CBA Talk: A Little Math

Make the following assumptions regarding the current collective bargaining negotiations:

  • The informal offers reportedly proposed by each side fairly represent the basketball-related income (BRI) split that each faction would accept to approve a collective bargaining agreement (CBA) right now.
  • The players are reportedly offering a deal that gives 53% to them and 47% the owners.
  • The owners have reportedly offered a 50/50 deal.
  • No costs have been excluded from BRI that weren’t excluded under the previous CBA.
  • Both sides are assuming the same types of system changes in the new CBA.
  • The 2011-12 BRI can be expected to be $4 billion.
  • The CBA would be for six years.
  • The expected BRI growth rate over the course of the next CBA is about 4% per year.

In such a situation, the players and the owners stand $120 million apart for this upcoming season, but about $790 million over the course of the six-year deal. Discounting those cash flows at 5% would yield a net present value of $664 million — which is the $790 million in “today’s dollars.”

The Math for the Players

If the players took the owners’ 50/50 offer now, they would get $2 billion this year, which equals roughly $24.4 million per game for the players collectively. In other words, if the players reject this offer, for each game lost, the players give up $24.4 million. Following this logic, it will take missing 27 games games (something that would happen by mid-December) for the players to have lost the $664 million that they are standing firm in order to receive via the BRI split.

Of course, that logic is flawed. The situation is infinitely more complex than that.

One of the big traps that we consistently fall into is viewing the sides as two monoliths. It makes the math easier. But it also muddies the waters. The “players” are 400-plus individuals at different points in their careers with different financial positions, personal concerns and general outlooks on life.

The truth is that the majority of these players will not be in the league for all six years of the next CBA. Only 48% of the players who played during the 2005-06 season played in 2010-11. In fact, 16% of the players from the 2009-2010 season were absent in 2010-11.

While fighting for future generations is great in concept, this really is asking a huge price from the majority of the league for 3 percentage points.

The Math for the Owners

The owners will experience the same “lost income” reality that the players are facing. For the sake of argument (and simplicity), let’s assume they lost $200 million for canceling the preseason, and stand to lose another $250 million or so per month for missed regular season games if they don’t accept the players’ offer now. Just like the players, if they stick to their guns (at a 50% split) they will be have forfeited $664 million by some time around Christmas to get back the $664 million they seek.

Also, like the players’ dillemma, it is infinitely more complex.

These are 30 owners who are in different financial positions. Jerry Buss and James Dolan stand to lose huge sums, while others like Herb Kohl, Michael Jordan and perhaps Herb Simon won’t be as badly hurt. Depending on the math, it’s not impossible that they would be actually losing less money by not having games.

Beyond that, the owners should recognize the 4 percentage points that are already theoretically “in their pocket.” Accepting the players position of 53% will still give them $160 million in savings this season (when compared to the 57% split of the previous CBA), and $884 million (in today’s dollars) over the course of a new, six-year CBA. Unlike the players, virtually all of these owners will be here at the end of the CBA. So the entirely of the deal is more relevant to all 30 of the current owners than it is to all of the more than 400 current players.

This consideration means that for every 1/82 of the season they cancel, they forgo another $2 million in savings on top of their other costs.

The Math for Both Sides

Everyone realizes that, once games are canceled, there will be lasting effects well beyond the simple lost profit/wages associated with these games. Should a lockout alienate fans and sponsors, then future revenues will be lost as well.

For every 1% reduction in the revenue forecast for the next six-year period, the NBA will lose about $263 million (in today’s dollars). This loss will be distributed more or less equally between the two sides and would be in addition to the lost income discussed above.

Continuing to Fight Doesn’t Add Up

Even if the owners are adamant about a 50% split, and the players have dug in at 53%, there is no math that says it is worth it to either side to lose games. I have tried to find a financial reason for either side to stand firm until the other breaks — no matter how long it takes — but I can’t. Not even if I take off my shoes.

Come Monday, if games are canceled, neither side can win. It will only be a question of which side has lost less.

But, as I’ve said before, even rational people will kill for money, but die for faith.

Right now, they say they disagree on “the economics,” but they don’t. They can’t — not if they vaguely understand “the economics.” No, what’s happening here is an Uncle Milty contest masquerading as a disagreement over BRI splits.

Well, boys, it’s come-to-Jesus time.

It’s time to put away the egos and take out the calculators. It’s time to take David Stern’s pointer finger, Dwyane Wade’s audacity, Dan Gilbert’s comic sans, Kevin Garnett’s scowl, the hard cap, the second mid-level exception, the roll backs, and stick them all in Mrs. Sarver’s purse. And then bury it all deep in an abandoned mine shaft.

It’s time for Stern to wrangle up the cats, and it’s time for player union heads Derek Fisher and Billy Hunter to bring in the rank and file. It’s time for each to end the rhetoric and the spin, and tell their constituencies straight up that not taking one more step towards each other is simply a lose/lose proposition.

It’s time for everyone to learn and understand what “Pyrrhic victory” means.

Acknowledgment: Once again, thanks to Larry Coon and his group of super geniuses over at LakersGround.net for helping to shape my thoughts here.

Topics: Billy Hunter, CBA Talk, Collective Bargaining Agreement, David Stern, Derek Fisher

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  • Shem

    Tim, this was an excellent article and you are spot on about the players side of the economic picture. However, I do think there is a flaw in your logic of the owners’ economic perspective. The players take whatever revenue is theirs to the bank (minus taxes of course). However, for the owners, their cut of the revenue (be it 50% or 53%), must be sufficient to pay the interest charges on the various things they’ve financed, as well as to pay arena workers, front office and administrative staff, coaches and the referees. Not only this, but there is a big disparity in the revenues each team brings in and while revenue is purportedly going to help solve this issue, the bottom line for the owners is that their cut of the revenue has to be large enough to cover expenses or else their really is no point to field the league. For example, if you own a restaurant and you’re spending 50% of the revenue on your staff, 30% of food, and 25% on rent and utilities, there really is no reason for you to continue running the restaurant because you’re losing money each month. This is obviously an oversimplification, but the principle is essentially reality for many NBA owners.

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  • http://www.eightpointsnineseconds.com Tim Donahue

    Fair point, Shem.

    I actually have a great deal of experience in turnarounds, and I have been on both sides of layoffs, plant shutdowns, and company closings. I understand exactly what you’re saying, and I think it may exist in some of the owners’ minds.

    However, I just don’t think the owners are at that point collectively. Clearly, I could be wrong, but that’s just not my feel. Part of it is that I know how long and hard it is to convince business leaders that something just isn’t working, and they should shut it down and walk away.

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