Arturo Galletti is the Co-editor and Director of Analytics for the Wages of Wins Network. He is an Electrical Engineer with General Electric in the lovely isle of Puerto Rico, where he keeps his production lines running by day and night (and weekends) and works on sport analysis with his free time.
Five hundred twenty-five thousand
Six hundred minutes
How do you measure, measure a year?
-“Seasons of Love” from the musical Rent
Where were you a year ago today? What were you doing?
A year ago today, I was breaking down my final predictions for every team and every player for the 2010-2011 NBA season. I was enjoying a fabulous opening week to what would turn out to be one of my favorite all time NBA seasons (and maybe my favorite sports season in which one of my teams did not win).
Now I sit here waiting for the NBA owners and players to argue their way to an agreement to end a bitter lockout. As a fan, I can’t help but be angry at losing such an enjoyable part of my life. That’s the why of that particular quote. Because I love this game, and that love is a gift. The emotional side of me is desperately hoping that the NBA players and owners alike remember that and give us back the game.
The logical side of me understands that there are reasons for where we are, and given that, we may just be on the cusp of the end of that lockout, so I wanted to break down and summarize those reasons.
By the numbers of course.
$3.817 Billion Dollars in 2011
Money is of course at the root of the problem. Specifically, it’s Basketball Related Income (BRI for short) that the players and owners are currently arguing about.
BRI includes pretty much any income received by the NBA, NBA Properties or NBA Media Ventures. It breaks down in three groups:
100% included:
- Broadcast rights
- Regular season gate receipts, exhibition game proceeds, playoff gate receipts
- Novelty, program and concession sales (at the arena and in team-identified stores within proximity of an NBA arena), arena club revenues, and parking
- Proceeds from team sponsorships, team promotions
- Proceeds from summer camps
- Proceeds from non-NBA basketball tournaments
- Proceeds from mascot and dance team appearances
- Proceeds from beverage sale rights
- Proceeds from other premium seat licenses
- Proceeds received by NBA properties, including international television, sponsorships, revenues from NBA Entertainment, the All-Star Game, the McDonald’s Championship and other NBA special events.
Partially included (this is the stuff Billy Hunter will point out gets taken off the top):
- 40% of proceeds from arena signage
- 40% of proceeds from luxury suites
- 45% – 50% of proceeds from arena naming rights
That number for 2010-11 was of course $3.817 Billion.
57%, 52%,50%
These are the the shares of BRI that the players and owners are specifically currently arguing about. 57% is the share that the players have enjoyed under the current Collective Barganing Agreement (CBA) with the owners. 52% and 50% are the numbers being touted by the two sides (with the players of course on the high end and the owners on the low end. The difference?
The Players are arguing a between a 9% and a 12% salary cut at this point ( a 3% loss) or about $70 Million dollars a year.
5.7 years and 8.4 gamechecks lost
If you look at all the data for the last 30 years, the average length of an NBA career is about 5.7 Years. In fact 80% of players will not spend a decade on the job.
Some simple math for you: 3% salary loss times 5 years is 15% salary loss over the course of a career, and this is much less than a 100% percent loss from losing a season. Even if the players could get back the full 57% share by losing a season they would end up losing money on the proposition (12% times 5 = 60% versus 100% for a season lost.
Seems like I want them to settle at 50% right? Not so fast. There is some margin to be gained for the players from a higher percentage share of the BRI.
If I assume the career length expectation from the table above, a worst case BRI share of 50%, new tv deals at 5% bumps every eight years and do some calculations I come up with the following: a 1% gain in BRI is worth 8.4 gamechecks lost for the players (or about three weeks). So going from 50% to 51% is worth shortening the season by 8.4 games (or in chart form):
January 6th, January 20th, February 5th and 50 games played
This are for the last lockout:
- The date when the last lockout ended
- The final agreement was signed
- The new season began
- Games played for that season
November 18th, December 1st, December 24th and about 74 games played
These are my predictions for the current lockout for the same. I think the final number will be 51% and that we will lose about 8 games (with the league schedule being heavy on back to backs).
2.9%,2.4%,8.2%
That’s the growth of BRI (which is also the rate of growth for player salaries), the general rate of inflation and the growth of team expenses from 2005 to 2011. These are the numbers are stress out the owners and motivate them.
To be fair, the economy was not so good.
Player salaries are fixed to league revenue growth but their expenses aren’t. If revenue growth is greater than expense growth everyone is happy. If not the owners start to lose earnings. There are three ways around that.
- Increase revenue. Say for example by moving teams to more profitable markets or contraction.
- Reduce expenses (i.e stop spending money like drunken sailors)
- Cut player salaries
The owners of course chose number three.
If everything plays out like I think (51% BRI share for the players, about 6% revenue growth per season and a 5% tv deal bump) the numbers for the new CBA will play out like so:
If all that happens (and the owners keep their expense growth at about 6.4%), everybody wins. Including players, whose salary gets back to current levels by 2013.
Get to it guys.
-Arturo
Wages of Wins Journal 
gelfnerd
October 28, 2011
Arturo,
Just wanted to point out this interview of economist Kevin Murphy on the lockout. One of the clearest interpretations of the owners v. players.
Good stuff.
http://www.nba.com/2011/news/features/steve_aschburner/10/27/lockout-q-and-a-kevin-murphy/index.html
greyv
October 28, 2011
Arturo–are you taking in the game on Sunday?
Russ
October 29, 2011
I’m genuinely confused why they are hung up on a couple of percentage points. Firstly, because despite what the league says, if the revenue growth Arturo projects is all in big markets, as it was since 2006, then the small market teams are going to hurt. If a proper revenue sharing system that protects small markets is in place then both figures would work. If it was 40 and 60 I could get it. Getting hung up over 50 or 52 is just asinine.
Secondly, when they finally get out of negotiations, teams will go away and contract players for a total amount that, on past figures, could be anywhere from 45 to 60% of BRI, such that the following September either the players or owners will receive or owe money that only superficially matches what they agreed in contract with each other as individuals. In these circumstances why isn’t close enough good enough: the players are guaranteed a minimum of 50 and a maximum of 52. If the owners collectively contract 52% of BRI to players in the next 3 months, on what basis ought it be reduced to 50, and vice versa?
W. Crimi (@lovethoseknicks)
October 30, 2011
Quite honestly, Murphy is either a liar or a moron. He implies that since the franchises have appreciated, the owners are making money despite operating losses.
They have a term for that.
It’s called the “greater fool theory”.
The present value of a business is a function of all the “FREE CASH FLOW” that can be taken from the business over its lifetime. A growing stream of free cash flow will tend to cause asset prices to rise over time, but as many people learned after 2000 when the dot com bubble burst, earnings and multiples of earnings MATTER to appropriate valuations. Just because you can occasionally find some idiot to pay more for a business than you paid, that does not mean it is intrinsically more valuable or that the appreciation will continue. Ultimately, earnings drive intrinsic value and force value and price to be sync. The owners of NBA teams have been learning the same lessons that dot.com investors learned after 2000 and residential real estate investors learned in the last few years. That’s why they are forcing these changes. For many of them, their businesses are actually worth WAY LESS than they paid. And like owners of all businesses, when you are not earning enough money to justify your existence, you either cut costs or liquidate. I think the players would like the latter option even less.
dberri
October 30, 2011
Here is a hint you should consider in the future… if you do not agree with an academic argument — try and think a bit harder. Maybe you are just not understanding what you are reading.