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The Brooklyn Connection

Over the last year, no NBA team has spent more money than the Brooklyn Nets. The franchise has traded for Joe Johnson and then re-signed Deron Williams and Brook Lopez to max contracts. While many traditionally big-spending franchises have been somewhat restrained by stiff new luxury tax penalties, the Nets have openly scoffed at them. At the same time, the Los Angeles Dodgers have dropped jaws throughout baseball by spending over $500 million on new players in less than six months.

The similarities between the two franchises run deep. They’re both operating in one of the biggest media markets in the United States, facing stiff competition for the dollars and eyeballs of local sports fans. Each is run by an aggressive new ownership group attempting to make a splash and “buy a title” in as quickly as possible. There’s no guarantee it will work for either, but the real story is the sea-change in the economics of pro sports that has made their gamble possible.

The Nets and the Dodgers have taken on contracts no one else would touch. The four years and $90 million left on Joe Johnson’s deal was widely viewed as completely unmovable, a millstone that would drag down the Hawks' franchise for years. Brooklyn sent back only expiring contracts when they picked him up. When the Dodgers acquired Adrian Gonzalez, Carl Crawford and Josh Beckett at the trade deadline, they were taking on more than $250 million in guaranteed money.

Yet, despite all that spending, neither is considered a favorite to win a title. The Dodgers may not even be favored to win their own division, not with the San Francisco Giants coming off their second World Series title in three years. The Nets have the second highest-payroll in the NBA at $88 million, but they aren’t a legitimate title contender, at least not yet. With a frontcourt of Lopez and Kris Humphries, they don’t have the interior defense to challenge Miami.

The Dodgers, at least, know that the MLB postseason is somewhat of a crapshoot and that even a flawed baseball team can get hot over a few weeks and win a World Series. There’s no such consolation for Brooklyn. The NBA playoffs are a brutal two-month enterprise that almost always results in the league’s best team hoisting the Larry O’Brien Trophy. Mikhail Prokhorov has said the team can be worth $1 billion by 2015; he’ll need to spent a lot more money to make that possible.

More remarkably, this seemingly reckless spending is occurring while most MLB and NBA franchises are cutting back on player expenses. The Thunder dealt James Harden due to fear of the NBA’s punitive new luxury tax penalties; the Mavericks broke up a title team under the theory that financial flexibility would be crucial to staying relevant in the new CBA. The Yankees, of all teams, have been signing players to one-year deals in order to get under the $189 million luxury tax line in 2014.

Both the MLB and the NBA are operating under a newly agreed upon CBAs, written under the pretense of curbing runaway spending in order to “improve competitive balance”. NBA owners won back billions of dollars from the players in the last lockout by lowering the percentage of BRI (basketball-related income) they could receive. Baseball avoided a lockout, partly because the player’s union allowed the owners to arbitrarily cap what they were spending in Latin America.

All of this occurred even as an unprecedented amount of revenue began flowing into both sports. With the advent of DVR and Netflix radically changing TV viewing habits, professional sports have emerged as one of the big winners in the entertainment marketplace. Since primetime TV can always be watched later, programs that can guarantee a live audience, like sports and singing competitions, have become invaluable for networks, especially for cable channels trying to justify their existence.

That has resulted in some astonishing contracts. The Lakers agreed to a 25-year, $5 billion deal with Time Warner Cable that will give them $120 million in local TV money this season. The Dodgers are negotiating a deal with Fox Sports that could be worth up to $6-7 billion over that same time span. With that kind of money coming in, committing $150 million to get one of the best pitchers in baseball may not be as big a deal as it once was.

This influx of money, in combination with the many restrictions on how it can be spent, has distorted the market. The Dodgers can’t sign a bunch of elite amateur players and very few great ones ever hit the market in the prime of their career; if they have money burning a hole in their pocket, they don’t have many places to spend it. The Nets are even more limited in what they can do: not only are they over the salary cap, but their ability to add salary through sign-and-trades will be hamstrung going forward.

The only way they can spend more is by overpaying their own players. Williams and Johnson are max-players, but a center who rebounds and defends like Lopez probably isn’t even if other teams were willing to sign him to one. Gerald Wallace, a wing player who has relied primarily on his athletic ability, probably isn’t worth $40 million as he goes deeper into his 30’s. Kris Humphries isn’t a $12 million a year player. His biggest value to the Nets isn’t what he does on the court; it’s how his contract could be used in potential trades.

This is no coincidence. The NBPA’s biggest priority in the lockout was the survival of the soft-cap system that allows middle-tier veterans like Humphries to cash in. Similarly, the MLBPA had no real objection to reigning spending on 16-year olds in the Dominican Republic, not when that money would eventually come back into the pockets of veteran players.

The owners, meanwhile, love these sorts of eye-popping contracts. When convenient, it allows them to cry poverty and bemoan the lack of competitive balance, which they can use to squeeze players even further in the next round of CBA negotiations. With costs controlled and money pouring in, NBA owners are poised to hit the jackpot when their national TV deal with TNT expires in 2016. As you may have heard, one of David Stern’s last acts as commissioner has been a ham-fisted warning about what happens to franchises who defy the dictates of TV.

The biggest concern is whether the entire cable TV business model is a bubble waiting to be popped. There are a growing number of people who have abandoned it, watching TV shows on Netflix and iTunes without ever needing to get a cable box installed. However, in our increasingly atomized society, professional sports are one of the dwindling number of ways for people to connect to a broader community. The demand for televised sports, one way or another, won’t be going down anytime soon.

The market for players is like a roll of toothpaste: squeeze from the bottom and it will come out the top and vice versa, squeeze from both ends and it will explode in the middle. It may seem like the Nets and Dodgers are operating irrationally, but you can’t evaluate their expenses without first considering their revenues. There’s a flood of money coming into professional sports; the other owners can only stem the tide for so long before soaring franchise values eventually wash them away.

 

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