Mavs Donuts: D-Lord's Lockout Mailbag
The last time we talked, we "called" it for you – the end of the NBA lockout was just around the corner, we said. The parties aren't that far apart, and they're just posturing for a bit (hoping to get the best part of those final compromises) before striking a deal, we added. At their next meeting, we'll see a deal, we trumpeted.
Wow, I was wrong! And in a big way!
Instead of a deal, at their next meeting the two sides took our "worst-case scenario" (but one we didn't think would be taken) of letting ego trump their business sense. The meeting ended in a hailstorm of blame tossed by each side at the other, with both ultimately fashioning mandatory and incompatible demands. If indeed they were close to a deal at one point, they weren't anymore.
Now what? Whatever common ground that might have been created over many weeks was smashed to bits at that juncture. In a last ditch effort, this week a federal mediator has persuaded the parties to meet, where he's trying to put Humpty Dumpty back together again.
Let's look at the situation Q&A style, with lots of help from our readers.
What happened to the "about to happen" deal?
We can unravel the situation a bit, but it simply raises more questions.
From what we had been hearing, all of the secondary issues had been negotiated to within deal-making distance several weeks ago, with the biggest biggie remaining: the split of total revenues (BRI). And in the days leading up to our prediction, that split had been taken incredibly close to a deal before both sides pulled away.
Then they met, and (reports say) it was irreconcilable differences on those smaller items that killed the chance for a deal, while the biggie (the BRI split) was not the deal killer. Huh?
Either someone went backwards, or someone told us things were all-but-resolved that weren't. Spin? Too much optimism? Miscommunication? No way to tell.
In any event, the lesson is clear: in this negotiation, if we hear that x,y, or z are resolved, we can't trust it apart from a deal or a joint statement by both sides. And to apply it to the current status of the talks, right now we hear that the split of BRI is resolvable while smaller items are the hang-ups to a deal.
True? Spin? Excessive optimism? Hard to tell.
In our last article, we noted that the players might be fighting for a pyrrhic victory, losing about $80 million for each week of canceled games, while their max upside (the difference between getting everything they want versus what the owners are offering) is only $120 million a year. But DB.com Boards posters/readers 'TOB41,' 'Sheilock' and 'Lukor' want us to consider the fact that the deal would be a multi-year pact, which would multiply what the players have to gain.
'TOB41,' 'Sheilock' and 'Lukor,' that's a great point that we didn't take time to discuss in detail in our overview story. Ideally, the 3% difference would mean about $120 million in year one, and a deal of 7 years puts $840 million on the table. Presumably revenues would get bigger each year, taking that number even higher.
We can fiddle with various projected growth rates, but if we use something in the 5-7% range, we get a total over the 7 years a bit north of $1 billion and perhaps closer to $1.2. Big money, to be sure.
But let's take the analysis even further.
How long can the players miss games, before they have lost more pay than they could possibly gain with a complete win? The owners are offering at least $2 billion a season. That means they'd have lost the whole $1.0-1.2B by having 3-4 months of missed games. That clock is ticking fast on the possibility of a win for them.
There are two other factors that also have to be considered. First, it's not very realistic to think that the players could gain the entire amount that the two sides are wrestling over. If they can only get 1% or 2% more by holding out rather than the entire 3% difference, that cuts down even further the time they have before they've ended up with a losing bet. If they get an extra 1%, they have to get a deal in less than 4-6 weeks if they want to come out ahead. That means they have to be on the court in December, just to make it worth their while. If they get 2%, they have somewhere in the 8-12 week range. January.
But a second issue might even be more important to most players. The "cost" for gaining those dollars over 7 seasons will all be paid by the current players. With an average NBA career of about 5 years, the average current veteran will have 4 or less years to recoup his losses from games missed this season. No one will make more 3 or 3 1/2 years than they would in 4, with the max difference between deals of only 6% (53/50=1.06), so only the above-average players in longevity are likely to recoup what they lose by sitting very long.
After looking in more detail, I gotta say it still doesn't look rosy for the players. With the whole point of the labor dispute being a desire to maximize their take from the league, it looks like they can only win by settling for a deal soon.
While we've focused on the players' potential losses by not getting a deal done, 'Harharbasketball' wants to know: How much are the owners going to lose by sitting idle?
Good question 'HHB.' And the answer is quite a bit hazier than for the players.
We'll start with the assumption that the next CBA includes significant revenue sharing that evens out the profits across the league. And we'll accept the numbers saying the owners' costs, above and beyond player salary, are 50% of revenue. (More on that topic in a later question.) We'll also use $4.3 billion as the revenues for 2011-12, a number that has been floated repeatedly lately by multiple sources.
Using those assumptions, and with the players getting their demanded 53% of revenue, the league as a whole would get 47% before expenses, spend 50% on expenses, and in 2011-12 end up with a net loss of 3%, or $129 billion. Each owners' share of that loss would be $4.3 billion. On a weekly basis, each owner would lose $172,000 by playing.
How does that compare to their situation if they sit idle? There are fixed revenues to some degree, but many of them would be sliced greatly and some would be eliminated entirely without a season. Team staffing has already been pared to a minimum, and there would be no need for game personnel as well as no expenses for advertising, travel, and so on. Some teams own arenas but most don't, and newly-available arena dates (as games are canceled) are already being rented out for concerts and shows.
How much expense would remain? I have no idea, and have found no reliable source for such data. But unless it's more than $4.3 million over 6 months, the owner is actually coming out ahead by sitting idle, since playing under the deal that's available will cost him that much.
Let me end this by noting one reality: all these potential losses are not a zero-sum game of owner-vs-player. In other words, whatever one side loses, the other side does not win. Instead, they can only win together. When they sit, no one makes money.
DB.com reader 'Don' emails a reminder: Even if the owners seem to be better off sitting idle, they still have a sizable hidden expense that might spur them to do a deal a bit quicker. The longer they sit, the more they risk losing fans, and in the long run that will cost them revenue after they restart.
Great point, 'Don.'
I don't know if that motivates one side over the other – with each side inevitably getting near 50% of the revenue, that lost revenue will come equally from the pockets of both players and owners. But you're quite insightful in noting that people will form new habits with their time and money if their NBA habit is unavailable too long – and that's a thought both sides should paste on their mirror and read daily.
As they fight over how to slice that future pie, it's shrinking.
In our article, we opined that ever getting the owners to offer more than 50% of revenue would seem quite unlikely. Their expense numbers on the table show pre-player-payroll expenses of about 50%, and an offer to then add player payroll of more than 50% would commit them to paying out more than 100% each year. 'Jommybone' wants to know f we can draw conclusions on the accuracy of those team audits and tax returns if the owners ultimately end up offering the players more than 50%?
That's an intriguing point, 'Jommybone.'
Let's start with the documents themselves. There seems to be no question as to what the owners' tax returns, and CPA-audited income reports (compiled using "generally accepted accounting principles" or GAAP standards) say: they say their pre-player-payroll expenses are 50% of BRI. Those types of documents can possibly be fudged, but we have no reason to think so. If they were, that would mean the owners are keeping two sets of books, which is leaping to such a negative that it's grossly unfair in the absence of compelling proof. At most we have a simple "what if," which comes nowhere close to that level.
In addition, my information from labor experts informs me that in the collective bargaining process, when an employer uses "we are losing money" to try to gain concessions from his union, he has specific obligations of accuracy in order to make such claims. The import is that if they claim losses, they have to be ready to substantiate their claims, and if it's later ever discovered that they lied, there are extreme negative consequences for them. As a result, I'm inclined to believe that these books are legitimate and say what we have been hearing.
However … all that having been said, I agree that sometimes numbers can tell a deceptive story. So, as for your what-if, here's my feeling: If the owners take less than 50%, we can say with certainty that the past losses on paper were definitely less meaningful to them than they claimed. It might also mean they had provided deceptive or faulty numbers, or it might mean that after having lost money hand over fist in the 2005 deal, they were again (and stupidly) going down a "make a deal that's questionable and hope it works out anyhow when revenue-creation gets easier" trail.
My gut tells me we won't see them give 50+%, however. I think the losses are a real issue to them, and they are tired of seeing the average player make about $4.5 million a year while the average owner loses more than $10 million a year. In my experience, employers don't like it when employees make more money than they do - and even moreso when they're paying big money to employees while losing money themselves.
'A42' wants to know ... is there any way to make a no-lose deal for everyone right now?' He notes that owner expenses are at 50%, which means they need 50% to keep from losing money. And he further notes that existing contracts were all written under a 57% guarantee, but that the current year would get erased if there's no deal before next summer. Will they have to wait until next summer for a deal to avoid having to choose between reducing existing player contracts (a probable deal-killer for one side) or owners losing money (a probable deal-killer on the other side)?
Wow, that's an interesting angle A42.
Fortunately it appears that neither side would be forced to accept losing hard money, if they reached a deal now. Maybe.
Using the projection of $4.3 billion in revenue, and with the owners needing 50% in order to break even, that leaves $2.15 billion for the players.
As we sit, the total of committed salary for 2011-12 is almost exactly $1.6 billion. The rookie salary scale is an item being negotiated and will be reduced somewhat, but for 2011-12 the first-rounders were to get $54 million or so under the 2005 CBA.
That still leaves about $500 million for free agency. And all the existing contracts would still be intact.
There's just one fly in that ointment. With the loss of the preseason, plus any fan disgust from extended labor haggling, the revenue projection of $4.3 billion is probably going to be iffy even if they save a full 82-game season. As a result, the owners and players may have much less to split and may both lose.
But in theory, a deal to keep both parties whole financially is definitely possible.
As the parties broke off negotiations and we were left wondering, 'Mavsluvr' wanted to know if there was a secret agenda by the owners that was fueling their demands, motivated by a desire not to end up like Cleveland and owner Dan Gilbert, when LeBron James left to go to Miami.
'Mavsluvr,' I think you've astutely hit the nail on the head for a large portion of what the owners want … but I don't think they've tried to keep it a secret at all. Maybe people just aren't listening?
As we've pointed out many times, the "hard (or hard-ish) cap" concept cannot possibly cost the players a penny when tied to a guaranteed fixed revenue pool. So despite the players' claims, it's clearly not there to reduce payrolls and has to be desirable to owners for another reason.
The owners have called it competitive balance, which is as good a term as any. But if we dig below the surface, that competitive balance issue probably became more urgent due to the events of the summer of 2010. In that one summer, Lebron James and Chris Bosh joined Dwyane Wade in Miami in an attempt to form a super-team, despite their old teams' willingness to pay them the max salary and trying hard to keep them. In the same summer, other bona-fide stars were also able to jump teams, with Carlos Boozer to Chicago and Amare Stoudemire to New York.
More importantly, it didn't stop there. During the ensuing season, two more big-time stars essentially forced their team to trade them, under the threat that they would simply leave at the end of the season: Deron Williams and Carmelo Anthony. And Chris Paul and Dwight Howard might not be far behind.
No problem for the players – but huge panic for owners.
Why? Because to begin with, there aren't enough stars to go around for everyone. As one writer noted when perusing ESPN's recent player rankings, if the NBA stars were spread evenly around the league, whoever is picking after about 14 won't even get one. So if you are fortunate to have one of those tough-to-find commodities, you don't want to lose them. And if you see them leaving right and left, you want the system changed to enhance your ability to retain yours.
If you are an owner in Toronto, Cleveland, Utah, Phoenix, Denver, New Orleans, or Orlando, you've probably got the issue of "how can we keep all the stars from gathering on just a few teams" at the very top of your agenda.
The league certainly can't force a player to stay forever on the same team. So the hard cap solution is to try to even out the destinations, by giving every team the same payroll to work with, under the assumption that it would tend to make every team have a similar chance to create a winner around that star. If the grass isn't any greener elsewhere, he might be more inclined to stay. Alternately, they are also fiddling with contract lengths or some sort of franchise tag to give an advantage to the old team.
As few stars as there are, having a league where they all eventually land in just a few cities would create a league of haves and have-nots. Those extreme powerhouses can provide a spark in the short term, and they certainly excite their local following, but they make it difficult-to-impossible to create a local fan base in the have-not cities. Ultimately that's not healthy for those have-not franchises, but it also is bad for everyone in that it keeps the league from being able to widen its fanbase. Spread the stars and increase the fans, is their aim.
The final question? We'll give that honor to 'DEL in Rockwall,' who sends this doozy: David, I have a question. I truly loved the NFL strike when we got Scab NFL Football. I would love to see Scab NBA Basketball. It is fun to watch and I would love to see the players swallow a bit of their ego while the scabs suited up and filled up the arenas. How long would they need to strike before we got some of that?
'DEL,' I can tell you've tired of the haggling and the egos. Join the crowd, bro. But you forgot about getting rid of David Stern, the most arrogant ego in the bunch, who would be cackling like a hen if what you proposed - a league of replacement players that filled up arenas - was possible!
Yes, in theory, Scab NBA Basketball is certainly possible at some point. It sure looks like the obvious answer for owners who can't afford the players they have, but the reality is that it might never happen. You're asking the NBA owners to field a team of D-Leaguers, and I'm certain that's not the business they each paid 100's of millions of dollars to own.
Can you see NBA owners bragging to their friends about their scab team? Nah, neither can I.
In addition, how many (including you) would pay for season tickets at NBA prices to watch second-tier talent play basketball? That would be a question not only for you to ponder, but also one that would give the Mark Cubans of the world plenty of reason to back away and seek a deal with their existing talent base.
But if there was any actual chance of it happening, my understanding is that it would happen like this:
First, the league would have to bargain the players to what's technically called an "impasse." That's the point at which the employer has determined he'll never get the union to work for what he thinks he should pay. At that point, in lieu of going out of business because he has no work force, the owner can simply declare that an impasse has been reached, and he can then start his business by implementing his best (formal) offer made in the collective bargaining process and opening the doors.
I couldn't see the owners going to that extreme unless they had lost a whole season and were still stalemated. So to answer your question, I'd say next summer (at the earliest) is when you should look for scab basketball.
Based on what we think we know of the league's formal offers, that would be a league with 47% of revenues going to players, maybe with some rollbacks of pre-existing contracts, and there would be either a hard cap or a very punitive tax system along with far fewer ways to exceed the cap.
If they went that way, maybe you'd see some existing NBA players. Or maybe it's all D-leaguers and rookies. Are you up for Dallas Mavericks basketball without Dirk? Or with all the Dirk stories centering around non-basketball junk, like whether Major League Baseball thinks he's celebrity enough to throw out World Series pitches?
Ugh, that's something I don't even want to imagine.