LeBron James and the Next Decision

The Miami Heat’s bid for basketball immortality – four straight NBA Finals appearances and three straight NBA titles, a feat which has only been accomplished once in league history – has fallen short. In the wake of this failure, we’re all left wondering whether this is the end. We’re all left wondering whether LeBron James is going to opt out of his contract with the Heat, and evaluate his options as an unrestricted free agent.

There are lots of reasons to think James will remain in Miami. The Heat have made it to the NBA Finals for four straight years, winning two. The conference in which the team plays is in shambles, installing them as early favorites to win future titles. He’s got a great market. He’s got the sun. He’s got the beach. He’s got the tax shelter. His two young sons enjoy South Florida and play middle school and AAU basketball, and his wife opened a juice bar in Miami last December. After four seasons in Miami, James’ ties run deep.

A skeptical man might say he’d be a fool to stay. The Heat’s reign at the top of the basketball world appears to be closing. Dwyane Wade’s skills are in decline, and his injuries are starting to mount. Chris Bosh isn’t quite the player he was envisioned to be. Shane Battier is done. Ray Allen may also be done. The “Birdman” is old. As is the entire team. The oldest in the NBA, in fact. There’s no youth. No promise for the future. And the rest of the league has caught up to the Heat of the present. If the Heat had a margin of error before — some cushion between themselves and everyone else — it’s gone.

James doesn’t need to make up his mind this summer. His contract runs for two more seasons, with an opt-out prior to each. He could decide to make another run next season and re-evaluate in 2015, or even play two more seasons and make a decision in 2016. 

Strategic Considerations

If James sizes up the league, sees the writing on the wall, and determines that it’s better to move sooner rather than later, he could make a change next month. He’s certainly not going to leave Miami for a worse situation, or for a rebuilding team that’s a couple of years away from title contention. If he changes teams, it will be to win right away. But where would that be?

The New York option? Just a couple months into the tenure of Phil Jackson as general manager, he’s already feuding with owner James Dolan. LeBron to New York long was a flawed theory anyway, considering it requires the Knicks finding a taker for Amare Stoudemire, Andrea Bargnani, JR Smith and Raymond Felton just to allow the cap space necessary to even consider a Carmelo Anthony-LeBron pairing. Have you seen those contracts?

The Los Angeles Lakers? Lately, they’ve been giving the Knicks a run for their money when it comes to dysfunction. Lakers owner and executive Jeanie Buss has looked like a hapless defender in attempting to justify the cap-space-crippling two-year, $48.5 million extension offered to Kobe Bryant back in February. Who rushes to pay the highest salary in the league, devoid of pressure from outside bidders, for a 35-year-old who is still rehabbing from what may be a career-ending injury? Bryant did return from his ruptured ACL, for all of six unproductive games, before suffering yet another major injury, this time a tibial plateau fracture that ended his season. Was there ever a time when Kobe-LeBron made sense anyway?

The Chicago Bulls? It’s at least a mildly interesting proposition, based on the mutual admiration between LeBron and Bulls head coach Tom Thibbadeau, as well the prospect of adding Nikola Mirotic in the years ahead to a core that already features Derrick Rose, Taj Gibson and Joakim Noah. But think of all that needs to happen for this to become a realistic possibility. The Bulls would first need to gut their team completely, with the exceptions of Rose, Gibson and Noah. LeBron would need to get comfortable with the notion that Rose can recover his full explosiveness and be fully healthy over the course of an entire season, that Rose would embrace him, that the two could co-exist, and that a Bulls owner with a history of frugality is truly committed to spending what it takes to build a winner. Then, of course, there’s the money — he’d still need to take an annual discount of at least $2 million just to make the math work.

The Houston Rockets could present a compelling proposition, with the prospect of playing alongside James Harden and Dwight Howard. Howard and LeBron would make for a dominant defensive duo, and Harden, Howard and LeBron would complement each other offensively. Houston would need some discount vets to fill out the roster, but with those three and Chandler Parsons they would have a real shot at being better than OKC and possibly even San Antonio. One problem is that the premise requires the Rockets to trade Jeremy Lin and Omer Asik to clear the necessary cap space. Due to an unusual provision in the CBA, their cap hits (for trade purposes and the like) are $8.4 million apiece, but they are actually each owed $14.9 million. The Rockets would therefore need to find partners willing to trade for the contracts of two players with expiring contracts, without a guarantee of a long-term commitment from said players, who are both owed $6.5 million more than the face value of their contracts (money which couldn’t be offset with more than $3.3 million in cash cumulatively), without giving Houston back any salary in return, all the while realizing what the Rockets intend to do with the savings. If they can get passed all that, LeBron would still be playing in the highly-competitive Western Conference.

Then there are the Clippers, where there could be visions of a collaboration with Chris Paul. It is true that LeBron and Paul might be as close to each other as any two players in the league. But the Clippers are capped out. For them to acquire LeBron, they’d need the cooperation of the Heat to facilitate a sign-and-trade. Maybe the Heat would oblige. But they’d surely demand, at the very least, Blake Griffin in return. The moment James leaves the Eastern Conference, he walks away from a virtual walkover to the NBA Finals. Would he really sacrifice all that for a team that will have just lost its best player? Lest we forget, Chris Paul is aging, and had a partial meniscectomy on his right knee back in 2010, as did Dwyane Wade, a surgical procedure which can have consequences that manifest several years down the road.

Some have been suggesting that the Clippers could bypass a sign-and-trade approach that would cost Griffin, and instead snag James with cap space. But think of all that’d need to happen for that to be conceivable. If the Clippers were to trade or otherwise rid themselves of DeAndre Jordan, Jared Dudley, Jamal Crawford, Matt Barnes, Willie Green, Reggie Bullock, Danny Granger, Glen Davis and Darren Collision — leaving themselves with just Paul, Griffin and JJ Redick — they’d still only have $14 million left over for James. Would James take just $14 million, playing alongside Griffin at $18 million and Paul at $20 million? Trade Redick as well and James could get $20 million. That’d leave a spectacular core trio, all of whom would be well compensated. But is it even remotely realistic to think the Clippers could move 10 players earning a cumulative $40 million? That’s what it would take.

And, of course, Mark Cuban will continue his crusade that anyone turning his back on the Dallas Mavericks is only fooling himself, even as Deron Williams and Dwight Howard have done so the past two offseasons.

Which brings us to James’ hometown of Cleveland, where mismanagement and personnel miscalculations have led to one of the most comically disastrous seasons in recent memory. Have you seen the Cavaliers lately? Or, more to the point, have you heard them? The in-fighting in the locker room? The lack of effort? The lack of accountability? The back and forth between Kyrie Irving and Cavs management?

But things changed rather spectacularly when the Cavs when one more stunning, unexpected turn of lottery magic created all manner of possibilities. If LeBron is to consider anywhere but Miami, it’s certainly in Cleveland. That is, if he can get passed the financial ramifications.

Financial Considerations

The financial landscape of the NBA will change, and dramatically, starting in 2016.

That’s when the NBA’s current national TV deal expires – an eight-year agreement that pays 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. 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 value to the cable distributors 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/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.

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 billion per year in exchange for about $3.5 billion in ad money.

In this context, the current NBA deal looks rather horrific. But that won’t be true for long.

Just about every sport is thriving in the television landscape that social media sculpts, resulting in record rights fees over the past four years. Every time a new league cashes in on the current TV rights boom, the NBA’s theoretical money pile grows. 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!

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?

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 $2 billion, and possibly more.

This new TV rights deal is bound to have a dramatic impact on how James, Kevin Durant, Kevin Love and other star players approach their free agencies in the years ahead. You can bet their eyes will be glued to these negotiations like a tongue to frozen steel.

Why? Because they have a gigantic stake in the outcome. For every dollar the league is able to extract from its television partners, the players are guaranteed to get more than fifty cents of it. Yes, the players will benefit more from the fruits of the league’s negotiations than will the league itself. And no one player gets a greater piece of the players’ cut than one earning maximum dollars.

It all works itself out via the salary cap system. Since the salary cap is set based on a percentage of league revenue, 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. And since maximum salaries are pinned directly to a percentage of the salary cap (35% for 10+ year veterans), every dollar generated directly affects a star player’s earning power.

So what effect will adding $1.1 billion of incremental revenue – increasing the payout from national TV rights from $930 million to around $2 billion – have on James’ earning power? That’s hard to say.

Television contracts almost assuredly 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 probably pay out a lot more than its $930 million average in its final season, just as it would probably pay out substantially 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 more and maybe less, depending upon such things as the term of the new deal and the annual increases it calls for), rising steadily in the years thereafter. But even that $750 million would have a dramatic impact.

The league’s current assumption for increases in revenues, salary cap, and maximum salaries over the next couple of years is 5%. Layering in a jolt in TV revenues of this magnitude on top of that increase could vault the salary cap by a whopping $14 million! That, in turn, would vault maximum salaries for players with at least ten years of experience by nearly $5 million!

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, on the strength of the new television rights deal, James could conceivably have the chance to sign a five-year contract that guarantees him a higher average annual value than what Cabrera just locked in.

Timing will be critical. Sign a long-term deal too quickly and he’ll miss out. Wait too long and he may no longer be able to get it.

The current TV deals expire after the 2015-16 NBA season. There are rumors floating about, however, that they could be terminated a year early as part of any re-negotiations. That means James would be best positioned to capitalize if he had the flexibility to sign a new contract after each of the next two seasons. In that way, his current contract is rather perfect. It allows him to do just that.

If James were to instead terminate his contract this summer and request his release from the Heat via sign-and-trade – to a team like, say, the Clippers – he would, by rule, be required to sign a contract of at least three years in length. But three years is after the 2016-17 NBA season. That’s too long for James to negotiate his post new TV rights deal. He will have missed his target window. By then, he will have thrown away at least a year, possibly two, at the elevated salary level. He will have watched multiple players far less deserving raking in salaries astronomically higher than his own. The current collective bargaining agreement will have already been terminated. He’d be subject to whatever new restrictions it imposed. He’d be subject to the restrictions imposed by the Over-36 rules. He’d be trying to negotiate his deal at the same age as Dwyane Wade is today. He will have created a financial mess for himself. Disaster!

So if James is to go anywhere but Miami this summer, it will surely be by means of a free agent signing, not a sign-and-trade. How many potential options would this alone eliminate?

If James were to terminate his contract this summer and request his release from the Heat via free agent signing, he could sign a short-term contract elsewhere that enables him to take advantage of the new TV rights deal in just the same ways as he could with the Heat, whether the new TV deal takes effect after the 2016-17 NBA season or one year early. He’d need only to sign a one-year contract with a player option for a second. But he might still be costing himself many millions of dollars in doing so. Because his new team wouldn’t yet have his full Bird rights, as would the Heat if he remains in Miami. Consider the consequences.

Let’s assume the new TV rights deal takes effect one year early, after next season. By then, his new team would only have his “Non-Bird” rights. This exception, which is a weaker form of the more commonly-known Bird rights, allows a team to re-sign its own free agent to a salary starting at up to 120% of his salary in the previous season (not over the maximum salary, of course). Raises are limited to 4.5% of the salary in the first year of the contract, and contracts are limited to four seasons in length.

Therefore, even if LeBron were to demand a full maximum salary from his hypothetical new team this summer, estimated at $20.7 million, the highest he could go in the first year of a new contract signed the following summer, after new TV rights deal takes effect, would be 120% of that, or $24.8 million. Would that be enough to get him up to the then-maximum? Probably not. So, don’t look for him to take any discounts if he were to sign anywhere else but with Miami. Because doing so might not only affect his first, short-term contract but also his subsequent long-term contract to close out his career. Remember: Whatever number he signs for this summer, if he were to sign a new contract the following year, he’d only be eligible for a 20% increase if he signs anywhere else but with Miami.

But there’s more. Raises in “Non-Bird” contracts are limited to 4.5% of the salary in the first year of the contract (as opposed to 7.5%); that could cost him upwards of $750K per year. And, perhaps most importantly of all, “Non-Bird” contracts are limited to four seasons in length (as opposed to five); that could cost him what could otherwise be an up-front guarantee paying out nearly $33 million that final season.

Add it all up and you could be looking at a one-year, $20.7 million contract, followed by a full maximum contract utilizing his “Non-Bird” rights, that could pay out an additional $108 million or so over the following four years, taking LeBron to the age of 34. A similarly structured Heat offer which leverages his full “Bird rights” would pay out the same $20.7 million next year, following by a full maximum contract utilizing his full “Bird rights” that could pay out at least $145 million over the following five years, taking LeBron to the age of 35. That’s, at the very least, a $37 million discrepancy. How many more potential options would this eliminate?

Now let’s assume the new TV rights deal takes effect as scheduled, two seasons from now. By then, his new team would only have his “Early-Bird” rights. This exception, also a weaker form of the more commonly-known Bird rights, allows a team to re-sign its own free agent to a salary starting at up to 175% of his salary in the previous season (not over the maximum salary, of course). Raises can be for up to the full 7.5% of the salary in the first year of the contract, but contracts are limited to four seasons when this exception is used.

Therefore, if LeBron were to demand a full maximum salary this summer, estimated at $20.7 million, the highest he could go in the first year of a new contract signed with the new TV rights deal in effect would be 175% of that, or the maximum salary, whichever is less. The maximum salary would surely be less. So, there’d be no difference in starting salary whether he signed a long-term contract utilizing his Early Bird rights with a new team after two years or if he signed his long-term contract utilizing his full Bird rights with the Heat after two years. Annual raises, at 7.5% of the salary in the first year, would also be the same.

In other words, if the new TV rights deal were to take effect in two years as planned, LeBron’s payouts, both in any interim short-term deal and new any new long-term deal to follow, would be identical to what the Heat could offer. With one exception. The Heat would be able to offer an extra year on the long-term deal. Because whereas the Early Bird exception would only allow for a four year deal, a contract utilizing his full Bird rights would allow for a five year deal.

Add it all up and you could be looking at a two-year, $42.3 million maximum interim contract, followed by a full maximum contract utilizing his “Early-Bird” rights that could pay out an additional $112 million or so over the following four years, taking LeBron to the age of 35. A similar structured Heat offer which leverages his full “Bird rights” would pay out the same $42.9 million, following by a full maximum contract utilizing his full “Bird rights” that could pay out $151 million or so over the following five years, taking LeBron to the age of 36. That’s a $39 million discrepancy.

James’ final five-year contract, which could pay out a projected $151 million(2), would produce a video-game-like average salary of $30+ million. That’s more than what Miguel Cabrera just locked in. It’d also guarantee him $194 million over a seven-year period, taking James through the age of 36.

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 do what it takes to get a Cabrera-type deal.

“I would do it…for sure,” James said with a smile.

The Next Decision

LeBron James is a basketball player. But he’s also a businessman. He’s not about to hastily sign a long-term contract this summer – not with the Heat, and certainly not with another team.

Until that fateful day when the new national television rights deal takes effect, for James, it may just all about maintaining flexibility. Flexibility to receive the largest possible contract. Flexibility to evaluate the choices of fellow superstar free agents. Flexibility to evaluate where it is he’d like to finish out his career.

Flexibility this summer would allow James the possibility to coordinate with potential free-agents-to-be Carmelo Anthony, Kyle Lowry, Marcin Gortat and Pau Gasol.

Flexibility next summer would allow James the possibly to coordinate with potential free-agents-to-be Kevin Love and LaMarcus Aldridge.

Flexibility for the summer of 2016 would allow James the possibility to coordinate with potential free-agents-to-be Kyrie Irving, Kevin Durant, Kevin Love (again), Al Horford, Dwight Howard, Brook Lopez and Joakim Noah, among many others.

Think about what a magical summer 2016 could be for James. The Heat doesn’t have a single player whose contract extends that far out. The slate would be wiped clean. James could potentially lock in every penny of his envisioned $151 million super-max contract. He could potentially do it in conjunction with any two star collaborators. And he could do it all right here on South Beach.

It may feel like this could be the end for the Miami Heat. But it could be just the beginning. The beginning of something spectacular. The transition from the current Big Three dynasty to an even more historic one to come. If any team had the chance to create a powerhouse in the summer during which Kyrie Irving, LeBron James, Kevin Durant and Kevin Love could all become free agents, wouldn’t it be the team that has already done it once before? The team which would have no salary commitments around which to maneuver?

Utilizing the early-termination option on his contract this summer, then, shouldn’t be taken as a definitive precursor to a departure, but rather James making sure he remains in control of the situation, gets the roster reconfigured to his satisfaction.

It’s difficult to see James not exercise that level of flexibility over his future. It’s precisely why he structured his current contract as he did – with the ability to terminate after its fourth, fifth and sixth seasons. But, by the look of things so far, it’s going to be difficult this summer for James to find an option better than Miami. And so, in the end, expect him to sign a new contract similar to the one he will have just terminated – a two-year contract, with an opt-out right after the first year, that pays out, at current salary cap projections, $20.7 million next season and $22.2 million in 2015-16, for a cumulative total of $42.9 million, which would represent an increase of approximately $250K.

5 Responses

  1. Berkeley223 says:

    Amazing stuff as always. I feel better about the heats long term future after reading this

  2. Jon says:

    This is off-topic, but I have a question regarding Wade. People are saying that there’s no way he’ll opt out of his contract because there’s no way he’ll leave $42M on the table, but I disagree and I’m curious as to your thoughts. If Wade were to opt in an collect the $42M, he’ll become a free agent when he’s 34 years old. Looking at Wade’s knee problems over the past few years and the way he seemed to decline overnight from the ECF to the Finals, I don’t anticipate a 34 free agent Wade being able to get a nice payday – I’m thinking at absolute best he’ll get a two year $12M deal, and that’s assuming his health remains the same as it currently is and doesn’t decline. So $42M over the next two years plus $12M over the following two years is $54M over the next four years. Not opting out would financially strap Miami and put Riley in a tough position to bring in free agents. However, what if Wade were to opt out of his contract and resign for four years for $12.5M per year? This would create cap space for Miami and Wade would only be leaving a total of $4M on the table over the course of the next four years. What are your thoughts?

  3. Albert says:

    Just wait a few more hours :). I’ve had my Wade article written for weeks, but I wanted to wait until after the Finals and I only make one post per day. Wade is tomorrow.

    It’s my last pre-written post, though. So if you have any other topics you’d like me to cover, feel free to let me know.

  4. Jon says:

    Haha ok. As for other topics, I’d be curious to hear your best guess at Miami’s roster next season. All of the projections I’ve seen have been great for Miami, but unrealistic. I’ve been reading some ridiculous guesses at Miami’s roster, and as much as I’d love to sign Melo, Lowry, Gortat, etc. and pay everyone $5M, I don’t think it’s happening. What’s your best realistic very early guess at Miami’s roster?

  5. John Markson says:

    I’m very surprised you didn’t mention the rockets here. Very move-able pieces (asik, lin) and the assets (picks/young players) to open up enough space for a core of harden, Dwight, lebron, parsons, beverley, and depending on lebron taking a little less could keep other solid young players like Terrence jones.

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