NBA lockout and business of sports

I’ve thought for a long time that coverage of sports would be markedly improved if it brought in a different group of reporters.  The standard reporter loves sports and has a journalism degree, which is all well and good, but it results in a limited perspective.  My two years getting a masters degree in business has made a huge difference in how I view and think about sports.

A good example of what I have in mind is this excellent interview between Steve Aschburner and a renowned economist who is assisting the players in the NBA labor negotiations. http://www.nba.com/2011/news/features/steve_aschburner/10/27/lockout-q-and-a-kevin-murphy/index.html  The whole thing is well worth reading if you are interested in professional sports, but I want to focus on two points in particular.

First, the revenue percentage that the players were looking for (57% in the expired deal, 52% is their current position against managements 50%) didn’t strike me as very high.  Having worked in service businesses on the financial side I know that compensation costs with the firms I’ve been involved in all ran higher than that, although I realize you’d have additional compensation costs that would have to be added to the players in order to get the total.  The economist makes the same point:

NBA.com: Many people understand that NBA players as a select group of specialized, highly skilled workers. Are there many many instances, though, in which labor commands more than 50 percent of an industry's costs?

KM: In certain sectors, there's a ton. You go to a law firm, most of its cost is labor. You've got to remember, labor is 60-something percent of the economy. In the service sector, it can be much higher than that. And these people really define the product. These are the ones people come to see.

What separates the NBA from a different basketball league? Well, it's the players. The basketball's' the same, the court's the same, it's the players who really are the distinguishing feature. That's not to say that the league doesn't have value. But the defining characteristic and the scarce resource, if you think about it from an economic point of view, is the talent. It's not unlike Hollywood, the music business or any of the other ones where the thing that distinguishes one person from another is the talent.

Second, when you hear that most of the franchises are losing money you tend to lean a bit towards the owners.  But then you see that people are still willing to pay record prices when a franchise is sold and wonder what is going on.  I think a big part of it is that these aren’t normal businesses but rather a mix between a business and a rare luxury good.  It’s been a while, but I seem to recall from reading Buckley’s books on sailing that owning a yacht was a money losing venture too.  So what?  That doesn’t mean people aren’t going to want yachts.  I don't know, but I doubt people make money from a membership into Augusta National. How many people knew or cared about George Steinbrenner before he owned the Yankees?  Or Mark Cuban?  Here again the economist makes a similar point (after going through the franchise appreciation benefit) he says:

KM: Secondly, it's a lot of fun to own an NBA franchise...

NBA.com: The "psychic benefits" Malcolm Gladwell touts.

KM: The psychic benefits are not trivial. Third, there are benefits outside basketball. Like who got a casino? Who got a land deal? Who got real estate? You start looking around, you say, 'There's a lot of benefits to being an NBA owner." You put all those pieces together, it explains why those people spent all that money for those franchises.

We are told all the time that sports is a business.  True enough, but we need to keep in mind that it is a very particular, peculiar business so that easy generalizations from what we think we know about the business world are likely to lead us astray.