David Stern and the NBA's owners claim the league lost nearly $400 million last season. Consequently, Stern argues that significant changes need to be made to the league's collective bargaining agreement. Specifically, players are going to have to accept less money.
Stern's comments sound familiar to those who have studied the history of professional sports. In 1879, the National League released the following statement:
The financial results of the past season prove that salaries must come down. We believe that players insisting on exorbitant prices are injuring their own interests by forcing out of existence clubs which cannot be run and pay large salaries except at a personal loss.
Yes, professional sports leagues have been worried about the salaries paid to players for more than a century. This history leads one to greet Stern's proclamations with some skepticism. Certainly Billy Hunter -- the head of the NBA players union -- doesn't accept the NBA's numbers. Or at least, words like "doesn't hold water" give us the impression that Hunter and Stern don't see the NBA's financial future the same.
Obviously the incentives of Stern and Hunter would lead them to see these numbers differently. The fans of the NBA, though, are motivated by a different concern. Fans would like to be able to pay less to go to games. And some might think that if the owners achieved their objectives (i.e. were able to get the players to play for less), ticket prices could come down.
In fact, President Obama made such an argument just a few weeks ago. Marv Albert asked the president what he would do if he was the commissioner of the NBA for a day:
The biggest change I'd probably propose right now is the commissioner needs to figure out how to price tickets so that ordinary people can go to the games. I mean, I think that ticket prices have gotten so high, and I understand that salaries are high, ticket prices are going to be high, but you know, you hate to think that the only person that can go to a game is somebody who's got a corporate account.
The president's argument reflects the beliefs of many fans. People seem convinced that higher player salaries have caused higher ticket prices. This belief, though, reverses the actual cause and effect relationship.
Ticket prices in the NBA -- like prices in general -- are driven by supply and demand. But supply in the NBA is essentially fixed. Teams play 41 home games each season. And because the size of the arena changes infrequently, the number of tickets available each year doesn't change much.
This means that prices are primarily driven by demand. Across time, we see that the number of people interested in basketball has increased. Furthermore, these people have higher and higher incomes. As a result, the prices teams can charge to fans have increased.
The increase in prices -- coupled with increases in other revenue streams (i.e. national television) -- has given teams more money to spend on players. And as a consequence, the salaries paid to players have risen over time.
Imagine, though, that the world worked as fans believed. We would then have to ask why players like Larry Bird and Magic Johnson were paid so little. The NBA recently announced that the salary cap in 2010-11 would be $58 million, a small increase over the $57.7 million cap that was in place for the 2009-10 season (such an increase suggests the league is not quite in as bad a shape as Stern claims). Back in 1984-85, though, the cap was $3.6 million. And players like Bird and Magic were only paid $1.8 million and $2.5 million respectively.
Magic produced 24.3 wins for the Lakers in 1984-85. And Bird produced 27.6 wins. To put those numbers in perspective, LeBron James led the NBA in 2009-10 with 27.2 wins produced (see Stumbling on Wins for how this is calculated). LeBron, though, was paid $15.8 million dollars last season. If the story told by fans was true, we would have to wonder why Magic and Bird simply didn't ask for more money 25 years ago. Both players should have demanded at least $15 million from their respective franchises. And if the Celtics and Lakers said they didn't have the revenues to pay such wages, both players should have simply demanded that each team raise ticket prices and charge more to networks to broadcast the NBA's games.
Actually, why should these players stop at $15 million? Why shouldn't NBA players like LeBron demand that the collective bargaining agreement be re-written so that King James can demand $100 million? Or how about $1 billion? Again, if you believe that salaries drive ticket prices, there really would be little to limit the salary demands of athletes.
Again, in reality it is demand for the game that drive ticket prices and ultimately player salaries. That tells us that the owner's attempt to reduce player salaries in the NBA is not going to change the prices charged to fans. If Stern is successful, all that will change is the profits earned by owners.
And that is ultimately what the current labor dispute in the NBA is all about. NBA owners would like to earn more profits. Lowering the prices they charge to fans is simply not consistent with that objective. As long as people are willing to pay the prices the NBA is charging, you can expect to see -- regardless of how the current labor dispute plays out -- ticket prices to remain higher than the president and other fans would like.
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