The Changing Landscape of the NBA

The NBA is thriving!

Just three years removed from a time when we were all seduced by claims of poverty from owners facing supposed losses that were mounting so quickly and so heavily that they forced a nasty lockout that nearly cost us the entire 2011-12 NBA season, we’ve entered into a period of unprecedented success for a league which has never been stronger.

Profits are soaring. People are doing more sports betting online to support their teams, moral in and outside the court is up.

Just about every team in the NBA that wants to be profitable can now be profitable, and without taking drastic Jeffrey-Loria-like actions that adversely affect their fan bases in doing so (here’s to you, Miguel Cabrera!).⁽¹⁾ Teams aren’t just profitable; they’re wildly profitable. The league as a whole projects to generate roughly $300 million in basketball profit this year. More than half of the league’s teams should produce eight-figure profits. One or two could touch $100 million!

Rising profitability means rising team valuations.

Just last year, the Maloof family sold a 65% stake in the Sacramento Kings along with Sleep Train Arena to a group led by tech entrepreneur Vivek Ranadive at an all-time record valuation of $534 million, despite the team playing in one of the league’s smallest markets. And that was after owners blocked the Maloofs’ agreement with investor Chris Hansen to buy and relocate the Kings to Seattle at a total franchise valuation of $625 million.

That all-time record valuation was eclipsed earlier this month, when Herb Kohl sold the Milwaukee Bucks, widely considering the least valuable team in the league, to hedge-fund billionaires Wesley Edens and Marc Lasry for $550 million (without an accompanying arena), a price which would likely have been significantly higher had Kohl, who paid just $18 million for the team in 1985, not required as a condition to the sale that the team remain in the city and with the fans of Milwaukee. It was a stunning amount for the Bucks, who are universally regarded as having the worst financial situation of any NBA team. And yet, Dallas Mavericks owner Mark Cuban called the purchase price a bargain, suggesting that even the least valuable NBA franchises are truly worth more than $1 billion.

That newly-minted all-time record valuation is about to get shattered. The impending forced sale of the Los Angeles Clippers, who play in the second largest market in the NBA, is about to multiply the current record times four! Former Microsoft executive Steve Ballmer has agreed to buy the team for a whopping $2 billion! That’s the second highest price ever paid for any professional sports franchise. The Dodgers baseball team, also of Los Angeles, were sold to the Guggenheim Group for $2.15 billion in 2012, but that price included land, parking lots and TV deals. The only real estate involved in the Clippers deal is for their training facility in Playa Vista. So, not a bad return on a $12.5 million investment by Donald Sterling in 1981. The deal has been submitted to the league for final approval.

Why the massive change?

Surprisingly, it’s not massive revenue growth. Revenues are growing very nicely, but not to the extent that would cause such a tremendous change in fortunes for league owners. Over the three seasons since the lockout, league-wide revenues have grown at a solid compounded annual growth rate of 5.6%, from $3.8 billion in 2010-11 to $4.5 billion in 2013-14. Now, with all revenues, there are steps to take and tools to use to ensure that this growth is substantial in the future. Whether it might be finding out the common opinion shared between everyone to find out what would bring increased success to the league owners, through surveys or similar tools (browse around this site for examples). Or, of course, the many other options companies can take. This way there is a direct correlation between what is required for revenue growth, and the solution to enable this to happen.

However, the more direct cause has been the impact of the new lockout-busting Collective Bargaining Agreement, which has been far more favorable to owners. Owners now get just about half of the NBA’s revenue, up from 43% in the old CBA. That may not sound like much, but over the past three seasons alone, this change has taken $813 million from the players and instead given it to the owners. Over the next two years, it figures to redistribute another $662 million. That’s a grand total of $1.5 billion redistributed over a five-year period – an average of roughly $50 million per team.

NBA owners were allocated more than $2.2 billion of the league’s revenues this past season, versus just $1.6 billion in the season prior to the lockout. Conversely, the players’ share of revenues has hardly increased at all; it was $2.2 billion prior to the lockout, and it was less than $2.3 billion this past season.

So, what does it all mean? Owners have increased their annual take by more than $600 million over the past three years, while player salaries have remained virtually constant. It’s no wonder why profits, and valuations, are soaring.

And things are about to get a whole lot better.

National TV Rights Deal

The central question of the 2011 lockout, endlessly paltered, parsed and probed was whether the league was actually losing money. While it was an interesting topic, its importance was somewhat overstated. A new CBA shapes the future of the league; it doesn’t need to address the past. It must be asked: How much of the lockout, then, was about owners feeling poor in 2011, and how much of it was about owners trying to get rich in 2016?

2016 is when the NBA’s current national TV deal expires – an eight-year agreement that promises pro basketball a total of $930 million per year from ESPN/ABC and TNT, divided equally among all thirty teams. TV rights fees are what networks pay to sports leagues for the right to air games. When a network acquires rights to the NBA, it makes money off selling advertising during those games.

ESPN/ABC and TNT make around $1.5 billion from a year from NBA-related ad money. These channels are collectively paying $930 million for that $1.5 billion, a potential $570 million gap between what the NBA sells TV content for and what networks make off of it. This is a quite a steal for the TV side, considering that networks often vastly overpay for the privilege of attaching themselves to prominent sports – that is, give more to the league than they get back in ad money, just to be associated with such a hot property.

There are hidden benefits to doing so.

Sports programming is the single most important form of content for networks. It allows them to pummel millions of viewers with in-game ads that flaunt their channels’ latest, and far less expensive, programming choices — whether they be pregame shows, news shows, shows where people are tempted to attack each other or cheat on each other or fall in love with each other or whatever else seems to be grabbing the pulse of the nation — and, in turn, dig a deeper moat around and solidify their brands.

For cable networks like ESPN and TNT, which reap revenues not only from advertisers but also from subscribers, it also serves as a way of delivering increased value to justify the ever increasing subscription fees charged to their cable distributors, who then pass it on to their customers in the form of larger monthly bills. ESPN’s average affiliate fee (what cable distributors pay to channel owners per user per month) was $5.54 in 2013, over four times more expensive than the next highest cable channel and compared to an industry average of just $0.26, which it can justify because the billions it spends on sports leagues and college conferences to get its hooks in the NFL, NBA, MLB, championship golf/tennis, college football/basketball and dozens of additional offerings create must-see programming that cable distributors can’t possibly live without. It’s what makes ESPN a $50 billion company!⁽²⁾

For perspective, the NFL recently signed record-setting TV rights deals with Fox, NBC and CBS that have the broadcast networks paying an average of $3.1 billion a year over a nine-year period starting in 2013. That came just two months after the NFL signed an eight-year pact with ESPN that boosted the cable sports network’s average annual rights fee to $1.9 billion. Networks give the NFL $5.0 billion per year in exchange for about $3.5 billion in ad money. And that excludes the $1.0 billion the NFL generates in its soon-to-be renegotiated deal with DirecTV for its Sunday Ticket package and the $250 million it generates from Verizon for its rights to live streaming of football games. The NFL currently generates a grand total of $6.2 billion in national media rights agreements in all.

In this context, the current NBA deals looks rather horrific. But if former Commissioner David Stern signed a bad television contract in 2007, one can certainly understand why. The NBA was cratering back then. New stars had struggled to grow in the darkness of Michael Jordan’s ever-enveloping shadow. The Shaq-Kobe drama had breathed temporary life into the league, like puffs down the gullet of a body without a beating heart. Then the duo broke up, leaving the NBA to slowly wither in its wake. Big market teams like the Lakers, Knicks, Celtics and Bulls were brands lacking a product, with no signs of future improvement. The Spurs had just pummeled LeBron’s Cavaliers in the 2007 Finals, a dismal four-game extermination that averaged a catastrophic 6.2 Nielsen television rating – limping its way into the record books as the lowest-rated series in NBA Finals history, down 27% from a 2006 Finals that itself was far from box office platinum.

An eight-year, $930-million-per-year deal? Sold.

Stern had negotiated for an increase of more than 20% from the previous average of $767 million despite declining viewership (which itself represented a nearly 25% increase over the $614 million per-year deal signed in 2002, then, also, despite declining viewership). The networks were more than willing to comply with what amounted to a modest 2.5% compounded annual growth rate in rights fees in exchange for an atypically long eight-year deal. The preceding six-year 2002 deal had been the longest one Stern had ever signed. Basketball history is littered with brief, flexible two-to-four year television arrangements.

The signing looked even better for Stern and the league as the economy got even worse. In 2008, credit froze because mortgage insanity planted massive hidden debts throughout the business world. The ensuing global economic meltdown blazed its way into the NBA, spurring widespread layoffs and igniting fears that league revenues could collapse by “maybe as much as 10%.” The league seemed fortunate to be able to cling onto a $930 million buoy every year.

Times have certainly changed. The NBA is currently at a post-Jordan popularity high, blessed with record ESPN and TNT ratings.

Basketball certainly isn’t alone in riding a viewership wave. Just about every sport is thriving in the television landscape that social and streaming media sculpts, resulting in record rights fees over the past four years. Each new deal makes all other ones seem more outdated: MLB more than doubled its previous take! The NHL more than doubled its take in Canada and nearly tripled its take in the U.S. NCAA conferences are quadrupling their previous deals!

Each time a new league cashes in on the current TV rights boom, the NBA’s projected money pile grows.⁽³⁾

It’s getting silly out there. Three years ago, the NFL cut a $1.9 billion per-year Monday Night Football deal with ESPN, an arrangement that towers over the NBA’s $930 million in total yearly television revenue. Your initial reaction might be: Are the rights to 17 regular season Monday Night Football games really worth more than twice the rights to every single regular season and every playoff NBA basketball game?

Of course, the NFL is king, and the ability to televise football grants ESPN a special kind of leverage in price negotiations with cable providers. But there were a whopping 145 nationally televised NBA regular season games this past season (75 on ESPN, 55 on TNT, 15 on ABC). Those are being followed by at least 81 higher-rated playoff battles (19 on ESPN, 4 on ESPN2, 45 on TNT, and 13 on ABC). That’s at least 226 NBA games generating less than half as much in TV rights money as 17 NFL games. Is it all that unreasonable to think that the NBA should do (significantly) better than this NFL deal?

An analysis of the MLB TV deals tell a similar story. The current MLB contracts with ESPN, Fox, and TBS, each signed in late 2012, pay out a combined $1.6 billion per season. And yet, the sport produced just $592 million in national TV advertising sales for its network partners during postseason play last season. The NBA, in contrast, produced $929 million for its television partners during its postseason play last season. That’s $337 million more! The NBA, despite only broadcasting around 145 games versus around 165 time slots for MLB, also generates more in advertising sales during regular season play. Is it all that unreasonable, then, to think that the NBA should do significantly more than $337 million better than MLB’s take?

The NBA is the only big-time brand coming up for bid in the next several years. With new national sports cable networks such as Fox Sports 1 and NBC Sports Network thirsting for live game programming to solidify their identities in an ESPN-dominant TV world, the NBA represents their last chance for a long while. The NBA is therefore about to enjoy the fruits of a massive bidding war. Networks are going to need to back up the brinks truck to secure rights to one of the few remaining DVR-proof properties on TV. It’s not all that difficult to fathom that the NBA will see its TV money pile grow to around $2 billion, and possibly much more.

To repeat: That’s an average of at least $2 billion – an increase of at least $1.1 billion over the average in the current deal – and possibly much more!

Of course, the impact of this added $1.1 billion is probably a bit less than you’d think. It is actually something of an illusion in that way. These contracts have escalator clauses built into them, to more directly align the payouts to the projected growth in the underlying ad (and subscriber) revenues they produce – the current TV rights deal will pay out more than its $930 million average in its final season ($1.03 billion), just as it would probably pay out less than the average payout in the first season of any new deal that is executed. In that way, a $1.1 billion average increase might only produce a $750 million initial jolt (maybe less, maybe more, depending upon such things as the size and term of the new deal, and the annual increases it calls for), rising steadily in the years thereafter.

Still, if you’re one of the league’s owners, you get a collective 49% of that jolt.⁽⁴⁾ Imagine yourself proceeding along with daily business and then, suddenly, your collective operating profits blast skyward by an incremental $370 million. Increasing every year. For the better part of a decade. Guaranteed.

Local TV Rights Deals

And if you think what’s happening in the world of live national sports programming is cornea-etchingly ridiculous, consider also what’s happening in the local scene. Local TV rights deals for highly coveted sports programming is going through an even more dramatic renaissance, if you can possibly fathom it.

The Los Angeles Lakers displayed what is possible on the local TV level with their Time Warner Cable deal signed in 2011. The pact is expected to generate $5 billion over 25 years, an average of $200 million annually, beginning with the 2012-13 season. That’s more than 5.5 times more than what the team received from its share of revenue from the NBA’s national TV rights partners last season!

With the Houston Astros, the Houston Rockets signed a 20-year deal with Comcast Sportsnet for a newly launched channel that began operations in Fall 2012. In addition to its $45 million annual rights fee, the Rockets got a 31% equity stake in CSN Houston. The team is currently the lead negotiator in the troubled network’s bankruptcy proceedings stemming from financial losses suffered due to the lack of carrier coverage. The prices paid by these regional cable companies to secure rights to their local sports teams are getting so out of hand, they require astronomical affiliate fees to justify. When competing carriers refuse to pay those affiliate fees, instead choosing to leave these channels out of their cable lineups, hundreds of thousands or even millions of residents are left without an ability to watch their local sports teams on television, and the regional cable companies, without the affiliate fees, go bankrupt.

The New York Knicks are somewhat unique in their regional sports network, MSG Network, is a wholly-owned subsidiary. Their current rights fee is approximated at $37 million.

The Boston Celtics signed a 20-year extension in 2011 to extend its TV contract to 2038 with Comcast Sportsnet. The team received a healthy $20 million bump in its right fee, which paid out $36 million last season, and took a 20% equity stake in CSN Boston.

As part of a $1 billion deal negotiated with the MLB’s Detroit Tigers, the Detroit Pistons agreed to a 10-year deal worth $350 million, a $35 million average, that expires at the end of the 2017-18 season.

These are all deals that pay out more than an allocated share of the NBA’s current national TV rights deal.

And things are about to get even better.

The Golden State Warriors’ new TV deal, which kicked in during the 2010-11 season, pays the team $28 million – $16 million more than its previous one – and runs through the 2014-15 season. After that, the team can renegotiate or get an increase to fair market value which, thanks to the Lakers deal, is more likely double to triple the current amount.

The Los Angeles Clippers’ local TV rights come up for bid when its contract with Fox Sports expires after the 2015-16 season, and that will spark a huge bidding war between Fox (who needs the Clippers to maintain the viability of Fox Sports West and Prime Ticket, fighting to keep both channels alive after losing the Lakers and Dodgers), TWC SportsNet (the Lakers’ channel) and the new SportsNet LA (owned by the Dodgers)⁽⁵⁾.

Each one of these new deals would be more lucrative than their allocated share of a new national TV rights deal to come, even if such deal were to hit a $2 billion average.

***

Factor in growth in areas other than TV rights, and owners stand to make an extra $1.3 billion or more in the 2016-17 season than they did in 2010-11, the year prior to the lockout, if all goes according to plan. By that point, they’ll be taking around $3 billion of the league’s revenues every year.

Six years after they locked out the players and petitioned the world for sympathy over mounting theoretical losses in a supposed unsustainable business model, owners will see their already massive revenues nearly double!

Owning an NBA franchise is no longer the hobby of billionaires. It has become a primary source of wealth.

CBA Expiration

Owners who once leveraged $300 million in supposed annual losses as the impetus to renegotiate their take of league-wide revenues from 43% to around 50% could be generating an incremental $1.3 billion to offset it by 2016-17.

Of the extra $1.3 billion the owners would be generating, about $920 million would be coming from the overall growth of the league. The extra $360 million would be coming from the adjusted revenue split. Do owners really need to take an extra $360 million from the players, on top of the $920 million and rising they’d already be getting?

The players are bound to want to renegotiate. They’re bound to want to get a little back on the revenue split.

They’ll have their shot one year after the new national TV rights deal kicks in. The current CBA runs through the 2020-21 season, although either side may opt out after the 2016-17 season. The timing of the opt-out is not an accident.

The question needs to be asked: If owners were using claims of mounting losses as the impetus to increase their split of league-wide revenues back in 2011, and six years later they’re no longer losing money but rather making piles stacked to the heavens of it, is it not fair for players to want to adjust the split back down?

The last negotiation was about sustainability. Teams were losing money, and the league fought to replace the existing system with a new one that helped them become and stay profitable. The next one will be about how to best share a windfall.

But, despite their new-found riches, owners aren’t likely to simply relent. Recent precedent across all major sports leagues is on their side.

Every league has its own idiosyncratic methods of calculating revenues and payrolls, which makes it difficult to compare across sports. But the trend is clear – player allocations of league-wide revenues are decreasing.

The NHL ratified its current collective bargaining agreement in January 2013, after a labor dispute which cancelled 510 games of the 2012-13 regular season. It is a 10-year deal, the longest in NHL history, expiring after the 2021–22 season, with a mutual opt-out provision after the 2019-20 season. It calls for a 50% split of “Hockey-Related Revenue” to the players. Much like with the NBA, it was considered a major financial win for the owners – in the 2005 CBA which preceded it, players were entitled to a share of revenues between 54% and 57%, depending upon the level of league-wide revenues, but were consistently receiving at or near the maximum 57%.

MLB ratified is current collective bargaining agreement in December 2011. It’s a five-year deal, equal to the longest in history, which allowed play to continue uninterrupted through the 2016 season. MLB has no salary cap system, and no mechanism to ensure that players receive a predetermined share of league-wide revenues. Players received 63% of revenues in 2003, a high in recent history. But, with exploding league-wide revenues, players’ percentage share has steadily decreased over the past decade. By 2008, the players were down to around 52%. It dipped below 50% in 2010, and according to Tribune-Review calculations, it sunk to just 42% in 2013.

The NFL ratified its current collective bargaining agreement in August 2011, after a work stoppage imposed by owners that lasted from March 12, 2011 to July 25, 2011. It is a 10-year deal, expiring after the 2020 season. It calls for the players to receive differing allocations of various streams of revenue, with bands to ensure that, for the 2012 through 2014 league years, the players will receive between 47% and 48%, and for the 2015 through 2020 league years between 47% and 48.5%, of “Projected All Revenues.”

However, these amounts are to be reduced for each league-approved stadium project in the years ahead. This so-called “Stadium Credit” can reduce the players’ share down to as little as, but no less than, 47% of “Projected All Revenues” for each of the 2012 through 2014 league years, 46.5% for each of the 2015 through 2016 league years, and 46% for each of the 2017 though 2020 league years⁽⁶⁾. Under the previous NFL CBA, which was last extended in 2006, the players received around 60% of league revenues, not including a $1 billion “expense credit” for the owners off the top, a structure that approximated a 50-50 split.

And so, despite the massive current profitability of NBA owners as well as the massive influx of incremental revenues to come with the new national TV rights deal – with precedent established for players’ current share of revenues of 42% for MLB, no more than 48.5% for the NFL, and 50% for the NHL – NBA players, comparatively speaking, will still be doing quite well at 51%⁽⁵⁾. Any attempts by NBA players to recapture a greater share of league-generated revenues will therefore be met with resistance.

Owners may or may not wish to concede a portion of the then-six percentage points they will have gained in the current CBA, and may demand significant system changes in return if they do — perhaps even attempt a move toward a hard salary cap system with no maximum salaries.

At a projected $6 billion in league-wide revenues, every percentage point give-back will equate to a reallocation of roughly $120 million — $60 million less for the owners and $60 million more for the players — and growing yearly.

Salary Cap Impact

The NBA salary cap – which forms the basis for how players are paid – is set based on a percentage of league revenue. So it should come as no surprise that, despite the massive windfall for the league as whole, because player salaries have not increased more than marginally since the lockout, so too has not the salary cap. In 2010-11, the cap was set at $58.044 million; this past season, it was $58.679 million. To this point, the financial windfall that has poured over the league has been exclusively for the benefit of the owners.

That will change somewhat next season. But while the salary cap is projected to rise substantially in the season ahead – 7.75%, to $63.2 million – don’t allow yourself to be entirely seduced by it. Even that growth is something of an illusion. Some of it is driven by the reversal of an artificially depressed salary cap for the season.

The cap for this season should have been about $60 million. But the league imposed a $1 million one-time downward adjustment because league-wide salaries were too high – a relic of the transition to the new CBA and the amnesty waivers it forced. Utilizing the single-use amnesty provision, which the vast majority of the league has done, removes the salary of its waived player from the team’s cap and tax calculations, but does not remove the underlying salary obligations that count toward league-wide salary.

However, based largely on the burn-off of amnesty payouts (which were $109 million this season) and teams’ ability to adjust their spending to the new and harsh realities of today’s progressive luxury tax environment, we shouldn’t ever see a downward adjustment again.

Instead, what we’ll probably see over the next couple of years is steady growth – about 5% growth in revenues and about 5% growth in the salary cap (excluding the impact of the one-time adjustment described above).

But that may all change, and rather drastically, starting in three years. The salary cap will get a major boost with the addition of the new TV rights deal in 2016-17, and could get another major boost with the addition of a new CBA in 2017-18.

Unlike in negotiating the split of revenues, the addition of new revenues in any new TV rights deal to come benefits everyone, including the players. If the league generates a billion dollars more in revenues, the players are entitled to more than half that increase.

It all works itself out via the salary cap system. Since the salary cap is set based on a percentage of league revenue (44.74%), a bigger TV rights deal means a higher salary cap. A higher salary cap means all of the league’s teams are allowed (and required) to spend more money on their players. Through the increasing spending (and backstopped by the guarantee of a check for the difference should salary spending not ramp up enough), the players acquire their agreed-to split of revenues.

A $750 million jolt to league’s TV revenue by itself would vault the salary cap by a whopping $11 million. Imagine a salary cap soaring more than 20% in one year, from around $66.5 million (the league’s current projection for the 2015-16 NBA season) to more than $80 million in 2016-17. That could happen!

That, in turn, would vault maximum salaries for players with at least ten years of experience, who are entitled to receive up to 35% of the salary cap⁽⁷⁾, by nearly $5 million!

This new TV rights deal is bound to have a dramatic impact on how upcoming free agents – LeBron James and Kevin Durant among them – will consider their futures.

James said earlier this year that he was amazed, and a little jealous, when he heard Detroit Tigers star Miguel Cabrera signed a (ludicrous and idiotic) contract that guarantees him $292 million over the next 10 years.

“I said wow. I wish we (the NBA) didn’t have a salary cap. It’d be nice to sign a 10-year deal worth $300 million.”

Baseball, of course, does not have a salary cap. The NBA does, and players are prohibited from signing contracts longer than five years in length. But James could have the chance to sign a five-year contract that guarantees him a higher average annual value than what Cabrera just locked in.

If LeBron were to, say, exercise the Early Termination Option on his contract this summer and replace it with a long-term contract with the Heat, as most supposed experts seem to think he will, he’d have a starting salary of approximately $20.7 million for next season, roughly equivalent to the salary figure from which he will have opted out. After accounting for the maximum 7.5% annual raises, that’ll increase to about $23.8 million for the 2016-17 season.

If he were to instead exercise the Early Termination Option on his contract this summer, replace it with a two-year maximum contract deal which figures to be slightly higher than the contract from which he will have opted out, and then execute a new five-year maximum value contract upon its completion, he could earn more than $26 million for the 2016-17 season, in the first of a five-year deal that would pay him in excess of $150 million to close out his career.

James will need to decide by June 30 whether he will choose to opt out of his contract this summer. But he did say he’d surely opt out if he could get a Cabrera-type deal.

“I would do it this summer for sure,” James said with a smile. “I’d opt out for that.”

But that’s not all. Things could get even better the following year.

If the players choose to opt out of the current CBA after the 2016-17 season, and seek to recover some of the $360 million and growing they ceded to their owners by agreeing to decrease their percentage of league-wide revenues from 57% to what will then be 51%⁽⁵⁾, the salary cap could increase even more. They’re bound to seriously consider it. If they don’t, they will have effectively locked themselves into the current CBA until its expiration after the 2020-21 season. By then, the $360 million annual give-back will have rocketed closer to $425 million.

At a projected $6 billion in league-wide revenues, every percentage point recapture would equate to a reallocation of roughly $120 million, which, in turn, would increase the salary cap by about $1.8 million.⁽⁷⁾

For a 10+-year veteran eligible to earn up to 35% of the cap, each percentage point recapture would, in turn, increase his maximum allowable salary by a bit more than $600K.⁽⁸⁾

It is certainly possible the players will not get any of it back. It is unlikely, even in the best of circumstances, they will get all of it back. The reality of what is to happen after (and if) the current CBA is terminated may lie somewhere in between.

Imagine a hypothetical scenario where the players were to negotiate for three of the then-six lost percentage points back. That change alone would increase the cap by more than $7 million.⁽⁹⁾ The league could be looking at the following type of scenario — starting with a relatively modest $66.5 million cap for 2015-16; seeing it increase a whopping 20% to more than $80 million in 2016-17 on the strength of a new national TV rights deal; and then seeing it rise sharply again, to around $91 million in 2017-18, based largely on a potential shift in the revenue split between players and owners. Maximum salaries for 2017-18 would soar to a whopping $30 million!

This may be too long for LeBron – who will be 32 years old at the start of the 2017-18 NBA season, and thus subject to the league’s “Over-36” rule⁽¹⁰⁾ – to wait in order to lock in his long-term deal, but perhaps not for someone like Durant.

If Durant were to bide his time on shorter contracts until the summer of 2017, and if the new TV rights deal creates an initial $750 million jolt to league-wide revenues, and if the current CBA is to be terminated after the 2016-17 season, and if the rules regarding maximum salaries and maximum annual raises and maximum contract lengths all remain the same in a potential new CBA, and if the players are to be successful in recapturing just three of their lost percentage points in the potential new CBA, a potential five-year contract for a 10-year veteran, like Durant would be, that starts in 2017-18 would be astronomical.

Imagine a five-year, $170 million contract, with a video-game like average salary of $34 million!

***

This is the future of the NBA. It is mind-blowingly bright — brighter than we could possibly have fathomed while being seduced by claims of owner poverty just three years ago.

Players can and should start planning for it immediately. It should permeate their consciousness during every contract-related negotiation in which they partake. Contract values, contract lengths and contract flexibility should all be carefully evaluated in the context of what lies ahead.

Starting this summer, the NBA will enter into what figures to be the one of the wildest, wackiest, most exciting, and most unpredictable four-year stretches in its history.

Notes:

1. While the league as a whole is substantially more profitable today than it was three years ago, some individual teams continue to struggle. However, the league’s new revenue sharing system represents a dramatic shift in league policy as the league redistributes wealth among its teams, which in turn allows just about every NBA team to be profitable if they choose. Some teams, notably the Brooklyn Nets, actively choose not to be profitable, given their wild and seemingly unjustifiable spending. But it is difficult to fault the broader league for that.
2. Don’t allow yourself to be naive enough to believe that your TV bill isn’t going to skyrocket in the years ahead as a result of the bidding war for premium sports content that cable networks like ESPN has prompted, on the basis of rising subscriber fees that broadcast networks don’t have. It’s why former Commissioner David Stern took nearly every televised game off of free television in 2002 and moved them to ESPN and TNT.
3. This is a overview of the current national media rights contracts for the four major professional sports leagues in the U.S.
4. Collectively, the players are guaranteed to receive 50% of forecasted revenues, plus (or minus) 60.5% of the amount by which revenues exceed (or fall short of) the forecasts, with a lower limit of 49% and an upper limit of 51% of actual revenues. If the new TV rights deal adds an incremental $1 billion in revenues, the players’ share will surely increase to the maximum 51%.
5. This is a fact that played a huge role in the sale price for the L.A. Clippers organization.
6. Because, in the NFL, the players’ share is determined based on projections of league revenues (rather than actual revenues), there is an adjustment and recapture mechanism to ensure that players have received an average of at least 47% of actual revenues over the life of the contract.
7. A slightly different salary cap calculation is used to calculate maximum salaries, based on 42.14% of projected revenues rather than 44.74%. In 2005, the players and owners negotiated a different formula for setting the salary cap but not for setting maximum salaries, so the two became decoupled, and this continued in the 2011 agreement. For this reason, the maximum salaries are not actually 25%, 30% or 35% of the salary cap, but rather instead a slightly lower amount.
8. Each one percentage point of revenue distributed from the owners to the players increases the percentage of revenues upon which the salary cap is based by 0.8948 points, and increases the percentage of revenue upon which the salary cap is based for purposes of maximum salary calculations by 0.8428 points.
9. The players will automatically gain an extra point for the purposes of the salary cap calculation in any new deal because the current cap calculation is based on an assumed 50-50 split of revenues, but by the time the new national TV deal kicks in, the players will actually be earning 51% (based on the formula described in footnote 2 above). A new CBA will surely correct for this issue.
10. LeBron James will turn 32 years old on December 30, 2016, and will therefore not be able to sign to sign a five-year maximum value contract, in accordance with the NBA’s Over-36 rule. The NBA’s Over-36 rule exists to recognize the reality that even though NBA players may be signing contracts that will not expire until after they are 36-years-old, the likelihood of them playing until that age is slim. The Over-36 rule applies when a player signs a contract that is four-years or more in length, and the player will be 36-years-old or older when at least one of those seasons begins. If the Over-36 rule applies to a player’s contract, his salary in his over-36 season is reallocated evenly over the earlier seasons of his deal for purposes of the salary cap, thus making it impossible for James to achieve a full maximum contract over a five-year term.