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David Stern's Biggest Problem

 

The dozen owners who have bought in since the last lockout have an expense that no new owners before that lockout experienced at this magnitude. Franchise values shot up around the turn of the millennium, which means that prices shot up, which means that financing expenses shot up. -- Tom Ziller

That, more than anything else, explains why the NBA lockout is not over.

The owners have already won significant concessions from the players' union. Most of their bargaining position is a well crafted illusion: there has been a tremendous growth in league revenues over the last decade while the players' take (57%) has remained constant. Had non-player expenses, like financing, remained the same after inflation from 1999 to 2010, the NBA would have made a record profit last year.

There are owners ready to settle.
Mickey Arison, the owner of the Miami Heat, was fined $500,000 for suggesting he wanted to end the lockout. However, there is a group of hard-line owners who still are not satisfied. Many of these over-leveraged owners bought franchises their net worth can barely support, and they need the players to bail them out.

No sane financial advisor would tell a client to tie up the overwhelming majority of their wealth in one asset. Yet, that’s exactly what owners like the Sacramento Kings’ Maloof brothers, the Phoenix Suns’ Robert Sarver and the Charlotte Bobcats’ Michael Jordan have done. In 2004, Sarver bought the Suns for $401 million. In 2005, USA Today estimated he was worth $400 million.

By focusing on ensuring cost certainty on a yearly basis, they are treating NBA ownership like a short-term investment, instead of the incredibly valuable long-term investment that it actually is. More importantly, they are doing this at the expense of the long-term health of the game.

NBA ownership is an exclusive and valuable club in which to be a member. The league artificially restricts the supply of franchises in order to boost the value of existing ones. Meanwhile, interest in basketball is likely to continue growing, while the public has shown it will invest great sums of money to build arenas and ask for nothing in return from the owners who profit from them.

As commissioner of the league, David Stern’s main duty is akin to the manager of a private country club: screening new members to make sure they meet the club’s standards and making sure existing members can pay their dues.

Stern can be very selective in who he allows to buy a franchise; the major professional sports leagues reject worthy buyers all the time. Major League Baseball has held up Jim Crane’s purchase of the Houston Astros for months because of concerns about racial discrimination.

In this era of increasing wealth inequality, there is certainly no shortage of billionaires in the world. Larry Ellison, the founder of the software giant Oracle worth an estimated $33 billion, has tried to buy a franchise for years, and the league recently refused to sell him the New Orleans Hornets.

Maybe, instead of pursuing frivolous spectacles designed to enhance his public image like the institution of a player dress code, Stern should have been working with wealthy investors like Ellison to enhance the overall financial health of the NBA’s ownership groups. Instead, there are too many owners demanding the unrealistic goal of 99% victory in labor negotiations. They have already received a large increase in their split of the income, a tougher luxury tax and fewer guaranteed years in contracts.

The players' union, whose core constituency are the veteran role players who make up the NBA’s “middle class”, have long said that an extremely punitive luxury tax, which they believe would serve as a hard cap and end guaranteed contracts for non-elite players, was their “red-line” in terms of what they would be willing to lose a season for.

It was these role players who betrayed the stars in the 1999 lockout negotiations when they agreed to maximum salaries and a rookie wage scale, measures which prevent players like Kobe Bryant and LeBron James from earning their fair-market value, in return for a higher percentage of revenues. They are adamantly opposed to a system that makes their wages unguaranteed and destroys their job security; they don’t call it a “blood issue” for nothing.

That’s why the owners’ latest offer, if accurate, is so infuriating. After a long series of meetings dealing with “system” (anything not related to the revenue split) issues, they gave the players two options: “Fifty-fifty with almost nothing for the tax threshold-breakers, or 53-47 for the league with the negotiations the two sides had worked out all week.”

Because they knew the players could never accept the luxury tax penalties they were offering in the 50/50 split, the owners were essentially offering the same 47% of league revenue they had proposed months ago. They could have saved everyone the time by just giving the players the middle finger and being done with it.

Stern doesn’t want to lose the season. A 69-year old rapidly approaching retirement, he knows he needs to save the season in order to salvage his legacy. He will eventually make a deal, unless the contingent of financially strapped owners force him to offer something so egregiously lopsided that the players couldn’t rationally be expected to agree to it.

As the owners’ public face during the lockout, he will become one of the most loathed figures in the history of the sport if the season is cancelled. He is, after all, still an Ivy League educated attorney, and one of the things they are paid to do is take the blame for their clients. The ill will a year-long lockout would generate would rightly cost Stern his place in the Hall of Fame.

In his memoirs, Stern will blame Sarver and his ilk for their role in these negotiations. In reality, he will only have himself to blame for putting them there in the first place.

 

 

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