Jerry Buss and the Brilliance of Magic's 25-Year, $25 Million Contract

A diverse class of basketball luminaries will be inducted into the Naismith Basketball Hall of Fame on Friday. The inductees are headlined by NBA legends Scottie Pippen and Karl Malone, and also include Lakers owner Dr. Jerry Buss, legendary high-school coach Bob Hurley, Sr., three-time NBA champion Dennis Johnson, Gus Johnson (the first player to shatter a backboard in an NBA game, not the screaming play-by-play man), WNBA legend Cynthia Cooper and Brazilian star Maciel “Ubiratan” Pereira, as well as the 1960 U.S. Olympic team and the greatest basketball team ever assembled, the Dream Team - the 1992 U.S. Olympic team.

For the purposes of this post, we'd like to focus on Dr. Jerry Buss, one of the true giants among owners in all of American professional sports in the modern era, who is under-appreciated, if anything.

Most basketball fans are well aware that Phil Jackson has won more NBA championships than any other head coach, with 11. It's probably a more significant achievement - and certainly one which flies far under the radar - that Jerry Buss has won more NBA championships than any other owner, with 10 (ahead of legendary Celtics owner Walter Brown, who won 7).

Not only that, but I also very strongly believe that no one person - not Jerry West, Magic, Kobe, Kareem, Shaq, nor even Jack Nicholson, Chick Hearn or Dancing Barry - is more responsible for the development of the Los Angeles Lakers into the NBA's signature marquee team than Jerry Buss.

While the Lakers developed a sound foundation of support in Southern California with a run of success and star players in the '60s and '70s, L.A. was still a Dodgers town when Buss bought the team in 1979.

Buss was the architect of Showtime, not just by cultivating a fan base of Hollywood celebrities, but also by insisting that the Lakers draft Magic Johnson as a de facto condition of the sale in 1979, overruling Jerry West, who preferred Sidney Moncrief. The Showtime era catapulted the Lakers to the status they hold today as the most popular sports franchise in L.A., and arguably the most popular NBA franchise in the world.

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One decision which endures as one of the true landmarks of Buss's tenure was initially controversial: when he signed Magic Johnson to a 25-year, $25 million contract extension in 1981.

Since a $25 million contract for an NBA superstar looks positively quaint in 2010 terms, it's hard to fully explain how stunning the deal was at the time. It was the longest and richest contract in professional sports history when signed - both the length and total dollar value were just monstrous numbers compared to others of the time.

Only two other players - Kareem Abdul-Jabbar and Moses Malone - were making a $1 million annual salary at the time, and the league minimum was a whopping $65,000. Nolan Ryan was the highest-salaried baseball player at the time, after signing a 4-year, $4.4 million deal in 1979.

Kareem immediately voiced concerns, both publicly and privately to Buss, about whether Magic would be able to remain coachable with such an enormous contract. And given Magic's extremely close off-court relationship with Buss, many Lakers teammates were uncomfortably uncertain about whether Magic had essentially become a member of team management.

Indeed, a major controversy developed just months later, as Magic's public comments were widely perceived as the cause of the firing of head coach Paul Westhead. At 22 years old, Magic's image became that of the classic modern athlete run amok, who had been given too much, too soon, and he was even booed at Lakers home games for a time. Of course, the Lakers went on to win the 1982 NBA championship under Pat Riley, and the Magic-Westhead controversy has long since been relegated to Lakers history.

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In retrospect, Magic's 25-year, $25 million contract turned out to be one of the most brilliant moves of Buss's tenure from every perspective: marketing, business, championships.

Marketing
Longtime Lakers/Buss chronicler Steve Springer recently wrote a thorough profile of Buss for Lakers.com, in advance of the owner's Hall of Fame induction which is highly recommended.

In the profile, Buss noted that the famous contract was a very deliberate maneuver to increase the Lakers' profile as well as to bolster the team's championship opportunities:

[Buss] had a unique plan for the Lakers that would hinge on two linchpins, Magic Johnson and Jack Nicholson. In a city long identified with the movie industry, Buss, the former chemist, devised a formula for success that mixed sports and entertainment.

On the court, Johnson, the Lakers' top draft choice in 1979, had the skill, style and charisma to make the team both a big winner and a huge draw.

At the end of his second season, the 21-year-old superstar became even more renowned when Buss signed him to a 25-year, $25-million contract, then the richest in sports history.

"I always felt other sports sometimes got a lot of press because their players were paid so much money," Buss said. "Anybody who makes an outlandish salary obviously attracts attention. That was what was behind my contract with Magic. I think it created a lot of attention for the Lakers."

Business
While most observers assumed that Buss was paying an outrageous sum of money to retain his superstar, famed agent David Falk delineated in his book, The Bald Truth, how the contract ended up being an incredible bargain.

Indeed, much of Falk's skill in the '80s and '90s was in anticipating that salaries were about to skyrocket, and that the day's record salary, often previously unimaginable, would soon be dwarfed. Falk consistently negotiated termination options which allowed his clients to have the option to explore free agency. By locking Magic into a "lifetime" contract, Buss saved money in the long run.

But there's more. As Falk says in his book: "[Buss] is a genius in what is known as present value. It's a financial term used to describe the process of evaluating a future stream of payments in terms of current dollars."

Here's how Falk described the 25-year, $25 million contract in The Bald Truth:

Magic was never paid his true value because no one around him understood the breadth of his value. Magic signed a five-year contract for $460,000 per year with the Lakers as the no. 1 pick in 1979. But because Jerry Buss, the team's owner, was an expert in deferred compensation, the deal paid Magic in even installments over thirteen years so the contract had a present value in the low $300,000s. In 1981, Magic renegotiated his contract, but the salary cap made its debut that season for the six teams with the highest salary structure, the Lakers being one of them....

Because they were over the salary cap, the Lakers couldn't change the two remaining years on Magic's rookie contract, so they agreed to pay him $25 million over twenty-five years starting at the end of the first contract. Thus Magic, who had led the Lakers to a championship as a rookie and was clearly one of the game's greatest players, had to wait two more years before the deal even kicked in. Buss was a financial genius who had predicted the increase in mortgage rates and he had bought millions of dollars in mortgages. He bought a $3.5 million mortgage with a 20 percent interest rate that effectively paid Magic's entire contract for twenty-five years.

CNN interviewed me in 1982 and asked if I thought the deal would set a new trend for player contracts.... I told the interviewer that while it sounded amazing, within three years Magic was going to be crying for locking himself into a long-term deal while the salary structure escalated around him. Three short years later, Patrick Ewing was headed toward signing for $3 million a year while Magic was making a third of that. He never made the kind of money he deserved because the people around him didn't have the foresight to see where the market was heading. They were looking backward instead of into the future. That, as well as competing with Buss's genius, meant Magic never came close to making what he deserved.

In an autobiography titled Magic, written by the Hall of Famer as a young man in 1983, Johnson indicates that he was the driving force behind the "lifetime" contract. Here's how Magic described it:

My original plan was to finish my career in the Midwest, in either Detroit or Chicago. But after my rookie season I had a new plan. I liked Los Angeles, the franchise, the Forum, the players, and the owner. What more could I ask for? I wanted to be a Laker for life.... I also wanted to avoid free agentry [sic]. Representatives of several teams had already made sly overtures to me, saying, essentially, that they had loads of money to offer me when my contract ran its course. I just wanted to play ball; I didn't want to go through the meat market. I had had enough of that in choosing a college.

Buss was receptive to the idea of a lifetime contract. "Obviously I hadn't considered this," he told [Magic's reps] later that summer, "but I'd be very happy to. Let me work up some numbers and get back to you."

There was no rush.... [At training camp, Buss] outlined the $25 million, 25-year contract. I just laughed when he told me about it. We were sitting in his apartment at the Ocotillo Lodge at Palm Springs. He laughed, too.

"Sounds great to me," I said.
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Dr. Buss easily could have delayed the negotiations for months, perhaps a year, to see how I responded to [Nov. 1980 knee] surgery. I certainly would have understood. But he never hedged.... Over the next few months, [they] hammered out the details of the richest and longest-running contract in sports history.

I knew I'd have to live up to it. I didn't know I'd have to live with it hanging over my head.

Championships
No matter how it got done, in basketball terms, Buss was the big winner. He drafted Magic, got him locked in for his entire career, won five championships with him in the '80s, and Jerry Buss was on his way on the journey which will lead him to Springfield on Friday night. In every way, the shocking 25-year, $25 million contract for Magic Johnson was a smashing long-term success for Jerry Buss.

Scottie Pippen and Karl Malone will likely dominate the proceedings with plenty of well-earned accolades, but don't forget that one of the greatest owners in NBA history - the one with more championships than any other - is also being inducted into the Naismith Hall of Fame in Dr. Jerry Buss.