Thomas Arnold, Hoopism fan and Economics student at William & Mary, has written a great article about the new player/team dynamic from an economic stand point. We really enjoyed it and hope you do to. The article is in two parts, be sure to read part 1. You can follow Tom on Twitter @tomrannosaurus.
Part 2: New NBA Econ 101: Salary Caps and the Demise of Small Market Teams
While LeBron is the first player to fully realize the ‘new’ economics of the NBA, he is not the first player to maximize his utility; he is simply the first to do so while leaving his hometown team. The issue is not with LeBron, or Carmelo, Deron, Dwight or Durant, but with the NBA’s terrible player pay rules. For the past 27 years, the NBA has had a salary cap. Fans of small market teams generally favor the cap as it is supposed to level the playing field for their teams. The NBA has, for 27 years, agreed with this view. This year the annual cap is $20,315,400, and it stands to reason that $20 Million in Milwaukee is the same as $20 Million in New York, right? No. The salary cap is going to disadvantage small market teams in the NBA in the future.
Simple logic would suggest that star players will want more to play in Salt Lake City than they would to play in Washington D.C. However, under the salary cap, the Jazz can’t offer a dime more than the Wizards, even with their small market disadvantage. There is no provision in the current CBA that would let a small market team offer a player more income, than a large market team, even if the player can make millions more in the large market from external sources. So small market teams are out of luck in free agency. What about the draft? If a small market team is lucky enough to draft a player that deserves a max contract after their rookie contract expires, they will most likely not be able to offer the player enough money to stay, rather than leave for a large market or for a team with a better chance of winning a title. The Bird exception does offer some wiggle room, but simply put, the extra money allotted by the Bird exemption is not enough to compensate for players desire for a championship, and not nearly enough to make up for lost external income available in a large market. Small market teams will lose their star draftees to free agency. The cap, meant to level the field, is essentially useless. The cap is broken.
The current breadth of players deserving of max contracts is larger than at any time in NBA history (if all those who receive max contracts deserve them is another issue). At the same time, the cap is still set at a level that assumes that there are only a few players worth maximum money. Teams must then fight for max contract players not based on the money they can offer but on externalities, the chance of a title or large endorsement deals. Essentially the NBA cap as it is currently designed will foster stratification of NBA teams into three categories: Large market teams that offer a max contract player external income, teams that offer a player a shot at a championship, and small market teams that offer neither.
Take, for example, the Knicks. The Knicks are a large market team with little hope for a title within the next two years, yet they have landed two max contract players. It is clear that Amare and Carmelo stand to make millions from playing in New York through secondary contracts that they could not make in Phoenix or Denver. Carmelo and Amare maximized their utility by taking a max contract and external income. The Heat, on the other hand, offer the tantalizing prospect of an NBA title. LeBron and Bosh each maximized their utility by signing with Miami, forgoing some income for an increased chance of a title.
Where does this leave small market teams? Essentially small market teams will be forced to compete under an entirely different set of rules than those teams that can attract max contract players. The Spurs are the perfect example of this. The Spurs currently have no player individually deserving of a maximum contract, and as such are not in jeopardy of losing their team to free agency. Additionally, they have legitimate title hopes and therefore can be expected to remain cohesive. The Spurs accomplished this almost exclusively thought prudent drafting and shrewd trades. The Spurs are the role models for small market NBA teams, while Miami is the prototype for large market NBA teams.
All of this analysis leads to a few clear predictions: small market teams will be forced to draft players from the middle of the pack in hopes that they can mold them into premier players, think Manu Ginóbili and Tony Parker, even if they have the opportunity to draft a future star player. Small market teams will be forced to give up their stars for players that can be offered more money to stay, unlike max-contract players who can be offered the maximum and still choose to go elsewhere, think Carmelo. Large market teams will attract talent because of the external income opportunities. These teams will then be able to attract more talent with their existing talent and the promise of a championship that comes with the concentration of talent.
Baring a drastic change in the CBA, this is the new NBA. Small market teams will become talent mills for large market teams. Dynasties will be formed, Boston, L.A., New York, Miami will compete each year for the title while the Clippers and Golden State incubate talent that they will lose to a team with title hopes. That is, unless the CBA changes the player pay structure. Enjoy the 2010-2011 San Antonio Spurs, because such a masterpiece of mid-level contracts may not appear again for many years to come.
What about OKC, or the Trail Blazers barring catastrophic injuries to Oden and Roy? Or if the Cavs actually had decent management? I agree that as a small market team with a potential max free agent, the onus is on you to put together a championship team or a team with championship promise before your star decides to move to greener pastures. However, this is not an impossible task- San Antonio did it and it will be done again.
Good article, but Golden State is far from a small market – just a large market that has suffered from poor management for the last 20 years. Larger markets definitely have an advantage in the glitz factor and in luring free agents, but endorsements don’t necessarily cover the loss in earnings a players takes when he leaves his original team for a big-market one.
Small-market teams have a definite disadvantage in the free agent market, but smart management can help alleviate that detriment. As seen in OKC, San Antonio, and Portland (go Blazers!), small market teams can land all stars through smart trades/drafting, smart cap management and, at least in the case of Portland, ownership willing to spend to win. Golden State, although a top-five metropolitan area, has been plagued by the reign of Don Nelson in the short term and, in the long-run, ownership unwilling to pay to keep their stars (the Clippers are similar in that sense). Now that the ownership has changed and has openly stated their willingness to pay, that market could change.
A lot of small market teams (Minnesota, Memphis, etc.) aren’t middling because of their market size, but because of ill-advised trades/weak FA signings and draft picks. Larger markets with bad management have encountered these problems, too (New York comes to mind), but their free agent acquisitions often overshadow these mistakes in the long-run. There will always be the Lakers and the Celtics and similar teams with superstars, but smart management can prevent small markets from staying irrelevant.
I agree (mostly) with your premise but I can’t agree with all of the logic or the conclusion.
Players choose where they go for two reasons:
1. Money (salary plus endorsements)
2. Externalities — specifically,
– the cultural experience in the city (nightlife, diversity, size, celebrity amenities and the adoration of its sports stars). NY, Chicago, and LA will always have advantages here. I’ll give Miami an honorable mention because of the allure of south beach to twenty-somethings but it’s really not a sports town (nor is it a large market) and the three amigos will soon learn that other than the notoriety they’ve created themselves, nobody really cares what’s happening in Miami sports-wise.
– the perceived chance to win (quality of the roster).
– the quality of the organization (how well it drafts, how loyal it is, how liked/respected is the coaching staff, how the fans treat players) This is where the Clippers lose out big time.
So market size is just one component (For one thing, the Clippers and Warriors play in the 2nd and 6th largest markets in the country, respectively).
And I can’t agree that “Dynasties will be formed, Boston, L.A., New York, Miami will compete each year for the title…”. Given the age of Boston’s core, they are probably going to NOT be a Top 4 team for a while after this season; the Knicks have lost most of their games with their two all-stars and have no money for a supporting cast. In the meantime, small market teams in Oklahoma City, New Orleans and San Antonio are doing just fine. And you completely left Chicago out of the discussion while it probably has the best future dynasty shot of any large market team right now…
So yes, in the short term there will be a steady migration of top players to large markets and occasional collusion by players to consolidate their talents in one city. But it’ll be a short-lived trend as players discover it’s much more complicated than that to build a winner if your name is not Shaq.
“Boston, L.A., New York, Miami will compete each year for the title while the Clippers and Golden State incubate talent..”
This sentence refutes itself. To clarify, insert “LA” in front of Clippers. Also, it seem the Nets play in a larger market than the Lakers, yet the Lakers have been slightly more successful for, oh, all time. And the Clippers are a.. Okay, just.. The Clippers. Competent management would seem to be a nontrivial factor.
The natural evolution of the situation as described would be for teams to continue gravitating to larger markets, e.g. Kings –> LA market, Fort Wayne Zollner Pistons –> Detroit. (For the Sacramento Lachrymentalists crying about the gosh-darn unfairness of it all, I’ll append the Rochester Royals –> Cincinnati, Cincinnati –> Kansas City, etc…) But it is this same LA destination market that is the home of the Incubators. (Michael Olowokandi wasn’t so bad — he was just being incubated.) So obviously something more is at work here. Other owners can see that the Clippers are proof that a team doesn’t have to be good to make money. The equilibrium should occur when the major metro areas have multiple teams and less dense areas share teams (The Rocky Mountain Sun-Nuggets, e.g.). True parity will come when every basketball player represents approximately the same number of citizens. If this seems unfair because of historical biases, one need only ask oneself if we were to start from scratch would it be fair to bless the average citizen of Memphis with SEVEN TIMES as many NBA franchises as the average citizen of Chicago?
There is another factor which subverts the standard large-market migration endorsement income theory. While Amare Stoudemire might sell more shoes from NYC, his primary source of income is now taxed not just by the Feds, but (for at least his home games) by the state of NY and NYC as well. If the marginal tax liability for the entire Knicks roster doesn’t exceed the marginal endorsement post-tax income, it’s certainly on the same order. If there were a true salary cap in place, the large-market tax consequences might actually reverse the great migration. Perhaps a future NBA finals will see the Cheyenne Sharks rumbling with the Juneau Jets.
The dominant factor driving the large/small market dichotomy is the soft salary cap. Having a luxury tax in place of a true salary cap really will amplify the advantages of the large market teams. In fact, you couldn’t devise a better system for promoting the large markets. I don’t think that this is even a happy accident. The league tilts the playing field while simultaneously chirping about egalite. At the level of the team, the marginal payroll from exceeding the fake salary cap will surely wipe out the ancillary income that is claimed to be driving the great migration. A large market owner with the latitude to spread around $20M would seem to be a lot more appealing to a star (or perhaps even more so for the ACGreen-type vital role-player) than spending his “nights and weekends” doing ads for Whataburger. There is a natural experiment that completely blows the large-market ancillary income myth out of the water. It’s name is Lamar Odom. The reason Lamar Odom is a Laker is not because he can now get more endorsements playing in Los Angeles than back when he used to play in, um, Los Angeles. It’s because the soft salary clap allows the Lakers to pay an all-star to come off the bench.
Thank you for this great article, I was just wondering, what is the Bird Exception?
A few points:
The Los Angles Clippers are indeed a small market team, L.A. is a massive city but the relative fan bases of the two teams is so disparate that it is clear the Clippers are not utilizing that large market. There are other teams that share areas, Nets and Knicks, but each has their own fan base, and importantly their own arena, and as such are not subject to the direct comparison that the Lakers/Clippers dynamic sees. This direct comparison that the Clippers are subject too castrates the team, L.A. is not their town.
I agree that long run equilibrium in the NBA is unlikely because of the oligopolistic nature of the league (the small number of employers/laborers gives each employer/laborer power in the market and therefore removes perfect competition). I speak of this equilibrium only in the medium run, perhaps the next 10 years. This is also relevant when speaking about the profit of each team. No where did I say that small market teams wont make money. In a cartelized, non-perfect competition environment like sports leagues, if the league succeeds and the degree of carelization is high enough, they all will make profits. Rather the difference is that small markets will begin to struggle to win titles, not to make money.
Further, I agree that small market teams will draft and/or trade their way to all-stars, but they will have to make a value judgment that is entirely new in the NBA: If we draft or trade for this player, will he just leave at the end of his contract? Is crafting his talent for one to seven years, only to have him leave and take the franchise with him worth it? I posit that many teams will say no, it is not worth it, and choose to compete with a team full of upper mid level players in an elegant system, ala the Spurs.
Finally, I think that it is clear that the progression towards dynastic large market teams has began. Permanent dynasties? Certainly no, but also certainly unlike the NBA we have known. I agree that the soft cap is an issue in the inequality of teams, but more than that, as I mentioned in the article, even if there were a hard cap small market teams would still lose on externalities. Because the NBA is not a competitive market for labor it is crazy to impose a hard cap, calling it market dynamics, and letting the market determine competition. Rather, Stern should implement a market weighting system wherein small market teams get more room under the cap than large market teams. As externalities become more and more important, the league should work to keep them in check.