Thursday, July 24, 2008

The Declining Dollar and Its Effect on the NBA

There’s no secret. The American dollar has been in decline for nearly a decade. Consequently, the Euro, which was introduced in January 1999, and faltered in the early going before central banks in Europe, Japan and the US acted together to intervene, has risen from $1.1747 USD on January 4, 1999 to $1.5780 USD as of July 23, 2008. As a result, the Euro has elevated in excess of 34% since its inception. Moreover, the Euro has increased by nearly 92% since it reached its record low of $0.8225 USD on October 26, 2000.

If Carlos Delfino is getting $9M per season to play in Russia, just imagine what offers this guy would get.

Courtesy: LoveFilm

Naturally, there are many more things other than basketball that the downward spiral of the American dollar has affected. Nevertheless, we talk sports here; therefore, the conversation turns to the only American sport with a global marketing approach: basketball. Sorry, hockey fan. I ask that you not shoot pucks at my apartment. My landlord would not appreciate that.

So, that takes us to the research question: How has the dollar’s decline affected the NBA?

To me, the issue is two-fold. To those who are more intelligent and better versed in the economic realities of sport, it is manifold.

First, due to the increasing competitiveness of European basketball as well as the relative strength of currency, more and more American-based players are leaving the States. This is not a new development. It’s just built steam very quickly. Following valued role players such as Carlos Delfino and Bostjan Nachbar, Josh Childress had, according to a story first reported by Yahoo, received a three-year offer equivalent to $20M USD to sign with Greek side Olympiakos. After further reports by the Atlanta Journal-Constitution, Olympiakos offered three years and $32.5M, which after taxes paid by the club becomes a net salary about $6.7M per annum for Childress. That crushes the Hawks’ offer which was five years and $33M, which after taxes paid by Childress becomes a net salary of about $3.4M per year. That’s nearly twice the net salary, even when counting that the Hawks’ best and final offer started at the mid-level exception of $5.6M, which is in the ballpark of what many expected Childress would be offered when all was said and done. Did I mention that Childress can opt after each season without a buyout?

Childress: Now has 32.5 million reasons why he should finally get a hair cut.

Courtesy: HoopsVibe

In this sense, if the trend persists, benches can be thinned of talented assets (i.e. players who are 6th through 8th in a team’s respective rotation) who would earn at least 1.5 times more with a top European team compared to an NBA squad. That means younger players filling up the back end of rosters, which can be scary for teams who treasure continuity. Perhaps, this will heighten the importance the growing importance of the NBDL.

Second, as evidenced by recent NBA drafts, many European-based players are drafted and have guaranteed funds in place but never step foot in the NBA. Why? That’s because first-round picks are subject to a rigid salary structure that does not allow a number of players to experience free agency until their fifth season.

For the European-based players selected in the latter part of the first round, there is a real fear that they may never set foot on the NBA hardwood for a number of reasons – unpalatable contract, high buyout and cultural issues.

For the same players who eventually join the NBA teams that draft them, there is an expectation of immediate playing time, as many of Europe’s elite are sacrificing their pocket books for the NBA dream. As a result, some have decided to leave at season’s end and return to Europe for considerably more money.

At the end of the day, money and sports are joined at the hip. If the value of the American dollar plummets another 34% in comparison with the Euro over the next nine years, you had better believe that some proven starters may end their careers in Europe if they find it financially necessary.

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