“Smoothing” Likely to be Key Buzz Word in Upcoming NBA Labor Talks

Professor Mark S. Nagel

Posted: April 23, 2015

With another successful National Basketball Association (NBA) season concluding with an all-time attendance record (21.93 million), it is amazing to look back at how the league’s financial outlook has dramatically changed since 2011, and anticipate how it is likely to considerably change over the next two years. In 2011, NBA owners were in a (relative) financial crisis, as the league was having difficulty finding billionaires interested in purchasing its franchises that were for sale, partly because of concerns regarding the short-term financial prospects for the league. Much of the trepidations revolved around “reported” franchise losses, which would result in the owners utilizing a lockout to delay the start of the 2011-2012 season. Among a variety of financial issues, the sharing of Basketball Related Income (BRI) was a central ownership concern. Prior to the lockout, the players received 57% of BRI. After the 161-day lockout concluded with the cancelling of 16 games, the players share was reduced to 51% for the shorted season with future years mandating the players’ share fall between 49% to 51% of BRI.

Though most pundits scored the new collective bargaining agreement (CBA) a “win” for the owners, few could anticipate how quickly that win would become a landslide. With the proliferation of DVRs making live sporting event content one of the few “must see” live television events,  a massive increase in international revenues through NBA globalization efforts, popular players and a more free flowing style of play attracting new fans, and a tighter containment on player salaries, NBA owners quickly saw their “crisis” turn to bliss. NBA franchise sales in 2011 and 2012 included:

June 2011: Detroit, $325 million,

October 2011: Philly, $280 million,

June 2012: New Orleans, $338 million, and

October 2012: Memphis, $377 million.

However, those sale prices are tremendous bargains compared to the May 2013 sale of the Sacramento Kings for $534 million, the April 2014 sale of the Milwaukee Bucks for $550 million, and the August 2014 sale of the Los Angeles Clippers for $2 billion. In a span of a few months, the entire NBA franchise valuation model was dramatically altered with the NBA transitioning from searching for viable purchasers to having little NBA franchise inventory available. Some have speculated that with the new nine-year, $24 billion television deal beginning in 2016-2017, NBA franchise values will continue to skyrocket to heights that might begin to more closely resemble National Football League franchises, which are all valued at over $900 million dollars according to Forbes latest professional sports’ report.

With those skyrocketing revenues, the players – despite their lower BRI percentage – have seen salaries escalate rapidly too, with dramatic increases projected in the next few seasons. The NBA salary cap was $63 million in the 2014-2015 season, but it is projected to be $67 million in 2015-2016, $89 million in 2016-2017, and $108 million in 2017-2018. If those projections are accurate, the entire NBA salary structure will change, with players entering free agency in 2016 or 2017 potentially facing a marketplace where every, or nearly every, NBA franchise will have significant cap space. In such an environment, franchises could meaningfully alter their player rosters without facing the traditional concerns of long-term roster management of player contracts.

Sensing such a potential financial landscape, the NBA owners have suggested that the salary cap, which is based on league revenues, be “smoothed” over the course of the next few seasons rather than have it increase so dramatically year by year. The owners have also proposed that instead of permitting nearly every franchise to have an escalation of their salary cap to such levels in a short period of time (the previous greatest year-over-year increase in the NBA salary cap was $7 million) that a large portion of the newly allocated player salary be disbursed evenly to all players. Though the players will reap the rewards of the future financial windfall in upcoming seasons, there is a feeling that the players recognize their “loss” in the last collective bargaining agreement and will seek a greater share of the burgeoning revenue bonanza. The NBA Players Association has recently rejected the smoothing proposal and the “lump sum” plan and has hinted that it might opt out of the current CBA after next year when both the owners and players can walk away from the CBA signed after the lockout.

It is difficult to believe, but at a time when the NBA’s popularity is growing around the world and revenues are expanding to record levels, the focus of the 2016 offseason might revolve around BRI, revenue sharing, salaries, and smoothing rather than free agency, trades, and team building.

About Professor Mark S. Nagel

A native of California, Dr. Nagel became a faculty member in the Department of Sport and Entertainment Management at the University of South Carolina in 2006. Prior to joining the department, he was the director of the graduate sport management program at Georgia State University. At Georgia State he was responsible for all aspects of the sport management program including recruiting and advising students, developing and scheduling courses, identifying and supervising adjunct faculty, and maintaining alumni and sport business relationships. Dr. Nagel has also previously worked as a sport management professor at the University of West Georgia and San Jose State University. Dr. Nagel currently serves as an adjunct faculty member at the IE Business School in Madrid, the University of San Francisco and St. Mary’s College of California. Before pursuing a career in academe, Dr. Nagel worked in different areas of sport management—primarily in athletic coaching and administration as well as campus recreation. During his years as an assistant coach of the women’s basketball team at the University of San Francisco, he helped lead the team to three NCAA Tournament appearances and a spot in the 1996 Sweet 16.

Dr. Nagel has co-authored three textbooks: Introduction to Sport Management: Theory and Practice; Financial Management in the Sport Industry; and Sport Facility Management: Organizing Events and Mitigating Risks. Dr. Nagel has authored or co-authored numerous articles in refereed journals such as the Journal of Sport Management, Sport Marketing Quarterly, Entertainment and Sport Law Journal, International Journal of Sport Finance, and Sport Management Review. He has also published extensively in professional journals as well as written numerous academic book chapters and given dozens of research presentations. He has also served as treasurer for the North American Society for Sport Management and the Sport and Recreation Law Association.