Saturday, February 20, 2010

On CBA Negotiations

NBA "superagent" David Falk made two useful observations in this recent New York Times article.

First, he stated that NBA owners have a "much more reduced financial ability to withstand" a work stoppage than NBA players do. At first glance, this makes sense: NBA owners own other highly profitable businesses and have other sources of cash-flow, plus plenty of wealth in the bank. Most NBA players are not gainfully employed outside of their NBA commitments. Sure, the top stars endorse commercial products such as insurance, shoes, and fast food, but most players don't have such opportunities. If they are prudent, they have invested their wealth in a mix of liquid and illiquid investments that produce a regular dividend stream, but sadly, not all players are so responsible with their money.

I suppose the surprising part of Falk's comment is the modifying word "much" in front of "more". If I earned 1 million after-tax dollars in just one year of my life, I would find a way to put that money to work so I could, for the most part, retire from the rat race forever. And the average NBA player salary is $5 million!

Second, Falk suggests that in the next Collective Bargaining Agreement, owners' revenue, for purposes of calculating a player salary cap, should include "China, franchise appreciation, broadcast rights, luxury seating".

Let us take a look at the current definition of Basketball-Related Income ("BRI") from Article VII, Section 1 of the Collective Bargaining Agreement:

  • Gate receipts [Sections 1(a)(1)(i), (iii), and (iv)]

  • Broadcast rights fees [Section 1(a)(1)(ii)]

  • In-arena novelty and concession receipts [Section 1(a)(1)(v)]

  • Parking fees [Section 1(a)(v)]

  • Team sponsorships and promotions [Section 1(a)(v)]

  • 40% of luxury suite receipts [Section 1(a)(1)(vii)]

  • 50% of arena naming rights fees [Section 1(a)(1)(viii)]

  • Licensing fees received by NBA properties [Section 1(a)(1)(ix)]

  • Receipts from premium seat licenses [Section 1(a)(1)(x)]

  • However, the following is excluded from the definition of BRI, among other things:

  • Expansion fees from new owners[Section 1(a)(2)(iii)]

  • Government subsidies for a new arena [Section 1(a)(2)(xi), (xii)]

  • Revenues from leasing team assets such as a plane [Section 1(a)(2)(xix)]

  • Falk has a point. It may be that owners are collectively losing money under the current regime, and the players' share of "Basketball-Related Income", as embodied in each team's salary cap, needs to be reduced. However, why are certain revenue streams, such as government subsidies, excluded from BRI? And why is only 50% of arena naming rights fees, rather than the whole hog, included in the BRI calculation? The more players have a stake in revenue streams, the more they (or their union, acting collectively as their agent) will have an incentive to take actions that grow the pie, such as charitable appearances, government lobbying, corporate motivational talks, and so forth. To the extent that Falk correctly identified revenue streams that are not currently completely included in the BRI definition (for example, he mentioned "luxury seating", but luxury suite fees are already 100% included in BRI), I agree completely with Falk.
    UPDATE February 26th: As for Falk's suggestion that players should share in franchise appreciation, the first paragraph from reader "Dan Palmer" in this article quite captures my view.

    More generally, franchise appreciation in sports is an odd duck. For most businesses, the enterprise value is based on some capitalized sum of future profit streams. Yet sports owners may want the asset for personal or emotional reasons. Who wouldn't want to own the Chicago Cubs? This non-"rational" demand, resulting in each potential bidder having his own idiosyncratic valuation for the business, makes a sports team far more like a house than a commercial office building.

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