Is there a competitive threat to the NBA?

On its merits, the dumbest trade in the history of the NBA, if not modern professional sports, occurred last week. There is no shortage of content explaining why the trading of Luka Doncic for Anthony Davis was a poorly exectuted trade in which the Dallas Mavericks got pennies on the dollar from the Los Angeles Lakers. Even if you subscribe to the theory that there is a signficant unobserved defect in Doncic motivating Dallas to avoid what would have been a new $350m contract, the fact remains they could have traded him for a host of draft assets far in excess of the value of Anthony Davis.

This has unsurprisingly spawned a cottage industry of conspiracy theories. The most popular is that the new Dallas owners are maneuvering for a casino license, but my favoirte is that the owners have inside information that a new Saudi Arabian, LIV Golf-style, rival league is in the works (I can’t find a post where such a thing was suggested. If you have a link, please put it in the comments). I have observed **ZERO** evidence for such a thing…but that doesn’t mean it doesn’t make for an excellent thought experiment, particularly since I think Saudi “sport washing” is largely motivated by a desire to diversify out of the oil business. A couple actual facts:

LIV Golf
- The conceit of LIV golf was that the PGA Tour had a global monopoly based on nothing but i) high start up costs, ii) historical capital including brand recognition, and iii) the network effects born of having every top player in the world currently participating. The Saudi Arabia’s Public Investment Fund (PIF) made the audacious move to commit no less than $2 billion in winnings and up front fees to players to switch to their rival event series. The PGA and PIF are multiple years deep into trying to negotiate a merger with the LIV tour.
The Saudi Pro League (Soccer/Football)
- The PIF took a 75% ownership stake in the league and immediately went plundering for talent around the world, signing late career-stage (but still very good) Christiano Ronaldo and a host of other excellent players, often tripling their salaries
- They didn’t fully ignore existing contract rights, probably because of a hope to eventually integrate into the broader international soccer structure.
The basketball labor pool is no longer American-dominated
- The best player in the world is Serbian.
- 36% of NBA players were born outside the United States.
The ABA was cooler than the NBA
- The last time the NBA faced competitiion from a rival league, they absorbed it in 1976.
- The WHA was in many ways cooler than the NHL as well. The NHL similarly merged with them.
NBA players are paid far less than their market value
- The owners and players union have a collectively bargained team salary cap of $140.6 million per season. The highest single player salary is $56 million.
- Young players are so underpaid relative to their value their contracts are some of the most valuable assets because they give you a competitive advantage under the salary cap. No one ever seems to bring up how much the NBA Players Unions allows owners to underpay incoming players.

So, let’s put it this way. Why *wouldn’t* the Saudi Arabian PIF invest $5 billion in creating a rival basketball league? Remember, the Saudi soccer league successfully acquired some of the best players in the world from a sport that a) has nearly zero restrictions on salary (“financial fair play” rules not withstanding) and b) is, quite frankly, miserable to play with players that are below your level. What sort of havoc could they wreak on the NBA?

They could at least double the salaries of every single non-American player in a league that, in many cases, would be a shorter flight to their home countries. For comparative pennies they could fill out the rosters tripling the salaries of all of the best players in the Spanish and Italian leagues. As the PGA learned, there are no doubt a couple dozen top American players that would be happy to play abroad for 200% salary bumps. Would a single season of Lebron be worth a half billion dollars to a nascent league? Victor Wembanyama is currently the single most valuable player asset in the NBA and is getting paid $12.77million a year. A Saudi league could start him at $60m a year today and not bat an eye. What is the career arc of a sport-altering talent worth from beginning to end for a global entertainment product?

How is this relevant to the Doncic-Davis trade?

What exactly are the incentives for players, especially non-American players, and the PIF to honor existing contracts? Having a top 5 player under contract has exactly zero value if they don’t intend to honor the deal. Let’s go further – what exactly is the value of a draft pick if the cartel enforcing your “right” to be the sole employment option for player if that draft right isn’t honored by a rival league offering higher wages? The entire market value of NBA assets is predicated on the pre-existing property rights surrounding contracts and draft status. The calculus underlying those values is made astonishingly complex by the byzantine rules of the NBA salary cap. It’s all very confusing, but also taken entirely for granted in the ecosystem of analysts inside and pundits outside the system.

What happens if a rival shows up with no regard for the pre-existing institutions of the NBA cartel?

Every NBA institution would be up for grabs. The salary cap? It threatens the ability to retain the top talent. The draft? Why would rookies accept pennies on the dollar and a single possible employer? Why would someone who grew up in Sao Paulo want to take an 80% paycut for the privlege of playing in a town they’ve never heard of? I’m sure people who grew up in Los Angeles would prefer San Antonio to Riyadh, but *how much* would they prefer it? Is it a $100 million preference?

There is no shortage of irony in European sports existing in largely unbridled market competition while American sports leagues putter on as little socialist cartels. The thing about cartels is that all the antitrust exemptions in the world won’t protect you from competition if you’re too profitable. And the NBA is very profitable.

Again, I don’t think there is reason yet to believe that the Dallas Mavericks made anything other than a foolish, no good, very bad business decision. But that doesn’t mean that it isn’t also the first sign that NBA owners aren’t 100% sure how to value their current assets going forward. This deal wasn’t just foolish, it was weird. When market prices get weird, big changes aren’t usually far off.