Why is this interesting? - The Collectivist Sports Edition

On the NBA, rules, and the operating principles of American sports leagues

Noah here. Over the last few years, there has been a flurry of big-name NBA players being traded. In each case, the players’ team received 3+ draft picks and swaps to give up the superstar. The idea is pretty simple: the Lakers trading for Anthony Davis or Nets acquiring James Harden are trying to win now and willing to exchange some of their future to do so. That future currency in American professional sports is almost always draft picks that allow teams to draft young players who might become stars, are contracted with the team for many years, and, crucially, are on locked-in lower salaries.

Just a few weeks ago, the Houston Rockets traded James Harden, a former league MVP, and purveyor of one of the finest beards in sports, to the Brooklyn Nets for essentially every good young player the Nets had, three future first round picks, and four first round pick swaps. (The latter gives Houston the right to flip picks with the Nets if the Nets’ draft spot is better.) In the end, the trade ended up being pretty complicated and involving four teams with multiple players and picks moving around the league. For our purposes, I’ve bolded the bits that matter:

In the trade, the Nets send center Jarrett Allen and forward Taurean Prince to Cleveland, and guard Caris LeVert and forward Rodions Kurucs, as well as three first round draft picks (2022, 2024 and 2026) and four first round pick swaps (2021, 2023, 2025 and 2027) to Houston. The Rockets also receive guard Dante Exum and a 2022 first round draft pick from Cleveland (via Milwaukee), and Brooklyn acquires a 2024 second round draft pick from the Cavaliers to complete the deal.

The dates of those picks and swaps tell an interesting story of the NBA. First, they go out to 2027. That’s because NBA rules stipulate that a team can’t trade a draft pick more than seven years out. More interesting, though, is the way the picks are staggered, with both picks and swaps separated by a year. That’s because there’s a rule in the NBA that a team may not make a trade that leaves them without first round picks for consecutive years. This is colloquially known as the Stepien Rule, after former Cleveland Cavaliers owner Bill Stepien. Stepien was so, well, cavalier with trading away the team’s draft picks in the early-1980s that the league eventually stepped in and made sure to protect other teams from handicapping themselves in this way. (As an aside, Stepien sold the team just a few years after he bought it, and the league actually allowed the new owners to buy back some picks to help soften the blow of the short-sighted Stepien.)

Why is this interesting?

The Stepien Rule raises a fascinating question for a competitive sports league: does it make sense to protect teams from themselves? After all, aren’t the thirty teams in the NBA competing for a championship? Don’t we live in America where the market decides all? If an NBA team wants to trade away ten years of picks, why aren’t they allowed to do so? The answer is that despite the fact that these teams try to best each other each season for the opportunity to raise the Larry O'Brien Championship Trophy, they’re not actually competing with each other as a business. On the contrary, the NBA is a collective made up of the owners of the league’s thirty teams (they prefer to be called governors, but that’s never really stuck). Those teams share everything from billions of dollars in national TV revenue to website best practices. In a decidedly capitalist country, American sports are almost entirely collectivist. 

A view of the setup for the regular NBA Draft Lottery announcement. If you want to dive into how the odds for the different picks are calculated, Wikipedia has you covered.

Here’s how Seth Partnow, who has covered the NBA for a long time and spent a few years with the Milwaukee Bucks put it on a recent episode of The Athletic NBA Show (edited for clarity):

I don't think it's understood quite the degree to which [while] on the basketball side, all these teams are competing, on the business side, there's a great deal of cooperation and sharing of best practices. There's a working group called TMBO [where] all the business offices get together and figure out how to make money, basically. The point being, that from a business standpoint, you can have ruinous competition. We've seen this a lot with startup leagues, where they don't have these guardrails in place. And one team has deeper-pocketed owners, and they spend all this money and, and suddenly, only two teams can compete. And there's no interest and 80% of franchises in the league fold. Great, you won. In a competitive business, that's great. Competitive industry, that's great. All your competitors go out of business, you're the only one left. In a sports league, the Lakers still need the Hornets, because who else are they gonna play?

And, obviously, it works pretty well for them. The big sports leagues pull in boatloads of money and generally put a competitive product on the field/floor. With that said, while teams within a league may not be in direct business competition, the leagues themselves most certainly are. Baseball, basketball, and hockey all do their best to program around NFL games because going head-to-head is a losing position. While things might not be zero-sum within a league, the attention of sports fans on Sunday afternoons in the fall certainly is.

And within the NBA, the Stepien Rule isn’t the only one that exists to protect the teams. In the last 25 years, the NBA has added maximum salaries and maximum years on contracts. Of course, this isn’t always great for players. But again, while they compete on the floor each night and negotiate individually for their contracts, they are unionized (as are all the other major sports leagues) and negotiate directly with the NBA to decide big questions like revenue sharing (and maximum contracts). In the end, it makes for a very interesting system that is a far cry from the truly open competition we see in places like England’s Premier League. (NRB)

Finance newsletter of the day:

Former investment banker Patrick Trousdale writes The Daily Upside, a business newsletter that covers the most important stories in business in an engaging way. In his words, “The Daily Upside delivers quality insights and surfaces unique stories you won’t read elsewhere. It’s completely free and you are guaranteed to learn something new every day.” It’s something that more finance-oriented WITI readers might dig, hence the plug.  Go sign up here. (CJN)

Quick Links: 

• WSJ from a few years ago: “Are the Green Bay Packers the Worst Stock in America?” “It costs $250 a share, pays no dividends, benefits from no earnings, isn't tradeable and has no securities-law protection. And buyers can't get enough.” (NRB)

• The Magical Extra Doses and Supply Chain Optimization (NRB)

• NYT media columnist Ben Smith on the Facebook Supreme Court (NRB)

• Since we’re on basketball today, a bonus: every bucket of Kobe’s career visualized. (Thx Ryan) (NRB)

Thanks for reading,

Noah (NRB) & Colin (CJN)

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