Wednesday, November 9, 2011

Newsflash: 52.5% of zero is zero

We’re not NBA experts, but we are accountants, so let us breakdown some facts and figures that only accountants would think of when debating the NBA lockout:

The figures above assume the 2011-12 season would generate the same revenue as 2010-11, a conservative assumption knowing that NBA revenues have grown in recent years.

To date, the players have effectively spent $349 million to try and convince the owners to move the Players portion of BRI from 47% to 52.5%. As of yesterday, it looks like they’ve been successful in negotiating their way up to 50% BRI – a gain of $1,164,000 per game from 47% BRI. If the dispute was settled today and no further games were lost, the players will recoup their $349 million investment after 3.7 seasons. This of course ignores the fact that a dollar today is worth more than a dollar in three years.

Given that the Players only want a three year deal, they’ve already “lost” and any further “investment” is really just throwing good money after bad.

Hopefully the Players recognize this soon, hammer out a deal and get back on the court (sooner rather than later).

If the season is lost in order to fight for 52.5% BRI (or other “structural” issues), the players will have spent approximately $2 billion dollars in compensation to “gain”, in the most unlikely best case scenario of 52.5% BRI, approx $4.5 million per game. Even with these most improbable gains, it would still take the Players five seasons to recoup the investment of a single lost season. Again, the five season best case scenario ignores the fact that a dollar today is worth much more than a dollar in 5 years. Additionally, the average career in the NBA is less than 5 years, so the average player will never recoup their investment.

That’s the best case for the Players.

If they lost a year and ended up back at 50%, it would take almost 20 years to recoup the investment, even longer if the owners were successful in reducing it below 50%.

If this information was presented to the Players, and they ignore it, they deserve their fate. If, however, this information was not presented to the Players, Billy Hunter and Derek Fisher have completely failed in their responsibility to represent the average NBA player. The Kobe’s and LeBron’s will be just fine, but the 10th, 11th and 12th man on each roster, and the reputation the NBA has worked so hard to build, will get crushed.  Just ask the NHL or MLB...

For some additional perspective on the demands made by the Players, let’s compare the BRI percentage demanded from NBA players to the compensation ratio received by the set of employees most well-known for “excessive” compensation – investment bankers.

In what is arguably the most hated and reviled industry in the world right now, employee compensation during normal and prosperous times was typically set at or just below 50% of net trading revenues (effectively the same as BRI for investment banks). However, during the not-so-prosperous times, this ratio fell dramatically. As an example, the “poster child” for excessive compensation, Goldman Sachs, set its compensation ratio at 36% in 2008 and 2009 and 40% in 2010, after consistently setting it at 50% in years prior to 2008. So, in the midst of the Great Recession, the big, bad investment bankers received 35% of their employers revenue in compensation while NBA players received 57% of their employers revenue in compensation.

Everyone is to blame for this mess, the Players for their incredible demands and the Owners for being poor businessmen and previously agreeing to those incredible demands. The solution is easy to see – agree to disagree, split the difference (i.e. 50% BRI), and get back on the court. Meanwhile, the non-millionaire employees of the NBA and its individual teams, and the thousands of small businesses that rely on the NBA, are jobless, waiting for Players and Owners to decided if the average NBA salary should be a paltry $5 million or an excessive $6 million.

This debate is so focused on who’s going to win, and who’s to blame, that the easy solutions get ignored. Sound familiar?


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