Why wouldn't we trust the owners?

A few weeks ago I offered a post at Huffington that concluded with the following paragraph:

Let me close by noting that NBA owners have also claimed they are losing money (a claim owners of sports teams have made since the 19th century). Such a claim deserves a post of its own (this is still one of my favorite stories on the subject). For now, I would briefly note that there is good reason to doubt this claim. After all, this is an industry where worker wages are capped (players in the NBA get 57% of revenues), a substantial portion of the NBA’s capital (i.e. sports arenas) is provided by the state, and firms have substantial monopoly power in the market place. Furthermore — and not surprisingly — the industry doesn’t seem to have a problem finding investors. So like the competitive balance claims noted above, the claim of substantial losses is so far not supported by much objective evidence. And that still leaves us with the simple story that people with a great deal of money often would like even more.

This paragraph led Tim Frank — Senior Vice-President of Communications of the NBA — to respond directly to me via e-mail.  Mr. Frank’s response essentially re-stated something that was posted at NBA.com last July.   As one can see, the NBA claims they are indeed losing money.

But as I noted at Huffington Post on Thursday, this argument is missing one key element.   The missing element is persuasive evidence that the league is actually losing money.  All we keep seeing from the NBA is a re-statement that they are losing money.  The actual numbers supporting this story, though, have yet to be presented.

My lastest for the Huffington Post doesn’t just note the primary problem with the NBA’s story.  It also discusses two other issues with the NBA’s story (click on the link to read the story).

I would like to note one issue with my analysis.  One issue I mention is that the link between payroll and wins in the NBA is rather weak.  The model I estimated (not noted at Huffington) looked at the link between team winning percentage and both relative payroll (payroll of the team relative to the league average payroll in a given season) and relative payroll squared.  Such an approach addresses the diminishing returns to spending.  As noted at Huffington, this model explains 12% of the variation in team wins. If we just look at relative payroll (without the squared term), we see that only 5% of the variation in wins is explained by team payroll.  Either approach reveals that much of wins is not explained by payroll.  And therefore another part of the NBA story is not confirmed by the evidence.

Let me close by noting that Chris Sheridan thinks this lockout could be resolved in time for the 2011-12 season to happen.  I think we can all hope Sheridan is right.  Certainly I would rather discuss basketball than these negotiations.

- DJ