A Substitute for War

Basketball philosophy

It’s simple: NBA owners are either hobbyists or terrible businessmen

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National Basketball Association

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TrueHoop has two posts today reporting on the discussion from the Sports and Label panel at the the MIT Sloan Analytics Conference today, which to me go right together in explaining the crux of the problem in the upcoming CBA re-negotiation.

The first is titled, “Is sports franchise ownership a hobby for the rich?“, and it talks about the growing trend of NBA owners being so rich that the amount of money at stake on their NBA franchise is pocket change to them.

The second is titled, “Sports and Labor panel address boarder issue of NBA profit“, which talks about all sorts of tricky nuances to the NBA situation.

To me the situation though just doesn’t seem that complicated. The NBA owners insisted on putting a salary cap in place last time the CBA was negotiated which actively penalizes teams in a variety of ways if they go over that limit. The current salary cap is $58.044 million, and 24 out of the 30 are over that cap. That salary cap was put there because NBA owners had already proven prone to spending too much money – and clearly, even though the owners now have an explicit penalty to their bottom line telling them “You’re doing this wrong, stop spending money!”, they still spend. Only the owners themselves stand in the way of achieving profitability.

Why is this happening? NBA owners aren’t acting like rational business men.

Well, it’s got nothing to do with the general popularity of the NBA. It’s about owners knowing full well what the situation is, and choosing to spend anyway. In the long view, they know this is not a way to make money and so they want more and more rules in place in the hopes of changing their behavior. However, up through this point, when push comes to shove, they just can’t say no to spending money for star players.

Businessmen behaving like rational businessmen do not behave this way. If fantastically valuable employee demands too much money because of what someone else is willing to pay him, the rational businessman cuts ties with him without a second thought, and so the only reason said businessman gets himself into trouble is if he there’s too much inaccuracy in the estimations revenues and costs.

And most businessmen would kill for a business as predictable and progressive as the NBA.  NBA owners for the most part know what their costs are going to be ahead of time, and know that revenue over any multi-year stretch will increase. The NBA’s revenue has increased from $2.7 billion 10 years ago to around $4.0 billion now. 50% growth in 10 years is amazing growth – far higher than the economy. There’s no good reason at all that this shouldn’t be working.

Let me also digress, and say I’d be more sympathetic to the owners if they hadn’t “won” the last CBA battle back in 1998. I don’t think people realize the scale of this, so here’s an example. Kevin Garnett entered the league in 1995, Kobe Bryant entered the league the next year in 1996. The one year difference meant that Garnett got to negotiate a new contract before the CBA, and Kobe did not. As a result, up through the ’08-09 season, Garnett had earned $234.9 million in salary while Bryant had only earned $148.4. Literally the owners were able to negiotate salaries down to the point that it those rules were kept in place, Bryant would almost certainly have lost in excess of $100 million by the time his career ended.

And despite that win for the owners, they’re still losing money.

Clearly the key here, is that owners feel that they cannot let players go to other teams even if it means they overpay the player. I get it – I just don’t have sympathy when they do this and try to blame the players. If you act like a hobbyist who cares more about winning that profit, that’s fine by me, just don’t pretend you don’t know how you got in this mess. At your heart you’re either an otherwise good businessman running your team like a hobbyist, or, you’re simply a very bad businessman.

Ixnay on the Escalating Contracts

Now, with all that said, a variety of intricate solutions have been proposed to help save owners from themselves. Some of them are smart, and I oppose none of them in principle. However, there’s one obvious way to help matters I haven’t heard others mention:

Stop making contracts where the player’s salary escalates as he gets deeper into the contract. The rationale for these contracts originally was based on the idea that the player would keep improving, and so it makes sense for him to get paid the most in the year it is thought that he will peak. In practice, what it does is make it easier for teams to sign talent, and much easier for the team to be paying ridiculously large salaries with they have a number of players at the end of their contract.

Moreover, cut the escalation and you not only cut some of the bloat on the back end but make it tougher for team to squeeze in contracts on the front end – thus making it tougher for teams to acquire a large number of big contracts at once, and making it less likely that a bunch of superstars will flock to the same team.  Lots of win here for the owners, and while the players might object strategically, it’s hard to argue that this would be anywhere near as painful to swallow as a number of other items they’ve swallowed in the past.

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3 Responses

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  1. Great insight. One of the best opinions I’ve read on this issue.

    Ryan

    March 5, 2011 at 4:22 pm

  2. […] It’s simple: NBA owners are either hobbyists or terrible businessmen (asubstituteforwar.com) […]


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