~ A Mediator's Musings ~

April 24, 2012 ~ Malcolm Gladwell, the NBA and the Lockout:
A Mediator’s Dissent (part 2)

In our last post, we began a discussion of Malcolm Gladwell’s piece in Grantland, in which he asserts that NBA owners are not really in business, that they have to own their teams purely for the “psychic benefits” that ownership of a sports team provides, and that if an owner does care whether he makes money with his team, he should sell the team to someone else who will own it for the right reasons. Mr. Gladwell published his piece during the NBA lockout, and his words critique the owners’ bargaining position there. His references to team owners in other sports, however, makes it clear that he believes that this reasoning applies to them, as well—and thus ownership positions in labor disputes in other team sports. We’ll continue to point out why we disagree with Mr. Gladwell and discuss what we think the businesslike nature of team ownership meant and means to ownership/player relations.

Mr. Gladwell’s overriding point is that “professional sports owners don’t have to behave like businessmen.”  He points to sports team owners who make (or made) decisions he finds inexplicable in business terms and thus who must value (or have valued) ownership of their teams for reasons having nothing to do with the money they make (or made) from team profits.1  And the value of teams on sale, he says, is so much higher than their value as a business (that is, based on their profitability) that they should be compared to a work of art that a collector owns purely for the psychic satisfaction that ownership gives him, and not to other types of investments or businesses2.

Mr. Gladwell has a point—there is no doubt that owners of sports teams, especially if they bought their teams in recent years, have overpaid for them if valued strictly like any other business. And there is no doubt that some owners have made what, at least in retrospect, seem foolish business decisions. But so what? That doesn’t mean they aren’t in business and don’t or shouldn’t care about profitability and value:

• Unlike a work of art, which neither produces revenue nor creates cost3, a sports team does both. Without subsidies from other sources, an owner can’t allow his costs to exceed his revenue forever, as with any business. And if that owner borrowed money to buy his team, as so many have done in recent years as the prices have gone so high, he needs to operate a profitable business to pay the bills.

• Yes, purchasers of sports teams have paid more to buy them, especially in recent years, than their value as profitable businesses would suggest. Part of that decision may well be the “psychic benefits” of ownership, but part may just be a shrewd business decision to purchase a scarce asset which will grow in value and for which someone will similarly overpay (in part because of the “psychic benefits”) when that owner is ready to sell. What that buyer will pay will inevitably turn on both the business’s profitability and the “psychic benefits” of ownership to that buyer. The owner of a team can’t do much, if anything, to increase the value of his team’s “psychic benefits” to someone else, but he can do something to increase its profitability.

• In recent years, purchasers of sports teams have generally been or been financed by people who have made money in other businesses. Those purchasers may be able to call on personal resources, including those other businesses, to subsidize the sports team if cash flow turns lean. But some families have owned their teams for decades and appear to have no or very limited other business interests; for them the cash flow of the business may mean financial survival and its value may mean the future well-being of their families.   Examples might be the NFL’s Maras (Giants), Halas/McCaskeys (Bears), Rooneys (Steelers), Browns (Bengals) and Davises (Raiders), or the NBA’s Busses (Lakers). They are very much in a business and likely care very much about its profitability4.

No matter what their revenues and public visibility, most sports teams share one trait: they are very much family businesses.  Whether the owners have other business interests or sources of money, the teams are typically controlled and dominated by a small group (frequently as small as one) of often related individuals who have no accountability to public stockholders or other outsiders.  They can run their businesses their own way, which might include behavior that a public company could not tolerate, but which they perceive will benefit themselves and their families. Sports teams, like other family businesses, can practice some form of nepotism—family members on the payroll whose employment and level of compensation may be decided not just by their level of talent and contribution but also by their names. A family may be willing to sacrifice some measure of profitability to “share the wealth.” A sports team family business can give its owner a chance to behave like a fantasy team owner and try to win championships without regard to short term costs—partly for psychic reasons but perhaps because he believes a winning team will generate more fan interest and higher revenues and thus higher team value in the long run. He may be wrong, but a family business gives him the right to be wrong. Or the owner can behave in a disciplined and businesslike way that attempts to maximize profitability, cash flow and team value at all times, and many owners do exactly that. Sports team owners behave in the variety of ways that owners of family businesses have behaved for generations.

So what does this have to do with the lockout and labor disputes? Everything. A sports team owner is very much in business—usually a family business, but still a business.  And like any business owner, he is concerned about short term profitability and long term value; different owners may emphasize one over the other, but both are matters of concern.  The NBA owners’ position in the lockout, as it turned out, was not as much about short term profitability as about long term team franchise value. And that is why the owners had such a strong bargaining position in those negotiations and why the end result was favorable to them. The players are young men whose skills deteriorate quickly as they age, even (or maybe especially) if they don’t play. Missing a full season could have been financially disastrous to many of them because it would have meant giving up a full year of a relatively short but lucrative career. While the owners would have suffered from missing a season, they calculated, rightly or wrongly, that any loss would be more than made up by getting more of the revenues through a better deal with the players and thus increasing the profitability and, most important, ultimate value of their businesses. And that is precisely what happened–the owners took the risk of missing a full season and were rewarded with a favorable deal. Watch for similar attitudes in future labor disputes in the sports world.

–Your “still looking for psychic benefits” mediator

1 Mr. Gladwell specifically mentions Tom Yawkey, who refused to hire a black player for his Boston Red Sox until years after Jackie Robinson, Willie Mays and many other black players were starring in the majors, and Dan Snyder, currently owner of the Washington Redskins, who, he says, operates them as a toy. Even if Mr. Gladwell correctly characterizes these owners, the very fact that their unbusinesslike behavior is worthy of mention suggests that in this respect they are “outliers” among sports team owners.

2 One would suspect, though, that most collectors of high-priced art (like a Van Gogh) have every expectation that they or their families will sell the work someday and thus will have great interest in realizing the premium inherent in the work’s psychic value to their buyer.

3 The art owner might have to pay some insurance premiums and personal property taxes, but those are likely to be trivial.

4 As we discussed in an earlier post, the McCourts, the once beleaguered owners of baseball’s Los Angeles Dodgers, appear to have had similar interests, albeit perhaps in an extreme way, and to have treated the Dodgers as the source of funds to support their lifestyles.  They owned the Dodgers for only a few years.   It now appears, though, that, even with all their baseball, marital and financial troubles, they are about to sell the team for a lot more than simply “psychic benefits.” One has to think that that result must have been something that they contemplated even when they bought the team.