The Economics of the NBA (or Why we have an NBA Lockout)

Having an interest in both economics as well as basketball means that the lockout is a perfect storm of intrigue for yours truly.  And, of course, being the opinionated blogger that I am, it gives me perfect material for yet another piece.  I’ve heard all sorts of “millionaires against billionaires” stories, but I don’t really want to simply add another uninformed (or semi-informed) opinion, so instead I’ll take what I know from the NBA financially and cross it with what I know from economics and we’ll see what we get in the end.  So here’s my perspective on what’s going on with the NBA.

First, even though this article was published on ESPN, I think we have to assume that the NBA is losing money.  What that means is that NBA franchises are spending more money than they are making, meaning that expenses (maintenance, advertising, equipment and player salaries) are greater than revenues (tickets, merchandise, parking, tv deals).  The other thing that has to be admitted is that the NBA as a whole is raking in the dough – at least initially.  The league is growing (economically) at a good rate and the NBA is making bank in terms of raw revenue.

So here’s the deal with collective bargaining agreements (CBAs): it’s essentially a deal made between the players union and the team owners as to the terms and conditions of employment.  Sounds pretty simple, right?  Don’t be deceived.  Here’s a beginner’s list of FAQs (I’ll refer to this a lot) on the recently expired NBA agreement.  In sports, players’ unions really hit it off big in the late ’60s with the MLBPA (history here) and Marvin Miller who essentially created the framework for free agency in professional American (and I assume other countries, too) team sports.  Three things this did was 1) take away the almost slave-master-like power of owners; 2) inflate player salaries, making athletics more lucrative than ever; and 3) make your ticket/parking space/memorabilia/hot dog far more expensive.

Basically, the problem you have in the NBA right now (if it is actually true that the NBA franchises are losing money) is similar to the one that has been brewing in Detroit for 80 years – Unions have created an imbalance of bargaining power, which means that it is very, very difficult to make profits.  I’m not making this up.  Ask the 235,483 (11.6%) unemployed persons in Detroit; or see what Michigan’s two contributions (Flint and Detroit) to “America’s Most Miserable Cities” have in common (hint: uber-strong Union presence).

To combat this problem, most professional team sports have salary restrictions (except baseball; again, Marvin Miller’s fault), which is supposed to counteract the balance in bargaining power.  An agent (let’s be honest, it’s not the players; it’s the agents) can’t ask for $50 million for his player if he’s capped at $16 mil.  Similarly, Carlos Boozer, though a fairly good player in his own right, cannot demand the maximum, because there is a pecking order to the whole thing – 2nd tier players (or lower, depending on how you feel about the Booz) cannot demand Lebron James money.  In fact, according to a recent stathead article, even Lebron James can’t demand Lebron James money.  Furthermore, there is a salary cap, which is a maximum that teams can spend on players overall, which is intended for league parity, but also drives down player salaries for obvious reasons.  Players (ie agents) hate both caps, because they provide an upper limit to spending.  So that’s their beef with the CBA.

Now, you say, “if the NBA has a CBA that includes a salary cap, doesn’t this solve the problem of the unions?”  The answer is tricky, because even though the expired CBA does have a salary cap, it’s what is called a “soft cap,” which means that teams can go over the cap (which, of course, is an oxymoron)… but only in certain situations.  In the NBA last year, the salary cap (remember, “soft cap”) was $58.044.  However, upon further review, it turns out that only 7 teams (scroll to bottom on link) actually were under the so-called cap, including just 2 that were over .500.

So here’s the catch-22: teams want (you could argue need) to make money; to make money (increase revenue), teams need to win; in order to win, however, teams need to spend; and when teams spend, they need to make more revenue to make up for their increased expenditures!  For most teams, this is a no-win situation.  Small markets like Milwaukee, Charlotte, Oklahoma City and Utah have to balance payroll (and victory) against revenue very precariously.  When your budget margin is razor-thin, there is no room for error.  So what end up happening is that teams that can afford to shoot way over the cap (LA, Orlando, Dallas and Boston) end up on top of the league, with one or two small market teams try to compete financially (Utah) or get very, very lucky (OKC).

This is what sets the NBA apart from your everyday business.  In business, we don’t tend to really care about parity too much.  As long as Best Buy is giving us good deals on our Taylor Swift CDs and plasma-screen TVs, we could care less that Circuit City went bankrupt and that there isn’t really competitive alternative to Best Buy.  That’s not how we want the NBA to be, though.  Yes, the most “economically efficient” outcome would be for the Lakers to have all the best players and crush the competition with everyone simply being a an LAL fan (think Globetrotters v Generals without the gimmicks).  But we want parity (to some extent) and kind of like the fact that the Celtics don’t win 11 out of 13 years (sorry Boston).

So this is what the dispute breaks down to.  Right now you’ll hear lots of arguments about what percentage of revenue the owners/players get, but really what that’s talking about is the salary cap, because the cap is determined by the division of revenue.  So what we’re looking at is the owners wanting a hard cap to cut expenses (and in the process, promote parity) and the players looking to make more money (or as the case may be, not take as large pay cuts).  So who’s the devil in this arrangement?  Really nobody, unless you believe that trying to make money is wrong in which case you should be clamoring for the heads of the middle-men (agents!) before either the owners or the players.  Of course you can demonize any side you want, since undoubtedly nobody is being completely honest (as is the case anytime there are billions on the line), but you probably have better things to do like attend to your own “personal problems.”

There’s always more I could write, but this seems like a good place to stop (also a good time).  Hope this explains what you want to know about the CBA and the NBA lockout.

Yours Truly,

Basketblogger

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  1. July 8th, 2011

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