Most everyone following sports today is aware of the NBA lockout. But with all the debate in the media about which of the two sides is “right”, I think many in the country have lost sight of some important facts with respect to the economic policies which govern sports in this country. This article will offer some suggestions on how to resolve the labor dispute, but will also venture into the area of appropriate compensation for professional sports in general. The second portion of the article will perhaps seem outrageous, so I would suggest that it be given some rather deep thought. I think if you do this, you’ll conclude that my premise is sound, and you’ll be surprised that you hadn’t considered such ideas before. Of course, I make no pretense that what I express in the second half of this article will ever come to fruition, but it is still good to bring this topic into the public forum, and encourage as much public debate as possible.
So let’s jump right into the discussion and dispel some of the more outlandish ideas being expressed by some NBA players, with the most significant being the players ability to start their own league. I actually would applaud the players if they did this. I would even challenge their courage and manhood if I thought it would prod them down this path. But I wouldn’t waste my breath, because such a notion is merely a smoke screen. The lockout, and all the posturing by both sides, is nothing more than a negotiating strategy aimed at getting the best possible deal. But hypothetically, let’s look at some of the consequences of the players forming their own league. Well for one, a cornerstone of the players position is the notion of guaranteed contracts. Ironically, with a players formed league, the first thing that would go out the window is guaranteed contracts. Only in the fantasy world of NBA players can the concept of guaranteed pay, regardless of productivity, be a reality. In the real world, no business operates that way, and certainly wouldn’t last for long if it did. Once the players become the “owners” of this hypothetical league, they would do what all owners do, and that is to minimize expenses and maximize profits. The amusing thing about professional athletics (in general) is that they want to be paid handsomely when they perform at a high level, and want to be paid equally handsomely when they don’t (thus the notion of guarantees). I would assert that paying players based on their productivity is a more sustainable model, and actually leads to greater overall satisfaction (when you consider the league in general, the fans, and product quality). The second problem with a players only league is figuring out how to organize the players into teams. All players want to win, so their competitive nature will ultimately come out, and figuring out how to make the teams fair, competitive, and entertaining will be a challenge. And then there is the issue regarding revenue sharing, because revenue in the various NBA cities is not equal. So in this hypothetical new players league, they likely would have 100% revenue sharing, non guaranteed contracts, and allow some form of player movement. But as each of these real world challenges are addressed, the players would come to the realization that the very positions that the current NBA owners are taking, end up being the same strategies that the players would have to adopt if they formed their own league. Of course, the players would still have to wrestle with the notion of player compensation (i.e. who gets into this new league, could it support all the existing players – that is very doubtful, and who gets paid the most). Now one reason I would strongly encourage the players to form a new league is because I think it would drastically reduce revenue directed towards the players (perhaps as much as 50% – but that is only a guess). Secondly, I think it would give them a wonderful dose of reality, and this is something that is sorely needed. Later on in this article, I’ll describe what I think is an appropriate player compensation model, but at present, this is something that the NBA players would certainly reject.
The second point I’d like to bring up is the strategy of players going overseas to play. I think this is a wonderful idea, and it definitely supports my not so secret objective of the cancellation of the upcoming NBA season. I would hope that if enough players do go overseas, there will be little motivation for the players to negotiate in good faith (because they are getting paid anyway), and there would be one less year of overpaid players and overpaid owners. Of course, the players that do get an opportunity to play overseas, especially the American born players, will get a wonderful life changing experience – and I would be genuinely happy for them. They will end up with a better appreciation for this country and the wonders that it offers, and will likely grow to be better people because of the experience. So although a player like Wilson Chandler will earn less money playing in China, he is young enough, and a good enough young man, that he’ll be way better off in a year from now because of his experience playing overseas. In general, I think players going overseas will give them a healthy dose of reality, and perhaps they can come back here and reshape the culture of the NBA.
Okay, now that I’ve got you thinking, I need to spell out how to resolve the NBA labor dispute, and this itself will be broken down into two parts. The first part will address guaranteed contracts, but in more general terms, will address overall player compensation. NBA basketball is probably the easiest of the major team sports to assess a players worthiness (well, at least as it contributes to team wins). Statistics do in fact matter with regards to contributing to team success, you just need to come up with the appropriate formula. Certainly, points per game is one of the more overrated stats, so that alone would be a poor measure. And defensive stats are much harder to measure, especially when considering team defense as compared to individual defense. Still, a combination of stats would serve as a good starting point for player ranking discussions. And a formula combining player voting, coach and ownership voting, and possibly even fan voting, should yield a rather effective ranking of the players across the entire league. And since I’m expressing the idea that compensation should be based on results, it only stands to reason that some portion of the compensation should be based on team success (both regular season win total, and playoff success). And although the exact formula isn’t that important to express now (in this article), as an example, player compensation could be based 30 percent on last year’s ranking, 20 percent based on ranking from the year prior, and 10 percent the year prior to that. This allows for compensation based on past performance, but rewards recent performance the most. And this still leaves 40 percent compensation for current year productivity, to be paid out at the end of the season. Such a model would eliminate the need for player holdouts (i.e., contract disputes), and since players would be involved in the ranking system, there wouldn’t be nearly as much contention. I believe that players and the coaches truly know how to rank NBA players, so why not put the control where it will yield the most accurate results.
So with player compensation addressed, that only leaves owner versus player revenue split, and team versus team revenue sharing. As for the owners, they certainly would have to come up with a revenue sharing system (across the teams in the league), because the compensation model I suggest above would require a split of gross revenue between players and owners, and since NBA cities/teams don’t generate the same revenue, a split of revenue between owners and players must include revenue sharing across all the teams. But, I think when you eliminate over paying for non productivity (due to a compensation model based on performance), there likely would be less hesitation on the part of ownership to share revenue across teams. As for the appropriate split between players and ownership, I could care less what that ratio is: 57/43, 50/50, or what ever – it just doesn’t matter. But I would assert that it should be resolved once and for all, and never debated again. I think if the compensation style were resolved (as expressed above), and if the split of revenue between players and owners could be resolved, things like competition amongst teams, player movement, and the NBA draft process would all be easy things to resolve. Most things could remain roughly the same – about the only thing that would have to be resolved is determining compensation for a team that lost a player (due to player movement). I think in general, player movement would be less frequent because players would be paid based on their productivity. But still, there might be players that don’t feel they are a good fit on one team, so some amount of player movement would still exist.
Now everything written above is modestly obvious, and certainly not the shocking aspect of the article that I promised. So the next portion will focus on something that will seem foreign and/or unrealistic. In fact, I probably will be considered extremely naive. I can assure you that I’m not naive, and although there will be many coercive forces at work to fight against the ideas I’ll express below, I think most reading this will conclude that what I propose is a more fair system for rewarding professional sports leagues. The sad truth is that power is tightly controlled in this country, and although it appears that we live in a free society, the reality is something quite different. If you’re curious, I implore you to read on.
So to cut to the chase, my premise (and strong desire) is that professional sports in this country should be exclusively “pay per view”. The so called “free sports” isn’t really free, it is in fact paid for by advertising. So what we have in this country is a form of socialism, or at best, a perverted form of capitalism. Actually, it might be both at the same time. It is socialism because we live in a society where everyone pays for professional sports – well, considering that the bulk of the revenue doesn’t come from ticket sales, parking fees, and league merchandizing. For empirical proof of this, just take a survey of professional sports owners and players and ask them if they want to migrate to a pure pay per view model (i.e., absent advertising revenue). My guess is they’ll fight you to the death on this point, and this can only mean one thing – that the revenue from ticket sales and the like doesn’t come close to being the lion’s share of their overall revenue. I don’t have the exact numbers (after all, I’m sure it isn’t something that professional sports leagues like to announce), but in regards to income, ticket sales, parking, etc. probably is a small net gain when you consider the huge expense of building and operating a sports complex. Of course, sports leagues have somehow convinced local governments to help pay for the arenas and stadiums. This too represents an affront to capitalism since economic blackmail is bestowed upon government officials such that they have little recourse but to cave in to the demands of professional sports teams. You don’t have to look any further than the Amway Center in Orlando, or perhaps the new arena being consider in Sacramento. I certainly commend the government officials in recent years that have allowed sports franchises to leave their cities. The only problem is that there are plenty of eager cities more than willing to lure teams with tax incentives and other discounts, all paid for by tax payers. The promise of economic stimulus is always the bait, but in reality, it is merely robbing Peter to pay Paul, with no net gain for tax payers, but certainly a huge financial windfall for the sports teams (and athletes). My point originally was that people perhaps would be shocked by what I’m expressing, and probably haven’t considered some of these economic issues. And the reason is simple, indirect payment is very obscured (i.e., you can’t see it). But business in this country is inter-related, with pricing models for goods and services being relative to both competition (which is often lacking) and perceived value. But at the root of all commerce (well, in a well functioning capitalistic society) is the ability to say no, I don’t want to buy this product. But sadly, professional sports is something that you just cannot opt out of (i.e., you’re forced to pay for it whether you like it or not).
But how you ask? Well, unless you are completely self sufficient (i.e., grow your own food, make your own medicine, build you own telecommunications networks, brew you own alcohol, build you own cars, generate your own power, etc.), you are at the mercy of the companies that offer these goods and services. And obviously, we all fall into this category because no one is self sufficient. And before anyone thinks that they can merely boycott companies that fund professional sports, think again. Just think of all the companies which sponsor professional sports: banking (Citi Field), office supplies (Staples Center), retail (Target Center), air travel (United Center) and the list goes on and on. Now think about all the products that are advertised during sporting events – it is virtually every product imaginable. When you think about the kinds of things that you buy, and the trickle down affect that it has, you’ll discover that it touches virtually every industry and market segment in this country. This is why there is no way to opt out of professional sports, and this is why we all pay for it. And for another dose of reality, how else can you explain salary cap increases in the NBA during a huge economic recession over the last 3-4 years. The only way is for abuse of monopolistic powers to be at play. Now it is easy to explain how this has happened. After all, there is a huge financial gain to be had by obscuring the true cost of goods and services. Business figured this out years ago. This is why bars want you to run a tab, hotels want you to charge things to the room, and retailers make is extremely easy to pay via credit card or offer same as cash financing. My premise is that if we had to reach into our wallet and pay for an NBA game on TV, we’d be way more discriminate about what games we watched, or perhaps wouldn’t watch at all. But the major professional sports leagues have figured out a way to get us all to pay for their content, and through very clever marketing, have convinced us that it is free, or at worst, is a minor expense which overall, is good for the national economy. I heard Drew Brees once say that we shouldn’t drink the “Kool-Aid” which the NFL owners were selling. I would assert that perhaps it is all of us that have been drinking the Kool-Aid that professional sports has been selling, and perhaps it is time for the consumers to stop.
So how could “pay per view” work? The delivery mechanism of content to consumers is getting more and more advanced (from a technology perspective). The concept of streaming content across a pipe and hoping people are watching is becoming rather out dated. There is now the technology to hand deliver content to anyone that wants it (and if I were to get my way, must be willing to pay for it). And in regards to payment, there are already rich rating and billing systems which can allow for customized pricing which would meet virtually everyone’s individual needs. When I say “pay per view”, I certainly wouldn’t want to dictate to content producers (in this specific case, I’m talking about professional sports), because they should be able to offer their product any way they want, and should be able to charge what ever they want. So when considering the NBA for a minute, if the NBA wanted to sell all of its games in a season, or just games for a particular team, or a particular game, or even games on a per minute basis – that all would be fine. How much they charge would also be up to them. Our role as consumers should be to merely decide whether we want to pay for it or not. In the simplest terms, my belief is that we should pay for what we get, and get what we pay for. Said another way, we shouldn’t pay for what someone else wants, and no one else should have to pay for what I want. Migrating to pay per view would solve that problem, and would align perfectly our individual priorities and our individual expenses.
So what can go wrong when we operate in a model where we don’t actually pay for what we want. Well for one, it allows for waste and gross overpayment . We all complain about how much money the government spends, but the same is true in the private sector. Staying within the NBA, consider the New York Knicks. Over the last 10 years, they have been near the top in regards to player payroll, yet haven’t won a single playoff series. Aside from this last year, their most recent playoff history consists of a first round loss to Toronto in 2001. As an example of how poorly the Knicks spent their money over that 10 year period, consider that in 2006, their payroll was 117 million, which was roughly 26 million higher than the next closest team. The Knicks record that year was 33 wins and 49 losses. In 2004, the Knicks were also the highest, paying roughly 12 million more than the next highest team. But obviously the high payroll didn’t equate to team success (since they haven’t won a playoff series in over 10 years). To demonstrate exactly how bad things got for the Knicks, a couple of years ago, the Knicks traded for Cuttino Mobley and his 18.5 million dollar contract, found out that he had a heart condition, could have voided the trade, but elected to go forward with the trade anyway. Only in the fantasy world of the NBA can a team benefit from accepting 18.5 million dollars of expense, yet get absolutely zero productivity in return. The so called justification for the Mobley trade was to offset bad decisions the team made with respect to other equally bad contracts. Yet as shocking as this will seem to anyone that ever studied business in college, according to Forbes, the Knicks have become the highest valued franchise in the NBA. I ask you, how is this possible absent abuse of power. And the answer is simple, it isn’t. If you want examples of abuse of power, just try to get cable service in Manhattan with anyone other than Time Warner. And good luck trying to hang a satellite dish outside your apartment window – they tend not to work so well without line of sight (and those pesky tall building do tend to get in the way). It is possible that in the coming years, access to content will be opening up (via multiple cable companies, or possibly via content over the internet). But my premise is there are a lot of barriers to truly fair competition, and during these periods, huge amounts of money are being tightly funneled through a very select few. My premise is breaking down the barriers could be as simple as encouraging a shift from an advertising model, to a pay per view model.
I’ve already discussed government involvement with professional sports in regards to tax incentives and sports complex deals, but I think we also need to consider the role government plays in regards to regulating the cable industry. It is true that the cable industry has spent a ton of money building out their networks, so it would be unfair to ask them to give up that benefit. But, we have to consider that in most major markets in this country, there is one and only one cable provider (well, excluding satellite service – more about that in a minute). In this country, there are laws which protect against abuse of monopolistic powers, so it is hard to imagine how such laws are being ignored when there isn’t true choice for cable and broadband internet in this country. It perhaps will get better in the coming years, but there certainly isn’t open competition for cable service in this country today. And in areas where there is consumer choice, prices are typically much lower than in areas where there is no choice. As for broadband service, since there typically isn’t adequate choice, consumers wanting high broadband speed have little choice but to bundle service with their cable company. I for one cannot get anything higher than 1.5 MPS without getting broadband internet service from Brighthouse networks. At present, I’m suffering with 1.5 MPS DSL service, but at some stage, I might be forced to switch back to Brighthouse, which means I’ll have to give up Dish network, and switch back to bundled Brighthouse services. So when you put 2 plus 2 together, you start to understand how a combination of factors lead to abuse of power, and thus lead to a situation where everyone in the country is forced to pay for professional sports. To recap, government helps fund sports complexes and offer tax incentives to sports teams. Government has allowed abuse of monopolistic power in that there isn’t adequate choice for cable and broadband service. And since internet and cable content is heavily driven based on advertising revenue, we end up with a model where everyone in this country is forced to pay for “stuff” whether they like it or not (i.e., there is no way to opt out – simply not watching doesn’t do anything, because we all pay for the professional sports teams when we buy every day items). So my premise that migrating revenue away from advertising and towards pay per view is actually the most fair alternative. This should be a zero sum gain for the cable companies (i.e., revenue loss from advertising should be offset by increase in pay per view revenue). And if the professional sports teams are truly valued by consumers, then people should be willing to pay for it (and if not, then that should say something about the perceived value of professional sports in the first place). I’m merely suggesting that we finally evolve a model where those that want to consume content actually pay for it, and those that do not want to consume it, aren’t force to pay for it. This seems fairly obvious to me, but I’m suspicious that a huge battle will be waged over this notion.
And in case it isn’t obvious, the reason I said that this article would likely end the NBA labor dispute is because if this article actually sees the light of day (and I’m hoping it does), then both the NBA owners and players will want to resolve the dispute as quickly as possible, so that we all don’t start focusing on how corrupt the current system really is. After all, they want us fat, lazy, and apathetic – this is how they’re able to steal our money without us even complaining about it. So I would implore anyone reading this article to share it with as many people as possible. This article isn’t about me (in fact, I’d rather remain anonymous). But there are plenty of really skilled economic thinkers in this country, so I’d love it if they started a public debate on this topic. I think that would be very enlightening for us all.
And just to stir the pot a little bit more, I have no idea why various women’s organizations aren’t absolutely outraged by government involvement, and sustenance, of professional sports, considering the overwhelming share of revenue is directed towards men. And this goes way beyond just the male athletes, but crosses over to agents, coaches, management, and the media empires. Of course, powerful women in the media also benefit from the very advertising based revenue model that I talk about in this article, so it would take some really courageous women to speak out in favor of migrating to a direct payment model (i.e., pay per view). Let’s hope that such courageous women still exist in this country, and let’s hope that they still have a voice.
Sources:
Players forming their own league – online article in New York Post, comments by Amare Stoudemire – http://www.knicks101.com/2011/10/12/new-york-knicks-amare-stoudemire-says-players-may-start-their-own-league-more/
Wilson Chandler playing in China – http://espn.go.com/nba/story/_/id/6907302/wilson-chandler-signs-contract-chinese-team
NBA salary cap – http://www.insidehoops.com/nba-salary-cap.shtml
NBA labor dispute (main points) – http://articles.nydailynews.com/2011-07-01/sports/29740941_1_nba-lockout-owners-deals
Knicks payroll for 2006 season – http://sportsillustrated.cnn.com/2006/basketball/nba/team.salaries/index.html
Knicks record for 2006 season – http://www.basketball-reference.com/teams/NYK/2007.html
Knicks payroll for 2004 season – http://www.insidehoops.com/nbasalaries.shtml
Top valued franchises in the NBA – http://www.forbes.com/2011/01/26/knicks-lakers-bulls-business-sports-basketball-valuations-11-teams_slide.html
Cuttino Mobley trade – http://sports.espn.go.com/nba/news/story?id=3726598
Money spent on sports arenas – http://articles.orlandosentinel.com/2010-09-29/sports/os-scott-maxwell-arena-reality-09291020100928_1_amway-center-billionaire-team-owner-magic-executives
Revenue from professional sports – http://www.bos.frb.org/peanuts/sptspage/inning4.htm
New York Times article showing revenue from ticket sales versus other revenue – http://fivethirtyeight.blogs.nytimes.com/2011/07/05/calling-foul-on-n-b-a-s-claims-of-financial-distress/
FCC fact sheet – http://transition.fcc.gov/mb/facts/csgen.html