Contrary to Gladwell, NBA Owners Do Get to Have Their Cake and Eat It, Too

Malcolm Gladwell's recent piece for Grantland argued that there was a faulty premise in popular discussions of the current NBA lockout. According to Gladwell, the faulty premise in discussions of the NBA lockout is that owners are losing money and, as businessmen, need to change the model because businessmen need to make money. The premise -- of NBA owners as ordinary businessmen -- is flawed because the NBA isn't an ordinary business and its owners don't own franchises for the same reasons that motivate ordinary business owners. Instead, Gladwell argues, owners buy teams for their psychic rewards, not to make money and that, therefore, owners are wrong to complain about lack of profitability and players are missing the point when they question owners' claims of financial distress.

Gladwell's article, which I enjoyed reading, includes its own faulty premise. The faulty premise is that owners face a trade-off between the psychic rewards of owning a team as the ultimate fantasy toy, and a desire to make money as hard-headed businessmen. In fact, owners in all of the major sports have shown an unwavering desire to make as much money as possible precisely by taking advantage of the fact that sports are not ordinary businesses. In fact, and this is directly relevant to the nature of American crony capitalism, owners do get to have it both ways.

Gladwell makes much of the example of Tom Yawkey, the long-time and ardently racist owner of the Red Sox. Yawkey would rather lose money than tolerate having blacks play for him. The Red Sox were the last major league team to suit up an African American player -- in 1959 -- and this irrational prejudice undoubtedly cost the team wins and money during the 1950s. Gladwell contends, reasonably enough, that Yawkey's behavior was irrational from the standpoint of winning -- and making money -- but explicable when one considers whatever psychic benefit Yawkey derived from running his team the way he wanted to. This, says Gladwell, is the real payoff to owners, who are already wealthy and don't really need to make more money.

But Yawkey is not an apposite point of comparison for contemporary NBA owners. Yes, the Mark Cubans of the world clearly revel in owning a sports team. But they've also leveraged all of the advantages of American crony capitalism -- whereby the rich and politically connected get to write their own rules, rather than playing by those which constrain the behavior of ordinary market actors -- to turn their franchises into cash cows while simultaneously poor-mouthing about their finances and misrepresenting themselves as caring, above all, about serving their fans.

There is good evidence, in fact, that NBA owners and Commissioner Stern are lying about their finances in order to secure for themselves even more riches than they already make (Gladwell is certainly aware of this). And they appear willing to sacrifice an NBA season to do so. Nate Silver and Arturo Galletti have documented some of the ways in which the commissioner is obviously misrepresenting the financial health of his franchises on behalf of the owners, by citing narrow profit and loss statements that don't begin to capture how lucrative it is to own an NBA franchise. They certainly aren't doing this to serve the fans. And they aren't doing this because they have a naïve misunderstanding of the real benefit of owning a team. They're doing it because they have reason to believe that this is a wise course of action for them in the long run -- they'll make more money in the future than they already make; fans will come back to the game eventually; and most media will fail to characterize accurately just how avaricious the owners are, preferring instead to focus on how much money the players make.

Gladwell makes clear that looking at top-line profit and loss data doesn't begin to capture how remunerative sports ownership is. For example, he writes:

Pro sports teams don't operate in a free market, the way real businesses do. Their employees are 25 years old and make millions of dollars a year. Their customers are obsessively loyal and emotionally engaged in their fortunes to the point that -- were the business in question, say, discount retailing or lawn products -- it would be considered psychologically unhealthy. They get to control their labor through the draft in a way that would be the envy of other private sector owners, at least since the Civil War. And they are treated by governments with unmatched generosity. Congress gives professional baseball an antitrust exemption. Since 2000, there have been eight basketball stadiums either built or renovated for NBA teams at a cost of $2 billion -- and $1.75 billion of that came from public funds.4 And did you know that under the federal tax code the NFL is classified as a nonprofit organization?5 Big genial Roger Goodell, he of the almost $4 billion in television contracts, makes like he's the United Way.

Of course, every article about owners and their finances ought to begin by acknowledging the Beeston rule. Thirty-odd years ago, the former Blue Jays executive Paul Beeston said: "Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every national accounting firm to agree with me." And it's an indisputable fact that the economic climate in general and accounting rules in particular are less favorable to large entities like sports franchises today than when Beeston made that statement.

For years, Forbes magazine has been doing great work highlighting the leagues' misleading claims about their profits and losses. As I wrote a few years ago, one illustrative example of how sports owners leverage their franchises into yet greater wealth was the Los Angeles Kings and Staples Center owner Philip Anschutz. According to a Forbes report in 2004, Anschutz bought the Kings for $113 million in 1995. The Kings lost $5.3 million in 2003-04. However, Anschutz parlayed that franchise into a green light from the city of Los Angeles to build Staples Center in downtown Los Angeles in 1999.

Forbes noted that Staples was a windfall for Anschutz -- the arena was busy almost every day or night during the year at the time of the report. Forbes observed that "premium seats for corporate fat cats are cross-marketed for other teams and events. Documents related to a bond offering on the building show that bankers estimated Staples Center would generate operating income of $50 million last year (2003-04, the year before the NHL lockout that wiped out the 2004-05 season), only a fraction of which shows up on the Kings' P&L statement."

In fact, a senior executive for the holding company that owns the Kings was quoted in the Downtown News in 2000 as saying, "If it wasn't for the Kings, none of this would have happened." (and remember, the Kings declared a loss in 2003-04).

Anschutz' story is not unique. Possession of a major sports franchise is typically a gateway to vast increases in an owner's personal fortunes, none of which is ever acknowledged by owners or commissioners and which players associations usually fight in vain to get sports talking heads to acknowledge. But the bottom line is this: the rules of the game are now structured so that there is no need to sacrifice profit for psychic reward (of course, overt racism and related prejudice is one thing that sports owners can't get away with anymore. See: Marge Schott). In other words, owners can have their cake and eat it, too.

Franchise ownership, now more than ever before, is a license to print money and to parlay existing wealth into ever greater wealth, regardless of success on the field. Owners may prefer, as Gregg Easterbrook noted this morning, to construct losing teams to make even more money, as several NFL franchises appear to be doing (and several MLB teams also appear to be practiced at). But it's both virtually impossible for owners not to make money on their clubs nowadays and virtually impossible that they won't -- individually or collectively -- lie about their finances in order to insist that they are entitled to make even more money, all while insisting that the fans are their top priority. Gladwell gets, of course, that owners have no business complaining about their business. But stories about eccentric racist owners from a bygone era suggest, however unintentionally, that owners are less ruthless, less driven by greedy cronyism (often at fans' expense) and more like the rest of us (in our supposedly shared fanaticism) than is really the case.