The Upcoming CBA: One Point of View

With my piece a few days ago about whether or not Herb Simon’s Luxury Tax limitation would prevent the Pacers from being competitive, I half-heartedly entered into the NBA Labor discussion.  This is something that I have been both itching to do and avoiding like the plague at the same time.

The itch comes from the fact that I have a perspective and opinions, and I think they’re ones that get somewhat under-represented in the conversation being led by NBA reporters and the NBA blogosphere.  By training and trade, I am a financial and operational analyst with about 20 years of experience, and tend to instinctively look at the NBA as a business, not a game.

The avoidance comes from the recognition that I don’t have anything approaching enough information or data to make a fully informed opinion.  The discussion has been broad, but not very deep.  The available financial information is pretty limited.  The kinds of questions I would need asked and answered to give a “complete” opinion dive deep into proprietary or closely held data.  This doesn’t prevent me from having opinions, it just forces me to keep in mind that the opinions are based more on assumptions than hard facts.

Honestly, virtually everyone out there who is writing or speaking on this topic — with the possible exception of Larry Coon — is guessing to one degree or another. To this point, the urge to avoid has outweighed the itch.  With the topic starting to heat up, and the subject broached in the Simon piece, it’s probably time to lay out what I have.  This will consist of some data, some experience, and some opinions.  It is not meant to be a prediction, nor is this a conclusive document by any stretch of the imagination.

Consider it a conversation starter.

Except for All Those Others That Have Been Tried

What really opened the can o’ worms in terms of my thoughts on the new CBA was the following paragraph:

Personally – and I know this is somewhat oversimplified -  I’d consider anything short of a hard cap with significant restrictions on guaranteed contracts disappointing.  Players would hate to hear this, but I’d actually prefer a lockout that achieves these goals – even if it costs the full season – to no work stoppage and an agreement that hasn’t materially changed from the current one.

When I look at the new CBA, I see it as a chance to address two basic conditions:  competitive balance and small market economic viability.  A hard cap affects both.

To paraphrase Winston Churchill, a hard cap is the worst mechanism for competitive balance, except for all those others that have been tried. To understand that, It’s important to clarify the difference between “competitive balance” and “parity.”  They are not the same thing.

Competitive balance is a market condition where no business is too big or has an unfair advantage.  Parity is equivalence.  The first is attainable, though difficult.  The second is practically impossible and probably undesirable.

You can’t worry about the end results when you’re trying to establish competitive balance.  You must worry about the starting point.  The best starting point is one where a well-run basketball organization cannot be trumped by deep pockets.

It is a fair question as to whether competitive balance and small market viability is really in the best interest of the NBA, but let’s leave those aside for a little bit.  If you want competitive balance, you must realize that you cannot lift everyone up to the same level — as admirable a goal as that may be.  To put it bluntly, you have to cut off the top.

Of course, the hard cap is probably just about the last thing that the NBAPA would like to see, because it would have a decidedly deleterious effect on guaranteed contracts, which are not required under the CBA.  That’s right.  Guarantees are only required in specific limited instances such as the rookie contracts and the first year of sign-and-trade deals. However, they are standard features on contracts in today’s market.  What’s more, they’re probably more important to the players than any other issue.

Consider these comments from Union Chief Billy Hunter:

The union has argued for a revenue deal similar to the current one, while rejecting the idea of a hard cap. Hunter says a hard salary cap would effectively end guaranteed contracts which he calls “the lifeblood” of professional basketball.”We’ve had that right for years, and it’s not something we’re trying to give up,” Hunter told ESPN.com on May 21.

Hunter is right.  Guaranteed contracts and a hard cap aren’t quite mutually exclusive, but they’re hand-grenade close enough.   With rare exception, no team is going to lock itself into long-term deals that don’t have any outs, for fear of finding themselves up against the cap and unable to re-sign a key player or a draft pick.  Under a hard cap, contracts are likely to migrate more towards NFL style arrangements, with signing bonuses that operate as de facto up front buyout agreements.

It is this issue that will precipitate the lockout, but it is one that I believe the owners will win, provided they commit to it.  After all, as Henry Abbott notes, there is already a league wide hard cap at 57% of revenue.

Sidebar Update – In the midst of reviewing this, Zach Lowe of SI.com’s The Point Forward reported that the NBA’s current proposal included a ban on fully guaranteed contracts, but no comment on a hard cap.  Rather than restructuring the entire piece, I’ll include what he says here:

Sources also said the league’s proposal would ban fully guaranteed contracts. All contracts would have limits on the amount of money a player would be guaranteed to receive, and those guarantees would decline during the life of each contract. In other words, a player making, say, $5 million per season over four years would actually be guaranteed less than $5 million in each of those four seasons — and the amount guaranteed would drop each season. The idea is for teams to be able to get out of undesirable contacts more easily and avoid ugly, Eddy Curry-style buyout talks.

Sidebar Update 2 – ESPN’s Mark Stein reported that the owners are proposing a hard cap, but not right away.

The proposal from NBA owners that the NBA Players Association rejected last week called for the implementation of a hard salary cap at a figure lower than the league’s current cap, but not until the 2013-14 season, according to sources familiar with the offer.

Sources told ESPN.com this week that the central change made by owners to past collective bargaining proposals called for easing in a more restrictive financial landscape over a three-season cycle as opposed to trying to impose a hard salary ceiling with immediate effect next season.

The league, sources said, regards this as a major concession, since the next two seasons would employ a salary-cap system with luxury-tax penalties not unlike the system currently in place. Teams currently operate with a salary cap of $58 million per franchise, with a dollar-for-dollar luxury tax imposed for every dollar teams spend over the tax threshold of $70.3 million.

Sources said the owners’ latest proposal, however, does still call for immediate rollbacks of 15 percent, 20 percent or 25 percent to current contracts depending on salary levels, as part of the league’s oft-stated desire to reduce payroll by roughly $800 million leaguewide on an annual basis.

The NBA’s ongoing push for such sharp salary reductions, sources said, is what caused the quick rejection from the players’ side, with the union also still determined to oppose a hard cap.

I remain convinced that the hard cap is the best — actually the only — way to create some sort of competitive balance.

Let’s look at some of the other ideas one by one.

Luxury Tax: It Doesn’t Do What You Think It Does

A luxury tax – no matter how aggressive – does not promote competitive balance, it discourages it.  It actually increases the gap between the haves and have-nots.

Consider this: over the past five years, the payroll figures I have indicate that the Mavericks have paid something on the order of $112 million in luxury tax, and the Knicks paid about $106 million – to win an average of 32 games per season.  If you create an avenue to spend more money, somebody will spend it.

Further, what’s the sense of a luxury tax?  What value does it add?  It’s meant to control spending, but it actually only does it on a very limited basis, very indirectly, and it does it to teams like the Pacers who already have financial constraints.

It doesn’t bring any more money into the NBA community.  It’s right pocket to left pocket, and it still leaves an avenue for richer teams to “buy the pot.”  Additionally, it inflates the market for players – at least marginally – because there is no actual constraint on spending.  Further, the ones who don’t bat an eye at paying the tax are also the ones who have no problems giving mindlessly stupid contracts to the likes of Eddie Curry or Brendan Haywood.  And those contracts make all of the other contracts more expensive.

Revenue Sharing: Right Pocket, Left Pocket

Revenue sharing has its place, but not in the discussion for competitive balance.  Revenue sharing does very, very little — at least not directly — for that cause.  Using revenue sharing in this regard is the attempt to “lift everyone up” that I noted earlier as likely being doomed to fail.

The drum I will beat is one of NBA unity.  The league and the franchises must recognize their inherent connections, and that means that all the teams affect both the national and the local revenue for each team.  The local revenue is in part a product of being a member of the NBA, and part should flow back into the NBA community.

It is not communism, socialism, or anything remotely approximating; it is simply enlightened self interest.  Whenever I watch owners in the same sport doing things that inflict financial harm on their colleagues, I think of the following exchange between Bart and Homer in The Simpsons’ “Lard of the Dance” episode:

Homer Simpson: Okay, boy. This is where all the hard work, sacrifice, and painful scaldings pay off.
Employee: Four pounds of grease … that comes to … sixty-three cents.
Homer Simpson: Woo-hoo!
Bart Simpson: Dad, all that bacon cost twenty-seven dollars.
Homer Simpson: Yeah, but your mom paid for that!
Bart Simpson: But doesn’t she get her money from you?
Homer Simpson: And I get my money from grease! What’s the problem?

The Players Association champions revenue sharing, but primarily because it moves the discussion away from things they don’t want, like hard caps and rollbacks.  However, even if it does more than I think to help competitive balance, it does little or nothing at all to address the league’s biggest problem — which is the NBA as a whole is losing money.

I don’t really have a deeply developed point of view on revenue sharing, other than to believe at least some measure more is necessary, and that sharing insufficient revenue will just share the pain, as opposed to spreading the wealth.  Therefore, I’d direct you to Graydon Gordian’s reportage on the Sports and Labor panel at the Sloan Conference, and this thorough discussion of Revenue Sharing and the NBA by Dave over at BlazersEdge.

One important note about revenue sharing: it is not part of the CBA discussion.  It is a league matter to be decided among the owners.  The players have no say in it.  None of that money comes out of their pockets, which is why they keep hawking it so hard.

Large Market/Small Market: Bright Lights, Big City

There was concern about a hard cap resulting in a migration of young talent from small markets to glitzy big markets.  Well, that may happen, but my opinion on that is, “Oh, well.”

Indianapolis will always be at some sort of disadvantage to cities like New York, L.A., and Chicago.  The problem with all of the things that we’re told benefit small market teams — bigger raises  for “home” team, Bird exception, rookie scale contracts — is that big market teams get those benefits, too.

Look, all those “home team” advantages didn’t help Cleveland with James or Toronto with Bosh.  They left to go to Miami only in part because of the lifestyle.  The biggest factor was Pat Riley, and the belief that it would be a well-run organization where they could play with great talent and win.  South Beach was just the icing on the cake.

Kevin Durant signed a max extension not because he got X% more or an extra year or any of that by staying there.  If he’d wanted to leave, he would have likely ended up getting that max through a sign-and-trade deal (like Bosh and James got their extra years).  Durant signed because he was in an organization he believed in.  Westbrook, Ibaka, and Harden will do the same.  If someone is going to leave a well-run organization to go to a big city, then he’s got different (not better, not worse) priorities and will figure out how to do that regardless.

Granted, the comparison of Kevin Durant to the Chris Bosh/LeBron James scenarios is a little bit of a stretch.  Durant was coming out of his rookie contract, and Oklahoma City would have had right of first refusal, which is a powerful tool.  Still, if you look back at the summer of 2006, when James and Bosh signed their extension, you could infer some lack of faith in their organizations by their insistence on three year deals.  The overall point holds, and we’ll discuss it more in the next section.

A hard cap will limit the spending of the rich (or the reckless) to the same level as the less wealthy (or the fiscally prudent).  It’s up to the Pacers and the Bucks and the Thunder and the Hornets to put together a well run organization that will allow these players to have confidence and stay with their franchise.

Franchise Tagging: Tag. You’re It

Another mechanism that has been floated that would supposedly help small market (but really all) teams keep their players is the idea of a “franchise tag.”  Zach Lowe of  SI.com’s The Point Forward reported on a form of this that has been included in the NBA’s latest offer:

The NBA proposed to the players’ union last month a version of the “franchise tag” that it wants to include in the next collective bargaining agreement, according to sources familiar with the matter.

The tag, however, would be very different from the NFL’s version, which allows a team to essentially block one of its free agents from entering the market by binding him to his incumbent team with a one-year contract that carries a high salary based on various parameters.

The system the league has presented would not work this way, according to sources. Instead, a team would be allowed to designate one player for preferential contractual treatment, including more overall money, more guaranteed money and at least one extra year on his contract. A player would have to agree to such a designation. It is designed to work as an incentive to get a player to remain with his team rather than as a roadblock to free agency, the sources said.

Take the situation between the Cavaliers and LeBron James one year ago. Under the league’s proposal, the Cavaliers would not have been able to unilaterally “tag” James a franchise player and bind him to the team for one more season. The Cavaliers would have been able to offer James various enticements he may not have been able to get from other teams, the sources said.

This is really just augmenting the current “home team” advantages.  It seems unlikely to me that it would have materially altered the events of last summer, or even the events of this past February, when Utah and Denver dealt their stars (Deron Williams and Carmelo Anthony) under the cloud of losing them for nothing.

Again, if someone wants to leave, they’ll figure out a way to leave.  Last summer, after the decision was made, we heard from several past NBA greats decrying LeBron’s move on the grounds of competition.  Pacer GM and Celtic Great Larry Bird said himself that he would have never wanted to team up with Magic.  However, every time he said that, he also said, “but I always knew Red (Auerbach) would put me in a position to win.”

Really, the only sustainable competitive advantage a team has is their ability to create an internal culture of winning and professionalism.  In my mind, if you give the Pacers a level playing field (hard cap and economic viability), then it’s up to them to create and maintain that culture.  That will be far better protection than any franchise tag or “designated player” system.

Small Markets: Because They’re There

Pacer fans reading this have an intuitive, albeit selfish, understanding of why things like competitive balance and the economic viability of small market are important.  However, it is also easy to understand why fans in cities like Los Angeles and New York would wonder why they should care.

Here’s one point of view from Ethan Sherwood Strauss:

2. The NBA needs small markets to thrive

After all, that’s why the NFL’s great! I feel like this is the “correlation is not causation” fallacy. Just because football thrives in Green Bay, doesn’t mean basketball should try its hand in places that lack eyes and ears. In particular, small Southern cities are a perpetual leaden kaboose, tethered to the sputtering NBA gravy train. Why is it virtuous to lose money in apathetic, unprofitable markets? If a small city like Portland turns out for its team, that’s fantastic. I just don’t see the numbers in prosthelytizing to some of the other, NBA-neutral towns. And I see even less sense in bending the rules so as to favor the relative boonies. The league needs a Grizzlies vs. Hornets playoff series or it will die?

It should be noted that the above paragraph was actually in a piece designed to argue against franchise tags, and as outlined above, I agree with him on that.  However, it seems that the question either hints at a deeper antipathy, or could at least be used as a proxy for the basic question of whether or not the survival of smaller franchises even matters.

The most basic answer is, “it matters because they’re there.”

The NBA is really a single entity, and while the teams are competitors on the floor, they are partners on the books.  They are all connected.  And since they are all connected, what affects one team affects all to one degree or another.

When I say basic, I mean, really, really basic.  In other words, I’m taking what amounts to a default position.  The NBA is a franchisor and for-profit business, and it’s goal is to make profit for it’s owners/shareholders.  In that case, it has 30 franchisees, then my core assumption is that it needs each franchisee to be profitable — or at least viable.  Failing franchises can only hurt the brand, and that’s why most successful franchisors have strict standards about which franchisees they select, and how those franchises are operated.

Therefore, the basic assumption is that it is in the best interest of David Stern, the NBA, and eventually, the Knicks, Lakers, Bulls, etc. that the Pacers, Bucks, Hornets, and Thunder all have sustainable economic viability.  There seem to be two ways to drive this.

The first is to create an environment where all 30 franchises can realistically field competitive teams, and during the virtually unavoidable down times, can offer their fan base (customers) the realistic hope of turning things around.  Again, a hard cap takes the surest steps towards this by (a) leveling the playing field and (b) actually creating cost containment franchise by franchise.

The second is to basically create something of a welfare state, with extremely aggressive revenue sharing that flattens out the revenue curve.  In this instance, teams like the Knicks and the Lakers would effectively subsidize teams like the Hornets and the Pacers.  The basketball risk is that teams like the Pacers could possibly become the NBA equivalent of the Washington Generals.

It’s really at this point where the lack of hard financial data affects the discussion.  I’m not fond of the second choice – not just because of its potential impact on the Pacers – but primarily because it closes the universe to a degree.  It cuts off potential outside revenue in the lesser markets by making them irrelevant.  However, it’s not out of the realm of possibility that the best way to maximize NBA revenue would be to do just that.  It is possible that there is more potential revenue in an NBA where New York, Boston, L.A., and Chicago are perennial contenders with cameos from the also rans, than one that sees a revolving door at the top.

Intuitively, to me, that seems both unlikely and a bad business model.  Besides, if that were the case, you’d have to question the need to have 30 locations at all.

Contraction: Do They All Need to be There?

The topic of contraction has been kicked around over the last few months, mostly as little more than an unenforceable threat being used by the owners to scare the players into line.  However, given the difficulties facing so many franchises, it should be considered.

Personally, I was not a fan of the expansion over the last two decades, and I was a relatively vocal proponent of contraction until recently.  My primary reason was that I thought expansion diluted the talent pool and quality of play.  The height of my ardor for this came in the late ’90′s and early ’00′s.  It cooled considerably once it became readily apparent that the Pacers would or should be at or near the top of the list of teams to contract.

I still believe that contraction would be good for quality of play, but I am not eager to see the Pacers cease to exist.

Still, contraction would ultimately be a financial decision, and here are some of the major concerns to be addressed:

  • Destruction of ValueAccording to Forbes, the Milwaukee Bucks are the least valuable franchise in the NBA at $258 million.  The New Orleans Hornets, who were recently taken over by the NBA and have been the subject of conspiracy theories regarding contraction, are valued in the same report at $280 million.  That’s a pretty big asset to destroy.  Who absorbs the loss?  What impact does it have on the valuation of the other franchises?
  • Customers aren’t portable - There are two obstacles to the NBA retaining a significant number of fans in a city from which a team has been eliminated.  The first is geographic, meaning that fans in Indianapolis would quite simply not be able to buy tickets and attend games on a regular basis, and there’s not likely to be a material increase in attendance/interest in the remaining cities.  The second, and by far most important, is tribal, for lack of a better word.  Most fans across the NBA are fans of (Insert-Team-Name-Here), not the NBA, per se.  As with all sports, the popularity has much, much less to do with the individual characteristics or beauty of the game itself, and much, much more to do with connections to players or community.  Without a “dog in the fight”, the majority of the fan base in a city like Indianapolis will simply follow something else, and the NBA will largely go dark.
  • Impact on National Television Contract – If contraction of the teams means contraction of the fans – which seems entirely likely – then it probably also means contraction of TV money.

Those are just three things that would fall into the “shut down cost” category to be considered in making such decisions, but there would certainly be benefits or offsets.  I don’t have access to anything approaching enough information to do those calculations.  It is well within the realm of possibility that contracting several teams would be in the best long-term interest of the NBA as a whole – both on the court and on the books.

A very simple rule of thumb is that once a business/location begins to consume cash, and it is reasonably expected that all future operations will be a net consumer of cash, it’s time to shut it down.

Based on what I can see, the Indiana Pacers have been consuming cash for years.  Anything short of drastic changes in the CBA which alter the economics of running an NBA franchise would lead me to conclude that this will be a semi-permanent state for this franchise in this city.  There may be hope of positive cash flows occasionally, but not consistently nor enough to offset past and future negative cash flows.  As an analyst looking at a normal business, I would tell you that either relocation or contraction within the next decade is the almost inevitable fate for the Pacers.

But this isn’t really a normal business.

An NBA Franchise Is Not a Yacht

In one of the many hours that I have had the television on as background noise, I heard the following comment attributed to Clint Eastwood:

The problem with making movies as an art is that it’s too much of a business.  The problem with making movies as a business is that it’s too much of an art.

There is no question that the same basic conundrum can be applied to the NBA.  This isn’t making widgets or Quarter Pounders.  Teams can’t insure consistent quality of inputs (players, talent) or outputs (play, wins/losses).  Providing a “good product” (winning team/contender) requires a great deal of skill, a great deal of luck, and some measure of witchcraft.

Or … another way is to just throw a great deal of money at it.

One theory that is being more consistently (and insistently) advanced is the idea of sports franchises as hobbies for the rich.  Here are a couple of different examples:

First, Timothy Varner of ESPN and 48 Minutes of Hell:

Increasingly, I think the NBA needs more owners like Mark Cuban and less like George Shinn, the former owner of the New Orleans Hornets. Owners whose wealth is not inseparably tied to the the financial health of the NBA or their respective franchise. The NBA needs owners who are willing to take on a franchise as an insanely expensive hobby.

This is not to say that every NBA owner should have the same net worth of Mark Cuban. But we should be realistic about what’s going on here. NBA teams are as much a hobby as they are a business. – Is Sports Franchise Ownership a Hobby for the Rich? March 4, 2011 ESPN True Hoop Blog

Now, Henry Abbott, patriarch of True Hoop:

In the decades after the purchase Miller noted that it was among the worst of his investments, in terms of cash, although it brought him great personal satisfaction.

At the moment the league has something like $54 million in annual revenue sharing. Not all that much, in a league that spends about $2 billion a year in player salaries. Essentially the league has said, to people like Miller: If you want to put a team in Salt Lake City, that’s your business. Literally. Your money to lose, or your money to gain. But don’t expect the busy concession stands in New York, Los Angeles and Chicago to supply the cash to rescue you if things take a bad turn.

I have heard people say that by conventional analysis, New Orleans does not have the wherewithal to support an NBA team. Sacramento is wrestling with arena issues. There have been worries in the past about places like Oklahoma City and Memphis. Teams have failed, of course, in Vancouver, Seattle and elsewhere.

Nobody is saying those cities should not have NBA teams. But the de facto model has been: Find yourself an eccentric billionaire who is ready to spend beyond all sense. Then you might have a chance.

And it seems to be working, as a way to get basketball in front of people outside the biggest cities. The NBA is present in plenty of mid-size markets, and teams like San Antonio and Oklahoma City are competitive, with a shot at profitability.

But the moment big-market owners are seriously on the hook to cover the losses in small markets, aren’t those owners – the ultimate sources of power in the NBA – going to get very choosy about where the NBA has teams? Wouldn’t that be the final nail in the coffin for cities like Kansas City and Seattle, that have so-so financials, who are trying to get in on the action? Oklahoma City appears to be a success story, thanks to a rabid fan base, but would a team ever get approved in a market that small in a world where the other owners had to cover losses? – Share Revenue, But Not Too Much October 21, 2010 ESPN True Hoop Blog

Both of these relatively accurately represent the reality of the current situation, and I do agree with Tim Varner’s point that an owners wealth not be inseparably tied to the financial health of the NBA or their respective franchises.  Owning an NBA team will not and probably should not be ever viewed as a normal business investment or held to the same standard of return on investment.  For all of the owners, there are soft returns such as personal enjoyment, prestige, and standing in their community.  There will always be at least some portion of franchise ownership that will be an exercise in vanity – a hobby if you will.

Where I differ greatly with Tim and Henry is in their conclusions.  What I infer from their writings is that this is not only an almost unavoidable fact, but also desirable.

Look, I have taken positions throughout this tome that are based only on some facts and assumptions.  All of them are subject to change, if given certain information that renders them incorrect or meaningless.  However, the following is a position that I can conceive of no realistic way that I could be convinced to change:

Treating NBA (or any sports) franchises as an expensive plaything for rich people is not only ultimately destructive to the NBA (or any league), it is also a bone-crushingly stupid business model.

The NBA is a business, and it needs to conduct itself as such.  To do that, they need to put each franchise in a position to be viable on an operational basis alone.  No sensible franchisor would adopt a strategy that says, “Hey, I know this is a bad location for my chicken joint, but the franchisee is rich and stupid, so he’ll keep it afloat.”

That thought process is utterly senseless.  It is predicated on the belief that there will always be an available billionaire with money burning a hole in their pocket.  It’s almost an intentional choice to create a bubble, and all bubbles eventually burst.  The league has been able to attract owners over the past decades because there was always the safety net of the increasing value of the team itself.  However, that’s been in decline, and Charlotte was sold at a loss within the last two years.

In his revenue sharing piece, Henry talks about wanting owners to “feel the heat,”  but how do you put heat on an “eccentric billionaire who is ready to spend beyond all sense?”  What part of being willing to spend beyond all sense guarantees that this “eccentric billionaire” isn’t the one that is corrupting the market?

It is a mistaken assumption that the market is set by the best and the brightest.  It’s actually set by stupidest surviving player – or the risk presented by the stupidest or most reckless player.  It’s why most rules are designed to restrict someone’s ability to do harm.

It’s also one of the reasons that I disagree with Tim Varner singling out Mark Cuban as a desirable owner.  It’s my opinion that an owner like Cuban is potentially much more destructive to the NBA’s long-term viability than, say, Donald Sterling.

Over the five years of payroll information I pulled,  Cuban’s Mavericks have spent $571 million in payroll and taxes.   Only Dolan’s Knicks ($568 million) were close.  He spent $97 million more than the two-time Champion Lakers, $158 million more than the 2008 Champion Celtics, and $215 million more than the 2007 Champion Spurs.

During that time, he paid Erick Dampier $44 million and Jerry Stackhouse $23 million.  Keeping in mind that my study started with the 2006-2007 season, it should be noted that he paid almost $35 million to Michael Finley – a player who hasn’t suited up for the Mavs since May of 2005.

This can’t possibly be behavior that we want emulated.

I realize that people will reflexively scoff at this criticism of Cuban.  The Mavericks, after all, have just swept the Lakers and could be headed towards a title.  They’ve won 50 or more games for 11 straight years…but that’s what makes Cuban such a threat.  He’s had success, but it’s probably more attributable to the presence of Dirk Nowitzki and the profligate spending of money than actually running the team well.  He basically writes more checks to paper over any mistakes or failed experiments they’ve tried.

None of this was done profitably, rather through leveraging Cuban’s wealth and his willingness to spend it – and that distorts the market.

Henry Abbott had a slightly different take on ownership-as-a-hobby when writing about a couple of lawsuits filed against Cuban:

In recent months we’ve had the Bobcats sold at a loss, the Jazz owner saying almost any other investment the Miller family would have made would have been more profitable, as well as steep discounts on tickets in places like Minnesota and Washington. The Cavaliers, despite having one of the biggest stars in the sport, LeBron James, at a below-market contract, are said to be close to break-even. And even though the economy is weak, meaning it’s not an ideal time to sell, nearly a third of the NBA is either on the market or has recently changed hands, which tells you something about how those on the inside are projecting the next few decades.

Who cries for the owners? Nobody. But as fans, we want a league where teams can be run competitively as businesses, not just as hobbies.

All of which leads, of course, to the ongoing talks between the league and union about the next collective bargaining agreement. What is the main lesson of Perot’s lawsuit against Cuban? “It validates,” says Postolos, “David Stern’s argument about needing a new CBA.”

You never know whose numbers to believe, but the evidence is mounting that the owners may have strong reason to drive a very hard bargain with the players. The players union is coming up with a proposal of its own for the next collective bargaining agreement. I hope that takes the realities of 2010 into account. – Mark Cuban vs. the Bottom Line May 14, 2010 ESPN True Hoop Blog

I’ve bolded what I really want to emphasize.  Beyond the basic business reasons, we as fans must understand that we are stakeholders in the game.  Its success and viability are crucial to us.  We can only exert influence through our buying power – both at the gate and in terms of products that advertise on the NBA.

If it’s just a hobby, then isn’t it OK for the owners to do whatever they want with it?  It’s OK for Cuban and Dolan to spend like drunken sailors.  It’s OK for Donald Sterling to just sit there, put out a bad product and siphon off the profits.  It’s OK for the Maloofs to move the Kings to where ever they damn well please.

If it’s a hobby, then the basic seller-customer relationship changes.  It is no longer the NBA and its owners selling a product to us as fans.  The NBA remains the seller, but the owners become the customer, and the fan becomes less relevant.

Treating it as a business and not a hobby brings a much needed degree of rationality to the process.  It removes a layer of variability from an already difficult and speculative venture.  It potentially takes pressure off both owners who actually would prefer to be fiscally responsible, and it takes pressure off the cities that host them.  It’s better for the long term valuation of the franchises as well.

It’s the Owner’s Mess

“This is the owner’s mess” is a common refrain.  Fine.  It’s the owner’s mess, but this is how they clean it up:  hard cap, more flexible contracts, lower salaries going forward.

Again, I go back to the basic premise that this is one business, not 30.  Having small market teams like the Pacers or Bucks struggle is bad for the Lakers and the Celtics.  Right now, contraction is little more than a big stick being waved around in the opening salvos of a negotiation.  It seems to me that if the current CBA were to continue for another five years, that contraction would be an unavoidable fact.  There will be too many teams – New Orleans, Memphis, Minnesota, Charlotte, Sacramento, Milwaukee, Indiana – and not enough chairs/cities/owners when the music stops.  I could very easily see the Pacers reaching the point where they can’t sell, can’t get help from a broke city, and simply don’t want to take the losses any more.  What does the league do when faced with that situation?  Do they take over more teams, as they did with the Hornets?  That’s not a long term solution.

Once that weakness shows, then the vultures start to circle, and the TV money is at risk.  If the TV money is at risk, the league is at risk.

A bad business practice is a bad business practice.  Just because the owners were complicit in the creation of the bad practices doesn’t mean that they aren’t allowed to take steps to end them, or limit them, and it doesn’t mean that they should have to live with them forever.  As a business, the league cannot afford to put teams like the Pacers and the Knicks in salary cap jail for years for the mistakes they’ve made.  These are not competitors, they’re sister companies, and they drag on everybody’s bottom line.  At the end of the day, a pattern of poor management will damn a team, but one or even a short series of mistakes should not crush them.  Plus, it’s kind of hard to argue that the current system penalizes incompetence when the Clippers make money while the Spurs and the Magic lose money.

Keep It Simple, Stu

There is so much I don’t know.   Everything I’ve written here represents well-developed, but incomplete opinions based on imperfect knowledge.  Some may be inspired nuggets of wisdom, and some may turn out to be laughably wrong.  All, part, or none of what I hope or want may come to fruition in the new Collective Bargaining Agreement.

Whatever the form of the CBA, it will require a great deal of detail work, but it’s usually best to have it based on simple precepts.  This is why I favor a hard cap so readily.  It most clearly and directly addresses competitive balance and cost containment.

It’s also why my base assumption is that it’s in the best interest of the NBA, it’s owners, fans, and players that the new CBA provide a business model that allows economic viability and stabilized or growing franchise values for all 30 locations.

There’s a lot of stuff here, but…for me…it really all comes down to the hard cap.  A hard cap will not be a silver bullet that will solve all of the NBA’s problems, but I’m not foolish enough to want to try to solve all of the NBA’s problems.  It is, however, the simplest, most effective way to take the biggest step towards this well articulated goal:

“a system in which all 30 teams can compete, and, if they are well-managed, to make a profit.” – NBA Deputy Commissioner Adam Silver, April 15, 2011

This is what I think today.  All of these positions (save the one noted in the “Yacht” discussion) are subject to change based on new or better information.  I haven’t addressed all of the topics — we certainly need to make some attempt at understanding the profit/loss numbers and the need for a reduction in the BRI percentage guaranteed to the players, as well as a discussion of scarcity of resources (not enough “elite” players to go around) — nor have I exhaustively addressed the ones here.

As I said, it’s a conversation starter.

It’s one point of view.  What’s yours?

Note: It is important that I note three invaluable and eminently reliable sources that I use whenever I try to understand the NBA:  Shamsports.com, Basketball-Reference.com, and of course, Larry Coon’s CBA FAQ.

Shamsports was the resource for 2010 & 2011 salaries, while Basketball-Reference was used for all years prior.

Please check out those sites.

Topics: CBA Talk, Collective Bargaining Agreement, Herb Simon

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  • http://www.shoot-hoops.com/ Clint Peterson

    This is the most comprehensive look at a topic no one wants to address, but has to, that’s out there. Well done, Tim. Don’t sell yourself short –there’s no easy answers, but at least you’re willing to take an experienced stand on these tough issues.

  • http://612sports.net Derek James

    It’s something to think about as a fan and and writer for another small- mid market team in the Timberwolves. Like you, I didn’t know much about th CBA stuff. I think a hard cap is the way to go but it would be unrealistic to expect the players to take a massive pay cut, so there would have to be some compromise.

    I knew the franchise tag the NBA proposed was different but didn’t know exactly how different until I read this. I also don’t see how this would stop a player who wants to leave from leaving. If they want to leave, they will.

    I know here in Minnesota, the minority owners have essentially refused to spend anymore money and is likely a big reason Kurt Rambis is still coach. The thing is though, unlike cheap owners like Shinn, Taylor has never been afraid to spend if the decision makers tell him that Player X will help the team. There is a big part of the problem: teams, not players, shooting themselves in the foot with bad deals.

    Should the players have to suffer for their teams’ poor decision making? It’s not fair, but it would be in the best interest of the league to save those teams from themselves. Is that answer Revenue Sharing or no more Guaranteed Contracts? It’s hard say but I cant imagine the owners of well-run/profitable organizations willing to support “Stupid Team X” to a great extent or the players willing to secede a steady pay check, even with a good rookie pay scale.

    Knowing the Wolves’ current situation worries me a little that the team may become stuck in basketball purgatory with a young team, cap space and poor decision making front-office backed by ownership who is fed up of losing money and won’t spend until they see results.

    Plain and simple, there are no easy answers but this is an excellent conversation starter.

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  • wintermute

    Great piece, as always. I actually agree with most of your analysis, though if you’ve read my post in PD, you’d know I favor more revenue sharing as a first priority over hardening of the cap – but like you, I think there are no silver bullets.

    I disagree with your view though that revenue sharing shouldn’t have a place in the CBA. The whole goal of the new CBA after all is “a system in which all 30 teams can compete, and, if they are well-managed, to make a profit.” Why rule out potential solutions like revenue sharing? In a way, the players are being asked to pay for the inherent inequality between big market and small market teams. Put it this way, if there was more revenue sharing, less pain will need to be inflicted on the players to ensure profitability for the teams. I’m sure this what the players think, and that’s why they keep bringing it up.

    Similarly, it’s why the owners like to bang on about getting salary rollbacks from players. I’m pretty sure that internally there are huge disagreements among the owners about revenue sharing, but I’ll bet they all agree that the players’ share of the pie should go down.

    Right now it’s all rhetoric. Really I don’t see the current system as being inherently broken. Tweaks in current mechanisms, like reduction in the players’ share of BRI (a league-wide de facto hard cap, that’s a very good point), hardening of the cap (removal of the MLE for example), and reducing protection on guaranteed contracts should go a long way to fixing the problems.

  • Tad

    This is a superb analysis of the CBA. I think you hit the nail on the head with your support of a hard salary cap. If the hard cap is put into place at a reasonable number, then I can see where revenue sharing can be part of the solution.

    Guaranteed salaries also need to go by the wayside. Look at some of the guys who are getting paid big bucks and you’ll quickly realize that things are out of wack. When a mistake is made it cannot be corrected for years. Signing bonuses would solve that problem and allow teams to cut bait and move on to the next big fish.

    I really like the fact that you are looking at the CBA from a business perspective and actually advocating that the NBA function as a business entity. That is a clear argument that too often seems lost on the “expert’ analysts from national websites. I completely agree with the negatives that you have pointed out regarding Mark Cuban. Just because he likes to spend his money irresponsibly doesn’t mean that other owners should have to do this simply to compete. There comes a time when you wonder why the village idiot gets rewarded for this type of behavior in the NBA.

    The early reports of what the owners are proposing has me encouraged. The NBA business model needs to be fixed and, it seems, the owners understand that.

  • aaronb

    I think you need to look at the NFL as a guideline. There was a time when they had the same competitive balance issues. The same cycle of “Have’s and Have Nots”.

    What did they do?

    They instituted large scale league wide revenue sharing. They made it such that a Green Bay and an Indianapolis franchise could not only compete. But actually keep their marquee players and win championships against bigger market clubs.

    It put the onus on running your club efficiently. And it penalized poorly run wealthier teams (Washington and Dallas).

    For my money, this should be the NBA league-wide goal going forward.

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  • Jonathan Brill

    Great write up, but not perfect. To start, any analysis that concludes that the Clippers are better for the NBA or its fans than the Mavs or the Spurs is highly suspect. The Clippers share a new arena with one of the most valuable and well known franchises in sports in the second largest metro area in the US. This means that despite doing nearly everything wrong they’re going to be able to charge more for their seats (in the top five every year) and TV/radio package and still make money.

    I think it would be useful to see a response to this post from a player’s agent. A hard cap seems like a rather inflexible way of protecting owners from themselves, one that affects players more than it does owners.

  • notKahn

    The point about Mark Cuban isn’t that he’s a spendthrift, it’s that he really and truly cares about winning and is willing to spend and experiment to make that happen. He might make some mistakes along the way, but show me an owner or GM who hasn’t overpaid a player. Additionally, as you mentioned, he’s been incredibly consistent in putting together good (perhaps not great) winning teams. It’s not just spending money on a yacht, it’s taking care of the yacht, buying a new motor if the old one breaks down, to make sure the yacht can be the best yacht it can be. That’s what Mark Cuban represents. He loves the Mavs and he’s pretty good at what he does. He reminds me most of Ted Turner in Atlanta – another rich, crazy owner who the fans would kill to have back. In addition to business sense and an understanding of the sport, there’s gotta be some love behind a decision to own a sports team. The worst possible scenario for a sports team or a league is a setup like Donald Sterling has, where you manufacture a perpetually losing team and still profit.

    You can say a lot of terrible things about Mark Cuban, but you can’t deny that he loves the team. And there are dozens of franchises across the US sports landscape that would kill for an owner who is as passionate and successful as Mark Cuban has been since taking over.

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