Lockout

[turk3d]

I've always wanted to live overseas, but it's not easy. If I was in the NBA I think I would definitely take advantage of the opportunity to live say in Italy for 6 months or a year. What an experience that would be.

Don't know if you saw the same interview I did with Williams, but that's one of the things he said when asked why he was doing it. He said it was a great opportunity for him and his family to go overseas and experience their lifestyle for a while (gave the impression it would not be long term). He basically said that the lockout gives him that opportunity and he still gets to keep his bbal skills sharp.

[floppymoose]

That equates to roughly a 12% annual return, thats pretty modest.

That outperforms the stock market average return over the last 20 year period. 12% is solid.

[Twinkie defense]

The fact remains though that you shouldn't have to sell your business in order to stop the bleeding. We want DeBartalos, Davises, and Steinbrenners owning franchises, investing in them, and keeping them for the long haul... not teams getting flipped and relocated every few years.

And anyway, some of these franchises have been sitting on the market without finding buyers. The Lakers may be worth a billion but the Bucks and Pistons are a tough sell.

[floppymoose]

The fact remains though that you shouldn't have to sell your business in order to stop the bleeding.

If they don't like the business model of owning an nba team, they shouldn't have bought one. If I'm a player, no way am I giving up my slice of the income pie just because some owner, *who is worth more than he was when he bought the team*, decides he'd rather have a steady income instead of asset appreciation.

It's like saying, "hey, i bought this house and the value has gone up, but i don't see any of that money unless i sell." If I don't like that type of asset, I shouldn't have bought a house. I shouldn't turn around and blame my mortgage bank for how that works, and demand they give me some money back.

[Twinkie defense]

That logic is faulty because obviously most owners didn't go into the current CBA assuming they would lose money every season, or they never would have been a party to the last agreement. And guys like Lacob were willing to pay top dollar because the team was profitable even though it has sucked, and with better management AND a new CBA he obviously feels very comfortable with his position. But that is not the case for most teams and won't be the case going forward under the same terms.

And anyway the players ARE going to give up a slice of their pie. So you are wrong on both counts.

[turk3d]

Some of them may have gone into (see Cohan) it for the juicy tax write offs. And others may have gone into it for the love of the game (see Lacob). Usually when you're doing what you love, you're bound to make money but when you're doing something you don't like (or even despise) you're more than likely to lose it.

[Twinkie defense]

Musselman is skeptical that players will play overseas... financial problems in Europe, sub-par competition in many countries, difference in style of play, and the games are spaced far apart - players have to do a lot of hard practicing and conditioning. Says China is the best bet for overseas play.

He also said insurance issues get in the way - "contracts are ripped up" if a player gets injured.

Next weekend Manchester City plays Mexico's Club America at AT&T Park. I saw Real Madrid play Club America at Candlestick. If players really want to make some money, spread the risk of injury, and become a real threat to the League they ought to do a barnstorming tour. They could go on European tour. Play in Vegas, New York, LA.

[floppymoose]

That logic is faulty because obviously most owners didn't go into the current CBA assuming they would lose money every season

I don't see how the logic is faulty. The owners know the nature of their investment is subject to a lot of things, including the CBA. If they could not forsee that the players would not want to guarantee the owners an income stream no matter how badly the owners mess up and no matter how fast the team values were appreciating, then the owners should not have got in the biz.

[floppymoose]

And anyway the players ARE going to give up a slice of their pie. So you are wrong on both counts.

Huh? Where did I say otherwise? I really don't know what the players are going to do.

[Twinkie defense]

Kirk Morrison is using the lockout to do a radio show on KNBR...

[Mylie10]

This whole lockout is a ploy for the owners to protect them from themselves.

[cali2wisco]

The depreciation allowance accounts for a reported 250MM of the claimed loss.

That is ONE component of the circumstances that lead me to disagree with the claim that the league is losing money. The complete thought process that leads me to this conclusion is not based on ONE piece of information or one paraphrase or one bumpersticker mentality catchphrase. It is based on observing the WHOLE scenario involving NBA ownership and the whole scenario does not come down to the annual cash flow. The use of the depreciation tax break contributes to the sham but it is about more than that.

Year to year cash flow is not the determinant of profit or loss on an investment. I have already explained once what TOTAL RETURN is. As long as the capital appreciation exceeds cumulative annual cash flow over the holding period then you are in a gain position. The owners are positioning annual cash flows as the primary source of value in owning a franchise and that is NOT true. The primary source of value in owning a business of this size is the potential for capital appreciation upon exiting the business. You are not at a "loss" position unless you LOSE money on your overall involvement with the enterprise on a total return basis.

Investors at this scale frequently take short term losses (and gain tax advantages from them) by commuting annual income into long term capital gains. A sports franchise is an UNSUITABLE INVESTMENT for someone who depends on a positive annual cash flow and can not meet periodic capital calls and can not afford to hold the franchise until an opportune time to sell at a gain. Equity ownership is a speculative enterprise by nature. If you want certainty, buy a bond. If the league insists on pursuing this course of turning the league into a suitable investment for people (like Chris Cohan) who depend on annual cash flow, then this will be a competitively weaker league for the fans. The objectives, and most likely end result of this lockout is going to be a financial model that even further insulates inept owners from the consequences of failure. The owners probably are going to win something here, and the result is going to harm the competitive product for the fans.

The financial model works. The model doesn't work for guys who are bad at owning a team and those who NEVER should have been approved or solicited to buy teams to begin with. Overexpansion is a bigger problem than player salaries.

i thnk your main idea is correct, but your logic behind the argument is flawed. When was the last time you saw anything appreciate in value that was consistently hemorrhaging cash? the financial model may have worked in the past but when your main cost input is shooting through the roof, owners have the right to be concerned that their struggling franchise may never return to profitability, which in the end will ultimately lower the franchise's value

[Sleepy51]

That equates to roughly a 12% annual return, thats pretty modest. and thats the value for one of the the best NBA franchises over that specific time period.

It is not a modest return at all. It is a HOF rate of return for equity ownership over the period in question. If your advisor got you 12% over the last 15 years you should give him your firstborn as tribute.

12% from 1996 through today covers a period where we have experience 3 major stock market corrections including a depression level event in 2008 where asset values of not only stocks, but bonds, major currencies, real estate and pretty much everything but commodities got clipped by more than 30%.

For perspective sake, from 1996 to today, the Russell 3000 index (98% of the US stock market) returned an average annual total return of 7.32%
http://component.russell.com/00001/inde ... ep4DR.aspx

Put yourself in their shoes (the owners), except pretend you are running an ice cream shop instead of a basketball team.

This is a ludicrous comparison. Not all business share the same investment characteristics. An ice cream shop is not really an investment designed to grow. It is a single location retail store in the foodservice industry. Foodservice is a horrible growth investment and generally a horrible investment overall. You do not open an ice cream shop with the intent of liquidating it for gain later. You open an ice cream shop with the intent of running an ice cream shop until you die in it.

My argument all along is centered on the fact that the NBA willfully pursued inappropriate buyers for an investment of this profile. Sports teams work best FOR FANS when they are owned by people who do not depend on the annual cash flows for their livelihood. They work best when they are owned by people with significant unrelated business and investment interests that allow them to continue to invest in the team for the sake of growing the value of the team through winning (think Mark Cuban.) The problem is that there are a limited supply of those kinds of owners and most of them own football teams or European soccer clubs. The NBA wanted to drive up franchise values so they sought to broaden the pool of prospective buyers (more demand for franchise ownership = higher franchise values) to support unsustainable expansion into Canada and Memphis (and still the pipe dream of Europe.) In courting unsuitable owners, the NBA has had to continue to engineer and re-engineer anti-competitive systems to protect illiquid and unsuitable and inept owners from themselves. This system of anti-competitive practices like the tank-lotto, like Rookie scale, like the soft cap exception system has (as such things always do) had unintended consequences which have hurt the competitive landscape of the game and exacerbated the league's descent into a haves and have nots competitive dynamic. they have wrecked the competitive nature of the league by encouraging mal investment and insulating owners from real economic consequences. That is why there is still money to be made whenever one of these yokels throws in the towel and sells their franchises at ever escalating record prices.

The price of milk has been steadily rising to the point where the cost of one cone of ice cream exceeds the price that anyone is willing to pay for it. Do you keep funneling money into a money losing enterprise? Nope, you shut your sh*t down until it becomes profitable to sell ice cream again.

I already didn't like your ice cream example and now I like it even less. The price of milk has not risen to the point where ice cream exceeds the price anyone is willing to pay. The ice cream buyers is THE FANS. And the fans are buying tickets and tuning in in droves. Everyone's TV deals are escalating, and attendance is fine. The ice cream IS getting sold.

If Deron Williams would rather make 2mil in Bumblefck Turkey than make 10mil (rather than 16 mil or whatever) playing in the USA, then let him do it until he and the rest of the players realize they are being a$$ (Please Use More Appropriate Word) and come running home.

Eventually, they will. I have no doubt that the owners will get most of what they want from this lockout. And as a fan, I dread that reality. When the players break, it is going to hurt the fans in the long run. We are going to get more anti-competitive structures to protect owners from loss, even when they are failing to deliver a winning product.

What this league really needs is to contract 4 teams. There is your player salary reduction right there. There is your sacrifice on both sides. 60 NBA roster spots at vet minimum is $45MM in payroll reduction off the bat. And more importantly the worst markets and worst operations in the league disappear along with their real and paper losses. The NBA took the Hornets into receivership because they actually managed to fail the economic model. But instead of contracting the team, do you know what the league is doing? They are lobbying the Katrina state into guaranteeing minimum ticket sales at the public expense in a new arena deal. They are asking politicians to put the taxpayer of Lousiana on the hook for guaranteeing them profits. That is how they are going to "engineer" financial value into a franchise that has flat out failed in that market. That is how these guys roll.

New Orlens, Charlotte, Toronto and Minnesota should go poof tomorrow. The remaining NBA owners should buy those guys out, shut them down and supplemental draft the players. If the remaining 26 teams all jettison their 4 least valuable players under mandatory buyouts we're done. No bailout needed. They (the solvent owners) invited these guys to take advantage of them. Let them repair their own marketplace out of their own pockes. You have to feel the pain if you ever intend to heal.

[billinder33]

It seems to me that this whole concept of NBA franchises being appreciation plays while losing money on an annual basis is similar to the housing market bubble - buying an asset in hopes of earning capital gains based on appreciation while constantly hemorrhaging cash until you sell. These models typically benefit those who sell in the peaks (Cohan) and harm those who's portfolios are heavily allocated into the franchise and/or happen to be the last ones holding the hot potato.

NBA players getting close to 60% of the gross revenue in a business that has huge operational expenses seems high to me. In the restaurant business (granted not a exactly an apples to apples comparison), about 33% is typically labor, 33% COGS, and the remaining third split between fixed costs and owner profit. While NBA franchises don't have much if any in the way of COGS, operational expense is through the roof - arena leases, travel expense, marketing, etc, and that doesn't even factor in the labor that is NOT associated with player salaries like coaching, scouting, and training, marketing personnel, backoffice staff, etc.

I am not one of those who feels that ownership should be endlessly punished for investing in a large player contract that goes south. I can't think of any other industry in which there is such a high risk of investing in one bad employee that bring a company to the verge of destruction. Fixing this problem would help losing teams return to competitiveness much more quickly, which would help the general health of struggling markets.

In a perfect world, owners would have a better mechanism for revenue distribution, and players would concede on things that help keep all markets competitive - salary cap, reducing or modifying guaranteed contracts for players who don't perform, etc Solutions that move in this direction will produce better outcomes for the collective league, and the collective of players who make it to the NBA. It will hurt the big market owners, the star players, and the players who don't live up to oversized contracts, and will benefit small market players, players who consistently perform at or above their contracts, and the general health of the league. Interestingly, it's classic case of social wealth distribution vs winner-take-all capitalism.

[Sleepy51]

i thnk your main idea is correct, but your logic behind the argument is flawed. When was the last time you saw anything appreciate in value that was consistently hemorrhaging cash?

All the time.

Small Growth companies appreciate in value with negative earnings all the time. Tech did it for 10 years. Biotech is doing it now.

http://www.fool.com/investing/general/2 ... by-mu.aspx

About half of stocks have no earnings.

I am NOT making anything resembling a stock recommendation here.
=

[Sleepy51]

and harm those who's portfolios are heavily allocated into the franchise and/or happen to be the last ones holding the hot potato.

You get it. The smalltime owners are the real pr who were not sufficiently diversified are the problem here, and they were intentionally courted to drive the market for the big time owners franchises to increase in value. That bubble HAS popped so now the owners are trying to engineer a bailout to keep their bubble going instead of taking their medicine and contracting the failed teams.

[Sleepy51]

NBA players getting close to 60% of the gross revenue in a business that has huge operational expenses seems high to me. In the restaurant business (granted not a exactly an apples to apples comparison), about 33% is typically labor, 33% COGS, and the remaining third split between fixed costs and owner profit. While NBA franchises don't have much if any in the way of COGS, operational expense is through the roof - arena leases, travel expense, marketing, etc, and that doesn't even factor in the labor that is NOT associated with player salaries like coaching, scouting, and training, marketing personnel, backoffice staff, etc.

Player salaries would be more accurately considered COGS (especially when they are being depreciated as property.) The core NBA product is PLAYERS PLAYING basketball. Not jerseys or nachos. 58% of revenues are spent procuring the raw commodity that the NBA sells.

Obviously there are differences, but looking at another company who's product is a commodity (XOM Exxon Mobile)
http://investing.businessweek.com/resea ... ker=XOM:US

They had sales of $342BB and cost of sales of $231BB. That's a 60% cost of goods sold.
Different businesses have very different investment and operating profiles. I would venture that the restaurant business has very little in common with a $400MM sports/entertainment complex.

[Sleepy51]

Interestingly, it's classic case of social wealth distribution vs winner-take-all capitalism.

On what humanistic grounds are the owners entitled to a "social distribution of wealth?" This is not healthcare. It's not education. Human civilization does not descend into Hobbsian carnage if a few NBA teams are shutterred for failure. The only wealth distribution being considered is to redistribute players wealth among already preposterously wealthy owners, who also dip into the non-voluntary fan pocket through tax breaks and public financing of stadium schemes . . . none of which do the players get to participate in.

[billinder33]

NBA players getting close to 60% of the gross revenue in a business that has huge operational expenses seems high to me. In the restaurant business (granted not a exactly an apples to apples comparison), about 33% is typically labor, 33% COGS, and the remaining third split between fixed costs and owner profit. While NBA franchises don't have much if any in the way of COGS, operational expense is through the roof - arena leases, travel expense, marketing, etc, and that doesn't even factor in the labor that is NOT associated with player salaries like coaching, scouting, and training, marketing personnel, backoffice staff, etc.

Player salaries would be more accurately considered COGS (especially when they are being depreciated as property.) The core NBA product is PLAYERS PLAYING basketball. Not jerseys or nachos. 58% of revenues are spent procuring the raw commodity that the NBA sells.

Obviously there are differences, but looking at another company who's product is a commodity (XOM Exxon Mobile)
http://investing.businessweek.com/resea ... ker=XOM:US

They had sales of $342BB and cost of sales of $231BB. That's a 60% cost of goods sold.
Different businesses have very different investment and operating profiles. I would venture that the restaurant business has very little in common with a $400MM sports/entertainment complex.

I'm not sure that's a fair comp either. Oil companies are typically low margin on mass volume industries. Plus, what comprises that COGS line item? 3rd party consulting contracts to companies like Halaburton? Drilling platforms? - one would think that would be operational, but when you look at their income statement, non-S&M non-Depreciation operating expenses are 12% of revenues, which I find difficult to buy into.

Probably a better comp would be high-end management consultant industries like Bain, McKinsey, or BSG, but since these companies are private, I don't know how we'd get that information. I was able to get a COGS on Accenture at ~70%, but here we have an industry with almost no operational expense relative to income, and a selling model that consists mostly of a salary + high comp D-to-B salesforce versus the local and national mass marketing for NBA teams and the NBA league. My personal consulting experience was several years ago being billed out at $230 while on a salary+benefit model that worked out to about $65hr (this does not factor time on the bench, but then again, I was never on the bench), which is 28%. So in terms of Accenture, I'm not sure where that 70% number is coming from, but there's definitely a ton of expenses in there that are completely unassociated with direct labor costs. My personal experience in 3rd party consulting is that direct labor cost is again about 30% of revenue.


I'm no expert in GAAP, but it seems to me that there is a big difference in the COGS line item of a GAAP Income Statement and direct labor expense. Strategically, there has been a huge push the last few decades to do everything possible to make operative margins look as low as possible to give companies that look of being lean-and-mean, even if they have to sacrifice gross margin to do it. prime examples here are offshoring and outsourcing - in the end you pay more for the cost of the good, but you've eliminated manufacturing operations. This is why I think COGS as a line item vs NBA direct labor cost is not a good comp.


The reason I picked the restaurant industry in my initial post was because I could easily segment out the direct labor expense, because it's an industry competing for disposable income, and also because it is an industry of high operating expense, which I believe is very much in play here. Obviously 33% is far too low of a valuation for highly specialized NBA labor, but the best value for all involved probably lies somewhere between that and the 60-70% COGS that we see in other industries.

[turk3d]

When dealing with COGS (and practically all accounting practices) there's a lot of "magic' that goes along with how people structure there books (they use whatever methods they feel will be most beneficial depending on their tax situations).

Again, running a sports franchise is much different from from a Candy Store, Restaurant business, Engineering firm, Consulting business, financial institution, etc., etc. which is one of the reasons you can't really apply many of your standard business operating practices.

Sports franchises are an exception and are treated as such by the IRS and the government. You have to look at this type business as a separate type of Business entity.