LeBron James And The Perverse Economics Of The NBA


LeBron James made big news Tuesday morning when his agent confirmed reports that the superstar planned to opt out of his contract with the Miami Heat, making James the NBA’s biggest name on the summer free agent market.

James was able to cancel the deal because the six-year contract he signed with Miami contained what essentially amounts to a player option on each of its final two years. It will no doubt draw reminders of The Decision, the televised spectacle during which James chose to join Miami four years ago, but in the end, he probably had little choice but to choose this route, especially if he wants to stay in Miami. There are two major reasons for this, the first being that Miami’s roster is in bad need of improvement. The second, which helps explains why James’ decision was necessary to address the first, is the NBA’s salary structure and the nature of the NBA’s “competitive balance” measures, which are geared less toward fostering competitive balance and more toward ensuring financial stability for owners at the expense of players, particularly stars like James.

The NBA’s existing salary structure has two caps that are relevant to the James situation: there is a “soft” salary cap for each team, and spending over it requires a punitive luxury tax, and there is a maximum limit on individual player salaries. James, Dwyane Wade, and Chris Bosh all took less than their allowed maximum to join forces in South Beach four years ago, but after San Antonio dismantled the Heat in this year’s NBA Finals, it is clear the team needs to re-tool its aging, shallow bench to become a true contender again, especially in the long-term. To do that and stay under the cap, the Heat need James, Wade, and maybe even Bosh to agree to again take less money than they’re allowed under the max, and they have to opt out to do that.

The justification for the structures that create these dilemmas for players like James is competitive balance. But Miami’s Big Three is instead a lesson in how they work in a way other than is supposedly intended. A salary cap combined with maximum salary theoretically prevents wealthy teams from buying up all the stars, from assembling a team of expensive players that will be anti-competitive. This is generally taken as gospel when it comes to James being underpaid and the NBA’s economic structure. But it isn’t necessarily true, because as Miami’s Big Three (and other versions before it) show, while the max salary reduces the influence of money on individual players, it does so to such an extent that they’re willing to take less in order to join together on a better team. Instead of promoting movement that would foster balance, the maximum salary limit often acts to inhibit it.

The problem here is that this view of “competitive balance” assumes that money is the only luring factor for superstar players like James. But when the league’s salary structures already ensure that players like James, Wade, and Bosh will be so vastly underpaid relative to their actual value, it reduces their incentive to chase money alone. They’re always going to be underpaid, so they might as well win or make money elsewhere, and that increases the incentive to rely on other factors, whether its their endorsement potential in any given market, how much they like an actual city, or, in the case of the Big Three, the chance to play with other superstars. This is true even if LeBron chooses to leave Miami. He won’t do so because another team can offer him substantially more money, but because he finds another team more attractive in terms of who he can play with and how viable his title chances there are. The balance of the league won’t really have improved as much as it will have shifted from Miami to some other city. In other words, these balance structures are often acting anti-competitive: absent a max salary limit or a salary cap, there’s almost no way a single team could afford James, Wade, Bosh, and, if recent speculation is true, maybe even Carmelo Anthony too.

But that’s OK with almost everyone involved, because competitive balance isn’t actually the point of any of this. Instead, these measures are generally meant to ensure financial stability for owners. Limits on salaries, both through a max and a salary cap, are effective at reducing costs in a way that bolsters revenues and increases the odds of profit. Add in other “competitive balance” tools, like revenue redistribution from rich teams to not quite as rich teams, and almost all of these ideas are intended to keep teams viable if not outright profitable, no matter the decisions they make, their success on the field, or the way they run their business. That, not competitive balance, is the goal, as Sports on Earth’s Aaron Gordon explained earlier this year:

Salary caps and revenue sharing accomplish very calculated and important goals for league offices with massive payoffs, the same goal they’ve been fighting for since the inception of the reserve clause more than 130 years ago: to systematically lower player salaries. In 2003, Rodney Fort published a theoretical work showing that redistributing revenues from rich teams to poor teams will make winning less valuable for all teams, and therefore make labor less valuable as well. What he showed was that if the benefits of winning (money) are spread out more evenly, then everyone has less incentive to win and therefore will spend less money on players to try and win.

The idea that merely owning a team could be insanely valuable was evident in the recent potential sale of the Los Angeles Clippers, who have been terrible for most of the three-decade ownership period of Donald Sterling. But Sterling’s team, without trying to win, remained cost-efficient if not profitable the entire time, and its value rose steadily — then rapidly — thanks in large part to many of these measures.

That’s not to say these types of structures have no benefit at all. The NBA isn’t a normal business — the Los Angeles Lakers wouldn’t benefit if a significant number of other teams lost so much money that they ceased operations — so ensuring at least some basic level of financial stability is important. And under the current structure, some of these restrictions are beneficial for players, because the max salaries redistribute money downward to a substantial middle class of players, thanks to the fact that a fixed amount (50 percent) of NBA revenues go toward a player salary pool. Every dollar James doesn’t make is a dollar another player can, and someone like LeBron or Wade can mostly make up whatever amount they are underpaid in endorsement deals anyway. Players are likely to remain OK with that too, because absent a total restructuring of the league’s economic model, anything that could be more beneficial to them would be offset by concessions that were more friendly to owners.

But even if there are some benefits to these sorts of measures, this much should be clear: while owners often use “competitive balance” as a justification for instituting policies that limit player salaries or to argue that players should make less, the primary function of this structure is to keep owners rolling in the dough. They win, whether their teams win or not.