8 replies to this topic

[hawksfanatic]

http://www.nba.com/2...rphy/index.html

He is a legitimate genius (MacArthur Grant), so its good to read. Some of what he says is something you may have heard before on this very own board...

[niremetal]

Interesting read, thanks for the link.

[AHF]

Two interesting notes.  One - I found it fascinating from a fan's perspective that this guy grew up with Magic's Lakers and then ditched them for Michael's Bulls when he moved from LA to Chicago.  That is interesting.

Two - He has worked as a advocate for the player's association for 6 years.  His view on the NBA's economics:

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Let's say the NBA is a $4 billion revenue business -- that's not exactly right but it's close enough. Then let's say you lose $200 million. That's 5 percent. OK, my franchises are worth -- let's make it simple, 2½ times revenue, which is well below Forbes [valuations] -- that's $10 billion. Now let's say it's appreciating at 4 percent a year. I'm getting $400 million in appreciation even though I only have $200 million in losses. I'm getting better tax treatment on the $400 million that I'm making, and I deduct at a higher rate the $200 million that I'm losing. Suddenly this picture doesn't look so crazy any more.

Let's take the Union advocate's position that teams are making, collectively, $200 in profits per year (recognizing that he admits that teams have lost equity value in addition to negative cash flow over the last 3-5 years).  That says on $4 billion in revenues the league is making $200 million in money.  It also says it is making $200 million based on $10 billion in assets.

That translates into a 5% Return on Sales and a 2% Return on Assets.  

Is that supposed to be an attractive business model?  That means if someone was going to borrow money to run this business that the cost of capital alone would outstrip the value of the returns.  That is not a sign of a healthy business.  Most businesses would be bankrupt with those numbers, but most businesses aren't owned by billionaires either.

By just loaning money on incredibly low risk projects out at 3%, that would be expected to return 300 million per year or 50% more than the return under Mr. Murphy's analysis.

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

That is definitely a big factor in why franchises command the prices they do.

I also thought this comment was bizarre - perhaps I am reading it wrong:

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Ultimately what it comes down to is, you get what you can negotiate. It's not what you deserve, what's "right," that ends up carrying the day. But then they ought to be straight up. They ought to say, "We've got the ability to negotiate. We'll hold your feet to the fire and get what we can."
The one thing I don't want to see happen: I don't want to see any lingering bad blood between the two sides. That's not good either. You run the risk that, if it gets too personal, that creates its own set of frictions going forward. I think people on both sides are cognizant of that.

I read this quote as saying:  Negotiations come down to leverage and what you can get, which I think is a truism that is true of nearly all negotiations.  Then he says:  "The owners ought to just come right out and say we are going to hold your feet to the fire and get what we can get."  
But if the owners come out and say that they are going to beat the players up in negotiations because they can, won't that generate the exact kind of personal bad blood he then says he hopes to avoid?  If either side tells the other side "I am holding a gun to your head and you are going to give me what I want" then that is going to generate incredible bad blood compared to achieving the same results more diplomatically.  If the Union during the last negotiations said, "You are going to give us a raise to 57% of BRI and lose money and asset value over the course of this CBA so suck it." the backlash would have been incredible.  Instead, they achieved that result without that level of resentment and bad blood.  So I am at a loss what he means by saying the owners should just come clean about beating the players around with leverage to negotiate a hard core deal.

Edited by AHF, 01 November 2011 - 10:13 AM.

[AHF]

Two more economists weigh in (this time ones that are not paid by either the owners or players and this time with less glowing credentials than Mr. Murphy).

http://www.grantland...the-nba-lockout

[hawksfanatic]

AHF, on 01 November 2011 - 10:10 AM, said:

I read this quote as saying:  Negotiations come down to leverage and what you can get, which I think is a truism that is true of nearly all negotiations.  Then he says:  "The owners ought to just come right out and say we are going to hold your feet to the fire and get what we can get."  
But if the owners come out and say that they are going to beat the players up in negotiations because they can, won't that generate the exact kind of personal bad blood he then says he hopes to avoid?  If either side tells the other side "I am holding a gun to your head and you are going to give me what I want" then that is going to generate incredible bad blood compared to achieving the same results more diplomatically.  If the Union during the last negotiations said, "You are going to give us a raise to 57% of BRI and lose money and asset value over the course of this CBA so suck it." the backlash would have been incredible.  Instead, they achieved that result without that level of resentment and bad blood.  So I am at a loss what he means by saying the owners should just come clean about beating the players around with leverage to negotiate a hard core deal.

I see what you are saying, but I'm giving Murphy the benefit of the doubt that he isn't contradicting himself. I believe those are two separate trains of thought. 1) Why play all these silly rhetoric games of "fair share" or "deserve" or "right" etc. and 2) At the end of the day don't be insulting and make sure there are no hard feelings.

AHF, on 01 November 2011 - 05:30 PM, said:

Two more economists weigh in (this time ones that are not paid by either the owners or players and this time with less glowing credentials than Mr. Murphy).

http://www.grantland...the-nba-lockout

Thanks for that link, I haven't seen this before.

Murphy is only paid by the NBPA during labor negotiations, while he may be biased he is at least knowledgeable (an understatement). I know of Cowen and no one takes him seriously. Cowen has done less than 0 in sports economics while his coauthor Grier hasn't done anything in sports economics since 1992 (even then he only ran regressions, his coauthor supplied the actual economics). All this to point out the vast difference in quality of actual economics going on between the two. To be more specific, I just can't take Cowen seriously when one of his main contributions is: http://tylercowenset...iningguide.com/

[AHF]

hawksfanatic, on 01 November 2011 - 07:25 PM, said:

I see what you are saying, but I'm giving Murphy the benefit of the doubt that he isn't contradicting himself. I believe those are two separate trains of thought. 1) Why play all these silly rhetoric games of "fair share" or "deserve" or "right" etc. and 2) At the end of the day don't be insulting and make sure there are no hard feelings.

I guess I see the two as linked.  The NBA uses that rhetoric to sell this to the public (i.e,. preserve their goodwill and the goodwill of their franchises) and to the Union (knowing that the Union doesn't care about this but also knowing it may make taking bitter news a little less insulting).

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Thanks for that link, I haven't seen this before.

Murphy is only paid by the NBPA during labor negotiations, while he may be biased he is at least knowledgeable (an understatement). I know of Cowen and no one takes him seriously. Cowen has done less than 0 in sports economics while his coauthor Grier hasn't done anything in sports economics since 1992 (even then he only ran regressions, his coauthor supplied the actual economics). All this to point out the vast difference in quality of actual economics going on between the two. To be more specific, I just can't take Cowen seriously when one of his main contributions is: http://tylercowenset...iningguide.com/

I do think Murphy's credibility is suspect in statement he is making to the media during negotiations when he is being paid by the player's Union and has represented them previously as well, but agree he is more qualified than these two.  Neither of them are offering too much in the way of insights by my thinking.  I don't get much out of their comments other than the fact that the owners have more leverage and there is a point at which the rationale move for the Union will be to cave if the difference is over 2.5% BRI.

[hawksfanatic]

AHF, on 01 November 2011 - 10:10 AM, said:

Let's take the Union advocate's position that teams are making, collectively, $200 in profits per year (recognizing that he admits that teams have lost equity value in addition to negative cash flow over the last 3-5 years).  That says on $4 billion in revenues the league is making $200 million in money.  It also says it is making $200 million based on $10 billion in assets.

You are ignoring the economic conditions around the years in question. Murphy points out the slowdown in equity growth for franchises (I don't see where he says they lost value), but also points out other assets have fallen in value. Saying that an NBA franchise only made 4% doesn't hold much value to me unless you tell me what the alternatives are. Murphy is also pointing out the fallacy of "what has happened in the past will happen in the future". Just because the NBA had slowed growth doesn't mean they will continue to have slow growth, the whole great recession had something to do with it (I guess one could imagine owner's operated under the impression of increased BRI growth and pegged their "other costs" to this so when BRI growth slowed this is how their costs appeared to rise...).

I don't see how this compares with a "start-up" at all though. A big incentive for the "billionaires" to own NBA teams is that they gain tax shelter for other projects they have. A "start-up" wouldn't have any incentive for a tax shelter. His other incentives are important too, although you will never hear me say "Psychic Benefit" as that is pure jibberish.

AHF, on 01 November 2011 - 07:30 PM, said:

I do think Murphy's credibility is suspect in statement he is making to the media during negotiations when he is being paid by the player's Union and has represented them previously as well, but agree he is more qualified than these two.  Neither of them are offering too much in the way of insights by my thinking.  I don't get much out of their comments other than the fact that the owners have more leverage and there is a point at which the rationale move for the Union will be to cave if the difference is over 2.5% BRI.

I don't see how the owner's have as much leverage as they believe they do. Cowen/Grier seem to dismiss the player's for having any leverage at all outside of the top 20-30. This seems completely false, many player's have gone overseas and negotiations between star players have been pretty open. The players have other options, so they do have leverage.

And don't trust any numbers from Cowen, mainly because he is at George Mason where they don't believe in math (only half joking). His calculations are based off of 09-10 BRI (but we have 10-11 available!) as well as projecting 0 growth in BRI (it only shrank once and that was during the great recession!). So its a higher number than $500 million, but its also not as simple as player's "holding out" for $500 million. One, he is ignoring that in the NBPA decision to not concede to the 50% share they should be accounting for the probability that they will get the extra 2.5%. So if the NBPA thinks this probability is high, then it is certainly rational to be holding out. But two, the NBPA knows this is not a one-shot game and negotiations like this are likely to occur again. So their are two incentives I see, 1) NBPA wants to have a better bargaining position for the next time and 2) NBPA wants to look credible in their threats to owners.

[AHF]

This is where Murphy admits that franchise values have actually decreased recently:

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NBA.com: The owners will say there's been a franchise bubble not unlike the housing bubble. A number of them bought high and don't think they'll see the equity growth.
KM: The fact is, guys have not done well over the last few years as asset prices generally have gone down. I don't doubt that. But to say that you lost money in the worst asset crash in memory -- and franchises haven't gone down nearly as much as many assets have gone down -- that's not telling you you need concessions going forward.

I do get the fallacy argument he is making (which applies both to the prior high growth and to the current recession conditions).  I also notice he keeps saying "we" in reference to the players which makes me question whether he would intentionally say anything that would hurt the player's bargaining position during his media interview.  

Even there, I question his definition of what doing "incredibly well" means.  Going up 8-9 percent while bleeding cash in the interim (which is how he nets out to his normalized assumption of roughly 200M/year for all collective teams) isn't a great investment compared to private companies that do well and certainly looks bad compared to MLB and NFL teams that virtually all make money on an annual basis while they are also appreciating in value.  

To me, it is obvious that he is looking to bolster the Union's position by doing this interview.  He is an advocate for the Union who is currently being paid to promote the Union's position -- not someone impartial simply giving an education to the public at large.  That doesn't  you discount what he has to say, it just means that you take it in context.

Edited by AHF, 01 November 2011 - 10:51 PM.

[hawksfanatic]

Rod Fort weights in on the RDA with a podcast on Wages of Wins. Its about 45 minutes, but if you listen to the first 8 minutes you will get a nice summary of the RDA.

http://wagesofwins.n...tion-allowance/