Potential Financial Implications of the Suspended NBA Season

This post was initially written on March 17, 2020, and then updated three times — once on March 20 (to reflect that players’ April 1 paychecks would be paid in full, per Adrian Wojnarowski), again on April 20 (to reflect the $2 billion-plus in revenue that could be lost if the rest of the season is canceled that was implied by the agreement between the NBA and players association to withhold 25% of player paychecks, per my own personal calculations), and a final time on May 15 (to reflect that $900M of the $2 billion-plus in potential revenue loss would be attributed to lost playoff national TV revenue, per Sam Amick). 

In the midst of a global coronavirus pandemic, the NBA has been thrust into a great deal of uncertainty. The league has suspended the 2019-20 season indefinitely. Nobody truly knows when or if to expect a resumption of the season’s play, or even how any such a resumption would be implemented, which very much depend upon factors well beyond the league’s control.

What is clear is that the league, rightfully, has prioritized the safety of its players and fans by shutting down play, which could have serious financial consequences for the league, its teams and its players.

The league is currently in the midst of assessing what those financial consequences could be.

How Much NBA Revenue Is At Risk As a Result of COVID-19?

Prior to the coronavirus outbreak, the NBA was projecting 2019-20 revenue of about $8.0 billion.

The league is very protective of the confidential nature of its revenue streams, so it’s not easy to determine exactly how much of that could be at risk. I am not aware of anyone outside of the league office itself who has access to them. The last reliable detailed breakdown that I have personally seen is from more than 15 years ago, which is essentially irrelevant. But we do know certain things, so we can make reasonable estimates.

We know that the bulk of NBA revenues come from four primary revenue streams: (i) gate receipts and related revenues, (ii) its national TV rights deals, (iii) local media rights deals, and (iv) merchandising/sponsorship revenues.

Gate Receipts and Related Revenue

No matter what happens from this point forth, the rest of the NBA season is highly unlikely to be played with fans in attendance, and that puts at risk the league’s largest revenue stream – gate receipts, and corresponding luxury box proceeds, parking, concessions, souveniers, etc., which, per the NBA, total to about $3.2 billion (40% of league revenue).

There are 259 games left in the regular season (which is about 21% of the 1,230-game regular season total). If you figure that each one brings in roughly $2.25 million, you could be looking at around $575 million of gate and related revenue losses. And this doesn’t factor in the dwindling crowds from before the suspension of play.(1)

Playoff gate receipts are even more lucractive. Since the first round expanded to a best-of-seven series in 2003, the playoffs have averaged 84 games. If you figure that each one brings in roughly $3.25 million, that’s another $275 million or so more (this, by default, needs to be a rough estimate, because it varies widely by market and by round as well as by number of games played).(1)

So, no matter what happens going forward, the league is likely facing around $850 million in revenue losses from gate and related revenues alone.

National TV Rights Deals

If the rest of the season can’t be resumed, it would put at risk a substantial portion of the league’s second largest revenue stream — its $24 billion national TV rights deals with ESPN/ABC and TNT, which will pay out about $2.4 billion this season (30% of league revenue).

Sam Amick of The Althetic reported that lost national television revenue from the playoffs alone would be approximately $900 million, according to a source who gleaned the figure from one of the many conference calls with commissioner Adam Silver. So, whether or not the entire rest of the season can be saved, there will clearly be a focus on playing out, at the very least, the playoffs.

Local Media Rights Deals

If the NBA can’t resume the rest of the regular season, it would also put at risk a portion of the revenues generated by each of the league’s 30 teams from their local media rights deals — including cable & over-the-air TV, radio, and other broadcast media — which contribute in excess of $1 billion in total.

Potential revenue losses from local media rights deals are tougher to project. Each team negotiates its own contract, with its own terms. Some are very large (the Los Angeles Lakers’ 20-year deal with Time Warner Cable that began in 2012-13 pays out an estimated $170 million this season) while others are relatively small (the Memphis Grizzlies’ deal with the Fox Sports pays out around $20 million this season).

Some may be impacted by the reduced schedule, and some may not be. But many of these regional sports network contracts require their teams to air at least 70 games to achieve their full revenue payouts. NBA teams have thus far played between 63 and 67 regular season game, though not all of those games for each team may have been aired on its regional sports network. In any even, all teams are at least most of the way to those thresholds, so any revenue prorations are likely to be relatively small. But with potential revenue losses this dramatic, every dollar of revenue counts, so the NBA could be motivated to try to squeeze in the last few regular season games necessary to meet the minimum triggers in these deals, if at all possible.

Merchandising/Sponsorship Revenue

No matter what happens from this point forth, a substantial portion of merchandising/sponsorship revenues — including everything from purchases from the NBA store; to team sponsorships and signage (arena names rights deals, jersey patch deals, etc.); to league sponsorships; etc. — which generate in excess of $1 billion in revenue cumuluatively, could be at risk.

Most NBA teams have arena naming rights and other signage deals. Most also have jersey patch deals which, cumulatively, add around $150 million in annual revenue. And the league has all manner of sponsorships, including with American Express, Anheuser-Busch InBev, Anta, Autotrader.com, BBVA Compass, Cisco, Diageo, FanDuel, Foot Locker, Gatorade, Harman, KIA, Kumho Tire, Nike, PepsiCo, Samsung, SAP, Spalding, Sportradar, State Farm, Taco Bell, Tencent, Tissot, Verizon, and 2K Sports, among many others. Many of these sponsorship arrangements may not be impacted, but some could be. The terms of each are unknown, as are projections as to which could be impacted by a cancellation of the season.

Total Potential Revenue Losses

How much of each of these revenue streams would be at risk would depend upon the scenario.

It’s in everyone’s best interest to first and foremost be safe. It’s also in everyone’s best interests to finish the season as well, if that proves to be possible. But the league has surely already sustained substantial revenue losses, and, if the season can’t be finished, those losses are sure to grow exponentially. In fact, it’s not all that difficult to imagine that the NBA will lose in excess of $1 billion even if the rest of the season can be resumed (almost surely without fans in attendance), and in excess of $2 billion if it can’t.

So perhaps overall revenues for the 2019-20 season will shrink from the originally projected $8.0 billion to somewhere between $6.0 billion and $7.0 billion.

How Would Such Revenue Losses Impact the League, Teams and Players?

The most fundamental principle of the CBA remains intact: However much they generate, the NBA and its teams are required to give between 49% and 51% of it to players, in the form of salaries and benefits. Some teams end up giving more than others but, as a whole, they need to give the players the exact amount to which they are entitled, right down to the dollar, every season.

Exactly what percentage of revenue teams must give to players depends upon how much is generated – players would get 49% at or below $5.302 billion, 50% at $5.307 billion, and 51% at or above $6.418 billion.

The integrity of the revenue split is typically maintained via the escrow system. Teams subtract 10% of each player’s annual salary from his first 12 semi-monthly paychecks, and put the money into an escrow account. If players wind up making too much, the league gives the necessary portion of the escrow funds to its member teams, and returns the rest to the players. If players wind up making too little, the entire escrow is return to the players and league cuts them a check for the difference.

Prior to the coronavirus outbreak, the NBA was projecting 2019-20 revenue of about $8.0 billion.

At that level, players would’ve been entitled to exactly 51% of it, or $4.08 billion.

If you add up all of the gross salaries of all players across the league as of right now, you’ll get to about $3.8 billion (of which 10%, or $380 million, has been set aside in escrow). They’re making another $320 million or so in benefits. That’s $4.12 billion total.

So if players are making $4.12 billion but are only entitled to $4.08 billion of it, they would’ve made $40 million too much. So the league would’ve simply taken that extra $40 million from escrow account, and returned the remaining $340 million to the players. Done!

As a result of the pandemic, however, things aren’t so simple. Revenues are falling dramatically, while player salaries and benefits are remaining almost identical. And it’s throwing the system into shock.

If revenue drops to $6.0 billion, players would only be entitled to 50.34% of it, or $3.02 billion. But they’re still making $4.1 billion in salaries and benefits right now.

So if players are making $4.1 billion and are only entitled to $3.02 billion, they’d be making $1.08 billion too much. And there’s only $380 million in the escrow account to bring it back down. The league would still be $700 million short.

Simply put, if revenues are falling and player salaries are staying the same, players will wind up making way too much, and there may not enough money in escrow to take it all back. And something needs to be done to fix it.

Anticipating this issue, the NBA did neogotiate a provision into the CBA – Article VII, Section 12(h), entitled “Revenue Decline” – to address it indirectly. The provision states that if there’s a substantial revenue decline that causes players to receive more than their rightful share, the NBA and the players association will negotiate in good faith to agree upon an adjustment that is reasonably satisfactory to the parties to address the issue.(2)

The integrity of the league’s revenue split is therefore almost assuredly not in doubt. The NBA and players association will join together and, in accrodance with the “Revenue Decline” provision of the CBA, come to some sort of agreement as to how to ensure the integrity of the revenue split.

Nonetheless, potential revenue losses of between $1 billion and $2 billion-plus isn’t easy to absorb, for either players or teams.

Each side would ultimately lose roughly half that money.

Players could see their salaries fall by $500 million (12.5%) if league revenues fall by $1 billion, and by $1 billion (25%) if league-wide revenues fall by $2 billion. Either way, that’s alot to absorb without notice.

Teams would see their portion of revenues fall by roughly the same $500 million (12.5%) to $1 billion (25%). And, unlike players, they still have corresponding costs (other than player salaries) that may not decline. This could create serious working capital and profitability issues.

Some teams may be in better position to absorb the financial strain than others. While the cumulative total many not sound so daunting, each team has very different demographics. Some — such as the New York Knicks, Brookyln Nets, Los Angeles Lakers and Los Angeles Clippers — play in massive markets that generate huge amounts of revenue, and could therefore be in a strong position to absorb a hopefully temporary revenue decline. Others — such as the New Orleans Pelicans, Memphis Grizzlies, Oklahoma City Thunder, and Milwaukee Bucks — play in tiny markets that generate comparitively little revenue, and rely upon revenue sharing from larger teams just to stay profitable, and could therefore face huge difficulties attempting to absorb such a large decline in revenue.

There’s little that can be done about the cumulative losses that teams will face. The simple truth is that the entire nation is struggling. And assisting NBA basketball is assuredly not a first priority for the country. But there are, at the very least, a couple of things the NBA can do to help teams with the cash flow issues they are facing as they try to make it through:

First, Wojnarowski is reporting that the league is seeking to increase its credit line from $650 million to $1.2 billion.

The NBA currently has credit facilities totaling approximately $4.6 billion, a portion of which is the $650 line of credit which presumably either is, or the league projects soon will be, fully drawn. The added $550 million will take its total exposure to $5.2 billion. The increased line will likely be backed in large part by the league’s national TV rights deals, so the debt should be fairly secure (despite the current issues) and the interest rate should be fairly attractive.

In connection with its league-wide facility, the NBA imposes a debt limit on each of its member teams. In June 2018, each team’s available credit line was raised to $325 million, and 20 or so teams were drawing upon it. The increased line suggests that the league is projecting that more teams will draw more of their available credit and needs more funds to support it all.

Second, if games are ultimately missed, the CBA contains a force majeure provision, that includes epidemics, which states that rostered players would each automatically lose 1/92.6 (1.1%) of their salary for each regular season and playoff game missed that was not rescheduled and replayed.(3) That could equate to about $1.2 million per team per game canceled.

Teams have between 15 and 19 regular season games remaining, for an average of 17.3 games, and the assumption for purposes of the calculation is that each team would play another 5.6 playoff games (based on an 84-playoff-game total). So, if the entire rest of the season is canceled, it would mean the average team would lose a total of 17.3 + 5.6 = 22.9 games. Each player whose contract runs through the end of the season could therefore stand to lose up to an average of 22.9/92.6 (24.7%) of his salary. That could add up to big dollars. Using a $1.2 million per team per game estimate, the league’s 30 teams would cumulatively withhold around $650 million if the entire rest of the regular season is canceled, and around $850 million or so if the playoffs are canceled as well.

Of course, the force majeure provision does not supersede the integrity of revenue split. So any reduction in player salaries likely wouldn’t have an impact on the cumulative distribution of revenues. If too much salary is taken from the players, teams will eventually get it back. But it could have several key benefits for teams, including: (i) increasing their near-term cash flow, and (ii) ensuring the integrity of the split is maintained (without corrective measures that would stretch into future seasons).

As standard practice, the vast majority (more than 90%) of NBA players get paid in 24 semi-monthly installments, beginning on Nov. 15 of each year and ending on Nov. 1 of the following year. These players have already been guaranteed 10(4) of their 24 payments thus far, leaving plenty of remaining compensation from which to withhold. But players can also negotiate for 12 or 36 semi-monthly payments. Those that have negotiated for 12 have already been guaranteed 10 of their 12 payments; there’s just 17% remaining, which means that, even if every last penny of their two future paychecks is withheld, it still wouldn’t be enough to cover the full amount of what the team was entitled to withhold if the entire rest of the season (including playoffs) is canceled. And players can also negotiate to have up to 50% of their base salaries paid in advance, which leaves even less remaining money from which to withhold. If such players don’t have enough remaining compensation from which to withhold, either withholding would need to extend into next season or they could be forced to to cut their teams a check. So, if the force majeure provision is activated, things could get a bit dicey for some players.

The NBA has publicly stated that players will receive their April 1st paychecks in full.(4)

The NBA made no such commitment to paying out players’ April 15 paychecks, but that’s not as meaningful as you might think. NBA teams are contractually obligated to pay them. They can’t unilaterally withhold players’ paychecks unless the NBA first invokes force majeure, and it can’t invoke force majeure unless it officially cancel games. The last thing the league wants to do is cancel games. It’s way too early for that, considering the financial ramifications described above. So, for now, the players have the leverage. If they want their full April 15th paycheck, they can simply demand it, and the NBA would be powerless to stop it.

But, at some point, the leverage will shift. If and once it becomes clear that the league will need to cancel some games, the leverage will swing just as strongly in the league’s favor. If the league does cancel games, its member teams can immediately stop paying player salaries until they are reimbursed in full for those games. The players don’t want that. So, at some point, both sides could come to some sort of agreement on a mechanism for withholding player salaries — one that allows the league to withhold a portion of player salaries without needing to officially cancel games, and allows the players to space out their withholding through the middle of November rather than being hit with it all at once.

What could such an agreement look like?

Well… The split of league-wide revenues is pre-determined. League-wide revenues will be what they will be. Both NBA teams and their players will ultimately get their predefined split of whatever the revenue figure ends up being. So a withholding agreement would really be about two primary things: ensuring that the mechanims that guarantee the revenue split are protected, and cash flow timing.

If players continue to get paid in full and games are ultimately canceled, the players will effectively have made way too much. They’d need to return some of their salary back to their NBA teams to maintain the integrity of the split. There are three primary ways for the league to take it back, and each has different timing implications: (a) force majeure (fastest option), (b) an agreement is reached (the timing implications depend upon what is agreed), and/or (c) escrow collections (the slowest option).

Given that, it’s not hard to envision what the NBA will want from any withholding discussions.

The NBA will want the full amount that they will be entitled to via force majeure in any agreement. That’s 1/92.6 for each game missed, which, if the full season is canceled, equates to roughly 25% of players’ full salaries. So, how does that equate to how much withholding will be necessary? Well, the vast majority of players get paid in 24 installments. Of the 24, 10 will have already been made by April 1. The rest is basic math. To reduce players’ overall salaries by 25%, then, (a) if the withholding starts with the April 15 paycheck, 43% of remaining 14 paychecks would need to be withheld, (b) if the withholding starts with the May 1 paycheck, 46% of the remaining 13 paychecks would need to be withheld, (c) if the withholding starts with the May 15 paycheck, an even 50% of the remaining 12 paychecks would need to be withheld. So, in any negotiation over withholding, expect the league to target somewhere between 40% and 50% of players’ paychecks (depending upon when the agreement is reached).

It’s not all that much harder to envision what the players will want from any withholding discussions.

Players will surely want to maximize the time value of their money. Notwithstanding tax implications, getting paid sooner is almost always better than getting paid later. They’re not likely to agree to such a high withholding figure just yet. Why? Two key reasons. First, the NBPA knows teams COULD be entitled by force majeure to have 25% of player salaries returned if the rest of the season is canceled. But that’s a big IF. It’s not by any means certain. So they’d surely prefer a more graduated withholding structure. Second, the players are still incurring withholding for regular escrow. Since escrow is 10% of players’ total salary, and players generally make their escrow contributions from their first 12 paychecks, and most players are paid in 24 installments, then, as basic math confirms, most NBA players are currently losing 20% of their paychecks to escrow. And they’ll continue to lose that 20% until their 12th payment is made on May 1. Players are unlikely to want to incur double withholding, so they will likely defer any agreement on withholding until the May 15 pay cycle. Doing so would have yet another added benefit: It would provide another 45 days — until May 15 — to evaluate how much of the season could be lost. If some of it can be saved, the NBA’s withholding demand would need to fall accordingly.

However it works out, any potential revenue losses will get split between players and teams. How and when the money will flow to ensure the integrity of the split is maintained is yet to be determined.

What Does All of This Mean for the 2020-21 Salary Cap? 

We – collectively as a nation, and the NBA as an association and community – will surely get through this coronavirus situation. The questions are as to when, how much damage will have been done for this season, and how much of the damage will extend into future seasons.

The answers to those questions will surely impact the 2020-21 salary cap. Let’s walk through how the salary cap is calculed, to see why.

There are two components to the cap calculation that determine its ultimate amount, and each will need to be addressed to deal with this unusual situation: (i) the revenue component, and (ii) the salary component.

Revenue Component

The salary cap is set primarily based on projected revenues for the upcoming season.

While a true projection of revenues for the upcoming season should drive the cap calculation, such a projection can be hard to make. The NBA and players association realized this long ago, and therefore drafting the CBA to state that if the sides can’t agree on a projection, they’ll instead utiilize the just-completed season to make such projections – by adding the pre-determined national TV revenue for the upcoming season to a 4.5% increase for all other revenue streams from the just-completed season. In practice, that’s exactly what they almost always do.

The current cap projection for next season — which was lowered from $116 million to $115 million at the end of January — is therefore based on a revenue projection that takes the pre-determined national TV revenue for next season, plus a 4.5% increase to the $5.6 billion in pre-coronavirus other revenue projected for this season.

So if there’s a sharp decline in that $5.6 billion of revenue (i.e., the portion that is not related to national TV rights) when it’s ultimately calculated, it would cause a corresponsingly sharp decline in the 2020-21 salary cap — each $100 million drop in revenue would lower the cap by around $1.5 million.

Salary Component

While the salary cap is set primarily based on projected revenues for the upcoming season, a portion of it, which typically only activates in extreme circumstances, kicks in when players earned either less than or far more than their appropriate share of revenue (before adjustments were made to reduce it back down to exactly amount) in the prior season. In such cases, the salary cap for the following season is lowered (if salaries were too high) or raised (if salaries were to low) accordingly.

The theory should make intuitive sense to you. If players get less than their fair share of revenue in any given season, the league raises the salary cap and luxury tax for the following season to encourage teams to spend more. Alternatively, if players get far more than their fair share of revenue, the league lowers the salary cap and luxury tax for the following season so that teams are forced to put the brakes on their spending.

Given the massive revenue losses that we could be facing this season, the players may not get anywhere near their agreed-to share of revenues. And we don’t yet know whether they’ll get too much or too little — it’s possible that they could end up getting way too much (i.e., if revenues collected by the NBA this season drop by anywhere up to $2.0 billion-plus, and salaries don’t drop at all, players would end up getting way more than their fair share of the reduced revenues), way too little (e.g., if the NBA invokes the force majeure provision and takes back anything up to the full $850 million or so in salary, they will have effectively reduced player salaries by more than their share of the revenue loss, and thus players could end up getting way less than their fair share of the reduced revenues), or somewhere in between.

So if there’s a sharp decline in that $5.6 billion of revenue when it’s ultimately calculated and players continue to be paid as scheduled, it would cause a corresponsingly sharp decline in the 2020-21 salary cap — for the first $400 million drop in revenue, the drop would not be extreme enough to activate this component, and there would be little to no salary cap consequences, but, after $400 million, each additional $100 million drop would lower the projected cap by about $1.7 million.

Combining Both Components

Combining the impact of both the revenue and salary issues described above, the 2020-21 salary cap could be at substantial risk if a there is a severe revenue drop this season (that is unrelated to national TV rights) and player salaries are not withheld —  each $100 million drop by about $1.5 million, and, once you hit $400 million, each additional $100 million drop by $3.2 million.

I’ve suggested above that up to $2.0 billion-plus in revenue could be lost this season. But in such a scenario, $900 million of it would be related ot national TV revenues. So, for simplicity, let’s say that losses unrelated to national TV rights could range anywhere up to $1.2 billion.

A $500 million drop in revenue could potentially lower the 2020-21 salary cap by a bit over $9 million, to $106 million. A $750 million drop could lower it by $17 million, to $98 million. At $1.0 billion, it drops to $90 million. At $1.2 billion, it drops to $84 million. That, at the corresponding drop in the luxury tax threshold, could wind up being a disaster for the NBA, its member teams, and a whole lot of players.

Making matters worse, this might not be just a one-year issue. Instead, it would cause wild fluctuations in the salary cap that span multiple years.

Why? If the salary cap for 2020-21 were to fall sharply, it would create a whipsaw effect for the following season – the lowered salary cap and luxury tax levels could be so constraining to teams that players ultimately wind up making too little in salary next season, which, if revenues return back to normal next season, could end up causing the players to earn far less that their rightful share. That, in turn, could create an opposite salary adjustment that blasts the 2021-22 salary cap artificially higher.

An artificially increasing 2021-22 salary cap would be good for teams like the Miami Heat, who are attempting to make a big splash in 2021 free agency. But not for the league as a whole.

The NBA and players associatoin will surely both want to avoid such a huge, multi-year disruption.

Potential Solutions

Projecting a 2020-21 salary cap level is very premature at this point, given both the potential for a large drop as well as the various mechanisms in place to guard against it.

The scenarios would depend upon whether or not the NBA can reach an agreement with the players association.

If the NBA and Players Association Can Agree

The NBA and the players association — both by the letter of the CBA(5) and by the nature of collective bargaining — have the power to agree to set next season’s salary cap however they feel best (rather than one that incorporates potential 2019-20 revenue losses and/or has a big downward salary-related adjustment, each as described above).

I strongly believe they will ultimately come to such an agreement. Quite simply, it’s in both parties’ best interests. If they can’t agree, the default mechanisms in the CBA would need to apply, at which point the salary cap would plummet. Nobody wants that.

So, ultimately, trying to forecast a potential 2020-21 salary cap is a foolish task. It could well end up being wherever the sides artifiically set it.

Such an agreement is  more likely than not at this point (considering the alternative is an outcome that is universally bad), and could produce a smaller drop than people are currently projecting. Which is why, in my humble opinion, planning around a reduced cap projection from the current $115 million level is prudent, but forecasting dire cap projections is premature at this point.

But pay attention to how much any coronovirus-related problems could impact 2020-21 revenues. Because if the problems caused by the coronavirus prove to be longer-term in nature (e.g., fans never really feel comfortable returning to games), future salary caps will surely need to adjust to that new normal.

If the NBA and Players Association Can’t Agree

Of course, there is no guarantee the NBA and players asssociation will come to such an agreement. So what happens if not?

In such a scenario, we could end up with some weird consequences, depending upon whether or not the rest of the season can be salvaged.

I’ve projected above that the league could be looking at revenue losses of $1.0 billion-plus even if the rest of the season can be played out, and $2.0 billion-plus if not. But, in the latter scenario, $900 million of that $2.0 billion-plus total would be related to national TV rights revenue, and, as described above, such a decline would not impact the cap calculation. So, whether the rest of the season is played or canceled, we could be looking at somewhere beteween $1.0 billion and $1.2 billion in revenue losses unrelated to national TV rights. And that, as described above, would lead to a $25 million to $30 million decline in the salary cap.

So, weird consequence #1: Whether or not the season is canceled, we could have the very same $25 million to $30 million projected drop in the salary cap. This weirdness is due to the cap calculation methodology.

But that’s only part of the story. (This next part could get invalidated by the NBA, but it is what the CBA literally states.)

If games are ultimately canceled, yes, the league could lose up to $2.0 billion-plus in revenue, but force majeure would be invoked, which would cause their percentage of the smaller revenue to drop. That, in turn, could reverse the salary component of the salary cap calculation and cause the 2020-21 cap to rise back up.

The amount of the salary cap offset would depend upon the relative drop in revenue to salaries, but it could range anywhere from nothing at all to $3.3 million per $100 million of salary savings.

So let’s create a couple of examples to see the true impact:

First, let’s assume a $1.0 billion revenue drop, assuming the rest of the season is played out in full. If you apply the formula above — that each $100 million drop in revenue would drop the cap by about $1.5 million, and, once you hit $400 million, by $3.2 million — you’d calculate that the cap would drop by about $25 million, from the current $115 million projection to $90 million.

Second, let’s assume a $2.1 billion revenue drop that caused by the entire rest of the season being canceled. But, of that total, $900 million would be related to the national TV rights deal, so only the remaining $1.2 billion loss would impact the cap calculation. Applying the very same formula, the revenue loss would initially cause the cap to drop by about $30 million, to $85 million. But if the entire season is canceled, including the playoffs, somewhere around $850 million-plus in player salaries would need to be withheld through force majeure.  So… the $1.2 billion drop in revenue would send the cap spiriling downward. But the $850 million in withheld salaries would send it back higher. The net effect? The cap would still fall, but by a far less devastating $10 million, to $105 million.

So, weird consequence #2: Canceling the rest of the season (and losing $2.1 billion of revenue) could potentially cause just a $10 million drop in the salary cap, but saving the rest of the season (and losing $1.0 billion of revenue) could potentially cause a $25 million drop in the salary cap. This weirdness is due to the force majeure provision, which has never before been utilized.

So, what does this all mean for 2020-21 and beyond?

The salary cap will likely fall from the current $115 million projection. But it’s far too early to project how much. The hope is that, whatever happens, revenue losses can be minimized, and limited only to the 2020-21 season.

As with all things, it’s just a wait-and-see situation. There’s really no other choice.

Notes:

(1) I know most people are working with more conservative projections of $1.2 million and $2.0 million in lost ticket revenue for each regular season and playoff game, respectively. But I tend to believe it’s more than that, particularly when including corresponding revenues from luxury boxes, parking, concessions, souveniers, etc.  

(2) Article VII, Section 12(h) doesn’t explicitly state that whatever mechanism is agreed to must reduce the players’ share of revenue down to 51%. I am sure that’s precisely what the NBA will pursue. The players association may not agree to give the entire thing back. Which is even more of a reason for teams to withhold salary.  

(3) The force majeure provision also potentially allows the NBA to terminate the CBA entirely. While I personally don’t think it will be terminated, as ESPN’s Brian Windhorst described before me, I think that we’d be wise to consider the fact that, since the NBA and the players association would need to come to agreement just to restart the season, either side could certainly condition agreement with respect to transition rules on a renegotiation of other provisions of the CBA. Do I personally think that’s likely? While it’s an intriguing and certainly very plausible idea, perhaps I’m not quite as far down the path of renegotiating unrelated provisions as is Brian at this point. But who the heck am I? Brian has actual sources. I have cereal.   

(4) This post was slightly updated on March 20, 2020 to reflect the NBA’s announcement that players’ April 1 paychecks will be paid in full. 

(5) The CBA provisions that would enable the NBA and the players association to adjust the salary cap calcluation to reflect a more accurate projection of 2020-21 revenues are as follows: (i) for the revenue component, Art VII, Sec 1(c), and (ii) for the salary component, Article VII, Section 12(h).

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    […] highly recommended to read this article by Albert Nahmad. Few are better at understanding and explaining the business side of the NBA than […]

  3. April 7, 2020

    […] repeater tax, especially since, with no end to the coronavirus-related shutdown in sight, the accompanying lost revenue will likely lower the NBA salary cap. The Celtics simply have too much money already locked up on […]

  4. April 7, 2020

    […] dueños,  directivos y hasta políticos, no detiene su curso. La NBA, como el resto de las ligas, se ve comprometida a nivel económico, y esto puede traer repercusiones importantes en el medio y largo plazo para los Celtics y el resto […]

  5. May 1, 2020

    […] into focus, the NBA’s not going to make any final decisions—and certainly not any that could cost the league and its teams north of $1 billion in lost revenues from its national and regional broadcast contracts, gate receipts, merchandising contracts, and […]

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