Why don't the players just fold?
To a lot of observers, that has been a big question hanging over these talks. The NFL players star in a far more lucrative league than the NBA, and they took pay cuts along the lines of what NBA players have been offered. NHL players took a far worse deal.
So what's with these NBA guys? Why don't they know they're beat? What leverage could they have?
The Players Association has finally made their brilliant economist, Kevin Murphy, available to explain, which he does very well in a talk with NBA.com's Steve Aschburner. The whole thing is must-read. After explaining that he grew up a Laker fan but converted to the Bulls in Jordan's heyday, he gets down to politely dressing down many of the NBA's arguments.
Past 4 a.m. Thursday morning Murphy was waiting for a car to the airport to teach a class for students at the University of Chicago. On NBA.com, he's teaching a class for lockout junkies, succinctly describing the key issue of the IRS benefits team ownership. He starts by asking: If NBA teams are such bad businesses, why do so many smart rich people keep buying them?
Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you've seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you've had. And if you're in the right tax position, it's actually pretty good because you've got a tax loss annually on your operating and you've got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that's not a bad deal.
Let's say the NBA is a $4 billion revenue business -- that's not exactly right but it's close enough. Then let's say you lose $200 million. That's 5 percent. OK, my franchises are worth -- let's make it simple, 2½ times revenue, which is well below Forbes [valuations] -- that's $10 billion. Now let's say it's appreciating at 4 percent a year. I'm getting $400 million in appreciation even though I only have $200 million in losses. I'm getting better tax treatment on the $400 million that I'm making, and I deduct at a higher rate the $200 million that I'm losing. Suddenly this picture doesn't look so crazy any more.
Then he talks about how the last few years are a poor basis for a long-term plan.
The fact is, guys have not done well over the last few years as asset prices generally have gone down. I don't doubt that. But to say that you lost money in the worst asset crash in memory -- and franchises haven't gone down nearly as much as many assets have gone down -- that's not telling you you need concessions going forward.
If you go back before the last 3-5 years, these guys did incredibly well. Their franchises weren't going up by 4 or 5 percent, they were going up by 8 or 9 percent a year. They were making money hand over fist. Should [the players] get credit for that? Should we get that money back? Now those are different people in some cases. They need to go get their money from the guys they bought the franchises from. That's the guy who has all your money. Not us.
But who bought anything in '07 that they're happy with the price they paid? If you bought a house in '07, if you bought stocks in '07, if you bought bonds in '07 -- I don't care what you bought, you're not happy with the price you paid. When you buy at the top, you don't make your money. That's not unique to the NBA, that's everywhere in life. But by and large, NBA franchise ownership has been a good investment. You can't base long-run projections on how you did in the biggest financial downturn of the last 50 years. On that basis, there are no good investments out there. But we know that's not true.