OT: NBA Lockout

Wrote this article for the main SportsTwo.com page. Thought I'd post it here.
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In a few days, the NBA is going to lock out its players. It's pretty much inevitable.

You're going to hear and read all sorts of rhetoric from the two sides and from media members who don't really "get it." They'll try to make this a "good guys-bad guys" thing and it's anything but.

As Michael Corleone said, "It's not personal, Sonny...it's strictly business."

It's my hope here to take the saber-rattling out of this situation and give you a clearer idea of what's truly going on. Warning: this isn't really about sports, but the basic business dynamics don't require an MBA (come to think of it, I've never found anything that requires an MBA...but I digress).

Finance 101

You'll hear it said that "the NBA is making money," which is both true and completely irrelevant. The NBA is a league and it doesn't make anything. If you want to know the financial health of the NBA, you have to ask the profit or loss question 30 times...once each for the 30 actual businesses/teams that make up the NBA.

Obviously, every business would like to make a profit, but depending on their situation, this can be difficult if such "hidden expenses" like interest on debt and the amortization/depreciation of assets are high. A business could be reasonably healthy, but because of these expenses, may show a loss. This is one of the reasons why accountants and financial types keep track of "operating income." Operating income excludes these hidden expenses leaving a purer picture of revenue less operating expenses.

If you're running at an operating loss, it pretty much means that what you're paying to make your widgets is more than what you can sell them for...not good.

According to Forbes magazine, in 2010 twelve of the NBA's 30 teams posted an operating loss. That's 40% of the teams in the league and that's a decidedly bad thing. However, in my opinion, it's not quite that bad since 2 of the 12 operational losers have purely self-inflicted wounds. The Portland Trailblazers (owner is Microsoft co-founder and noted philanthropist, Paul Allen) and Dallas Mavericks (owner is Mark Cuban, who probably bought the team because of it's name) both spend on players' salaries like they're mega-market teams though they clearly are not. Put another way, they're irresponsible, but can afford to be. Oh yeah...Cuban was rewarded for his fiscal irresponsibility with an NBA title this season.

Mismanaged or Just Mid-Market?

You'll likely hear that a big part of the problem in the NBA is that too many franchises are mismanaged. I don't know if they are or aren't. However, it's pretty obvious that, if you're the New York Knicks, Chicago Bulls or the LA Lakers, you can charge a lot more for your tickets than if you're the New Orleans Hornets, Sacramento Kings or Milwaukee Bucks. Even more important, big market teams can make several times what mid-market teams can make in local TV and radio contracts.

It's not a level playing field.

Still, some mid-market teams made money in 2010. Perhaps the most notable was the Oklahoma City Thunder who posted a remarkable operating income of $12.5MM. The Thunder is the city's only big league franchise...ever. In baseball terms, they're strictly Triple-A. However, when the New Orleans Hornets needed an alternative place to play due to Hurricane Katrina, OKC was chosen and the city received the NBA so enthusiastically that the league helped engineer the move of the struggling Seattle Supersonics franchise to OKC.

The Thunder inherited a young superstar named Kevin Durant who was joined by star-in-his-own-right point guard Russell Westbrook in 2008. The Thunder's front office has done a very good job of building around their nucleus and the team has been exciting and very successful on the court.

Some will point to the Thunder as an example of a mid-market team that has done it the "right way." While I give credit to the Thunder, for the 2009-10 season, they paid Durant and Westbrook a combined $8.6MM. Durant alone will jump to $13.6MM in 2011-12 and Westbrook will soon follow that same path.

Good-bye OKC operating income.

The Crux of the Matter

Based on the current collective bargaining agreement (CBA) between the NBA players and owners, only about 20 of the current teams can be expected to break even or better in terms of operating income. In the simplest terms, this means that either the league needs to eliminate "fringe" franchises or significantly change the CBA...ideally by enough to make the current 30 teams viable.

The truth is that neither the owners nor the players want contraction. For the owners, contraction's a bad idea for two reasons - 1) having 30 significant media markets included enhances their leverage in terms of the national TV contracts and 2) having these markets in the fold minimizes the chances of the formation of a rival league. While rival leagues seldom succeed for long, they always seem to do two things while they live - raid a couple of your superstars and generally increase players' salaries.

The players, particularly the non-stars, don't want contraction for the most obvious of reasons...fewer job opportunities.

From the owners' perspective, this is where the argument ends. Contraction or making the CBA more mid-market-friendly. In the soon-to-commence public relations war, the players and their representatives will seek to add a 3rd alternative...increased revenue sharing.

NBA Revenue Sharing

As I mentioned at the beginning of this article, when taken in total, the NBA is profitable. The players, while acknowledging the financial problems of the smaller market teams, will claim that the dollars are there...they just need to be distributed more equally.

At first hearing, this may sound good, but it's an absolute non-starter from the owners perspective, and any reasonable business perspective. If you just bought a mega-market NBA franchise and paid the huge premium for the privilege, you are going to have a very serious and completely reasonable problem if someone tries to cut the (large) anticipated revenue stream that was used to set your purchase price. You'll also scream bloody murder over the fact that a significant change to the revenue sharing rules would cause the asset you just paid $500MM for to be reduced to $300MM.

When it comes to revenue sharing, it's one of those situations where you simply can't change the rules in the middle of a game.


So What's Next?

The owners pretty much laid their cards on the table when they introduced their $62MM "Flex Cap" proposal. If the union doesn't accept this in the next few days, the owners may go back to their silly posturing about a $45MM "hard cap" and the elimination of guaranteed contracts.

The problem here is that the owners' Flex Cap proposal may be close to their best offer (though the owners very purposely left key final details open to negotiation). The union treated the owners proposal like a posturing move (that is, they crapped all over it). It's possible that the players' representatives made a tactical error here that may cost both sides time and money only to have them end up in the same place they could be right now.

At the risk of repeating myself, the key point is that the owners are determined to come away with a CBA that works for 30 teams, not the current 20 teams who are or could be (if not for owner largesse) in the black in terms of operating income.

The players don't want to give up what they have and this is understandable. However, if they aren't ready to accept something very close to the owners' Flex cap proposal, the 2011-12 NBA season is unquestionably in jeopardy.

As fans, we're definitely on the outside looking in, but I hope that this helps you be a better consumer of the stuff that the media's about to throw at you.

Tom Nossem

 

I side with the players. Maybe a few people will go sit in the stands in Chicago to root for Reinsdorf on game days, but I bet for the most part the stadium is empty.

If an owner can't afford to be in the game, he should sell the team. The owners are all rich men who understand a P&L. There's nobody holding a gun to their heads making them pay a player $20M or more per season.

If the minimum salary requirement is $45M, they could pay 15 guys $3M each if they choose. If they want to compete with Mark Cuban, they can spend more. Though Cuban's spending hasn't won him numerous championships.

 

Checkout http://bulls.com

Seems all of the NBA.com team sites have removed every mention of any of the players' names.

 

The Bulls have, but I tried Atlanta and they show a roster.

 

I suppose it's OK to choose sides, but since it's not a game, I don't think it's required.

I wouldn't pay to watch Reinsdorf play either. If this is all folks here want to know about the NBA labor situation, I'm sorry I wasted the keystrokes.

The plain truth is that mid-market teams can either choose to compete or break even/make a small profit. As the article pointed out, OKC was a rare mid-market team that showed and operating profit in 2010 (and a pretty solid one), but it was because they had Durant and Westbrook on rookie contracts. They'll begin showing operating losses in whatever the next NBA season is. I guess Bulls' fans don't need to care about this since we're not fans of a mid-market team.

The "If an owner can't afford to be in the game, he should sell the team" works as long as there are enough Paul Allens or Mark Cubans, which is to say owners who can afford to lose money indefinitely, out there. As times have gotten tougher, these guys are kind of a dying breed.

I do agree that no one should buy an NBA franchise if they're looking for a good business investment. There are lots of better ways to invest.

Denny, I'll give you this much...you keep things simple and you're certainly entitled to you opinion.

I don't think the current NBA labor situation is simple and so I try to gain an understanding of it, and when I think I've succeeded, I share my thoughts in the hopes that others who may be interested might benefit a little. I'm going to continue to do this, but if folks here feel it's a waste of their time, I'll stop posting my thoughts here (though I'll continue to provide this content for Sportstwo's main page).

 

Your article was a fine read. I didn't argue with any of it, I just posted my opinion on the subject.

The issue of small market teams being able to compete is still all on the owners. If they want to, they can implement a profit sharing program so Reinsdorf could have his nice P&L, but would fork over some cash so teams like OKC can afford to pay it's players competitive salaries.

The past CBA required the owners to give the players something like 57% of BRI. It sure seems like the teams don't have more than 43% of BRI in other expenses - that coming from looking at Forbes' WWW site reviewing the NBA team's financials.

And I do believe there are plenty of guys out there with $billions who could own the teams, if the current owners insist on having negative P&L statements.

You are right that I see pro sports as a game and not a business. Historically, the teams in all sports have been toys for rich kids, or corporate write offs, and not profit centers.

 

Thanks. Good to know someone reads them here (I tend to get more feedback from the other places I send these).

As for surgery, the most likely candidate is OKC, which I think is the smallest (media) market in the league. As I wrote, they made money in 2010, but they're a sure loser going forward. Sacramento's another prime contraction candidate. Memphis lost money in 2010 and that was before bumping Gay and Randolph (not to mention M.Gasol)..they're financially screwed. Minnesota, Milwaukee, Charlotte and Indiana are other hopeless cases if the CBA doesn't change...they'll be bad and still lose money.

Again, as Bulls' fans, we may not care about whether these franchises survive, but their fans care deeply and the NBA wants those middle markets in the fold as well.

From the owners' perspective, this is all about strengthening its weakest links at least to the point where they can both reasonably compete and break even (regardless of what is done with the CBA, I can't see them being operationally profitable in a sustainable way).

 

Denny, first off, I apologize. I felt that your comments were dismissive of what I wrote when in fact they were simply your opinion. I got unnecessarily pissy. My bad.

Not surprisingly, I disagree with you, but what new.

Your idea of having the haves subsidize the have-nots is entirely unrealistic...there simply aren't enough (if any) socialist owners of big-market NBA teams...Reinsdorf certainly isn't one. Still, no one said that fans need to be realistic. Frankly, realistic or not, I suspect that we're all going to be fiddling while the NBA burns. What else can we do?

Eventually there will be NBA basketball again. I hope it's in November, but I'm not optimistic. I suspect that the owners are ready to let the 2011-12 season die. I doubt that the players will let this happen. Unfortunately, right now it's a game of "Chicken" and I fear that no one will win.

 

But see, the players and owners are both being socialistic in this whole thing. The owners claim, "we as a group lose $X" and the players are collectively bargaining (a socialist concept). It isn't Bulls players negotiating with Bulls management, and so on.

I'd prefer it were capitalistic.

Another reason I side with the players is that they don't have any upside beyond their contracts. Reinsdorf makes $60M in profit, and no player makes that. Reinsdorf also makes $20M a year in EQUITY, which is something you didn't mention in the article. Like, he bought the Bulls 20 years ago for $100M and it's worth $500M now, so $400M in equity / 20 years = $20M. To be really fair about it, the players should get a cut of the equity, too.

 

Very thoughtful stuff.

That's a damn good point about the owners not being in a very capitalistic situation...they're a cartel (it's necessary, but that's what they are). They compete on the court, but are partners in the overall enterprise.

I think I get what you're saying, but wonder if you'd feel the same way if you were a fan of a mid-market team. Really Denny, they (mid-market teams) can't sustain any reasonable level of competition without losing money. I know that you want all the mid-market owners to be like Paul Allen or Cuban, but they're a dying breed.

As a Chicago fan, contraction is probably the best answer, but that's not going to happen. Personally, I'm not into the right or wrong of this...I'm focused on the reality. The reality is that the NBA as it currently exists, can't accommodate 30 teams without some serious concessions from the players. I can't blame the players for not wanting to give up what they have, but I fear that the longer they hold to this position, the longer we'll be without NBA basketball.

I don't get any big kick out of trying to decide who's right or wrong in this because there is no right or wrong. I hear fans talk about "fairness" and laugh. These are labor negotiations...any individual's idea of fairness is entirely irrelevant. The owners want significant changes and the players want the status quo. The players know that they must make concessions, but understandably want to hold on to as much as they can.

You can favor the players or the owners, but we're unorganized fans so we don't matter. This is a business thing and we're not a part of it.

I'm just trying to make as much sense of it as I can.

 

San Antonio has managed with win championships and maintain profitability while being in the 25th largest metropolitan area.

5 teams have operating losses > 10M.

http://www.forbes.com/lists/2011/32/basketball-valuations-11_land.html

The bottom 6 teams in revenues (wins in parens) are New Jersey (24), Memphis (46), Milwaukee (35), Indiana (37), Minnesota (17), and Charlotte (34). Those teams make less than $100M in sales.

New Jersey is in the #1 MSAs in the country. Their problems are all self-inflicted. They have a new $billionaire owner who bought the team with his eyes wide open, so he is willing to turn things around as he sees fit.

Of the rest, only Memphis was a 2nd round playoff team and this was the first time they made it that far. Only 4 playoff trips since the team was started.

The rest are sub .500 teams.

Maybe trying to win will put more butts in the seats.