Reasons to Be Optimistic About the NBA Lockout

The players and owners could still come to a compromise before the collective bargaining agreement expires tonight



The NBA looks like it is about to follow the NFL into work stoppage limbo when its current collective bargaining agreement expires tonight. Most reports on the negotiations have the two sides far apart, and pessimism is bolstered by the NBA Finals. Although it was a ratings and dramatic success, both of the finalists—the Dallas Mavericks and the Miami Heat—employed roster construction strategies that are beyond the budgets of most teams.

Yet there are reasons for optimism. The two sides are not as far apart as they seem, and while the last NFL work stoppage took place nearly a generation ago, the lead actors in this NBA drama were present in 1998, when a lockout cost the NBA almost half a season and a tremendous amount of its popularity.

Cost certainty is at the core of most sports labor negotiations. Most team owners buy their franchises as a means of building their brand as successful businessmen. Nearly all entry level investment advisers could show you better, faster, more secure returns on a few hundred million dollars than owning a sports team. Once these owners discover the cost of owning a team—and there are nearly a half dozen new ownership groups in the NBA since the last CBA was signed—and that player salaries are the primary outlay of revenues, then these changing the salary structure becomes a priority. On the other side, players want as few limits as possible to maximizing their earnings potential from their brief time as an elite athlete. That's why nearly every CBA negotiation is so contentious.

The NBA negotiations this spring and summer have been no exception. Few doubt that many NBA teams are in the red, but how many and why are questions that split down party lines. The players contend that standard accounting tricks result in red ink for a majority of teams with bottom line difficulty, and place the number of money losing teams at 10. The owners point to the salary structure and estimate that 22 teams are under water financially.

It isn't the top salaries that are the biggest problem; that was settled in the 1998 negotiations. One major cause of the 1998 lockout was that Kevin Garnett, then an emerging star with the Minnesota Timberwolves, rejected a $103 million contract extension and signed for $126 million; this led to a maximum contract clause in the CBA. This time the problem is that many marginal players are making money well out of proportion with their value. For instance, four of the eight highest paid players in the NBA, Rashard Lewis of the Washington Wizards, Andrei Kirilenko of the Utah Jazz, Michael Redd of the Milwaukee Bucks, and Gilbert Arenas of the Orlando Magic, are either subpar players or so often injured that their teams can't count on their production. Each makes more than $15 million a year, and in the NBA nearly all contracts are guaranteed.

The early proposals put forth by the owners called for a hard salary cap of roughly $50 to 60 million per team; this would replace the existing model which allows for substantial exceptions, especially for a team to re-sign its free agent players and for teams over the cap to add an additional player or two (Larry Coon has an excellent FAQ about the current NBA salary cap here). The Mavericks payroll sits at $91 million, almost half again more than the current cap. For this indulgence the team pays a luxury tax of approximately $20 million, which is distributed to those mostly smaller-market teams whose payroll is beneath the cap. Imposing a hard cap, even phasing one in would be completely impractical as it would force many teams to cut a starting a player and some teams like the Magic and Los Angeles Lakers would have to lose three or four, This would also eliminate guaranteed contracts, a concession that no player's union is likely to make.

These issues may seem intractable (here is a breakdown of them) but there is middle ground. The NBA brings in roughly $4.2 billion annually, and the split of those revenues between the players and owners has been 57/43 in the players' favor. The first proposals from the owners would have more than reversed that split—which, to no one's particular surprise, brought forth invective from the players. While the two sides remain apart on the details of the agreement, they have moved much closer on the fundemental issue of guaranteeing an equitable split of the revenues. I think that if they see a middle ground on the split by the Thursday midnight deadline, then they will extend it, and work out the details over the holiday weekend. Overall there is enough wiggle room on all the issues that several bloggers and veteran NBA observers have created their own agreements that merit reading. This one from Tim Donahue of Eight Points Nine Seconds favors the plight of small market teams. This one from NBA reporter David Aldridge is more moderate.

My optimism is further supported by history. The NBA was at a peak of popularity in 1998. Michael Jordan's second retirement, which followed that season, cost the league some fan interest, but ratings and attendance dipped much more substantially than it did during the legend's first hiatus from the game. Most of the drop can be attributed to the lockout that wiped out nearly 40 percent of the regular season and resulted in a rough and tumble 50 games in 13 weeks schedule full of poorly played basketball. After negotiators missed their June 30 target and the league imposed a lockout, a deal wasn't reached until January 18, when the possibility of canceling the entire season loomed. It took the league more than a decade to regain the popularity it had before the lockout. Many of the principals players in these negotiations were party to or at least present to the labor strife of 1998. I doubt any of them want to repeat it.

Once a lockout goes into effect, the latest offers go off the table, and the owners would be smart to wait until at least mid November to see if the players position softens once the rank and file begin losing paychecks. Thus the gloom and doom folks have reason to worry that the season is in jeopardy if an agreement isn't reached soon. Eighteen months of negotiation have brought us this far; starting over in November won't be a promising scenario.

The NBA Players Association and the team owners are almost close enough on the big picture issue of splitting the overall revenues to split the difference. If they did, working out the mechanisms of that split would be a formality. But, one important hedge is to remember that one side consists of young men who have made many millions of dollars playing a game, and the other is comprised of men who expect profits from business that often deliver a poor return on investment. Forecasting those two groups to compromise in their rationale self interest may be asking too much.