Hard Times on the Hardwood

The NBA has some financial housecleaning to do, and that isn’t a bad thing.

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During the last 30 years, the sports business has remained remarkably resistant to economic trends. The national economy goes up, and sports thrive; the economy dives into a recession, and sports still thrive. The reason is simple. Sporting events are a reliable deliverer of eyeballs to TV screens. Networks love this: Their costs are limited to camera, description work and a marketing campaign.

As the audience for television diversifies among hundreds of different cable channels, sporting events have retained a larger share of their audience than prime-time dramas. Thus every major sports league has received extraordinarily large sums of money from TV networks for broadcast rights, and the resulting exposure has generated billions in additional money from corporate sponsorships, luxury boxes and on-site advertising.

This time, though, things are different, and signs arrive almost daily. This baseball season, many free agents who eagerly awaited annual contracts in the tens of millions found themselves settling for one-eighth of their expectations.

In the NFL, the biggest and most profitable sports league, a few big contracts have been doled out, mostly by teams that either have great need (the Detroit Lions) or teams that like making big headlines (the Washington Redskins and Oakland Raiders). But many teams have laid low, preferring to sit out the dance. Meanwhile, NFL commissioner Roger Goodell has taken a 20 percent pay cut and eliminated 169 positions in the league office.

It almost goes without saying that the auto industry woes are clobbering NASCAR, and the PGA is really, really happy to have Tiger Woods back to offset what would have been a steep downturn in revenues.

No sport has been affected by the economy more adversely than basketball, especially in the NBA. Last week David Falk, the agent who handles most of Michael Jordan’s dealings, made a splash predicting that a long lockout loomed when the league’s collective bargaining agreement comes up for renewal in 2011. That dire prediction was followed closely by the news from NBA commissioner David Stern that the NBA had secured a $200 million line of credit to aid 12 teams in danger of losing substantial sums of money this year. Earlier in the season, the league cut 80 jobs or 9 percent of the workforce from the league’s main office. Evidently the resumption of the Boston Celtics-Los Angeles Lakers title rivalry, which recalled the halcyon eras of the ‘60s and ‘80s wasn’t enough to save the NBA from the current realities.

In other words, all the carping about the NBA’s finances and future isn’t just the usual, fashionably snarky carping. There are real problems. But this doesn’t mean the NBA is the next Bear Stearns or Lehman Brothers. Instead it means that the league has some housecleaning to do, and that isn’t a bad thing.

The problem is at the executive level where these contracts are offered and approved. For many years, NBA front offices were run with the prudence of a teenager at a mall with an unlimited credit line. Absurd contracts were handed out with little regard for risk or future financial impact. Those deals are what have most NBA payrolls stuck near the luxury tax line (a dollar-for-dollar penalty imposed on by extravagant teams like the Knicks who spend more that the allotted amount). At the trade deadline, even the Lakers and Celtics were dumping players to minimize their penalties.

Teams were run in this irresponsible way because the bottom line didn’t matter. A little red ink was a good way for owners to hide the profits from their other businesses. What we’re seeing is what happens when those other businesses start coughing up losses. Suddenly the sports franchise was just another attack on the owner’s suddenly shaky finances. (And let’s get this much clear, no one owns a sports franchise to make money; there are—or at least were—better returns on the dollar in other sectors.)

Teams should be run like businesses, rather than self-aggrandizing devices. That should mean professionalization in the front office; real human resource managers with the ability to measure proposed salaries vs. production and projected production and who will negotiate contracts based on data rather than former players doing it on a hunch or two.

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