Blog Entry

NBA Lockout Primer: questions and answers

Posted on: June 29, 2011 10:30 pm
Edited on: June 30, 2011 1:12 am
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A quick primer to get you up to speed on the NBA lockout. Posted by Ben Golliver. 

david-stern-billy-hunter

If you think the upcoming NBA lockout and potential work stoppage boils down to billionaires and millionaires fighting over who gets to make money off of a game, I wouldn't argue with you.

Despite more than a year of rhetoric from both sides, charges that the game's economic model is totally flawed and needs to be revamped and threats that an entire season could be lost, the labor situation facing the NBA boils down, first and foremost, to dollars and cents. NBA owners are looking for a larger share of the pie, less financial risk and a more equitable playing field; the players are mostly aiming to maintain the status quo, which includes a healthy share of league revenues, lengthy, guaranteed contracts and a soft cap system that helps prop up player salaries.

The league's teams are represented by NBA commissioner David Stern, deputy commissioner Adam Silver and an ownership panel. The players are represented by NBA Players Association Executive Direction Billy Hunter, NBPA president and Los Angeles Lakers guard Derek Fisher, and other board members.
 
To get an idea for what the two sides are arguing about and where they stand on each of the major issues, let's break it down item by item.

1. Split of Revenues 

By far the biggest issue facing this labor situation is the division of overall revenues. In the NBA, revenues are referred to as Basketball-Related Income. Under the current system, the players take home 57% while the owners are left with 43%.

Over the last year or so, the owners have raised a number of reasons they feel their share should be bigger: costs associated with stadiums, additional expenses incurred through long-term debts, the rising costs of travel and so on.  The NBA has claimed that 22 of its 30 franchises lost money this past season.

The easiest way to fix that problem, of course, is to drastically reduce costs associated with players. In other words, by cutting their salaries significantly. Options on the table: rolling back future salaries of previously agreed to contracts, reducing the length of contracts (less years = less money) and reducing the amount of guarantees in a contract (allowing an owner to get out of a bad contract more easily or more quickly). It goes without saying that the players are opposed to all of those ideas on principle, given that they represent major concessions to what they have previously negotiated for themselves.    

2. The Type of Salary Cap

Unlike the National Football League, the NBA operates under what is called a "soft cap" as opposed to a "hard cap." In a hard cap system, there's a spending limit that you cannot exceed on player salaries. Once you hit the maximum salary amount, you can't add players without subtracting current players by trading or waiving them. In a soft cap system, teams are able to exceed the salary cap in a number of ways. In the NBA, the most common way to exceed the salary cap is to re-sign your own players to large contract extensions. The NBA also has salary cap exceptions which allow teams that have exceeded the salary cap to sign additional players. These include the mid-level exception, which allows every team  over the cap an extra salary slot that is equal to the average player salary in the league, and the veteran's minimum, which allows a team to fill out its roster with low-dollar salaried players.

The NBA owners have proposed switching the league's salary cap to a hard cap system. This would have the effect of limiting spending overall, as owners would not have the ability to employ their exceptions or sign their star players to lucrative extensions without making cuts from the rest of their roster. Under a hard cap system, if you wanted to sign a star player to an extension, you would have to make room by getting rid of other players first. For example, if the Memphis Grizzlies wanted to sign Marc Gasol this summer, they would have to trade away some of their current players to make it happen.

A soft cap system is ideal for the players. It keeps salaries high, gives them good options in free agency and allows them to be rewarded for their loyalty if they decide to stay with their current organizations when they become free agents. It's worth noting that some teams -- especially big-spending teams -- are going to be opposed to a hard cap system. Star-laden teams with large payrolls like the Miami Heat, Los Angeles Lakers and the New York Knicks would be difficult, if not impossible, to build in a hard cap system. The Lakers have the highest payroll in the league, in part, because they have signed stars like Kobe Bryant, Andrew Bynum and Lamar Odom to big-dollar extensions.

The NBA has enjoyed booming popularity this season, in large part because of the success of the Heat, which was built on acquiring multiple, high-dollar free agents. Switching to a hard cap system could kill that golden goose. Still, many owners are pushing to level the playing field when it comes to spending because large-market teams are able to shell out significantly more dollars because their revenues -- in the form of television deals and the like -- are so much greater. One possible compromise that has been raised is a "flex cap" system, which would firm up the current system a bit but still allow for some exceptions.

A balance will need to be found between protecting the owners' ability to retain their own players while also protecting them from being able to spend so recklessly that they are not able to turn a profit. The players believe this boils down to the owners simply needing to exercise greater restraint. The owners believe the system needs additional measures because spending big -- way too big -- has become necessary to put together a winning team. 

3. Revenue Sharing

There's no better way to illustrate the difference between large markets and small markets in the NBA than to look at the TV deals. In 2007, the Portland Trail Blazers reportedly signed a 10-year agreement with Comcast Sports NorthWest to carry their games for $120 million. In February, the Los Angeles Lakers announced a reported 20-year, $3 billion deal with Time Warner Cable. In other words, the Lakers will receive more revenue in the first year of their deal than the Blazers will over the duration of their decade-long deal.

Currently, the league has a system of revenue sharing that redistributes money from teams that exceed what is called the "luxury tax." When teams spend significantly over the salary cap, they pay a dollar-for-dollar tax to a league-wide fund that gets split up and sent out to all the teams that didn't spend significantly over the salary cap. 

Generally speaking, small-market teams argue that the large-market teams couldn't succeed and profit as greatly as they do without the league structure and all of its teams. Therefore they believe large-market teams should share a great portion of their revenues. The large-market teams believe their organizations and brands are the ones generating the revenue and therefore believe they shouldn't need to share those revenues with small-market teams. By and large, the players are mostly indifferent on this issue. They care less about how the owners divvy up their money and more about what slice of the Basketball-Related Income pie they receive themselves. 

NBA commissioner David Stern has said he wants to create an atmosphere where all 30 teams can compete for a title. That's been taken to mean that the NBA will expand its revenue sharing system. It's possible that the revenue sharing discussion would come after the first two issues mentioned above are resolved.

4. Tertiary Issues

Every time these two sides get together to negotiate, smaller issues arise. In the past, these have included things like the dress code, the institution of a one-and-done rule which mandates players attend college for at least one season, and the inclusion of an amnesty clause, which allows owners to achieve some financial relief on a contract that currently exists.

This time around, the owners could push for an expanded version of the one-and-done rule which would require two years of attendance in college. The players generally oppose that revision -- and the current rule -- preferring that high school players be eligible to enter directly into the NBA Draft pool. 

Both sides could be in favor of an amnesty clause as the owners receive financial relief and the players would be paid in full and able to seek a new contract if it is used.

A franchise tag, which would increase a team's ability to keep its own high-demand free agents, has also been rumored.
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Comments

Since: Oct 27, 2008
Posted on: June 30, 2011 6:40 pm
 

NBA Lockout Primer: questions and answers

thegaret,

The comment that 22 of the teams are losing money should be considered HIGHLY dubious.  There are at least 3 questions to be asked about this:

1 - Are they actually counting all the revenue on that set of books?
2 - Are there any accounting tricks that add costs that are not real?
and the one that we may never know
3 - Are they paying relatives/friends/partners salaries at a competitive level?

In some ways, you would not want the business to make lots of money if you could say run your personal car/driver through the franchise.  It would lower the tax liability of the company and you would still get what you need.

I am not suggesting that the players do not make too much.  I am just suggesting that to take the money loss at face value is probably wrong as well.
 



Since: Aug 21, 2006
Posted on: June 30, 2011 3:01 pm
 

NBA Lockout Primer: questions and answers

I would think the whole salary issue could be solved if owners opted not to give players big dollars. Either the players don't play or they can choose to sign for less money than they hoped. I think it's ridiculous players in any sport will make more in a year than I will ever make in a lifetime.



Since: Feb 16, 2010
Posted on: June 30, 2011 3:00 pm
 

NBA Lockout Primer: questions and answers

Players should hold the revenue-split. Don't let it pass below 54%. On everything else I agree with owners. A super hard cap system with cap raises every 5-8 years so the owners have incentives to raise revenue that wouldn't be divied up the next year. Less players on the roster: 12, with a 30 day DL. This would improve thier D-League product and reduce costs.

Revenue-sharing should be done in a limited way. Not to cut top teams but, to support the bottom teams. They should agree to a "poverty level" that encompasses 3-5 teams currently. Should a team fall below the poverty line the NBA equals thier revenue to the poverty level. This team then goes on "probation" including luxery restrictions. Should the team stay below the poverty line for 6 years they become compressed by the Association

Keep the one-and-done rule. It's really good. If anything let it go to two years.




Since: May 5, 2010
Posted on: June 30, 2011 12:04 pm
 

NBA Lockout Primer: questions and answers

1. Split of Revenues - 57% to the players is not working if 22 teams lost money last year. This number needs to be reduced. I am unsure what that figure sure be.

2. The Type of Salary Cap - Owners need to learn to not over spend! Brian Cardinal who is a role player for the Mavericks signed a contract that was worth $47 million over 7 years. That is $6.7 million a year for a career average of 5 points a game? A bit much but who can blame Cardinal for signing?

3. Revenue Sharing - The NBA is a business but the true money is made when you sell the team. Problem with profit sharing is a lot of small market teams don't use the money to get better for example the Florida Marlins received $92 million in revenue sharing and pocketed it having one of the lowest payrolls in baseball! If revenue sharing is going to be an issue then use the money you are giving to make your team better! Invest!

4. Tertiary Issues - The fact of the matter is most basketball players will not make it to the NBA. It is far less than 1%. There are roughly 900 teams in college basketball, with an average of about 12-13 players per team, not included inactive players, which means over 10,000 players per year. There are roughly 360 active NBA players. The NBA is for the truly elite. What do you do about the other 99%? Help give them a college education to prepare them for their future when the bottom falls out of their NBA dreams.





centralharlemit
Since: Jun 30, 2011
Posted on: June 30, 2011 11:29 am
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centralharlemit
Since: Jun 30, 2011
Posted on: June 30, 2011 11:16 am
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centralharlemit
Since: Jun 30, 2011
Posted on: June 30, 2011 11:11 am
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Since: May 15, 2010
Posted on: June 30, 2011 9:12 am
 

NBA Lockout Primer: questions and answers

Well, much like baseball, the owners have visited these 'ills' upon themselves by paying out RIDICULOUS contracts.  I just read that Shawn Green - yes, that Shawn Green, who hit 328 HRs over 15 seasons (most during the prime steroid era) - made $100 MILLION for his career.  Based on his big contract years, that means he averaged about $8 million during his most productive years.  I don't hear anyone longing for Shawn's return, and his teams had a total of 2 postseason appearances.  Really.

In basketball, I see the contracts of guys being shuffled around that I thought were retired, and am stunned at the big money they make.  Watching the Knicks this year, I think they killed their playoff hopes by trading their TEAM guys for Carmelo Anthony, an overpaid scorer.  They'll be paying for that contract for a long time.  I just don't understand why more teams don't build like the Patriots - players fit the system and are paid to play in the system, not to supersede it.  I think fans are tired of the money shell game, and are willing to take 'less' on the player front to accept more from the TEAM.  Honestly, who goes to a game to see Kobe heave 50 shots or A-Rod hit HRs?  I go (on those rare occasions when I can AFFORD it) to see the TEAM win.  Owners need to end these ridiculous contracts with huge guarantees and no-trade clauses and wake up.  (Seriously, a guy with a $200 million deal gets a 'no trade' list.  Seriously.)  Front-load the deals at lower numbers, put in buy-outs, and shorten the length.  Reinvest the money in coaching and evaluation and FAN FRIENDLY things like CHEAPER TICKETS and LOWER CONCESSIONS.  Everyone - including FANS (you remember us) - will be the better for it.

Oh, and be sure to ostracize the idiots like Tom Hicks - they're not your friend.





Since: Aug 31, 2006
Posted on: June 30, 2011 3:31 am
 

NBA Lockout Primer: questions and answers

The NBA is strictly about big city basketball, and this is why casual fans have such a hard time embracing the game. Small - mid markets literally have no way to compete with such cities year in and year out.
Reducing the player split to 33 - 67 with each every market throwing 10pct of their local TV market into the revenue split.

This would leave the players at approx. 75 million and the owners of small markets woulld save about 20 million additionally

2011 avg mid market team
110 x 43 = 47.3 million + 10 million local market = 57.25

2012 Team revenue proposed 66
110 x 62.5 = 69 million + 9 million = 78million

Currently 2011 Players deal
110 x 57 = = 62.75 million

2012 (having all markets share in local tv revenue)
Players would recieve:
110 x 33 - 36 million + 10pct local revenue of all teams (40 million) = 75 million

Conclusion teams" Markets size equals lions share even with the deal but equality comes into play because the field with a hard cap of 60 million comes into play. Basically 2 cities NY and LA would basically save the CBA



Since: Dec 5, 2006
Posted on: June 30, 2011 2:20 am
 

NBA Lockout Primer: questions and answers

Comprehensive primer, Ben. Clear and concise. The issues are established but the spin continues from both sides attempting to turn the tide of public opinion against the opposition. This is understandable, kind of like an animal trapped in metal jaws will chew its leg off to escape. We are almost to the point where the players and the owners might as well cancel the season because the revenue has already been damaged.

The easiest way to fix that problem, of course, is to drastically reduce costs associated with players. In other words, by cutting their salaries significantly.
It is not only the easiest way to fix the problem but the only way to fix the problem. The players salaries make any other cost for a team, including building acquisition and maintenance costs, minimal. The split of BRI is actually the secondary problem, however, as the hard cap issue accounts for an even larger disparity. The NFL has reportedly recently reached a tentative agreement with its players to lower its players' split of BRI from 53% to 48%. The NBA at 57% for its players is just out of whack. Newer owners who have spent on average of about $375M for their team have a reasonable need for return on that investment. The losses of $300M added to a 10% return on investment would put the deficit at about $1.5B. The owners must believe that the future revenue streams will increase significantly, as they have offered to guarantee players $2B (of $3.8B currently) per year over the life of the contract.

By and large, the players are mostly indifferent on this issue. They care less about how the owners divvy up their money and more about what slice of the Basketball-Related Income pie they receive themselves.
The players have been public in their demands for revenue sharing and they do have an interest. Both the players and the owners have benefit in a league of 30 competitive teams. To gain this parity it is not only essential to level the revenue disparity but to level the salary expenditure disparity. When the top salary spending team spends $70M more than the bottom spending team against a salary cap of $58M it highlights the issue. A hard cap plus revenue sharing seems to be the answer. Again we can look at the NFL with its far more successful financial model to see both a hard cap and revenue sharing. The reason revenue sharing has to be an issue it that the salary cap is set at 1/30 of the players' BRI split (less a bit for player benefits). If the Lakers take in $3B, that revenue is added to the BRI and Portland will see the salary cap increase without the same revenue stream to meet that increase.


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