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Foul called on NBA owners’ claims of money lost

Jul 5, 2011, 4:53 PM EDT

David Stern AP

The NBA owners continue to say the lockout is going on because the players don’t understand the fundamental need to change the league’s poor financial system — that $300 million was lost this past year.

More and more reports are questioning the severity of that loss.

The latest is Nate Silver at the New York Times, who questions the heavy losses the owners claim, and particularly the claim that player salaries are to blame.

On this point he is spot on — NBA players salaries make up 57 percent of the Basketball Related Income the league takes in. That number is fixed in the current Collective bargaining agreement — it is a fixed cost, the owners know exactly how much the players will cost the league as a whole. It’s the non-player costs that increase faster than income, Silver notes.

Growth in non-player expenses has outpaced that of salaries, having increased by 13 percent over five years and 43 percent over 10 years. Although some of this undoubtedly reflects sound business ventures, like the league’s investments in digital media or efforts to expand the game internationally, they have nevertheless had a reasonably large effect on the league’s bottom line. Had nonplayer expenses been the same in 2009-10 as they were in 1999-2000 (adjusted for inflation), the league would have made a record profit that year.

Even with those costs, Silver says the owners are making money.

Even as it stands, however, the Forbes data suggests that the league is still profitable. Its operating income — revenues less expenses (but before interest payments and taxes) — is estimated to have been $183 million in 2009-10, or about $6 million per team. The N.B.A.’s operating margin (operating income divided by revenues) was about 5 percent in 2009-10 and has been about 7 percent during the life of the current labor deal.

A 5 percent or 7 percent profit is not dissimilar to what other businesses have experienced recently. Fortune 500 companies, for instance, collectively turned a 4.0 percent profit in 2009 and a 6.6 percent profit in 2010 (both figures after taxes). Profit margins in the entertainment industry, in which the N.B.A. should probably be classified, have generally been a bit lower than that.

Silver goes on to say that a lot of the losses the owners claim are tied to depreciation and amortization when a team is sold. However, the league has noted that amortization is not used in the $300 million loss figure for the past season. Silver misses the mark there.

The players need to understand that some owners are hurting and there needs to be adjustments to the system. Things like the players hotel rooms and food per diems are not taken out of that 57 percent — they get to count the revenue minus any expenses. Those expenses are rising. Players need to give up some of their pie (maybe by rather than taking 57 percent of the gross allowing some deductions of league expenses from that before the “net” is divided up, maybe just taking a much smaller percentage of the gross). The owners have some valid points about the needs to alter the system to create a chance for all teams to make money (although revenue sharing must be part of that).

But it’s still hard to buy the owners claims that the league is in that much financial peril. Particularly when people are stepping in to pay record prices for franchises.

  1. goforthanddie - Jul 5, 2011 at 5:06 PM

    Cooking the books is as easy as nuking a Pop Tart. All it takes is a good accountant. The players know this. Hell, some of them can show you exactly how it’s done.
    I don’t think anyone disagrees that changes need to be made. But Herr Stern and the owners are hurting themselves with all this bullshat. The owners caused the problem by signing all those big paychecks, they have no right to cry.

    • jjstrokes - Jul 5, 2011 at 5:21 PM

      As a finance major I couldn’t agree more. Love the last statement. Seems like the Owners handed out MAX deals like hot cakes for the last 5-10 years.

    • tjstyles - Jul 5, 2011 at 6:00 PM

      I certainly get your point of accounting being able to make the numbers tell whatever story you want it to tell, but there is one thing that you seem to be missing here. The players make 57% of the revenue. Period. A new max contract does not take a single dime more from the bottom line than a veteran minimum contract; it really takes money way from the other players. That is the whole point of the article that this story is on; the fact that players salarys are a fixed expense.

      • jjstrokes - Jul 5, 2011 at 8:49 PM

        You make it seem like the players have never argued about that 57% throughout these negotiation….. & I guess you’re also saying that the 1.7 billion dollars leftover (3.8bill = ’10-’11 total expected rev’s) after salaries are paid isn’t enough for a bunch of billionaires to figure out how to pay everyone else.

        I almost forgot, what type of business is this?… Ooooooh yeah, it’s BASKETBALL. Who spent their whole lives learning how to be the very best in the world at the sport? THE PLAYERS… The rest of the people in the league are a bunch of lame business-majors (just like myself haha) so maybe they should get creative & start something up if they can’t make money off BASKETBALL!!!

      • tjstyles - Jul 6, 2011 at 1:30 PM

        jjstrokes, you were so eager to blast my post that you neglected to actually read my post. Where is it that I implied that the player have never argued about that 57%? Where did I say anything about the remaining money not being enough to cover expenses? You completely made up your entire first paragraph, cause I did not say anything that you are accusing me of saying.

        I get that you don’t think that having a skill that millions of people are willing to pay money to watch you perform should make you as much money as these guys are making, but that does not change the fact that max contract deals have no effect on the bottom line. That is the ONLY thing I was saying in my post. Let’s pretend that the CBA was not expiring, and this coming off season each team gave out a new max deal; at the end of the year, the players would make 57% of the revenue. If instead, the owners did not give out a single contract for more than the veteran minimum, the players would make 57% of the revenue. That is my point. The values of the contracts do not factor into the equation. The players make 57% of the revenue no matter what stupid contracts the owners write.

        I am not taking sides in this post. If you want to debate the specifics of the issue or whether or not people deserve the money they are paid, that is fine. I am simply clearing up the facts here. Max deals do not affect the leagues bottom line. There is a maximum and minimum amount of money the players can make; in both cases, that number is 57% of the revenue. That is all I am saying.

      • jjstrokes - Jul 7, 2011 at 2:29 PM

        I think your first major point WAS that the players make 57% (that’s why you wrote-out Period after…. So I guess it’s totally unreasonable to even question whether the owners even deserve 43%…

        Owners are the ones undeservedly offering MAX deals to players who have no business making that kind of moola.

        I can tell you have a accounting/CPA background, so do I.

        So you think it’s as simple as every NBA contract is a fixed cost (I wish it were that easy). Ever heard of contract-OPTIONS, player & team options? Since you wanna be the NBA’s next CFO: how exactly do you expense those contracts?

  2. jjstrokes - Jul 5, 2011 at 5:20 PM

    They could simply give the players daily spending limits for road trips, sounds like an easy fix…… Kurt, it pains me to say this but you did a good job here. Although, now I almost think you write most of those articles specifically to get the sort of outrageous/negative reactions that usually follow tho. This is much better publicity for your website, good ish.

    • jjstrokes - Jul 5, 2011 at 11:18 PM

      So besides hotels & room service, what other non-fixed costs do these owners face that can contributed directly to the players???

  3. florida727 - Jul 5, 2011 at 5:35 PM

    Politically incorrect I’m sure, but if you want to improve the NBA’s bottom line, withdraw the financial support for the WNBA. That’s a cash drain to the nth degree. That league couldn’t cover its expenses if you spotted them the c-o-v and e.

    • goforthanddie - Jul 6, 2011 at 1:02 AM

      Have any numbers on that? Never even thought about the WNBA, now I’m curious.

  4. mistercharitystripe34 - Jul 5, 2011 at 6:17 PM

    Stop giving max deals to guys like Rudy Gay (who has never made an all-star squad.

  5. philtration - Jul 5, 2011 at 7:12 PM

    Spending your money like a drunken sailor and then bitching about the new tattoo when it is suddenly no longer in fashion is no way to run a business.
    And why do you have to have the players stay in the finest hotels when they travel?
    Do they not live a life of luxury already?
    This is your job and you stay at the hotel, play the game and then get your ass out of town.
    Is that asking too much for the millions you receive in salary?
    That is how other business travelers do it.

    They are going to kill next season and I then am going to lose all interest in the NBA.
    I am not going to waste my time focusing on a bunch of rich, and for the most part moronic crybabies fighting over money.

  6. nfl25 - Jul 5, 2011 at 7:45 PM

    i may be wrong but even if they broke even or MADE 10 million, arent you supposed to make a fortune when you own an nba team? why not just say we broke even. they dont have to lose tons of money to show things have to chnage.

    i dont care about that anyways, they can figure it out. just no guaranteed contracts

  7. hail2tharedskins - Jul 5, 2011 at 11:38 PM

    I think Silver is more than a little biased. Even using the data he provides would suggest a loss and yet he intentionally excludes certain expenses (interest and taxes) to suggest profits. He reports operating income at $6mil per team (excluding interest and taxes). Now without even touching taxes, interest expenses for the owners that don’t own their teams out right would certainly be in the millions and could be in the 10s of millions. So, if the operating income is only $6mil, then the likely associated net income would be negative! (and the problem is even more obvious when you consider teams at the top of the league like the Lakers report something like $50+ million in operating income, which would mean there are a lot of teams that have negative operating income in order for the league average to be only $6 mil.)

    I’m not saying that owners aren’t fudging the numbers, I’m sure they are to a certain extent – but I can’t stand when a so-called reporter starts to fudge the numbers and facts of a story to mislead his readers! And this was an obvious case, when

  8. harsh22 - Jul 5, 2011 at 11:41 PM

    The players are going to have to take a big hit. The owners are in charge, that is the way it is in every business and the NBA is no exception. The new owners that paid a bunch are going to shut the season down to get what they want. The NBA owners who also own hockey teams are going to make sure they get want they want, they will close it worked in hockey and it will work in the NBA. The players should just make a deal now or they are going to have to figure out what it’s like to have no income for a year.

  9. icu84bs - Jul 6, 2011 at 6:14 PM

    Good to see most of the NBA fans understand this ‘labor dispute’ is MOSTLY (not all, but mostly) a problem caused by several of the newer NBA team owners. Many don’t seem to practice BUS101 when running their teams.

    Some of the more competent owners are not hard liners, they know they can work out something with the players. Let us hope Stern is also listening to them and not just to the ‘blow the place up and start over’ crowd.

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