In NBA lockout negotiations, the owners have already won concessions on covering rising expenses to put on games and made moves on so-called "competitive balance issues." The last push for owners: get players to cover debt financing on franchise purchases.
Oct 31, 2011 - We're at the same place we've always been in the NBA lockout in the macro sense: there is no basketball because, as the fly-by media likes to say, the owners and players can't divvy up $4 billion. But we are, in fact, closer to a deal than ever: the owners and players' union have reached agreements they can live with on dozens of system changes, including big-ticket items like luxury tax.
Meanwhile, on the granddaddy of issues -- the split of basketball-related income that players take home in the aggregate, a figure which sets the salary cap and luxury tax threshold -- the two sides are just 2.5 percent apart. Unless you think that the owners have gone back down to 47 percent so that they can raise their offer to 50 percent for the fourth time. In that case, the two sides remain 5.5 percent apart. I'll understand if you're confused, because I am too.
It's very easy at this point to look at the losses incurred by the players by virtue of missing games and wonder why 2.5 percent is such a big deal. The same can be said for owners, who might be torching the edges of their businesses by holding out for 2.5 percent when they've already won 4.5 percent and system concessions. But consider what that 2.5 percent represents.
The NBA claims that it lost $300 million last season, after about three-quarters of its teams lost $450 million in the aggregate and a handful of teams combined to make $150 million in profit. Players have already conceded $180 million by moving from 57 percent of basketball-related income to 52.5 percent. The owners' 50-50 proposal would represent $280 million in player concessions on the revenue split. So the two sides are fighting over that $100 million difference.
What's that $100 million represent?
Last week, NBA.com's Steve Aschburner interviewed Kevin Murphy, a players' union economist who also happens to be a MacArthur fellow and renowned professor. Something Murphy said about the league's claims that the rising costs of game presentation and promotion have led to losses resonated and fit this discussion.
NBA.com: Management cites rising costs in marketing, ticket sales and other areas.
KM: Ask them to show you how much their costs have gone up as a percentage of BRI. Our moving from 57 to 52.5 covers more than 100 percent of any cost increase they've had.
The players' concessions cover more than 100 percent of those expense increases. That jibes with an older union claim that only half of the league's claimed losses came from actual operational issues, while the other half represented depreciation and interest payments.
Those interest payments? They are connected to owners' purchases of NBA franchises. And that's the cash that owners are holding out for: player concessions to cover the financing of the teams bought in the past decade or so.
When Robert Sarver, the man who spent $401 million on the Phoenix Suns just before the economic crisis, complains about his return in front of players, he's not laying bare exactly why he doesn't have a return. A huge chunk of money goes toward interest payments on the loans that these owners take out, up to eight figures in some cases. The dozen owners who have bought in since the last lockout have an expense that no new owners before that lockout experienced at this magnitude. Franchise values shot up around the turn of the millennium, which means that prices shot up, which means that financing expenses shot up.
This is the true mystery meat of the NBA lockout. Owners have tried repeatedly to frame this as a situation in which player salaries have gotten out of control; every time David Stern mentions the average NBA player's salary, this is a direct attempt to convince the general public that salaries are the problem. They aren't the problem, though -- the last collective bargaining agreement directly tied payroll levels to revenue levels. As revenue has risen or flattened, payroll has risen or flattened. What's grown out of whack are the non-player expenses, which the NBA would like you to believe are jet fuel, t-shirt cannons and the Quick Change couple. But those expenses have only been part of the problem; the debt financing is the new thing here.
Despite annual losses, team owners typically cash out when they sell their teams. But this cash is strictly off-limits to players, because owners take on the investment risk. Well, if they get their deal at 50-50, we can toss that out of the window. By making up all of their losses via labor concessions, the owners will essentially scratch off most of the cost of investment just like that. Forget about Sarver bringing his wife the mid-level exception in a designer bag. He'll be bringing her the invoice for some $9 million in interest payments that Steve Nash, Amar'e Stoudemire and Grant Hill are now taking care of.
If you wonder why owners like the Heat's Micky Arison are agitating to get back on the court, consider another reason: unlike Sarver, Cavaliers owner Dan Gilbert, or Celtics co-owner Wyc Grousbeck, Arison isn't stuck financing a bloated investment right now. Not only is he profiting because of the presence of a legit championship contender and the biggest star in the game, but his team was bought long before the price boom and economic collapse. Jerry Buss and James Dolan are in the same spot. This lockout is about investments gone wrong, and the fight for labor to pick up the burden. Remember that, no matter what Sarver and Stern tell you.
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Correct
It’s not so much about small market owners vs. big market owners – it’s new owners vs. old owners. NBA franchises were profitable no matter what the year to year profit/loss was, as long as the franchise itself was appreciating at a huge rate.
As the difficulty with the sales of the Hornets and Pistons have shown, it’s getting hard to find a buyer for these franchises, and the price for a franchise is about to start not only flattening out, but depressing.
The new owners like Sarver are desperate because they are about to be underwater, having more debt in their franchises than there is value. If Sarver can only sell for 200 million, selling the franchise will ruin him.
For more long term owners that paid less, this is an issue, but a less desperate one. However, all owners can agree that a franchise with a league that has guaranteed reasonable player costs is going to be worth more to a buyer.
Personally, I think the way out of this was to ditch the yearly salary cap and go with a total salary cap. For example, let’s say a team is paying guys 100 million this year – that would be OK as long as their total salary liability for future years was under 200 million. This would be great for the players because they would probably get the choice to sign a contract with less years and more money per year or more years and less money per year. And no franchise would ever have so much future salary liability that it wouldn’t be an attractive buy.
I don’t think my plan is happening though.
Get The Frickin' Rebound
by fuhry on Oct 31, 2011 11:16 AM EDT reply actions
Oh small market teams would Love that!!!
(sarCHASM)
"Victory goes to the player who makes the next-to-last mistake."
- Chessmaster Savielly Grigorievitch Tartakower
by lietothegirls on Nov 1, 2011 2:42 PM EDT up reply actions
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