Should've gotten Williams & Walker

DALLAS — What do you add to an NBA championship team on Draft Night?

That’s the question the Dallas Mavericks’ front office was faced with heading into Thursday night’s draft, looking to stack up on talent with the No. 26 pick in the first round (forward Jordan Hamilton) and the 57th overall selection (Tanguy Ngombo) in the second round. But as the night developed, so too did a change in the Mavericks’ plans.

Packaging the two selections together in a three-way deal that also involved Denver, the Mavs wheeled and dealt their way to a trade with the Portland Trail Blazers, sending the rights to the two picks to the Pacific Northwest in exchange for 26-year-old swingman Rudy Fernandez and the rights to 2007 draftee (30th overall) Petteri Koponen.

At midnight on Thursday, the N.B.A. locked out its players in what could be the start of a long labor dispute. Some observers, like ESPN’s Michael Wilbon, believe the entire 2011-12 season could be threatened.

Such a move would not be without precedent: the N.H.L. canceled its 2004-5 season. But the N.B.A.’s current financial condition is different than the N.H.L.’s in one important respect. Whereas there was almost no doubt that the N.H.L. was in fact losing money in advance of its lockout — player salaries had mushroomed by more than 400 percent from 1994 to 2004, according to independent estimates — the N.B.A.’s claims of financial hardship should be viewed more skeptically.

Instead, independent estimates of the N.B.A. financial condition reflect a league that has grown at a somewhat tepid rate compared to other sports, and which has an uneven distribution of revenues between teams — but which is fundamentally a healthy and profitable business. In addition, it is not clear that growth in player salaries, which has been modest compared to other sports and which is strictly pegged to league revenue, is responsible for the league’s difficulties.

The table below reflects the N.B.A.’s financial condition from its 1989-90 through 2009-10 seasons, as according to estimates prepared by Forbes and Financial World magazines. (All figures are adjusted for inflation. Some data was not published by Forbes in some years and is therefore left blank.)


The first column is league’s gate receipts or ticket revenues; the Forbes data suggest this is one area of legitimate concern. Adjusted for inflation, ticket revenues are down 6 percent compared to five years ago, although they are up 22 percent compared to the 1999-2000 season.

Other revenues, like licensing and media rights, have increased at a healthier clip, because the N.B.A. is locked into long and lucrative television contracts. They have grown by 11 percent over five years, adjusted for inflation, or by 30 percent over 10 years.

The league’s primary expense is player salaries. They have followed a nearly identical trajectory to league revenues, having grown at a 24 percent rate over 10 years, but with growth having flattened out since the recession. This is not a coincidence: under the league’s current collective bargaining agreement, player salaries are strictly tied to league revenues. In fact, because of a little-known provision in the labor agreement, players must return a portion of their salaries if they exceed 57 percent of league revenues, as has happened in several recent seasons. As I will discuss at more length later, the portion of revenues earned by N.B.A. players is similar to that of the other major sports leagues and has been stable over the past decade.

Growth in non-player expenses has outpaced that of salaries, having increased by 13 percent over five years and 43 percent over 10 years. Although some of this undoubtedly reflects sound business ventures, like the league’s investments in digital media or efforts to expand the game internationally, they have nevertheless had a reasonably large effect on the league’s bottom line. Had nonplayer expenses been the same in 2009-10 as they were in 1999-2000 (adjusted for inflation), the league would have made a record profit that year.

Even as it stands, however, the Forbes data suggests that the league is still profitable. Its operating income — revenues less expenses (but before interest payments and taxes) — is estimated to have been $183 million in 2009-10, or about $6 million per team. The N.B.A.’s operating margin (operating income divided by revenues) was about 5 percent in 2009-10 and has been about 7 percent during the life of the current labor deal.

A 5 percent or 7 percent profit is not dissimilar to what other businesses have experienced recently. Fortune 500 companies, for instance, collectively turned a 4.0 percent profit in 2009 and a 6.6 percent profit in 2010 (both figures after taxes). Profit margins in the entertainment industry, in which the N.B.A. should probably be classified, have generally been a bit lower than that.

So why are N.B.A. owners seeking such significant reductions in player salaries, reportedly to about 45 percent of league revenues? The simple reason is that they think they can — and this reflects an awful lot of money. If salaries were reduced to 45 percent of revenues, this would save the owners roughly $500 million per year, or about $3 billion over the course of a six-year labor contract. It is hard to estimate either the near or the long-term cost of cancelling a season, but the potential gain from a more favorable contract is large enough that it is something the owners might be willing to risk.

What the owners may be thinking about is their position compared to that of the other sports leagues. Baseball and football are cash cows, with the N.F.L. having brought in more than a billion in profits (before taxes) in 2009, and Major League Baseball about $500 million in its most recent season.

By contrast, the N.B.A.’s position is more comparable to that of the N.H.L. Several N.B.A. owners also own N.H.L. teams, and they may be looking to that league’s lockout as having been successful, because it recovered from $228 million in operating losses in the three seasons preceding its lockout (according to the Forbes data) to a state of profitability comparable to the N.B.A.’s.



It is not clear, however, how much player salaries are to blame for the N.B.A.’s having failed to achieve an N.F.L.-like level of profit. Between 2000 and 2009, player salaries in the N.F.L. represented an average of 56 percent of league revenues, and that total averaged 58 percent in Major League Baseball — both close to the 57 percent target enshrined under the N.B.A.’s current deal. By contrast, when the N.H.L. locked out its players and was losing money, player salaries made up 66 of league revenue. (They have since fallen to about 54 percent.)


The other factor is the distribution of revenue from team to team: 17 of the 30 N.B.A. teams lost money in 2009-10, according to the Forbes data. Most of the losses were small, and the league was still profitable as a whole because of profits made by successful franchises like the New York Knicks, Chicago Bulls and Los Angeles Lakers, who together netted about $150 million by themselves. But there are a sizable number of owners who have reason to be unhappy.

In some ways, the N.B.A.’s present condition closely resembles that of Major League baseball before its 1994-95 strike. Baseball was still profitable as a whole in advance of the strike, but about one-third of its teams had lost money in 1993, according to Forbes, while just four teams accounted for almost half of all league profits.

The solution that baseball has since adopted — greater revenue sharing in lieu of a salary cap — could also be a natural one for the N.B.A.: the profits made by the Knicks, Bulls and Lakers alone would be enough to cover the losses of all 17 unprofitable teams. (Players might have some reason to object to revenue sharing — some versions of it are the economic equivalent of a tax on player salaries — but they would probably prefer it to the more draconian measures that the league will try to impose.)

Another way in which the N.B.A. resembles baseball, unfortunately, is by having circulated financial data that doesn’t necessarily hold up to scrutiny. In 2001, Major League Baseball issued figures suggesting that it had incurred losses of $232 million before interest and taxes; Forbes’s independent estimates instead suggested that the league had made a profit of $127 million. But that year’s labor dispute, and the next in 2006, were resolved amiably and with few changes to baseball’s economic structure, and years of profits have followed since.

A similar discrepancy exists today between Forbes’s estimates — a $183 million profit for the N.B.A. in 2009-10, and those issued by the league, which claim a $340 million loss. The difference between the two numbers is roughly of the same size on an annual basis as the salary concessions the N.B.A. is seeking.

There are several reasons to be skeptical of the N.B.A.’s figures. First, many of the purported losses — perhaps about $250 million — result from an unusual accounting treatment related to depreciation and amortization when a team is sold. While the accounting treatment is legal, these paper losses would have no impact on a team’s cash flow. Another potential (and usually within-the-law) trick: moving income from the basketball team’s balance sheet to that of a related business like a cable network, or losses in the opposite direction.

Second, the leaked financial statements for one team, the New Orleans Hornets, closely matched the Forbes data. And the sale prices for some teams have exceeded their figures. The Golden State Warriors were purchased for $450 million in 2010 — more than the $363 million that Forbes estimates they are worth. The Detroit Pistons were recently sold for a price reported to be about $420 million, more than Forbes’s estimated value of $360 million. The Washington Wizards were bought for $551 million last year, a 70 percent premium over Forbes’s estimated price of $322 million. Comparing actual to theoretical sale prices is not always safe because other assets are sometimes packaged with the teams, but the market for N.B.A. franchises is clearly quite healthy and inconsistent with what the league claims to be a failing business model.

The third reason for skepticism: the N.B.A.’s data has not been made public, although it has been shared with the players’ union. If the league expects their figures to be viewed credibly, they should open up their books to journalists, economists and fans.

Fourth, the current labor deal — which was signed in 1999 and renewed with relatively few changes in 2005 — was initially considered favorable to the league. Although revenue growth may have been more tepid than the league might like, especially in the past few recessionary years, player salaries are tied to revenues and have grown at no faster a rate. The claims made by sports owners on the occasion of a labor dispute — smart and successful capitalists who suddenly become enamored of restrictions on the free market and their own wherewithal to make decisions — often stretch credulity. But to hear the N.B.A. owners complain about the current deal now, when none of the fundamentals have changed, reminds one of the old Woody Allen joke about two women kvetching at a restaurant: “Boy, the food at this place is really terrible,” one says. “I know. And such small portions,” the other replies.

Put another way, there is no reason to assume that the N.B.A.’s actual financial condition falls somewhere in between the two figures: it may be just as likely that Forbes is underestimating rather overestimating the league’s profits. For instance, The Times reports the league’s revenues (not profits) to have been $4.3 billion in 2010-11, more than the $3.8 billion estimated by Forbes for 2009-10. (One reason that the Forbes estimates could be too low: it has become more difficult to measure ticket revenue since teams are now designating some of their most expensive tickets as ‘premium seating,’ and these seats are not reflected in publicly-available estimates of ticket prices.)

None of this means that the N.B.A. is without problems. For instance, the sluggish growth in ticket revenues may suggest that the league’s fans, who are younger than those for other sports and more likely to be African-American, are being priced out of the stadium experience.

In addition, the fact that a significant number of teams are failing to turn a profit, even by the Forbes estimates, reflects a potential lack of competitive balance in the league. Since 1990, a total of eight distinct N.B.A. teams have won a championship, compared to 13 teams in each of the other major sports leagues. Although some of this has to do with factors intrinsic to the structure of basketball, the current salary cap rules may worsen matters by limiting player movement, making it difficult for teams to rebuild. Fans in many cities have little realistic hope of seeing a championship any time soon.

Nor does this mean that we aren’t in for a long lockout. Rather, the fact that the N.B.A. has released financial data that is so at odds with estimates provided by credible and unbiased organizations like Forbes suggests that the league’s owners are armed to win the public relations battle — a key part of what could be a yearlong war of words with their players.

And he was never going to get out of the first round with T-Mac on his team.

If this week’s negotiating sessions represented the 11th hour of the labor dispute, then we’re quickly approaching the 59th minute. The league has made it clear that if a deal is not in place by Monday, regular season games will be cancelled. Fans of Derek Fisher might even point out that we’re quickly approaching the point where just four tenths of a second remain.

The two sides left the negotiating room Tuesday about three percentage points apart on the biggest issue. The split of basketball related income (BRI) is the elephant in the room. It’s the key to the entire process -- come to an agreeable number on the BRI split, and everything else will fall into place.

The rhetoric following the negotiating sessions made it difficult to pin the two sides to an exact number, but it essentially boils down to the owners offering 50 percent, with the players drawing a line in the sand at 53 percent.

Three percent. It’s the difference between an opening tipoff and an empty arena.

For both sides, the negotiating process boils down to a simple question -- should we accept the offer on the table, or can we do better if we say “no” and wait?

For the players, the cost of saying “no” can be easily quantified. The owners have offered the players 50 percent of BRI. This season’s BRI is expected to be around $4 billion, so the owners are offering the players a $2 billion slice of the pie. The players are holding out for a 53 percent share, so they’re looking for $2.12 billion.

That’s $120 million that separates them. Of course, that’s just in year one. Over the course of a six-year agreement, assuming four percent growth per year, the total is closer to $796 million.

To say “no” and wait means to suffer the consequences. Those consequences very soon will be cancelled games, meaning revenue will be lost that will never be recouped. The players will be faced with choosing between a 50 percent share of a larger pie, and a 53 percent share of a smaller pie. The longer they hold out, the more the pie will shrink.

If we use the 1998-99 lockout as a guide, a canceled game costs each player 1/82nd of his salary. A full NBA regular season lasts 170 days, so each missed week represents 7/170th of a player’s income. So if a week’s worth of games is cancelled because they say “no” to the owners’ 50 percent offer, the players miss out on $82.4 million.

The players are holding out for an additional $120 million in 2011-12, but holding out costs them $82.4 million per week. They would lose everything they stand to gain this season in less than two weeks. On Monday the league is expected to announce the cancellation of the first two weeks of the season, which will cost the players $164.8 million.

Over a six year agreement, the players would burn through the $796 million in a little under 10 weeks. If they continue to hold out for 53 percent, and the owners hold firm at 50 percent, the players will reach the break-even point around December 16th. If the sides settle for 53 percent past that date, then the players would have been better off by taking the owners’ offer of 50 percent before games were cancelled.

Keep in mind that December 16th represents the point at which the players as a whole will break-even. Each individual player would need to stay in the league for six years to recoup his lost wages. In a league where the average career lasts fewer than five years, that’s going to be a problem.

This is one reason the owners have an advantage in this labor dispute -- they have a longer window of time to recoup their losses. An average player is likely to be out of the league in a few years, but an owner can hang on to his team for decades.

The players and owners need to find a way to bridge the gap. They are close enough now that a creative solution -- such as a system where players are guaranteed to make no less than 51 percent and owners are guaranteed to pay no more than 52 percent -- can save an 82-game campaign.

For players, holding out for a better deal simply doesn’t make sense.

And none: The NBA's phony deadline

Jeff MacGregor
ESPN.com
October 10, 2011

The rich do some stupid things.

This mutual suicide pact among NBA owners, for example. They had another meeting Sunday night to suss out the details. Slow poison, or a quick bullet to the brain? We'll hear more about it Monday afternoon once NBA commissioner, executioner and grief counselor David Stern starts canceling regular season games. At least that's what we've been told. Or threatened. It's just the latest phony deadline in the absurd story of a nonsense lockout.

We're on the brink! The whole apparatus is at risk! Save us!

Idiots.

Sorry. I had a whole polite thing worked up. Lots of statistics. Reasonable. All points of view represented. But this is just deeply, impossibly stupid. In fact, the more I think about it, the angrier I get, and the more I realize that any owner who can't break even on professional sports in this country is a moron. Or a liar. Honestly. If you can't manage a pro team at a modest profit in the United States of America in the early years of the 21st century, you shouldn't be allowed to vote or operate a motor vehicle. You shouldn't be allowed near the stove.

At a time when the production and consumption of distraction are the only healthy sectors of the American economy, and when city, county, state and federal tax dollars pay for the arenas and the stadiums, to lose money on the operation of a pro sports franchise has to be grounds for involuntary psychiatric commitment. Or prosecution.

And if any of this sounds familiar, consider where we've heard it before.

The NBA, too big to fail!

Because between the lines of all this basketball madness is just another example of the nitwit superrich expecting their employees and/or the government and/or the general public to bail them out.

Save us from ourselves! they cry. Save us from our cartoon greed and our lurid excesses!

These credit derivatives are a win-win-win right down the line!

These credit default swaps are in no way a ticking time bomb!

This Eddy Curry contract will never blow up in my face!

Never!

So here we are.

Back to the sort of disaster capitalism we've seen from the leagues before. And from Wall Street. And from Congress. Another bogus stalemate in which the fan loses and for which the little guy pays. Same old con game standoff between management and labor.

OK. Fine. Let it fail. I'm tired of being played for a sucker.

There's basketball everywhere.

In an economy this bad, most of us will be happy to watch college ball the next six months; or the satellite package with Lega Basket Serie A on it and the Israeli Basketball Super League, down at the corner bar; or we'll thumb through our own season on the Xbox. Or just watch the kids play in the driveway. These are lean days, Clueless Billionaire.

Or maybe the players will start their own league and barnstorm from armory to armory the way they did it back when. The value in the NBA is the talent, after all. And as start-ups go, it wouldn't cost much: just $89 to incorporate in Delaware. Call it the Peoples' Traveling Basketball League (patent pending). Twenty bucks a seat.

Me? I'll go up to the Rucker, or over to 4th Street. Or I'll walk to Sara D. Roosevelt Park and watch the neighborhood game from a bench with the other old kibitzers. See some young men as gifted and ambitious and carefree as players anywhere. Beautiful to watch. Once it gets cold out, we'll move the game inside to the community center. Whole thing costs nothing. Unless we go around the corner to Yonah Schimmel's for knishes at halftime. Then it's $3.50. Try the kasha.