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Kevin Murphy on the NBA Negotiations

2011 October 28
by Skip Sauer

University of Chicago economist Kevin Murphy is worth reading or listening to on just about any subject. So when he’s interviewed about the NBA labor dispute, and when he’s taking part as an adviser in the negotiations, well that’s a must-read interview for the TSE crowd.

NBA.com has the interview, which strikes me as just a bit unusual given that Professor Murphy is working for the players. They even refer to him as a “renowned economist”! Maybe this is a sign that the bluster from the owners’ side is subsiding. That would be a good thing, since the NBA will need to get off their hard line if we are going to have a basketball season.

For posterity, here are two choice cuts from the interview:

NBA.com: Given the numbers that are out there now — the owners offering 50 percent of basketball-related income (BRI), the players seeking 52.5 — it seems like a small gap to close.

KM: Saying that and getting one are two different things. You can sit there and say, ‘We’re only X apart.’ But the other guy can say, ‘Well, it’s only X, why don’t you move?’ And you say, ‘It’s only X, why don’t you move?’

NBA.com: You can “cut the baby in half.”

KM: Sometimes. But people will say, I already cut it in half to get to here. That’s certainly our view of the world. We started from where we were. We didn’t stretch our position in order to give it up. They started from what objectively — I think they would agree — was a massive change in the system and have “given” from there. But if you start 100 miles away and move 50 miles, you can still be outside the range of reasonable. Had they gotten their initial offer, that would have been the most one-sided deal in the history of sports negotiations — by, I think, a fair stretch. It was an enormous ask on their part.

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.

……

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.

If you go back before the last 3-5 years, these guys did incredibly well. Their franchises weren’t going up by 4 or 5 percent, they were going up by 8 or 9 percent a year. They were making money hand over fist. Should [the players] get credit for that? Should we get that money back? Now those are different people in some cases. They need to go get their money from the guys they bought the franchises from. That’s the guy who has all your money. Not us.

But who bought anything in ’07 that they’re happy with the price they paid? If you bought a house in ’07, if you bought stocks in ’07, if you bought bonds in ’07 — I don’t care what you bought, you’re not happy with the price you paid. When you buy at the top, you don’t make your money. That’s not unique to the NBA, that’s everywhere in life. But by and large, NBA franchise ownership has been a good investment. You can’t base long-run projections on how you did in the biggest financial downturn of the last 50 years. On that basis, there are no good investments out there. But we know that’s not true.

NBA.com: Management cites rising costs in marketing, ticket sales and other areas.

KM: Ask them to show you how much their costs have gone up as a percentage of BRI. Our moving from 57 to 52.5 covers more than 100 percent of any cost increase they’ve had.

NBA.com: How does it make sense economically to hold out for a small percentage that’s much less, in sheer dollars, than what the players are losing by missing games? A gap of 2.5 percent is worth $100 million annually, but a missed month of paychecks is $400 million.

KM: Part of it on our side is an investment in the future. If you give up a lot today, you’re not just giving it up today, you start the next contract from that much lower. So you’re talking about the long-term impact of that kind of concession.

You can say the same thing for the owners. They’re losing money every week. The answer is, both sides are losing in this. It’s a shame we can’t get a deal. But I’m not going to make it sound easier than it is. It’s always easy to say, “Well, one of you guys should give in.” But tell me who? And when someone says, ‘Just compromise,’ at least recently, that hasn’t been happening. Maybe it will.

Murphy is always full of insight, and there is much more to enjoy in the full interview at NBA.com.

One Response
  1. October 31, 2011

    Student @ChrisBenno13 has written a great article on the NBA negotiations would love 2 hear your thoughts? http://sportspress.com.au/-news/4-news/586-cba-negotiations-a-comparison-of-the-nba-and-afl.html

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