NBA Lockout Day 7: Money Maze

"In this country, you gotta make the money first. Then when you get the money, you get the power."

In the 1990s, Bud Selig and the Major League Baseball Players Association started a war that essentially wiped out what would have been an historic season.

In 1994, Tony Gwynn lost his bid at being the first to hit .400 since Ted Williams did it in the 40s, Matt Williams lost at chance at hitting over 61 homeruns, the Yankees missed a chance to make the playoffs for the first time in 13 years and the first-place Montreal Expos were disposed of.

This historic decision by Selig to attack the labor issues in the MLB has paid off so far since baseball hasn’t entered a work stoppage since.

Players gained unrestrictive earning power through free agency as the owners made more money than ever with increased television revenue that lead to the building of more stadiums in a time now to be referred to as the Steroid Era.

Now, David Stern and Billy Hunter are attempting to follow suit in the NBA that is now in it’s third lockout in 16 years.  Two of those work stoppages came during the Jordan days when the game was more robust and advertisers flocked to the sport.  In addition, they are trying to do the opposite of what the MLB did by restricting the money flow and power given to the athletes.

With baseball, the owners couldn’t prove their financial hardship and lost.  Meanwhile, it’s the basketball players that can’t seem to prove that with the NBA.  It’s very easy to see that there’s a problem in the money system just by looking at some of the top paid players: Kobe Bryant at No. 1 with $25.5 million last season followed at No. 2 by Rashard Lewis who earned $22.1 million last year.  Post Carmelo Anthony, the entire Nuggets roster only earned $28.6 million.

Meanwhile, the owners have not yet proven that it is these salaries that have led to such financial problems in the NBA.  Regardless, isn’t it the owners that sign these athletes to such deals?

According to a report done by Forbes and blog post by Nate Silver on NYTimes.com, the NBA has grown at a slower rate than most other sports.  Ticket revenues are up 22 percent as a whole from the 1999-2000 season; however, they are down six percent from five years ago.  Silver suggests that a lot of fans, mainly younger and/or African Americans, simply can’t afford the higher ticket prices.  That along with the fact that there is a recession going on, may explain the current dip in revenue collected at the gates.

The NBA did increase money flow from other revenues such as licensing and media rights.  They locked into lucrative, long-term television contracts that have done nothing but make money.  The increase in revenue from such deals has grown by 11 percent over the last five years and 30 percent over ten years.

While income is one of the many issues on the table, how this money is spread is the bigger problem.  Players’ salaries are the biggest expenditure in the NBA but have  increased nearly identically with league revenue, having grown at a 24 percent rate over ten years.  However, such growth has flattened out since the recession.

This leveling out is also due to how salaries are tied to overall income in the league.  Players must return a portion of their salaries if they exceed 57 percent of league revenue.

Another area of increased expenditures in is non-player expenses that have actually grown at a higher rate with a 13 percent increase over the last five years and 43 percent over the last ten years.  Some of this growth in spending is due to decisions that have arguably helped the league such as growth in digital media and attempts to expand the game globally (does a particular game in London ring a bell?)  In fact, the league would have made a record profit if these expenditures from last season matched those of the 1999-2000 season.  Again, these costs are why the game has become so popular worldwide.

Regardless of this increased spending, the Forbes data suggests that the league has made money.  Its operating income, which is revenue minus the expenses named above and before taxes and interest, is estimated to have been $183 million last season.  This comes to about $6 million per team.  Its operating margin, which is operating income divided by revenue and is used to measure rates of profitability, was at about 5 percent in 2009 and 7 percent for the total life of the most recent labor deal that just expired on July 1.

These numbers may seem small but just so happen to coincide with how most businesses have done recently.  According to the article, Fortune 500 companies collectively turned a 4 percent profit in 2009 and 6.6 percent in 2010.  Additionally, these margins in the entertainment business have been lower than that.

In spite of this, the NBA profitability should not be drawn as a single number.  Every single team has it’s own rate of growth.  Seventeen of the NBA’s 30 teams lost money in 2009-10, according to Forbes.  The losses themselves were small and the NBA did make money but that was mainly due to profits made by some of the more successful franchises.  Collectively, the Knicks, the Bulls and the Lakers made $150 million, which alone would have been enough to cover the losses of all 17 unprofitable teams in the league.

Adam Silver and David Stern are playing a dangerous money game.

Yet, Silver states that there are several reasons to doubt a lot of the NBA’s numbers.  Paper trails have been muddled with the selling of several teams and roster depreciation. Between 1977 and 2004, owners could write off half the team’s purchase price over five years, thanks to the pretend-loss of player value. Now, after tax law revisions in 2004, owners can write off 100 percent of their team’s purchase price, albeit over a 15-year span.  These “losses” can then be passed off onto owners’ personal income tax forms.  It’s confusing but essentially money can “disappear” from a team.

Next, several teams have been sold for much more than their actually worth, according to Forbes.  The Golden State Warriors were purchased for $450 million last year but Forbes had them only worth around $87 million.  The Detroit Pistons were recently sold for $80 million more than they were worth at $420 million.  Forbes estimated the Washington Wizards to be worth $322 million but sold for $551 million last year.

Though a lot more is up for sale than the teams themselves in these instances, it is important to note that the business of buying franchises is quite healthy in the NBA since none of been purchased for less than their worth.

Third, the most recent labor deal was agreed upon by the owners and players in 1999 and slightly ratified in 2005.  Players’ salary growth is directly tied to league revenue growth but all of the sudden the owners aren’t happy with the current deal.  This leads to some speculating that they are trying to take a bigger bite out of the pie.  None of the fundamentals have changed yet they want more.

Lastly, the NBA’s numbers should be taken with a grain of salt since none of their figures have been made public.  Only the players’ union has seen the numbers while the media and fans have been left in the dark.

However, the NBA has released a statement defending these figures that are still in the dark.  They claim that they have no idea how Forbes came up with their numbers and that they are highly inaccurate.

The statement claims that the NBA in fact has lost money every season under the most recent collective bargaining agreement that was put into place in 1999 and expired at the beginning of the month.  The league states that they have never posted a positive net income or operating income in any of these years.  Additionally, they say that they have never lost money during the process of team selling or acquisition and that they use a generally accepted accounting approach.

Ticket revenue is another figure they disagree with saying that they haven’t increased 22 percent since 1999 but only 12 percent.  Silver states that 17 teams lost money last year but the league says it’s actually 23.  Additionally, their losses were in no way small with every team losing an average of  $20 million.  Yes, the Bulls, Knicks and Lakers made a profit but it in no way could have covered the league’s loses which totaled around $340 million and that’s after taking into consideration revenue gains.

It's gonna be a wild ride.

Maury Brown with Forbes posted his own response on the magazine’s website about Nate Silver’s piece.  He has stated that the numbers used in the blog post were a barometer to show general trends based on operating income.  He said that net income would have been more accurate for the piece and has gone even further in stating that the league in fact lost over $1 billion in the last six years as opposed to a loss stated by Silver.

Despite the statements and disagreements made by all three parties, one thing is for sure: there’s a lot of money on the table and essentially no one wants to give it up.  The players want to start conceding their salary cash once it has hit 65 percent of league income while the owners want to lower it from 57 to 45 percent.  The NBA wont release its figures and the union won’t budge.

Baseball players were made happy by being given more power and money in their last restructuring but in a deal that increased revenue sharing in a league where four teams made half of the money for baseball.  Basketball is in a similar mess but their answer is to lower the cap, harden it and take away from players’ salaries.  While trends have leveled out, someone in the mix wants more.  The players want to get paid more to play and concede even less while the owners who signed them to such deals for so long want rules in place to protect themselves from putting such contracts on the table.

An NHL model seems a little more viable for fixing the NBA after they put in place a hard cap in 2005.  The baseball model seems to just be putting off the inevitable while owners spend more and more on their rosters.  Basketball needs a system that will curtail the spending and stop the bleeding that the league says it is experiencing with lost revenue.  Sadly, this is the only answer to the problem and it’s one that both Stern and Hunter will have to find a way to agree on.

You can’t separate money from the game of basketball.  It gives players the incentive to play and owners the reason to own.  If the system is broken (which it looks like it is), it’s been that way for some time.  It’s time for these two parties to sit down and settle the money game so we can get back to the real one: basketball.

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