<
>

Why the owners will win the lockout

9/20/2011

There was a brief glimmer of hope that Tuesday's bargaining session would yield some sort of progress. Amid hushed rumors over the weekend that the players would move on the financial issues if the owners would move on the structural issues, the session amounted to little more than a stare-down. Hopes for a compromise that would allow training camps to start on time were effectively dashed.

So much for that idea.

The owners are from Mars and the players are from Venus -- while the owners see a broken league in need of a huge financial overhaul, the players see one that needs just a few tweaks -- mostly on the owners' side -- before everyone can resume rolling in the dough. They get together occasionally to remind each other how high the stakes are, and point out the consequences should the other side fail to come down from its high horse. They have also exchanged snarls with each other in the media, and occasionally in the legal system.

So where is this all headed?

In this dispute ideology has trumped pragmatism, and both sides have been too entrenched in their own viewpoints to consider the kinds of concessions that eventually will be needed to bridge the gap ... er, gulf. We've reached the point where the lack of progress will have tangible consequences. Very little time remains before training camps are scheduled to open, and even if the two sides had a handshake agreement today they'd still need to get a lot of things done before opening the doors to the players. They'd have to finalize the details of the agreement, write the final draft, proofread it, sign it, distribute it to the teams, decide when free agency starts, and then hold an abbreviated offseason where players are signed and trades are completed.

If a deal isn't hammered out soon, then it's not good news for the players. The longer this lockout lasts, the stronger the owners' position becomes. The players can make it tough on the owners in the meantime, but they can't prevent the inevitable. In a game of tug-of-war, the bigger side wins. In this dispute the owners are the bigger side. Here are several reasons why the owners hold more of the trump cards, and the players need a deal sooner, rather than later.

Arguments in principle no longer matter

The two sides do agree on something -- the league really is losing money. But that's where the agreement ends. The league points to losses of $370 million (audited), $340 million (audited) and $300 million (estimated) over the preceding three seasons, and has shared its certified financial statements with the players to prove it. It's all kosher according to generally accepted accounting practices (called GAAP), and much of it represents money going out the door on an annual basis -- the cost of running the league.

The players contend that the league is more profitable than it has led us to believe, and say that certain categories of expenses should be excluded from these discussions. One of these is the interest payments on debt used to finance franchise purchases. It is common for some of the purchase price of teams to be financed, and the interest on this debt counts toward the team's bottom line. According to union president Derek Fisher, this interest totaled $130 million in 2010-11, and none of it should be the players' problem. Just as players aren't entitled to share in the profits when a team is sold, neither should they be saddled with expenses related to buying the team in the first place.

The players say that if you remove the expenses that don't apply to them, the losses are closer to $100 million than $300 million, and seven to nine teams, rather than 22, are really struggling. The players' proposals have reflected this interpretation.

The players say that acquisition expenses and operational expenses should not be mixed. The owners say that these are all variables in one big equation that allows the league to exist -- and hopefully turn a profit. To them it's all money that's going out the door, and the league isn't sustainable unless this money is accounted for. And the two sides have passed the point where the merits of either side's arguments are going to carry the day.

Nowhere else is the contrast between the two sides' positions so vivid. But we've already reached the point where such arguments in principle are irrelevant. Neither side is going to convince the other of the merits of its own logic. No one is going to have an epiphany and say "you were right about that."

Arguments in principle simply don't matter any longer.

The owners have more at stake

This one is simple. The owners have hundreds of millions of dollars invested in their franchises. For many owners, the difference between a favorable deal and an unfavorable one is the difference between turning a profit and continuing to pour in money, year after year.

The players were extraordinarily well paid in the previous agreement, and will continue to be extraordinarily well paid (relative to what they could make elsewhere) under the next agreement -- no matter how much it tilts in the owners' favor. And the new deal can be structured so that the lower-paid players have to sacrifice less.

Every measure of financial compromise costs individual owners more than individual players. Let's say the two sides are $300 million apart, and agree to split the difference -- giving up $150 million each. With 30 teams, each owner gives up $5 million. But with 450 players, an individual player gives up a third of a million.

The stakes are simply a lot higher for the owners.

Time is on the owners' side

In a battle between millionaires and billionaires, the billionaires will generally come out on top. The NBA owners are richer and have deeper pockets. They can better afford to drag their feet, knowing that even though the lockout hurts, the players will be hurting more.

It is also much cheaper to run a locked-out league. They don't have to pay the players 57 percent of their overall revenues. Jet charters? Hotels and meals for road trips? Gone, along with the expense of putting on the games themselves.

The league also gets a lot of its money in advance. Teams are still paid on their national TV contracts, and only have to pay back the money in arrears if games are missed -- which will be a problem after the lockout, not during. And they've already collected money from season-ticket holders.

Finally, the owners' window of time is much longer. The average NBA career lasts less than five years, but an NBA owner may hang on to his team for decades. Any losses from missed games and bad PR stemming from the current lockout can be made up over time through a more favorable agreement. This is not true for most NBA players. The lost salary from 2010-11 may never be recouped. These players stand to lose more in 2010-11 than they stand to gain by leveraging a better deal.

Players' conflict of interest: Current players versus future players

For the union leaders the goal is not simply to make the best possible deal for the current NBA players. They previously rejected a proposal which guarantees them at least $2 billion per year over the next 10 years, but decouples their salaries from revenues so that their overall share could fall to less than 40 percent in later years of the deal -- after most of the current players have retired.

So far they have refused to treat this negotiation like the national debt and pass the burden on to the next generation. But as the lockout progresses and the players begin to miss paychecks, dissent could rise. Players who stand on principle today could be faced with sacrificing a significant portion of their career earnings in order to protect future players who are now in grade school. Some players will put increasing pressure on union leadership to get a deal done in order to protect their own nest egg.

The owners are a more cohesive unit

In addition to the gap between current and future players, there are also demographic differences between richer and poorer players, older and younger, those playing overseas and those staying home, and there are outside pressures from agents and sponsors.

On the league's side it is said that there are two principal factions: longtime owners and newer owners who paid a premium for their teams, are heavily leveraged, and can't continue to operate without a significant financial overhaul. However, the owners have presented a homogenous and unified front behind David Stern, and can likely maintain it longer.

Over time, it is more likely that the players will succumb to the increasing pressure and outside interests. Splits may develop between players who are already set for life, and those for whom a lost season represents a huge portion of their career earnings.

The players need the owners more than the owners need the players

Where can the players make salaries that are comparable to what they can earn in the NBA, even with a deal that is favorable to the owners? Nowhere. FIBA leagues in Europe and China pay much less, and few jobs are available. China also won't allow players to return to the NBA should the labor dispute be settled midseason, which will prevent players currently under NBA contracts from playing there.

Starting a new league would present numerous obstacles. It is unlikely that an upstart league will consist of 30 teams and pay commensurate salaries, so there will likely be many players making much less than they made in the NBA, and many more players stuck on the outside looking in. A new league would have to find arenas in which to play, along with new sponsorships and TV contracts.

More importantly, a new league would need to secure a great deal of financing. Any potential owner faces a great risk to his capital should the NBA open its doors and resume business. Financing an upstart league might be too risky for any investor.

A new league also would be faced with the same issues that plague the NBA. In addition to paying the players, the new league also would have to cover expenses. There is no reason to think that such a league wouldn't be faced with the same choice between dealing with operating losses and playing its players less.

While the players need these 30 teams, the owners consider these 450 or so players to be mostly fungible. With an average career length of about 4.7 years, players are replaced on a regular basis. The exception is star players, around whom the league is marketed, and who tend to have much longer careers. These players are not so easily replaced, and losing them could have significant and long-lasting effects.

However, league executives don't necessarily concur. "This is much less a star-driven league than you think," said one. Another echoed the same sentiments, telling CBSSports.com, "They won't make squat and no one will remember who they are in a few years."

But it's not all one-sided

These factors all point to an eventual deal that significantly favors the owners. But that's not to say that in this game of tug-of-war, the players aren't going to put up a struggle. The players have been here before, and are better prepared this time to withstand a prolonged work stoppage.

The players successfully used the element of surprise in 1964, telling the league just two hours before the All-Star Game that they wouldn't play unless the league agreed to put a pension plan in place. The league returned the favor in 1998, giving the players just three months' notice that it was reopening the 1995 CBA. This time the players are ready, and the union has been telling players for two years that they must curtail spending and save money in preparation for what could become a year without NBA basketball.

The players were also helped by a windfall resulting from the terms of the 2005 agreement. In order to meet its 57 percent guarantee the league had to refund the entire $162 million escrow balance, and supplement it with a check for $26 million, payable to the players it was locking out. The players' war chest is further strengthened by money that continues to come in, in the form of endorsements and overseas salary. A few players even had the foresight to negotiate contracts in which some of their 2010-11 salary is deferred to 2011-12, so they will continue to receive a steady income during the lockout. Unlike the players of 1998-99, these players are hunkered down.

Some players were scheduled to receive salary in advance of the season (as early as July 1) and have already missed paydays, but for most of the league the regular pay schedule begins on Nov. 15, and those players won't start to feel the pinch until then. For this reason, many feel the league will continue to drag its feet until November before serious horse trading begins.

Countermeasures

In the meantime, the players haven't been content to just sit around while time continues to slip away. They have filed a charge with the National Labor Relations Board (NLRB), contending that the league has not been negotiating in good faith (among other things). The NLRB has finished its preliminary investigation, and its initial briefs are expected soon. If the NLRB finds that the charge has merit, the board can issue a complaint, initiating a lengthy administrative process that begins with a hearing before an administrative law judge. In the meantime, the NLRB can seek an injunction lifting the lockout pending the final resolution of the complaint. This injunction would force the league to open its doors, which would provide the players with a great deal of leverage.

The players know that even with a number of expenses (such as player salaries and travel costs) not being paid during the lockout, many expenses will remain. These include facility costs, front-office salaries, and interest payments on the league's enormous debt. If the work stoppage extends into the season, then the lost revenue from television, advertising, ticketing and concessions will make the problem worse. The league may be better equipped to withstand a lengthy work stoppage, but it'll be no picnic.

A prolonged lockout will have a lasting effect -- it will take a long time for the league to win back the fans it alienates. Both sides expect revenues to increase significantly over the next several years. The players feel the owners won't want to jeopardize this over what they largely perceive as a money grab.

The nuclear option

The players also have the option of decertifying the union, which would shift the arena of the dispute from labor law to antitrust law. Such a move would allow the players to challenge many of the league practices, including the lockout itself, as anticompetitive, and potentially subject the owners to treble damages (up to $6 billion a year) should the players prevail in an antitrust suit.

But Fisher and the union also see the downside to decertification. "When you choose to decertify, you give up all the things that have been negotiated and fought for," he said. "It's truly only there if we absolutely have to make that choice."

Decertification will become a viable option as games are canceled and the entire season is jeopardized, when continued negotiation is increasingly perceived as a dead end. Even the threat of decertification provides the players with negotiating leverage -- the league has filed a federal lawsuit asking the court to declare that the lockout does not violate antitrust laws, and that the players' contracts would become null and void should the players decertify (the league filed its own charge with the NLRB at the same time).

While many legal experts believe this lawsuit has little chance to succeed, it does send a signal to the players that there may be serious consequences if they vote to decertify, and it may delay or dissuade the players from a decertification vote.

Where we're headed

With increasing murmurs that the players' confidence in his leadership is waning, Billy Hunter is now in the hot seat. Some agents may be ready to lead a charge to decertify the union which would end Hunter's tenure as lead negotiator. With both time and his grip slipping away, he may be in a now-or-never situation for negotiating an amicable solution.

If the union hasn't already decertified by then, the pressure will greatly increase by Nov. 15, when most players begin to miss paychecks.

Around mid-January it probably will become necessary to cancel the entire season. The sides reached this point in 1999, barely salvaging an abbreviated, 50-game campaign. This time around it is unclear if the two sides will be able to salvage even a partial season.

The bottom line is that the NBA is no longer a league where wealthy owners with plenty of money to spend can use their teams as playthings. Recent purchasers have paid hundreds of millions of dollars, have financed significant portions of their acquisitions, and are operating on much thinner margins. These owners don't want to operate a league that continues to lose significant amounts of money. A compromise deal that does not significantly tilt the players' revenue guarantee in the owners' favor will be unacceptable.

On the other hand, these owners didn't invest hundreds of millions of dollars to let their arenas sit empty. An underlying assumption is that the players will begin to fold once they start missing paychecks. But what if they don't? The owners would have two alternatives -- the first is to continue the hard-line stance, banking it all on the union eventually breaking. This may be the only way to get the significant changes they are seeking.

The other alternative would be to become more conciliatory once it is clear that the season is in imminent danger and the players aren't going to fold. If the season is going to be salvaged, then this course of action may be necessary. If we get to January and neither side is willing to budge, then there likely won't be a season.

This leaves a short window to do what inevitably will be done if we are to have a season -- hammer out a compromise deal. If the two sides get it done now, they can avoid the loss of games. If they wait until January, then the lost revenue will never be recouped.

Through it all, NBA fans will continue to be the ones caught in the middle. And like a child caught in a divorce, they could care less about who's right or who wins.

They just want mommy and daddy to stop fighting.

Author's note: A couple months ago I assembled a team of financial and legal experts to help me parse through the league's financial documents and make sense of the financial issues that underlie the labor dispute. They contributed greatly to my previous article on the lockout and continue to donate their time and expertise. I am greatly indebted to them for their contributions.

Larry Coon is the author of the NBA Salary Cap FAQ. Follow him on Twitter.