A few weeks ago, Jeff Pearlman wrote a column at Sports Illustrated that claimed Eddy Curry was young, talented, and a complete waste. When I saw this column I thought I should write something. And today I finally did at the Huffington Post. My basic argument… fans of the Knicks shouldn’t be disappointed that Eddy Curry isn’t currently available.
The Eddy Curry story is part of a larger story in the NBA. David Stern is currently asking players to take a significant wage cut. He claims that without this cut in wages, owners can’t make money.
For a response to Stern’s claims, let me re-post a brief story offered today by Matthew Yglesias:
The best way out of a recession is a combination of expansionary fiscal and monetary policy to bolster aggregate demand. Failing that, you need to have a grinding process of nominal wage cuts and unbalanced deflation that can take years to end and cause massive human suffering in the meantime. David Stern wants the National Basketball Association to do its part to make the dream a reality:
Stern said the league wants player costs to drop $750 million to $800 million. Deputy commissioner Adam Silver said the NBA spends about $2.1 billion annually in player salaries and benefits. […]
Stern and [Deputy Commission] Silver spoke after completing two days of meetings with league owners, who are seeking major changes to the current CBA that expires June 30. Silver said the league has told the union that owners are in a “diseconomic situation,” with projected league-wide losses of about $340 million to $350 million this season.
Though season ticket sales are up, both insisted that no matter how well the league does at the box office, it won’t change the fact that an overhaul is necessary to a system in which the players receive 57 percent of basketball-related income.
“Even though we reported we have record season ticket sales over the summer and otherwise very robust revenue generation, because of the built-in cost of the system, it’s virtually impossible for us to move the needle in terms of our losses,” Silver said.
This kind of pleading always strikes me as unpersuasive on the merits. If I owned a business that was losing tens of millions of dollars a year, I’d be eager to sell the business for a relatively small amount of money. When the Washington Post Company put Newsweek up for same, for example, they were ultimately willing to part with the firm for $1 on the condition that the new owner assume Newsweek’s pension liabilities. Similarly, when General Motors and Chrysler were revealed to have an unsustainably high labor cost structure, nobody wanted to buy either firm at any price so the government had to step in.
By contrast, when Mikhail Prokhorov bought the New Jersey Nets—by no means the league’s most lucrative franchise—he paid $200 million for the privilege. Ted Leonsis bought the Wizards, a terrible team, from the Pollard family for over $500 million this past summer. The high price of NBA franchises strongly suggests that operating one is valuable even with 57 of basketball-related revenue going to player salaries. Part of the issue is that the teams themselves can be in some ways loss-leaders for businesses whose real profit center is an arena or a cable network. Accounting can be misleading, actual asset prices are telling you something.
And here is something else Yglesias said about the NBA’s claims last February.
If NBA teams are really in such bad economic shape then how come we’re not seeing more teams change hands? In other words, if “[a]bout half of the league’s 30 franchises are losing money” then how come that isn’t leading owners to sell their teams? Someone genuinely losing money on his NBA team ought to be willing to sell it at a cheap price to a rich guy hoops fan who doesn’t mind losing money, or just to a businessman who overestimates his basketball-management prowess.
Rationally speaking, if NBA teams are hugely profitable it makes sense for owners to grab as large a share of the revenue as possible. And if NBA teams are posting huge losses it . . . also makes sense for owners to grab as large a share of the revenue as possible. The state of the economy, in other words, has very little to do with anything. And this is really the key issue in the collective bargaining dispute—as a fan, I’d be fine with a hard cap (easier to understand) and happy with shorter contracts (nobody likes to see a team crippled by a bum long-term deal) but from a business point-of-view the owners’ core interest is in reducing the players’ aggregate share of the revenue but nothing about their pursuit of that goal has anything to do with the business cycle or anything a fan would care about.
Let me summarize…NBA owners have every reason to claim they are losing money. And NBA owners do want a system that allows them to make money even if they give Eddy Curry $60 million. But the recent sale of NBA franchises suggest that the NBA is really not a league where losing money can’t be avoided.
– DJ
Wages of Wins Journal 
A.S.
October 22, 2010
The two transactions cited by Mr. Yglesias are more complicated than he lets on in his post. Prokhorov purchased an 80% interest in the Nets, plus a 45% interest in the Barclay’s Center, plus an interest in the Atlantic Yards (residential and commerical) development. Leonsis purchased the portion he didn’t already own of the Wizards, the Verizon Center, and certain Ticketmaster operations. Now, Mr. Yglesias acknowledges that basketball franchises can be loss leaders for arena and other operations. And that is probably what is going on here. But, at least in regards of the Nets, we know full well that the Nets basketball team has been losing A LOT of money over the past several years. We know this because the Nets have been owned in part by a public company, Forest City, which is required to make public certain of the Nets’ financials.
It seems to me that that if the sale of franchises for big money is an important part of the economic picture here, the simplest way to bridge the gap between the players and owners is to have the players participate in a percentage of the proceeds when a team is sold.
Shawn Ryan
October 22, 2010
“It seems to me that that if the sale of franchises for big money is an important part of the economic picture here, the simplest way to bridge the gap between the players and owners is to have the players participate in a percentage of the proceeds when a team is sold.”
Don’t see that happening. Really the Players Association just needs to call B.S. on the owner’s, and Stern’s complaining (i.e. cash grabbing, and generally I wouldn’t be that on-the-nose with a critique, but it’s obvious that the losses reported are not a realistic assessment of the values of these teams, which the owners obviously know, so to make these arguments is pretty ridiculous IMO). And I have little doubt that they will since the falsehood of the collective owner’s claims of poverty should be obvious to any accountants that the Players Association employ for negotiations. That’s the thing that creeps me out about it though, Stern knows that the Players association is legit, and has been very effective and not likely to be fooled by accounting tricks. Therefore, I see his declaration that the NBA is losing money and that this loss needs to be paid for directly by the players as a campaign to get fans to see players as greedy (a view for which fans already have a propensity) while the owners are being far greedier by cynically taking advantage of the recession in order to further enrich themselves at the expense of the players, who just happen to create all of the NBA’s value.
jbrett
October 22, 2010
No power on Earth can shake Donald Sterling loose from his grip on an historically bad NBA franchise. Golden State has for years pushed fans toward mass suicide, and the team was just sold for an absurd figure. Maybe–just a wild guess here–these guys have been turning a profit? Enough of a profit that they can give insane contracts to guys who were never any good, or whose legs fell off after they signed? Even if they hire coaches who are clinically dead (or just brain-dead), or who methodically shred the psyches of the most talented players? Yeah, I’m thinking the truth is it’s damn near impossible to lose money owning an NBA team.
jbrett
October 22, 2010
By the way, the Heat are saying Mike Miller is out ’til January with a thumb injury. Do they seem a little snakebit so far?
Italian Stallion
October 22, 2010
If an NBA franchise is a loss leader for other profitable business ventures and the net of all related investments is a satisfactory return, I don’t see how that makes the players entitled to the above average profits from the other businesses. If anything, the management and employees of the other businesses may have something to complain about.
Smart businessmen are always looking for synergies between businesses that make the whole greater than the sum of the parts. But those kinds of things don’t always work out. So the returns belong to whoever is risking the capital and smart enough to make it work.
Italian Stallion
October 22, 2010
jbrett,
John Lennon wrote a song about the Miami Heat. It was called Instant Karma.
Bill Gish
October 22, 2010
I will always remember an economics professor of mine in college explaining the wider definition of “rent”, and using professional athletes as his example of another scarce commodity that consumers are required to pay rent to acquire.
As long as all the money in the world will only drive up the price of a scarce commodity like LeBron James, and does little or nothing to increase the availability of comparable talent, we fans will pay our share of the rent.
That said contracts are too long and something has to be done about farces like Eddie Curry. The latest farce I heard about was that various contractual and insurance considerations will force the Bucks to pay Michael Redd $18 million dollars to not play basketball this season even though Redd wants to try to come back.
szr
October 22, 2010
Even if Stern were right that teams were losing money on basketball, the solution is still BS. There are two sides sitting down at the table when a player contract is being negotiated – and it isn’t the player’s agent who is responsible for making the owner profitable – it is his responsibility to get his client the best deal he can.
But the bigger issue keeps coming back to the main point. If owning an NBA team were a bad deal, we’d see them being sold a lot more than we do. Or maybe we’d see an entire league of Mark Cubans who have so much money they don’t mind losing it on a hobby.
Also, it doesn’t matter if Prokhorov loses money on the Nets if they play a key role in an ecosystem of business that are hugely profitable. It isn’t unfair to the hot dog venders (who are hugely profitable) that part of their profit goes to covering the expense of running a show that gives people a reason to gather together.
Michael
October 23, 2010
I can see a problem with the idea that if teams were really losing money we would see them change hands more often.
What if owners have been biding their time in anticipation of the new c.b negotiations, and for that reason holding onto their teams in the belief that they will be able to negotiate these sorts of cuts?
I guess the only way to find it will be if the renegotiations fail and owners then start selling their teams.
John Giagnorio
October 23, 2010
“If an NBA franchise is a loss leader for other profitable business ventures and the net of all related investments is a satisfactory return, I don’t see how that makes the players entitled to the above average profits from the other businesses. If anything, the management and employees of the other businesses may have something to complain about. ”
I think people are referring to profitable business ventures built around the team. Say I own the Atlanta Braves and TBS, and I show Braves games on TBS. I charge all baseball related expenses to the Braves, possibly including production costs for putting the games on TBS. I then turn around and credit all the advertising money that I make off the games to TBS without paying the Braves for tv rights. The profits are unquestionably generated by the players, yet they belong to another business through accounting tricks.
John Giagnorio
October 23, 2010
dberri, I really admire your willingness to call out team owners for this stuff, whether it’s baseball, football, or basketball. Keep up the good work!
Italian Stallion
October 23, 2010
John,
I understood what people were talking and still don’t think basketball players are entitled to the profits in other businesses even if they are basketball related. Each business requires it’s own investment of capital, entails risks etc… and many such attempts at synergy fail. Successful use of synergies should accrue to the owner.
In additon, the criteria for business success is not being profitable.
Success or failure is determined by the risk adjusted return on investment.
If a businessman invests 1B dollars in a combination of a basketball team and several other related businesses, he better be making more than 100m a year profit on the net of it all or he’s a failure.
If they are using accounting tricks to mis-allocate the true costs and revenues to the appropriate business, that would be something meaningful to explore. But I would guess there are accounting rules guiding what they can do legally. If they could get away withe the scenario you are describing, then that information should clearly be part of the negotiation..
dberri
October 23, 2010
IS,
I would encourage you to read more about labor negotiations in sports and the accounting practices of sports teams. In this area, you don’t understand exactly what is going on.
John Giagnorio
October 23, 2010
I’m not really sure what you’re arguing.
Owners of all businesses take risks. Employees take risks as well, although less obvious ones. Owners and employees split the money businesses make in a way determined by the free market. There’s no need for any outside observers to decide what’s fair. The NBA owners have opted against this system. Why do you think this is?
As far as the accounting trick, there’s no “if” about it. The exact scenario that I described is pretty common.
reservoirgod
October 23, 2010
The owners know Yglesias’ point (and thus the NBPA’s point) is valid that’s why they’re talking contraction now. Check out this quote from Stern:
“Asked if contraction should
be a chilling word in Memphis, Stern said: ‘No, it
shouldn’t be. It’s a good word to use, especially in
collective bargaining.'”
The contraction talk is a complete bluff. They just sold a team in Charlotte for goodness sake. Plus, the owner of the Timberwolves said he had no plans on selling anytime soon and this is after cutting ticket prices while shelling out tens of millions for practice facilities. Yes, NBA ownership is a good gig to have, indeed.
DR
October 23, 2010
David Stern is lying. Case closed.
Josephus
October 23, 2010
The players should make a trade. The league gets shorter contracts. (Let’s say max three years if a player switches teams, four if they do not- or if they really want to give the home team an advantage, two years if a player switches teams, four if they do not.) But then they get rid of the cap altogether.
The league knows that large contracts don’t cripple team flexibility. Two things cripple team flexibility, the desirability of the franchise in terms of location (ie. Minnesota is in a huge disadvantage), and the salary cap, which forces teams to pay (precisely in form of a loss of flexibility) for making bad economic decisions.
How can you possibly feel sorry for 1) an owner who chooses to spend whatever money he chooses to spend? And 2) And owner not putting out a successful product when there is huge market inefficiency in terms of winning and spending. One could year in and year out put together a 40-50-win team for the salary cap merely by taking advantage of such inefficiencies.
Oh, and yes, of course contraction is a bluff. It’s no better for owners than it is for players. It damages the overall revenue stream. After the labor talk, Stern will once again be talking about putting two teams in Europe with other Russian mobster owners running them.
Dan
October 23, 2010
“Ted Leonsis bought the Wizards, a terrible team, from the Pollard family”. Ahh.. the blogosphere….
bills
October 23, 2010
I am surprised that everyone seems to ignore the players’ responsibility for their situation. Every single one of them is very rich by almost any standard one wants to apply. The poor rookie just out of college makes a guaranteed minimum of over $500,000 per year, and all other players make more. The median income for each player is about $2,000,000 per year.
People have been predicting a lockout for the last couple of years. The players have had plenty of time to sock away enough money to tide them over for an extended period. They should be able to last a year or more with ease. And if they have not yet done it they still have almost a year till the lockout can start to catch up. In short, they should be immune from any threat of lockout.
I expect some of the players have made preparations but I also suspect that owners know their players well. They do not believe that enough have done so to make a difference. They are betting that a lockout will put the majority of the players into financial difficulty.
You can talk about the greed of owners all you want, but I find the stupid greed of the players who refuse to forgo current spending to make provision for the future, even when the owners have made no secret of what they intend to do, as just mind boggling.
The ownership is exploiting the fact that the players do not have the will or discipline to prepare for the lockout which, with their incomes, should be easy.
I have very little sympathy for players who are being hijacked by a weapon that they themselves provided.
todd2
October 23, 2010
No one forced Cuban to pay Nowitzki $20M.
reservoirgod
October 24, 2010
Bills:
I think it’s easier said than done that the players should have saved enough money to survive a lockout. Two million dollars is $1 mil after taxes. Then there are fees to pay for agents, managers and financial advisors. Then there’s money to pay the friend(s)/family member(s) that take care of everything while the player’s on the road. If all that overhead wasn’t enough, there are family members who need to be taken care of so the player knows they’re safe and sound (in the book Color of Wealth, the authors’ research shows that afrikan-americans disproportionately spend more money on older relatives than younger relatives compared to other americans). It’s not as simple as you make it out. When the average player is only in the league 4 yrs, it’s not easy taking care of all those obligations and saving enough money to live for a year without any income. If the average american can’t save enough in 4 years to afford their cost of living for a year w/out income, then why would you expect an athlete to be any different?
Schermeister
October 24, 2010
” If the average american can’t save enough in 4 years to afford their cost of living for a year w/out income, then why would you expect an athlete to be any different?”
Because they have a much larger amount of disposable income.
If they spend money on other people or foolishly that is not an excuse.
reservoirgod
October 25, 2010
Schermeister:
I see. So millionaires are supposed to live like thousandaires. Spending money foolishly is only an excuse for people who earn less than $1 million? Ok…
Daniel
October 25, 2010
NBA teams just aren’t good investments– there are so many things you can plunk down $500M that will make you a ton of money. Owning an professional sports team is an elite status symbol, and the only way many billionaires can ever gain national celebrity, despite their fantastic nose for cash.
Large pieces of land that have only part-time uses are generally poor investments– see amusement parks and theme parks like Six flags and Sea World– they’re loss-leaders for an entertainment company and a beer company, and they’re among the least profitable subsidiaries on the books of their respective parent companies. The problem is that these locations aren’t dynamic enough to support the diversity of high-margin activities necessary to eat the cost of year-round upkeep. Stadiums need to be almost constantly booked during the year to make up for the operating losses of NBA teams, and ownership of the team without ownership of the stadium makes many professional sports teams money pits, especially NBA teams.
This is part of why the Pacers are in such dire straits at the moment– the team is losing tons of money and cannot afford their lease on the stadium (the agreement was made when the Pacers team was winning, with no thought for contingencies such as the state of the team if Reggie Miller couldn’t play basketball until he was 50), and they have no operating income outside basketball-related activities to help mitigate the shortfall.
Schermeister
October 25, 2010
Millionaires have the option to depress their spending, normal people have much less options. And yes millionaires should live like thousandaires when they no longer are aquiring millions. Like when they strike.
And yes the nesc. items for life of a rich person and normal person are the same. Hence the whole disposable income term. Since when does earning the money entitle you to always spend all of it and then complain when you lose the money? Reservoir, you make sound like I should start a charity for them
I dont particularly care for either of the sides. The owners are simply hiding the money they are making or making it in other forms. Or they are perfectly happy to lose money on the team as a toy. The assets they own (teams) have been increasing over inflation over the last 20 years, so without making money per year they are still in the black. Treating the team like a complex stock or bond. Farms and many small businesses are ran this way.
The players spend their money foolishly and appear to not be in a position to strike. They also dont particularly understand the position they are in.
An average player might play 5-6 years in the nba. The loss of a year is 15-20% of their net income of their respective careers meaning they better have stored away some cash cause they may not make the lost income back in the course of their careers depending on what offers they have backed away from already. (I hardly doubt we can believe Sterns numbers since he will alwasy try to tell us the owners side of things.)
Kevin Broom
October 27, 2010
Leonsis bought the Wizards (and the Verizon Center) from the POLLIN family (not Pollard). Abe Pollin bought the then Baltimore Bullets in 1964. At his death, he had owned the Bullets/Wizards for longer than any other NBA team owner.