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David Stern, Do You Believe NBA Owners Really Need the Players' Help?

Stephen Brotherston@@ProBballNBAAnalyst IFebruary 24, 2010

ARLINGTON, TX - FEBRUARY 14:  Dwayne Wade #3 of the Eastern Conference (R) is awarded the MVP trophy by NBA Commissioner David Stern after the NBA All-Star Game, part of 2010 NBA All-Star Weekend at Cowboys Stadium on February 14, 2010 in Arlington, Texas. The Eastern Conference defeated the Western Conference 141-139 in regulation.  NOTE TO USER: User expressly acknowledges and agrees that, by downloading and or using this photograph, User is consenting to the terms and conditions of the Getty Images License Agreement.  (Photo by Jed Jacobsohn/Getty Images)
Jed Jacobsohn/Getty Images

With statements like:

“a crippling labor agreement”

NBA will lose $400 million dollars”

“NBA has lost hundreds of millions over the past few years”

David Stern has laid out the NBA owners' position on the up-coming labor negotiations with the players.

But with a contract that already diverts a portion of players' salaries back to teams as income declines, just how much help do the billionaire NBA owners really need?

Have NBA teams really been losing hundreds of millions of dollars each year or is David Stern merely taking advantage to an economic downturn to make the richest NBA franchises even richer?

Are players getting a bigger share of league revenues than their teams can afford to pay? Or is any pain felt by NBA owners entirely self-inflicted?

Independent financial information says the owners’ arguments are on shaky ground!

Call me a cynic, but it is very hard to take much of what anybody says as credible leading up to labor negotiations.  Independent sources of financial information that have no stake in the proceedings are far more likely to provide an accurate approximation of the truth.

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Fortunately, Forbes has put out independent estimates of how the North American professional sports franchises have done for years.  And we can look up some unbiased information for ourselves.  Forbes: NBA Team Valuations 2009

Last year, the NBA’s franchises made about a quarter of a billion dollars in operating profits.

As Forbes describes it, operating profit includes the cost of arena debt but excludes the financing costs of owning the franchise.  And therein lies the real problem undermining some NBA teams.  They simply have too much debt. At $3 billion in debt, the NBA taken as a whole is one highly leveraged enterprise.

This excessive debt level is what has driven the New Jersey franchise to be sold to a Russian billionaire and what is forcing some teams to look for new ownership.

Perhaps the league should have ensured owners without the resources to support the debt used to acquire their franchises put up more equity.  Perhaps the league should admit many of the more established owners only have debt in their franchises in order to shelter the profits they make from taxation!

The league’s top five most profitable franchise’s (Lakers, Bulls, Pistons, Rockets, Knicks) are also among the best financed and rake in over 80 percent of the league’s income.

In fact the eight NBA teams that are in the best shape (add in Suns, Spurs, and Raptors) made over 110 percent of the league’s profits last year.

A dozen NBA teams did have operating losses in 2008-09, but over half of those teams had relatively small losses.  The worst five NBA franchises incurred about 74 percent of all the losses.

And why should NBA teams be immune from the impact of a recession.  No one else is!

Perhaps the biggest argument for how the NBA owners are the cause of their own problems resides with Mark Cuban and Paul Allen.  These two wealthy owners appear to treat their franchises as personal toys.  They can afford to.

Last season the Mavericks and Trailblazers lost a combined $38 million on an operating basis.  That’s about a third of the losses incurred by teams in the NBA.  And they had the highest and fourth highest payroll costs in the league.

Of course, this past offseason and at the trade deadline, Mark Cuban did commit his franchise to more payroll.  (Like he cares about what the Mavericks spend?)

So two of the five teams with the biggest losses should have no issues with the current CBA.  They appear to like things as they are!

The fifth biggest losing team in 2009, the New Jersey Nets pain is entirely self-inflicted.  After operating at about break-even for the previous two years, they began trading away the last of their star players to create cap space for 2010.  Deciding to field a really bad team for a couple of seasons after telling your fans “We’re moving” is a sure way to lose money.

And with new billionaire ownership arriving in time for next season, the Nets are not going to be concerned about player costs in the future either.

The owner of the expansion Charlotte Bobcats needs to give his head a shake.  When the team controlled player costs, it made money.  As soon as they approached and exceeded the salary cap, losses mounted.

A small market team with unbelievably low ticket prices (close to half of most franchises charge), Charlotte has limited revenues.  There is a direct, straight-line relationship between Charlotte increasing payroll and their operating loss.

If Charlotte cannot support ticket prices at close to the NBA average, perhaps the team needs to move? (again)

If one were to define “special case” for professional sports franchises, one could put the Pacers logo on the page.  There is a good case to be made that the Pacers declining revenues have more to do with the “malice at the Palace” and fielding poor teams for the past four years than the current CBA or even the economy.

The Indiana Pacers are in trouble.  A new CBA is not going to fix their problems.

Three other losers that appear to be in less trouble include the Timberwolves, Grizzlies, and Bucks.

The Timberwolves have been in trouble for years.  Ticket prices that compete with Charlotte.  Arena receipts that are best described as a joke.  A building in desperate need of upgrades.  And revenues per fan at less than half what other small market teams earn.

The Timberwolves operate with big market player salaries and small market revenues.

The Memphis Grizzlies have d-league ticket prices (average $25) and d-league arena revenues. At an estimated $15 million in gate receipts, the Grizzlies pull in about one-third what their expansion cousins the Toronto Raptors get.

The fact the Grizzlies have lost money for seven straight years is probably best attributed to the fact that the 1.2 million people in Memphis just are not going to pay enough to watch the NBA.

If things don’t turn around this season, one has to question why they stay?

The Milwaukee Bucks only got themselves in trouble last season because they let player costs balloon up by $9 million.  After five seasons in a row of prudent management in a small market, look for the Bucks to get their player costs back under control soon.  (And don't blame the players if they don't.)

Looking back at last years information, it gets hard to believe David Stern’s cries for help from the players association.  It is a little easier to believe Stern’s statements that the game is in great shape and revenues are declining less than expected.

The one thing Stern was accurate about was that league revenues did decline last season.  Forbes numbers put that decline at about a third.

And while that was significant, it was completely foreseeable that the NBA’s revenues would decline in a recession.  Actually they did foresee it!  That is precisely why the league holds back a portion of each players pay for redistribution back to the teams in the event league revenues drop.

Last year, each team got about $6 million back from the players.

There is no such contract with your employees that can protect every franchise from local market conditions or general economic decline and it is disingenuous for David Stern to suggest the NBA problems rest solely with a “crippling CBA”.

Clearly many of the franchises problems rest squarely on the shoulders of their owners.

The real concern that NBA fans should have now is that David Stern and the owners of the league’s most profitable franchises have learned a lesson from the NHL lock-out.

The NHL lock-out implemented a hard cap and dramatically lowered players salaries.

But what it really accomplished was to split the players even further along the lines of maximum salary star players and minimum salary guys.  It did not get easier for small market teams to get star players.

And perhaps far more importantly, it cut the payroll cost of the leagues most profitable teams almost in half.  Highly profitable teams, like the Toronto Maple Leafs saw their profits double.

But pay attention to the lower revenue teams the new NHL salary structure was supposed to save.  They are all still in big financial trouble.  Some having gone through bankruptcy court, many reportedly looking for new ownership.

David Stern would be servicing the likes of the Lakers, Pistons, Bulls, and Knicks well.  The Mavericks and Trailblazers would be forced into operating profitably.  But make no mistake, there is no CBA that can save bad teams in weak markets with poor ownership.

The risk of an NBA lock-out is high.  But it is for all the wrong reasons.

We should be happy to hear how David Stern explains why it’s the players who are at fault and that the independent financial information is entirely incorrect and misleading.  It should be especially enlightening to hear how the league's two biggest money losers have been crippled by the current CBA. Cut quickly to Cuban and Allen as Stern makes those comments.

Waiting Patiently...

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