Adam Silver and David Stern (AP Photo)

The NBA Lockout, Competitive Imbalance, and TV

Many NBA writers are busily disseminating a myth that the NBA lockout exists to bridge the gap between the small- and large-market teams. They pen stories of the owners attempts at fixing the league’s competitive imbalance problem.  The luxury tax figures prominently in the folklore. It’s a campfire story that the NBA loves hearing told aloud since it masks the real issue at hand.

The NBA wants 30 competitively-balanced financial reports.

The cycle of negotiations between the players and owners plays to a predictable script.  First, the two sides start with an icy standoff.  They refuse to meet for talks, and they make known their ‘ironclad’ stances known to all who are willing to listen.  It’s posturing at its finest.

Then, as a critical deadline approaches, they get together.  In order to keep both sides at the negotiating table, they talk about “system issues”, which is labor talk code-speak for “issues other than money”.  The luxury tax and other competitiveness issues fall into this category.  After working on these problems for a while, both sides leak reports that minor progress is being made.

Of course, the illusion of peace detonates when the subject of money arises.  The owners essentially say to the players, “you show me yours then I’ll show you mine.”  The players strip nude and reveal a smaller (but not quite small enough) BRI number, while the fully-dressed owners snicker and smirk at their nakedness.  Everyone runs away flushed, and the cycle begins anew.

Now comes word that in the latest round of talks, the two sides decided upon a mutually agreeable luxury tax before the BRI issue broke them apart again.  According to Howard Beck of the New York Times,

The breakdown came after the parties resolved the second-thorniest item — a new luxury-tax formula. The tax will start as a dollar-for-dollar penalty, just as it is now. But it will increase by another 50 cents for every $5 million spent beyond a set threshold — to $1.50 per dollar spent after $5 million, $2 per dollar spent after $10 million, and so on, according to a person who has seen the plan.

While this measure will certainly make the small-market teams more viable — and therefore, less likely to move to another market in hard times — it only them in a financial sense.  It won’t solve the myriad other problems hindering their competitiveness.

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The teams sitting at a competitive disadvantage are beset with problems that have little to do with market size.  We need a better term.  I suggest the phrase “perennial underdog”.

A luxury tax will help these squads maintain dollar-and-cents viability.  It won’t help them from a win-and-loss standpoint.  Here are the reasons why:

1)  Payroll size is a terrible predictor of success.

Here’s a buried lede from from Howard Beck’s piece on competitive balance, a story which asserted that the owners were locking out to force a luxury tax that would give each team a reasonably equal chance at winning,

But again, the union views the parity issue as a red herring, an excuse to shift hundreds of millions of dollars from players to owners. Many economists are unconvinced that payroll controls do much to promote competitive balance.

“The statistical correlation between payroll and win percentage is practically nonexistent,” said Andrew Zimbalist, a professor of economics at Smith College, who has studied the issue.

And even if there is a small correlation between dollars and success on the court, one must be very careful in asserting a cause-and-effect relationship (I stressed this point a couple of week ago).  As Tom Haberstroh aptly pointed out,

What we’ve learned is that spending is cyclical. The smart organizations, like all businesses, try not to spend until they need to. As an example, the Boston Celtics’ payroll the year before they formed their Big Three? It ranked 19th in the NBA. The year before that it was 21st. They lost over 100 games over those two seasons. 

The NBA might contend that the Celtics weren’t winning because they weren’t spending. But we must be careful about confusing cause and effect here. It may also be the case that the Celtics weren’t spending because they weren’t winning. Why throw big money at free agents when it won’t really move the needle for title contention? Perhaps it is better to keep costs low until you can swing a big trade or increase your chances to land a superstar in the draft (see: Thunder, Spurs, Bulls). 

So if a team’s willingness to spend doesn’t tie into its level of success, then what does?  Could it be that…

2)  Successful teams maximize their opportunities in the draft.

Yes, success is borne of strong leadership.  Haberstroh’s article found that 34 percent of a teams success tied into the draft record, while only 7 percent tied into their spending levels.  (Let’s pause for a second to give the Knicks fans a chance to nod in agreement.)

3)  Salary caps, Bird rights, and luxury taxes may serve to help the perennial underdogs retain their own top-shelf free agents, but they won’t help the underdogs attract other teams’ talent.

Even the most punitive of luxury taxes won’t level the playing field for the Bucks/Raptors/Clippers relative to the Lakers/Heat/Celtics.  It’s simply not that simple.  Payroll is only one variable in the equation.

There are many other factors that play, such as:

Warm-weather climates:

Consider the Nielsen estimates on media market sizes.  (Not a perfect estimate, but it will suffice.)  The markets ranked from #18-20 are (in order):  Cleveland, Orlando, Sacramento.  Even if all other factors were equal, that’s a pretty easy choice, right?

States Without Income Taxes:

This one is a huge boon for Texas and Florida (and consequently, MIA, ORL, SAS, HOU, and DAL) when trying to lure free agents.  In a system with capped salaries, players can maximize their earnings by opting for a state with a minimal tax burden.

Prior Marketing Exposure:

Tell me if you’ve heard this line before.  Sometimes it’s used to justify a cockamamie argument for NBA contraction, and other times it’s used to rationalize why some teams are perennial bottom feeders.  “There aren’t enough stars to give one to each team.”  Boo friggin’ hoo.

There’s a reason the league doesn’t have enough stars, and it’s also the reason that you won’t find a superstar moving to a city like Milwaukee or Minneapolis. It’s a well-kept, yet unkept, secret.

The league doesn’t market half of its teams.  It doesn’t even put them on TV.

For a league that is constantly trying to measure itself up to the NFL, one would think that they could follow its system of regional television coverage — a system that’s been largely in place since the NFL-AFL merger.  The NFL gets all of its teams onto TV.  The NBA?  Not so much.  Perennial underdogs like Charlotte, Milwaukee, and Minnesota get a game or two on “national TV”, which usually means a Tuesday night game on NBA TV.

The perennial underdogs are trapped, especially on this particular marketing angle because it’s a vicious cycle (as well as a chicken-and-egg problem, but that’s an issue for another day.)  What’s the cycle?  Win games, get on TV.  Then charge for more tickets and TV rights.  With more dollars in the kitty, sign more premium talent.  Then win more, charge more, etc… The cycle feeds on itself in many cases, but mismanagement usually knocks it off-kilter after a while.  Worse yet, the underdogs have no way to break into the cycle.

For example, Andrew Bogut is a stud.  Basketball fans should have his name on the tip of their tongues, especially when it comes to naming the best centers in the league.  They don’t — and it’s not like he’s a mystery rookie from an unheralded program.

So why is Chris Bosh infinitely more well-known among casual fans (if you think I’m showing Buck bias, substitute Lamarcus Aldridge)?  It’s because Bosh shares the big stage with LeBron and Wade.  He’s on television ALL the time.

Bosh left Toronto when he had the chance.  And he didn’t choose self-imposed exile in Charlotte or Milwaukee, nor did he pick the NBA outposts of Sacramento or Minneapolis.

Good luck getting a top-tier free-agent to move to one of those Stern-forsaken cities.

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Tags: Competitive Imbalance David Stern Luxury Tax NBA Lockout NBA TV

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