How Technology Has Disrupted the NBA and What Does It Mean?

Technology changes everything, including in basketball. While I have only watched basketball since the mid-2000s, I can’t help but to notice the effects of technology disruptions in the past 10 years alone. Like all disruptions, it creates winners and losers. This thought motivated me to tally the effects and see if there are lessons to help me navigate the changes in my own field as well.

Well, here are my observations below and my conclusion comes at the end.

1. More 3 pointers and faster pace.

Competing against streaming, the golden age of TV, to apps, NBA evolved to garner viewers (and also win games). The league average 3 pointer field goal attempts increased from 18.1 in 2007 to 28.7 in 2017. Likewise, the league average possessions per 48 games increased from 92.4 to 97.8 in the same period.

Winner – J.J Redick signing a 1 year $23 million a year deal with the Philadelphia 76ers. Making 3 pointers help.

Loser – Roy Hibbert went from an All-Star in 2014 to a 2^nd round draft pick trade piece in 2016 and out of the league in 2017. Being 7’2 and setting good screens don’t help anymore.

2. Social media.

Facebook, Instagram, snapchat, twitter, etc have given players and participants a platform and access unlike anything we have seen before. Charles Barkley even said young players are forming super teams of social media. There is no taboo in talking to each other when one can bypass calling each other’s household.

Winner – ESPN Columnist Adrian Wojnarwowski’s name has become synonymous with NBA break news. His tweets during the free agency season has been termed “Woj bombs.” 

Loser/Winner – Eric Bledsoe. After a disastrous start to the Phoenix Sun’s season and the firing of head coach, Bledsoe tweeted “I don’t wanna be here.” It led to a $10,000 fine from the NBA and benching, but it worked out in the end. He got sent to a good team in the Milwaukee Bucks. He got himself fired from his job, but he also got him to an even better job.

Loser – D’ Angelo Russell’s leaked snapchat video of his then Laker teammate Nick Young’s cheating confession led to Young and Iggy Azalea’s broken engagement and his expulsion from the team.

3. Content Platforms.

The strong network effects of social media content sharing and high smartphone penetrations have given life to content producers across multiple platforms. The days when sports content creation is limited to papers, radio shows, and TV are long gone.

Winner (Youtube Entertainers) – Brandon Armstrong’s basketball impersonations under BdotAdot5 has led to invitations to NBA All Star Weekend’s celebrity games and appearances on the Jimmy Kimmel Show.  ChrisSmoove’s NBA 2K video game playing led to his collaboration videos with NBA players Tony Parker and John Wall. He is also selling T-shirts based on his catch phrases.

Winner (Youtube Video Editors)- The Frishberg brothers’ basketball mixes on Youtube under Maxmillion711 has garnered him over 45,000 subscribers and over 20 million views. He has also become an in-demand editor for a number of sports organizations. There are also lots of NBA highlight reel editors who constantly play a mouse and cat game with Youtube over copyrights issues.

Winner (Podcasters) – Bloomberg’s article on Dunc’d On, a basketball podcast by Duncan and Leroux, says it all. These two NBA outsiders quit their law professions to produce between 5-15 hours of content each week and they are commercially profitable. Podcasts from active/former NBA players, J.J Redick, Randy Foye, Richard Jefferson, Channing Frye, etc have also become a thing.

Winner (New Media Groups and Writers) – Bill Simmon’s The Ringer, Lebron James and Maverick Carter’s The Uninterrupted, and Nate Silver’s FiveThirtyEight have all found success with or without the affiliation of large media organizations.

Losers – other content creators. There are only so much eye balls to go around and the competition is fiercer than ever.

4. Big Data. 

Sports analytics have been around since econometrics and popularized since Michael Lewis’ Money Ball, but the NBA is undergoing a big data revolution, credit the abundant hardware, software, and human resources.

Winner – Noah, a sensor technology company, used to track basketball shooting is employed by the Toronto Raptors to help players train. NBA has hosted its 2^nd annual hackathon in 2017 to promote and recruit basketball analytics talents. Houston Rockets GM Daryl Morey has long been a proponent of sports analytics. He co-founded the MIT Sloan Sports Analytics Conference and may get the last laugh one of these days if his Houston Rockets wins the championship.  

Loser – Coaches, scouts, trainers, and managers from the last generation. Also, Charles Barkley, a long and strong opponent of analytics.

After going through all the winners and losers, I did learn several things about industry changes and career paths. 

Don’t be stubborn and ignore trends.

If you are on the court, learn how to shoot some 3s. If you are behind the scenes or on the sidelines, know some analytics. It is fine to recognize one’s limited aptitude for whatever is trending and focus on one’s strength, but it is important to stay relevant and literate.

Stay alert and seize the window of democratized opportunities.

Successful basketball content producers seized the leveled playing field created a path despite their lack of degree or access. The window of democratized opportunities is limited because the first mover advantage disappears and new barriers to entry are inevitably rebuilt. When seizing opportunities, there is a balance between preparing and acting. Don’t go in unprepared, but don’t act only when you are 100% prepared because by then it is too late.

Build on what makes you unique, including what you might perceive as your disadvantage.

Reading Bloomberg’s coverage on Dunc’ed On, I learned that Duncan and Leroux leveraged their lawyer background into being experts on NBA’s Collective Bargaining Agreement, a key puzzle in understanding NBA salaries, trades, and teams.

Also, it reminded me of what I read about Kyrie Irving and Xi Jingping. Kyrie said he developed his acrobatic layups because he grew up playing on a hoop with a broken backboard. He joked that he imagines how much better he would have been if he played on a good hoop. However, my thoughts are the opposite. It is precisely because of the broken backboard, he developed his now unstoppable acrobatic layups. Similarly, Xi learned from his disadvantaged youth and turned it into a strength. “Many of Xi’s generation agree that when their schooling stopped and they learned to survive on their wits, they developed emotional toughness and independence of thought. Xi later reflected on his ability to listen to other points of view without necessarily bowing to them. I had to learn to enjoy having my errors pointed out to me, but not to be swayed too much by that. Just because so-and-so says something, I’m not going to start weighing every cost and benefit. I’m not going to lose my appetite over it.” (quote =/= endorsement)

Either ETFs cools down or I am dead

I may be chicken little and think the sky is falling, but it is unclear what my financial analysis skillset in will get me in the future, especially the long run.

Financial professionals often tout the power of free markets. They speak highly about creative destruction and speak with ease about re-training programs for those left behind. However, they, including me, may get a taste of their own medicine. Challenges from passive investing may render the traditional finance skillset useless and anachronistic for many. Either ETFs cools down or I am dead.

It came fast and furious, passive investing through ETFs will account for about 50% of all assets under management by 2017-year end. As more people put their money into ETFs, fewer people are putting their money in mutual funds and hedge funds. So far, there is a good reason for this. Since QE started in 2008, the broad market has been performing very well. While good stock/bond picking is nice, investors say no thanks when the whole basket of stocks/bonds was rising. It is reasonable to say that ETF will cool down because the market will eventually underperform active management, especially when global QE stops.

However, I worry this won’t be the case. Overtime, it may be become a habit that is hard to kick. After Japan suffered its bubble burst, cheap 100 yen stores selling daily items sprung up and became part of life. 30 years later, it does not matter whether one is rich or poor, they all go to the cheap 100 yen stores because it is a part of life. It also may be a genuine low cost disruption that is here to stay. Regardless of whether it is piggy backing on QE or not, ETF is a true innovation in terms of its efficiency and cost. Similarly, fast fashion, ecommerce, ride sharing, and streaming have toppled their incumbents in recent years and have not looked back. Lastly, the case for ETF may be tied up in the same mystery of low inflation. In this low growth and low return era, it is reasonable for investors to want to minimize their management fees because they lack confidence.

*ETFs may also blow up and start a financial crisis due to its now wacky construction, liquidity concerns, and bubble characteristics. However, this discussion deserves a blog post of its own.

As of now, it is hard to say conclusively whether this is a big fad or a big seismic shift, but either way it is impacting the financial industry ecosystem. Due to the accessibility and popularity of ETFs through robo advisors, financial advisors who make commission from helping investors are hurting investors opt to “Do It Themselves.” Trickling down to the next level, since people are buying ETFs instead of mutual funds, money managers who charge a fee off their assets under management are pressured. Further down the chain, investment banks who relied on money managers’ trading business are also hurting. There is a chance that a counterbalance will set in since the ecosystem change will impact the market in the long run, whether in its liquidity, asset allocation, or productivity. However, until then, the pie for financial analysts has shrunk and is shrinking.

Additional forces that threaten to reduce the size of the pie are regulations. A European regulation called Midfid II will dictate how money managers pay for research and it will lead to job losses. Before Midfid II, money managers paid for research through soft dollar, which means they paid for research through their trading commission they pay to the bank. Banks agreed to it because at the very least, research was another service differentiator that helped them stand out amongst the competition. Given the debates around the usefulness of investment bank research and the squeezed margins for money managers, many research firms will be caught swimming naked. Eventually, the bottom performing research will get cut. Another US based regulation called Fiduciary Duty Act, which aims to improve transparency and accountability, will force financial professionals act in the best interest of their clients. One direct effect is that financial professionals will now opt for the cheapest and most convenient options because they want to stay out of trouble. Since ETFs are cheap and popular, they will direct clients to ETFs because they don’t want to have to explain themselves.  

The passive management and current regulatory trend may be the perfect storm for industry professionals. The laid off investment bank research analysts will rush to get jobs at money managers, but money managers are constrained. Not only is their revenue shrinking due to challenges from ETF, but also their expenditure is growing because are forced to pay for research. This means that a crowd of people will rush to squeeze into an already crowded and possibly shrinking room.

As I said before, it is unclear what my financial analysis skillset will get me in the future. If ETF is here to stay in the long run, then a financial analyst may become no different than the horse breeder in early 20^th century. Both professionals have nice skills and both were valuable when horse carriages and active management mutual funds ruled the world. However, if ETFs becomes what car is to horse carriages, then financial analysts may suffer the same fate. They either have to become the best analysts in the world and work for Warren Buffet, similar to the horse breeders who work for the few domestic and race horse owners, or they have to re-train and find a new job. They either have to find something translatable or go into the automobile or new finance industry.

I maintain that either ETFs cools down or I am dead. Just kidding, I won’t be dead. I will just have to think hard about where else I can apply my skills or re-train for a new craft. I will not be the first to experience this type of industry shifts, nor will I be the last.

*I will follow up with my own rebuttal piece about why I may also be wrong and why the sky is not falling down. 

Casino Like Financial Markets

In this world where too much money is chasing too few assets, asset price inflation and subsequently, gambling on prices, become inevitable. This means that financial markets may turn into casinos, but this outcome is better than the alternatives.

To begin, money and assets are different in that money is cash, deposits, and cash like funds while assets are things that provide future benefits. In the past 70 years, the combination of post WWII peace, globalization, and the break from gold standard has led to the creation of lots of money. Peace allows households to just live and enjoy life, giving them the opportunity to make money without interruption. Globalization enables those who are good at making money to make lots of it. Lobster men in Maine and miners in Mongolia can now sell their goods far and wide at speeds and scales unseen before. Fiat currency made money printing possible. Whether the printing is to meet genuine economic demand or spurred by government stimulus, central banks no longer had to worry whether they have enough gold to back their money up. Putting it all together, it has been a perfect storm for money creation.

As for assets, there is simply not enough of it. There are lots of consumption goods, but there are not enough investment goods. While they both provide future benefits, only investment goods are assets worth chasing with one’s money. Since consumption goods’ values expire and depreciate, it makes little sense for people to park their money in these assets that lose value. As a result, money naturally gravitates toward investment goods, lured by the promise of capital preservation and appreciation. (Preservation is important because inflation eats away the value of money and appreciation is desired because what is a better way to make money than to make money with money).

What does this mean altogether? It means that asset prices will rise over time since there is too much money chasing too few assets.  Money has to go somewhere and it will pour into available assets. However, the process is messy and unpredictable (largely). The inflow of money is disorderly, unlike water filling an ice cube tray. Money will come in and out and assets will rise and fall. This volatility makes it difficult for assets to find and stay at an equilibrium price. Such opportunity to make quick bucks by predicting the direction of prices draw people in and those who captured by their animal spirits turn into gamblers. Also, as markets become more sophisticated, the typical buy low sell high strategy has evolved beyond one’s imagination. Instead of picking good stocks or a good house, there are now strategies betting on prices, interest rates, exchange rates, spreads, volatilities, and everything else.   

However, this is not a bad thing. This casino is better than other forms of gambling. Financial markets create much more good than Las Vegas’s casinos or horse race betting. Furthermore, it is much better to isolate the gambling on investment goods than consumption goods.

First, unlike Las Vegas and race tracks that end up creating lavish hotels and genetically engineered horses, this casino allocates capital, creates endless jobs, and spreads financial literacy. Though gambling sounds bad, the large number of market participants help enable a deep market. This deep market increases the possibility of someone out there willing to take the other side of the trade as a buyer or a seller. Whether it is buying a stock, foreign exchange, or an interest rate swap, one can feel confident that their transaction will go through at a given price. Through this deep market, resources can be allocated more efficiently. Stock picking rewards good companies by giving them a cheaper cost of capital. Foreign exchange forwards allow companies to put their idle foreign exchange to good use to those who wants to buy it now for the future. Interest rate swaps enable companies to swap their less desired fixed interest rates for a preferred floating exchange rate. Also, ever since financial markets evolved from a room of loud traders to electronic markets that now exists in the clouds, financial markets can now create jobs anywhere. In comparison, the jobs created by casino and race tracks are mostly limited to those within the proximity of these sites. Lastly, working as part of the value chain of financial markets, one is able to become an expert in financial matters. These workers are not only able to use these skills for themselves, but also become agents to spread financial literacy to others. Financial skill is much more applicable and useful compared to knowing how to deal in black jack and knowing how to brush horse’s hair.  

Second, it is much better to have this casino on investment goods than consumption goods. If the flood of money is channeled toward chasing consumption goods, it would no longer be known as capital appreciation, but as hyperinflation. The first allows people to preserve and grow their wealth while the second destroys their wealth through the erosion in their purchasing power. One is happy to see his or her 401K investment balance goes up, but one will be distraught to see the price of daily items spin out of control. One observable example can now be seen through housing. Homes are both a consumption good and investment good. People consume housing for shelter, but they also invest in homes for their retirement. The dual purpose real estate serves doubles the demand for this asset. As a result, home prices have skyrocketed in past decades as more and more wealth chases this asset, which often struggles to keep up with the demand. This phenomenon has forced poorer people out of their neighborhoods at best and created destructive housing bubbles at worst. Even till today, housing continues to be a thorny issue despite the numerous painful experiences of housing bubble bursts in Japan, US, Europe, and elsewhere.

In the end, we are left to choose our own poison. By accepting conflict, protectionism, and gold standards, one can create a world with less money. However, the weak and powerless will undoubtedly suffer more. Destruction is more costly to them, protectionism hurts poor nations’ income and deprives rich nations from cheap goods, and gold standards limit stimulus and cheap credits. If one accepts the current arrangement and let money creation continue, then one may be left with hyperinflation or casino like financial markets. I do not know about you, but between the two, I pick casino like financial markets.