The commish wants to reduce player’s costs, possibly contract teams.
by Kyle Stack / @KyleStack
“Prepare for battle.” That’s the thought that must be running through the heads of all the primary characters in the NBA’s ongoing collective bargaining negotiation.
Another layer was added to this contentious face-off last Thursday when NBA commissioner David Stern made one notable demand: The League wants to slash player costs by $750 to $800 million per season. During a media conference call the next day, Stern also confirmed that team contraction was a possibility, as was originally reported by CBSSports.com’s Ken Berger on Thursday.
The fallout from the threats to slash player costs and possibly contract teams open a litany of questions. Thankfully, Gabe Feldman, Director of Tulane Unversity’s Sports Law Program, and Robert Boland, a professor New York University’s Sports Business school, were around to answer them.
How serious is David Stern’s threat that player costs will be slashed by up to $800 million per year? 
“My first reaction is anything you hear publicly leading up to negotiations…some of it has to be posturing,” Feldman said.
That rings true for just about any negotiation. It’s likely that $800 million is the maximum amount Stern and the League office thought they could express publicly without being considered madmen. Even if that figure is lowered in negotiations, the League still holds the upper-hand.
“The player’s association does not have a lot of economic weapons to fire,” Boland said. “They’ve been locked out before [by the owners] and come back and sued for peace pretty quickly.”
In fact, the only real leverage the players have is to play overseas, according to Boland. Don’t plan on that happening anytime soon; at least not for the League’s best players. They have enough money and don’t need to lower themselves to playing against inferior competition.
“Stern holds the cards here,” Boland emphasized. “He can look reasonable by enforcing a deal or putting a deal on the table that is not as bad as what he’s proposing.”
Is the NBA in such poor financial shape that cutting player costs by up to $800 million per year is necessary?
If you were to ask Stern, he’d probably say ‘yes.’ It was Stern who noted early last season that the NBA would lose $400 million during the 2009-10 campaign. He later amended that figure to $370 million. On Thursday, Stern and deputy commissioner Adam Silver predicted the League will lose $340 to $350 million for the upcoming season.
Hearing these numbers makes it seem as if the NBA can’t get people to spend money on its product. Yet it was only a month ago that I wrote an NBA official had told me season-ticket renewals for all teams combined was over 80 percent and rising. Two-thirds of the teams had sold 1,000-plus new full-season tickets, according to the official. To top it off, season-ticket sales were up 40 percent for this summer vs. in 2009.
Feldman said that while the NBA has to balance the message about its financial state, there is a larger point the NBA is trying to make. The owners are arguing that given the structure of the collective bargaining agreement (CBA), no matter how well they do in ticket sales, TV deals and other forms of revenue, the general economic model that’s in place still gives too much money to the players. The players receive 57 percent of all basketball-related income (BRI). That figure would have free-falled to 41 percent last season had the player costs been cut by $750 million, the low end of the desired cut Stern made public Thursday.
Multiple problems exist with the economic model, although some stand out above others. For example, salary cap exceptions which are intended to let teams exceed the cap to sign valuable players might do more harm than good.
“The troubling one is the mid-level exception,” Boland said. “It has allowed teams to supersede the salary cap for players I would describe as being less than quality players.”
Here are a few examples: Wesley Matthews, coming off a productive yet unspectacular season, nabbed a five-year deal for $33 million from the Trail Blazers. Al Harrington, one of the League’s weaker defenders, signed with the Nuggets for five years at $34 million. The Bucks overlooked the fact Drew Gooden played for eight teams in eight seasons to ink him for five years at $32 million. Somehow, Amir Johnson, Tyrus Thomas and Travis Outlaw each signed deals for at least $34 million.
The NBA clearly could benefit from a hard salary cap, which would prevent owners and general managers from doling out absurd amounts of money to undeserving players. The hard cap would limit exceptions, which would give teams greater revenue certainty.
This isn’t to make it sound as if owners and general managers deserve all the blame for sky-rocketing salaries. Other factors are out of their control, and that’s where Boland began to explain how disrupted the NBA’s financial model really is. As he explained it, the problems with the salary cap begin with the minimum amount of cash each team must spend on its payroll.
“There aren’t many teams alike in their revenue earnings,” Boland said. “I think that’s one of the great challenges the League faces.”
Take the Lakers, for example. If they pull in $600 million during a season, some of that money gets divided amongst all teams. Since the salary cap is based on BRI, and since BRI is totaled in part by team revenue such as ticket, merchandise and sponsorship earnings, a team that makes a lot of money one season will end up helping raise the cap the next year.
When a salary cap is raised, the floor rises with it. That’s an unsustainable activity for the League’s poorer teams. Boland likens the disparity in team revenue to that of them standing in a pool. “They’re all standing in a swimming pool, and they’re standing at different heights in it. And the water hits them at different levels.”
Some teams are practically drowning, while others, such as the Lakers or Knicks, aren’t bothered by the increasing water level. Remember, the salary cap was raised by $2 million for 2010-11, to $58 million, after Stern warned last season of a substantial decline in this season’s cap.
A hard cap would help lower the floor by basically lowering the entire cap. That could be done by simply cutting player costs; there could be other ways to get it done. But it’s clear that’s on Stern’s agenda. Boland emphasized that point.
“Stern is a master negotiator — he’s brilliant at this — and I believe he’s putting together a plan where he’s going to lower the salary cap floor.”
But can we get a final decision on this $800 million number. Does it make sense?
“It’s difficult to believe that it’s the NBA’s final number,” Feldman said.
Okay, enough about just cutting player costs. Will Stern actually cut teams from the League through contraction?
This one is harder to predict. Contraction means identifying struggling franchises. How is that determination made? The Charlotte Bobcats don’t produce an incredible amount of money; they were 22nd in attendance last season. Yet they made the Playoffs and are certainly in the cards to do so again this season. Other teams, such as the Grizzlies and Kings, have economic problems and perhaps aren’t good enough on the court to offset them. Yet removing a team from the League doesn’t just affect the number of NBA jobs available — it extends to compromising the League’s fan base.
Feldman posed a question which Stern and the League’s front office will have consider ad nauseum. “If you get rid of the NBA franchise in Memphis, are you getting rid of the NBA fans in Memphis?”
There’s nothing that can answer that question with any certainty, although Feldman recommended looking at comparable markets which lack an NBA team. It doesn’t take a genius to assume ratings for NBA games are lower in cities without a squad. So, if retaining fan interest nationwide is a core concern for the League, then contraction isn’t a great answer.
“What the League is trying to do is make the sport more profitable and more economically feasible for the owners,” Feldman said. “The answer is not making a move that’s going to make less money for the owners overall.”
Even if a team isn’t making money in the short-term, the NBA would benefit from looking at a team’s long-term sustainability. Feldman reasoned that’s what the NHL did when it expanded to warm weather cities in the ’90s. Rightly or wrongly, what’s important to this argument is the NHL decided to make a long-term commitment.
“I don’t think the NBA can make a decision on whether a team is making money this year,” Feldman said. “There are too many factors that go into it to make that short-sighted of a decision.”
Perhaps a team’s struggles isn’t because of its locale. Sometimes, as Feldman noted, it could be the owner who’s the problem. Surely Grizzlies fans can’t be happy with owner Michael Heisley, who forever etched his name into NBA lore in 2008 by practically giving away Pau Gasol to the Lakers via trade. Other struggling teams from the last few years, such as the Warriors and Nets, have gone through ownership changes and are seemingly better off from it.
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