Tuesday, July 5, 2011

Economic Outlook from the NBA Lockout


Lockout Beard

As league officials and players stand apart on a new collective bargaining agreement, cities across the nation will suffer the consequence.  Obviously the fans will be deprived their favorite sport, but where the real loss comes in is in dollars and cents.

BASICS

A couple of students from the University of Maryland did a study on the potential harms of the 1998-1999 lockout by comparing the past lock outs of baseball and football.  They also looked into if bringing a team to a city would help or if a team left a city, did it affect the economy negatively.  During their research they found no evidence that a new team brings an economic growth, nor if a team departed, it took revenue and income with them.   They are basically saying that the economy is fine without sports. (Link)

The company Ocean Media Inc. came up with a chart that highlights the loss in revenue from various sources for both the NBA and NFL.  They highlight the income the leagues will be turning their backs on because of the disputes with their unions.  



The average person will look at these numbers and wonder why the league can walk away from that.  Why can’t they just agree to continue to all make money?  The problem isn’t about the fixed incomes like their television contracts, but for the NBA, it’s about the expenses they must endure, most dominantly player salaries.  The league last year incurred $2,015,399,593.00 in salaries, the television contract wouldn’t account for half of that.  Currently the NBA has $6,526,441,991.00 owed to NBA players, which adds up to roughly $18, 129,005.53 per player in the league today. 



WHY THE OWNERS DON’T MIND

There is no secret that the majority of NBA franchise owners can endure a year of income loss.  They truly believe that over 6 billion owed to player salaries limits the growth of the sport.  The income from advertising doesn’t cover the player’s expenses. With ticket sales bringing in roughly $800 Million to $1 Billion, they still fall shy.  The estimate of $3.5 Billion in Revenues each year by the league translates to the player’s expenses equaling approximately 57% of revenue. Leaving the rest for staff, both on the court and in the management offices, league-wide, expenses related to real estate (Stadiums), travel (planes, hotels), and many more. 

“One of the differences in the NFL and the NBA is that it’s very clear NFL teams are profitable,’’ said sports economist Andrew Zimbalist. “Not having a season will mean that profits they would have made won’t happen. In the NBA, you see there are losses. So, the owners are less likely to say, ‘Oh, we can’t afford not to have a season.’ Not having a season means they’re not going to have the operating losses they would have had.’’

It is not hard to see why the owners are willing to risk a year of income as well as a year off from paying the players.  The system is set up to fail moving forward, especially in today’s economy.  How long could the NBA continue the current model, a system, which pays players some players tens of millions, when the player hasn’t played a game in over two years.  One could blame the owners for this problem, but when this problem occurred league-wide, it needs to be addressed.


TEAM LOSSES

We discussed the losses league wide and now we must look at the impact that each team will face.  Many speculate the struggles will be passed down to restaurant owners and other local businesses near stadiums.   Each newspaper across the nation has looked at the potential outcome of zero NBA games.  Many are quoting business owners who say their best nights are on game days, which account for 25-50% of their business.

Jimmy Gage, general manager of Thaifoon restaurant in The Gateway shopping area adjacent to EnergySolutions Arena (Utah), was equally disheartened when learning that a lockout was about to begin."It will be really, really bad for local business," Gage said. "Game nights are crazy here. We fill up pretty much every game night. It would be really, really difficult for us without those game nights."

  
Restaurants and parking business’s wouldn’t be the only ones to suffer.  Each city will be losing out on tax revenue as well.  Hotels and transportation will take a hit with the lockout, which added together turns out to be a large sum per game.  Many sports marketing firms have calculated revenues per game in various cities, which will now equal the amount of money business’ won’t collect.

“Each Celtics home game at the TD Garden results in about $420,000 of outside-the-arena consumer spending for eating and drinking, retail, hotels, transportation and parking, according to the Boston Redevelopment Authority. Add in tickets sales and Garden concessions, which have an economic impact on arena workers and local suppliers, and the number jumps to $1.8 million per game.” 

“In Chicago, the Bulls games generate about $173,000 a game in city and county taxes from ticket sales alone, estimated Marc Ganis, president of sports consulting firm Sportscorp Ltd. Add in taxes from parking and concessions, he said, and the losses amount to $250,000 to $300,000 each game.” 

The biggest downfall will be for cities that poured money into a new stadium, such as in Orlando.  Although the venues will still be used for concerts and other events, the majority of their income comes from the basketball games. 

“However, if the team is not drawing crowds to the Amway Center for at least those 45 dates, the city could lose $2.5 million in other ways. It won't collect a $2 surcharge on each ticket sold. It won't get the revenue from fans who pay to park in city garages.Some of the ticket and parking money helps cover the arena's $17 million annual operating budget. If total revenues fall short of that total, city taxpayers will have to make up the difference.” 

The last part of the equation that effects the teams are the newly acquired organizations, like the Golden State Warriors and soon Atlanta Hawks. The Warriors ownership group may have to incur a large loss their first year, because although they won’t be responsible for some expenses (player salaries), they will be responsible for any mortgage or other bank notes they may have borrowed. 


1999 lockout outcome

The last lockout resulted in loss of fan interest, which is evident.  Ticket sales decreased the following two seasons post lockout by 2% each year.  Not only the ticket sales, but the television ratings also took hits, about 2 million viewers.  The loss for each cities entertainment business seemed to take a hit as well, which contradicts the report from the University of Maryland students.

For Cleveland's entire business community, revenues lost because of the lockout in November alone amounted to more than $15 million, according to the metropolitan-area chamber of commerce, the Greater Cleveland Growth Association.


The players also had to adjust to the loss of income.  Many of them lost large amounts of money, like Charles Oakley lost a $10 million dollar balloon payment.   Kenny Anderson had to give up some of his eight cars, which cost him $75,000 annual for maintenance. 

"You know, just get rid of the Mercedes," Anderson said, adding: "It's like they say, the more you make, the more you spend. I have to start getting tight.''


More so, the 1999 lockout seemed to be strategic, as this one is appearing.  The owners have to correct some issues with the current system.  In 1999, 5 teams played their final game in their stadium at that time. Also, a few new stadiums opened up during the lockout. 

Conclusion

Whether you believe the report from the University or if you believe the speculation on the business owners, one thing is for sure, the lockout comes with a loss.  Whether that loss translates into financial deficits for business owners, being unemployed as players, or the loss of games for the fans Although the total economic impact might not effect the city as a whole, it will effect business’ that thrive on extra patronage the NBA teams bring to the cities.  

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