John Wall’s Contract and the Risks of Running an NBA Team

Washington Wizards' John Wall celebrates in Washington

We talk a lot about how NBA front offices fail on this blog. The results speak for themselves. Of the 30 NBA teams, only 2 have made it to the playoffs every season for over a decade: the Spurs and the Nuggets. And only the Spurs can also proclaim regular post-season success.

When it comes to leadership, the notion of risk often comes up. NBA management is hard right! They have to risk a lot to win, right? Well, not exactly. Recall the following:

  • Cities heavily subsidize the cost of stadiums.
  • Players’ salaries as a whole are fixed.*
  • Individual player salaries are fixed.*
  • In regards to player contracts, teams tend to hold most of the leverage.*

One reason all of these advantages don’t alway win out is that people are irrational. Players behave unexpectedly. Owners and GMs and coaches behave unexpectedly. But that said, the idea of risk is low. Let’s examine a prime example.

The Washington Wizards acquired John Wall, arguably the top prospect, in the 2010 draft. Yet another risk buffer, the NBA allows poor teams to select the “best” talent. And thanks to the NBA’s contract rules, John Wall’s contract has been very cheap. The risks that Washington has dealt with thus far regarding Wall are virtually non-existent. It gets worse.

Negotiating with yourself

The Wizards just inked Wall to a five year max deal. John Wall’s contract is such that as long as the Wizards extended a minimum offer at the end of the season (I believe somewhere near $8 million for a single season) then John Wall was a restricted free agent. This means that they could have matched any offer John Wall received, if he agreed to its terms. Additionally, the rules also prevent other NBA teams from offering as good of a deal. The Wizards can offer a five year deal worth roughly $80 million. Other teams can only offer contracts for up to four years, and the total per season is slightly less.

As such, we notice the Wizards were in a very safe situation, where there was no possible way for Wall not to be on their roster next season unless that’s what the Wizards wanted. Additionally, even in the “worst case”, they’d would have signed him to a cheaper contract. So why on earth did they make such a fiscally irresponsible move?  The answer, like many others in my life, is actually summed up best by Malcolm Gladwell.

The Risks aren’t financial, they’re social!

The following is from clips of a discussion Malcolm Gladwell had with Eleanor Wachtel at the Toronto Reference Library. It definitely applies to the “risks” sports management has to deal with.

The risks that entrepreneurs take, I think, are social risks [...] The risks they take are not material risks, they’re very often using other peoples money or, more interestingly what makes them brilliant entrepreneurs is they understand a  business that’s not risky. Everyone else thinks it’s risky but it’s actually not. They’re geniuses at understanding something is a far surer bet than  the rest of the world thinks. Ted Turner is a great example!
[… Gladwell describes how Turner decided to buy a cable company to
use with his billboard company …]
The risk [Turner] took was social. All of the business old guard of Atlanta when he
made that move essentially ostracized him and called him an idiot. To be called
an idiot by your peers is a very devastating thing, right? If you look at the
careers of great entrepreneurs and you look at the moment that they took
their plunge, the plunge is a rarely a great financial or material risk, it’s
a social risk. At the moment they started their new business, everyone around
them said “You’re an idiot!” and they had to endure years and years and years
of essentially being a pariah. That is insanely difficult! That’s way harder
than gambling with somebody else’s money!

Why did the Wizards take John Wall? We actually know that Ted Leonsis, the owner of the Wizards, was aware Stumbling on Wins (and endorsed it!) He was also aware of Arturo’s work at the time. Wall’s college numbers were not that impressive. And thus far, his career has been mediocre, at best. Not picking Wall though, would have appeared crazy to most in the NBA community.

How about signing Wall now? If the Wizards don’t sign Wall it will appear to other players that they don’t care about players. To other owners, it will appear like they are cheap. To their fans, it will appear like they are bad owners. Ironically, these things don’t dictate what wins games, which is what fans will pay for. However, they will dictate how the Wizards are perceived.

Contrary to the myths that teams can find a magic bullet to become better — well actually, that is true, but as there is typically only one LeBron or Dwight free at a time, this strategy tends to fail — it often takes team time to improve. And to do this requires making smart moves (or being lucky). If the Wizards were shrewd and genuinely wanted a better team, they’d make smart and financially sound moves. Except, this would take a while. This leaves the Wizards two paths. They can make irrational moves and be told they’re being smart by most people. Or, they can make “smarter” moves, and be told they’re being idiots. While I don’t agree, I certainly understand why’d they’d pick the first path. Sometimes the lack of risk just isn’t worth it.

-Dre

*See Larry Coon’s CBA.

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