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December 1, 2015

The NBA is headed for Financial Problems

By EconMatters

 
Distressed Cost Structure

The NBA has been a distressed business since the glory days of the “Bird-Magic” and “Air Jordan” era. It really suffered at the gate with the downturn in 2008 due to the financial crisis, and judging by early attendance numbers this year coupled with irresponsible and out of control cost structures on the player side of the equation for the past 5 years the NBA is badly in need of a financial restructuring to better align their costs with their profits.

Gold Rush Free Agency Mentality

Player salaries have been steadily rising due to poor mismanagement practices by ownership and a free agency process where the players hold all the cards. The Super Star players like Lebron James set the ball rolling for free agency with his Decision Circus which lifted all boats and had incompetent General Managers around the league seemingly caught in a Gold Rush Hysteria giving max contract deals for role players like Carlos Boozer. It isn`t really the Super Star players getting max contract deals which is hurting the league`s finances as much as the average to downright mediocre players receiving huge fully guaranteed contracts which are often so bad that the teams end up just writing off the contracts and cutting the players loose with several years left on the contracts.

Poor Incentives in Place for Winning

The poor mismanagement by ownership of these franchises is one factor, the other is the actual product on the court, and a broken business model. Unlike the NFL where in any given year many teams legitimately have a chance to win the Super bowl, in the NBA in a good year only 4 or 5 teams legitimately have a chance to win an NBA title. The rest of the teams are either purposely losing due to a poorly constructed ‘Drafting Incentive Plan’ purposely tanking to gain a better percentage chance in a lottery process, or putting a poor product on the court with no chance of winning an NBA title. This year it is even worse with basically only 3 teams having legitimate chances of winning an NBA title, and all the rest looking like poorly constructed versions of fantasy basketball teams with major shortcomings.

The Houston Rockets

An example of how even the better general managers around the league are pretty awful at controlling costs is the situation with the Houston Rockets. Daryl Morey GM of the Houston Rockets who has been cost conscious in the past avoiding some of the pitfalls of routinely giving bad contracts to substandard to average players has even fallen into this Gold Rush Mentality of the Free Agency Madness.

This offseason Daryl Morey gave a backup point guard $6 Million per year in Patrick Beverley who averages 5 points a game, he also gave another role player in Corey Brewer $8 Million per year to average 6 points a game on 31% FG shooting, he gave $3.3 Million per year to an unproven second round K.J. McDaniels who averages 1 point a game, and acquired Ty Lawson`s $12 Million salary in the offseason and is averaging a robust 7 points a game. The Houston Rockets are already committing over $22 Million per year guaranteed to Dwight Howard who averages 13 points a game and $16 Million per year to James Harden who averages 29 points a game but refuses to play defense, and is a team morale killer who already quit on a coach getting Kevin McHale fired.

Make no mistake the NBA is a player`s league, and that is going to be its downfall, the inmates are officially running the asylum. The players make so much money, and the ownership has poorly negotiated with the player`s union, where unlike the NFL players who are cut due to poor performance with substantial non-guaranteed portions of future salary obligations, the NBA teams have to eat the entire guaranteed contract regardless of performance on the court.

Catch-22

The catch-22 for ownership is once they are in this position is that they cannot fire the players, so the coach must always be the one to get fired. This further undermines any coach as the players realize they run the show. Accordingly they put effort forth on the court when they feel like it, and the coach has no real authority over the players to command effort on a nightly basis. And given that most of the teams have no realistic chance of competing for an NBA title, often times NBA players just mail it in from an effort standpoint, further undermining the quality of the product for the fan base which ultimately hurts season ticket sales.

Network Deals & On Demand

The only thing that has saved the NBA so far has been a large broadcast right`s deal with the networks in the ‘thought that content was king’ bubble, that other than the NFL, is now showing signs of severe hubris as major cord cutting is even affecting sports programming providers like ESPN as subscribers bail due to the rising costs. The NBA owners have been spending like drunken sailors expecting these huge television deals to continue into perpetuity, and they are in for a rude awakening come negotiations over the next television rights packages. On Demand is eating into everyone`s pie, even sporting events, with only the premium live events able to command higher advertising rates going forward.

Global Competition for Viewers

Plus with the emergence of global television, Soccer and other sports are much more competitive even for viewership in the United States. And given the poor quality of product, often subpar effort on the court with mismatched incentives, and most teams having little chance of winning an NBA title - the NBA is in dire need of restructuring from a management, product and costs standpoint. Just watch NBA games and look at the number of empty seats each night around the league and compare this to college football games.

NBA Rosters & Bad Salary Deals

All one has to do is look at almost any NBA roster to find ridiculous contracts where the salaries don`t match the player`s performance on the court. Every NBA team is saddled with these hefty fully guaranteed financial ‘lemons of contracts’ due to incompetent general managers and poor ownership decisions with regard to running the franchise. The players run the show, and have for the last 10 years, and the product is being run into the ground as a result of a poorly handled Draft Incentivization Plan, and incompetent negotiations with the player`s union over the years by the Executive Management Team of the NBA.

Brand Building is often more important than Winning in Basketball – “The Beard”

In fact, the players today care more about building their brand so as to secure a huge shoe deal than about actually winning games. Case in point is James Harden`s $200 Million shoe deal with Adidas or dating a Kardashian, and the Rocket`s having a top 10 Team Salary Obligation of $90 Million, and a bottom 10 Winning percentage of 0.389! There is hardly any incentive at all for James Harden to actually play hard on defense when he has already cashed in on his brand!

This is why when a team actually plays good team ball like the San Antonio Spurs or the Golden State Warriors and plays hard on defense it is such a shock to the system, and a huge advantage over the other NBA teams. This serves as an outlier event as opposed to normal behavior, and thus why the NBA routinely puts forth such an uninteresting and noncompetitive product on a nightly basis across the entire league!

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Item Reviewed: The NBA is headed for Financial Problems Rating: 5 Reviewed By: EconMatters