NBA Drops 2017-18 Salary Cap Projection $1M, to $101M, Due to $30M Drop in Revenue Projection
The NBA salary cap has experienced staggering growth in recent seasons.
The cap jumped from $58.7 million in 2013-14, to $63.1 million in 2014-15, to $70.0 million in 2015-16. That’s a near 20% growth in just two years.
But it’s nothing compared to what happened this season.
On the strength of new national TV rights deals with ESPN/ABC and TNT, which will add a whopping $1.1 billion of incremental revenues in 2016-17, the cap soared higher than helium-sucking angels: to $94.1 million.
While the new national TV rights deals are the headline, they certainly aren’t the only source of growth. Not by a long shot.
For 2016-17, the league expected a $320 million, or 7.5%, increase in revenue from sources other than the national TV deals at the start of the season. The sources are both varied and highly lucrative.
Anheuser-Busch InBev extended its partnership with the NBA, which began in 1998, for another four years in December 2015. Financial terms of the deal were not disclosed, but the new deal, which kicked in immediately, is considered to be among the league’s largest.
PepsiCo replaced Coca-Cola as the league’s official beverage partner after 29 years, in a five-year deal struck in April 2015 that kicked in last season. Financial details were not disclosed, but PepsiCo is also considered one of the league’s largest sponsors.
Internet giant Tencent started a deal with the NBA in July 2015 to provide live games and other programming in China. The pact, worth $500 million over five years, also has a revenue sharing component that could add an additional $200 million.
Verizon replaced Sprint as the league’s sponsorship content provider in November 2015, signing a contract worth around $400 million over three years.
Tissot partnered with the NBA in October 2015 as the league’s first ever official timekeeper, signing a contract worth around $200 million over six years.
State Farm in January 2016 extended its multi-million-dollar partnership with the NBA for six more years.
ExxonMobil, Kumho Tire and New Era each struck multi-year partnerships with the NBA in October 2016.
Then there’s the local TV deals that started with the 2016-17 season.
The Los Angeles Clippers got a six-year deal (with a mutual opt-out after two years) with Fox Sports Prime Ticket that will pay out an average of $55 million per season, far less than the $125 million projected by Bank of America Merrill Lynch when it advised Steve Ballmer on the purchase of the team in 2014 but still more than double the $25 million the team had been getting.
The Dallas Mavericks inked an extension with Fox Sports Southwest worth more than $50 million a year, double the previous payout.
The Cleveland Cavaliers kept its games on Fox Sports Ohio for five more seasons, with an extension worth nearly $40 million per year.
Add it all up and you get a whopping result.
To start the season, the NBA was projecting 2016-17 revenues to reach $6.68 billion!
Revenues were projected to grow so high that teams couldn’t possibly keep up with their spending. Players are entitled to 51% of league-wide revenues in the form of salaries and benefits, which at $6.68 billion of revenues would come to $3.41 billion. Yet, despite the massive outlays last summer, teams came nowhere close. The league projected the players to top out at $3.20 billion, or 48% of revenue, a $210 million shortfall.
But the growth doesn’t stop there.
While the sticker shock of the new national TV rights deal is now over, growth from other sources will continue to soar next season.
For 2017-18, the league expected another $440 million, or 9.5%, of growth in revenue from sources other than the national TV deals to start the season. That’s even more than this season, as new revenue sources emerge.
Nike signed a massive new deal to replace Adidas as the NBA’s uniform provider starting with the 2017-18 season. The eight-year contract, signed in June 2015, is worth more than $1 billion, an average of $125 million, up from the $400 million over 11 years, an average of $36 million, that Adidas was paying.
Take-Two Interactive Software announced its plans to partner with the NBA to launch the NBA 2K eLeague, a venture which is scheduled to start in 2018.
And then there’s the three-year pilot program signed last April, which allows teams to sell advertising space on their jerseys. The program will begin with the 2017-18 season, and could bring in up to $200 million in incremental annual revenues.
Add it all up and the league is projecting to blow past the $7 billion revenue mark next season, just five years after it crossed the $4 billion mark.
To start the season, the NBA was projecting 2017-18 revenues to reach $7.22 billion!
At $7.22 billion of revenues, the players’ 51% share would come to $3.68 billion. That’s a lot for teams to spend. But the new CBA will help teams in that regard. The new agreement will substantially increase salaries in all ranges – including minimum salaries, the bi-annual and mid-level exceptions, and maximum salaries. It will also increase player benefits by around $30 million, as material enhancements to all manner of player retirement, health, and other benefits, including the establishment of a new health insurance benefit and new education/career development programs for retired players, kick in.
At the time the new CBA was struck, the league was actually projecting the resulting increases in both salaries and benefits for 2017-18 would increase to $3.72 billion, a $25 million overage.
Not only are teams starting to catch up to the exploding revenues with their spending, but those revenues are finally beginning to taper off… if only slightly.
In a memo distributed to member teams on Apr. 6, the league issued revised salary cap guidance for each of the next two seasons:
- For 2017-18, the salary cap is now projected at $101 million, with a luxury tax threshold of $121 million.
- For 2018-19, the salary cap is now projected at $102 million, with a luxury tax threshold of $122 million.
The source of the drop? A $30 million decline in projected revenue.
The league is now expecting to generate approximately $6.65 billion in revenue this season (from $6.68 billion), and $7.19 billion next season (from $7.22 billion).
So… How did the league arrive at its new salary cap projections?
At the end of each season, accountants jointly appointed by the NBA and the players’ association finalize the total revenue haul for the past season and, on that basis, project the revenues for the season ahead.
Revenues for the coming season are projected based upon an agreement between the NBA and the player association. If the parties can’t agree, revenues are then projected by taking the revenues from the prior season from all sources other than the national TV rights deals, and then increasing them by 4.5%. To that, the league adds the revenue called for in the national TV contracts for the coming season to get the total projected amount.
To arrive at the salary cap for the season ahead, the league then takes 44.74% of that projected amount, subtract projected benefits, and divides by 30 (the number of teams in the league). The luxury tax uses a similar formula, but is based on 53.51% of projected revenues.
Adjustments to the cap are then made if players received too little, or way too much, of their designated share of BRI in the form of salaries and benefits in the prior season.
If players didn’t make enough in salaries and benefits to reach their designated share of BRI, the league cuts the players a check for the “shortfall” at the end of the season. To ensure a shortfall doesn’t occur the following season, the league takes the amount of the shortfall, divides it by 30, and adds the result to the salary cap the following season. That, in turn, artificially increases the salary cap. The higher the salary cap, the more teams will spend, the less likely a shortfall is to occur the following season.
If players made more in salaries and benefits than their designated share of BRI, the league takes back the “overage” at the end of the season. They do this by withholding 10% of the paychecks each player receives throughout the season, and placing the funds into escrow. If there is an overage, they take back the excess money from the escrow account and return the rest back to the players. If the overage is very large, the league will decrease the salary cap in the following season to help put the brakes on spending. If the overage is small, no adjustment is made.
The revised cap calculations therefore became as follows:
The league initially expected to generate $6.68 billion in BRI for this season. With the $30 million decline in revenue, that’s now $6.65 billion.
On that basis, the projected BRI for 2017-18 was correspondingly dropped, to $7.0 billion.
To calculate its 2017-18 cap projection, the league did the following:
- It took that $7.0 billion of projected BRI, multiplied it by 44.74%, subtracted projected player benefits from the total, and divided the result by 30; that’s $94.5 million. The $30 million drop in revenues therefore caused this part of the calculation to drop by about a half million dollars (from $95 million to $94.5 million).
- While the league’s initial revenue projection was $30 million too high, its $3.20 billion projection for player salaries and benefits is proving to be very close to accurate. But if revenues come in $30 million less than previously projected, the players would in turn be entitled to about $15 million less than previously projected, which would drop the projected shortfall from around $210 million to around $195 million. Realizing this, the league took the new $195 million projected shortfall for this season and divided it by 30; that’s $6.5 million. The $30 million drop in revenues therefore caused this part of the calculation to drop by another half million dollars (from $7.0 million to $6.5 million).
To arrive at its projected cap figure for next season, the league then simply added the $94.5 million and the $6.5 million together to get $101 million.
The league utilizing the same calculation, replacing 44.74% with 53.51%, in arriving at its $121 million luxury tax figure.
In arriving at its projected BRI for 2017-18, the league is utilizing a $7.0 billion figure. But that’s a conservative projection. The league is actually expecting BRI for next season to rise higher than that. It was expecting about $7.2 billion. With the $30 million decline in revenue, that’s now around $7.19 billion.
On that basis, a projected BRI for the following season was established: $7.5 billion.
To calculate its 2018-19 cap projection, the league took that $7.5 billion of projected BRI, multiplied it by 44.74% subtracted projected player benefits, and divided the result by 30; that’s $102 million. Since the league isn’t projecting a shortfall for next season, there is no adjustment added to that. The figure stays at $102 million.
The only modest cap growth for 2018-19 is therefore deceptive in nature. That it’s growing at all speaks to the huge revenue growth projected for that season. The upcoming $101 million cap projection for 2017-18 is being propped up by $6.5 million in adjustments that have nothing to do with revenue. Strip them away and you’re talking about a $94.5 million cap. Against that backdrop, a growth to $102 million the following season might seem more substantial. That’s the proper context in which to evaluate it.
The league utilizing the same calculation, replacing 44.74% with 53.51%, in arriving at its $122 million luxury tax figure.
The revised salary cap and luxury tax projections could put further strain on teams in all spending brackets.
Teams like the Cleveland Cavaliers and Portland Trail Blazers, which have spent exorbitant amounts in the past few seasons, could face harsher penalties with the lower tax threshold.
Teams like the Los Angeles Clippers, Toronto Raptors and Utah Jazz, to retain core players which are about to hit free agency, could be required to spend well into the lower tax threshold.
Teams like the Golden State Warriors could conceivably be both positively and negatively impacted by the lower cap and tax levels. The Warriors could be a taxpaying team next season, for just the second time in their history, when Stephen Curry’s contract shifts from the most team-friendly in the NBA to perhaps the most expensive in NBA history. But the $1 million cap reduction also reduces a potential max salary for Kevin Durant to $35.4 million – a $350K decline — which is now just $3.5 million more than the $31.8 million he could earn with Non-Bird rights. If Durant demands the max, it would require the Warriors to utilize cap space and, in turn, likely sacrifice upcoming free agents Andre Iguodala and Shaun Livingston. If Durant accepts a Non-Bird deal, the Warriors could retain their entire core and Durant could hit free agency again as early as next summer.
Teams like the Washington Wizards, which are trying to avoid the tax, could be further challenged. The Wizards are one of three NBA teams which has never paid it. They traded away Andrew Nicholson earlier this season, possibly with an eye toward being able to re-sign Otto Porter even at the max and still avoid paying it. That becomes substantially more difficult now.
Teams like the Miami Heat and Boston Celtics, which are trying to maximize cap space to make a major free agent run, will see their potential cap space shrink. The Celtics are hoping to get the first overall pick in the 2017 draft (with the draft pick obtained by the Brooklyn Nets) and to sign Jazz free agent Gordon Hayward in free agency. The $1 million drop in the cap was particularly painful in that regard, in that it causes them to be unlikely to get all the way there without some degree of outside assistance.
Of course, cap figures won’t be locked in until after the season is over. A strong, and long, playoffs could presumably generate more revenue than expected and increase the figures back up. A weak, and short, playoffs could do the reverse.
Where exactly will the 2017-18 salary cap end up?
How will teams respond to the new levels?
How will impact this revision impact the league’s and each team’s long-term salary cap projections and planning?
Only time will tell.