Just What Can The Lakers Afford

Kurt —  July 10, 2008

As we wait for what the Lakers will do about Ronny and Sasha ( JONESONTHENBA, who has some good NBA contacts, heard the Lakers will match for Ronny Turiaf, but they resign both? And if not which one is more crucial to the current team and its makeup?) an interesting discussion of what the Lakers can afford and be reasonable with has come up in the comments.

We don’t know all the financials, but Bill Bridges (who, without getting too much into his background, knows plenty about the business side of professional basketball) says the Lakers can afford the increase:

The Lakers as an economic agent operate in an almost perfectly vertical inelastic supply market. That is, there is a fixed supply of seats on offer and a high demand for those seats. This equals pricing power. Also the consumption of these tickets is inelastic to exogenous factors such as overal economic state of the community. A 10% decline in mean wages of greater Los Angeles does not precipitate a commensurate decline in ticket prices.

If Ronny’s fair market salary is $2.5M per annum (for argument’s) sake, the incremental $1.5M “over payment” works out to an average increase in home ticket prices of $2 per ticket. Due to inelastic supply and demand properties, the Lakers have ample ability to absorb the extra $1.5M with no impact on team (and the Buss family) finances.

The only time that salary levels matter is if you under the cap and need room to make a big signing. Once you are over the cap the only thing that matters is the elasticity of your local supply – demand market. The Lakers are fortunate to have an inelastic one.*

* They have to keep winning to keep the markets inelastic.

Then Reed added this followup:

There are really three parts to a free agent signing: (1) will the player make your team better (fit and skills), (2) is the player’s salary at fair value (based on the market, length, age, risk, ability to replace), (3) does the salary fit within the team’s bottom line payroll budget without costing them a greater need.

I think we can safely analyze prongs (1) and (2). First, Ronny unequivocally makes us better. He is better than our other existing backup big men and as good as or better than others available on the market. Second, I believe the proposed contract is fair value. While we remember overpaying for role players the last two summers with Luke and Radman and are now reaping some of the consequences, that does not necessarily mean that Ronny is overpriced. There is a much shallower supply of quality, young big men that are sure to contribute in their minutes than there are of role wing players. These big men are almost always “overpaid” in free agency, but that really just means that the market dictates them being worth more per production than players at other positions. Ronny is big, active, has decent skills (high post jumper, good passer), provides great chemistry, and has proven he can produce when called upon to fill in as a starter when injuries hit. In today’s big man market, that is worth $4M a year, which means the contract would almost surely be movable at any point in the future. Yes he hit some kind of wall late in the season, but don’t forget how critical he was on the road trip before Gasol arrived, or after Gasol sprained his ankle.

That leaves us with the final variable — payroll budget. This is what we don’t know and why we are probably all over the map on the issue. If Buss’s bottom line is something like $77-80M for the final 14 man roster (probably a reasonable assumption given the past), then matching on Turiaf has serious consequences. It means we either need to move one of Radman/Luke (unlikely) or pass on Sasha. Between Ronny and Sasha, I think we all prefer Sasha, so that means Turiaf has to go. However, if Buss’s bottom line is a little higher, then matching on Turiaf becomes very reasonable given how he helps the team and the moderate contract amount.

Finally, JONESONTHENBA adds this:

I just know that in 2007 with a decently high payroll and with a team that was not even close to as good, the Lakers still made $31M in profit. Revenue from advertisers, ticket sales, merchandise, and concessions (although people might have drank more during the down years out of depression), seemingly all go up when a team is winning. The Lakers have one of the best business operations departments in the league. They will figure out how to capitalize on the team’s success and make even more money, which would allow them to go over the luxury tax and still have a bottom line that is satisfactory to them. People also forget that this team is also owned by AEG (30%). They are well capitalized and will likely be very willing to do anything to keep this team winning and rolling, as the Lakers are key to driving people downtown and making the other AEG properties (L.A. Live) viable. The real concern for the Lakers is not if they can afford it, but if it ruins cap flexibility in the future. But sometimes, when you’ve got a team that is capable of winning for years to come, you just have take your chances, roll the dice, and worry about the future burden when you get there. I mean, look how it is paying off for Boston. Their salary Burden with the big three is pretty ridiculous, and will stay that way while those guys are on the roster. They pretty much have no cap flexibility beyond the mid-level. But they don’t care, because they are making money and are winning. Just some things to keep in mind when discussing the Lakers and their financial situation.