Derivative Hoops

Hubie Brownstone has more than a decade of experience in and around the NBA, and is contributing to Epsilon Theory pseudonymously.

As with all of our guest contributors, Hubie’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

Synthetic Basketball

At the start of the 2007-2008 NBA season, something fundamental to the game had changed. 

For whatever reason, be it cost, consistency of materials, sponsor demand – especially sponsor demand! – the league started play that year without leather. The ball – rock hard yet grippable when wet – used over the previous decades had been replaced by a ball made of composite materials. It was a disaster. From the outset, players complained that the new, scienced-up ball was both too sticky and too slippery.

The surface of the ball was so tacky that it would cause the skin on the tips of players’ fingers to split from repeatedly flicking the ball with spin. Since this motion is only required for shooting, passing and dribbling, this was a problem. 

Though any change in equipment is met with cries of how terrible the new version is, I can confirm this complaint was real. One of my regular pickup runs at the time started using the composite ball because it was what the pros used. The pain of picking up a steel-stringed guitar for the first time pales in comparison to the sensation of a deep paper cut punctuating the release of every jumper or chest pass.

Meanwhile, when the ball got wet, something that happens continuously over the course of a hotly contested NBA game, the ball became extremely slippery and difficult to control. In the face of the complaints, the league relented, and the composite ball vanished less than two months after it arrived.

Balloons and Billions

But there’s a synthetic basketball, and then there’s synthetic basketball.

After more than two decades of continuous “number go up” with franchise valuation, that trend is at risk of ending. 

Consider that in 2000 Mark Cuban paid around $280 million for the Dallas Mavericks. Co-owner Marc Lasry recently sold his not-even-controlling share of the Milwaukee Bucks at a valuation reported variously as $3.2 or $3.5 billion. Even inflation-adjusting the cost of the Mavs purchase – give or take $490 million in 2023 dollars – this means that the Bucks are worth 7 times as much as were the Mavericks. Despite toiling in a market roughly a third of the size of the Dallas-Fort Worth Metro at the time of Cuban’s purchase. 

Surely, this magic beanstalk of franchise value coincided with a similar upswell in revenues, right? Not really. The mere possibility of explosive revenue growth has combined with…capital-friendly macro tailwinds to send franchise valuations to the moon.

But actual growth has been a bit more prosaic. Allowing for the possibility of some Hollywood accounting in the league’s calculation of so-called Basketball Related Income – the players are collectively entitled to 49-51% of BRI in salaries per the collective bargaining agreement in place between owners and players – inflation-adjusted, per-team revenue has roughly doubled.

League revenues are projected to continue to rise. With the CBA-mandated revenue split continuing to tie player salaries to leaguewide cash intake, the level at which the cap is set is an effective proxy for those revenues. To aid in longer term roster planning, the league provides future year projections of the cap to teams. Per those estimates, the league expects gains of around 10% annualized over the next half-decade. Nothing to sneeze at, but not nearly the amount needed.

Increases in existing per-game revenue streams are likely more incremental than exponential. Ticket sales are already close to capacity, as the league itself recently touted 97% occupancy for the past season. National media rights deals are expected to continue to rise, though the uncertainty around many teams’ local media partners might counteract some of that windfall. 

In the case of a normal consumable, the first move after exhaustion of current inventory would be to simply create more. More games would mean more ticket revenue, more chances to sell merch and booze and expanded opportunities for “partnership activations” during timeouts. But as we’ll get to shortly, increasing inventory – adding more games to the schedule – isn’t a viable option. 

With that off the table and assuming a minimum of rationality from the scions of finance who own sports teams in this day and age, they must have expectations of more money from somewhere that isn’t, strictly speaking, “basketball revenue.” Certainly, numerous franchises have played the public stadium finance card to extract value from state and local coffers, while many have also become event production, hospitality or real estate holding companies which happen to have basketball teams as flagship products.

New opportunities have been posited, if not actually realized or even projected. Among these have been the promise of technology enabling more customizable – and monetizable! – content delivery, while the opening of new markets with the continued expansion of the NBA brand across the eastern hemisphere into Europe, Asia and Africa, has been used to suggest the addition of millions if not billions of new paying customers.

But for the Number Go Up music to keep playing a little longer, some of this new money from those or other sources needs ot be realized. To continue growing at the demanded rate, the business of basketball needs more to sell. But there is already too much basketball.

Too Many Games?

The NBA can’t simply add more games because everyone knows that everybody knows the NBA regular season is too long. Everyone knows this because the NBA’s member teams are doing all the things you would do if you knew that the season was too long. The teams know the season bloated as competition and imposes unsustainable demands on athletic performance.

For whatever reason wrapped up in the vagaries of sporting development, US-based sports leagues do not crown a champion at the conclusion of regular league play, but rather to filter out the worst teams and seed the remainder for the “Playoff” tournament which will determine the seasonal champion. 

This is not the only possible system. Most soccer leagues around the world determine a winner strictly off of the league table. The 20 clubs making up the English Premier League play every other team twice, home and away, and the team with the best aggregate results lifts the trophy on that basis alone.

In the NBA, as with other primarily American leagues, this is not the case. The bulk of the season represents the preliminary stages, and the team’s perceived success has much more to do with how long they can remain in the 16- team knockout tournament than how many of the 82 regular season games they won. Instead of determining the outcome of the season, those 82 games serve to both eliminate the truly non-competitive teams – with the recent advent of a “Play-in” mini tournament, fully 20 of the thirty teams play at least one postseason games while 16 advance to the Playoffs – and sort the remainder to give top teams easier matchups in the hope that the best teams will be those left standing in the latter stages.

Under this system, the last 20 to 25 regular season games don’t serve much competitive purpose. Historically, teams which occupied the top 8 (playoff) positions in each conference 60 games into the 82 have overwhelmingly finished in the top 8, with a majority of teams landing within a single seed position of where they sat 22 games earlier. In fact, by around half way through each season, the bulk of the playoff field is readily identifiable.

Even if those last 20 games produced more jockeying for position, it wouldn’t much matter. Best- of- 7 basketball series are won by the better team to a far greater extent than in any other major men’s North American league. In a sport where talent, especially superstar talent, is a far bigger driver of success than strategy, “being the better team” more or less requires having said talent available to play.

Which in turn illustrates the second dimension of the season’s superfluousness. From a player health and performance standpoint, playing 82 games from late October to early April – 3 or 4 per team per week, punctuated by frequent overnight air travel – is incompatible with maintaining peak athletic performance.

With the irrelevance (in sporting terms) of 25% of the season and the desirability of being healthy entering the Playoffs, the incentive structure has an inexorable logic. Teams will rest players. Despite some lightly-if-at-all-coded tropes about players’ supposed laziness, “load management” – aka sitting a player healthy enough to compete – is overwhelmingly at the behest of and intended to be a benefit for the organization.

Everyone knows these absences degrade the quality of regular season games. Of course, expecting 3-to-4 games per week of max effort would also have this effect. But “quality of play” is hard to pinpoint. A star player on the bench in street clothes is obvious. At this point, stories of young fans traveling long distances and paying exorbitant prices for a chance to see their heroes perform only to find out the star is a healthy scratch are a near- weekly occurrence.

One way to ease this problem is to shorten the schedule from 82 games. Everyone knows the NBA isn’t ready to consider this solution. Gate revenue and Regional Sports Network (“RSN”) inventory are needed to feed the beast. While the specter of possible RSN bankruptcies threatens to upend this paradigm, that outcome is speculative enough to prevent the current schedule from going anywhere, and in fact the league is adding a few more games in the form of an in-season tournament.

The Game Outside the Game

If more games isn’t the answer, monetizing the spaces adjacent to and derived from the games themselves is the logical next step. Instead of introducing a synthetic basketball, start selling Basketball™. 

These derivatives of basketball bear superficial resemblance to the real thing. Pictures of players, team logos, hell, even the highlights are all there. But these are flattened images, attempts to catch the reflection of the games themselves without containing any of the substance.

Some of these derivatives are sales efforts in the traditional sense, attempts to induce or extract money from fans on activities or goods adjacent to the games. The increasing integration of sports gambling – much more on this in a future essay – is one of these areas. The NBA isn’t the only league not tofully understand what they bought alongside all the gaming revenue. Remember the league’s brief embrace of crypto/NFT speculation? Remember FTX Arena in Miami or NBA Top Shot?

But perhaps more pernicious are the derivatives which aren’t directly hawking products. The discussion of the games becomes subsumed by the debates around the games.

While discussion of “legacy” rather than an ongoing competition might drive clicks, the extensive focus on championships won further diminishes the regular season. So, too, the sugar high of reporting and/or speculation on transactions – the distinction has become blurred to the point of meaninglessness – can serve to devalue not just the regular season, but the entire existence of certain franchises. In 2019, ABC/ESPN led the pregame show previewing the Milwaukee Bucks second Christmas Day appearance in 42 years not by discussing the teams championship potential, but whether superstar Giannis Antetokounmpo should request a trade.

In other words, ahead of one of the of the highest profile events of the regular season, the conversation was doing little to sell the actual product in order to discuss events which might happen, off the floor, months or even years later. 

To be clear, what I’m derisively calling “derivatives” when employed aren’t bad things in small doses. Who doesn’t love a lively MVP debate – Jokic was robbed, BTW – a bit of fantasy sports banter or some titillating player movement gossip? But if the side dish becomes the main course, the entire taste changes, curdling into something unrecognizable and frankly a little rotten. 

Ben Thompson, writing in Strachery, describes the NBA’s current approach as reaping without sowing. And I think that’s precisely correct. All of these derivatives efforts risk wringing short term dollars out of the status quo while neglecting the care and feeding of the underlying entity – the games – which might starve the league of the oxygen, the sunlight even, needed not only for growth but survival. 

In those terms, the story is completely recognizable and familiar; it is the story of our current age writ small. When we can no longer squeeze additional value from a thing, we must create abstractions of that thing – derivatives – that still have some juice. But doing that inevitably makes the game less about, well, the game.

The synthetic metaphor is so on the nose – or is it the fingertip? –  that it is painful. The ball that superficially resembled the old one, wasn’t at all the same and was roundly rejected.

The Trust Thermocline

It would be an impressive feat indeed to turn an exhibition of skill performed at the rarefied level of the NBA – as of the 2023 All-Star Game, only 4,788 players have stepped on the court during a game over the 77 year history of the league – into something fungible and commodified. But the NBA risks just that commodification as the focus drifts further and further from the on-court play itself.

Which brings us to the bigger problem facing the league. Assuming the need for expanded, albeit synthetic, inventory is met, what might be the consequences of that success?

With the bulk of the current product already at risk of devaluation – the Playoff games which get so much focus encompass around 85 games per season compared to 1,230 regular season contests – an increasing focus on these basketball-adjacent products risks steep decline in consumer trust of the underlying product. By both actions – and occasionally words –  the teams are telling fans that the regular season doesn’t matter. What happens if the fans start believing them en masse?

Unlike the case of the synthetic financial products which turbocharged the housing bubble of the mid-to-late aughts, the underlying activity – basketball-as-entertainment – is nothing like as essential. Even if the instruments go poof, a house is still a house. Professional sports appear some place well below shelter on Maslow’s hierarchy.

And the risk to the league is that fan interest and trust won’t decline in dribs and drabs, giving plenty of time for course correction, but rather all at once. In November 2022, digital strategist Gareth Edwards described how this process works in the context of the initial flailings of Musk-owned Twitter. 

The essay reads as somewhat prophetic in its own right, but the central point is that users of a service or product will put up with a whole lot, whether service degradations or price increases, until all of a sudden they won’t. Which point they are gone as customers, not likely to ever return.

Wired into those products and services is a “trust thermocline.” It is a point which, once crossed, otherwise healthy businesses and products suddenly collapse.

The easiest way to understand how trust thermoclines work is to look at how they fail. Content services, both print and digital, are particularly prone to these failures. So are social media networks or businesses that focus on delivering quality-of-life monthly services—from TV streaming to beers of the month. Broadly, any business in which the consumer forming an emotional [emphasis in original] relationship with the product contributes to adoption is at risk of such failures.

According to Edwards, the businesses most exposed to this risk rely on “subscription revenue”. Such as season tickets, cable bundles and League Pass licenses.

And at the point of failure, consumers might “simply disengage completely from the business.” In blunt terms, if and once a fan decides the league is bullshit, they cease to be a fan and are unlikely to become one again.

And without the fans, what is left?

——

To be fair, the 2023 Playoffs didn’t show a league or product in crisis, at least not on the surface. The play on the floor drew positive reviews, and despite a supposed non-glamour matchup of Denver against Miami in the FInals show piece, initial numbers suggest the series largely matched the ratings of the 2022 edition which featured more established draws in the Celtics and Warriors. However, simply equalling the prior year is less impressive considering the nearly 50% decline in ratings across the past decade due in large part to cord-cutting.

As Edwards wrote so eloquently, breaking trust with core customers – the fans – is something that happens slowly and then all at once. Even the excitement of the 2023 Playoffs caused a fresh wave of discussion about the meaninglessness of the regular season, from the second round flameout of MVP Joel Embiid’s 76ers to the fact that the 8th seeded Heat reached the Finals, defeating teams in Milwaukee and Boston who had won 14 and 13 more regular season games than had Miami. The 7th seeded Lakers making it all the way to the Western Conference Finals despite a largely chaotic regular season didn’t help either.

Alongside that reinforcement of the underlying “too much basketball” narrative, the rise of basketball derivatives at the expense of actual basketball is pressure in that direction. It is not the only such pressure. In many ways, professional sports operate as a microcosm of both the promise and ills of the modern world.

Across a range of topics from gambling to officiating to media/fan interaction, there is often the feeling of everyone trying to carve their own little slice of the pie without regard to what each bite means for the whole, nor having much care for ensuring that future generations have any pie at all. 

Over however long the Epsilon powers that be will have me, I’ll describe and discuss many of these topics in more detail in the hope that viewing these issues through the lens of sports will allow a little more clarity and engender a lot less tribalism to find fixes that work rather than just serve whatever agenda is ascendant in the moment.

I hope you’ll enjoy the detour with me.