In a few days, the NBA is going to lock out its players. It's pretty much inevitable.
You're going to hear and read all sorts of rhetoric from the two sides and from media members who don't really "get it." They'll try to make this a "good guys-bad guys" thing and it's anything but.
As Michael Corleone said, "It's not personal, Sonny...it's strictly business."
It's my hope here to take the saber-rattling out of this situation and give you a clearer idea of what's truly going on. Warning: this isn't really about sports, but the basic business dynamics don't require an MBA (come to think of it, I've never found anything that requires an MBA...but I digress).
Finance 101
You'll hear it said that "the NBA is making money," which is both true and completely irrelevant. The NBA is a league and it doesn't make anything. If you want to know the financial health of the NBA, you have to ask the profit or loss question 30 times...once each for the 30 actual businesses/teams that make up the NBA.
Obviously, every business would like to make a profit, but depending on their situation, this can be difficult if such "hidden expenses" like interest on debt and the amortization/depreciation of assets are high. A business could be reasonably healthy, but because of these expenses, may show a loss. This is one of the reasons why accountants and financial types keep track of "operating income." Operating income excludes these hidden expenses leaving a purer picture of revenue less operating expenses.
If you're running at an operating loss, it pretty much means that what you're paying to make your widgets is more than what you can sell them for...not good.
According to Forbes magazine, in 2010 twelve of the NBA's 30 teams posted an operating loss. That's 40% of the teams in the league and that's a decidedly bad thing. However, in my opinion, it's not quite that bad since 2 of the 12 operational losers have purely self-inflicted wounds. The Portland Trailblazers (owner is Microsoft co-founder and noted philanthropist, Paul Allen) and Dallas Mavericks (owner is Mark Cuban, who probably bought the team because of it's name) both spend on players' salaries like they're mega-market teams though they clearly are not. Put another way, they're irresponsible, but can afford to be. Oh yeah...Cuban was rewarded for his fiscal irresponsibility with an NBA title this season.
Mismanaged or Just Mid-Market?
You'll likely hear that a big part of the problem in the NBA is that too many franchises are mismanaged. I don't know if they are or aren't. However, it's pretty obvious that, if you're the New York Knicks, Chicago Bulls or the LA Lakers, you can charge a lot more for your tickets than if you're the New Orleans Hornets, Sacramento Kings or Milwaukee Bucks. Even more important, big market teams can make several times what mid-market teams can make in local TV and radio contracts.
It's not a level playing field.
Still, some mid-market teams made money in 2010. Perhaps the most notable was the Oklahoma City Thunder who posted a remarkable operating income of $12.5MM. The Thunder is the city's only big league franchise...ever. In baseball terms, they're strictly Triple-A. However, when the New Orleans Hornets needed an alternative place to play due to Hurricane Katrina, OKC was chosen and the city received the NBA so enthusiastically that the league helped engineer the move of the struggling Seattle Supersonics franchise to OKC.
The Thunder inherited a young superstar named Kevin Durant who was joined by star-in-his-own-right point guard Russell Westbrook in 2008. The Thunder's front office has done a very good job of building around their nucleus and the team has been exciting and very successful on the court.
Some will point to the Thunder as an example of a mid-market team that has done it the "right way." While I give credit to the Thunder, for the 2009-10 season, they paid Durant and Westbrook a combined $8.6MM. Durant alone will jump to $13.6MM in 2011-12 and Westbrook will soon follow that same path.
Good-bye OKC operating income.
The Crux of the Matter
Based on the current collective bargaining agreement (CBA) between the NBA players and owners, only about 20 of the current teams can be expected to break even or better in terms of operating income. In the simplest terms, this means that either the league needs to eliminate "fringe" franchises or significantly change the CBA...ideally by enough to make the current 30 teams viable.
The truth is that neither the owners nor the players want contraction. For the owners, contraction's a bad idea for two reasons - 1) having 30 significant media markets included enhances their leverage in terms of the national TV contracts and 2) having these markets in the fold minimizes the chances of the formation of a rival league. While rival leagues seldom succeed for long, they always seem to do two things while they live - raid a couple of your superstars and generally increase players' salaries.
The players, particularly the non-stars, don't want contraction for the most obvious of reasons...fewer job opportunities.
From the owners' perspective, this is where the argument ends. Contraction or making the CBA more mid-market-friendly. In the soon-to-commence public relations war, the players and their representatives will seek to add a 3rd alternative...increased revenue sharing.
NBA Revenue Sharing
As I mentioned at the beginning of this article, when taken in total, the NBA is profitable. The players, while acknowledging the financial problems of the smaller market teams, will claim that the dollars are there...they just need to be distributed more equally.
At first hearing, this may sound good, but it's an absolute non-starter from the owners perspective, and any reasonable business perspective. If you just bought a mega-market NBA franchise and paid the huge premium for the privilege, you are going to have a very serious and completely reasonable problem if someone tries to cut the (large) anticipated revenue stream that was used to set your purchase price. You'll also scream bloody murder over the fact that a significant change to the revenue sharing rules would cause the asset you just paid $500MM for to be reduced to $300MM.
When it comes to revenue sharing, it's one of those situations where you simply can't change the rules in the middle of a game.
So What's Next?
The owners pretty much laid their cards on the table when they introduced their $62MM "Flex Cap" proposal. If the union doesn't accept this in the next few days, the owners may go back to their silly posturing about a $45MM "hard cap" and the elimination of guaranteed contracts.
The problem here is that the owners' Flex Cap proposal may be close to their best offer (though the owners very purposely left key final details open to negotiation). The union treated the owners proposal like a posturing move (that is, they crapped all over it). It's possible that the players' representatives made a tactical error here that may cost both sides time and money only to have them end up in the same place they could be right now.
At the risk of repeating myself, the key point is that the owners are determined to come away with a CBA that works for 30 teams, not the current 20 teams who are or could be (if not for owner largesse) in the black in terms of operating income.
The players don't want to give up what they have and this is understandable. However, if they aren't ready to accept something very close to the owners' Flex cap proposal, the 2011-12 NBA season is unquestionably in jeopardy.
As fans, we're definitely on the outside looking in, but I hope that this helps you be a better consumer of the stuff that the media's about to throw at you.
Thursday, June 30, 2011
Friday, June 24, 2011
Bulls Draft: Smart, Not Spectacular
By all accounts, the 2011 draft class was an exceptionally weak one.
So if you're the Bulls and you come in with the 28th, 30th and 43rd picks, you're expectations should be adjusted accordingly. The Bulls didn't find their shooting guard of the future, but then again, they didn't expect to.
Having established themselves as legitimate title contenders, the Bulls entered the draft with a dream and a plan. The dream was that they could somehow use their picks and a non-rotation player or two in a trade that would net them a shooting guard like the Grizzlies' O.J. Mayo or Houston's Courtney Lee, both players for whom the Bulls showed interest at the February trade deadline. It didn't happen in February and it didn't happen on Draft Night.
Since the dream didn't materialize, Bulls management moved quickly on their plan. Though they had 3 picks, Bulls' General Manager Gar Forman made it clear that they wanted no more than 2 rookies on their roster. The truth is that they preferred zero or one, leaving more room for veterans who could help the team immediately. Though their dream didn't come true, they executed their plan very nicely.
Nikola Mirotic
First, they traded their #28 and #43 picks for the Minnesota Timberwolves' 23rd overall pick. With that pick, they selected 20 year-old Montenegro-born power forward Nikola Mirotic. The 6-10 power forward has two things the Bulls really like. First, he's got talent...loads of it. Second, because of his contract obligations playing for the prestigious Real Madrid team, he won't be available for at least two years, saving the Bulls a roster spot. According to DraftExpress.com, for my money the foremost published source for talent evaluations of NBA prospects, "Chicago just drafted the 7th most talented player in the draft with the #23 pick." Most scouts I've read agree and feel that Mirotic would have been a top-10 selection if not for his contract commitments. The truth is that the Bulls are more than happy to have Mirotic develop his game overseas where he can get much more game action against quality competition.
While those fans whose only form of gratification is the immediate variety will be disappointed that they'll have to wait to see Mirotic in a Bulls' uniform, for Bulls' management, this was Christmas in June.
Jimmy Butler
At #30 the Bulls selected 6-8 Marquette swingman (shooting guard/small forward) Jimmy Butler. Butler's life story would be made into a movie except it already was. If you saw "The Blindside," just substitute Butler for Baltimore Ravens offensive tackle Michael Oher and switch from the gridiron to to the hardwood and the stories are virtually identical. Suffice it to say that if it's true that it's not what you achieve, but what you overcome that matters most, this kid's character is off the charts.
Character is great and all, but can the young man ball? Playing in the tough, tough Big East Conference last season, Butler averaged 16 points and 6 rebounds per game while shooting 49% from the field and 35% from the 3-point arc. Good numbers. And before you go thinking that Butler is one of those productive college players who lack the athleticism for the NBA, be advised that he posted a 39-inch vertical leap at the combine, just an inch short of what Derrick Rose did. The two words most often associated with Butler are versatility and defense...good words.
While it's always a longshot for a 30th pick to make it in the NBA, Jimmy Butler's overcome much worse.
It's not surprising that few fans are doing cartwheels over the Bulls' draft. Still, I think the Bulls did a great job of executing their pre-draft plan and for this deserve at least polite applause.
Wednesday, June 22, 2011
NBA Proposal - A Hard Cap by Any Other Name
The current collective bargaining agreement (CBA) between the league and the players includes a "soft" salary cap that is set at 51% of league basketball-related income divided by 30 teams. For the 2010-11 season, the team salary cap was just over $58million. However, the current CBA contains several "exceptions" which allow teams to exceed the cap. This is why it gets its "soft" designation. The fact is that only about 1/3 of the teams in the league are actually at or under the current cap and teams like the Los Angeles Lakers and Orlando Magic have payrolls of around $90million. So yes, it can often be a very soft cap.
What the owners proposed is something they're calling a "flex cap" which is ironic because its revolutionary feature (for the NBA) is that it is in fact a hard cap design. In essence, the owners' proposal would retain its main salary cap and would even increase it to $62million. They would also retain the key salary cap exceptions including the "Larry Bird" exception (allows a team to go over the cap to sign its own player) and the "Mid-Level" exception, or MLE (allows a team that's over the cap to sign one or more free agent players so long as the total salary added doesn't exceed the league's average salary, currently around $5million). Sounds reasonable so far.
The Catch
The owners proposal was for a yet-to-be-negotiated minimum team salary and a maximum team salary. It's the maximum team salary that is controversial because, as the owners presented it, none of the exceptions that allow teams to exceed the salary cap figure would apply when it comes to the maximum team salary, that is, the maximum team salary is the hard cap.
Cleverly, the owners didn't propose the upper and lower bands of their proposal. Essentially, they've told the players that "once you buy into our overall design, we can be somewhat flexible about the actual numbers." The problem is that the players have said that they'll never accept a hard cap and correctly see that this is exactly what the owners have proposed.
The Philosophy of a Hard Cap
Most fans view a hard salary cap as a way for the owners to control overall player salary costs. However, the truth is that the NBA has a very effective control of overall player salaries built in to the current CBA. The players' salaries are guaranteed not to exceed 57% of revenues. An 8% deduction is taken from each player's salary and put into an escrow account. If player salaries exceed the 57%, the owners receive the overage from this escrow account, and if the total escrow account is insufficient, player salary deductions are increased the following season.
So why a hard cap? Why not just fiddle with the 57% figure? Good question and it's exactly the question the players are asking. The reason is that, for the NBA, the hard cap is about enhancing competition (or "parity"), not cost control. The current CBA includes a "Luxury Tax" provision that sets the tax level at 61% of basketball-related income (divided by 30 teams). Last year the tax trigger was about $70million, or $12million over the salary cap. For each dollar a team exceeds the $70million level, that team must pay a dollar of tax. After the season, the tax pool is divided among the teams that did not have to pay the tax.
The plain truth is that the Luxury Tax has been a failure. For the 2010-11 season, 7 teams exceeded the tax trigger point. The combined record of these 7 teams was 352-242 and only one of them had a losing record (Utah Jazz at 39-43). Once again, the league champion was among the Luxury Tax teams (Dallas Mavericks at $86.6million).
By insisting on an absolute maximum salary, the league hopes that their mid-market teams like the Sacramento Kings, Minnesota Timberwolves and Cleveland Cavaliers will be better able to compete with their big-market brothers and that this will open the road to their financial health.
Hard Cap Not All the Owners Want
Sort of lost in all the talk about the owners' hard cap/flex cap proposal is that they also want a 50%-50% revenue split with the players. As mentioned, the players currently receive 57%. This is hardly an insignificant aspect of the owners' proposal and may actually be more important to the owners than the hard cap since, in the end, virtually all labor negotiations are about how the revenue pie is split.
Unfortunately for fans, this situation is looking very similar to the NHL negotiations of a few years ago. In that case, the owners insisted on both a bigger piece of the pie and a hard cap. The players said they were flexible on the revenue split, but would never accept the hard cap.
The entire 2004-05 NHL season was lost.
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