Basketball Is In Trouble

Of all North American professional team sports, the indoor leagues are in more trouble than the outdoor sports.  They are definitely at a disadvantage in terms of venue attendance as indoor arenas are almost universally smaller than outdoor stadiums.  But today, the gate is not close to being the main source of revenue,  so the blame lies elsewhere.

Interestingly, the indoor team sports (basketball and hockey) have smaller rosters than the outdoor sports (baseball, football and soccer), so the cost of athlete contracts are minimized and they are still in trouble.

The NBA might be on the brink of complete disaster.  Or it might be on the brink of exploiting its players in a manner that hasn't been seen since the advent of free agency in the 1960s and 1970s.   The players have been locked out for many months.  There is no end in sight.  The owners have decided that they aren't making enough money and have decided that they will boost their profit margin on the backs of the athletes.  At the same time the owners have refused all requests to back up their claims with proof in the form of financial numbers.  Outside observers note that revenues have climbed every year for decades and the industry pulls in multiple billions each year, yet somehow, the owners are not only not making enough, but actually losing money!

First of all, I believe that anyone who makes a claim and refuses to substantiate their claim is almost assuredly lying, or at the very least, stretching the truth to an absurd degree.  No rational person would give their trust in such a situation, but that is exactly what NBA owners are telling the players to do -- "just trust us!"  Second, most owners are multi-billionaires that have been incredibly successful in their other business pursuits.  The notion that they can't find a way to make their multi-billion dollar industry profitable without forcing a 15-20% rollback in player salaries as well as dozens of other structural concessions in collective bargaining is absolutely ludicrous!  If they were this inept at business they never would have become wealthy in the first place!

What appears to be happening is that the owners feel they aren't making enough money by being franchise owners and operators.  In other words, their invested money would do better in other ventures, which implies that the opportunity cost of being an owner is very high.  The logical thing to do in such situations is to reinvest your capital in more profitable ventures.  That is what business is about!  But owners are alpha males of the first order.  By and large they made their obscene fortunes by being ruthless and cutthroat.  Getting out of the sports franchise ownership business would feel like losing to them.  These people never lose.  They manipulate the rules until it is impossible for them to lose.  Winning is the only option.  Charlie Sheen to the nth degree.  So, instead of recognizing that sports franchise ownership is not a high return industry and moving their money to better investments they have planted their feet into the ground and will move mountains to make it a more profitable industry and anyone in their way will suffer!

For what it's worth, most intelligent people recognize that sports franchise ownership is not a money maker.  Few if any owners are making their fortune on sports entertainment.  Pundits basically refer to franchises as "toys" for the ultra-wealthy.  They are status symbols and allow former and wannabe athletes to live out their sports fantasies at the ownership and management level.  Anyone who purchases a sports franchise in the 21st Century and expects it to be their bread and butter is delusional.  The NFL makes money, well, except apparently the Detroit Lions who are managing to lose money.  Given how Detroit has been hit as hard or harder by the economic downturns of the past decade than any other North American city perhaps this is not completely unexpected.  A select few MLB franchises make real money and only a few more operate at a profit at all.  The NHL has some franchises that make money but other than the Toronto Maple Leafs none of them make significant profits.  Why the NBA owners think that they should universally be making money hand over fist must be a product of ego and hubris as it is certainly not based in realism.

And then there's the players.  NBA players are not very sympathetic.  They may represent 'labour' in this dispute but the typical fan cannot identify millionaires as 'labour'.  It is only relative to the billionaire owners that they seem to be the disadvantaged 'poor'.  In a battle between billionaires and millionaires no one gets the public's sympathy.

That does not mean that the public doesn't take sides.  They definitely take sides.  In almost all cases fans and the public both side with ownership.  It's completely ironic but explainable too.  In a society weaned on The American Dream the public is predisposed to look favorably on the wealthy.  No one looks beneath the surface and asks questions like "how did they become wealthy?"  Surely some billionaires became super-rich by pure entrepreneurship.  They saw a market need that was not being addressed, formed a company to fill that need, did the job better than anybody else and became rich by making life better for their customers.

This is not the typical story.  Most people come to extreme wealth in less than entirely wholesome manners.  Taxes are avoided either illegally or by lobbying politicians to reduce their tax burden.  The 'bribe' known as lobbying is cheaper in the long run than meeting their moral and legal tax obligations.  Monopolies and oligopolies are formed and the public gets gouged.  Monopolies are leveraged into other markets in grossly anti-competitive fashion.  Companies with potentially threatening new innovations are purchased before they can come to market and affect the bottom line.  The pending innovation is sometimes incorporated into the established company's products and is sometimes quashed -- which is never in the public interest.  Stereotypically, the wealthy don't bother to watch on whose heads and hands they step on the way up as they have no intention to ever allow themselves the indignity of having to climb back down.  In rare cases laws beyond the scope of Antitrust are broken in various cost-cutting measures meant to improve the profit margin.  Likewise, ethics are often a casualty of big business.  Manufacturing is shipped offshore to sweatshops employing children to reduce costs, regardless of the drastic negative effect the lost jobs have on the local economy and regardless of the human rights violations happening on foreign soil away from prying eyes.  Polluting is rampant and either hidden or environmental agencies are paid to look the other way.  Ultimately, few fortunes are built in a fashion that will get the profiteering decision makers into Heaven.  But we are awed by their success, nonetheless, and put them on a pedestal as paragons of virtue, wishing we could be like them.

The players on the other hand are perceived as opportunists who have little to no value to the economy outside of their athletic ability.  In other words, if they didn't have their sport in which to make a fortune they would be working class stiffs living paycheck to paycheck.  As such, athletes should take whatever pittance the owners throw their way and be thankful for it.  The fact that the athletes are often more highly educated than the owners actually works against them!  The public is alienated by education and intelligence as they can't relate to either.  "Dubya" managed to portray the educated as "the elite", people to be held in scorn and marginalized, while portraying the super wealthy as "the ordinary guy"...and America ate it up, hook, line and sinker!  What is incredibly ironic is that the likelihood of a person escaping the ranks of the poor or middle class and becoming wealthy through sport are greater than their chances to become wealthy by other means.  Sportsmen and athletes are the very embodiment of the American Dream and yet we look at them with disdain.

Here's some common sense that seems to be lost on the masses.  On the whole, money is not made in sports on the acuity of owners or management.  It is made on the skill and popularity of the athletes.  How many NBA owners can you name?  For most people the number is two, the most notorious two -- Mark Cuban and Michael Jordan -- or less!  If the owners are mostly unknown, how can you attribute any portion of ticket sales or television revenue to the owners?  The athletes are the only commodity of sports and have every right to demand as much money as the market is willing to bear.  That is the nature of capitalist, free market economics.  (Actually, I think the entire industry is broken and all parties should be making no more than 10% of their current earnings, with the other 90% either being 'returned' to the consumer in the form of lower ticket prices or being contributed to worthy charities.)

Another piece of common sense is that the contractual concessions and salary reductions the owners seek amount to a request for the players to protect the owners from themselves!  When a player signs for $30 million dollars a year, or $1 million for that matter, no one is holding gun to the head of the owner forcing them to offer that contract!  The owners would never make the kind of decisions they make in sports in their other businesses!  So, because the less affluent billionaire owners suddenly can't seem to manage a budget they are going to take it out on the players.  It all comes down to the egos of the owners.  They cannot abide losing so spend money they don't have in a vain attempt to win.  They all end up doing it, so overspending doesn't guarantee anything beyond blowing their budgets.  (When only some of them do it, like in MLB and the English Premiership (soccer), money does buy success.)

Another deep dark secret of the NBA is something known as BRI -- Basketball Related Income.  Ticket sales, direct television, Internet and radio contracts and sale of merchandise and memorabilia (replica uniforms, caps, etc.) count in BRI.  ALL the NBA contract negotiations revolve around BRI.  What the owners aren't telling you is that they are making a mint off of their franchises in areas that don't count as BRI.  For example, a great many of the franchise owners also own various media.  They use their franchises as cheap or free content for their media.  All the money made by these media wings of the owner's conglomerate doesn't contribute a penny to BRI.  Generally, these moneys are comparable to the BRI itself!  So, while the team as an independent business unit may be losing money on paper the owners are making very tidy sums as a result of league operations.  The NFL, for all its failings, doesn't make a distinction between profits made directly and indirectly from the operation of the league.  Good for them for being so up front.  The NBA, however, does make that distinction.  It's like a huge tax shelter -- they make money but avoid paying taxes by an act of accounting.  IMHO, this kind of obfuscation are merely lies of omission, and are thus still lies.

[Small tangent]
For what it's worth, creative accounting is being used everywhere by owners and management to exploit investors and employees alike.  Tens of thousands of investors and stars of Hollywood motion pictures whose contracts call for a percentage of profits have never seen a red cent because, on paper, movies that grossed hundreds of millions of dollars seemingly lost money.  If they lost money, how are the fat cats in control making money hand over fist?  Lawsuits stagnate in court -- studio lawyers ensure that it costs these cheated investors more money in legal expenses to recoup their rightful earnings than the earnings are worth.  This is done because human greed knows no bounds and because they know they can get away with it!  Justice is indeed blind, but not in a good way.
[end of tangent]

Finally, like much of the financial world today, money isn't make on the operation of business.  In terms of public holdings the proceeds from the operation of business are paid out as dividends.  Dividends represent a very small portion of the growth of wealth.  The value of the stocks themselves is what matters these days and often the value of stock has little to do with actual earnings or even earning potential.  Speculation and psychology play a big part in stock valuation. Sports franchises are exactly the same.  The owners don't make much money from the operation of these franchises.  They make the real money by selling the franchise for twice what they paid for it.  In general, franchise values, particularly for prestige franchises, only go up, so there isn't much in the way of risk involved in ownership, in spite of what the owners and their PR machines (including their League Commissioners) tell you.

Frankly, the athletes experience more risk than the owners! How many times have you heard someone tell a child that their chances of making the big leagues are somewhere between slim and none and they had better place a lot of attention and effort on a back-up plan just in case they fall short of their professional goals and their dreams of making it rich in sports.  Perhaps you've done it yourself.  Kids are highly resistant to listening to adults, especially parents.  Somehow they always seem to think they know better than the people who have experienced everything they (the kids) have and much, much more and thus have earned the wisdom of age.  A child's intuition, hope and tenuous grasp of logic generally wins the day.  For what it's worth, the kids that don't invest any time in a backup plan and devote themselves exclusively to their dream are often the ones that make it.  Of course, talent is required but hard work and unswerving dedication go a long way, too.  In either case, the amount of time and money invested in the quest for a professional sports career is much riskier for a have-not kid than any risk the owners experience by operating a franchise!  Yes, the owners put up more money, but their return on investment is astronomically higher than that of athletes.  (Not many athletes complete college and those that do often have degrees that are little more than a piece of paper.  The athlete that graduates with a (functional) degree in law, medicine, engineering, hard science or education (or other profession) are few and far between.  Their degrees generally qualify them for virtually no form of gainful employment.)

Based on news coverage, it is pretty clear that the owners had no intention of bargaining in good faith.  They had a goal in mind and nothing short of achieving that goal today would suffice.  (In other businesses, management might seek smaller concessions today and seek further concessions in the next Collective Bargaining Agreement, but the NBA wants it all now!  They aren't willing to risk the possibility that the economic reality of the NBA might improve in the future, jeopardizing their ability to leverage further concessions from the Player's Union in subsequent CBAs.)  The players have moved significantly from their starting position.  They have accepted the fact that they are going to come out losers in these negotiations even though they don't accept the assertions by the NBA that they are leeching money.  Ownership hasn't really moved.  What little movement there was merely changed completely unrealistic and unfair positions to less unrealistic and unfair positions.  This is standard practice -- the owners never expected to achieve the originally offered deal..  You always ask for more than for what you are willing to settle.  In this case, the demands were so radical and drastic that the starting position was simultaneously comical and desperately sad.  The owners weren't even hiding the fact that they were bargaining in bad faith.  They issued ultimatums like "take this deal or the next offer will be much, much worse for you."  (The point of bargaining is for two differing positions to move towards each other, not away from each other.)

Given that the owners had no intention of bargaining in good faith, the players were left with two choices.  They could let the owners get away with highway robbery and take a bad deal.  The other option was to reject the bad deal and walk away from the farcical negotiations, specifically pointing to the owners' bad faith, and dissolve the union.  Unions are only worth something to its members if it can do a better job negotiating contracts and working conditions than the individuals could manage separately.  There's no point in paying dues to an organization that can achieve nothing.

The absence of a union opens the door for an Antitrust lawsuit against the NBA.  The only recourse for players is to appeal to the courts of law.  All major team sports have been in violation of America's Antitrust legislation for a century.  Baseball, America's National Pastime, received exemption from Congress from Antitrust laws.  That having been said, if it could be demonstrated that this exemption was no longer in the best interest of the American People it would disappear in a heartbeat.  None of the other sports leagues have similar exemption.  The assertion of Antitrust violations have never really been tested in court.  The NFL Player's Association made a weak attempt to challenge the NFL earlier this year.  The initial results favored the players but ultimately a higher court overturned the ruling and sided with ownership.

If the players succeed in their court claims that the NBA is operating in violation of Antitrust laws it is unclear how this would affect future operations.  There is no reason to believe that such a ruling would directly result in better contracts for players.  In fact, there may be no change in internal economics at all.  Worse, the owners may decide to be punitive on top of being greedy and offer even less "to make up for lost revenues resulting from the lockout."  First of all, the owners are locking out the players, not the players striking against the owners.  Games aren't being played because the owners refuse to stage them.  Any "lost revenue" is a result of owner decisions, not player malpractice or malfeasance and the owenrs have no leg to stand on demanding recompense.  Second of all, the NBA is claiming that owners are losing money by operating under the current CBA with current player contracts.  If they would lose money by operating, then surely they are saving money by locking out the players!  In that case, there isn't a single dollar that needs to be "made up"!  The owners would simply be using this as an opportunity to further pull the wool over the public's eyes and gouge the players even deeper.

In the terrible eight years suffered under Dubya, the Supreme Court was stacked with very thinly veiled ideological conservatives.  With Republicans having control of all three Houses (Representatives, Senate and White) there was nothing that could be done to prevent these politically incorrect, politically motivated and basically unethical appointments.  The bottom line is that the players have no hope whatsoever of wining this matter in the courts.  They may win in a local circuit court.  They may win in the Court of Appeal.  But they are guaranteed to lose when the matter reaches the Supreme Court which is completely in bed with Big Business and the super-wealthy.

But it doesn't really matter...it won't get that far.  Obscenely paid lawyers representing the owners will use every trick in the book (and will probably invent a few new ones!) to delay the procession of this case through the courts, that is, if they can't derail it entirely!  Only a couple of the owners make a substantial portion of their income, directly or indirectly, via the operation of the NBA.  The rest will continue to have annual earnings on the order of $100 million upward to $2 billion!  If the NBA never plays another game, they will simply write off the franchises as losses and gladly take the associated tax breaks.

All but a couple of the players make their money directly from their NBA contracts.  The few that could live off of their significant endorsement deals will find those deals disappearing -- players that don't play make poor spokespersons for sponsoring companies.  So, in effect, all the players make their living from the operation of the NBA.  They can't afford to continue to forgo 'average' annual incomes of $4 million when the 'average' player has a career lasting only 4 years.  (Significantly more than 50% play 4 years or less.)  They are making a stand on moral grounds and they can't possibly win.  Given that this contract dispute is part of a larger phenomenon of the rich getting richer faster and to greater extremes than ever before and the middle class (and relatively speaking the players are the middle class of that particular subsection of the economy) seeing their standard of living rapidly eroding the players are essentially taking one for the team, meaning us.  The best they can really hope for is forcing the American media and American public to take a long, hard look at what is happening on their watch.  It is unlikely that the media will be paying attention, and if they don't the public won't even be aware of the significance of what's happening.

My personal preference is that the owners be forced to sell their franchises -- at a major loss, the cost of their hubris -- to owners that recognize that sports ownership is a 'big toy for big boys' and a status symbol and have no expectation to make significant money.  You may feel that this makes no sense.  Neither does multi-billionaires extorting cities and states for hundreds of millions to billions of dollars to build brand-spanking new, state-of-the-art stadiums that they will completely own using only public money.  The gravy train for the ultra-wealthy financed on the backs of athletes with the little guy's hard earned and scarce dollars needs to stop.  (Don't even get me started on how the NCAA and its member schools exploit student athletes!)  The new reality for the NBA will involve much lower levels of BRI due to lost goodwill / bad publicity and everyone will make less.  This is reasonable when you consider the true value of their contributions to society relative to (relatively) poorly paid teachers, doctors, scientists and engineers.  It is disgusting how entertainment is so enormously overvalued by modern society!  Still, the split of revenue between the anonymous owners and star athletes will be more equitable and reasonable.  Preferably this happens sooner rather than later.

Of course, this is not going to happen.  The players will watch potential income evaporate every single day they are locked out.  This is money they can never get back.  In the end, they will come back to the table and take half of what the owners were offering before.  Why?  Because the system failed them, because the owners can get away with it and because the players have no other options.

There is a remote chance that the players will try to form their own league, owned by the players, and the NBA will become obsolete.  NBA franchise values will become $0.  I suspect that should this option be pursued by the players that the owners will sue on imaginary grounds and the courts will somehow agree with them, putting the kibosh on the players' attempts to be self-sufficient.  Besides, the players would need somewhere to play these games and the owners they are being oppressed by are the very same owners of the athletic venues they would need to use.  The owners could play it one of two ways.  They could laugh at the players and their upstart league telling them to go to Hell.  Or, they could charge 100 times the going rate for the rental of their facilities.  Again, it all boils down to the fact that the players can't win.  The deck is not only stacked in the owners favour, it is marked, too, and the owners know exactly what the next cards are going to be.  Further, the dealer is an owner that can deal from the bottom of the deck without any chance of being detected. The owners cannot lose!  The society that we've built and are so proud of has set things up so that the just cannot win.  Power and money buy justice.

Even if/when the NBA once more puts the squeak of rubber soles back into the arenas they aren't out of the woods.  Officiating in the NBA is an exercise in politics.  The popular, big market teams get the calls.  The superstars get the calls.   The home team gets the calls.  NBA officiating is terrible.  In part this is human psychology.  Officials cannot completely separate themselves from their own thinking or the human desire to please others.  They please the audience by calling in favor of the home team.  They please the most influential players, the superstars, by making calls in their favor.  They please their bosses, the NBA itself, by ensuring that the most lucrative and popular teams make the playoffs and go farther in the playoffs by making calls for the big market "in" teams.  All of these are subconscious processes and to some extent unavoidable.  Regardless, officials should be aware of these inherent biases and be consciously avoiding them!  They don't appear to be combating anything. The fans and pundits that are most steeped in testosterone and have been "drinking the Kool-Aid" for years will tell you that's just how it is.  It is up to the journeyman, rookie and unheralded player, the visiting teams and the have-not franchises to suck it up and overcome the adversity.  I'll never understand why inherent and obvious unfairness is explained away as a fundamental part of competition.

Also, it was revealed a number of years ago that at least one NBA referee (or exactly one, depending on who you believe) was corrupt and taking money on the side to call a game a certain way or ensure a certain outcomes for gamblers and gangsters, like "making a spread".  He claims he wasn't alone and that he's been made a scapegoat so the league can say it dealt with the 'isolated' problem when in fact it continues unabated.  He may be a bitter and miserable cheat that got caught and got punished (he was convicted and received prison time) and is trying to make himself look better by creating a conspiracy theory...or, he could be telling the truth.  The public will never know, unless somehow another cheat is exposed.  Given the prevalence of proven corruption of soccer officials, and the proliferation of legal and illegal gambling, corruption probably has a greater hold on all professional sports than anyone is willing to admit.

In the cases of both inherent bias and blatant corruption the league seems not to particularly care.  They are making money and that is apparently all that matters.  TV contracts are more lucrative when the most popular players and teams go the farthest in the playoffs, ultimately/hopefully winning championships.  So long as this is happening, the league seems disinterested in exposing or changing anything.  The NBA has the greatest disparity of any professional league and thus more dynasties than any other league.  More than any other sport you can count on the same teams making the playoffs year after year and the same teams missing the playoffs year after year.  The emergence of a team from the also-rans to the elite almost never happens.  The self-centered and self-interested owners will tell you that this is because the 'good' teams universally have better management.  Posh!  NBA officiating paves the way for the maintenance of the status quo.  Also, salary cap or no salary cap, the best players all end up playing for the 'good' or 'traditional' markets because everybody knows that's the only path to winning.  If the owners' claims of poverty are even remotely true, is it any wonder that the have-nots aren't making (enough) money when they cannot succeed on the court?  It isn't the players causing the problem, it is the league and the owners that are at the root of all the NBA's problems, but it will be up to the players to solve them, mainly in the form of financial givebacks -- money is the ultimate band-aid -- and the (relative) poor will support the wealthy-beyond-belief.

Basketball is in trouble.