Published October 21, 2011
By flirting with a significant loss of games or even a lost season due to the lockout, the National Basketball Association threatens to bring last year’s impressive momentum to a screeching halt and could even be doing serious damage to its brand.
Yet the current NBA lockout is aimed at fixing the league’s business model, which has seen more than 50% of its franchises lose money amid the tough economy and only the richest teams competing for championships.
These competing forces highlight the careful balance in work stoppages in the sports world between short-term negative outcomes like a dip in ratings with long-term efforts to regain economic stability.
“It’s a constant cost-benefit analysis for a league to consider a work stoppage,” said Robert Boland, a sports business professor at NYU and former player agent. “Is what you will gain from improved labor costs worth the amount you will lose to get there?”
Economy Fuels Losses
The current NBA lockout is complicated by two crucial factors: the nation’s economic doldrums and last season’s success.
NBA owners appear to be more willing to push the players to the brink of a lost season because of the weak economy, which has caused consumers to grow reluctant to spend on tickets and merchandise and businesses to hold off on big purchases like luxury suites.
According to Forbes, 17 of the league’s 30 teams lost money last year, led by the Orlando Magic, which lost $23.1 million, and the Charlotte Bobcats, which bled $20 million.
Franchise values stood at $369 million on average, down 2.6% from their $379 million peak two years earlier. The value of the Detroit Pistons and Cleveland Cavaliers tumbled 25% and 26%, respectively. Last year also saw the NBA take over the money-losing New Orleans Hornets to avoid a firesale or even a bankruptcy.
By comparison, just two of the NFL’s 32 franchises lost money last year and the average franchise value rose 1.4% to $1.04 billion, Forbes said.
However, the work stoppage paints an ugly picture during from a public-relations standpoint: While many Americans fear for their jobs, millionaire athletes battle billionaire owners over how to share a $4.3 billion pot of money.
“I think both sides do worry about the optics,” said Russ Granik, former NBA chief operating officer and a current vice chairman at boutique investment bank Galatioto Sports Partners.
It’s clear the NBA enjoyed one of its strongest seasons in recent memory last season as the sports world obsessed over a whirlwind free agency period that saw LeBron James transform into a villain overnight by ditching his hometown Cavaliers and teaming up with a pair of superstars in sunny Miami.
Game 6 of the NBA Finals, which was broadcasted on Walt Disney’s (DIS) ABC and saw James’s Heat fall to the Dallas Mavericks, drew the highest television rating for a Game 6 since 2000 and 22% higher than the year before. The rating was the third-highest for a Finals game since ABC began televising the series in 2003.
“I do think there is a particular concern this year because the momentum seemed so good. The level of play and the way the games were played seemed to hit a new high,” said Granik.
Understandably, the run-up to this year’s potential NBA season is creating significantly less buzz this year. According to NM Incite, online buzz about NBA teams during the two weeks of preseason on blogs, message boards, online news sites and public posts on Twitter and Facebook has plunged 31.2% year-over-year despite a rise in buzz about general topics.
“The thing that is a killer about any kind of work stoppage: if you are a league with positive momentum a work stoppage absolutely shuts down any momentum you’re having,” said Boland. “If you were about to add $1 billion in revenue, suddenly you didn’t do that."
Still, to this point concerns about how to divvy up league revenue have trumped short-term worries about momentum.
“When it comes time to a fight over that pie -- particularly this pie at this time -- that takes priority,” said Charlie Grantham, former executive director of the NBA Players Association. “The negativity of the loss and the impact on the brand become secondary.”
Will the NBA Follow the NFL's Labor Blueprint?
It remains to be seen whether the NBA decides to take a page out of the playbook of one of its sports world peers.
It could follow the NHL, which lost the entire 2004-05 season. Even though that work stoppage did serious damage in the short-term to hockey's popularity and leave it with a shrunken footprint, it also seemed to fix the league's longer-term economic flaws.
“It was tough medicine for everybody and the effects hurt some in the years after, but ultimately the revamped model really helped save the day for their business,” said Lee Berke, CEO of consulting company LHB Sports, Entertainment & Media.
For the NBA, wiping out a whole season would risk losing fans and ad dollars to other options such as competing sports. According to Nielsen, TV advertising totaled $411.99 million last regular season and $405.89 million during the playoffs.
“If you’re out for a long period of time it could do damage, but if you remain in business under this current model, it could do significantly more damage,” said Berke.
While the first two weeks of the season have already been scrapped, the NBA could try to mirror the NFL’s successful work stoppage, which didn’t cause a loss of any regular season games.
Of course, these are tough comparisons to make because owners in the NBA and NHL -- unlike the NFL -- were losing money when they locked players out.
Repeat of '98 Lockout?
Hopes have been raised in recent days of a quick resolution as the owners and players have huddled for a series of marathon talks. While the players have agreed to cut their share of basketball-related income from 57% to 43%, the owners are calling for 47% and a hard salary cap.
Grantham said he believes that if progress continues, the two sides may be within “maybe 10 days of a deal getting done.”
It appears the owners have time on their side because they don’t depend on the revenue stream they receive from the NBA. However, players are losing paychecks for each game that gets canceled -- money they will never see returned.
“For the NBA owners, a war of attrition is helpful to them strategically. If they are losing money, this prevents their loss,” said Boland.
Boland sees a 25% to 50% chance of a lost season and said if he was representing a free agent that needed to make money, he would recommend they sign a full-year contract overseas, as several players have already done.
Others believe an agreement may be reached in the coming weeks in an effort to salvage the season’s final 50 games and perhaps the crucial Christmas Day games that draw huge amounts of viewers.
“Whatever damage that happens will be erasable as long as they come back in a relatively short period of time,” said Berke.
Both sides may be hoping for a repeat of the 1998 season, which saw a cancellation of the first 30 games but a quick rebound for the sport, in part thanks to the final season of Michael Jordan’s championship run with the Chicago Bulls.
“They came roaring back and ultimately everything was great,” said Berke.