NBA player: money tree or money pit.

Sale, Martha Lair ; Hunter, Debra Renee

INTRODUCTION

While abundant research is available on certain aspects of sports marketing and on the relationship between winning records and various measures of success, there is little, if any research examining the relationship between the choice of inputs and the financial success of the sports team (Irwin, et al. 1999). The purpose of this paper is to examine if there is a positive relationship between player salary cost and the financial performance of a franchise in professional basketball. While this paper does not address the salary caps and financial structures of professional sports, it does examine the effectiveness of differing managerial approaches to the choice of sports talent. In other words, is an investment in higher salaries for NBA players justified on a return on investment (ROI) basis?

Performance in the context of this paper refers to financial results. Performance, in terms of wins and losses, will be mentioned but was not the basis of research for this paper. The reasoning for this approach is simple; ownership of a professional NBA team represents a significant financial investment and player salary cost is the most significant operating category. Despite the institution of salary caps and the high labor cost for players, considerable latitude is exercised by team management in the strategic choice of how much to pay in total player salaries. Therefore, performance in this context will be measured as the correlation between total player salary cost and the financial performance of the team.

It has been argued that the production, distribution and consumption of professional sports are unique in many respects (Stotlar, 1994). However, there is a common assumption that a professional sports team in the United States is a profit seeking business. In fact, professional sport executives maintain that a professional sports team is managed similarly to any other business (Mullin et al., 1993). Player personnel selections greatly influence the business strategy of the professional sports team (Nourayi, 2006). In this paper we consider the willingness to incur higher player salaries as a strategic input-choice characteristic of team management. This characteristic is measured by total player salary cost. We attempt to determine the correlation between this strategic management characteristic and the financial performance of the team. The expected correlation will be modified by uncontrollable market variables such as market size. In addition to these market variables, player salary is almost certainly influenced by a host of moderating variables such as win/loss records and the popularity of individual players. However, if the perceived similarities between professional sports and other businesses exist, the cost of this most important input should influence financial performance. It is hoped the results of this analysis will provide useful information on how this managerial characteristic impacts financial success.

PRIOR RESEARCH

As previously noted, there is little research available which is relevant to the current research question. The available body of research concentrates primarily on attendance (Soucie, 1994) or win/loss records (Wakefield and Sloan, 1995) as measures of success in performance. The weakness in this approach is analogous to a corporation measuring performance based on market share or gross receipts. Moreover, as reported in Irwin, et al., (1999), Spolestra (1997) resoundingly refuted the idea that more victories equals more profit. In spite of these findings, the news media continue to attribute financial success of professional sports teams to win/loss records (Teaford, 2002).

In addition to a large body of sports marketing research, a limited number of papers on a variety of other elements of professional sports management have been published. Ferrand and Pages (1999) focus on the image of the professional sports team and associations between professional sports and sponsorships from other corporations. Nourayi (2006) demonstrated the suitability of applying a continuous improvement framework and benchmarking to professional sports team management. This ambitious work not only analyzed the relationship between win/loss ratio and fan attendance (ticket sales), it also examined the playing characteristics of individual players, identified performance gaps, and explained success in the terms of win/loss.

METHODOLOGY

This study assesses the relationship between total player salary cost and a team's financial success as measured by operating income. If player salary cost usually provides an adequate return on investment, then an increase (decrease) in player salary cost should generate a corresponding proportional increase (decrease) in operating income. Therefore, the null hypothesis would be stated as:

[H.sub.O]: Player salary cost has a positive relationship with team financial performance.

A regression analysis is performed in which player salary cost serves as the independent variable while operating income is the dependent variable. This study also analyzes total player salary cost, operating income, and operating income as a percentage of player salary cost by team to identify trends and/or patterns.

DATA COLLECTION

For the purposes of this paper, total player salary cost includes salaries, benefits, bonuses, and penalties incurred as a result of exceeding the team's salary cap. In the NBA, franchises may exceed the salary cap, but when they do so, they must pay a penalty equal to the amount by which they exceed the cap (Salary Cap for 2004-05 is $43.87 million, 2005). Total player salary cost and operating income for each NBA franchise was obtained for a ten year period, 1998 to 2007 (NBA Team Valuations, 2007). For comparability purposes, the Charlotte Bobcats are excluded from the analysis since this expansion team has only existed since 2005.

RESULTS

As noted in Table 1, player salary cost is negatively related to operating income in all but the first of the ten of the years tested. This relationship is statistically significant at alpha equal to .05 for the combined model of all ten years and six of the ten individual years (2001, 2003-2007). These results support a rejection of the null hypothesis which stated that total player salary cost is positively related to operating income. The results for 1998, 1999, 2000, and 2002 are not significant at a level of alpha equal to.05. However, all but the one of these years also show a negative relationship between player salary and operating income. While the 1999 results may be influenced by the NBA strike which occurred during the season, no other events can readily explain the insignificant results for these years.

Table 2 lists the teams with one of the five lowest operating incomes as a percent of total player salary cost in at least three years during the study period. Not surprisingly, there are a number of teams that consistently fall into this category and over the ten years of the study, only six distinct teams fall into this category.

Similarly, Table 3 presents the teams which generated one of the five highest operating incomes as a percent of total player salary cost in at least three years during the 10 year study period. The Chicago Bulls, which are considered by most to be one of the most, if not the most, successful NBA team ever, tops this list. A case might be made that the investment in player salaries during the years prior to 1999 resulted in the exceptional return on player salary in the subsequent years.

During those pre-1999 years the Bulls roster included many hugely popular, talented, successful, and expensive players. It is highly possible this investment in talent built a fan-base that continues to contribute to the financial success of the franchise. In 1998, the Bulls incurred more player salary cost, $69 million, than any other team; this was the only year the Bulls did not rank in the top five teams for the highest operating income as a percentage of player salary cost. As a result of restructuring in an attempt to eliminate some older and more expensive players, the Bulls lost Scotty Pippen, and Dennis Rodman, among others. These changes, along with Michael Jordan's retirement, decreased the Bull's player salary cost significantly. Despite disappointing performance on the court, this decrease in player salary cost allowed them to generate the highest operating income and the highest operating income as a percentage of player salary cost in seven of the next nine years, and they were in the top five the remaining two years (2002/2006 and 2004/2005, respectively).

While no one can dispute the fan appeal of top athletes such as Michael Jordan, Dennis Rodman, and Scotty Pippin, the higher salaries paid to keep these athletes does not necessarily generate enough revenue to cover the higher salary salary cost and provide an adequate return on investment for the owner(s) of the sport franchise. This finding moderates Spolestra's (1997) finding that more victories corresponds to higher profit only to the extent that these victories may be achieved without excess player salary cost.

Generalization of this study is limited. This study was limited to one league of one sport. It remains to be seen whether or not similar results would be found with other sports or other sport leagues.

REFERENCES

Ferrand, A. & M. Pages (1999). Image management in sport organisations: the creation of value, European Journal of Marketing, 33(3/4), 387-401.

Isidore, C. (2004). Cracking the Financial Code of Sports Business. Retrieved February 27, 2005, from http://www.businessjournalism.org/content/3240.cfm.

Irwin, R. L., D Zwick, & W. A. Sutton (1999). Assessing organizational attributes contributing to marketing excellence in American professional sport franchises. Journal of Consumer Marketing, 16(6), 603-615.

Mullin, B.J., Hardy, S. and Sutton W.A. (1993) Sport Marketing. Human Kinetics, Champaign, IL.

NBA Team Valuations. (2007). Retrieved June 25, 2008, from http://www.forbes.com/2007/12/05/biz_07nba_all_slide_3.html? thisSpeed=15000.

Nourayi, M. (2006) Profitability in professional sports and benchmarking: the case of NBA franchises, Benchmarking: An International Journal, 13 (3), 252-271, Retrieved August 18, 2005, from http://ejournals.ebsco.com/direct.asp?ArticleID=46EAB624280D1417E3AD.

Salary Cap for 2004-05 is $43.87 million. (n.d.). Retrieved February 27, 2005, from http://www.nba.com/news/cap_040713.html.

Soucie, D., Doherty, A. (1996) Past endeavors and future perspectives for sport management research, Quest, 48, 486-500. Retrieved 5 June 2007, from Business Full Text database

Spoelstra, J. (1997) Ice to Eskimos, HarperCollins, New York, NY.

Stotlar, D. K. (1994) Successful Sport Marketing. Brown & Benchmark, Dubuque, IA.

Teaford, E. (2004) Kings showing no love for LA. Los Angeles Times. August 8, 2004. late edition, S06.

Wakefield, K.L., & H.J. Sloan (1995). The effect of team loyalty and selected stadium factors on spectator attendance. Journal of Sport Management, 9(2), 119-34.

Martha Lair Sale, Florida Institute of Technology

Debra Renee Hunter, University of Southern Indiana

Table 1: Regression Analysis P-Values

          Coefficient X     t-Statistic       P-value

All        -0.17802011      4.748405017     .002831767
2007       -0.81114231     -3.656029367     .001091241
2006       -0.85700253     -4.570937585     .000096468
2005       -0.47335541     -2.127663513     .042645796
2004       -1.09379673     -4.693681922     .000069379
2003       -1.5339911      -5.903464851     .000002730
2002 *     -0.21300697     -0.883473409     .384779734
2001       -0.46595732     -2.083729186     .046779412
2000 *     -0.07345917     -0.286325759     .776814190
1999 *     -0.18395018     -0.694457324     .493328341
1998 *     0.115494832      0.504497664     .618004351

Table 2: Teams Producing the Lowest Operating Income as a % of
Player Salary cost

               1998        1999        2000        2001

Mavs         (24.1%)     (62.5%)     (16.7%)     (38.3%)
T-blazers       -           -        (17.1%)     (21.1%)
Grizzlies       -           -        (20.0%)     (25.5%)
Bucks           -        (65.2%)     (27.1%)     (26.7%)
Nuggets      (25.0%)        -           -           -
Knicks          -           -           -           -

               2002        2003        2004        2005       2006

Mavs            -        (24.0%)     (41.0%)     (18.9%)     (24.7%)
T-blazers    (27.4%)     (85.0%)     (63.5%)     (35.6%)     (22.7%)
Grizzlies       -        (37.0%)        -        (22.9%)     (25.4%)
Bucks        (14.3%)     (24.2%)        -           -           -
Nuggets       (9.4%)        -           -           -           -
Knicks          -           -        (14.6%)        -        (33.1%)

              2007

Mavs            -
T-blazers    (33.5%)
Grizzlies    (16.0%)
Bucks           -
Nuggets      (11.0%)
Knicks       (41.0%)

Table 3: Teams Producing the Highest Operating Income as a % of
Player Salary cost

              1998        1999        2000        2001        2002

Bulls          -         100.0%      160.0%      157.6%      90.7%
Lakers        65.8%        -          63.8%       47.7%      78.6%
Pistons      107.1%        -           -          45.0%         -
Suns           -         24.0%        34.7%       55.6%         -
Celtics        -          9.5%         -           --        35.4%
Clippers       -           -          41.4%       36.4%      47.1%

              2003        2004        2005       2006       2007

Bulls        104.3%      64.9%       58.3%       80.3%     115.8%
Lakers         -           -         57.6%       42.9%        -
Pistons      47.1%         -         43.1%       34.9%      75.8%
Suns           -           -         83.3%       74.5%      86.5%
Celtics      46.4%         -           -           -          -
Clippers       -           -           -           -          -