Reader Rant of the Day: A Lawyer Friend on the Idiocy of the Lockout

Many thanks to Friend of Grantland Matt, who e-mailed editor-in-chief Bill Simmons this week to express some NBA-related ideas and remind us that despite the thousands of easy jokes, there are good lawyers in the world. We’re publishing his e-mail (with minimal edits) below to share his very smart thoughts on sports subsidies and the travesty that is the NBA Lockout.

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You mentioned in an article recently why the NBA doesn’t enter into an interim deal to save this season, based on the most recent deal, and immediately begin working on a complete overhaul of the system based on a framework you set forth. I’m a mergers and acquisitions attorney, so I work on multi-million dollar deals (albeit not nearly as large as the NBA deal), and throughout the NBA and NFL labor talks, I kept wondering myself why interim deals don’t happen in the labor context. It’s baffling to me that the sides would simply abandon the revenue lost from a labor stoppage, especially in light of the fact that once that revenue is gone, it never comes back (they’re lost games, never to be replayed). Good attorneys who aren’t pandering to the public or to clients who pander to the public do everything possible to massage deals, to make them happen, and to make sure the client realizes all possible revenue. We work out interim deals, we extend deadlines and keep everyone working as long as we feel the sides are negotiating in good faith. I can’t imagine telling my client that I advise shutting down operations pending a deal; I’d much rather advise that I’d worked out an extension keeps money flowing while I devised a solution to the problem. Also, I do distressed M&A (bankrupt and insolvent companies) that have already run out of operating capital; I consistently work out deals with banks to continue funding an insolvent company pending consummation of a deal because nothing destroys a company’s value like a work stoppage. In almost every other non-entertainment field, work stoppage more or less ensures liquidation of the company.

Owner-induced work stoppages make my skin crawl. These work stoppages are not like autoworker-commenced stoppages, where strikes are the only way that the owners will listen. Strikes create leverage specifically because work stoppages cause so much damage. On the contrary, in these deals, owners shut down their own shops to squeeze labor. In the NBA, the owners seem to claim the situation cannot continue because costs exceed revenue. I have not seen the economic analysis, but journalists seem to agree. However, no crisis event occurred that necessitated a stoppage, and losing the revenue of a block of games destroys top line revenue without negating many fixed costs, particularly stadium costs. The NFL, everyone was making money, the owners seemed to simply demand a greater return on capital at risk. They were willing to kill the business to increase return on investment.

I believe that owners in the sports entertainment space shut down operations in a kamikaze style business tactic because market manipulation created conditions that permit the owners to exert undue leverage. The owners provide a product heavily supported by government subsidy. They provide a product that nearly every American invests in financially and emotionally. They provide a non-essential product. Although these are businesses, making huge money, they also have an element of leisure to them. This is not a manufacturing plant nor a financial services firm. Normal businesses cannot decide to shut down to pressure labor; shutdowns would destroy the business. However, because the public subsidizes owners, and because owners are in these businesses for their own leisure, they can afford to lock labor out. The public needs to stop subsidizing these pseudo-businesses; although I love sports, public subsidization amounts to spending tax dollars of all people to please the sports-loving segment of the population, and that is inherently unfair. Public benefit from sports entertainment is limited when factored against tremendous public expense building stadiums and supplying services. Furthermore, if these owners left the business, certainly sports businessmen would fill that void and make that money for them. These owners and leagues aren’t the only ones able to produce this product.

Just like when asking for public support for building a stadium, these owners have grown accustomed to holding constituencies hostage because they’re given disproportionate leverage to negotiate. It’s sickening to see an elite class taking advantage of a constituency merely because they can. Although it’s predictable behavior (people are incentivized to use the tools available), it can be predictably corrected by forcing owners to behave like real businessmen. At the very least, if we’re going to support these owners with public funds, then they need to be likewise regulated to create an equitable system. That includes equitable rules regarding labor (fair splits with players, who are equally if not more important (keeping in mind that owners deserve a fair return on investment for risking capital). However, if we subsidize sports as an institution with public funds, then we subsidize the sport, not the owners, and that means players deserve return on investment too. It also means there need to be equitable systems for cities, so that they don’t lose teams (Cleveland Browns) or players (LeBron James) simply because the city happens to be a small market. Small markets are necessary to foster the competition, small markets need to be subsidized as part of the sport. I have so much trouble with baseball because the system is sickeningly skewed towards large markets. I have trouble with basketball because the system is skewed towards large markets.

Labor deals, LeBron, the Zombie-Sonics, these things show us that in the subsidized world of sports, we have supported owners rather than supporting sports. Although the subsidization seems completely unnecessary, if we are going to subsidize, we need to subsidize the sport, not the owners. And like all good subsidies, if we give the money, we get to attach strings, meaning we get to set rules so that there are no work stoppages, and so that the sport is fair to the fans, since we ultimately spend the money that makes the owners and players rich (the contempt they show for fans is another subject).

Why not create a league of cities, make that a union, really show owners, players, everyone involved that we want new rules? I guess it’s too much to ask of sports fans to get behind something like that.

— Matt in Ohio

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Filed Under: David Stern, NBA, Reader E-Mail Rant of the Day