It's a rather odd moment in time for NBA commissioner Adam Silver to claim that a "significant number" of NBA teams are still losing money.
The NBA, after all, signed an incredible new national television deal months ago that will pay out $24 billion over nine years, more than doubling the league's annual take. That doesn't go into effect until mid-2016, but beyond that the NBA continues to beat financial forecasts. The league was projected to earn $4.66 billion in basketball-related income over the past season; instead, it earned $4.84 billion. That's a cool $180 million in unexpected revenue. And bolstering its burgeoning popularity, the NBA posted the best TV ratings for the Finals series since the Jordan era. Everything is looking up.
Yet Silver would have us believe that NBA teams are still in trouble. From Tuesday's press conference in Las Vegas:
I don't know the precise number and don't want to get into it, but a significant number of teams are continuing to lose money and they continue to lose money because their expenses exceed their revenue. [...] That in order to compete across this league with a relatively harsh tax, teams are spending enormous amounts of money on payroll. Some of the contracts we talked about.
Let's look at this for a second. Based on the final basketball-related income number, the average team revenue this season was $161 million. The highest team player payroll for the season was the Nets' $91 million. Since that $91 million figure was over the luxury tax threshold, Brooklyn had some expenses in the form of luxury tax payments ... which goes directly to teams with lower payrolls. The Nets ended up paying out $19 million in luxury tax, for a total player expense of $110 million.
In fact, 2014-15 marked the second lowest luxury tax total since the tax was implemented in 2002. Payrolls were basically completely sane. The Warriors, who won the championship, were under the tax line. The Hawks, who were the No. 1 seed in the East, had a payroll under the salary cap. The only Western power who paid the tax (and thus had one of Silver's "enormous payrolls") was the Clippers, who had a whopping $81 million payroll and $5 million of taxes. And again, the average team revenue figure was $161 million.
So the absolute most expensive team in the NBA in terms of player costs spent $51 million less than the average NBA team revenue. Blaming player salaries, especially when they are capped by the collective bargaining agreement to roughly 50 percent of revenue, is absurd! If 30 teams are making a combined $4.84 billion and paying out no more than $2.4 billion payroll, there can be only three explanations as to why a "significant number" of teams would be losing money. The first is other expenses. Silver:
They still have enormous expenses in terms of arena costs. Teams are building new practice facilities. The cost of their infrastructure in terms of their sales people, marketing people, the infrastructure of the teams have gone up [...]
Oh. All those shiny arenas that NBA teams are getting the public to largely foot the bill on. Here's a pretty solid way to reduce arena construction expenses: get more than 20 years out of the arenas
you've already built the public has already built for you! And those practice facilities -- that's a thing now. The ever-struggling Pelicans spent $15 million on a practice facility. The Wizards are looking to spend $20 million to build one. The Nets (always an outlier) earmarked $45 million to rehab an industrial warehouse with views of Lower Manhattan. The Lakers are reportedly spending $80 million for a new team headquarters and practice facility.
Of course, like the arena costs -- or the modest portion most teams actually pay for their new arenas -- these practice facilities are financed over time. Tom Benson is not plunking down $15 million in cash and telling Bob The Builder to construct a magnificent paean for weight training, ice baths and scrimmages. The annual ongoing cost of building and operating these facilities is small, and will continue to be small in the grand scheme of NBA finances. This is a red herring.
And the cost of people who work in basketball but don't play basketball? Okay, coaches are a little pricey and there are some GMs who make extraordinary amounts. But if you think sales people, marketing people or whoever else works in the bowels of an NBA team is really making a dent in that $161 million of average team revenue ... then go talk to one of those team employees. Another red herring.
(I wonder if there isn't a hidden expense that actually takes up a big chunk of the pie but is never discussed by management: the financing of team purchases themselves. When Vivek Ranadivé bought the Kings, he certainly didn't pay cash. The same applies for Wes Edens and Marc Lasry in Milwaukee. Do they get to count their financing costs for the team purchase among their basketball expenses? If so, what's that cost look like for teams like the Suns, Kings, Bucks, Hawks, Hornets, Warriors, Pelicans, Sixers and other recently transferred teams?)
So capped player expenses aren't the problem and other personnel or infrastructure expenses aren't inherently restricting teams' ability to turn a buck. Perhaps distribution is a problem. That $161 million is just the average team revenue, after all. Back to Silver:
[...] in some cases their local television is much smaller than in other markets. In some cases because of historical deals, and in some cases just because the market won't command the kinds of dollars that you can get in the larger markets. [...] Just so everybody understands the conundrum. So when the Lakers get a fantastic local television deal, because if they generate $140 million in local television, 50 percent of that goes to the players. But it's not -- the Lakers are only paying their 1/30th of the 50 percent to the players. That money gets distributed among all the teams. So even if a team is moderately successful in a smaller market, if there is outside success in a larger market, that raises the payrolls for everybody.
In other words, because the NBA's revenue sharing model is weak and because there remain a number of bad local TV deals on the books, instead of 30 teams making roughly $161 million in revenue last season you have some teams below $100 million and some teams above $200 million. At the low end, you get into trouble when you have a standard-issue $70 million player payroll and all the other costs discussed above.
This is all framed as a problem to be discussed with the players' union in the near future. In reality, this is an issue for the NBA teams to sort out among themselves. In fact, the league shut the players' union out of the discussion of the revenue sharing model during the 2011 lockout, saying it was an internal item irrelevant to players' financial interests. If the league is going to ask players to cut their share of the pie again, then the players need to be a part of the discussion on leveling the economic playing field. The 21-win Lakers probably turned a(nother) $100 million profit while the Wizards, who made the second round of the playoffs after a solid season, possibly got hung with another substantial net loss. (Per Zach Lowe, the Wizards lost roughly $13 million in 2013-14.)
Now some lower-revenue teams are being saved by revenue sharing: the Pelicans and Bucks have turned profits in recent years because of large revenue sharing payments from the high-revenue teams. But clearly more is needed. That well-run teams are still losing money while a 21-61 team is making $100 million tells me the NBA is not doing enough to redistribute revenue.
The last explanation for why the NBA can be a booming business while a "significant number" of teams lose money is that some teams are just horribly run as businesses. The Nets lose millions upon millions of dollars every year. Whose fault is that? THE NETS! You can't negotiate away management's ability to be a disaster. This is a simple but important point. If you have incompetent, spendthrift people running teams, you are always going to have teams that find ways to lose money. There is nothing to be done to save them because they do not want to be saved.
It's clear that Silver is pouring a foundation for a 2017 lockout here. Of course no one wants a lockout. We'll hear that a lot over the next two years. And hey, the players can avoid a lockout by giving the ownership a bigger slice of the growing pie. And Silver's squad is going to have one heck of an arrow in its quiver when it comes to public perception. Hell, he already unveiled it in this very press conference.
In terms of the announced new contract signings, again, we have a partnership with the players, so to the extent we're generating more revenue, the players are going to do better. It's roughly a 50-50 deal, and those contracts are ultimately a product of the 50 percent of the revenue that the players receive. So the better the league does, the better our players do.
And I think most fans recognize that to the extent that these guys have a special and unique talent that are being rewarded by the marketplace. It's very difficult to make value judgments. I'm like any other fan when I say, oh, my God, I can't believe that compared to a teacher or doctor or someone else. But we live in a market economy. So that's how values are set.
Emphasis mine. This is beautiful, disgusting rhetoric. A seven-figure career administrator has the temerity to compare artificially-capped entertainer salaries to those of teachers and doctors on behalf of the interests of a cartel of billionaire hedge fund hawks, tech boomers, real estate developers and man-child heirs. That's pretty damn rich, Commish.
Set the doomsday clock. Again. A lockout's coming.
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