NBA Lockout - Feels Like We're Going to Have a Season

First of all, let's acknowledge that Chris Sheridan and Mark Heisler have pretty much been saying this all along - so credit where it is due to those guys. But after all the huffing and puffing, it seems like we're going to have an NBA season after all.

Oh, it's not done yet and the clock is still ticking. The two sides met for a couple of hours Tuesday, and agreed to meet again Wednesday. There's some real urgency to that Wednesday meeting, with the Rosh Hashanah holiday making Thursday and Friday off-limits for key negotiators on both sides. Given that the 1999 lockout precedent indicates an agreement in principle needs to be reached by October 2nd in order for the season to start on time November 1st, yeah, Wednesday's meeting is big. By the way, in case you don't have your calendars handy, October 2nd is Sunday.

Nonetheless I'm completely convinced at this point that these guys are going to come up with a deal that's going to save the season. Am I optimistic because the owners reportedly budged on the hard cap issue? Is it because the gap in the revenue split is reportedly shrinking? Well, sure those are factors. But the real reason I'm optimistic is that I know that none of the guys in that room are stupid... and they can do some basic math.

The numbers being leaked continue to fluctuate, and these are after all still just leaks, so maybe the figures are totally off base. But if what is being reported is even close to accurate, then the two sides are now within 10 or fewer percentage points of each other on the revenue split. The players are supposedly down to 54%, having also indicated a willingness to go a little lower, while the owners are reportedly up to at least 44%, possibly as high as 46% or more. 

So let's do some math. If a season is lost it will ostensibly be to get more leverage to get the deal you want. But it has very direct consequences in the loss of real revenues. Heisler has pegged that number at $167M per week. I don't really know what the exact number is, but in terms of total league revenues it's approximately... let's see... carry the 4... hmmm... take the square root.... um... EVERYTHING. The National TV money, the local TV money, the arena advertising, the ticket sales money... basically, the league gets to keep merchandise sales, which let's face it, are going to be a little down if the season is lost.

So don't tell me about the money-losing owners who aren't afraid of losing a season. Sure, they might lose money if the season were played - but they'll lose a hell of a lot more money if the season isn't played. Because they forego essentially all of their revenue, but they still have all of their expenses aside from player salary - and going back to some discussions from earlier in this lockout process, we've already established that those 'other' expenses are quite significant. Teams still have to pay a coach and maintain practice facilities... and although there's some dispute as to whether interest should be included in losses for the purposes of negotiating a new CBA, there's absolutely no question that interest represents a real expense to some highly leveraged owners whether they have a season or not. 

As for the other side, obviously the players lose all of their NBA salaries if a season is lost. Some of them will recoup some money playing in foreign leagues, maybe in some exhibitions. Some super stars could probably make even more than their NBA salaries if they want to work hard on foreign tours and make more endorsements and what not. But the vast majority of the players simply lose a year of salary - gone.

Now, you could make an economic case for taking a hard line to get the deal you want, if you were going to get that deal in perpetuity. But that's not going to happen. The owners have proposed a term of ten years for the new CBA - the players have suggested six. The prior two CBA's were six years, so it seems more likely to me that the new one will be six as well. So even if you get the exact deal that you want today, if that deal is a disaster for the other side, we're right back in a labor dispute in six (or at most ten) years.

If you lose a year and then sign a six year deal, that's one year in seven with no revenue - that's 14% lost right off the bat. Even if you sign a ten year deal, it's 9%. Now add to that the inevitable drop in attendance and TV ratings that ALWAYS follows a work stoppage in a major sports league - instead of that 4% growth you're expecting, replace it with a 5 to 10% drop. This is not news to the NBA - they experienced it first hand at the beginning of the century after the last lockout. Now you're dropping several more percentage points both directly (ticket sales) and indirectly (that new TV deal you're due to sign in 2016 is going to be based on lower ratings AND a growing reputation for labor strife that tends to cause periodic work stoppages). So losing a season basically guarantees that you will lose anywhere from 15% to 20% in aggregate - right up until the point where you're right back at the negotiating table, facing off with a ticked off adversary once again.

Who in their right mind would consider a 15% loss, when they were within 4 or 5 points of a deal with a compromise? Answer: no one. No one in their right mind that is. 

This thing has been moving towards a 50-50 split from the very beginning. I wonder who was the first person to write that in this lockout process? By the way, if you haven't seen it, check out the picture of the "50-50 Split Cake" Ken Berger sent to the negotiators on Tuesday. Well played sir. How u?

I feel a little like the owners will be getting away with something if they get a 50-50 split - after all, they negotiated a take of 43% in 1999 and renewed that agreement in 2005. I've yet to hear an explanation for why they thought 43% was the right number then, when now it seems so far wrong. Sure 50% would represent major movement from the owners' original proposal of around 40% - but that was always a disingenuous offer. It irks me to reward them for making such a bogus starting offer, and then to justify it by saying "Well look how far they've come from their bogus offer." For that reason, my guy tells me that 52-48 or 51-49 is more appropriate; but in the end a compromise is a compromise, and the players aren't exactly starving here. Besides, there's something very tidy about 50-50.

If we put that 50-50 split into the context of the purported losses of the league, an extra 7% of $4B in revenue means about $280M - a little less than the $350M the league claims to have lost last season, but more than the $150M that the player's association recognizes as legitimate (the rest being amortization and interest that the players don't feel they should be paying for). So that would be another compromise.

Once the split is determined everything else will work itself out. The mid-level exception as it exists today is probably a thing of the past, and frankly, good riddance. The hard cap is apparently out of play now, with a more punitive luxury tax taking it's place - just as I suggested last week. (The current suggestion apparently increases the tax rate based on how much above the threshold the team is, as opposed to basing it on how long they've been above the threshold as I suggested; I like my idea better, but either could have the desired effect of eventually driving the teams back below the tax threshold while increasing revenue sharing money in the meantime.)  

The owners continue to try to decouple player salaries from annual revenue growth, which to me is simply baffling. It is clearly in the interest of both the league and the players that league revenues grow - why would the league not want the players to share equally in that growth? Strangely, the owners continue to behave as if the NBA is all about them - but ask yourself this question: if you had the choice of watching NBA players playing in a different league, or different players playing in the NBA, which would you choose? I thought so. The owners will need to allow salaries to grow right along with revenues at whatever split they decide on.

It seems like it's going to get done. They had to drag it out, to put on a good show, to drive the best deal they could. But in the end, no one was going to give up the season. They just had to do the math.

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