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Monday, October 31, 2011

NBA lockout part 2: The best and worst case scenarios for the Utah Jazz

Following last week's blog on the NBA Lockout, several folks emailed me asking what is the best-case and worst-case scenario as far as the Utah Jazz are concerned with the new collective bargaining agreement in terms of luxury tax, salary cap, etc.

The best case for the Jazz will be three-fold:

Eric D. Schulz
1) A hard salary cap, which will force the "have's" (the big market teams like the Lakers, Knicks, Bulls, Heat, Mavericks) to compete on a level playing field with the have-nots. The big-market teams have such a financial advantage that they ignore the salary cap/luxury tax and consider them a cost of doing business. For example, the Lakers last season paid total salaries of $110.4 million, including $20 million in luxury taxes. If you look at the teams with the highest payrolls, they consistently are the teams in the Conference Finals/NBA Finals.

The National Hockey League (NHL) has a hard salary cap, and it appears to have restored competitive balance. Since their lockout season in 2005-06, of the twelve Stanley Cup Finalists, 10 different teams have appeared. In the same period in the NBA, the Western Conference champions have been only San Antonio (05 and 07), Dallas (06 and 11), and the Lakers (08, 09, and 10). In the East: Miami (06 and 11), Boston (08 and 10), Orlando (09), Cleveland (07), and Detroit (05).

2) Increased Revenue Sharing: The NBA currently has two revenue sharing mechanisms. First, all the monies collected from luxury taxes are distributed equally among those teams that do not go over the luxury tax limit. There is also a pool of money that small-market teams can earn based on a complicated formula that uses "performance & effort" criteria based on the teams sales and marketing efforts. If the team is deemed to have done all they can do in these areas based on their market size, they receive a portion of the pool -- but its a relatively small amount, one to two million dollars per team on average. And only a handful of small teams get these dollars every year.

The small market teams like the Jazz want to move to an NFL revenue sharing model, where teams get to keep their "premium" seating revenues (luxury boxes, Hollywood "Courtside" seats) and local sponsorship dollars, but the rest of the ticket revenues are pooled together as a league and shared equally. Small market teams also want local TV/radio rights monies included in the shared pool as well, since there is such a wide disparity among the values of those in cities like Los Angeles vs. Salt Lake City.

3) Franchise Player Designations: The NBA is on a slippery slope, with players now colluding to form their own All-Star teams. Boston started the trend with the trade for Kevin Garnett, followed by the Lakers acquisition of Pau Gasol. 2010 was the tipping point, when LeBron James, Chris Bosh and DeWayne Wade decided to join forces in Miami, and Carmelo Anthony forced a trade to the Knicks to join Amare Stoudamire, and together they are lobbying hard to get Chris Paul to the Knicks.

The NFL has Franchise Players, and it has worked well in keeping "stars" put. Had Cleveland been able to designate LeBron as their franchise player, Denver designated Anthony, and Utah designated Deron Williams, most of what has happened this past season in terms of "star" movement would not have. But under the current system, the good ol' days of Karl and John playing for a Utah team their entire career is never going to happen again. The Jazz will be able to do what they did with Deron - re-sign him to his first max contract, then be forced to trade him or watch him walk in year 6 or 7 (just when he is reaching All-Star status). Small market teams will constantly be in rebuilding mode, unable to compete.

So what is the worst-case scenario for the Jazz?

No salary cap. In other words, keeping some form or variation of the luxury tax, and not reducing the basketball related income down to at least 50 percent. The big market teams have such a huge advantage financially, it's akin to Zions Bank trying to compete with Citibank. As long as the big market teams can "buy" their advantage and have owners like Jerry Buss, Mark Cuban, and other rich people, the Utah's of the world will never be able to compete. Sure, they may have a one-year blip like the Jazz run to the Western Conference Finals in 2007, but nothing sustainable. Money always wins in the NBA.

The other thing that needs to get fixed are the outlandish salaries paid to mid-level players…guys who fill up the roster, but aren't putting butts in seats. Guys like Al Jefferson ($14 million), Mehmut Okur ($12 million), Andrei Kirilenko ($17 million), and Paul Millsap ($8 million). Sure, these guys are good, but people don't say "Gee, lets go drop a hundred bucks to see Andrei Kirilenko tonight"; they DO say that, however, for guys like Kobe, Kevin Durant, LeBron, and Dirk.

To fix it right, a hard salary cap, where the total team salary can't exceed X no matter what, would by default drag down these mid-range guys salaries. Teams would end up doing what Miami did last year - pay the three "stars" good money, and everybody else makes minimum wage. That's how it should work – and THAT would restore competitive balance to a league of have's and have nots.

- Eric D. Schulz

Eric D. Schulz is the Co-Director of Strategic Marketing and Brand Management at the Jon M Huntsman School of Business at Utah State University. Prior to joining the University, he spent five years as Vice-President of Marketing for the Utah Jazz (NBA); he previously was VP of Marketing with the XFL Football League, and served as a General Manager in minor league baseball. He can be reached at

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