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Monday, October 17, 2011

NBA Lockout Observations

The NBA owners cancelled the first two weeks of the regular season. The owners demand severe concessions from the players, and the players' union hasn't caved (yet).

Even if the owners approved the players' last proposal, it's still a huge win for the owners. They already got the players to concede 4% on the cap number, 57% to 53%, a huge win.

Dropping the cap number from 57% to 53% isn't a 4% pay cut for the players. It's a 7% pay cut. (4% divided by 57% is 0.07). That's pretty severely greedy, to get a 7% pay cut concession from your workers, and still demand more.

The owners claim "We're losing money!" That's hard to prove. There's all sorts of clever accounting and loopholes. For example, suppose the same person/corporation owns the team and the TV channel. Then, the TV rights can be sold for $50M when they're really worth $100M. That allows the team to claim a loss, while the owner makes a fortune.

There's another interesting aspect. Most NBA teams play in taxpayer-financed arenas. Taxpayers are financing the owners, in the fight against the players.

Scenario #1: Suppose owners paid for their own stadium. The owner would think "WTF? I paid $1B for this arena and it's sitting empty? That's a lousy return on my investment."

Scenario #2: Taxpayers pay for the stadium. In effect, the owner isn't suffering from idle capital, during the lockout. The taxpayer bears the loss, more than the owner. With taxpayer-financed stadiums, the owners have very little capital expenses.

The franchises are very valuable. However, the owners have no real capital expense. Their biggest expense is player salaries, eliminated during the lockout. The major networks show other stuff during the lockout, continuing to enjoy their monopoly/oligopoly. The game day arena workers are all temps. All the other workers are laid off during the lockout. By getting free arenas from taxpayers, the owners aren't suffering any capital losses.

That's a very interesting observation. With taxpayer-financed arenas, the owners actually have very little tangible capital invested in their business. They enjoy a State-backed monopoly, but invested practically zero actual capital.

There's another problem with CBA negotiations. The contract is approved by a majority vote of players. The NBA could offer a lower cap, but double the minimum salary, and a lot of players would vote for the deal. That's the problem with democracy. The majority can steal from the more-productive minority. Other clauses, like the mid-level cap exemption, provide an incentive for average and below-average players to vote for a deal that cheats superstar players.

The salary cap and maximum salary hurt superstar players. A superstar will get great TV ratings and sell out arenas, but the CBA caps his salary. The current system cheats superstar players, who are worth more than the maximum salary.

Teams like the Knicks and Lakers could afford to spend 2x or 3x times the cap, because they have a monopoly position in a large market. The salary cap gives the Knicks and Lakers windfall profits. NBA franchise rules prevent other teams from moving to NYC or LA and competing with the Knicks and Lakers.

NYC probably has the population to support 4 or more teams, but NBA rules forbid it. This guarantees huge profits for the Knicks. A small-market owner can't move his team to NYC and compete with the Knicks. A small-market owner can't move to Chicago and compete with the Bulls.

That's one advantage of the European promotion/relegation system, compared to the US system of giving each team a monopoly in each city. The US system guarantees that big market teams have a big economic advantage over small-market teams. In Europe, if I wanted to and had the money, I could buy a minor league team, invest in it, and eventually get promoted to the top division, even in a city that already has a team. In the USA, the monopoly franchise system guarantees inequality between big-market and small-market teams.

The NBA owners are being obviously greedy. They already got huge concessions from the players, but want more. There are plenty of ways to cook the books, and present the illusion that you're losing money. With taxpayer-financed arenas, taxpayers are subsidizing the owners in their battle against the players, because tax-funded arenas lower the owners' capital expenses. The city-monopoly franchise system guarantees inequality between big market and small market teams, because it's illegal to move a small market team to a bigger market and compete with an existing team. The CBA process gives the players' union an incentive to ratify a contract that cheats superstar players while boosting benchwarmers' salaries. A salary cap and maximum salary provides windfall profits for owners of big-market teams.

The whole CBA negotiating process is a State-created mess. The State gives NBA owners a monopoly, making it hard to start competing leagues. In a really free market, if the players were unfairly underpaid, someone would start a successful competing league. The State subsidizes owners with taxpayer-financed arenas. The State subsidizes cable and broadcast TV, giving them a monopoly/oligopoly. Labor law forces the players to negotiate via a union, rather than each player making his own contract.

Some fans may blame the owners or players. The real blame belongs to the State. State labor law encourages brinksmanship negotiating, where neither side budges until the last minute. Under State labor law, if you make concessions early, that's a boost to the other side, because that becomes the baseline for future negotiating.

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