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NBA Lockout Puts Veracity Of Owners' Claims To Test

Why is David Stern receptive to an NBA lockout financial deal that doesn't make the league profitable? Could it be that the NBA's claimed losses were trumped up? No!

We are mired in the NBA lockout because David Stern said that owners lost $300 million last season, and had lost money in every year of the deal. While we all quibble over whether the rich men who own basketball teams ought to deserve a guaranteed profit, or whether the asset is more a vanity project with value that grows almost continuously, the profitability question was absolutely central to the league's argument for a system reset. It was also the league's argument for the separation of labor negotiations and revenue sharing reform. The quote is nearly famous in nerd circles: "You can't revenue-share your way to profitability."

Cutting out those losses and creating "guaranteed profits" was at the center of the storm, until it wasn't. Throughout the saga, Stern and deputy Adam Silver have always also emphasized competitive balance -- that quote would be "we want 30 teams to be able to compete" -- but profitability was the excuse for the lockout, the impetus, the justification. Now we're seemingly focused on system changes with regards to a harder team salary cap. The players' union made it clear that financial concessions would come if the owners conceded their push for a hard cap; the owners, thanks to some of the owners, denied that request and will apparently still attempt to negotiate a hard or harder cap.

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But look at the concession the union has offered. Multiple reports suggest that the players were willing to go down to a 53-percent revenue split with owners. The previous collective bargaining agreement included a 57-percent share for players; the union's June 30 proposal began at 54.3 percent and climbed to 56 percent over six years. 

So the NBA lost $300 million collectively while giving 57 percent of $3.8 billion in revenue, or $2.17 billion, to players. A 53-percent split would have given players $2.01 billion, saving the league $160 million and ... not coming close to erasing the league's losses of $300 million.

Wait, let's revise, since this is obviously where we are going: A 53-percent split would have given players $2.01 billion, saving the league $160 million and ... not coming to erasing the league's claimed losses of $300 million.

Explain to me how a league that argued so vociferously for the need to become profitable caves on the money at this point without either admitting that the claims were trumped up (as described by the union and a number of writers) or conceding that -- just like in 1999 and 2005 -- owners are agreeing to a deal that will guarantee that they collectively lose money.

By the league's own numbers, moving the revenue split to 53 percent will lead to annual leaguewide losses of $100 million or more. That's a lot better than $300 million, sure -- but it's not profitability. There's a reason the league wanted to freeze player salary and (albeit temporarily) decouple salary from revenue: there is no feasible way to simply negotiate a revenue split that erases the league's claimed losses and gets approved by the union. A 50-50 revenue split would still leave the league only on the edge of profitability based on the league's claimed losses ... and the players would light themselves on fire before accepting such a deal. 

To be honest, when the reports that the union's concessions amounted to a 53-percent split came out, I was shocked that this was actually considered progress. Offering $160 million in givebacks at this point is swell, but the union had already offered $100 million in givebacks. That extra 1.3 percent, in the grand scheme, doesn't mean a whole lot ...

... unless you reconsider the league's claimed losses as the union and skeptical writers see them. Remember, all along the union held that only about half of those claimed league losses were real. You could attribute $150 million to (perfectly legal) accounting tricks involving depreciation and interest payments on the massive loans so many owners took to finance the purchase of their team. The other $150 million? Legit, no-quibble losses.

With the players' 54.3-percent split proposal, the league would still be losing about $60 million or more per season based on the view of those skeptical about the NBA's claims. With the 53-percent proposal, break-even on this lower, no-frills number is achieved.

When you consider that, it's no wonder Stern is so excited about the union's proposal, to the point where he actually came off as receptive in his public comments. (That those public comments also relayed that there'd be no deal without a hard cap should be ignored for the purposes of hope, optimism and continued sanity.) This proposal doesn't get the league to profitability by the standard of Stern's June talking points, but it could get the NBA to real profitability, once you make clear that those June talking points were trumped up and that players can't be expected to take paycuts so that Joe Lacob can spend $450 million on a crummy team.

But consider this: in six years when the league returns to the table to claim more losses based on depreciation and interest payments, those claims are going to fall on deaf or at least highly skeptical ears. You can't put this back in the box unless Stern immediately spins that the owners did not get profitability in this deal, that he consigned his owners to another six years of collective losses and that by the end of the deal Stern's own work will have resulted in a business that has lost money for something like 18 straight years.

If the owners take this financial deal with or without concessions on the cap structure, the league will find it impossible to negotiate on the basis of profitability for the foreseeable future. If it takes the owners a bit longer to get used to the idea and consent to the deal, that's understandable. While it's the union make concessions in the negotiations, the league will be doing so in making the deal.


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