We’ve been reviewing the numbers about the lockout for a while here at the Wages of Wins. The owners insist on acting as if owning an NBA team is a business and not a luxury good or political move to achieve other gains. But when we look at the NBA as a business, we can see the owners are terrible at running it as such. Let’s start with just some simple math:
Profits = Revenue - Costs
Cutting Costs
The owners are claiming their profits are negative and that means that either their revenue is too low or their costs are too high. The owners have decided to focus on costs and there is a serious problem with how they’ve done that. First let’s review some of what we’ve gone over:
- The owners are focusing on controlling player costs. Arturo pointed out that the problem is that these have stayed even with inflation.
- From the same article, other costs have been going up uncontrollably.
- The best scapegoats have been jet fuel and stadium employees, but these are weak excuses at best.
So the owners are “losing money” and they are trying to make up for it by cutting costs. The problem is that the costs they are addressing don’t seem to solve the problem. In fact, if trends continue, Arturo speculates that even in the ideal case the owners’ cost cutting solution will land us in the middle of another lockout in 2020…assuming that there will be NBA basketball being played by then.
Increasing Revenue
If cutting costs won’t solve the issue, then surely raising revenues will? Let’s run that one down too:
- NBA revenue has grown by leaps and bounds
- From 1999 (last lockout) to 2006 (last CBA), league revenue grew from $1.6 billion to $3.6 billion
- From 2006 (last CBA) to 2011 (current lockout), league revenue grew from $3.6 billion to $3.8 billion
- The NBA is overextended in 19 of its 30 markets
- The top markets are 3-4 times as profitable as the bottom markets in the NBA.
Despite the owners’ best attempts at failure, the NBA appears to be a success. This is in spite of several bad business practices, including hosting a team in a city like Indianapolis, which wouldn’t be profitable even in the best case scenario. It goes without saying that the NBA has opportunities to increase revenue, yet none seem to be under consideration.
Summing Up
The owners are locking the NBA players out because their profits are too low (their claim is that they are taking a loss). Using the most simple math, a good business person would either cut the bad costs or raise revenue. Instead of pursuing these two options, the owners are trying to cut their stable costs. Instead of moving teams to better markets, the NBA wants to talk about contraction or revenue sharing. So despite the hours upon hours of talk and the back and forth, the owners haven’t even addressed the issues that led them to shut the league down. As a matter of fact, the odds of there being a season this year are looking quite low. I’ll end with a quote by the late Albert Einstein:
The thinking it took to get us into this mess is not the same thinking that is going to get us out of it.
Unfortunately for the fans and the players, NBA owners seem to be stuck in their thinking with no end in sight.
-Dre
Wages of Wins Journal 
Jeremy Britton
November 15, 2011
Great summary of the blog’s recent coverage. It strikes me that the league and owners weren’t really prepared to enter these negotiations. They’re dilettantes play acting the role of businessmen. There seems like a real lack of honesty and leadership in their ranks.
Just as infuriating is the unpreparedness of the players’ union. They walked in to this with their eyes closed.
If they are both willing to lose a full season to negotiations that are off the rails when it comes to rational business positions, how far will they go? My sense is neither of them are really prepared for what lies ahead. Could they both back in to the dissolution of the league?
Alex
November 15, 2011
Dre – Do you have the numbers to see if the Pacers were profitable when they were making the playoffs?
Russ
November 15, 2011
Alex, you can track the Pacers (and other teams) reported incomes here. (They may or may not be perfectly accurate, but they are probably close enough). They were profitable every year but 2005-06 when their salary blew out. Since then their revenue has dropped $15m and costs remained stable, so they’ve been losing more and more money.
Dre, I get the sense the small market owners wanted enough revenue sharing and/or enough BRI rollback to make themselves profitable. When they didn’t get enough of either they dug in. Moving teams is really a form of revenue sharing because a lot of the available moves are into markets with teams already (where owners have vetos); culling teams is bad for the league (fewer games, less market reach), the players (less employment) and owners (less franchises). the biggest problem seems to be the NBA can’t control its owners. If revenue sharing is the solution (and it almost certainly is) and Stern could push through revenue sharing against the will of the major markets, then he surely would have.
ludwigvonmises
November 15, 2011
I think you need to identify the specific costs that are rising faster than the rate of inflation in order to determine if they are controllable. My guess is that the league has limited control otherwise they would already be cutting those areas. They obviously exist otherwise the league would be profitable. If they are not controllable, then either players salaries have to be cut across the board or the league needs a major contraction – in other words, player salaries have to be cut via another route. It’s called the unemployment line and millions of Americans that work in the real world become familiar with the process when their company is in the red.
The idea that the NBA is a luxury good is beyond preposterous. Every business can define itself to be whatever it wants.
If an owner wants to donate all his profits to charity he can.
If an owner is willing to lower his margins and profits in order to give his customers incredible value he can.
If an owner wants the highest paid employees in the industry he can.
If an owner wants to balance all three he can etc….
The NBA owners are defining the NBA as a business that would like to earn enough on its invested capital to justify its existence as a profit seeking venture, Some people may not like that definition, but it’s not for them to decide or like. It’s for the owners of that capital to decide and for the customers and employees to decide whether they want to do business with the NBA.
Seriously, you guys really need to learn something about basic free market economics and business.
ludwigvonmises
November 16, 2011
Revenue sharing is only a solution if you believe you have the right to control someone else’s money to implement your own agenda (which to no one’s surprise is usually in the interests of the receiver and not in the interests of the person with the money).
Those with the revenue to share should be the ones to decide if, when, and how much revenue they should share. They would do so when it was in their own interests to do so ALSO.
If there was enough damage to the league from a lack of competitive balance and other financial issues, teams like NY, Dallas, LA etc… would be willing to share because it would ultimately make the league better and make them and everyone else more money. But they obviously don’t feel that’s case now and no one should be forced to hand over money to someone else just so the other guy can be more successful or to achieve some idealistic goal of not having to cut player salaries.
mettaworldpiece
November 16, 2011
The problem is that the owners want to also restrict player movement. Remember, the players agreed to the 50/50 breakdown but the owners refused to give in on certain system issues, not BRI split. Granted, a large amount of owners didn’t want 50/50.
Also, the NBA is cutting costs in non-player expenses according to Stern.
Furthermore, not sure I agree about 2020. New TV deal was expected with a much higher payday. Also, a lot of the “costs” in the past 5 years are overseas investments (China!), so to claim these costs will continue on their trajectory makes no sense if it pays off as they expect.
Basically, the owners built up their arenas and invested oversees the last 3-5 years raising their “accounting losses” by a lot in a manner to making the players take a huge paycut. Meanwhile, in 4 years the owners are expected a huge injection of revenue growth most people don’t realize (because they don’t share them in their projections) and thus they will reap all the benefits of the growth. Players pay for the investments now and don’t share later. It’s genius, really.
Well, except the owners might have just pushed too hard and a lost season could be devastating to that model. Let’s see if there’s some sanity on their side.
Wayne Crimi
November 16, 2011
The bottom line is the bottom line.
The financials of the league have been reviewed by the players, their lawyers, independent auditors, and the IRS. So the losses are real despite the rhetoric and difficult to understand accounting.
To understand the problem you have to determine which costs the owners have control over and which they don’t. You have to assume they are addresssing non player costs to the best of their ability already. All businesses with losses do.
So the only option to get ot profitability is to also look for cuts in player compensation. The only alternative to cutting player salaries is contraction. The problem is that contraction is the same thing as cutting player costs. It’s just in a different form.
The teams that can’t support the salary structure would be eliminated and with them perhaps 60 to 150 NBA players.
Anyone think the players would sign off on that deal? I think not. We’d be hearing the same anti owner rhetoroic we are hearing now
Dre
November 16, 2011
Ludwig,
I’m very confused by your point on teams. You are saying it’s ridiculous to say they aren’t treating it as a business because you can define a business as whatever you want?
Second you say we need to learn basic free market economics. Please explain in a market with controlled player movement and capped salaries how the NBA represents a free market?
Finally, I don’t think revenue sharing is the answer. That said your first comment “Revenue sharing is only a solution if you believe you have the right to control someone else’s money to implement your own agenda” is exactly what the owners are doing to the players right now.
Dre
November 16, 2011
Russ,
I think you are right on the revenue sharing. That said I would prefer multiple teams in big markets to revenue sharing. That means they’d have to compete for the money as opposed to forcing “successful” teams share. Also we see in various large markets you can run your team poorly (New York and the Clippers) and still profit.
Dre
November 16, 2011
Metta,
I’d believe it. It’s even more genius when you consider the owners have gotten cities to bare most of the costs of making the stadiums. In tandem with that
Wayne,
No the owners have not opened their books. They claim they “offered” to let the players see them (which was likely with a huge concessions tied to it) and that the players declined. My basic point was the costs “sinking” the league are not the ones being addressed. Why on earth would I believe the owners are “looking into it” when they locked out the league over them and haven’t talked about them explicitly at all.
Wayne Crimi
November 16, 2011
There is a sound business reason for the owners to want to restrict movement.
Some commentators have suggested that owners/GMs are making all these stupid deals that are causing the losses .
However, not every deal that seems stupid is actually stupid. Here’s an example:
The Atlanta Hawks overpaid for Joe Johnson by a significant amount.
Was that stupid or the least bad of two possible bad decisions?
If they gave him the money they knew would have a bloated contract on the books that would lower their chances of profitability and hamstring the team for years as Johnson aged because no one else would want him.
On the flip side, if they offered a “fair” contract, some other team with excess profits would certainly have given him a max contract to try to win a championship. A team in a big market could afford to take a shot on him and still be very profitable.
Even worse, the Hawks were about a 50 win team and a minor contender the year before. If they let Johnson walk, the team would have become a more marginal playoff team, the fans would have been furious with the owner for being cheap (see the Clippers), the other star players on the team would start rumbling they wanted out also because they wanted a chance to win a championship and didn’t want to rebuild etc… And finally, because the team was worse attendance would probably fall, TV ratings would fall, and the Hawks would be screwed financially anyway.
So they were basically screwed either way.
The same can be said of Rudy Gay and dozens of other bad deals that are given out every year. It’s a lose lose situation for some teams. Lose if you pay the player and lose if you don’t.
That’s why some owners want more control even if they already have the 50-50 split.
Without those controls the super rich teams like NY, LA, Dallas etc.. will always be able to afford to wildly overpay players in the pursuit of a championship because they will still be very profitable. That forces the smaller markets into a no win situation and almost guaranteed losses as they either overpay or the quality of their team closely collapses.
Dre
November 16, 2011
Alright all love the discussion but mass comment size is hurting. Gonna steal a page from Twitter and tack on a 150 word limit on comments. No cheating with multi-posting. If you have a super long thought and feel it’s coherent enough feel free to send it along as an oped.
Wayne Crimi
November 16, 2011
Dre,
1. The team and league level financials have been audited by independent auditors and got past the IRS. “We” may have all the individual tax returns for every team, but the losses are real or everyone would know about it. The only debate is about whether the accounting reflects economic reality. That is more of a debate about the legal accounting standards. They are complex rules. I do not want to suggest I’m an expert, but I am an investor and have no major problem with what I have seen.
2. The owners have a right to implement their agenda on the employees as long as they aren’t breaking any laws. Ownership gives you that power. You are then free to accept the deal or take your services elsewhere.