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Saturday, November 12, 2011

NBA Players Should Sign the Deal

                Currently, the NBA is in an elongated labor dispute with the owners and players engaged in a quarrel centered around division of revenues. Now, the owners are seeking a 50/50 split with the players, while the labor force is pushing a larger share in their favor. I have just one statement to that: keep pushing players, let your refusal to accept the deal demonstrate your ignorance.

                The players for the NBA are forgetting a salient fact; they are getting paid exorbitant salaries to play basketball and there is a very limited window them to capitalize on an extremely fortuitous life.  Yes, gentlemen, you are getting paid significantly more than the majority of the people in the world to go and play a sport that you play for the fun of it. How lucky are you, and yet you are whining over getting paid slightly less money than you previously received.

                Just to demonstrate the ridiculous of the players’ desires, let us compare them to the rest of the people in the U.S. The median household income in the U.S. was $50,221 in 2009 (according to the U.S. Census), while the average NBA salary last year was $4,790,000 (per Sportsintelligence.com). That salary equates to $92,199 per week or 184% more than the average household in the U.S. makes in an entire year. So while many Americans worry about paying the bills to heat their homes, paying for groceries, and saving money for their retirement, NBA players are complaining about whether they will earn $4 million or $5 million per year.

                According to the latest reports, the owners offered the players a 50/50 split for the new labor agreement, which was of course rejected by the players. Now, I understand that most of the players either did not complete college or did not major in business administration but that is a very generous offer. The player’s expenses related to work are pretty much covered.  Their travel is paid for, as well as their lodging and I imagine that they receive some sort of stipend for food or have their meals provided for when on travel. So basically, their pay is all take home. The owners are not so fortunate.

                In order to run an NBA franchise, there must be a significant amount of cost incurred by the franchise. The entire staff of the team has to be compensated for their efforts, to include those who run the front office, the media department, the sales office, concession operators, and even those who clean the locker room and wash the player’s uniforms. In addition to compensating the support staff, there are costs to either rent the arena or operate it (depending on whether it is owned by the team or rented from a municipality). Also, there are the expenses related to travel to include chartering/operating team air planes, lodging the players, providing transportation to and from the plane and lodging, as well as other incidentals such as providing sustenance. Lastly, owners must pay for insurance related to everything from injuries of players to insurance for operations related to operating the venue for the games.

                So what happens when players are not able to perform to the expectations of their contracts, or if a star player of a franchise gets a season or career ending injury? The player is perfectly fine. Yes, their contracts are guaranteed, so they get every dollar that their contract stipulates whether they play five minutes of one game in their contract or every minute of every game. Yet, the owners are not so fortunate; they bear all of the risk associated with running an operation. So if they sign one of the best players in the league to a max contract and the player decides that they would rather not manage their diet, gain 50 lbs and not play very hard during games, they are still stuck paying every cent mandated in their contract.

                While the team is failing to play up to expectations, the franchise starts faltering. Fans quit coming to the games and revenues start to fall. As a chain reaction starts, the TV and radio revenues start falling, and when the media contracts come up for renewal, the new offer is significantly less than the previous (if you don’t believe me, check out the Seattle Mariners’ new radio contract and compare it to the previous one). Ultimately, the franchise starts losing money and the owner is writing the checks.

                When enough franchises start losing money, they cannot afford to continue to field the best talent the league offers, unless they draft better than other teams. In fact, you would find that in order to get the better players, the team must over pay on better than average talent and probably cannot attract the premium talent because there is no incentive for the best players to join the team. If you don’t believe me, let me ask you this: Would you join a crummy or marginally decent team, when you could join a team that could win a NBA championship? I wouldn’t, and I don’t you would either.

                The owners are stating that many of the franchises are losing money, and though the players dispute it, there are audited financial statements to back their assertion. These statements have been criticized by the players union as accounting loses that do not represent actual revenue loses (per ESPN http://sports.espn.go.com/nba/columns/story?columnist=coon_larry&page=NBAFinancials-110630). The basic premise of the players’ assertion is that the losses shown on the accounting statements are amortized loses that are derived from the premium paid for teams in excess of the tangible assets of the team at the time of the sale. Should those fictitious loses count against the losses?

                The owners paid a premium for an asset and need to recoup that premium in some sort of fashion. If they didn’t then why would they buy the team in the first place? Listen, most of these people own the team because they are good businessmen and made a fortune or maintained a family fortune very well. They wouldn’t purchase a team if there wasn’t a possibility of recovering their expenses. That premium would more than likely have been utilized to invest in some sort of profitable venture that would return a decent profit. The owners instead forgo the opportunity to invest that money in something probably more profitable and instead buy a team so they rightfully should amortize those loses but should also include the opportunity cost of the loss of potential profits from that money (I am not actually advocating they do so because that would be unethical and despicable but am just trying to make a point).

                So, let the players complain about the amortization of the revenues, they are trying to take a strong position in order to secure the best deal possible for themselves. However, if they don’t know that they already have a great deal, the people advising them should explain it to them. If there are no NBA games going on, there are no NBA paychecks to collect. Yes, there are international paychecks, but those come at a reduced rate in foreign venues far away from home. The owners will always make money, maybe not with their NBA franchises in the near future but they have other businesses and the acumen that helped them attain their holdings and will continue to be successful.  The players however, their clock is ticking because each day that passes without a paycheck is another one that cannot be recouped because their careers are over when their body cannot perform at the level required and that time is much shorter than the average career of a businessman. If they had the owners’ acumen, they would have already signed the deal, realizing just how lucky they are.


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