Friday Podcast on the Wages of Wins Network

Posted on March 18, 2011 by

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If it’s the weekend, it’s time for another Wages of Wins Network podcast  (click on the link to listen!!)

On Friday the cast was as follows:  

Mosi moderated the podcast and prepared the following review of our discussion.

Collective Bargaining and Socialism in Sports

Mark Cuban wrote a blog post last year about collective bargaining in the NFL. It seemed his basic point was that the CBAs for the NBA & NFL are flawed because they result in the owners assuming 100% of the risk. According to Cuban:

 “The hardest job in professional sports is the assessment of  player skill. The second hardest job is determining how to allocate salary to players in a manner that builds a championship team.”

 The players get to benefit from this problem but never have to give back salaries or contribute capital to make up for losses:

 “You can’t ignore risk. Nor can you assume 100pct of the risk and hope the real bad stuff never happens.  The NFL and its owners, since we are using them in our example, are assuming 100pct of the risk of the economy falling again. They are assuming 100pct risk of their bigggest TV customers having their primary delivery systems eliminated. They are assuming 100pct of the risk of trying to convey money from big markets to small markets to try to compensate for an irrational cap system. They are assuming 10opct risk on the capital invested in their franchises, PLUS capital they may have to add to cover any losses.

The players side? While individual NFL players take on significant risk, the players as a whole take on ZERO risk.  If their membership just shows up for games, 53 guys on each team are getting paid.  They never have to give the money back or contribute capital to make up losses.

The solution? Its a system where risks and rewards are allocated properly. Owners should take on more risk than players because they have more upside from franchise appreciation. They shouldnt take on all the risk. Nor should players be excluded from sharing in the upside of equity appreciation. Im not saying that for example players earn a share of the sale price when an NFL franchise is sold. There are a variety of ways to track or index appreciation of franchises that rewards players that can work better and more efficiently.  When the index appreciates the economics available to players appreciate. When the index depreciates, the amount available to players should be reduced as well.”

Dave and my understanding of the NBA CBA is the owners did negotiate some controls over their risk with the escrow system that tries to ensure salaries & benefits do not exceed a designated percentage of basketball-related income (BRI – see the work of Larry Coon for more on this). I believe the NFL has a similar mechanism that takes money from the pool available for player salaries to build stadiums.

Do Cuban’s comments change how the owners’ demand for the players to give back money should be viewed (whether it’s $1 billion or $500 million)?

Cuban’s assertion is that the owners need to protect themselves from Black Swan events (in this case, he cited the FCC ruining the NFL’s biggest customers’ ability to broadcast NFL games). Dave said, “No,” unless the owners are willing to make the players partners and share the profits with them.

 Dave also thought the following points needed to be made:

  1. NFL players do take risk since their contracts are not guaranteed.
  2. Although NFL players are cut for not performing or getting hurt, there is no mechanism for increasing pay if a player does better than expected.  And since performance in the future can’t be forecasted very well in the NFL, teams are often benefitting from increased production from players were not expected to be that good.
  3. Assessment of player skill in the NBA is a challenge when looking at the draft.  But veterans in the NBA — relative to the NFL — seem relatively easy to evaluate.  Of course, it helps if you are not spending $100,000 per year on a model that doesn’t work.  In other words, Cuban made his job more difficult by hiring the wrong people.

 I would also add that relative to Europe, there is less risk in North American sports.  The North American leagues maintain monopoly power in each market.  So even if a team is bad, they still can sell tickets because there are no other teams to watch.  Plus they reward the losers, which also minimizes the downside of bad decisions.

 Forbes’ Michael Ozanian wrote:

“National Football League and National Basketball Association collective bargaining battles are about the same thing: reducing player costs from about 50% of total league revenue (before revenue deductions for costs specified in the football and basketball CBAs) to roughly 40%. If NFL owners are victorious the subsequent increase in operating income would result in an aggregate $15 billion gain in value for the 32 teams. If the NBA owners get what they want even the downtrodden franchises would increase at least 30% in value (~$2.7 billion).”

Mosi asked Dave if there’s a magic number for splitting revenues between the owners and players. Dave explains how it’s handled in other industries and what a good model could potentially be for the NBA.

  • Dave wrote two articles this week discussing examples of socialism and corporate welfare in professional North American sports that dovetail nicely with the discussion of risk and Collective Bargaining (see HERE and HERE). It appears Cuban, and owners like him, would argue the NBA needs socialist practices to mitigate the risk they assume by owning professional sports franchises. Dave says that contradicts some of the basic tenets of capitalism.
  • Mosi & Dre asked if the problem is bad incentives. For example, if there’s a lower risk associated with trying to lose than trying to win, then doesn’t that ruin competitive balance? Does the Short Supply of Tall People incentivize losing or justify the owners’ argument that they need to reduce their financial risk?
  • Arturo said the competitive balance argument is a myth and Dave agreed.
  • Dave conceded that if teams began evaluating players properly, then the NBA would still need to do something to compensate teams that suffer from the Short Supply of Tall People.

March Madness Moneymakers

  • Let’s end on a more fan-friendly topic – March Madness. Last year, Dave wrote about the impact a Final Four appearance can have on a prospect’s draft position (it improves by about 12 spots.
  • Dave picked San Diego State, UNC, Kansas & Pittsburgh to make the Final Four this year (for the Wall Street Journal via a blind bracket). Which players from those teams are likely to cash in on their appearance in the next NBA draft?
  • Dave picked Harrison Barnes as the player most likely to profit from going to the Final Four
  • Arturo said he hasn’t run any numbers but thinks Kenneth Faried has a real chance to benefit the further Morehead State advances on the back of his 17-rebound games. Dave said they’ve got a good chance to make the Sweet 16 since Richmond upset Vanderbilt.
  • Mosi & Dave said Kyle Singler could benefit if Duke makes it to the Final Four. Kyrie Irving could help in that regard if he can be as productive as he was in his first eight games.
  • Dre makes his Final Four picks, but no moneymakers, so Mosi questioned his “unhealthy” dedication to ESPN Radio’s Mike & Mike in the Morning Show.
  • Mosi admits he may have an unhealthy dedication to Allen Iverson and, surprisingly, Dre admits that he enjoyed watching Iverson play! He does watch games!
  • Mosi picked University of Washington’s Isaiah Thomas and Georgetown University’s Chris Wright as potential moneymakers from his biased (and flawed) brackets. Dave said he hopes that’s the case and the Knicks end up picking him in the NBA draft in a moment of confusion.

The podcast ends with a suggestion that someone studies whether Gus Johnson is fixing games with a Buffalo Wild Wings button.

– Mosi Platt

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