I’ve read/listened to a lot of stories recently about how the current NBA salary structure is threatening to put the NBA out of business. The system is broken these stories say and an out of control salary structure is threatening make small market teams extinct.
The stories are fairly easy to believe. All you have to do is close your eyes and think and very quickly a few examples of grossly overpaid player quickly come to mind.
Here, then, is my attempt at explaining what is actually going on. Before that you might want to peruse the following links for background:
I managed to source a link for:
- Larry Coon’s collective barganing agreement (CBA) FAQ at cbafaq.com
- Forbes list of NBA revenues by Team (http://www.forbes.com/lists/2008/32/nba08_NBA-Team-Valuations_Rank.html)
- Wikipedia entry on the NBA Cap (http://en.wikipedia.org/wiki/NBA_salary_cap#NBA_Salary_Cap_history)
- US inflation (http://www.inflationdata.com/inflation/inflation_rate/historicalinflation.aspx)
Back already? Good. Let’s get to the numbers.
The key fact to start with is the following: Players salaries are a fixed Cost at 57% of League Gross revenue.
Let’s repeat that: Players salaries are a fixed Cost at 57% of League Gross revenue!
Any and all cap nonsense is a bunch of hot air. By being fixed to league revenues, Player salaries cannot balloon out of control. The league in fact has controls in place in the CBA to keep that number fixed. Those controls are:
- The Luxury tax limit, which is simply set by taking the league’s estimate of gross revenue for the season dividing it by 30 and multiplying by 57% (and adjusted against actual revenue using Control #2).
- The League holding back 8% of player salaries in escrow and using that money to make adjustments to guarantee the 57%. This is the fudge factor that allows them to keep Player Salaries at a fixed percentage of Revenue.
There is a simple equation then for determining how much money the league actually makes:
Profit Margin = League Revenue -Player salaries (a fixed cost) – Team expenses (Variable Cost)
The big problem with a lot of the analysis I’ve read is this is that not all of this information is public and it makes determining the truth somewhat hard. Writers and analysts are left scrambling for answers based on gut and feel because they don’t have all the facts.
This is a problem we can fix. After all in the advanced stats world we deal with complicated equations all the time and this one is much easier.
Let’s lay out the relevant information:
- Using the Luxury tax limit numbers for each year we can figure out Player Salaries (Luxury Tax Limit times 30)
- We can determine League revenue (Player Salaries/0.57).
- We can assume the league made money in 2005 (say 14 million per team or about $420 Million total)
- The League claims an operating loss of 300 Million this year.
- The owners get the 40% BRI number the union claims they want.
- Player Salaries and revenues are locked in at 2.4% percent increases tied to inflation (with one notable exception)
- TV rights go up 21% as they did when last negotiated (the exception)
Under this extremely favorable scenario, the owners will still start losing money by 2020 and looking again at player salaries with evil intent.
Ok, maybe the math is not so simple but the conclusion is clear. The owners are looking to take the money from the talent. Funny that it all comes down to simple incentives in the end.