What Might The Owners Want? (A Look At The Numbers) Part I

In light of the recent breakdown in talks between the NBA and the Player’s Union, I thought I would try to look a little more closely at the available numbers in an attempt to discover exactly what the owners hope to achieve in the CBA negotiations.   I don’t pretend that this analysis is exhaustive in any way, but I do hope that it might help to illustrate why the two sides seem so far apart in their proposals.   I’m also choosing to break up the analysis into two pieces – thus the ‘Part I’ in the title.

Before looking at the numbers themselves, let me provide due credit to the sources of the raw data.  The BRI numbers come from Larry Coon’s 2005 FAQ and his 1999 FAQ, while the numbers on league-wide losses come from Maury Brown’s piece at Forbes back in July.

What I do not have access to is the actual numbers of league revenue.  So, for purposes of this analysis, I have to estimate this number.  To do this, I’ve taken the publicized report that actual NBA revenue was $4.2 billion in 2010-11 (as opposed to the $3.8 billion that makes up BRI) and made the assumption that the amount of non-BRI revenue was exactly $400 million in 2010-11 (we all know this is not the exact number, but a choice had to be made).  This would make the BRI figure 90.5146% of total revenue in 2010-11.  The other years of this analysis, then, are also presented with the assumption that in each year, BRI was 90.5146% of the total amount of league revenue.  Not precise, I grant you, but hopefully good enough to make some broad analysis.

What I also do not have is the yearly amount of expenses that do not include player salaries and benefits.  However, simple math can get us close.  We have a good guess about total league revenues and the NBA has given us the figures of league-wide losses each year.  We also know that, thanks to the escrow system, player salaries and benefits were adjusted in each year of the previous CBA to represent 57% of the yearly BRI figure (Note: I know that in 2008-09, the escrow system was not enough to bring the salary/benefits figure down to 57% and an additional adjustment was necessary the next season to do so.  However, for purposes of simplicity, the numbers in this analysis are presented as if 2008-09 actually reached that 57% goal and as if extra money was not needed to be withheld in 2009-10).  So, I’ve simply subtracted the player salaries/benefits from the assumed revenue figure and plugged in expenses accordingly to arrive at the published loss figures.

Let me also acknowledge that I know there is much debate over the validity of the figures of league-wide losses that are being used here.  I would rather not re-hash that debate in this analysis.  Rather, I am taking the perspective of the “worst scenario” – if these loss amounts are indeed true, then what would need to change in the next CBA to satisfy the owners and turn these losses into profits.   If the losses are indeed exaggerated, then it would follow that the changes might not have to be as dramatic.

BRI – Actual vs. “What Could Have Been”

With the specifics of my assumptions out of the way, let’s proceed.  First of all, I want to take a look at what BRI actually was over the last 6 years (ie, during the course of the previous CBA) vs. what it might have been projected to be at the time that the CBA was signed in 2005.  I say this because there have been numerous reports (this one by Ken Berger, for example) over the last several years that suggest that revenue growth in the NBA has not been as large as was possibly expected back in 2005, at least in part due to the state of the US economy over the last few years.

During the course of the previous CBA, BRI grew from $3.037 billion in 2004-05 (the last season of the 1999 CBA) to $3.817 billion in 2010-11.  This represents a healthy 25.68% increase over the course of those 6 years.  As a visual, take a look at these two graphs, showing the actual BRI amounts each year on one line as compared to 3 other lines that I am calling “What Could Have Been”: (click on the charts to enlarge)

I call these other three lines “What Could Have Been” for the following reasons:

  • The 2005 CBA itself seems to assume at least a 4.500% increase in non-national-television revenue annually, as this was the figure used to determine the annual “Projected BRI” figure.  It seems reasonable to me, then, to compare actual BRI with an annual increase of revenue in this amount.
  • During the final four years of the 1999 CBA, BRI grew by a cumulative average of 5.516%, so it is reasonable to wonder what would have happened to BRI if this trend had continued throughout the six years of the 2005 CBA.
  • Finally, I used a figure of 6.300% as my final comparison, as this annual increase, according to my analysis, would have taken the NBA into the black in 2010-11.

The real question in my mind is this – what was the expected level of revenue growth when the CBA was signed in 2005?   One could argue that the minimal expectation was a 4.500% annual growth, with a healthy expectation of something nearer to the 5.516% annual increase that I’ve charted.  Perhaps even a hope for something close to the 6.300% that is pictured above.  Honestly, I don’t have an answer.  If pressed, I would probably say that the owners expected something near to the 5.516% growth that history had shown (over the course of the last few years covered by the 1999 CBA) was possible.  How else to explain that the owners agreed to increase the designated percentage of BRI guaranteed to the players from 55% (the level during all but the last year of the 1999 CBA) to a permanent 57% in the 2005 CBA?  Looking back now, such optimism might seem misguided.  But we have to remember that in the summer of 2005, the league had just experienced a 10.2% annual increase in revenue.  Perhaps, at the time, optimism seemed appropriate.  Perhaps, in the minds of the owners, increased revenue streams could provide the league with the overall profitability that it desired.

The charts do demonstrate that for the first few years of the previous CBA, revenue increased at a level equal or nearly equal to these possible expectation levels.  BRI increased by 4.51% in 2005-06 and by a robust 6.62% in 2006-07.  However, this trend did not continue, as over the next three years, BRI only increased by 3.99% in 2007-08, by 2.53% in 2008-09 and by 0.97% in 2009-10.  Even a healthy 4.78% increase in BRI in 2010-11 could not overcome the limited revenue increase during those three years.  All of this would manifest itself in the bottom line – a poorer financial showing than what owners seemingly had expected.

Profit/Loss – Actual vs. “What Could Have Been”

Again, my purpose in all of the analysis is to try to get to the heart of what the owners want to see happen in the next CBA to alleviate what they claim to be major losses.  It’s helped me to get a better picture of this by taking the actual numbers (at least my best guess at the actual numbers) for these six years under the previous CBA and looking at how they match up with how they would have changed if revenue levels had actually increased by those “What Could Have Been” levels.

Here is, to the best of my ability, my representation of what actually happened under the previous CBA, using the assumptions listed at the beginning of this piece (click on the charts to enlarge):

And here are the numbers if revenue would have increased at 4.500%, 5.516% and 6.300% annually:

Here’s a composite chart of the bottom line profit/loss (in this case, nearly all losses):

As I mentioned above, according to these figures, if revenues would have increased by 6.3% each of the last six seasons, the NBA would have been profitable during the 2010-11 season, even by these most pessimistic figures available.  Even so, although it would have cut the claimed cumulative loss league-wide nearly in half, the owners would still have claimed to have lost over $1 billion over the course of the previous CBA even if revenues had increased every year by that amount.

Some Thoughts On All This

Looking at the data in this way helped me to see the position of the owners in a new light.  For example, it gave me a basis for being to come up with possible answers to the excellent questions asked recently by David Berri, who queried the following:

But the NBA claims it is not just the recession. The NBA claims the league has lost money in every year of the just expired CBA.

One should note why this claim is necessary. If the NBA only lost money in the past few seasons then the players could argue that these losses were due to a temporary economic condition (the recession — despite what some people in the media seems to suggest — is not permanent). And therefore, the league does not need a permanent change to the percentage of revenues going to the players.

By claiming the losses have existed since 2005, though, the NBA runs into another problem. Are we to believe that the NBA signed an agreement that immediately led to losses? Certainly it is possible that in 2005 the NBA did not know revenues and costs in 2010-11. But shouldn’t the NBA have known what revenues and costs were likely to be in 2005-06 and 2006-07?

Looking at the numbers, perhaps the owners were interested not in making the league profitable by the beginning of the previous CBA but were very interested in having the league be profitable by the time that it expired.  Perhaps they were banking on revenue streams being high enough to make this possible.  And perhaps as Berri suggests, they were able to predict the financial picture in the first two years under the previous CBA but were not able to see beyond that (after all, revenues did increase by 11.4% in those first two years).  Such an approach by the owners six years ago – a willingness to suffer short term losses if long term profitability was eventually achieved – would be consistent with their current approach, at least in the words of deputy commissioner Adam Silver, who earlier this summer suggested that the owners are “prepared to take less in the early years of a 10-year deal because we would come out in the latter years with something we are satisfied with”

Overall, though, after looking at the data in this way, I don’t think that the owners believe now that the answer to their claimed economic woes is simply in hoping for generous increases in revenue streams.  I believe that they are committed to instituting changes in the CBA that will eventually move their books from the red to the black.

What might those changes be?  And will they be effective?  I have some thoughts on that, but will leave that for Part II of this analysis – look for it soon.

About these ads

Leave a comment

Filed under contracts, Lockout

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s