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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