As the NBA lockout tears through its fourth month, with all eyes on mediator George Cohen on Tuesday, the concepts we discuss have become a bit removed from tangible situations. All of the talk about competitive balance and David Stern's aim to have 30 teams compete for a championship is now firmly stuck in a theoretical debate, one focused on whether the possibility of balance truly exists. It's an important question, but one that shows how far off track we are.
The continuing Dwight Howard saga is a real-life example of competitive balance in action. Orlando is a mid-sized to small market (No. 19 in U.S. and NBA) with an owner who can afford to spend with the high-revenue teams only when the Magic are legitimately competing for a title. (This describes most owners of teams in mid-sized to small markets -- teams like the San Antonio Spurs, Sacramento Kings and -- of course -- Portland Trail Blazers have paid luxury tax multiple times in the past decade.) The Magic were $20 million over the tax threshold last season, and currently sit about $16 million over a projected salary cap for 2011-12.
: 'I Don't Know What Else I Can Do' In Orlando
If the Magic become less-than-competitive over the next few seasons, it won't be because Rich DeVos won't spend. He's spent, and he'll spend. If the Magic fall from grace, it'll be because Howard skips town in 2012, via trade due to hostage situation or via free agency. Chances are, like the Cleveland Cavaliers and Utah Jazz before them, the Magic will be forced to deal with a sudden rebuild when losing their MVP candidate.
This is where skeptical theory -- the argument that competitive balance can never exist in the NBA -- and unfolding history meet. The Magic's ability to compete on a level playing field with the high-revenue, big-market contenders like the Chicago Bulls, L.A. Lakers and Dallas Mavericks has nothing to do with cash and everything to do with talent. The Magic plucked Howard off of the top of the 2004 NBA Draft and never looked back. The team got him into a second contract -- all teams get their superstars into second contracts, a note we'll revisit below -- but has been unable to find the right mix to win a title. The Magic came close in 2009, advancing to the NBA Finals, where the Lakers pounded them. But the rooster named Rashard Lewis' Contract has come home, and Magic GM Otis Smith looks just about out of options to recalibrate the team quickly enough to compete with the Bulls and Miami Heat.
Dropping the high-end of the salary cap won't help the Magic, a midsized to small market team, remain competitive. Shifting the cost burden, which Orlando already bears a significant portion of, won't matter. Killing the mid-level exception? Creating a more punitive tax? Those items, which are hailed in the name of competitive balance, will hurt the Magic's chances of competing one last time. No, competitive balance in the NBA starts and ends with the distribution of the best players.
The draft is the great equalizer in the NBA: even the L.A. Clippers can land on luck thanks to the ping pong balls. But free agency, at least these days, tends to undo some of the good the draft does in terms of even distribution. You have LeBron James joining two All-Stars in Miami instead of remaining with Mo Williams and Anderson Varejao in Cleveland. You have Carmelo Anthony pushing for a trade to New York to join Amar'e Stoudemire. (Maybe one of the major 2012 free agents -- Howard, Deron Williams or Chris Paul -- will join them.) The second that the lockout ends, you will again hear all about Dwight's desire to play for the Lakers, to move to L.A., to carry Kobe Bryant to a sixth ring. It may or may not be true, but you will hear about it, because big markets tend to have a bit of privilege in their back pocket, and they can conjure storms like Gandalf, and it's amazing.
So the question is: how do you keep small/mid-market superstars from leaving for glitzier pastures? If you want competitive balance -- and David Stern says he does, and he does the owners' bidding -- you want the most even distribution of stars possible. You don't want the Miami Heat. (Please just ignore what the Heat did in the ratings.) There are two broad ways to get to an even distribution: you restrict the ability of teams to add high-priced stars in their prime, or you incent the players to stay with their non-glitzy teams.
The NBA has not betrayed its real lockout motive -- lower player costs and a stricter pay-for-performance set-up -- and, as such, has headed toward the restrictive path. A hard team salary cap, a punitive tax, the so-called Melo rule -- these are salary-slashing tools that restrict talent conglomeration.
This ignores what has worked to lead every single superstar of the past eight years to sign his second contract with the team that drafted him. Why do teams sign extensions with their first teams, extensions that essentially extend the rookie scale to seven years? Because the risk-reward balance completely skews toward staying with that team. First-round picks are wed to the team that drafted them for four years. But after their third season, they can sign extensions from 3-5 years long that go into effect after Year 4. Essentially, players can bank on their production in Years 1-3 to secure max salaries in Years 5-7. (This used to be Years 5-9 before LeBron debuted what Bethlehem Shoals named the "mini-max".) To get the same salary on a hand-picked team, young stars would have to wait until after Year 5, and would be required to take a sub-max salary in Year 5 -- the qualifying offer -- to get to unrestricted free agency.
As a result of the early extension process, no young star gets to unrestricted free agency until after their seventh year in the league.
If the league wants to extend that further, it needs to add early incentives to prevent players from choosing free agency after Year 7. Don't even let them get close. LeBron and Chris Bosh showed that the existing incentives -- an extra year and slightly higher raises -- don't do the trick for true stars, just easy-to-overpay second-tier players like Michael Redd and Joe Johnson. (The abomination that is the sign-and-trade further neuters the "home team.") The incentives need to be stronger and need to come earlier. Under the old collective bargaining agreement, "third-contract" extensions can be negotiated beginning three years after the in-place extension was signed -- so after Year 6. But by this point, players in mid-sized or small markets may already have the wanderlust. Consider that this is exactly where Howard is now: six years in, one season left on his deal. The only real incentive to sign now is to protect against catastrophic injury during the 2011-12 season. But Howard knows he could replace his left leg with driftwood and someone would still throw $15 million a year at him next season. He has all of the power.
You fix the problem by moving up the point at which players can sign the second extension -- change the language from "three years after extension is signed" to "two years before contract ends," which is how it works for veteran players who sign free agent contracts instead of extensions. Here's the real incentive: allow these extensions to exist on a different level than normal contracts in terms of max salaries. If you sign a second extension after Year 5 or Year 6, you're allowed to make the max salary for an eighth-year player (30 percent of the cap) ... beginning as soon as you sign the second extension. It's basically an extension and a renegotiation in one, and it's the only way players can make more than 25 percent of the cap before they have been in the league for seven years.
Let's look at a concrete example on the proper timeline. Chris Paul entered the league in 2005; the completed 2010-11 season was Paul's Year 6. After Year 3, he negotiated an early Bird extension at the max salary to go into effect after Year 4; this was a four-year extension through 2013, but with an early termination option in 2012. (This is the mini-max, which allows stars to get the security of the early Bird with a quicker path to free agency.)
Under the old rules, Paul, who made $14.9 million last year and is due $16.3 million this year, could now sign an extension with the New Orleans Hornets for five years and $108 million. His total salary from Years 6-12 would be $139 million.
Under the proposed change, a year ago, Paul could have negotiated a five-year extension to go into effect after the 2011-12 season. By agreeing to sign that extension, Paul would have been eligible for raise his salary in 2010-11 and 2011-12 from the $31.2 million the old system allows for to $37.9 million. As Paul's 2012-13 salary -- this is the first year of the extension signed in 2010 -- would be at a minimum 10.5 percent of his 2011-12 salary, under the new system his total salary from Years 6-12 would be $165 million.
This creates an actual incentive for star players to remain in smaller markets. To turn it down, stars would have to turn down an immediate raise of about $3 million per season, a more lucrative third contract to the tune of about $20 million and security against injuries. The average draft age is now stabilizing at 20 years old; the new plan would keep stars on their first teams -- barring trades -- for 12 years, or throughout their primes. I'm not a Heat hater, and I'm fine with stars taking their destiny into their own hands. But if the league wants competitive balance, it needs to try harder to understand what keeps players home.
Of course, the cynic in me knows that the competitive balance argument is a Trojan horse aimed at expense reduction and increased pay-for-performance (also known as "fewer guaranteed contracts"). This idea does nothing on those ends, so of course it's not something the owners will embrace. But if at some point the smaller markets owners want help remaining competitive instead of help remaining solvent, something has to be done to incent stars to keep signing those early extensions.
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