Should Sports-Team Owners Expect to Lose Money?

If the NBA is going to be a cartel, it should at least be the kind of awesome cartel that aims to support all fans -- not just the lucky ones rooting for teams under benevolent billionaires

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The NBA is locked out over how to divide money between players and owners. Malcolm Gladwell has advice for the guys in the suits: Give up the act. Basketball isn't a business.

It's certainly not a typical business. The bosses are each worth more than $100 million. They organize like a cartel. The key employees, most in their mid-20, often make seven figures a year. They are "owned" to a degree that would make a junior accountant cry "indentured servitude." Labor mobility is determined by talent drafts, ironclad contracts, and abrupt trades. The customers are minimally price-sensitive.

With all that in mind, Gladwell suggests we chuck Microeconomics 101 out the window. He says owning a basketball team should be like owning a painting: Something rich people do for both the money and the psychic benefits.

"The big difference between art and sports, of course, is that art collectors are honest about psychic benefits," he writes. "They do not wake up one day, pretend that looking at a Van Gogh leaves them cold, and demand a $27 million refund from their art dealer. But that is exactly what the NBA owners are doing."

Greed is endemic in professional sports. But the NBA lockout isn't just about how much money ends up in the owners' pockets. Like any economic system, basketball's collective bargaining agreement creates incentives that determine how consumers (in this case, fans) experience the game.

In the current CBA, the incentives stink. They keep the best players in the richest markets (or under the richest owners) and make it almost impossible for smaller cities to compete on a long-term basis. Take for instance the "soft" salary cap. Salary caps exist to keep teams equal. If Warren Buffet buys the Washington Wizards, you don't want him paying $1 billion each to LeBron James, Dwight Howard and Chris Paul. So the NBA (like the NFL) applies an overall cap to team salaries to improve parity.

In the NBA, there are all sorts of exceptions to the cap that allow rich owners to spend more than double the official limit of $58 billion. Under the "Larry Bird Exception," for example, teams can re-sign players without counting their salaries above the cap. This means that deep-pocket teams (Boston, New York, LA) that draft great players find it easier to keep them, while poorer teams, like Minnesota, compete without such advantage.

If the NBA is going to work like a cartel, it should at least be the kind of cartel that provides high quality entertainment to as many fans as possible. Allowing a handful of teams to amass all the talent by spending 200% more than smaller markets is a bad way to build a national entertainment business.

The expiring CBA has other nonsensical details. Guaranteed contracts saddle teams with highly paid under-performing athletes that become albatrosses for the team and sap fan support. They should go. Revenue sharing should increase. Without dramatically changing the share of money reserved for players, these changes would still make the game better for fans, fair to players, and acceptable to owners.