Breaking Down The Breakdown: The NBA Lockout

So, here we are my friends. The NBA and the Players Association has decided that they can’t play nice. The dispute boils down to owners seeking more financial stability and profitability off of their teams and the players wanting long-term security and financial guarantees. There are layers to this onion we’re currently peeling through. There is the exterior issue that everyone notices and comments on, who gets paid but under that is the important issues. What does it take to run the league? What is adequate compensation? What about non-performance related revenue? What are the free agency goals of owners and players? 

This is where I hope to come in handy in helping to frame the lockout debate. There is the clearly visible financial struggle and we’re seeing divisions on both sides of the debate within their own camps. The implications of the lockout are wide reaching for a sport that finally got some spotlight for the summer and most of this season. Unfortunately they’re still having problems biting into the NFL’s slice of the pie and the NBA is not so dearly embraced in the United States that it will be able to sustain such a huge black eye of missing an entire season without having further reaching damage. We’ll look at this after the jump.

When we’re looking at the financial aspect of the NBA we have to keep in mind that the league itself spans 30 teams across the United States in markets that vary in size from that of New York City to that of Memphis and Oklahoma City. The operation of these teams varies drastically from leagues such as the NFL in many ways as well. The NFL splits ticket sales at a 60/40 home/away clip, revenue sharing is league wide, ownership is often split amongst investor groups or operated as a publicly invested group (Green Bay Packers). The financial acumen of the individual owner in the NBA is what helps keep his franchise operating in the red or the black. The owners are saying that 22 of 30 franchises operated at a loss this past season. If we’re playing the guessing game I would venture a guess that the profitable franchises were: LA Lakers, New York Knicks, Boston Celtics, Miami Heat, Chicago Bulls, Oklahoma City Thunder, Houston Rockets, and the Golden State Warriors. That means the financial viability under the current CBA of the other 22 teams in the league is unsustainable under the current agreement. From an owner’s perspective if the league seeks to continue with 30 teams something must be done. Contraction is an option amongst financially strapped teams (The Hornets are almost a foregone conclusion as contraction leverage) to attempt to streamline operation costs in the league. How can this be addressed? Let’s look at some basic splits.

Currently players receive 57% of revenues generated outside the game. The owners receive 43%. As it stands now the owners are seeking a split of 60% and 40% in their favor. An article posted on NBA.com as of June 27, 2011 referenced revenue sharing between owners and players is something that the owners are interested in discussing only after the terms of the agreement are hammered out. Proposals from both sides are guarded. The Player’s Union is seeking to have guaranteed figures as it stands, the owners are seeking to allow revenue sharing to serve as leverage in finalizing a deal. Where this gets sticky is that the owners themselves should be seeking to redistribute revenues to each club to cover salary, operation costs, and subsidies to funding facilities. As it stands now NBA players are the second highest paid of the United State’s four premier leagues (MLB, NBA, NFL, NHL).

Revenue sharing amongst the players is functional as it helps to bridge the gap between role player paychecks and superstar paychecks via distribution amongst the players. Then again, the NBA also has a favorable salary structure to both players and owners by way of penalties. The Kings incurred that penalty this year with their payroll. If a team is under the minimum salary requirement the players receive the difference between the minimum and the current pay as a bonus. For the owners when a team exceeds the luxury tax the subsequent penalties assessed to each team are distributed amongst teams under the salary cap. These mechanisms are in place for players and owners to attempt to subsidize their earnings and cover their costs. The ultimate questions to address in revenue sharing are as follows:

If the players receive nearly 60% of revenue split now, should they acquiesce a certain amount in player salaries over the life of a new deal? 

If the owners aren’t seeking a revenue sharing amongst franchises, is a hard cap asking too much to cover costs? 

With 73% of the league operating at a loss, is this financial structure viable?

Free agency is another point of contention that is necessary to address in the current labor negotiations. Money is a primary motivator but we must not lose sight of what Lebron James, Chris Bosh, and Carmelo Anthony catalyzed this past year. Lebron’s act of narcissism this year began creating questions and a general concern and panic amongst teams. Players rightfully should be allowed some say in their places of employment but there are a few complicating factors in the equation. First, we’re dealing with contractual employment. If you’re an at-will employee then that’s fine, you are disposable at your employer’s whim and you may leave on your own. In contractual obligations you’re obligated to fulfill the terms and your say is diminished since you waived your rights the moment your name hit that paper. The second factor that combines with the first to create a point of contention for owners is that in the NBA the loss of one player can drastically alter your franchise’s entire course, its marketability, and its financial stability. As Houston fans this should come as no surprise. Yao Ming goes away and we’re no longer a playoff team, we’re no longer as viable as we were. Cleveland knows this in an extreme fashion in that Lebron went away and the value of the Cleveland Cavaliers plummeted. The NFL solves this by way of the franchise tag (Both exclusive and non-exclusive). The owners have offered a "flex cap" which is essentially a transition to a hard cap. The flex cap proposal was a salary cap coupled with some player exceptions that enable a team to go over that cap but the exceptions were flat. Essentially it is a disguised hard cap without detouring too far from current salary structure.

Carmelo Anthony also deserves blame for bringing about discussions of franchise tagging in the NBA. Lebron is a model for an exclusive franchise tag where a player is not allowed to negotiate with teams for one year while the club surrounds him with talent. Anthony is the argument for a non-exclusive franchise tag. Under the non-exclusive tag a player may negotiate with other teams but he must be paid no less than the average of top 5 players at his position. If that player signs with another team then the team he left is owed two first round draft picks. Owners are seeking more of a say in their investments and the players wish to preserve their autonomy. No doubt free agency is important but with the impact a single player can have on an entire franchise the ability to franchise a player would help enable teams to hold on to marquee players and encourage migration of top tier talent in a swap. This would go hand in hand with a restrictive cap to teams to attempt to level the playing field for smaller market teams.

Finances and free agency are the hot topics and yes, some basics are good to have but what has happened recently? Recently the two sides are coming across as divided in their own camps, confusing overall, and stubborn from both sides. Some concessions are being made. Here, in quick reference format you can be caught up some of what’s going on.

The Owners:

Want: Want a hard salary cap, more revenue sharing from the players NOT included in the CBA, shorter contract durations, less guaranteed contracts, lowered player salaries, and more of a say in player destinations and talent dispersal.

Have Conceded: Non-guaranteed contracts

Should Seek: Revenue sharing among moneymaking teams (TV Deals and merchandise revenue) amongst each other to promote viable financial circumstances for teams, lowered guaranteed player salaries and contract duration, a franchise tag, and a hard cap.

Aren’t pursuing: A revenue sharing among moneymaking teams and less financial set teams.

 

The Players:

Want: To maintain high player salaries and contract durations, stabilized revenue sharing, current free agent structures, maintenance of the current salary structure.

Have Conceded: $500 million dollars off player salaries over a 5-year period to avoid a hard cap.

Should Seek: A revenue sharing structure in the CBA to be completely viable amongst teams, current contract durations, salary guarantees, retention of a soft cap.

 

A proposed deal to me, which makes sense for me would be if the owners established revenue sharing of ticket sales and television deals at a 60/40 split (in favor of the owners) with the 60% being divided amongst all franchises to cover operating costs. Establish a soft cap that may only be exceeded with player exceptions with a non-exclusive franchise tag. Player contracts should be partially guaranteed based on performance/health incentives for durations comparable to what they are now. Players agree to cut back salaries by $200 million over 10 years to alleviate giving up 17% annually in revenue sharing they retain $300 million and go from giving up $100 million a year (To renegotiate in 5 years) to only giving up $20 million a year in a sustained CBA structure. The players get their durations, most of their guarantees, relinquish less salary over the life of the deal, retain the right to large paychecks, give up a little bit of say in free agency, and disperse a broader revenue sharing amongst all teams in the league to help cover cost and spread prosperity. The owners continue to operate under a familiar framework, gain more profits from their franchises, have to bite the bullet and spread around their TV deals to help markets like Memphis and Sacramento attempt to sign free agents and gain leverage, and regain some more say in the players the dump millions into.

These are very basic and doubtless there is more to it but I’m working from open source material and have not found a great deal of material of proposals and rejections. What we’re stuck with right now is knowledge that currently the players are divided amongst each other (if you follow Shane Battier’s twitter you’ll know what happened between him and Billy Hunter, Shane’s outspoken-ness on wanting negotiations to happen but his frustration that both sides are too far apart, and the NBPA’s reaction) and the owners cannot agree on what they want (Big money teams don’t want revenue sharing of television and ticket sales to be shared amongst teams, small market vs. big market, and hard cap vs. soft caps). So what’s the projection? You may want to find a hobby because the NBA is going to lock out for a while. There isn’t harmony amongst both camps and the NBPA and the League office is extremely hostile towards each other. The league is going to take a hard hit on this one. David Stern will now have presided over two lockouts, a refereeing scandal that was swept under the rug, the Brawl At the Palace, a thug reputation league, and now a narcissistic league. This is the consequence of entertaining personas rather than teams in basketball. The players have embraced a lifestyle that allows flaunting their lifestyle, an aloof separation from the fans, and a level of privilege that the French Nobility reveled in until a bunch of pissed off peasants stormed the Bastille and reminded them what life really was like. All I can say is either there’s going to be a lot of people beheaded or we’re going to be extremely bored until the 2013 NBA season.

Strap in TDS, this is going to be one of those times where it’ll be slow but we’ll try to make it work for you.

 

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