How low with the players' share of revenue have to go to end the NBA lockout? The Hook crunches the numbers. It's not pretty.
Every day since the NBA lockout began, we've run a daily series called "This Is Why We Can't Have Nice Things." Each item looks at an awful player contract or other massive expense for NBA teams, and presents with very little comment. In the aggregate, with the Rashard Lewises and Gilbert Arenases and Calvin Booths and Keith Van Horns, it paints a picture: these owners waste a lot of bread.
Tim Donahue of Eight Points, Nine Seconds made a brilliant point this week: all those bad contracts really don't matter a bit in the aggregate. Under the NBA's now-expired collective bargaining agreement, player salary is set at 57 percent of basketball-related income. As we've seen with the NBA's extra payments to players as a result of 2010-11 salary not quite hitting that level, the split is honored no matter where actual salaries come in.
If every team had signed an Eddy Curry, 2010-11 salaries would still come out to $2.17 billion, because that's the cap presented by the old collective bargaining agreement. Had owners been frugal all this time and withheld on some of the more ridiculous contracts, salaries would have come out to $2.17 billion last year, because owners would have had to kick more than $26 million over to the players to reach the 57-percent level.
As we all know, that 57-percent revenue split helped lead to $300 million in claimed losses by the 30 NBA teams.
Now questions do remain. Ian Thomsen of Sports Illustrated reported in last week's print edition that income related to owning NBA teams but not found under the definition of "basketball-related income" was some $500 million last season, and that when you include that figure in revenue figures, the players take home 50 percent of total revenue, not 57 percent. The players may want, as a condition of a steeper cut to the split, to include all income derived from the NBA included in basketball-related income. Massive questions about expenses also remain. The union feels some that are included shouldn't be, and the NBA needs to explain the massive year-to-year fluctuations of the massive non-player expenses line.
But assuming you changed none of that -- you leave the definition of basketball-related income exactly how it is, and you don't remove any big items from accepted expenses -- what revenue split would you need to allow the owners to stem the bleeding in the aggregate and maybe turn a total league profit?
First, let's look at how things could play out if the old CBA had been extended another five seasons.
We're assuming 4 percent annual growth in revenue and non-player expenses. With the 57-percent split that has been in place for almost a decade, the league would see claimed losses rise from $312 million in 2012 to $365 million in 2016. For the next five years, assuming what we assume about smooth revenue increases, the league would lose $1.69 billion.
Obviously, that's not tenable. Hence, the lockout.
The players' union presented a proposal during June negotiations that called for a 54.3-percent revenue split, meaning that players' salaries would be capped at 54.3 percent. (That would serve to lower the salary cap, maximum salaries, the mid-level exception and the luxury tax threshold, all of which are functions of the revenue split.)
That move would give back more than $100 million in player salary in the first year. But would it make much of a dent over a five-year period?
Based on these projections, the league would just be losing $200-250 million per season, for an aggregate five-year loss of $1.1 billion. So it's little wonder that the owners didn't embrace the players' concessions.
The owners, of course, made their own late offer. The specific details of the owners' proposal remain shrouded in mystery, but the major takeaway was a player salary figure decoupled from revenue and capped at $2 billion. We've already applied this system to the past 10 seasons to see how owners would have made out. (They would have made out quite well.) How would they do for the next five seasons?
Owners would likely turn a small loss next season, then see the profits begin to roll in as revenues continue to rise while player salaries remain static. Decoupling player salary from revenue allows owners to capture all future growth of the sport (until the next CBA is negotiated). Is that fair? Regardless, it's a clear path to widespread profitability in the NBA.
But that's not a tenable plan. The union understands what the owners are after, and I'd expect players to accept a lower split or hard cap before consenting to a decoupling of revenue and salaries.
According to some reports, the NBA seems to like a 50-50 revenue split. As noted, the union likes 54 percent. What if we cut the negotiations, left all other issues equal, and moved the split to the middle ground, 52 percent? What would the next five years look like?
We're still seeing losses ... according to the NBA's claims. Derek Fisher, in that Ian Thomsen piece mentioned above, claims that $130 million in debt payments on team purchases is included in the 2010-11 expense claims. We can go in circles about whether it's appropriate that interest payments on franchise purchases ought to be legit basketball-related expenses when it doesn't matter one lick to players whether Chris Cohan or Joe Lacob owns the Warriors. In some small way, players are being asked to help cover the losses the NBA is experiencing in part because of massive interest payments on the franchises ... when the players will never see a dime when the team is flipped for (likely) big profits in the future.
If you assume debt payments will continue to be a large line item in non-payroll expenses, you can see that a 52-percent split would essentially leave a gap just as large as franchise financing. From the players' standpoint, the league would be breaking even, considering that the union doesn't consider franchise purchase debt financing a legit expense for these purposes. The players would be giving back $200 million in 2012 alone.
But the league still isn't profitable on paper under this compromise. Owners continue to maintain that franchise purchase interest should be included in the league's stated losses, because it's a real cash loss. So to get to break-even from the league's standpoint you really have to go all the way down to a 50-50 split.
... and even that doesn't get all the way there. If the owners really are serious about a 50-50 split, they are -- according to their own claims -- consigning themselves to additional years of losses. The projections say the league would lose $192 million over the next five years -- a far cry from the $1.6 billion under a 57-percent split, but it's still a loss. You still don't have universal profitability.
Consider that, and consider how far we are from getting players to consent to a 50-50 split (miles, miles and miles) ... this is why just about every reporter and columnist predicts a long lockout. And the killing issue remains non-salary expenses, which have been rising at a pace faster than revenue over the last several years. Debt financing is a big part of the expenses, which begs the question: Does the NBA have a team ownership bubble? Is the league in so much collective debt as to be unprofitable for the foreseeable future?
Let's hope not.
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