Discussion Panel: Weighing in on the Lockout

Since I've been seeing a lot of these round table discussions about the labor situation, I thought I'd take a stab at crashing the various parties. It's summertime, and as long as I bring along a case of PBR and some Jello-cake, I'm bound to be allowed to stick around for at least a question or two. 

Experts Weigh in on the Lockout | NewsOK

Experts: 

  • Larry Coon
  • John Lombardo
  • Ken Berger
  • Darren Rovell
  • David Aldridge
Question 1: When Will the lockout end?

Consensus: Sometime before the year is over.

Worst answer: "Awhile." 

Sherman's answer: We have to look back at the way David Stern said that new franchise owners were viewing this labor situation. 

"We do have a limited number of franchises and people want to get in. But I would tell you that most of those purchases are based on the assumption that the model will be changing. And that is what's going on in the marketplace." - David Stern on the attractiveness of purchasing a franchise

Several franchises changed hands this past year, and it might seem odd that individuals would be willing to pay so much for franchises that have not historically performed well ($450 million for Warriors, $556 million for Wizards, $200 million for Nets). One of the reasons why a premium was still offered for these teams is because potential owners were approaching it with the view that the labor deal would be changing.

In other words, men bought these teams based on the condition that the overall financial structure of the CBA was going to change; it was a fundamental facet of them agreeing to buy the team at the price they did. They also offered those purchase prices knowing that a labor lockout was practically certain.  

Given that the new owners bought their respective teams knowing that 1) a lockout was likely; and 2) a new deal was a primary facet of their acquisition, why on earth would they capitulate to the players' demands after only a few months? I'm not arguing that the owners are right or wrong in their position, but if you examine the question from the viewpoint of their primary self-interest, they've already taken into account the cost of a lost season and are ok with it, if in the end they achieve their desired goal of a new deal. 

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Question 2: How is this work stoppage different from 1998?

Consensus: More money is involved.

Worst Answer: The league is in a different place.

Sherman's answer: One of the big issues with the 1998 lockout was the players' salaries that were spiraling out of control, both for rookies and veterans. The new deal put contract lengths and salary limits in place so that owners would be protected from their need to overpay everyone, be it a marginal player, rookie, or superstar. 

I keep seeing the phrase "cost certainty" vs "profit certainty," and Aldridge uses it again in this question. I'm not really sure what it means, this phrase "profit certainty," and how it is all that different. In both years, the NBA was trying to mitigate its expenses. The difference though is that in 1999, our country was enjoying economic growth (7.1% growth in Q4 of 1998 alone, as compared to the current anemic 1.9% growth). Now, as a result of varying degrees of stagflation, the teams cannot outpace their dynamic costs and their profits have gotten squeezed. Yet in both cases, the issue was in controlling costs. The only place where "profit certainty" exists is in the fixed income market, and the downside to predictable revenue is that it caps out the opportunity to capitalize on risk. Can an owner truly argue, "I want guaranteed profits," one year, and be fully content when his fellow owners go out and make more money than him next year? I doubt it. The risk of loss is what challenges owners to perform well. If you remove the moral hazard, then they lose the will to compete.

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Question 3: Which side can least afford a lost season?

Consensus: The players.

Worst Answer: Both sides.

Sherm's answer: I'll take the contrarian viewpoint and say it is the teams. The reason why is because it is much easier for an individual to bend his standard of living to his wage. To be sure, any player is going to have financial commitments that are draining on his bank account, be it house payments, family expenses, child support, or alimony. Those expenses are real, so I don't want to make light of them.

However, the risk the franchises bear is long term harm to their revenue streams. After the 1998 lockout, the NBA found itself in a difficult place both financially and from a public perception standpoint. In fact, there are still many former fans out there that are turned away from the game almost 15 years after the fact. If you harm enough of your fanbase, they will not come back for a very long time, if ever. Players will always be able to play, but owners who don't see the big picture run the risk of enduring another half-decade of public scorn, which in turn effects all of their revenue streams.

***

Question 4: Which side is right?

Consensus: Who knows?

Worst Answer: It's nuanced.

Sherm's answer: It is unfair and nonconstructive to paint the right/wrong argument in such broad strokes, because there are so many facets to the negotiation. I think a better question is whether both sides are arguing in good faith. To this point, I think Berger gets it right in that the owners are trying to have their cake and eat it too by shifting undue risk to the players. As the owners, they are the party who is primarily responsible for bearing the risk of economic swings. They control the purse strings. To attempt to shift the risk that is born from economic uncertainty to the players is an improper assignment of risk. If the owners want the players to bear a greater burden of economic risk, then they should also be allowed to participate in the benefits of assuming that risk. 

***

Question 5: One thing owners are most likely to give up?

Consensus: Hard cap.

Worst Answer: None.

Sherm's answer:  The hard cap is probably the right answer. If other components are secured in place (salary reductions, shorter contracts) then a hard cap becomes redundant. They can achieve the same effect by putting other controls in place.

Rovell also chimes in with the escrow money that the teams are arguing they should be able to keep. If you want a good example of negotiating in bad faith, demanding back money that players have already earned is a good way to do it. 

***

Question 6: One thing players are most likely to give up?

Consensus: Money.

Worst Answer: None.

Sherm's answer:  It is always going to come down to money, because that is the one thing that teams can control that is uniform across the league. Mavericks owner Mark Cuban is renowned for catering to his players' needs because he manages his business with the philosophy that it is his job to put them in the best possible position to win.  However, not every owner ascribes to that philosophy, and that is indeed their right. However, success under either scenario is never guaranteed.   

***

Question 7: One non-negotiable for the owners?

Consensus: The revenue split.

Worst Answer: The disparity between the highest paying and lowest paying teams. I would tend to think that only about half the owners are interested in narrowing this gap.

Sherm's answer: It is probably going to be the revenue split, because the owners have demonstrated that they have a hard time controlling costs, both fixed and variable. Owners have a tendency to overpay players and coaches but without the benefit of creating matching revenue streams. 

***

Question 8: One non-negotiable from players?

Consensus: Guaranteed contracts.

Worst Answer: An unmatched reduction in income.

Sherm's answer: This one is easy - guaranteed contracts are the biggest gains that any pro athlete can acquire in the negotiation process. It is particularly important due to the temporal nature of pro sports and athletes' careers. When a players' retirement is one bad fall away, the guaranteed contract is the one thing that protects them financially in the wake of catastrophe. 

As an aside, I've always found it interesting that the one sport in which a guaranteed contract would be most valuable (NFL) is the one pro sport that does not actually have it. As a direct result of not having guaranteed contracts, the NFL is the most competitive pro league in the world.

***

Question 9: Any chance the players agree to a hard cap?

Consensus: Not likely.

Worst Answer: Anything's possible.

Sherm's answer: I think we're far more likely to see a hard cap than a removal of guaranteed contracts. One of the biggest things a hard cap accomplishes is that it either removes or impedes the usage of salary cap exemptions such as Larry Bird exemptions

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Question 10: What will happen to the one-and-done rule?

Consensus: It will remain intact if not go up by one year.

Worst Answer: It will be negotiated.

Sherm's answer: I think that removal of the one-and-done rule is merely a bargaining chip, a demand that the players will cede in an attempt to get other things that they really want. I think it is obvious that the league is in a much better place today than it was in the 1990's and early 00's, and that is in large part due to the retention of older players in the league.

One point I think worth considering though is the impact the removal of the rule has on the cumulative prosperity of players. Because contracts are guaranteed, an infusion of young unproven talent has the potential effect of squeezing out the overpriced older talent. The contracts would instead go to the younger ball players, which has an interesting result - the league talent gets younger and cheaper. While the "cheaper" part might allure owners, certainly the "younger" part should offset it because it means the overall product would decline. From the players' perspective, it lowers their average base salary, which puts them at a future negotiating disadvantage. The problem is that, without a fully functioning D-league, the roster spots available are limited. As such, an influx of younger, cheaper talent would make the overall structure a buyer's market. From a pure personal income standpoint, the best thing the players can do is limit the supply of labor.

***

Question 11: What would a hard cap mean to small market teams?

Consensus: It would probably help them.

Worst Answer: n/a

Sherm's answer: I don't think this issue has gotten fully fleshed out, because in every analysis I've read, there is an assumption that the hard cap is instituted a priori. However, that cannot possibly be reality, because a cap has to be in proportion to the salaries that comprise it. If we just assume that some number is taken and then teams have to adjust to it, the result is that the cap puts pressure only on unsigned players. I don't think that can work, because then it makes a top-heavy league even more-so. Instead, there must be some sort of transitional grace period or a roll-back of every player's salaries in order for the proportions to remain intact and reasonable. 

***

Question 12: Does the league need something to help with competitive balance?

Consensus: Yes.

Worst Answer: "The league will be healthier when all 30 teams have an equal shot at competing for a title rather than just the richest teams."

Sherm's answer: I believe the idea of competitive balance is not attainable in a sport that plays close to 100 games per season. The NFL is often held up as the model for competitive balance because in theory any team can win in a given year, but of course that really isn't true. We make that argument and conveniently forget that the Detroit Lions and the Cincinnati Bengals are in the league. 

Competitive balance really means that any team can compete for a playoff spot in a given year. When it comes to championships, the haves will always be the haves, and those haves will always be dominated by a superstar. This is simply the way the league works. The best players control a disproportionate share of a team's success. However, if you consider competitive balance by way of making the playoffs, then that is entirely achievable. Consider the Eastern Conference - the Pacers made the playoffs after having won only 37 games last season. The next three teams after the Pacers won 35, 34, and 30 games. Given the swing of a few games, the order of those teams' final standings could easily be rearranged. Is that competitive balance? Or is there some higher fictional standard to which a team should set its sights on?

***

Question 13: How might a shortened season impact level of play?

Consensus: Negatively.

Worst Answer: "I don't think it will"

Sherm's answer: Do you even remember what happened in that shortened season in 1998? Fans and columnists alike were openly mocking the terrible quality of play. The Knicks made the final as an 8th seed, which should never, ever happen. 

Would such a scenario repeat itself? While basketball is a little bit more fluid than a regimented sport such as football, Thunder fans know what the value is in having a team play together all season. We saw a team that had glaring holes at the beginning of last season slowly figure them out and become a better team for it. However, that process does not just happen; it only occurs on the back of previous invested time and dedication. Without a summer league, training camp, and pre-season, the players would be far from ready to put forth their best effort. Even worse, the fans who have already committed to season tickets next year would be hurt the most.

***

Question 14: What is the greatest risk to the league?

Consensus: A lost season means lost momentum.

Worst Answer: None.

Sherm's answer: Aldridge is right in that the NBA does not have the same momentum underpinnings that the NFL or MLB do, and so it has to ride on a crest of momentum in order to stay relevant. As previously noted, a work stoppage for any length of time does long term damage that takes a long time to undo.  

***

Question 15: Must fans witness this dispute every few years? 

Consensus: Probably.

Worst Answer: None.

Sherm's answer:  When you're trying to fuse capitalistic principles with a socialist perspective on competition, labor disputes are inevitable. The interest of making money often comes at the odds of building a fair model for everyone. All you need to do is look at the NFL - their labor stoppage has much more to do with how to slice up the revenue available and less to do with the structural problems that plague the NBA. 

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