Perplexity in the Capitalism Era – The Revelation of the “Stoppage”

 

Foreword: We are trying to find out the reasons why this situation happened and what the solutions are for this case. While we try to learn from our predecessors, hopefully, we are able to keep this not-so-mature industry running and not see this current impasse turn into a long work stoppage that will hinder its continued development.

The National Basketball Association (NBA), once again, is involved in a work stoppage. This could be the worst crisis in the 65-year history of the league. If the season is canceled, the owners, the clubs, the players, all broadcast companies, the sponsors, and all the audience and fans will be victims of this event. No matter who is innocent and who is not, many people will suffer economic hardships.

Looking back over the history, there is always something “worse than that” that would dwarf the “worst situation” in most scenarios. We still believe in the wisdom of the American owners and players. They can run so fast, even faster than Bill Porter and faster than we can catch up. Therefore, many people are optimistic about the outcomes and they believe that a final agreement will approve a split of revenues between owners and players along the lines of a 57% to 43% split and that this will happen before the deadline passes for starting the season on time.

Owners and players should be able to share in the glory of championships and make this a win-win situation. Nothing could be worse than the season of 1998-99. I have no doubt that no one wants to lose a season. However, if we are looking for a temporary peace just like the 1998-99 season and the issues of “hard cap” and “soft cap” on players’ salaries remain in the agreement in the future, a greater stoppage will occur at some point in time and the situation would be even worse than what the other three major U.S. professional sports leagues have.

The solution here does not involve patching a leak. The problem is how to establish a business model that can keep pace with the times. The sea flood into the land has created a muddled situation. The capital flow is going backward. The work stoppage of the NBA in 2011 is a perplexing problem of this era.

A wave of NBA capital flowed over the world and developed new markets globally in the 1990s. This included the sports market. Back in that time, the NBA was trying to acquire bigger shares of the sports market which was already dominated by the National Football League and Major League Baseball. Paul Allen, the co-founder of Microsoft, and other emerging magnates became owners of several NBA franchises and the NBA entered into a cycle of “rapid commercialization” that has lasted until the present time. Maybe it is a little cruel to say this but that was not the correct soil to plant this 100-year old league in. It was simply a case of personal self-interest. The idea was to see how fast professional basketball could make a profit and cash in on the capital markets of the world. It is like the song “Guang Ling San” that was played by ancient Chinese philosopher and poet Ji Kang before he was executed at the age of 40 by Sima Zhao. It is just grumbling before the closure.

That does not have to be a problem. Actually it could be a pair of strong wings that help the NBA fly higher. It is rare to find an old-school owner in the NBA like one can find in Massimo Moratti from the Football Club Internazionale Milano or in Andrea Agnelli from Juventue Football Club in the world of soccer. The NBA has more owners who are celebrities from this new burgeoning business entity. They do not have a long history but they were able to create multiplier effects to improve their economic futures.

Americans has been manipulating the world’s capital economy for a while and they have done pretty well with it. The problem is that the investors of this era are looking for a rapid profit and quick capital turnover. They just could not wait another two years for the results. They won’t take some blocks from one wall to fix another. They won’t agree to receive their return in installments. Everyone in this era is pursuing maximization of financial investment and profit return. Unfortunately, economic crises came alone and it sparked the latest trouble. A work stoppage in the NBA is but one unfortunate consequence of this short-sighted approach.

  1. The incompatibility of an unbalanced market size and the model of profit sharing

The business model of the NBA unfortunately is infused with Americans’ obstinacy and unique thought process. However, the NBA is the league that pays the most attention to global markets among the four major professional leagues. Although with some contradiction, it is always able to find the opportunity and to hear the sound of gold coins dropping into the money bag from every corner in the world. It is like all the Chinese parents taking their children who have different abilities to look for jobs from every different company on a windy, rainy day. Simply, the league controls the operation and standardizes the operation. The successful achievement is well-known around the world. But I would like to discuss some potential problems.

First, the unbalanced market size makes it very difficult to adopt the current profit-sharing business model globally. The key problem at the heart of the work stoppage is that the smaller markets are shrinking to an even smaller size than before. The owners of the teams in small markets are suffering from this unfair natural situation. The league is intending to use the salary cap or luxury tax to solve the problem. Just like Gilbert Arenas said, a hard cap won’t change the fact that all players would do everything they can to play for the New York Knicks or Los Angeles Lakers. Big markets remain big; small markets remain small.

Not only have the teams from smaller markets had to share profit equally with the teams in bigger markets, profits from broadcast rights or sponsorships are limited. It is almost impossible to increase the value of a team from a smaller market when facing domination by those big clubs, which have some extra $50-60 million for their payrolls.

The unbalanced markets would exclude and reject an individual business model. European soccer has experienced over 100 years of development. Although major resources continue to flow into bigger clubs, median and smaller clubs are able to remain viable even while facing difficulties in running their businesses. Actually, some of them did pretty well. The transfer of some players from clubs like Ajax Amsterdam, Udinese, and West Ham United to other clubs has successfully increased the monetary value of the players.

Is it possible for the NBA to allow the smaller teams to have their own unique operation model? Is it possible to remove the pressure of a $300 million price tag when teams are transferring players? By using the typical monetary transferring system and global supply system in soccer, median and smaller size clubs are able to enjoy some success, while dealing with their limited cash flow. Increasing each team’s ability on overseas development and increasing broadcast rights are also some other possible solutions.

  1. Imbalance on Team Branding and Players’ value

In soccer, we were crazy about Diego Armando Maradona and Zidane before and now we follow Lionel Andres Messi and Cristiano Ronaldo. In Formula-1 auto racing, we were fascinated about Ayrton Senna da Silva and Michael Schumacher before, and now we are spellbound by Fernando Alonso and Sebastian Vettel. While we follow these stars, their clubs or their country actually have successfully nurtured and publicized these talents. These talents make history for the club or the country. That is the victory of chained value and the glories are shared.

However, we see a different picture in the NBA. Starting with the draft, players have a halo placed around their heads and heroism thrust upon them. We repeatedly see a talent create a famous team. I have heard a saying that the team is the servant of the players. Is this good or bad? I only can find the answer from the updated club value numbers listed in publications like Forbes Magazine. Team owners in the NBA probably care about their team value more than anything else. No. 1 on the list is Manchester United, No. 5 is Real Madrid, and No. 7 is Arsenal. Not one NBA team was listed in the top 40. The highest ranked NBA team is the Knicks at No. 47 followed by the Lakers.

Don’t forget, Bayern Munchen, F.C. Barcelona, and AC Milan are all ahead of these top two NBA teams. Oh by the way, a Ferrari racing team is also ahead of them. Because of owners’ obsession for their clubs, I believe that all the Barcelona fans, including Messi fans, will continue to support Barcelona and be fascinated over their team’s performance even if Lionel Andres Messi were to leave the team. What happened when LeBron James left the Cleveland Cavaliers?  I only heard media criticism of Cleveland as the most horrible city in the U.S.  If the NBA wants to catch up to the size of market shares that the NFL or MLB teams enjoy, it needs to take care of the current headaches it is suffering.

  1. Should we blame on players’ salary or the league’s operation model?

Now even basketball fans are leaning to the side of owners. Fans think that those highest paid basketball players, such as Kobe Bryant and Lebron James, who comprise 75% of the players’ payroll, are overpaid. I think it is a little too high because this is higher than the players make in the NFL, which has three times the television market share of the NBA.

However, we cannot deny that NBA players have a different market function compared to players from the NFL. NBA players have done so much for global development of the brand. Someone may ask why NBA players still get higher pay compared to European soccer players while both leagues have eyes on global promotion.

According to a report from Sporting Intelligence in 2010, the average weekly salary for a NBA player is £50847 (roughly $30,000) . Premier League players have the highest weekly earnings which are £28230 (roughly $18,000). However, the later one is calculated after taxes, but the NBA players must pay federal, state and city taxes. I am not trying to defend the NBA players and I do think their pay is a little too high. This is the nature of a completely free American market. Star players are able to shake the club when they stomp their feet. Players are able to use their finely written contracts in negotiations with their team owners for compensation. No matter how angry and unsatisfied the owners are, they can only follow the league’s and players’ agreements.

So we know that it is a problem and that it is unlikely to be able to reduce players’ salaries. How can the NBA do on their operation scope?  Isn’t it true that the NBA already maximizes its development? If the NBA already has successful global strategies, why are new strategies needed? Are there any feasible mechanisms from which both the league and clubs can unify and clarify their financial statements? Are there any marketing strategies that can be improved?

Broadcast rights in the U.S., for example, count for $930 million in annual income, which is still shabby when comparing it with the NFL’s $4 billion annually. Although the difference is quite large, were negotiations too pessimistic with ESPN and TNT over broadcast rights that took place several years ago? More importantly, the NBA still needs the boldness of vision and needs to think about how the NFL overtook MLB in terms of broadcast revenues more than 40 years ago.

The NBA is a complex organization and it is well developed. It is a strong and dynamic business empire with unusual qualities. Any discussion on the NBA’s business model could make people fall into a complicated equation process. Anyone who debates this issue could also wind up showing off their slight accomplishments in front of real experts. None of these concerns matter. For a burgeoning market, doing careful deliberations and taking proper precautions before it rains are usually beneficial.

Dr. Jie “Jack” Guo is the president of WorldTeam Sports and a leading sport entrepreneur in China who represents the NBA in that nation. He is spearheading the development of three planned sports cities in China and broke ground on the Juan Antonio Samaranch Sports City in April in Fujian, China.  Dr. Thomas P. Rosandich was present at the ribbon cutting ceremony for this project, which will include sport education programs provided by the Academy. Guo received an honorary doctorate in 2010 from the Academy in recognition of his work to help develop sport in the world’s most populous nation. For more information on Dr. Guo’s work and on the Academy please go to www.ussa.edu.

 

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