Tag Archives: NBA Lockout

The Bottom Line on the NBA Finances

Posted on by
10


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.

Michael Jordan’s Lockout Stance is fueled by Kobe Hate

Posted on by
6

The most recent news is that Jordan is part of a group of owners prepared to lose the season. But it goes further than that with Jordan: he was apparently one of those pushing for a 47% BRI split. Jordan is being labeled a sell-out. For a man that’s made millions selling underwear, that’s not anything out of the ordinary.

However, I have a different theory why Michael Jordan is fighting for such a hard BRI line. Simply put, Jordan enjoys his status as greatest of all time. He holds the record for the two largest single season salaries, with $30 million in 1997 and $33 million in 1998. In fact, Michael Jordan is the only player to crack $30 million in salary. However, Kobe Bryant will hit $30 million in 2014. If Jordan cuts the BRI, he can keep Kobe Bryant off the list of $30 millioners. Even better, if he locks Kobe out for a season, he lowers Kobe’s shot of hitting six titles. So all of Michael Jordan’s greed and selling out may just be a clever ploy to hide his status as the ultimate Kobe hater.

-Dre

Weekend Podcast: Sports Economist Rodney Fort on NBA Lockout and Roster Depreciation Allowance

Posted on by
8

Sports economist Rodney Fort, an expert on roster depreciation allowance,  joined the weekend podcast to discuss the NBA Lockout and the WoW Network’s analysis of NBA owners using the RDA to hide profits.

Podcast Details

How to listen: Download the MP3, subscribe to the RSS feed or go to the iTunes store.

Podcasters: Mosi K. Platt and Rodney Fort

Recorded: 11/4/11 3:08 PM EDT

Background

In the article “Better Angels”, WoW blogger Arturo Galletti explained his theory that NBA owners were able to turn the profits reported by Forbes into the losses reported by David Stern using a tax advantage called the Roster Depreciation Allowance (RDA). The RDA was created after businessman Bill Veeck purchased a Major League Baseball team in 1946 and convinced the IRS that the roster of players was a depreciable asset that reduced his tax obligation.

Several readers, like A.K.S. and emuhd, took issue with Arturo’s analysis. The WoW network asked Fort, an economics professor from the University of Michigan, to weigh-in on the impact of the RDA on the NBA Lockout and collective bargaining with the National Basketball Players Association. Fort and his co-author Edward Coulson analyzed the RDA in the paper, “Tax Revisions of 2004 and Pro Sports Team Ownership.”

Questions

Why does the RDA have “illogical foundations”?
“A possible parallel is the depreciation of livestock that is purchased for work, breeding, or dairy purposes but not kept in an inventory account. Apparently, these types of livestock ‘wear out’ in their relative productive roles and the IRS allows them to be treated as depreciable assets for tax purposes.”
If players are treated like chattel for tax purposes, then was Bryant Gumbel so far off calling David Stern a “plantation owner”?

If pro sports owners and the IRS agreed that 100% of the team’s value comes from the players in the 2004 revision to the RDA, then is 50% of league income a fair split for the players?

Is Arturo’s analysis accurate in Better Angels? Are owners using the RDA to claim operating losses?

Are the 2004 tax revisions to the RDA responsible for the spike in prices of NBA franchises?

The paper “Tax Revisions of 2004 and Pro Sports Team Ownership” outlines the impact of the 100/15 rule on hold and sell strategies for team owners. Arturo mentioned that NBA owners are using a blended strategy where they “hold” onto the team by selling it to relatives running shell corporations. Is that the case?

Companion Reading

Fort’s answers to these questions referenced the material linked below.

Could Your City Give a Sports Team a Good Home?

Posted on by
30

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

Posted on by
7

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