High Stakes and Low Margins in the Contemporary NBA
In 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.