Despite agreeing to terms on a broadcast deal reportedly worth $24 billion over nine years with television giants ESPN and TNT in October, the National Basketball Association might not be on as firm financial footing as many might think, according to some ominous figures cited by NBA commissioner Adam Silver.
Silver put a damper on the prevailing optimism of what was expected to be a lucrative free-agent summer in 2016, when he detailed the league’s potential financial troubles in a press conference on Tuesday. The commissioner said that a lot of franchises are failing to turn a profit, despite the league earning nearly $5 billion in basketball-related income.
The possible downturn could raise the chances of an NBA lockout.
“I don’t know the precise number, and I don’t want to get into it,” Silver said. “But a significant number of teams continue to lose money, and they lose money because their expenses exceed their revenue.”
On the surface, it might be difficult to believe that NBA teams aren’t turning a profit. Two weeks after the start of free agency, $2.6 billion in player contracts have been awarded with players that have never made an All-Star team signing max contracts for more than $20 million a season. But according to Silver, the increase in revenue hasn’t been enough to make up for increasing arena costs, costs for new practice facilities, luxury tax bills and the salaries of team employees.
The luxury tax was put in place by the owners as a way to encourage less spending on players, but that hasn’t stopped teams like the Brooklyn Nets and Los Angeles Clippers from going beyond the threshold. As a result, they’ve had to pay large amounts of money to be redistributed to teams that don’t spend nearly as much.
Revenue sharing is in place to ensure that smaller market teams can benefit from the success of larger market teams. But the league’s policy hasn’t done enough to make sure that teams can be profitable in spite of their local TV deals.
The collective bargaining agreement that was signed in 2011 called for the players to receive a 50-50 split of the league’s profits, down from the 57 percent they received under the previous deal. Because the NBA has been so successful in terms of income, the CBA will force the owners to pay the players’ association nearly $500 million after the 2016-2017 season.
"That's not, of course, the ideal outcome from our standpoint," Silver said. "It's not something we predicted when we went into this collective bargaining agreement."
Not everyone is buying what Silver is selling. NBA teams are being sold for record amounts of money, including the L.A. Clippers’ sale of $2 billion last year. Average NBA players are making more money than ever, and the reason is because teams are making more money than they could have imagined.
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
However, the repeater tax, which has plagued the Nets, could be a contributing factor to teams failing to receive a windfall.
"Depending on how many times a team is over the salary-cap tax rate, teams could pay anywhere from 2.5 times on the amount over the cap up to 4.75 times," said Michael D. Colangelo, Assistant Director of Projects for University of Southern California's Sports Business Institute. "This is a temporary issue as most teams should be closer to the cap when it jumps next year, but the tax can be prohibitive and cause expenses to exceed revenue."
After a lockout cost the NBA 16 regular season games in the 2011-2012 season, Silver contends that the league is hoping to avoid another work stoppage. But one might be inevitable if the owners are hoping that the players will give them an even bigger piece of the pie.
Both the owners and players have until Dec. 15, 2016 to give notice that they want to opt out of the current CBA. With Anthony Davis signing a $145-million deal this offseason, and LeBron James looking to sign a contract worth more than $200 million in 2017, the owners will likely want to rework the labor agreement if they continue to cry poverty.
Colangelo claims a work stoppage, spearheaded by either the owners or the National Basketball Players Association (NBPA), remains a possibility, with the soaring salary cap and increase in the cost of contracts as the key sticking points.
"If anything, the term 'guarded optimism' can be used. A work stoppage may happen, but it would be difficult for both sides to convince the general public and fans that games should be missed. It is in the interest of both sides to come to a deal before the 2017-2018 regular season starts, but that doesn’t mean a work stoppage won’t occur in the offseason," said Colangelo.
There have been two NBA lockouts that resulted in a shortened season from 82 games. The 1998-1999 season had 5o regular-season games, and the 2011-2012 season had 66 regular-season games.