High Stakes and Low Margins in the Contemporary NBA

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Luxury Tax TableIn this weekend’s Dime, Marc Stein drew attention to the fourteen teams that have luxury tax payments looming this July. The list includes perennial heavyweights such as the Lakers and Spurs (although, given their success, San Antonio pops up on this list infrequently), as well as the ashen remains of the Isiah-era Knicks.

The list is also a beginner’s guide to the on-court architecture of the ’09-10 season. Of the seven teams that owe eight digits worth of luxury tax, six are amongst the the top seven teams in the league. New York has not shared the on-court success of its big-spending brethren.

Similarly, of the nine teams with records above .600, only the Atlanta Hawks are not in the tax.

What the list does not include are many teams that will be able to spend at this pace year-after-year. The Lakers and Mavericks may be prepared to throw away exorbitant sums each summer, but in all likelihood the Spurs, Magic and Cavs are not.

Peter Holt, the Spurs owner, is reported to be worth $80 million dollars. That means, in a single season, the franchise owes 1/8 the owner’s net worth in luxury taxes. Although not every one of those dollars will come directly from Holt’s pocket, that is a large fraction nonetheless.

The Cavs and Magic are vulnerable for other reasons. For the Cavs, I see their high levels of debt and low profit margin as causes for concern. The Magic actually operated at a loss last season. And although they have the sixth most expensive payroll in the NBA, Orlando is only the 13th most valuable franchise.

What does this mean? It means the on-court arms race sparked on August 1st, 2007 has accidentally given birth to a financial situation that, for many franchises, is unsustainable. According to Forbes, 11 other teams aside from Orlando posted an operating loss last season. Evidence suggests several other franchises have razor thin profit margins. But that has not stopped teams from spending more and more. The same Forbes article claims that “player costs increased to $2.3 billion during the 2008-09 season from $2.2 billion the previous year.”

Now, many franchises are not spending more. Actually, naked cost-cutting and unashamed salary dumps have become common. But as the NBA’s vulnerable franchises scramble to stay alive, it’s powerhouses have shown themselves increasingly willing to throw financial caution to the wind in the hopes of winning now. It is only a matter of time before a franchise overextends itself financially, and some combination of on-court underachievement and unforeseen economic hardship pushes the team to the brink.

I very well could be wrong; sports is a business inhabited by the super-wealthy, a notoriously difficult group to break. But if Americans have learned anything over the last few years, we have learned that recklessness is not a vice to which the wealthy are immune.

  • Daniel

    Maybe it’s just me, but I get the idea from posts like this, as well as ones on ESPN, that the NBA is headed toward financial ruins. What happens when losing teams (say the Grizzlies) operate in the negative so much, that they cease to be able to cover the cost?

    At what point does the NBA itself become in jeopardy?

  • Bryan

    Daniel, I think that is why so many people feel that the NBA is headed for a lockout once the current CBA expires. There is no way teams can continue to successfully run under the current agreement.

  • TheRed&Black

    but before the league goes under, let’s pull and LA, and bring in Superman! Could you imagine. Duncan along side Howard?! ha

  • lvmainman

    Am I the only one that knows math? If players get 57% of revenues and that equals 2.3 billion, then 100% of revenues equals 4.035 billion a year.

    So divide evenly by 30, each team starts with $134 million. Subtract players payroll for Spurs $80 million, that leaves $54 million. What kind of other expenses could chew up that kind of money? Cities exempt most stadiums of taxes. A game basically pays for itself with revenue vs. expenses when sold out, making $50,000 a game. If AT&T cost 175 million, those cost are maybe $10 million a year over 20 years or $20 million over 10 years. So, that leaves $34 million a year minus $10 million in tax, you’re left with $24 million. How are they losing money?

    Players don’t share in all revenues @ 57% (only tv and merchandising I believe), like global stuff in China, Europe, England, etc they receive only like 2%, same with EA Sports likeness’ it’s 2%. Players get ZERO local concessions, parking, etc.

    Someone explain where a teams’ $54 million that’s left after salaries are paid disappears. Forbes doesn’t list any specific expenses except salaries. How would they know if a team is turning a profit without ACTUAL proof? Is there an income statement they can produce? No. Just word of mouth from management. Has management given up charter jets? No. Are numerous teams for sale ala the Phoenix Coyotes? No.

    Why won’t the NBA produce these loss statements in public if they’re actually losing money?

    Shows how gullible Joe Public can be when it comes to money.

  • lvmainman

    Did I forget other events at stadiums, the rodeo for instance?

    Again, will someone explain how on earth teams lose money knowing salaries are guaranteed to be capped at 57%?

  • http://www.48minutesofhell.com Graydon Gordian

    Ivainman

    A couple of things…

    First, in regards to “why won’t the NBA produce these loss statements in public if they’re actually losing money?”

    My reaction would be the exact opposite. In my experience covering companies, those that are struggling are the most fiercely protective of their financial information while those that are succeeding are far more willing to let a little sunshine in. The fact that business side of the NBA is full of shadowy corners suggests to me that the league is struggling, not that they are secretly succeeding.

    “How are they losing money?”

    The Spurs are not losing money. In fact, according to the Forbes chart I linked (it’s the link labeled “an operating loss”), they made $19.4 million in operating profits last year. Which, when you consider the losses they most likely take on the Toros and the Silver Stars, is probably not far off from the $24 million figure you produced.

    “How would [Forbes] know if a team is turning a profit without ACTUAL proof?”

    Good point. I myself wish the process by which Forbes produced these numbers was better understood. But, for proprietary purposes, they don’t reveal it. I wish I had something more rock solid to go on, but at this point Forbes seemingly does the most thorough work on this subject.

    “Are numerous teams for sale a la the Phoenix Coyotes? No.”

    Well, a number of franchises, including the Bucks, Grizzlies, Timberwolves, Kings, and Hornets are dangerously close to being moved, which is often a sign of financial distress. The Nets, who were just sold, are already in the process of being relocated. So, actually, although numerous teams are not for sale, my underlying point remains valid.

    “Has management given up charters jets? No.”

    My entire point was that recent financial trends are emblematic of managerial irrationality and excess. In fact I said, “we have learned that recklessness is not a vice to which the wealthy are immune.” If they have not given up their charter jets (I don’t know if they have or have not), I don’t see how that is at all contradictory.

  • Nick (Italy)

    It is quite shocking for an European to see that owning a sport team can be a viable and profit making business.

    In Europe (with the exclusion of England, maybe), where the big tv contracts and the large crowds are a prerogative of football, without any relevant competition from other sports, the owners of top teams normally intervene at least once at year raising capital or, anyway, losses.

    For example, Inter Milan, which is the top football team in Italy today, lost some 500M of Euro (724M USD) in the last 3 years.

    And talking about basketball, I guess (but haven’t checked the data) that almost every Euroleague team is losing money every year. Just look at the payrolls and at the average attendance…