Although it's unclear when the latest labor dispute between players and owners in the National Basketball Association will end, it's very clear that the owners will ultimately win. How can we be so sure?
Essentially this is an old fashioned stick-up.
The last Collective Bargaining Agreement (CBA) gave 43% of Basketball Related Income (BRI) to the owners. ESPN.com reports that the union has agreed to increase this percentage to 47% while the owners insist on 50% of BRI. So whether the two combatants end up with the owner's or union's position, the owners take money out of the player's pockets.
The union clearly prefers the owners getting only 47%. So should the union hold out for a better deal? It turns out that waiting doesn't work out as well as one might think. Larry Coon -- an expert on the NBA's salary cap -- laid forth the numbers last week.
The owners have offered the players 50 percent of BRI. This season's BRI is expected to be around $4 billion, so the owners are offering the players a $2 billion slice of the pie. The players are holding out for a 53 percent share, so they're looking for $2.12 billion.
That's $120 million that separates them. Of course, that's just in year one. Over the course of a six-year agreement, assuming four percent growth per year, the total is closer to $796 million.
To say "no" and wait means to suffer the consequences. ...If we use the 1998-99 lockout as a guide, a canceled game costs each player 1/82nd of his salary. A full NBA regular season lasts 170 days, so each missed week represents 7/170th of a player's income. So if a week's worth of games is cancelled because they say "no" to the owners' 50 percent offer, the players miss out on $82.4 million.
The players are holding out for an additional $120 million in 2011-12, but holding out costs them $82.4 million per week. They would lose everything they stand to gain this season in less than two weeks. On Monday the league is expected to announce the cancellation of the first two weeks of the season, which will cost the players $164.8 million.
Over a six year agreement, the players would burn through the $796 million in a little under 10 weeks. If they continue to hold out for 53 percent, and the owners hold firm at 50 percent, the players will reach the break-even point around December 16th. If the sides settle for 53 percent past that date, then the players would have been better off by taking the owners' offer of 50 percent before games were cancelled.
One might look at Coon's numbers and note that if games are not played, the owners will also lose revenue. Although that's true, the pace at which the owners lose is different. Players are paid evenly throughout the regular season, and when the season ends, the player's paychecks also end. Owners, though, keep earning money when the regular season ends. In fact, owners receive a significant portion of their revenue in the playoffs. Certainly the lucrative TV contracts are primarily about broadcasting post-season games.
That means that although the players are losing millions at the start of the season, the owners will be losing less. Therefore, if games are cancelled in November and December -- and resume in January -- the owners will essentially be making money.
So here is the choice the players have today: Agree to give the owners demand of 50% of BRI. Or wait and give up salary in November and December. Even if the final agreement is at that point closer to the union's position today, the owners still end up in a similar place to where the owners are at the moment.
In sum, heads the owners win. Tails the players lose.
And that leads us to wonder, how did the players end up losing these negotiations? Negotiations can be thought of as a contest. The owners entered this contest with the clear objective of taking money away from the players. For the players to win this contest they had to take some action that could threaten the owners.
One possibility was to go on strike last April. The players had to suspect a lockout was coming. Back in April, the players had the upper hand in the negotiations. The players had already been paid for the 2010-11 season while a significant portion of the owner's revenue had yet to appear. Had the players gone on strike in April, they could have demanded a CBA that would have been more favorable.
Once the playoffs had been played, though, the players no longer had the ability to call for a meaningful strike. At that point, they needed to get creative.
Back in July I suggested the players consider starting their own league (this call was echoed by Stuart Anderson of Forbes.com). Such a move would threaten the billions of dollars the owners make from the game of basketball and force the owners to lower their demands. But the players never made such a move.
With no threat to the owners, the owners merely had to wait. Again, if the players agree to the owner's current position, the owners win. Even if the owners agree to the player's current position, the owners are better off than they were last April. And if the players are locked out for a few months, the owners win even more.
One might think that a lockout might anger fans and threaten revenues in the future. Research I published with Martin Schmidt, though, indicates that fans are not able to carry through on their threats. Specifically, we found in a study of baseball, football, hockey and basketball that strikes and lockouts have no lingering impacts on attendance.
In sum, there appears to be no downside to the owner's strategy. The owners entered an alley with the players and said "this is a stick-up!" And the players learned they were unarmed. Now we just have to wait for the players to cough up the money. When that happens...
And the players will wonder why the bothered to wander unarmed into an alley with the owners.