Adam Silver: ‘A significant number of teams are continuing to lose money’
Back in October, after the NBA put the finishing touches on a new nine-year, $24 billion broadcast rights deal that nearly triples the amount of money the league receives from ESPN and Turner Sports, Cleveland Cavaliers megastar LeBron James made sure to note that he expected the changing financial standing of the league to prompt a change in the nature of conversations between NBA owners and the National Basketball Players Association — the union that represents NBA players — in the years to come.
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“We gave a lot,” James said, referring to the resolution of the league’s 2011 lockout of its players, which shortened the 2011-12 season by 16 games and resulted in the reduction of players’ share of basketball-related income (BRI) from 57 percent of the pie to a 49-to-51 percent “band.” That drastic shift was projected to cost players roughly $3 billion over the life of the new collective bargaining agreement (CBA).
Since that massive ownership victory, NBA franchise prices have skyrocketed, with the Sacramento Kings selling for $534 million, the Milwaukee Bucks selling for $550 million, the Los Angeles Clippers selling for a paradigm-exploding $2 billion, and the Atlanta Hawks selling for between $800 million and $900 million. In January, Forbes estimated the average value of an NBA franchise at $1.1 billion, a massive year-over-year increase that might actually undersell the true value of the 30 NBA teams. (Players, of course, don’t see a dime of the profits owners make when selling their clubs.)
Combine that with the monstrous influx of new TV cash, and players — including the best and most visible player on the planet — have a hard time envisioning owners making that same case with a straight face come the summer of 2017, when either side can opt out of the 2011 CBA and begin new negotiations.
“The whole thing that went on with the last negotiation process was the owners are losing money,” James said. “There’s no way they can sit in front of us and tell us that right now.”
And yet, mere weeks later, in a press conference headlined by the NBA Board of Governors deciding not to reform the draft lottery system, there was Commissioner Adam Silver, saying that “one-third of the [NBA’s 30] teams are still losing money.” And there he was on Tuesday, chatting with reporters at Las Vegas Summer League, beating the same drum:
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. Even with revenue sharing, and fairly robust revenue sharing, when some teams are receiving over $20 million checks from their partners.
If your immediate response to reading “a significant number of teams are continuing to lose money” was to laugh and shake your head, well, you’re not alone:
Haha yeah ok: Adam Silver says a “significant amount of teams” are still losing money in the NBA because their expenses exceed revenue.
— Andrew Bogut (@andrewbogut) July 15, 2015
You’d wager that the Golden State Warriors center wasn’t the only player who found the claim laughable, what with the NBA making a record $4.84 billion this year, TV revenues going through the roof, franchise values exploding, the league setting a new attendance record and netting the Finals’ best TV ratings since Jordan’s Bulls were running things. And maybe especially because the commissioner had just gotten finished trumpeting the great shape the league was in:
The goal, of course, is to have a robust 30-team league, not just a league where teams […] in large markets or owners who are willing to lose lots of money can have top‑notch payrolls. So I think it’s very positive. The league is very healthy. I think owners recognize that and our owners are extremely competitive.
We introduced, by the way, I should have said earlier, Tony Ressler to his new meeting, first meeting as the owner of the Atlanta Hawks. Somebody I’ve known for a while, but we’re thrilled to have him in the league. Somebody else who has been extraordinarily successful in his primary business, come in to the league, going to compete hard to win. That makes for a very healthy league.
A “very healthy league” in one breath, a “significant” number of teams losing money in the next. Huh?
Silver’s vagueness surrounding precise numbers and “significance” captures some of the complexity involved in figuring out franchises’ full financial pictures. Grantland’s Zach Lowe reported last summer that nine NBA teams were expected to lose money on the 2013-14 season after factoring in revenue-sharing payments and luxury-tax bills. But those projections dealt solely with teams’ basketball operations, leaving aside revenue generated from other sources.
That ties into the larger question of what exactly goes into the BRI that the players and owners split. As Deadspin reported back in May, some sports economists and lawyers believe that the CBA’s failure to include basketball-related businesses also owned by NBA owners — like stakes in the arenas in which the teams play and the regional cable networks that broadcast their games — allows for a financial shuffle that prevents players from getting their fair share of some very lucrative revenue streams.
The projections reported by Lowe also included “losers” like the Brooklyn Nets and New York Knicks, exceedingly valuable franchises whose basketball-specific profitability went by the wayside thanks largely to their major-market-triggered revenue-sharing responsibilities and their willingness to spend exorbitant amounts on payroll, which triggered massive luxury tax bills, especially in Brooklyn’s case. They don’t, however, factor in sweetheart deals like the one that has exempted James Dolan’s Knicks and New York Rangers from paying property taxes on Madison Square Garden since 1982. Other owners can benefit from myriad tax advantages, too; Steve Ballmer can reportedly recoup up to $1 billion of the $2 billion he spent to buy the Clippers via “goodwill” tax deductions over the next 15 years.
So, for one thing, it’s incredibly tricky to figure out whether teams are actually losing any money. For another, Silver’s claim that owners are in a tough spot because their expenses are too high sounds awfully odd coming after owners willingly and of their own accord shelled out an estimated $2.6 billion in player contracts over the first two weeks of free agency.
That’s especially true considering, try as they might to land big fish, this wasn’t the likes of the Knicks and Lakers spending insane paper. It was comparatively smaller-media-market teams like Cleveland (for LeBron James, Kevin Love and, eventually, we expect, Tristan Thompson), San Antonio (for Kawhi Leonard and LaMarcus Aldridge), Memphis (for Marc Gasol), New Orleans (for Anthony Davis and Omer Asik), Oklahoma City (for Enes Kanter) and Milwaukee (for Greg Monroe and Khris Middleton).
Silver referenced teams spending “enormous amount of money” on players “in order to compete across this league with a relatively harsh [luxury] tax.” (A more punitive tax, by the way, that they themselves put in the last CBA.) But only five teams paid the tax this season — three big market (Nets, Clippers, Knicks) and two smaller (Oklahoma City, Cleveland) — and the total luxury tax collected plummeted from $151 million last summer to $42 million this summer, thanks in large part to the Nets’ commitment to reducing their tax burden. Thirteen of the 16 playoff teams, including the eventual champion Golden State Warriors, didn’t pay the tax last season.
Some teams — including the Warriors, who just paid to keep Draymond Green and who will see last fall’s extension for Klay Thompson kick in — will move into tax territory next season, but with the influx of TV money spiking the salary cap and luxury tax lines past the $100 million mark by 2017-18, that “relatively harsh tax” could soon become an all-but-irrelevant issue. For the purposes of this particular discussion, though, it might already be one.
As SB Nation’s Tom Ziller notes, if the average NBA team’s revenue was $161 million this season — $4.84 billion in total BRI, divided by 30 teams — and the most expensive team in the league (the Nets) paid out a total of $110 million in payroll and luxury taxes, then it strains credulity to claim teams lose money because they spend too much on players. Besides, with league revenues spiking so much — a 7 percent increase this year, a projected bump to more than $5 billion next year — the NBA’s projecting that salaries, even after all this new spending, won’t reach the full 50 percent of BRI that the CBA mandates players receive.
When that happens, the NBA has to cut a check to the players union — these are the “shortfall” payments that became a talking (and sticking) point during negotiations over Silver’s “cap smoothing” proposal, which the NBPA rejected — to distribute among its membership to make up the difference. Come next summer, Silver says, that’s going to be one hell of a check:
There are projections that for next year we could be writing a check moving close to half a billion dollars to the Players Association. That’s not, of course, the ideal outcome from our standpoint. It’s not something we predicted when we went into this collective bargaining agreement.
Now it’s happened because the revenue we generated was much higher than we had ever modeled. But we’re also learning that when you have all that money coming into the system, team behavior isn’t necessarily predictable either.
If the league is literally making more money than its teams can spend on talent, to the point where owners will have to cut the union a $500 million check, then it’s hard to see how payroll is the real issue. So Silver points to other areas:
[Owners] 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 […]
What ESPN.com’s Kevin Arnovitz calls the “arms race for the best training facilities, medical services and branding campaigns” is real, with multiple teams looking to secure land and spend tens of millions of dollars on new facilities. But this, again, doesn’t seem to pass the smell test. Some notable exceptions aside, off-court personnel rarely carry price tags heavy enough to tilt franchises’ balance sheets. Teams famously seek and typically get at least some level of public funding for stuff like arena construction. Owners tend to finance the cost of building new facilities and amortize them over time, making such costs both smaller-scale and longer-term ownership issues rather than sure-thing year-to-year profitability ruiners.
The other issue Silver raised might be the biggest-ticket item:
[…] and in some cases, [a team’s] local television [contract] 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.
Of course the vast difference between the values of, say, the Lakers’ $200 million-per-year local TV deal and the $20 million-per-year deal that the Miami Heat had before their recent seven-year re-up can create a vast difference in profitability. It remains unclear, though, why players should bear any responsibility for more equitable division of the league’s staggering profits among owners. Silver himself said as much back in October.
“We’ve always said to the players’ association […] you can make revenue sharing our issue, not yours,” he said. “We’ve never come in and said because a particular team is unprofitable that that somehow becomes your problem. We recognize it’s our obligation to run a well-managed league.”
Then again, he did so in the context of talking about his preference for a hard salary cap, which is not exactly music to players’ ears. Plus, given the sting of 2011, if the league’s going to start changing how teams share money, you’d suspect the union — now led by the quite fierce Michele Roberts — will want to be involved in those negotiations rather than just trusting owners’ pie-slicing.
Ultimately, though, Silver can’t guarantee profitability for all 30 teams, just as he can’t legislate proper management of all 30 teams. If Mikhail Prokhorov wants to burn hundreds of millions in an ill-considered and ill-fated pursuit of a championship, that’s between him and his accountant. The commish can, however, try to tilt the system even further in favor of the mostly billionaires who run it by laying out an argument that the NBA, “healthy” and flush with new cash as it is, just can’t keep all of its members from feeling the pinch.
“I will say, as we have done historically with the Players Association, and rather than at least publicly having a back and forth with the union on our revenue and expenses, we’ve made absolutely clear to them just as we have historically that we will share the audited financials of the league office and all 30 teams,” Silver said. “So it’s my hope that if we begin by sharing of that information and building trust from it in terms of what our actual finances are, that will lead to an understanding, a common understanding, of what the league finances are and will move us that much closer to a long‑term relationship, long‑term collective bargaining agreement.”
I wouldn’t necessarily hold my breath on that trust — Roberts has already echoed LeBron’s thoughts and cautioned Silver against crying poverty again — but there’s still time before the Dec. 15, 2016, deadline to opt out of the CBA, so there’s still an opportunity for sanity to prevail.
Even if you don’t share the commissioner’s position that it’s too early to worry about a labor stoppage, and even if you don’t believe both sides truly want to avoid one, you can cross your fingers and hope that both sides recognize just how foolish it would be to derail this gravy-train-on-biscuit-wheels. You can hope that any lockout that does come will be brief, won’t cost any games, and will give us at least a few more years of getting to enjoy this game we love before having to hear, again, about how the NBA’s Board of Governors just can’t seem to figure out how to keep afloat the franchises they wouldn’t dream of selling.
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Dan Devine is an editor for Ball Don’t Lie on Yahoo Sports. Have a tip? Email him at [email protected] or follow him on Twitter!
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