that top players will not all abandon ship the first chance that they have to do so.

The owners did not "create" the current system; the current system was created as a result of collective bargaining and the next system will also be created by collective bargaining. I predicted and still believe that the lockout will last until the players consent to a fundamental restructuring of the league's business model, which means not just changing the revenue split but also altering the salary cap, guaranteed contracts, etc.

I will not publicly speculate about how someone like Abbott attains such a prominent position but, sadly, there is no shortage of examples of people who obtain prominent/prestigious positions in various fields without possessing the relevant skills. Abbott's commentaries about players are generally off base, his take on the lockout is not very realistic and he assembled a roster of bloggers (The True Hoop Network) that is, to say the least, very uneven in quality. Abbott claims to link to/promote only the highest quality writing but that is clearly not the case both in terms of who he promotes and who he refrains from promoting. Josh Tucker (from Silver Screen and Roll) has publicly discussed how difficult he found it to work with Abbott because Abbott pretty much wanted to dictate what Tucker could and could not say; perhaps that glimpse behind the curtain explains why Abbott is attracted to (and attracts) subpar writers--a truly great writer is not going to want a hack telling him what to say.

 
At Thursday, October 13, 2011 1:44:00 AM, Blogger David Friedman said...

Yogi:

Sheridan was an AP beat writer for years before joining ESPN and he recently left ESPN to run his own site. I have never been a big follower of his nor was I ever particularly impressed by his work but when he departed ESPN I held out (brief) hope that perhaps he would serve as an independent voice--but instead he turned his fledgling site into a bizarre showcase for his nonsensical beliefs that (1) the lockout would end quickly and (2) the only reason that the lockout did not end quickly is that the "lawyers" highjacked the process, as if David Stern and Billy Hunter are powerless to control their own legal representatives.

Abbott achieved a great breakthrough for bloggers by selling his site to ESPN and thus making basketball blogging a mainstream media activity but he has completely squandered this opportunity and this great platform with his agenda-laced writing and with the bizarre choices he has made regarding whose work he promotes and whose work he disregards.

 
At Thursday, October 13, 2011 1:54:00 AM, Blogger David Friedman said...

Anonymous:

Read the Forbes coverage and decide for yourself. Forbes independently determined that the Spurs--and most other NBA teams--are losing money.

The term "fault" is being thrown around here very recklessly. I never said that this is the players' "fault," either individually or collectively--I merely explained how the actions of certain players helped expose the flaws in the current NBA business model, flaws that the owners are determined to correct.

In order for NBA teams to compete it has become necessary to build expensive, modern arenas with all kinds of amenities. A major part of the Spurs' expenses consists of paying off the debt service on their arena. This is not the players' "fault" but it is a reality of doing business: the owners cannot continue to hand out long-term, guaranteed contracts that pay 57% of the league's revenues to the players. The players are going to have to accept the reality that their cut is going to be significantly less than 57% and that something has to be done about the long-term, guaranteed contracts--either the contracts have to be shortened or they cannot be fully guaranteed.

So many media members want to blame the owners for giving out long-term deals but I have yet to hear anyone suggest that Gilbert Arenas and other underperforming players should give up guaranteed money that they clearly are not earning.

It sounds good to say that businesses that are losing money should just go out of business but you are failing to understand the realities of the NBA. The NBA is one entity with 30 franchises; if franchises are in bad shape or start going out of business this is not good for the league overall or even for the players (fewer teams means fewer jobs for the players). The NBA has to set up a business model that is fair for the owners and fair for the players.

Sadly, the systemic issues afflicting the NBA business model appear to be too complicated for most media members to understand--or else these media members are ideologically opposed to understanding these issues for some reason. So, we can expect to see more slanted coverage and more ill informed suggestions and predictions.

 
At Thursday, October 13, 2011 11:30:00 AM, Anonymous boyer said...

Ok, I accept that the business model is broken, and there are lots of bad contracts, and this needs to be fixed. I'm looking at it from the players' perspective here. The owners got basically exactly what they wanted in 1999, so naturally it was viewed as a huge win for the owners. Now, 12 years later, with the system the owners created(fine, bargained for, but this is the system they wanted), the players are supposed to accept and believe it's not working, and the players are the ones to be penalized now. And even with the best offer from the owners on the table, it's substantially worse for the players now as opposed to 1999. I realize this is moot, because it needs to be changed. I'm just saying it's easy to see why the players are so opposed to the owners' offers. The players' salaries have gotten out of control for a lot of the players.

I understand that if team A doesn't spend X amounts of dollars on a player, then there's at least one other team out there that will do the same, usually, not always, but usually, but some of these contracts, even under this system, are just such terrible decisions. Joe Johnson has made 5 AS, but he's never been close to an elite player. I find it hard to believe anyone else would pay him a max contract, and he would make less with other teams than with atlanta. But, that's the system.

As far as stars leaving teams, I can see now how awful the heat fiasco is turning out to be. But, is it really different now as opposed to in the past, with the stars leaving for supposed brighter pastures? Haven't we seen stars leave teams for awhile now, or is it really much worse these past few years? I guess what happened last year is much different, but in general, I don't see much difference, but maybe there is.

Is the lockout about money or is it about competitive balance, or both? I'm looking at all the teams, and nearly every team, minus a few very poorly run franchises, have made the playoffs in the past few years. While money surely helps, it doesn't seem like money necessarily is the deciding factor on who wins or not. Basketball is unlike football/baseball, in that one player is so much more valuable.

Is lowering the players' salaries really going to help that much? Our teams going to have payrolls of $35mil or so now? That's not going to work. There has to be lots of other expenses these teams have that could easily be gotten rid of. I don't know, it just seems dumb to not accept the deal if by not accepting, you will lose a lot of money. They should just accept it.

 
At Thursday, October 13, 2011 12:07:00 PM, Anonymous boyer said...

Do any of these reported losses by the owners have anything to do with many of them overpaying for their franchises? It seems like this might be the case, and they want to get this money back, especially now since that the economy is in decline. I'd like to know when the owners started having losses. What year was this? Do you know, David, or know where to find any of this data? It's hard to believe these reported losses have been happening for 8-10 years or so. This seems like a recent development. But, have contracts really increased that much since 5-6 years ago? I guess the players have it pretty good, their salaries inflated too much too fast.

 
At Thursday, October 13, 2011 1:11:00 PM, Blogger David Friedman said...

Boyer:

What happened in 1999 is irrelevant. It is 12 years later now: the world is different, the economy is different and the NBA's business model is not working. The players are not being "penalized"; they are being shortsighted and unrealistic: as I wrote in February, the NBA's business model is broken and the players will not receive any more NBA paychecks until they accept that reality.

It is true that in the past other stars have left for "greener pastures" but the difference now is that star players are seemingly working together long before their current contracts expire in order to figure out how to end up on the same team together. That is apparently what LeBron, Wade and Bosh did and it seems like what is happening with Melo, Stoudemire, DWill, CP3 and Dwight Howard (not that all of those guys will end up on the same team but they seem to be trying to figure out how to create duos or troikas in their destinations of choice). This is a major problem in at least two ways: (1) it is very bad for the league if it seems like a star is more interested in figuring out who he is going to play for next year (or in two years) than in trying to help his current team win (we saw that last season with Melo and DWill); (2) if this system continues to go on unchecked then the stars will all end up in four or five markets and the rest of the teams will be noncompetitive both on the court and economically. As I explained in this article, the league and the players have to find a way to balance the players' rights to be fairly compensated while having some freedom of movement with the league's need to have competitive balance and economic stability. It is important to note that, contrary to what many have asserted, these stars are not giving up money to try to win; when you factor in reduced state taxes and increased endorsement opportunities it is doubtful that LeBron, Wade and Bosh gave up any cash by going to Florida (they each still nearly received max deals anyway) and Melo, DWill et. al are all looking for max or near max deals. As I said more than once before LeBron made his "Decision," if winning a ring is truly his number one priority then he should take the midlevel exception and go play for the Lakers. The problem is that the players want to receive max money and choose their teammates and choose where they will play--yet the media is portraying this situation as if it is entirely the owners' fault! Playing in the NBA is a privilege that brings with it great wealth and perks but if the players insist on having everything then they will get nothing and there won't be an NBA season.

Here is the latest Forbes data regarding NBA team values: Forbes NBA Team Values

Note that the most profitable team--the New York Knicks--is one that is not a contender and, most people would agree, has been poorly run for the better part of the last decade. The second most profitable team is the Chicago Bulls, followed by the Houston Rockets and L.A. Lakers. New York, L.A., Chicago and Houston are the four biggest cities in the U.S. On the other hand, city size--and even on court success--is not everything, because San Antonio (the seventh biggest U.S. city and home to four NBA championship teams since 1999) is one of 17 franchises that lost money according to Forbes' most recent data (and there is every reason to believe that even more teams lost money last season, though that data is too recent to be included in Forbes' report).

 
At Thursday, October 13, 2011 8:17:00 PM, Anonymous boyer said...

All right, it makes a lot more sense now, or you're making sense. Your take on the lockout is extremely different than everything I've read so far. I'm confused why basically everyone else sees it a lot differently than you do.

Not that I don't believe what you're saying, but it's just hard for me to believe all the losses the owners are reporting, or that their losses are directly related to the players. I understand it's irrelevant, but still. It'd be interesting to see all the revenues and expenses of the spurs. Is their stadium debt a normal expense? They have to have a lot more expenses than just players' salaries. They have to be receiving a lot more revenues than the expenses they pay the players, don't they? Guess not.

I think the competitive balance around the league is great right now. But, with the trend you're talking about and we're seeing right now, that if the stars decide to join forces, then the competitive balance will probably not be there as much. So, what you're talking about with the stars wanting everything, it makes sense.

 
At Monday, October 17, 2011 12:21:00 PM, Anonymous Ilhan said...

Great read as usual, David. Let me vent a minute though:

(Part 1)

One point that is sorely lacking in the coverage of the lockout is the consideration of fan interests. It goes without saying that the two parties involved do not (have to) have the best interest of the NBA fans. The media, however, must protect those interests and report also from that perspective. Yet, virtually everyone in the media continues to behave as if the economic fortunes of the owners and players (and the league) were the only thing at stake. (To be fair, more conscientious members of the media consider the fate of people working in the NBA-related industries.)

So an informed piece of commentary like yours (that lays out just what is at stake for the two sides, what sort of leverage they have, and whether or not their positions on the matter are justified/consistent) seems to me to be merely the first part of the job. It needs to be supplemented by an analysis of how the proposed changes effect the game and the fans. Let me elaborate.

In view of some of the changes proposed (at one point or another) by the owners such as a significantly lower and hard cap, limitations on player movement in free agency etc., I think we can say that the owners would love to have an NBA where a team such as the '03 Nets (one great player and complementary chumps) is the best possible product. They seem to hate the possibility of a '83 Sixers or a '96 Bulls. Under their *responsible* and *feasible* new regime, I don't see how you can have great teams without lowering the max contracts even more. At best, you can perhaps get two great players through the lottery but you won't be able to surround them with a quality cast for lack of cap space. I understand that the current collusion among the young stars to migrate to the big markets and play together is unacceptable since it is simply not sustainable within the present system. However, the answer shouldn't be these draconian measures which would render team-greatness virtually impossible. Team owners, understandably, don't give a fig about greatness. Their understanding of parity seems to be: If we get Durant out of the lottery, we'll build a genuine contender. If we get a Joe Johnson or Gilbert Arenas, we'll literally pretend our guy is of the same caliber as Durant and sell false hope for years while overpaying him and making money off of gullible local fans. In any case, we'll have parity of mediocrity and the gap between the best and the worst won't be that big.

Now, it seems to me that there is a clear conflict of interest here between the owners and the fans, at least the non-homer, genuine basketball fans. I personally would hate that version of the NBA, yet can't see how the owners have anything but such a thing in mind.

One thing to note about parity. As you have stated many a time, there are only about a handful of genuine superstars, maybe a little more, in the NBA at any given time. And with the exception of the '04 Pistons, a team that has one or more of those stars on its roster wins the NBA championship. That is the lay of the land. Parity comes into the equation with the draft; getting one of those stars, to some extent, is up to chance. Now, I think the choice is between great teams around such superstars winning the trophy and not so great teams around the same superstars winning the trophy. By definition, there aren't enough genuine superstars, "franchise players", to have the parity to contend for 30 teams. The NBA shouldn't pretend it is possible. It simply is not.

 
At Monday, October 17, 2011 12:26:00 PM, Anonymous Ilhan said...

(Part 2)

So something along the (old) European soccer model with very american improvements makes much more sense to me:

1. Have decent revenue sharing among teams for TV and internet revenue.
2. Get rid of any team salary cap whatsoever. This implies not having a lower cap, too.
2a. (2) makes trading players for cash or picks under any circumstance possible.
3. Make free agency 'free' only in the sense of liberty to change teams, but not in the sense of doing it without cost. If team A wants player X, who is at the end of his contract, from team B, have team A pay team B some significant portion of the new overall contract of player X as transfer fee.
4. Provide a very, very significant financial bonus for the NBA Champion. (Perhaps also for the Conference finalists)
5. Some changes in guaranteed contracts.

Consider the case of LBJ in Cleveland with these changes in mind. First of all, with no cap, the Cavs are not stuck with a roster that is, at least in LBJ's eyes, unfit to contend. They can in principle bring in any other free agent if they are willing to pay for him. This amount can be paid in real cash or, if the other team is willing, be paid by players on the Cavs roster. Since there is no cap for either team, there is no limitation for either team. It is only a matter of money and perception of where each team is at. If the Cavs believe that their team is a sure thing to win the trophy, and get the significant championship bonus, then they will spend to get Wade or someone else. Plus they can trade away the players they don't want or have a roster spot for in exchange for cash or picks. Take the other scenario. Say LBJ does not want to stay in Cleveland even if Wade and Bosh are willing to come along. Then the Cavs say "ok, take him Miami, pay us a percentage of his new contract as a fee, and we will rebuild". Moreover, they can try to trade Shaq etc. for cash or picks. Now they still have a cut of the TV/internet revenues created by LBJ on his new team, they have the significant transfer fee to compensate for the loss of merchandising and ticket sales and, perhaps most importantly, they can simply get back to a very low payroll by trading away their players for cash and picks. The Cavs are in a very good place from a fiscal point of view. And the contenders in the league, not just the team that gets LBJ, but also the other teams which get Shaq, Jamison, improve very much. The quality of basketball/teams at the very top improves drastically. One thing to note is that, given strict revenue sharing for TV/Internet deals, no single team can do this kind of aggressive star collection for very long. At some point, unless the same team wins the trophy every year (there are too many superstars for that to happen imo) and collects the significant bonus, every team will transition from contender to bottom feeder and vice versa. But there will be, unlike today, no bottom feeders with contender payrolls.

 
At Monday, October 17, 2011 12:30:00 PM, Anonymous Ilhan said...

(Part 3) This entire picture depends on the idea that, due to the draft, it makes sense either to be a contender or to be a bottom feeder in the NBA. Being a 5th-8th seed has absolutely no meaning other than playoff ticket sales. Let certain teams be bottom feeders year after year, until they strike gold with an LBJ or Kobe or Durant. Let them have very low payrolls, Let them have in consequence have very low ticket sales (on nights where another bottom feeder is in town). They will be compensated through TV/internet revenue sharing and, in any case, they will be in the bonus due to low payrolls. And no one, and I mean no one, will pay Rashard Lewis or Joe Johnson max money. The Hawks, if they are bottom feeders that year, will offer mid money to Johnson. If a contender wants to have Johnson as a third or fourth wheel, they will have to offer more money and pay the Hawks extra fees. I very much doubt that very many contenders will want to pay much for Johnson as a third or fourth wheel. But if they can, then they should be able to take that risk. In that case, if they are willing, a team like the Hawks could function like a farm team for second/third-tier stars until they come upon a genuine franchise player. Even if it never happens, the Hawks will be in a much better position economically, since they will be paid transfer fees by contenders who could use a Joe Johnson or a Josh Smith as a third wheel and who could afford/want to pay more than the Hawks.

My point is that if there is serious revenue sharing for TV/Internet, then the difference between, say, the Lakers and a small market team would be solely due to ticket sales and merchandising. If the Lakers are willing to use that extra to collect many stars, then the Lakers are taking on a very big risk. If they don't win the trophy, they have spent a lot and, because of (3), much money has gone to the small market teams they have transferred players from. If you are a small market team, then the picture is clear. If you've gotten a Tim Duncan or a LeBron James through lottery, behave like the Lakers for a short time during your star's prime. Spend. Surround him with great/good players. If you make mistakes, spend even more and get other players while trading/releasing the unproductive players. You will never get locked into past mistakes, never waste a player's prime due to managerial mess-ups a la Garnett era Timberwolves. If you win the trophy, you collect on the big bonus in addition to having had sell outs in every home game. If you don't win, you still have your sellouts, TV/internet revenue, merchandising etc. And if you don't get a Durant or KG or TD through the lottery, you simply have the luxury of not spending money and still collecting the shared revenue. This might have radical implications about the BRI division between owners and players, but then it might not have.

 
At Monday, October 17, 2011 12:40:00 PM, Anonymous Ilhan said...

(Part 4)

Even if I am totally missing the point and suggesting absurd and inapplicable things, I am pretty much sure that the cap, whether soft or hard, is not good for the product on the court and therefore for the fans. It locks the teams onto past mistakes, dooms them into mediocrity or at least render improvement impossible, makes star players want to bail on defective, yet practically unchangeable rosters. It does all this, while not really helping the teams or protecting the teams from themselves as advertised. And still the owners are defending it, worse demanding a lower and harder cap! It goes to show, at least in my eyes, that they have an interest in mediocrity disguised as parity, in conning their own local fans into thinking Arenas, Johnson, Lewis et al are the answers.

Yes, the business model is broken. Yes, the players are deluded and spoiled. It shows in the fact that not one player among hundreds said: There are rotten apples among us who, due to guaranteed contracts, steal not only from the owners, but also from the players who are on the outside willing to come in and contribute. Instead we get BS like this from Tyson Chandler:

http://articles.nydailynews.com/2011-06-03/sports/29631693_1_d-antoni-leon-rose-eddy-curry

But there is more than one way to fix the business model. People in the media, and the bloggers, should weigh things which the owners or the players understandably don't care much about. In accordance, they should be making suggestions beyond judging the proposals already on the table. Public interest, in this case for the quality of basketball, should be a creative motivator beyond saying "come on guys, make up, and start the season already!" Yet we hear/read nothing about how the proposed changes will effect the game (and thereby us, the fans) and how the game SHOULD and SHOULD NOT be effected. End of tirade.

 
At Monday, October 17, 2011 11:35:00 PM, Blogger David Friedman said...

Ilhan:

The primary purpose of this article is twofold: (1) provide a proper context for readers to understand why the lockout happened/why it has lasted so long and (2) refute some of the nonsense spewed about the lockout by Abbott, Sheridan et. al.

You bring up an interesting third issue that I did not address--namely, how the lockout affects and is viewed by arena workers, fans and other people who are directly affected by the situation but have no voice in how it will be resolved.

Your detailed proposals are interesting but because I do not know anything about the financial structure of European soccer I cannot intelligently compare it to the NBA. However, I do not think that your idea of an NBA with no salary cap would work; a big market team like the New York Knicks would simply spend $500 million (or some ridiculous number) to sign all of the members of the All-NBA First Team while smaller market teams would not be able to compete.

The ultimate solution of the NBA lockout will involve a harder salary cap than the previous one, a reduction in the percentage of revenue received by the players, some form of revenue sharing to level the playing field among the franchises and some kind of provision (perhaps similar to the NFL's franchise player tag) to restrict (but not completely eliminate) stars from all ending up on a handful of teams.

You mentioned my oft-repeated assertion that there are really only a handful of legit franchise players in the NBA--but it is important to understand that neither the owners nor the players want to admit that this is the case: the owners want to promote that the NBA is a league full of stars, while the players want to see as many of their brethren as possible receive max contracts. The fact that there are only, at most, half a dozen franchise players means that you are right that true parity--meaning, at the extreme, that everyone has an identical chance to win the championship--is not feasible. The two biggest problems with the NBA's current business model are that (1) even an excellently run franchise like the Spurs is losing money and (2) small market teams (which, for NBA purposes, means teams like Cleveland, Denver, Utah, Orlando, New Orleans, etc.) feel like they have no chance to retain their best players. I predicted in February that the lockout will continue until the NBA's business model is changed to address those issues; this article points out that Abbott appears to not understand the issues at all, while Sheridan simply keeps repeating that the lockout will be short and painless even after the lockout has proven to be neither and threatens to end most if not all of the 2012 season.

 
At Tuesday, October 18, 2011 1:17:00 AM, Anonymous Anonymous said...

marcel

i agree owners have all leverage players will have to give in. i think there will be some change not drastic. mid level exception and bird rights. the players should go 50-50 on revenue. i dont think there will be a hard cap. they should get it done quick.

off topic alot of people think kevin durant could be next kobe. u see similarities

 
At Tuesday, October 18, 2011 5:03:00 AM, Blogger David Friedman said...

Marcel:

I think that the salary cap will become "harder"--i.e., the luxury tax will be more punitive--but I doubt that the NBA will have an absolutely hard cap with no exceptions.

I don't want to delve deeply into off topic discussions but, as much as I like Durant's attitude and respect his game, I see very little similarity in any way with Kobe: Kobe is a multidimensional player while Durant's primary skill set strength is scoring; Durant will have to become much better at other facets of the game--and also prove that he can consistently carry a team deep into the playoffs--before any comparisons with Kobe will be warranted. I don't intend to debate the subject any further here, though, because this article is about the lockout, not player comparisons (I did a player comparison article back in August when I responded to Chris Palmer's player rankings).

 
At Tuesday, October 18, 2011 8:10:00 AM, Anonymous joel said...

ah - finally, a voice of sanity in a bewildering array of anti-business sentiment. People forget that the 57% the players are entitled to is 57% of GROSS sales, not 57% of profit! In the movie industry, a top star is likely to only get as much as 20 gross points (20%) of the box office. And that certainly doesn't include popcorn sales, or merchandising sales, or parking lot income (shockingly, BRI - basketball related income - includes all that and more!) A top star like Jim Carrey may choose to forgo his $25M salary (as he did in "Yes Man"), and in exchange, get equity in a film.

See http://www.variety.com/article/VR1117987471?refCatId=13.

If basketball players are willing to do likewise, and risk their salaries to get a share of then profits, then that would make logical sense. But for as long as they don't take any financial risks, I don't see how they can command more than the gross percentage that Hollywood pays its stars.

 
At Tuesday, October 18, 2011 3:25:00 PM, Blogger David Friedman said...

Joel:

Exactly. The players, not the owners, are the ones who are insisting on a guaranteed profit--and the players are not taking any financial risk, unlike owners who invest substantial capital to buy and run their teams.

 

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