Author Archives: Arturo

The Bottom Line on the NBA Finances

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Arturo Galletti is the Co-editor and Director of Analytics for the Wages of Wins Network. He is an Electrical Engineer with General Electric on the lovely isle of Puerto Rico, where he keeps his production lines running by day and night (and weekends) and works on sport analysis with his free time.

Damn it all,  the angel of Stern has struck, throwing gasoline on a fire, and so the season hangs by a thread. We really are so close to where we need to be to make it happen. I was not a happy camper, but I thought to myself: what else is a mathematically inclined and bored NBA fan left with? What is left for me but to wait?

Thankfully, inspiration struck (like a podcast you might say). What if I took a stab at laying out the finances of every team? Would that level the playing field enough to get this deal to happen? Then again, I might just make everything worse.

Let’s start with the gate & concessions. For that I needed a few pieces of information:

  • Attendance numbers for the 2010-11 NBA Season
  • Information on the average amount of money spent on concessions.  That study in particular comes up with something called:
    • The Fan Cost Index™ which comprises the prices of:
      • four (4) average-price tickets
      • two (2) small draft beers
      • four (4) small soft drinks
      • four (4) regular-size hot dogs
      • parking for one (1) car
      • two (2) game programs
      • two (2) least-expensive, adult-size adjustable caps.

If I take the attendance figures (divided by four) and multiply them by the The Fan Cost Index™ I get:

The top five teams in the league (Lakers, Knicks, Bulls,  Heat, and Celtics) make three times as much money at the gate as the bottom two teams (Grizzlies and Pacers).  Thirteen teams make twice as much as the bottom two. A smart person might even ask: why only one team in New York (right Mikhail?). This is what the media refers to when they talk about small versus large markets, and this is before we get to the TV money (national and local) and all the other incomes.

Now comes the first tricky bit. You see, while the national tv money is easy to determine, the local tv money and the division of other income is harder to come by. Of course, like any good engineer, I figured out a good workaround:

That is the pricing for NBA tickets from the secondary ticket markets. This is publicly available data (The internet is a wonderful thing). Using that data as a guideline and what I know about the NBA’s finances I came up with this:


That is my estimate for each team’s Net Operating Income (NOI), or Basketball Related Income (BRI) as it’s become known, as well as team valuations. A couple of quick notes here:

  • The share of the national TV contract is not quite split equally amongst the 3o teams. All 26 non-ABA teams get 1/30th of the money. The owners of the Spirits of St. Louis get a 1/28 th share (go here for full detail) and each former ABA team gets a 1/30th share minus a fourth of that Spirits share.
  • I estimated Team valuations at 2.8 times the NOI (BRI) for each team. I am not including other assets such as stadia. For a fuller estimate go here. You’ll note that I am not that far off.

With the sharing from the national TV contract included, the previously noted disparity is somewhat reduced (the Lakers and Knicks only make 2.5 times as much money as the Pacers and T-Wolves, not 3 times :-)), but it’s not quite enough. The problem is that the gate and concessions for the larger market teams are on par with the total income for the small market teams. There can be no real parity until there is actual revenue sharing of the gate at least (the NFL has a 60/40 Home/Road split). A good source for more info on this is here.

That takes care of direct incomes, so let’s get to the bone of contention. Let’s talk player salaries. Again, I needed some sources of information:

  • All salary data is from here. Thanks to ShamSports. I’ll do something fun with it later.
  • Salary Cap/Luxury cap information from the inimitable Larry Coon.

Remember how everyone talks about the 57% Share of BRI for the Players?

That’s correct for the entire league. It’s incorrect for individual teams, and therein lies the problem. Twelve teams have player salaries at less than 57% of their BRI (including the Knicks, Bulls and Heat, yes those Heat, at less than 40% ). The other eighteen are not so lucky.  There are in fact four teams at 80% or greater.

Let’s add in expenses and get to what the league is claiming as their bottom line (backed by their tax returns). (Note: I used $266 as the loss number since the closest I could find for a number was about $300 million).

Those are the league’s claims — near as I can figure it — in technicolor. Add in playoff revenues and about 19 of those teams claimed losses on their tax returns.

There are two very important things missing:

  • The Tax Break: the tax break in question is the Roster Depreciation Allowance (RDA -see here). To put it very simply, the RDA allows you to claim the value of your franchise as a loss in your books over a period of 15 years and in essence save 35% of that amount on your tax returns (this is known as the 15/100 Rule of Thumb [see here for more detail]). You can claim that loss on whatever schedule you like. You want to claim 90% in Year 5? Go right ahead. No loss claim in Year 11? Good for you. For this estimate, I’m assuming 1/15 th of the value of each franchise is available to be claimed and the value has to be multiplied by 1.35 (1 for the loss, .35 for the tax break).
  • The increase in franchise value: The average value of an NBA franchise has increased 78% since 2000 (see page 26 of this report). I’m going to use 4% as my value increase number to be nice.

When I add those in we get:

That looks closer to the truth. I know that not every team is claiming the RDA, but that’s not the player’s fault.  The bottom five teams come out as losers for their owners on the bottom line. For the most part this is is a function of location (7 of the bottom 10 are in my list of franchises in overextended markets), which again is not the player’s fault.

Tomorrow we’ll get into how these numbers will look with the various deals being thrown around during the lockout. I hope you can wait that long!

-Arturo

Disclaimer: I do not have access to the NBA’s books. Everything in this article is put together from public statements or logical inferences. I do not claim to have this perfectly right. However, I do feel like I am in the ballpark. The sources I used are listed, please update me if there is a better location to get my data.

Could Your City Give a Sports Team a Good Home?

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Arturo Galletti is the Co-editor and Director of Analytics for the Wages of Wins Network. He is an Electrical Engineer with General Electric in the lovely isle of Puerto Rico, where he keeps his production lines running by day and night (and weekends) and works on sport analysis with his free time.

“In the middle of difficulty lies opportunity.”

-Albert Einstein

Can your city Support a new Professional Sports Team?

Let’s start with the graphical answer.

What inspired this particular graph? A few posts back, fellow WOW writer Devin Dignam identified 6 cities that  are very difficult markets for their NBA teams. I liked this post a great deal. So much so, that I decided to extend it and flip it around. Rather than ask who shouldn’t have a team, I decided to ask who should.

In my previous post on the state of the lockout, I pointed out that  NBA bemoans its economic situation and shrinking profits but their approach at solving the problem is fairly narrow.

The profit equation for any business is simple : Profit = Revenue-Costs. The NBA is focusing largely on cost-cutting (and mostly on the player side) and are leaving a humongous opportunity on the table to increase revenues.

It all comes back to a simple question: Which cities can best support an NBA team? Or for that matter, any professional (MLB,NFL,NBA or MLS) sports team ?

If the NBA can properly answer this question, they can go from worrying about shrinking profits and contraction to talking about record revenues and expansion.

Let’s see if we can help them out (while answering the broader question).

Before we get to the good stuff, I need to get some explanations of terms and links out of the way:

  • The work done in this piece draws a lot from the fantastic work by The Business Journals site in their OnNumbers section. Particularly their pieces on Sports Capacity , Overextended Sports Markets, Viable NFL, MLB and NBA markets  as well as the link to Metropolitan Areas Total Personal Income for 2010.
  • The data for this piece is a drawn from the US Department of Commerce (for US markets), OnNumbers estimates for Canadian Markets, and the Goverment of Puerto Rico.
  • “Pro teams”: the number of NFL, MLB, NBA, NHL, and MLS teams in a city. The cost of adequately supporting a franchise was estimated by OnNumbers  to be:
    • $85.4 billion for MLB
    • $37.6 billion for the NHL
    • $36.7 billion for the NFL
    • $34.2 billion for the NBA
    • $15.4 billion for MLS.
  • “Total personal income(TPI)”: the sum of all money earned by all residents of an area in a given year. Using team revenue data and average ticket prices one can calculate amount of TPI needed to adequately support a team in each north american professional sports league.
  • “Available personal income(API)”: simply TPI less the cost it takes to support the city’s pro teams. If API is positive, it means that you are good to go for a franchise. If API is negative, then you really need to figure out where you are going to move your team. Only teams in the NFL, MLB, NHL, NBA and MLS are counted for this calculation.

All that nice data is here as a google doc .

Let’s start with the negatives first. Which markets cannot support the teams they have?


There are 19 cities that qualify as overextended. The table ranks each city in terms of the gap in income to support the franchise as a percent of the Total income for the metro Area. To me, this is an important distinction because it allows to identifies markets like Indianapolis, Charlotte, San Francisco, Detroit and Salt Lake (15 thru 19) that could very well be able to support the current franchise load if they achieve some measure of economic growth in the next few years.

Milwaukee comes out on top of my rankings because I am assigning them a 70% share in supporting the Green Bay Packers.  The cities in the top three (Milwaukee, Cleveland and Denver) reveal an interesting problem: as it decreases in popularity, Major League Baseball is going to find it increasingly difficult  to support the current franchise load. Eight of the ten teams in the top ten field MLB franchises and would clear their gap by losing those teams.

For the non MLB cities on the list:

  • Buffalo is already in an NFL timeshare with Toronto.
  • New Orleans had the NBA repossess their team.
  • Winnepeg gets the benefit of the doubt in hockey-mad Canada.
  • Nashville is a victim of NHL overexpansion and can be addresed by a quick relocation

The NBA has 11 teams on that list. They break out as follows:

  • Victims of a bad economy: Pacers, Bobcats,Warriors,Pistons, Jazz.
  • Cities with a johnny-come-lately MLB expansion problem: Denver, Phoenix.
  • Candidates for relocation: Bucks, Cavs, Hornets and Timberwolves.

The NBA needs to be thinking about finding markets for these four teams. Let’s identify the candidates.

There are 37 markets in the US and Canada that could support a new or an additional NBA Team. New York and LA lead the list but already carry two franchises each, so let’s leave them as backup options. Of all the candidates with an NBA team already, I am only going to consider Chicago. That gives us:


That’s 23 markets available for expansion (including Puerto Rico yay!) plus a second Chicago team as number 24. The most logical candidates to me would be: Chicago, Riverside-San Bernardino-Ontario (the Inland Empire), Bridgeport-Stamford-Norwalk or a general Connecticut team, Vegas, and Montreal as fallback option. So one option could be for the NBA could “encourage” their owners to say:

  • Move the Bucks to Chicago
  • Move the Cavs to Conneticut
  • Move the Hornets to Vegas
  • Move the T-Wolves to the Inland Empire

Every single one of those owners would see their franchise value significantly accrue  from such a move. Each one would be a trade up in terms of market size and income available. An additional plus is that 3 of those markets would be NBA only and new markets for the league.

Plus I can see the jerseys now for the Empire team:

Those are not the balls you're looking for

Sometimes, these things just write themselves.

-Arturo

The State of the Lockout

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Arturo Galletti is the Co-editor and Director of Analytics for the Wages of Wins Network. He is an Electrical Engineer with General Electric in the lovely isle of Puerto Rico, where he keeps his production lines running by day and night (and weekends) and works on sport analysis with his free time.

Five hundred twenty-five thousand
Six hundred minutes
How do you measure, measure a year?

-”Seasons of Love” from the musical Rent

Where were you a year ago today? What were you doing?

A year ago today, I was breaking down my final predictions for every team and every player for the 2010-2011 NBA season. I was enjoying a fabulous opening week to what would turn out to be one of my favorite all time NBA seasons (and maybe my favorite sports season in which one of my teams did not win).

Now I sit here waiting for the NBA owners and players to argue their way to an agreement to end a bitter lockout. As a fan, I can’t help but be angry at losing such an enjoyable part of my life. That’s the why of that particular quote. Because I love this game, and that love is a gift. The emotional side of me is desperately hoping that the NBA players and owners alike remember that and give us back the game.

The logical side of me understands that there are reasons for where we are, and given that, we may just be on the cusp of the end of that lockout, so I wanted to break down and summarize those reasons.

By the numbers of course.

$3.817 Billion Dollars in 2011

Money is of course at the root of the problem. Specifically, it’s  Basketball Related Income (BRI for short) that the players and owners are currently arguing about.

BRI includes pretty much any income received by the NBA, NBA Properties or NBA Media Ventures.  It breaks down in three groups:

100% included:

  • Broadcast rights
  • Regular season gate receipts, exhibition game proceeds, playoff gate receipts
  • Novelty, program and concession sales (at the arena and in team-identified stores within proximity of an NBA arena), arena club revenues, and parking
  • Proceeds from team sponsorships, team promotions
  • Proceeds from summer camps
  • Proceeds from non-NBA basketball tournaments
  • Proceeds from mascot and dance team appearances
  • Proceeds from beverage sale rights
  • Proceeds from other premium seat licenses
  • Proceeds received by NBA properties, including international television, sponsorships, revenues from NBA Entertainment, the All-Star Game, the McDonald’s Championship and other NBA special events.

Partially included (this is the stuff Billy Hunter will point out gets taken off the top):

  • 40% of proceeds from arena signage
  • 40% of proceeds from luxury suites
  • 45% – 50% of proceeds from arena naming rights

That number for 2010-11 was of course $3.817 Billion.

57%, 52%,50%

These are the the shares of  BRI that the players and owners are specifically currently arguing about. 57% is the share that the players have enjoyed under the current Collective Barganing Agreement (CBA) with the owners. 52% and 50% are the numbers being touted by the two sides (with the players of course on the high end and the owners on the low end. The difference?

The Players are arguing a between a 9% and a 12% salary cut at this point ( a 3% loss) or about $70 Million dollars a year.

5.7 years and 8.4 gamechecks lost

If you look at all the data for the last 30 years, the average length of an NBA career is about 5.7 Years. In fact 80% of players will not spend a decade on the job.

Some simple math for you: 3% salary loss times 5 years is 15% salary loss over the course of a career, and this is much less than a 100% percent loss from losing a season. Even if the players could get back the full 57% share by losing a season they would end up losing money on the proposition (12% times 5 = 60% versus 100% for a season lost.

Seems like I want them to settle at 50% right? Not so fast. There is some margin to be gained for the players from a higher percentage share of the BRI.

If I assume the career length expectation from the table above, a worst case BRI share of 50%, new tv deals at 5% bumps every eight years and do some calculations I come up with the following: a 1% gain in BRI is worth 8.4 gamechecks lost for the players (or about three weeks). So going from 50% to 51% is worth shortening the season by 8.4 games (or in chart form):

January 6th, January 20th, February 5th and 50 games played

This are for the last lockout:

  • The date when the last lockout ended
  • The final agreement was signed
  • The new season  began
  • Games played for that season

November 18th, December 1st, December 24th and about 74 games played

These are my predictions for the current lockout for the same. I think the final number will be 51% and that we will lose about 8 games (with the league schedule being heavy on back to backs).

2.9%,2.4%,8.2%

That’s the growth of BRI (which is also the rate of growth for player salaries), the general rate of inflation and the growth of team expenses from 2005 to 2011. These are the numbers are stress out the owners and motivate them.

To be fair, the economy was not so good.

Player salaries are fixed to league revenue growth but their expenses aren’t. If revenue growth is greater than expense growth everyone is happy. If not the owners start to lose earnings. There are three ways around that.

The owners of course chose number three.

If everything plays out like I think (51% BRI share for the players, about 6% revenue growth per season and a 5% tv deal bump) the numbers for the new CBA will play out like so:


If all that happens (and the owners keep their expense growth at about 6.4%), everybody wins. Including players, whose salary gets back to current levels by 2013.

Get to it guys.

-Arturo

How the Owners Plan to Steal a Billion Dollars

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Arturo Galletti is the Co-editor and Director of Analytics for the Wages of Wins Network. He is an Electrical Engineer with General Electric in the lovely isle of Puerto Rico, where he keeps his production lines running by day and night (and weekends) and works on sport analysis with his free time.

Editor Dre’s Note: Arturo has written a great piece for you with a killer twist ending. I like to play spoiler though. So here’s flipping to the end of the post:

  • Recap – The owners are likely lying on their books and actually earning a profit of hundreds of millions rather than losing millions.
  • The owners Stand to make hundreds of millions of dollars even if they lose a season if they change the BRI rate (even to the players’ proposed level)
  • If the owners stand firm they could gain over a billion dollars over the next six years if they win the lockout.
  • And of course here’s a great Arturo graph to sum it up!

And now like an episode of Lost I’ll let you see how this surprise twist came to pass!

Follow the money. Always follow the money.

-All the President’s men

In 1998 at arguably the height of its popularity , the NBA locked out it’s players. At issue was a clause allowing NBA owners to cancel the contract with the player’s if more than 51.8 percent of “basketball-related income” (BRI) went to player salaries. The NBA, at the time, claimed 15 of the 29 teams posted losses that season. The NBPA claimed that only four of 29 lost money. The NBA went to a vote after the season and locked its players out.

Tony Kornheiser summed up public perception by describing it as a labor dispute  “between tall millionaires and short millionaires.” Much like nuclear war it was a short, unsatisfying conflict which nobody won.

Fast forward to this year

On June 30,  after arguably it’s most successful season since 1998, the NBA locked out it’s players. At issue was the fact that 57 percent of “basketball-related income” (BRI) went to player salaries. The NBA, at the end of the season, claimed 22 of the 30 teams posted losses . The NBPA has disputed this claim. Negotiations took place between The NBA and the players union but both sides failed to reach an agreement prior to the expiration of the CBA .

Four months later and at the risk of losing an entire season we seem to be at an impasse. The NBA and its players seem to be locked in a deadly stalemate which no one can win.

Weirdly, this all sounds eerily familiar.To quote Karl Marx: History repeats itself, first as tragedy, second as farce.

Pundits are frothing at the mouth decrying  the folly of a possible lost season. How, they ask, can the NBA even consider throwing away what had all the potential of being a historic season? Why in the world would the NBA want to go through this crucible of torment again?

The answer as with most things comes down to the incentives. To put it simply, by tearing up the CBA, the NBA stands to make scads of money even if they lose the entire season.

For the NBA this is a financial no-brainer. Let’s prove that shall we?

Let’s break down the money first. The league claimed a loss of $300 million for 2010-2011. I’ve  in gone over these numbers in detail before (see here, here and here if you’d like to peruse them) and what I’ve come up with looks like so:

So a claimed loss of $300 million becomes a profit of about $200 million. Now that we know the numbers for 2010-2011 we can work out the effect of the lockout on the finances of the NBA owners. Let’s start with numbers using that NBA claimed loss of $300 million:

If we use the league’s own numbers, by locking it’s player’s out and lowering the BRI by any amount the owner’s stand to make money even if they lose the entire season. If the players had accepted a 47/53 split they’d stand to make an additional $380 million a year (or about 2.2 billion for six years even if they lost the season). At a 50/50 split the numbers are $267 million per year and $1.6 billion for 6 years. Even the player’s counter offer for 53/47  has the league making a tidy profit of $153 million per year and $1 billion for 6 years (and all this is without accounting for a new, increased tv deal for the 2016-2017 season) .

What if I use my corrected numbers for the league with a $200 million profit for the NBA teams for the 2010-11 season?

Again, the league comes out ahead in all the proposed BRI split scenarios even with losing the 2011-12 season. The player’s 53/47 proposal nets them $563 million over 6 years, A 50/50 split nets them $1.1 billion over 6 years and their own 47/53 proposal has them netting $1.7 billion over 6 years.

Sadly for the fans of the game of basketball, while a bad karmic decision the lockout is an incredibly sound financial decision NBA owners.

To quote scripture: “The love of money is a root of all kinds of evil”

-Arturo

Are the Owners using a Cheat Sheet to beat the players?

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Arturo kindly decided to make a cheat sheet for the NBA Players that are currently in negotiations. Above is chart showing the different pay grades in the NBA and how a new BRI split would alter each player’s pay. Arturo also kindly phrased this in another way for the players: “How much of a pay cut will I take if we accept this deal? ” (shown below)

You’ll notice that I’ve highlighted the 47% column (the owners initial offer), the 53% column (the players’ counter), and the $2,000,000 salary row. Why is the $2,000,000 salary row important?

Table 3: 2010-2011 Player Salary Tier breakdowns

Current Salary Players at or below salary % Affected

$500,000

100

22%

$1,000,000

196

44%

$2,000,000

240

53%

$3,000,000

279

62%

$4,000,000

314

70%

$5,000,000

337

75%

$6,000,000

354

79%

$7,000,000

369

82%

$8,000,000

378

84%

$9,000,000

386

86%

$10,000,000

397

88%

$11,000,000

409

91%

$12,000,000

412

92%

$13,000,000

423

94%

$14,000,000

431

96%

$15,000,000

432

96%

$16,000,000

436

97%

$17,000,000

444

99%

$18,000,000

447

100%

$19,000,000

448

100%

$20,000,000

448

100%

$24,000,000

449

100%

While it is often floated around that the “average NBA player” makes around five million dollars, that is a little skewed. Because certain superstars like Kobe Bryant make lots of money it brings up the average for the whole. According to Basketball-Reference, 449 players were paid to suit up last season. Just over half of these players made less than $2,000,000.  Again, the $5 million average is very misleading.

When we look at how much of an impact of the player giving into the owners (accepting 47%) versus getting what the players want (i.e. 53%) we see for the $2,000,000 group it’s only a difference of $170,000.  And for the lowest tiered workers — who make $500,000 or less — it’s only $50,000!

This reminds me of an interesting story from Freakonomics about real estate agents. When selling a $200,000 house a difference in $10,000 seems huge. Leaving a house on the market longer can actually be worth as much as $10,000. A real estate agent though only gets a 1.5% cut (6% commission split between the buyer and selling agent. The agent then splits their commission with their firm) so an extra $10,000 for the seller only gets the agent another $150. For several weeks of work this in not a lot for the agent. As such, the real estate agent actually has an incentive to sell lower for a quicker sale even though it hurts the seller — who is supposed to be on the same side as the agent!

Back to the NBA… the current BRI is around four billion dollars. That means every percentage point is worth around $40,000,000 for the players collectively, and the difference between the 47% and 53% offers is a quarter of a billion dollars! However, for a majority of the union it’s less than a few hundred thousand dollars. As the NBA union argues collectively we see that most players merely have an incentive for the lockout to end as opposed to fighting for tens of thousands of dollars (again, even though hundreds of millions of dollars are at stake). The players talk of standing strong may not hold up as many of them have an incentive to cave.  And it’s entirely possible the league knows this. So in the fight between the players and the owners, it may be that the owners are using the same sheet as Arturo and that may be why we could still see basketball this season.

-Arturo and Dre