The Financial Impact Of The NBA Lockout
Football fans were on edge for months until the NFL finally hammered out an agreement to salvage this year's season. Basketball fans may not be so lucky as the first two weeks of their season have already been chopped from the schedule. While it's been 13 years since the last NBA lockout, many sports fans have longer memories and less patience than they did the last time around. (For more, read Pro Sports Unions: Do They Help Or Hurt?)

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With the American economy on life support and millions out of work, one has to question the wisdom of millionaire owners and players fighting over a multibillion-dollar pie. How much sympathy will the fans have for the league and its stars as autumn turns to winter without a resolution? That's an open question, but the longer the stalemate drags out, the more irritated and disloyal those fans are likely to become.

The Dispute
An estimated $4.2 billion in league revenues and $2.2 billion in player compensation were on the line when the lockout began at the end of June. The bargaining had started in earnest 18 months earlier, bouncing from New York to Dallas and on to Miami. While there had been numerous offers and counteroffers attempting to close the gap, no agreement was reached by the deadline.

One major sticking point was a late move by the players to increase the current $5 million average salary up to $7 million at the end of their proposed six-year deal. This demand was at loggerheads with the owners' objectives of higher profitability and competitive balance across the league. The league believed that a jump in compensation that large would have jeopardized teams that would have likely broken even under previous player proposals. (To see if being part of a union is a good idea, read Unions: Do They Help Or Hurt Workers?)

Positions
Initially, the league entered negotiations with a proposed 61/39 split of basketball-related income (BRI). Besides ticket sales, BRI includes merchandising, parking and concession stand fees, television contract income and advertising revenues. This would have forced the players to reduce their share by 18%, down from the 57% guaranteed by the expiring collective bargaining agreement. Subsequently, the league bettered its offer to a 50/50 split which was presented as an equal partnership.

In addition, the owners wanted to exclude more items from the baseline used to calculate BRI. A week before the lockout began, the players offered a concession to drop their share from 57% to 54.3%, which they estimated would reduce their take by $500 million over the life of the agreement

Last year, NBA teams collectively lost $300 million, with 22 of 30 individual teams ending up in the red. This led the owners to propose to change the current soft salary cap to a "flex" or hard cap in order to reduce costs and prevent the wide disparity in total compensation among teams. A hard cap can't be exceeded, but a soft cap allows teams to go above the limit when certain conditions are met. As a matter of practice, a small minority of teams have ever stayed below the soft cap.

One of the primary reasons for maintaining the soft cap has been to allow smaller market teams to hold onto star players who might otherwise leave for a bigger contract. The players view the proposed hard cap as a way for the owners to squeeze their salaries to solve what the players see as a management issue, and would prefer to focus on the revenue sharing aspects of the agreement. (To learn more, read How Salary Caps Changed Sports.)

The financial impact to the players won't be felt until mid-November when about 90% of them would normally receive their first paychecks. The risk to the players is that the league will harden its positions as more regular season games are canceled. The impact to owners is more complicated because of stadium contracts, team office payrolls, corporate partnerships, sponsorships and advance ticket sales. For the teams that have been losing money, there's actually a short-term financial benefit to withholding player salaries. The longer-term impact of losing fan support is far more difficult to assess.

Beyond the owners and players, an immediate impact will be felt by those working in supporting roles for the league and its teams. While these people aren't on either side of the bargaining process, they have a huge stake in the outcome. This includes the team staffs, trainers, arena employees, merchandisers, concessionaires and all those who make a living from the basketball industry.

Current Status
The entire 114-game preseason and first two weeks of the regular season, scheduled to begin on Nov. 1, have already been canceled. The loss of 100 regular season games scheduled through Nov. 14 will cost the players about $170 million in salaries. Several big name players including Carmelo Anthony and Kobe Bryant have indicated their potential desire to play overseas if an agreement isn't reached soon.

The biggest stumbling blocks are still the salary cap and revenue sharing. A federal mediator was brought in to attempt to find common ground and close the divide between the sides. So far he's had no success, and it won't be long before the league has to make a decision regarding games scheduled for the third week and beyond.

The Bottom Line
All league business is on hold, and the teams and players are prohibited from having any contact until a resolution is reached. Several veteran players have publicly stated they are ready to sit out the entire season rather than give in to the league's demands. While the veterans can probably afford a long lockout, that view may not be shared by the younger players and rookies.

The two sides are far apart and appear to be dug in for the long haul. Commissioner David Stern has already indicated that all the games through Christmas are questionable if an agreement isn't reached by about the end of October. The longer the lockout continues, the more likely it is that a large part or all of the season will be lost. (To learn why this collective bargaining agreement in controlling player salaries is so important, check out Top 7 Pro Athlete Contracts.)

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