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Economist Murphy takes us all to school on players stance

Oct 27, 2011, 2:25 PM EDT

derek Fisher AP

Kevin Murphy is smarter than you.

And me. And David Stern and Billy Hunter and everyone else in the negotiating room. There’s no objective way to prove that, but do you have a MacArthur Foundation “genius grant?” Are you the guy the people who wrote “Freakanomics” think is the smartest person they know?

That’s Murphy. And he’s the players’ economist. Union head Hunter said that pretty much every projection Murphy made back in 2005 about how the labor deal hammered out then would play out was spot on. He may grasp all the moving parts of this negotiation better than everyone.

And he spoke at length with’s Steve Aschburner. You need to read this. All of it.

Know that Murphy has a dog in this fight — the union pays him. But he is too insightful not to read.

And this goes back to the core arguments of the entire lockout — how much money are the owners really losing? And who should pay for it?

I would say the primary disagreement is not over the accounting numbers. It’s what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn’t very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest — it’s changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you’re telling me that these things lose money every year, something’s missing, right? These people aren’t stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money?

Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you’ve seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you’ve had. And if you’re in the right tax position, it’s actually pretty good because you’ve got a tax loss annually on your operating and you’ve got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that’s not a bad deal.

I’ll be honest, the last couple sentences are hard to follow for me. My tax position does no require a lot of thought. But you get the idea that what is in the official books is not the entire picture.

To all of you people saying “name another industry where the workers would get half the revenue” (yes, we read the comments) Murphy has an answer:

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.

Then there is the competitive balance issue. The idea from the owners that there needs to be more parity, something Murphy says clashes with the NBA’s star-driven league. Like another report yesterday, Murphy says that what you spend really only has about a 5 percent to 10 percent impact on wins on the court. (The owners) want Milwaukee fans, for example, to not only root for the Bucks but to have most seasons with hope that their team can compete with bigger-revenue markets.

KM: There’s an element of that. But also, be careful what you wish for. When you get a Sacramento-Charlotte NBA Finals, guys will be crying over the TV ratings. We know that even with baseball — it’s an exciting World Series but the ratings aren’t there because it’s the Texas Rangers and St. Louis [Cardinals]. Basketball is even more star-driven. You get to an NBA Finals that doesn’t have one of the premier players in the league in it, it becomes a lot less interesting. And with 30 teams, not everybody is going to have one of the premier players.

All the number crunching is nice. But let’s get to what really matters:

Can the two sides reach a deal soon so we can have basketball?

“I was very pessimistic last week after the Thursday blow-up but I’m beginning to come around and think we’ve got a shot,” Murphy said. “If there’s a deal here, it’s going to be a deal that nobody likes. That’s what deals are. Nobody walks out feeling like they got a complete victory. That’s initially. But then you get back to playing and you realize, geez, I can live with this.”

  1. somekat - Oct 27, 2011 at 3:09 PM

    So basically, they can’t be losing money because this clown (who is paid by the union), doesn’t think so? Or they should just eat the losses, because they get tax breaks?

    He also NEVER mentioned another line of work where they would get 50% of revenue. Just random maybes and what ifs

    Once again, a schill for the players

    • skids003 - Oct 28, 2011 at 12:29 PM

      What he says is true, it’s just skewed toward the players’ side. I doubt any of the players undrstand anything he said he though, other than the NBA needs its “star” power.

  2. drmonkeyarmy - Oct 27, 2011 at 3:38 PM

    This guy might very well be brilliant, but there is a problem….everything he says is skewed because he represents one of the parties in the fight. If an unbiased economist came out with his/her opinion, it would carry a ton more weight in my book. Why would I gave this guy any more credibility than I would David Stern or Billy Hunter? Because he has a bunch of letters after his name and others say he is brilliant? His perceptions are skewed by the cause he represents.

    • kinggw - Oct 27, 2011 at 10:06 PM

      It doesn’t matter who the economist works for and you don’t have to take his word for it. If you were to do some research you would realize that he is right. Your so busy trying to discredit the guy you didn’t take the time to see if his claims are legitimate. In addition to Murphy, respected publications like Forbes and the New York Times have called shenanigans on the Nba’s claims, but I guess you know best.

  3. marcusfitzhugh - Oct 27, 2011 at 4:19 PM

    That’s the problem with the NBA. Everybody is in everybody else’s business. The owners are saying “somebody’s got to help me make a profit”. The players are saying “I’ve got my family to feed”.

    Newsflash for BOTH of them – fans don’t care if owners make a profit. Your team, your problem. Fans don’t care if 30 year old ex-NBA stars have gone through MILLION OF DOLLARS in salary and endorsements (staggering amount isn’t it?) and have to get a job (like the rest of us). We’re here to be entertained. Not to cater to some family feud where two groups can’t figure out how to divide FOUR BILLION DOLLARS (really staggering amount, isn’t it?)

    They’d better settle this thing. Somewhere out there, someone is devising a better way for us to spend our time and money. When that happens, owners AND players can kiss the good life goodbye.

  4. texmex2 - Oct 27, 2011 at 4:27 PM

    Hmmm, throughout the history of our World we have always had genius economists throughout time who will solve all our problems and yet our economy is still in the tank and getting worse. Apples and oranges, the NBA system is broken and needs a real fix… mediocre players making millions of guaranteed dollars is obscene, 50/50 split is more than fair.

    • kinggw - Oct 27, 2011 at 9:44 PM

      Economists aren’t the problem and never have been, the problem is when the powers that be don’t listen to the economists because they think they know better.

  5. sdelmonte - Oct 27, 2011 at 4:50 PM

    I give a lot of credit for actually reporting the story and not being just a tool of the league. It must be hard for the staff there to remain objective.

  6. rtlguru - Oct 27, 2011 at 5:06 PM

    He’s nothing more than a paid shill. All the points he brought up can be turned around in favor of the owners just as easily.

    Lets take the two main points from this article.

    One, it’s ok for the owners to accept a loss because they are rich and have other income to offset the losses, thus deferring taxes.

    Two, he compares the NBA to law firms, service sector, hollywood and the music industry to justify the players getting more than 50% of revenue. Fine, do any of the above industries pay their workers more than 50% of revenues AND accept a loss to defer taxes? You won’t find one example of this. When the above companies start losing money, they cut wages or go belly up. Look at law firms as a perfect example of a labor/star driven industry. They have get wages for the top stars up but laid off or cut pay for the “mid-level exception” lawyers and the scrubs to remain profitable.

    Just because the owners can absorb the losses because they are rich doesn’t mean they should continue to loss money and not cut wages. This is the norm for every other industry in our economy. Why are the NBA players the exception? What makes them so special?

    I guarantee you if the players all formed their own league, and essentially became player/owners they would not be paying themselves 57% and taking losses on the other end to offset their earnings with their operating losses.

  7. sactoking - Oct 27, 2011 at 5:59 PM

    Apparently the “genius” threshold is pretty low nowadays, since each one of his quoted items has a pretty big logical fallacy in it.

    In quote #1 he downplays the owners’ revenue loss claims by emphasizing the fact that those operating losses are more than offset by the capital appreciation realized when the team is sold. A similar comparison, one that ‘normal’ people might relate to, is owning a rental house. If you own a rental house with a $1500 per month mortgage and can only get $1200 per month in rent, you have a loss from operations of $3600 per year (just like the owners’ losses). You might be willing to accept that if you can sell the house in 5 years for $100,000 more than you bought it for, since even after the 5 years of losses you’d be up $82,000. This logic has two problems:

    1. It assumes that annual losses are acceptable. Why should the owners just have to accept that the team will lose money every year.
    2. It assumes that the “bigger fool” theory is correct; that some bigger fool will always be willing to pay more than you paid.

    Taken in conjunction, why should the current owners assume that an asset with negative operating results continue to appreciate in value? Logically the NBA franchise bubble will have to burst at some point as prospective owners realize that the purchase price is too high for a negative revenue stream.

    In quote #2 he downplays the owners’ objections about the share of revenue given to players by citing other industries that are “service-based”. And you know what, he’s right. For something like a law office, employee salaries are a disproportionately large percentage of expenses when compared to something like an airline or heavy manufacturing firm. The problem is that NBA franchises are probably more closely related to large, capital-heavy corporations than they are to small, information driven industries. Professional sports teams play in arenas and stadiums that cost hundreds of millions of dollars, in cases up around the billion dollar mark. They own or lease large swaths of land for parking. They employ thousands of support personnel manning ticket booths, food carts, and mops. The capital overhead and non-player expenses associated with professional sports are akin to Toyota or 3M and not the 3-person consulting firm.

    Even worse, take quote #1 in the context of quote #2. What he has essentially said is that the players’ position is this:

    “The owners can afford to lose money each year because the capital and non-player assets will go up in value over time and the players deserve a majority of the revenue because the capital and non-player assets aren’t worth much.”

    Finally, in quote #3 he crosses up the characterization of competitive balance. He begins by cautioning against parity because “[w]hen you get a Sacramento-Charlotte NBA Finals” people will complain about the ratings. He then goes on to say that the NBA is star-driven. In his words, “You get to an NBA Finals that doesn’t have one of the premier players in the league in it, it becomes a lot less interesting. And with 30 teams, not everybody is going to have one of the premier players.” You know what? That’s absolutely true about how the NBA is now. Teams like Sacramento and Charlotte have a close-to-zero chance of attracting a star player these days, so if they somehow do make it to the NBA Finals they likely won’t have that star power. With true competitive balance it’s likely that a team from Sacramento or Charlotte that made it to the Finals would have a star, since LA/New York/Chicago/Miami wouldn’t be able to attract every big-name star. So, in reality, he just argues for the opposite of what he was arguing for.

    Reading the article didn’t leave me feeling any more sympathetic for the players than I was yesterday and it certainly didn’t make me think anything of Mr. Murphy.

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