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.
Wages of Wins Journal 
A.K.S.
November 8, 2011
Interesting article. For a sanity check, I compared the estimates you used for the Nets against the leaked audited financials for the Nets (which I think are the most recent leaked audited financials). Granted, your estimates are for 2011 and the latest leaked financials were for 2009 (the 2010 financials were only for 9 months, on account of the sale from Ratner to Prokhorov). Your estimate of operating income of $91.6M were about 16% higher than the audited operating income of $78.8M. Adjusting for the two year time difference, I’d say you were off by about 10% or so – not bad. With respect to operating expenses, I’d bet that the average $63M you used for “other” expenses varies significantly among teams – the Nets, for example, had operating expenses excluding player salaries and amortization (which the NBA says is not included in the $300M number) of $48M or so in 2009. But with no way to know how the expenses vary among teams, the use of a flat $63M average per team seems good enough an estimate as any. As I’ve posted before, you are incorrect about the RDA; no use in rehashing that here. And according to the Hambrecht survey you cite, NBA franchises values were flat between 2010 and 2011; they did not increase by 4% as you assert. Accordingly, I do not find your last chart useful. But the rest of the charts are quite interesting.
W. Crimi (@lovethoseknicks)
November 8, 2011
Two points.
1. Any appreciation of the value of the franchise should NEVER EVER be included in a profit loss analysis. That’s the “greater fool” theory that was used to justify the increasing prices of dot.com companies in the 90s and real estate until 2008. There are times that people pay idiotic prices for franchises and businesses based on their actual income streams. That has been the case with the NBA. Without a split of BRI that brings the league into profitability on an aggregate basis, I can assure you the values for many teams will fall.
2. I don’t understand all the nuances of the Roster Depreciation Allowance, but I thought it was addressed quite well by someone else a few weeks ago when he demonstrated it is NOT an issue in the financial statements presented to the players.
To begin with, even if you disagree with the RDA in terms of assessing business results, your beef in not with the owners. It’s with the accounting standards board and IRS that agreed to it.
Secondly, I personally think it’s a valid deduction.
Ask Dan Gilbert if the value of his franchise changed when Lebron went to the Heat.
There is no question that the value of a team is partly a function of the players it has under contract. That value is at its greatest when a star player is first signed. It shrinks the closer and closer it gets to contract renewal time because the player could leave.
We could argue all day about what the values should be and how to write them off over time, but that’s the nature of accounting for things like depreciation that reflect declining values. They are estimates of reality, not reality itself.
W. Crimi (@lovethoseknicks)
November 8, 2011
I should add, that as star players age, their value also decreases.
Dre
November 8, 2011
Wayne,
The RDA as explained on the podcast with Rodney Fort was summed up nicely. It doesn’t make sense unless the players are property (which they aren’t). Additionally your point on Stars players decreasing with age isn’t always true. Players improve with age when younger, stay consistent when older and then at some point start to decline. Depreciating with age is not a trend that is always true.
Also wiLQ pointed out with the appreciation, why isn’t it valid? Owners sell teams and profit and no part of this is covered in the CBA. Why shouldn’t profits from sales be included in the CBA? And the greater fools theorem was also addressed in the podcast. You can’t really call something a bubble until you have hindsight. To just say “The values keep going up, it must be greater fools theorem” isn’t valid.
Also as far as I can tell Arturo isn’t disagreeing with the RDA. He’s saying it is a valid deduction teams can take and the teams that aren’t are making a mistake that should not be put on the players.
A.K.S.
November 8, 2011
In repsonse to W. Crimi, I’d say that, while it is correct to state that franchise value appreciation shouldn’t normally be used in an annual profit-loss analysis (after all, appreciation is not realized until a sale), I do think that the Players have a point that this is a benefit to the Owners that the Players don’t currently share in. However, if I were running the NBPA, I wouldn’t be arguing that the Players deserve some boost in BRI percentage because of the franchise value appreciation, I’d instead be asking for equity in the league – so that Players share the rewards (and risks!) of franchise value appreciation separately from the BRI split. (William Rhoden has a great article on this in the NY Times yesterday.)
greyv
November 8, 2011
Any chance you could recalculate those estimates at 50% and 47% BRI, so we can see how owner profits change?
Also, does anyone want to take a stab at unraveling decertification for me? I’m a little confused by the latest TrueHoop post about hardline owners wanting the players to reject the current proposal. My understanding is that if the players decertify, even if they lose the antitrust suit against the league, the league still has to negotiate each player contract individually.At this point, if the players don’t have enough balls to start their own league or alternative basketball showcase, then I’m all for scrapping the CBA entirely and letting the Lakers and Knicks try to buy their way into championships ala the Yankees. I’m so tired of the tyranny of bad owners.
Arturo Galletti
November 8, 2011
Greyv,
That’s tomorrow’s post. Day after is revenue sharing.
Russ
November 8, 2011
Arturo, very good post, and in line with the numbers I’ve calculated, and raised in comments on other posts. The other thing worth noting is that, since the last CBA revenue growth has been much much stronger in the bigger markets than the small ones. According to the Forbes figures 2006-2010 the bottom-6 went backwards by 4%, the top-6 increased by 24%. That’s a big problem for the smaller teams, though not one revenue sharing wouldn’t fix.
And I remain baffled by the apparent salience of BRI in these negotiations. Why haggle over an exact figure that in the final wash-up is only a rough guide to what each team pays in salary? Why not keep it is a range: a minimum of 47%, a maximum of 53%, if contracts totaled a figure outside that amount, it would get adjusted, otherwise players would get what was agreed to individually? Unless they don’t want a deal – is it possible the small market owners are holding up player negotiations in order to force more revenue sharing (the big markets are probably losing the most in a lockout).
W. Crimi (@lovethoseknicks)
November 20, 2011
The value of a business is determined by all the cash that can be taken out of the business over its lifetime discounted by an appropriate interest rate.
Assuming you can make a reasonable and informed estimate of the value, fluctuations in the prices of businesses only tell you if someone is making a good or bad deal. In the short term, lots of things move business prices.
But to clarify the point, suppose the prices of NBA franchises declined by 50% due to the economy or other factors, would the players be willing to give the owners back a decade of salaries?
Regarding the RDA. They are not depreciating the players. They are depreciating the “contracts” which clearly can have value just like below market leases etc…