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.
As I was listening and reading an interesting thing happened. Massive warning bells went off in my head. My brain’s finely tuned financial bs detector, trained to spot where numbers don’t quite add up, called shenanigans. The owner’s claims that Player salaries are driving the NBA into the ground are simply not true. They’re hoping the people they’re bargaining with fail at basic math or aren’t paying attention.
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.
Just by looking at those facts and without actually crunching the numbers, my contention is that If the NBA made money in 2005 and now they lose 10 million with a FIXED cost for salaries, then team Expenses are growing past the rate of inflation in a bad way. The problem then isn’t the players it’s the owners and their exploding their costs and spending money like drunken sailors. (Editor Dre’s Note: I wanted to replace this but I found the metaphor strangely appropriate)
The math does not disagree. Let’s illustrate it:
The simple takeaway from that table is that Player Salaries and NBA Revenues are growing exactly at the US inflation rate (score one for economists everywhere!). Team expenses are growing at a ridiculous five times that. The owners must know this. A new labor deal will not fix that.
Let’s illustrate this again:
Let’s operate under the following assumptions:
- 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.
In fact, if the owners move to a percent of the Net revenue and not gross revenue (as they also want to do), they can then manipulate the bottom line to bilk the players by for example borrowing against the value of the teams and charging the debt servicing to the team expenses.
Let’s illustrate this as well:
Here I assume a Net Revenue split of 50/50 and that the owners curtail their spending to 2011 levels. This yields a stable business model for the owners but it does so by knocking player salaries down to $3.2 million per player on average from $5.2 million now (a 40% net drop and a steadily decreasing share of the pie over time).
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.