One of the central facts of the current NBA labor dispute is that the existing collective bargaining agreement already precisely caps player salaries at 57 percent of basketball-related revenue. Talk of tweaking the maximum contract rules or the precise dynamics of the salary cap is, under the circumstances, a red herring. What’s more, as Arturo Galletti points out, this fact lets us realize that if NBA teams are becoming less profitable, that’s because spending on things other than player salaries is surging:
In real terms, NBA revenues have been flat over the past few years. And player salaries have also been flat. That’s not great. You like to see real wage growth and real revenue growth. At the same time, NBA players earn some of the highest wages in the world and NBA franchise owners are even richer, so basically it’s all good. But while player salary costs are growing at roughly the rate of overall inflation, other expenses are growing at five times the rate of inflation.
Now it’s hard to say exactly what’s going on here. But this is one of several reasons why I think it makes more sense to focus on the equity value of the franchises rather than accounting profits or losses. If I owned the Wizards, I might hire myself and a bunch of my basketball fan friends and family members to work in the front office at inflated salaries. After all, the collective bargaining agreement caps my ability to invest team revenue in hiring basketball players. And hiring my friends to hang out and help me manage the team would be fun. This would, presumably, make the team “less profitable” than if I paid my friends less. But the ability to hire my friends would be part of the value of owning the enterprise and thus factored into the equity price. And to reiterate our point from last week, almost all owners of NBA franchies have made profitable investments in team ownership over and above the general fact that owning an NBA franchise is a lot more fun than owning 10-year German bonds.