Magic Rumors

ESPN’s Zach Lowe and Brian Windhorst have published an expansive and well-researched report on NBA teams’ finances, providing details on the league’s revenue sharing system, the impact from national and local television deals, and how a lack of net income for NBA franchises could push the league toward considering relocation or expansion.

The report is wide-ranging and detailed, so we’re going to tackle it by dividing it up into several sections, but it’s certainly worth reading in full to get a better picture of whether things stand in the NBA. Let’s dive in…

Which teams are losing money?

• Nine teams reportedly lost money last season, even after revenue sharing. Those clubs were the Hawks, Nets, Pistons, Grizzlies, Magic, Wizards, Bucks, Cavaliers, and Spurs. The latter two teams – Cleveland and San Antonio – initially came out ahead, but paid into the league’s revenue sharing program, pushing them into the red.
• Meanwhile, the Hornets, Kings, Pacers, Pelicans, Suns, Timberwolves, and Trail Blazers also would have lost money based on net income if not for revenue sharing, according to Lowe and Windhorst.
• As a league, the NBA is still doing very well — the overall net income for the 30 teams combined was $530MM, per ESPN. That number also only takes into account basketball income, and doesn’t include income generated via non-basketball events for teams that own their arenas.
• The players’ union and its economists have long been skeptical of NBA teams’ bookkeeping, alleging that clubs are using techniques to make themselves appear less profitable than they actually are, Windhorst and Lowe note. The union has the power to conduct its own audit of several teams per season, and it has begun to take advantage of that power — according to ESPN, the union audited five teams last season, and the new CBA will allow up to 10 teams to be audited going forward.

How does the gap between large and small market teams impact income?

• Even after paying $49MM in revenue sharing, the Lakers finished the 2016/17 with a $115MM profit in terms of net income, per ESPN. That was the highest profit in the NBA, ahead of the second-place Warriors, and could be attributed in large part to the $149MM the Lakers received from their huge local media rights deals.
• On the other end of the spectrum, the Grizzlies earned a league-low $9.4MM in local media rights, which significantly affected their bottom line — even after receiving $32MM in revenue sharing, Memphis lost money for the season. The Grizzlies will start a new TV deal this year that should help boost their revenue, but it still won’t come anywhere close to matching deals like the Lakers‘.
• The biggest local TV deals help drive up the NBA’s salary cap, with teams like the Lakers and Knicks earning in excess of $100MM from their media agreements. According to the ESPN report, the Knicks made $10MM more on their TV deal than the six lowest-earning teams combined.
• As one owner explained to ESPN, “National revenues drive up the cap, but local revenues are needed to keep up with player salaries. If a team can’t generate enough local revenues, they lose money.”
• Playoff revenue from a big-market team like the Warriors also helps push up the salary cap. Sources tell Lowe and Windhorst that Golden State made about $44.3MM in net income from just nine home playoff games last season, more than doubling the playoff revenue of the next-best team (the Cavaliers at about $20MM).

How is revenue sharing affecting teams’ earnings?

• Ten teams paid into the NBA’s revenue sharing system in 2016/17, with 15 teams receiving that money. The Sixers, Raptors, Nets, Heat, and Mavericks neither paid nor received any revenue sharing money. Four teams – the Warriors, Lakers, Bulls, and Knicks – accounted for $144MM of the total $201MM paid in revenue sharing.
• While there’s general agreement throughout the NBA that revenue sharing is working as intended, some teams have “bristled about the current scale of monetary redistribution,” according to ESPN. “The need for revenue sharing was supposed to be for special circumstances, not permanent subsidies,” one large-market team owner said.
• The Grizzlies, Hornets, Pacers, Bucks, and Jazz have each received at least $15MM apiece in each of the last four years via revenue sharing.
• However, not all small-market teams receive revenue-sharing money — if a team outperforms its expectations based on market size, it forfeits its right to that money. For instance, the Thunder and Spurs have each paid into revenue sharing for the last six years.

Why might league-wide income issues lead to relocation or expansion?

• At least one team owner has raised the idea of expansion, since an expansion fee for a new franchise could exceed $1 billion and it wouldn’t be subject to splitting 50/50 with players. A $1 billion expansion fee split 30 ways would work out to $33MM+ per team.
• Meanwhile, larger-market teams who aren’t thrilled about their revenue-sharing fees have suggested that small-market clubs losing money every year should consider relocating to bigger markets, sources tell ESPN.
• As Lowe and Windhorst observe, the Pistons – who lost more money than any other team last season – are undergoing a relocation of sorts, moving from the suburbs to downtown Detroit, in the hopes that the move will help boost revenue.

What are the next steps? Are changes coming?

• The gap between the most and least profitable NBA teams is expected to be addressed at the NBA’s Board of Governors meeting next week, per Lowe and Windhorst. Team owners have scheduled a half-day review of the league’s revenue sharing system.
• Obviously, large- and small-market teams view the issue differently. While some large-market teams have complained about the revenue sharing system, they’re outnumbered, with smaller-market teams pushing those more successful clubs to share more of their profits, according to ESPN.
• Trail Blazers owner Paul Allen is one of the loudest voices pushing for more “robust” revenue sharing, sources tell ESPN. Some team owners have argued that the system should ensure all teams make a profit, while one even suggested every team should be guaranteed a $20MM profit. There will be “pushback” on those ideas, Lowe and Windhorst note. “This is a club where everyone knows the rules when they buy in,” one owner said.
• On the other end of the spectrum, some teams have floated the idea of limiting the amount of revenue sharing money a team can receive if it has been taking payments for several consecutive years.
• Any change to the revenue sharing system that is formally proposed at the NBA’s Board of Governors meeting would require a simple majority (16 votes to 14) to pass.