Why is NBA player-owner bargaining asymmetric?

Following up on the recent NBA lock-out post, some of you have asked why losses should be asymmetric across the two sides in the bargain.  Co-author Angus writes to me:

Re your commenters howling that the situation regarding losses is symmetric. It is NOT symmetric. (this is the part we didn’t do because of the basketweavers.)

First, the owners are losing net revenues, the players their gross revenues. Do we really think profits are >= labor costs?

Second and most important, owners are sacrificing SR net revenues for LR increases in franchise values from cost control. Players have no LR gains to motivate SR pain.

Owners have a LR view, players SR, so it makes much less sense for players to take a SR hit without a big offsetting gain.

In the comments, “fan” adds:

The reason the owners can hold out longer than the players is that the revenue/profits for the two sides are asymmetrical. Owners’ revenues are back-end weighted toward the second half of the season and playoffs, while the salaries are paid on a per (regular season) basis. So if the season is 40 games, player salaries are halved, but owners’ revenue drops by, say, 30%.

A commenter named Alex (not the MR Alex) writes:

While I think other commenters above are correct in the making the point that the two sides are asymmetrical, I don’t think that anyone has correctly explained the most important reason they are asymmetrical. The most important reason is the sides’ relative COSTS. It is correct that both sides are losing revenue. But while the players are avoiding a few of their costs, the owners are avoiding much more of their costs.

The bottom line: It’s not symmetric, even the basketweavers should see that.

Comments

Where does talent come in? Is it wrong to say the players are monopoly labor providers and capital markets are competitive? Replace these players with the world's 300+ next-best players and I think the fan base shrinks.

True, but that is what gives the players any leverage whatsoever. As Tyler said last time, the owners would prefer to down-size for the new normal.

You can only do that in a world without antitrust law. You can't even get to this imaginary place with a statutory labor exemption because there is no conceivable way even the most genius lawyer could figure a way to exclude the top 300 players from the labor force. As I said in the other thread, NBA players are not like steelworkers. They are like CEOs. They are naturally paid a wage determined by auction where being perceived as better than the next guy is worth a huge premium.

Angus is right on. When owners were long term owners, a revenue split roughly aligned the owners and players interests and made them partners.

Now that owners have an eye on team market value appreciation, which is not shared with players, the revenue split no longer completely aligns the two's interests. They need a franchise sale tax to make it up.

Without it, the players are just going to get chipped away in each round of negotiations, until the European leagues become more competitive with the NBA.

...and this is how unions begin to make sense.

What are basketweavers?

Doesn't it boil down to the fact that for owners, ownership is a hobby while for the players this is a job?

Of sorts. The thing is that owners have several business so losses in the basketball help offset other business income that would be taxed at 35%. But NBA franchises appreciate fast and when they sale it it gets taxed as long term capital gains at 15%.

Wouldn't this argument generically apply to every strike? The workers mostly always stand to lose individually more than the owners.

This is not a strike is a lockout. Workers would be happy to play, the owners will not let them until they agree to lower pay.

The only reason management can pull this out is because the NBA is excepted of key parts of the anti-trust legislation. If the player had half of brain they would have de-certified the union and sued the NBA on anti-trust grounds. The NFL players did such thing and fared much better than the NBA players will.

It will be interesting if the players succeed with a hostile decertification (although it would be highly unlikely the union leadership would remain hostile if they knew they were going to lose).

It's not a strike, Rahul. The owners are locking out the players.

I second the basketweavers questions. A person should be able to dip in here for drive-by enrichment without the necessity for daily visits to get the 'in' references. Thanks!

"Basketweaver": Someone who majored in a silly major like basketweaving, instead of economics or something. He's saying that even an economic illiterate should be able to understand the differing incentives facing players and owners.

I don't think there is any empirical support for the proposition that the value of an NBA franchise will increase due to cost control. The LA Clippers are the epitome of cost control (joined now by the Kings; pre-Prokhorov, the Nets were probably next in line). Their franchise value was near the bottom of the league. Conversely the Knicks have the worst record on cost control of perhaps any business in America yet have one of the three highest franchise values in the league. So that argument is way off base, imo.

Cost control for an individual franchise does not necessarily improve that franchise's value, but cost-control system-wide for all franchises would increase the value of all franchises.

Curious about the basket weaving reference. 10-15 years ago I remember basket weaving being the standard joke class athletes would take in college to maintain academic eligibility. No idea if that joke is still at all current. So, basketweavers == college kids too dumb to take actual academic course.

The only other time in my life I've heard people talk about basket weaving was when I visited South Carolina and there were some black women who did some sort of traditional basket weaving. It was all very StuffWhitePeopleLike and the upper-middle class white chicks I was with got very excited -- I was supposed to be impressed by the authenticity, but I just thought -- it's a basket. And I can buy a better and cheaper basket at Target.

In Jackson Hole, I was wandering around various shops downtown and in one I saw a little basket that looked like absolute crap, so out of curiosity I checked the price- it was $14,000!

The current craze seems pottery. The StuffWhitePeopleLike-sort-of-girls will turn up with awful, mis-shapen, half-baked mud-creations and oooh-ahh at each others performance genius.

Your assessment only makes sense if you assume all the players have about an equal say in determining the outcome of labor negotiations, and that all the players have the same incentives. Both of these assumptions are false.

(1) The NBA's marketing strategy relies on heavily promoting its star players, much more so than the NFL or MLB. Tens of millions of dollars and countless hours worth of promotion have convinced most casual fans that the only games that matter are games featuring clashes of top-20 players. If a number of top players picked up their gym bags and left, the NBA would deliver, in the opinion of most fans, a vastly inferior product. This gives the best players much more leverage in negotiations than the easily replaced roster-fillers than make up most of the players union.

Unlike average players, excellent players usually have revenue streams outside of basketball (sponsorship deals, appearance fees, investments etc), and more options within basketball. Already one great player, Deron Williams, has started playing in Turkey, and if the lockout continues other great players are sure to take their talents elsewhere as well. Playing in Europe is attractive for several reasons: the players can stay in shape and keep their skills sharp while locked out; they can extend the reach of their personal brands by playing challenge-match style exhibitions against one another; without a salary cap, the player's value would be determined by the market instead of by a cartel. Before Lebron James signed with Miami, he was offered $50,000,000 a season by the owner of Greek team Olympikos. While no one would want to play in Greece right now, other European vanity owners would offer contracts that at least match what the best players could get in America, and they would probably exceed NBA contracts. Chinese teams are a possible destination as well. None of this would be terribly relevant except . . .

(2) The players union is not a monolith. The interests of the superstars are not aligned with those of the roster-fillers. Mostly, the roster-fillers don't want the minimum salary to go down, and they want games to start as soon as possible. But the costs that the owners are trying to wrestle down have exploded mostly at the top, eg dwarf-star Joe Johnson getting a max contract. Cost-control winds up pitting the owners against the NBA player equivalent of the 1%, and neither the owners nor the stars have a compelling reason to back down, at least not yet.

So, the situation is more complex than you make it out to be. The league is hindered by its own (otherwise effective) marketing, the players have different and sometimes conflicting incentives, and the players that have the best ability to withstand an extended lockout, and hurt the league in the process, are the players with the best reason to wait it out. This doesn't even get into the different incentives on the owners side, nor the complicated sociological/psychological stuff on the players part that could drastically change how negotiations unfold.

I don't think the back-weighted revenues matter - because the two sides are bargaining over the player's share of revenue. If they settled just in time for the playoffs, the players would still get 50%, or 52.5%, of the basketball revenue. The fact that they are normally paid equally through the season is misleading. The LR/SR and cost issues remain.

The "owners are saving more of their costs" argument is only true if the labor of the players doesn't count as a cost to the players, because of course during a locker they're saving 100% of their labor. And if the players don't consider their own labor a big cost, then why would they deserve a big portion of revenues?

The real problem is that there exists a fan base that is immune to abuse by owner and player alike. Were it up to me, professional sports would very quickly return to simpler times and quite a few athletes would find themselves occupying Wall Street along with every Hollywood actor and TV star. How wonderful it would be for the soul of the fans, players and owners alike: games that normal people could readily afford to attend regularly. Oh. And no more cultural grease trap of movies and TV.

One can dream.

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