The Major State(ment) of NBA Economics

Basketball as a sport has been around for a long time.  Officially being recognized as a sport in 1930 by the International Olympic Committee (IOC) led eight basketball-loving countries to form the Fédération Internationale de Basketball Amateur .  Shortly after in 1934 the United States of America was welcomed into the FIBA.  This was the moment that the rest of the world would come to realize that Americans DOMINATE Basketball.  Since Basketball's inclusion in the 1936 Olympic games, Team USA has won 13/17 Tournaments.  America's victory in that first olympic games was a factor in the creation of the National Basketball Association (NBA) in 1946.   The original NBA was made up of eleven teams, four of which folded after one year. Flash forward to 2010 and there are currently thirty NBA teams in twenty-two states. It's safe to say that basketball has long been a part of American society, however, the NBA's economic impact on America has long been an overlooked statistic.  Having an NBA franchise in a city provides a strong business that the city can grow around. An NBA team provides its city with jobs, a venue to hold large events, and a business in which millions of dollars can flow through generating economic growth.  Recently, the NBA has had financial troubles. In 2010, seventeen of the thirty teams operated at a loss.  This could be due to awful CBA agreements the league implores, or it might have something to do with the tough economic times that have recently led the the trend of a disappearing middle class.  With the middle class unable to afford the luxury of attending NBA games, the association has also been met with hard times.  Perhaps the recent failures of the NBA act as a "canary in the mine shaft" with regards to the strength of the U.S economy.  Using economic insight, a relationship can be formed between the financial woes of the National Basketball Association and the disappearance of the middle class in America.  It is a dependent relationship where the NBA requires a strong middle class to be succeed.

The financial success of the NBA can be molded into an economic indicator. The concept of using peculiar consumer goods as indictors of the whole economy is not a new concept.  Believe it or not this idea originated around a theory involving mens socks, and subsequently men's boxer briefs.  "Here's the theory, briefly: Sales of men's underwear typically are stable because they rank as a necessity. But during times of severe financial strain, men will try to stretch the time between buying new pairs, causing underwear sales to dip."  The NBA as the consumer product applies to the same theory: That in strong economic times the NBA will flourish as consumers have more disposable income to spend on attending games/buying merchandise etc..  Oppositely, in rough economic times the NBA will struggle due to fans deciding to forgo funding the league. The NBA is a American consumer product just like underwear or socks.  Sports are a necessity in American culture. Thus the success of the NBA and the strength of the economy are correlated. The NBA is an economic indicator. Given that the NBA is currently  in a grind in a financial grind then it must be true that the American economy is struggling. In recent times, struggling is an understatement.

Lets face it, times are tough in today's economy. On a national level America is importing much more than its exporting while the massive budget deficit continues to plummet.  The unemployment rate is as high as its peak of the 1980's. Also, our stimulus actions to revive the economy have been futile:  “The recovery is so weak that it is not strong enough to generate new jobs for the new entrants in the labour force, let alone to find jobs for the 15 million Americans who would like a job and can’t get one."    The economy has seen a slight increase in growth over the last year, however many believe this to be a type of "false" growth.  "Mohamed A El-Erian, chief executive officer at Pacific Investment Management Co (Pimco), has estimated the possibility of deflation and a double-dip recession in America at 25%."  Deflation, or a currency losing value in terms of other currencies, is a more common concept.   A double dip recession is a more complicated notion.  In layman's terms, "A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession."   This is a probable future of America's economy.  We faced a recession in 2008 and have seen some returns over the past two years, but a double dip recession would be catastrophic to the already breaching economy.  America's economy is in trouble, and it's likely to get worse before it gets better. Based on the original correlation theory, the NBA must also be going through tough times.

As the American economy has tumbled so has the economy of the NBA. Though NBA commissioner David Stern would like the public to think otherwise, the NBA is feeling the squeeze too. "Despite Stern's assurances, the NBA has not been immune to the financial down turn, slashing eighty jobs from its U.S. work force earlier this month."  In their annual valuations report, Forbes magazine stated that in 2010 17/30 NBA teams operated at a loss.  This means that seventeen owners would have made more money if they had just locked the doors and not played.  That number is up from twelve teams in 2009, and even further from ten teams in 2008.  This trend is worsening because the NBA is doomed by its reliance on ticket sales. "Ticket sales are not sexy--like streaming basketball games on the Internet or opening up offices in China--but they still pay the bills for teams. The NBA remains a gate-driven league." In recent years the revenues from ticket sales are declining annually. In 2009, "Net gate receipts, the money teams make from ticket sales, fell to an average of $828,985 per game, down from $894,823 at the same point last season. Only nine teams were up or flat in average net gate receipts through Nov. 29, while 21 teams saw a decline."   This season they are even worse. For example, one game this year was played in front of less than 1000 fans.  The typical arena holds over 20,000.  This season, a majority of teams don't regularly sell out games, and some never do.  

History proves that 2010 isn't the first time that economic recessions and the NBA struggling were correlated.  The last time the NBA had to lockout do to financial issues was in the 1998-99 season.  Owners complained that they weren't making any money and locked out the players thus canceling half the season.  This was followed by a recession in early 2000. At the beginning of the NBA in the 1950, the association consolidated from seventeen to eleven to eight total teams.  Coincidently, America went through three recessions in 1949, 1953, and 1958. Oppositely, the league expanded in 1970's as the economy took a turn for the better. Again the league struggled in the early 1980's as the economy was hurt by energy and oil crises.  Then, it flourished in the mid to late 1980's and America's economy boomed.  During that time, the NBA became what it is today and really hasn't backtracked much.   The true source of today's the problem lies not with the NBA but with a sector of fans no longer able to afford  attending games.

A consequence of the struggling economy that has taken a tole on the NBA's success is the disappearance of the American middle class. The American middle class is a dying breed. Analysis of the American economic classes post recession highlights that the middle class has been esspicially hurt.  The rich are still rich. The poor are still poor, however, this group is simply growing larger.   The middle class is molding into the poor. MotherJones.com put together a series of graphs detailing just how great the divide is becoming. Eventually, we could have the rich, the poor, and the poorer. Micheal Synder, editor of The Economic Collapse, has detailed this in an article published on Yahoo finance.  In it, he gives "22 statistics detailed here [that] prove beyond a shadow of a doubt that the middle class is being systematically wiped out of existence in America."  To highlight a few, 

"•The top 10 percent of Americans now earn around 50 percent of our national income.  
 • 83 percent of all U.S. stocks are in the hands of 1 percent of the people. 
 •The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the   
  nation’s wealth.
 •Approximately 21 percent of all children in the United States are living below the poverty line in 2010 - the    
   highest rate in 20 years
 • Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8
    million in 2009."

Synder continues his concerns about the destruction of the middle class in a topic specific article. He states, 

"The middle class in America is being ripped to shreds right in front of our eyes and very little is being done to stop it.  Desperation is rising across the nation.  More Americans slip into poverty every single day.  It is almost as if a cloud of gloom and despair has descended upon the U.S. economy and every single month the situation only seems to get darker."

David Autor of MIT, has concluded that the Middle class is becoming extinct because, "America's workforce is splitting into high- and low-paying jobs. The middle-income demographic is disappearing".  The evidence and numbers are there to conclude that indeed the middle class is disappearing from America.  This is a scary thought as the last time this happened on such a broad scale was prior to, and during, the great depression.   Obviously this isn't good for the economy but it also is the reason for the struggle of the NBA.

It must be argued that the NBA needs a strong middle class to survive. The NBA revenue stream relies too heavily on ticket sales. Conversely, to make up for a team's high operating income they make tickets expensive and provide forty-two homes games per team.  The problem is that the percentage of Americans that can afford these season tickets has dwindled.  Even President Obama remarks that "I understand that salaries are high, ticket prices are going to be high, but you know, you hate to think that the only person that can go to a game is somebody who's got a corporate account." If the supply of games is, then it will lead to low demand for the games.  Also, since the NBA must maintain high ticket prices to overcome high operation costs, consumers demand to purchase tickets decreases.  This has led to the NBA's financial problem. To better understand why teams require a middle class an analogy can be drawn.  By comparing the economic classes to the sections of a basketball arena the picture is more clear..  The extremely wealthy will always fill the best seats closest to the court.  The polar opposite poor will always fill the cheap seats at the top of the arena.  It takes a strong middle class to fill out the entire arena.    The disappearance of this class has led to more and more teams unable to sell out their games. As the middle class becomes poorer they are faced with two options for supporting the NBA.  They can move up to the poor seats. Or they just abandon the NBA all together.  Unfortunately for the NBA people are imploring the latter option.

Other major American sports leagues don't require a strong middle class to survive.  They have found a way to work around the issue of a poorer America.  The National Football League (NFL) only has eight home games per team. Based on the NFL's monster popularity there are numerous fans that love to attend games for the sentimental/entertainment value. By limiting the supply of games that local fans can attend, the NFL's fans having a higher demand for tickets to the games.  this allows the NFL to charge a premium for tickets. This, along with incredible TV deals and revenue sharing, caused only one NFL team (out of 32) to operate at a loss in 2009. Major league baseball implores the opposite strategy. They supply a high quantity of games to the local fans.  By giving each team eighty-one home games, it allows the franchises to charge extremely low prices for the tickets.  This strategy allows them to generate ticket sales for two reasons.  One is that all Americans can now afford to attend the games so there is a revolving door of fans filling up the stadium.  Two is that the low prices allows teams to put the most fans in the stadium, which leads to more inside the park revenue of concessions/merchandise purchases. Like the NFL, the MLB only had two (out of thirty) teams operate at a loss in 2009.  These organizations have figured out something that The NBA hasn't. The NBA implores a failing strategy of numerous home games coupled with expensive tickets. 

This argument is based on the dependent relationship of the NBA and a strong middle class, however, there are some that would argue other factors contribute to the NBA failure.  Perhaps it's that the NBA has lost its popularity among sports fans.  Maybe people no longer care for the game of basketball and the product the NBA has to offer.  This is possible but disproven by the fact that, "The N.B.A. All-Star Game on Sunday attracted an average of 9.1 million viewers on TNT, up 33 percent from 6.9 million last year, according to Nielsen. It was the league’s most watched All-Star Game since 2003, when Michael Jordan made his final appearance."  The NBA is as popular, if not more popular, than ever.  Other opponents will contend that although seventeen teams lost money, there were still thirteen teams operated at a profit last year. This kind of inner analytical review would definitely help the NBA fix its more troubled franchises.  However, most of the teams making money are doing so not based on financial strategies, but by other factors.  Six of the thirteen profitable teams are in the biggest U.S markets (New York Knicks, Los Angeles Clippers/Lakers, Golden State Warriors, Chicago Bulls, and the Houston Rockets). These teams are fortunate to be in areas where there are enough rich to sell out the entire arena twice.  Two teams (Detroit Pistons, and Boston Celtics) have a large unbreakable fan base due to their histories of success.  One (Toronto Raptors) are the lone team in an entire country.  There are only a few teams (Phoenix Suns, Portland Trailblazers, and Cleveland Cavaliers) that are succeeding in small markets that the economy has affected.  The majority of the successful teams are a product of their environments.  Their success relies on factors that other teams cannot reproduce on a whim.

The financial success of the NBA and the current state of America's economy have long been correlated.  The reason for this is that the NBA needs a strong middle class to survive.  When the economy is bad, the middle class shrinks, resulting in the NBA failing to sell tickets.  These are the reasons that the NBA is currently defaulting.  The middle class has almost vanished in the current recession, and the NBA will have to change its ways in the future if it wants to survive.  Currently, the player to owners ratio of revenue splits is 57% to 43%.  With the tough times the owners will need more money to keep the league afloat, or they will have to shut down. Consequently, that is what the league will likely do in the future.  The league plans to lock the players out if a new Collective Bargaining Agreement can't be reached.  The NBA doesn't realize that they could solve their problems by restructuring the amount of games played and the price of tickets that could be alternative solutions to their problem. They could adapt the philosophies of the MLB or the NFL in an attempt to open their doors to fans of any economic standing.  However, the NBA is run by millionaires and billionaires that don't feel the squeeze of the economy that the average middle class American is experiencing.  Thus in all likelihood the NBA will lock the players out in 2011 and the league will be hurt.  How it recovers remains to be seen.