Why The NBA May Be Headed Toward Another Lock Out
Following the NBA's annual Board of Governors meeting during the Las Vegas Summer League, where the league's 30 owners gathered, NBA Commissioner Adam Silver addressed several of the potential rule changes he believes will be implemented heading into the 2015-16 season.
Among the topics discussed at the forum were playoff seeding, the nine-day free-agent moratorium and inclusion of countdown clocks during quarter breaks and time-outs.
When asked about the impact of the nine-year, $24 billion media-rights agreement the league signed last October with ESPN and Turner Sports, Silver mentioned many NBA teams are losing money and failing to turn a profit because expenses exceed income.
"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."
A full-year, annual valuation of NBA franchises released by Forbes earlier in the year shows that the league has never been in better economic shape.
For the first time in history, the average NBA franchise is worth $1.2 billion, an increase of 74 percent from last year, when teams were valued at $634 million.
The league collectively earned $4.84 billion in total basketball-related income, which positioned the average team revenue to be $161.3 million this past season.
Attendance and TV ratings also reached all-time highs this past season.
Despite a 3.4 percent upswing in the average price of an NBA ticket (to $53.98 from $52.50), a total of 21,926,548 fans filled arenas across the league, providing an increase of 2.4 percent from last season's attendance of 21,392,721.
The profusion of surpluses that ensued during the 2014-15 season doesn't end there.
With the 2015 NBA Finals averaging 19.9 million viewers, it became the most-watched and highest-rated series since Michael Jordon's final championship in 1998.
There's no question the NBA is a multi-billion dollar enterprise. But in no business are you guaranteed to make a profit. The same goes for NBA teams.
With the league expected to generate $2.6 billion annually from the new television deal (starting with the 2016-17 season), and $125 million per year from an eight-year apparel contract with Nike (beginning with the 2017-18 season), teams may be at fault for experiencing lack of economic growth.
"Teams are spending enormous amounts of money on payroll — some of the contracts we talked about. 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 and in some cases their local television is much smaller than in other markets."
With the salary cap rising from $67.1 million to $70 million for the 2015-16 season (and it is expected to surpass $100 million in the next two years), teams committed $1.4 billion in salaries to free-agents on the first day of free-agency, and an estimated $2.6 billion overall.
Only three teams that were among the top 10 in payroll last year got past the first round of the playoffs, including the Brooklyn Nets, who lead the league with a $91 million payroll and $19 million in luxury taxes.
It's an indication that some teams are spending enormous amounts of money on payroll that they can afford. But, it doesn't always add up.
Owners of professional sports teams are neither forced into pursuing and purchasing new stadiums and practice facilities, nor is the funding for these projects coming out of their pockets. Most current NBA arenas are upheld through public financing and taxpayer money.
Seven years ago, the Seattle SuperSonics were relocated to Oklahoma City after the state legislature rejected a proposal from former Sonics owner, Howard Schultz.
The SuperSonics were eventually sold for $350 million to an ownership group in Oklahoma City.
It still continues to be an underlining issue on the business side of the game. Milwaukee Bucks team president, Peter Feigin, told Wisconsin lawmakers that if $250 million is not granted for the proposed arena in downtown Milwaukee by 2017, there is a possibility the league will buy the team for $575 million and move it to Las Vegas or Seattle.
Despite the current collective bargaining agreement scheduled to run through the 2020-21 season, there is the possibility of another lockout with the players and owners having the option of opting-out on Dec. 15, 2016.
Similar to the 2011 CBA negotiations, the owners at the time weren't content with their financial health, and it costed the NBA 16 regular-season games in the 2011-2012 season.
In the end, the solution was to reduce the players' share of BRI from 57-43 to a 50-50 split.
Michael Roberts, executive director of the players' association, isn't buying into the idea of owners' expenses decreasing their profits:
“All of the data we have access to indicates that our business is thriving and will continue to do so in the near future. We agreed not to debate some of the finer points of negotiation in public, and aren't going to change that approach now in response to some remarks from the Commissioner on Tuesday."
The NBA accumulating $180 million more in BRI than originally anticipated will force the league to cut the National Basketball Players Association a $57 million shortfall check, and potentially another worth $500 million after the 2016-17 season.
No one franchise is paying more than their 1/30th of the 50 percent to the players. With the money getting distributed equally between larger and smaller markets, a competitive balance is instilled into the salary cap system and free-agency.
Still, there is inconsistency with the revenue sharing and business model of the NBA's current CBA.
With additional basketball-related media and arena revenue streams controlled by the owners not attached to the players' share of BRI, the split between the owners and players union lacks transparency.
The thought of avoiding another work stoppage will be filled with doubt if the owners continue to seek more in figures.
Based on the monetary projection of the TV deal, revenue-sharing and business partners, the resources are there for franchises to financially succeed. It's just hard to believe they aren't turning a profit out of it.