https://sportshub.cbsistatic.com/i/r/2018/07/13/96556662-7325-4217-aae1-7f304a72ac26/thumbnail/770x433/9743f031fdbeeea4874924142f5ea9d9/lebron-james.jpg

Parallels between the NBA salary system and open source

A story about how open source increases stakeholder value at the cost of stakeholder monopoly

After catching up with a colleague for a couple of cheeky Saturday coffees I was listening to one of the excellent NPR podcasts: Planet money. Specifically, an episode titled “Lebron James is still getting underpaid.” While listening I was returned back to the following conversation about the value of open source:

(See the whole thread for additional context)

Open source is an issue that I’ve struggled with personally over my career. I contribute to open source projects out of a sense of justice, but without being able to point to a (clear and direct) relationship between these open source contributions and an increase in business profit.

Lebron James is underpaid

While I recommend that you listen to the podcast noted above, I will attempt to describe how the NBA salary arguably underpays Lebron, but how this is probably fine. Now, I don’t watch, nor understand Basketball, so I apologise in advance if my understanding is inaccurate.

Lebron James is arguably among most effective NBA players of all time. He’s able to shoot, pass and work effectively in a team at a higher performance level than most other players. However, despite his proficiency he’s unable to leverage that for a higher income. Specifically, the NBA limits income in two ways:

Income cap

The NBA salary cap limits the amount a given team is able to pay a given player. The limit applies both to the total amount of money that a team is able to spend on all it’s players, as well as the amount money a team is able to spend on any given player. So, regardless of what a team might want to pay Lebron, they’re limited by rules set at the league level.

The draft

Perhaps the more nefarious way in which Lebron’s salary is limited is the draft. In most other industries a given employee can simply advertise their skills on the open market, finding an employer that will pay them the largest amount of money possible for their given skillset.

This is not the way it works in the NBA. Instead, players who wish to join the NBA are subjected to the draft. In the draft the worst teams in the league are given first preference over their choice of players who are eligible for this process. So, the choice for where Lebron is going is not up to Lebron, but rather up to a combination of chance and the team who would choose to pick up from the draft. He’s thus unable to ‘shop around’ between teams to find those who will pay him a larger salary.

In summary, both Lebron’s cash salary is limited directly, and he’s unable to negotiate between teams. Ostensibly, not an enviable position to be in.

It’s probably fine

The weird part about this system is that, in total, Lebron is probably able to net a larger salary as a result this system, designed to limit his salary in comparison to other players.

The trick is in understanding the value proposition of basketball. When fans are spending money on basketball, they’re not spending money investing in the highest performing team over a long period of time. Rather, they’re spending money on their hometown team, the team they identify with. Additionally, they’ll only spend the money on this team if they believe this team has a chance of winning the NBA championships.

By allowing lower performing teams first pick at higher performing players and limiting the total income, the NBA guarantees that there will be a high degree of movement in the high performing players to low performing teams. Those consumers who would spend money on these teams will then rally behind the hope these high performing players will bring, but not at the expense of fans associated with the team the player has just left — instead, remaining loyal to that team (at least for a time)

This greatly increases the value of the basketball league. Back to Lebron, the vast majority of Lebrons wealth is not in direct recompense from the league, but rather through endorsements or other advertisement deals. These endorsements are only possible due to the mystique associated with the league and sports fans investment in it, in turn directly a result of the draft and the salary cap.

In summary, while Lebron earns less from the NBA as a result of the aforementioned rules, he earns far more from the league that results.

Software is undervalued

Now, to software. Software has eaten the world, and underpins the vast majority of many industries. Banking, commerce, logistics and healthcare are all now built on top of software solutions of some kind or other. With the advent of newer techniques such as “machine learning” whole complex and previously human specialities are being delegated to machines to compute and determine.

It stands to reason given that the development and distribution of software is now fundamental to our modern economy that it would be among the most highly paid industries worldwide. And, while there is indeed a high profit margin to be made, I would conjecture that compared to other industries of similar effort it’s undervalued.

A specific class of software, in my mind, is responsible for the massive reduction in costs that make this modern ingenuity possible: Open source software. Open source software is characterised by a couple of properties which decrease it’s value:

It’s free

Rather than attempting to build and sell complied computer applications, open source software makes the “source” of the application freely available. This means that any sufficiently skilled users can simply navigate to the appropriate place (usually GitHub), acquire a copy of of the software and start using it.

This means that of the range of software solutions that attempt to solve this problem, at least one alternative can be implemented for a minimal investment. It additionally anchors all other software solutions at an insanely small price, and forces other providers to make their take on this solution trivially easy to use.

A practical example is email. While it’s possible to set up a mail server on ones own computer or network, it’s now free to use email from major providers (sponsored by advertisements) or only ~5 EU per month to use email free of them.

It can be modified and redistributed for profit

In addition, open source software can often be freely packaged and sold as part of proprietary software solutions. There are now technical solutions to a given problem such as ensuring information safety (OpenSSL) or HTTP network connectivity (libcurl) that are packaged in almost every device on the planet.

Vendors then implement their products on top of these software solutions, providing friendlier, cheaper user services without needing to re-implement and resolve otherwise technically complex problems.

This means that there is essentially no possibility to profitably implement a new technical solution that solves the same problem as one of the well known, well used open source solutions.

It’s probably fine

Given the above free and open source software, it stands to reason that to make investments in software would be an absurd investment, doomed to eventually be consumed by an open source alternative. Indeed, we’ve seen complex solutions become dramatically cheaper, making businesses that solve this problem unprofitable.

However, as an industry the vast majority of our income is derived from solving user facing issues in some capacity, rather than solving technical problems. Additionally, it turns out there are such a vast range of user issues that need to be solved that despite the rapid evolution of open source alternatives, there are yet still more consumer problems that can be solved. Sharing our knowledge with open source allows us to do so in a progressively cheaper and more efficient way, dramatically increasing the value of the software industry in total.

Our profit is thus not determined by our monopoly on given technical knowledge, but rather how we’re able to take advantage of these open source solutions to solve consumer needs.

In conclusion

It seems that there are several systems in which avoiding establishing a monopoly can increase the total value of the system to the profit of all involved. Open source makes the continued increase in quality and prevalence of software possible, allowing new opportunities and higher profit margins for all involved with the industry.

Thanks

  • Planet money. This was a cool line of thought to explore, and I like the parallels.
  • Matt Asay and Joseph Jacks. Their conversation was an interesting one.