Monthly Archives: April 2014

Some thoughts on the Sterling situation

I spend a fair amount of time around the Clippers. I’m friends with their president Andy Roeser, I know their GM Gary Sacks, I work with their excellent PR staff, I’ve talked to Doc and many of the players. I eat dinner with some of their game operations people when I’m there, and I even watched the last NBA draft at their practice facility. I attend a fair number of their games (not as many as I’d like, due to my personal schedule) — about the same number as Laker games.

I’ve also been around Donald Sterling, although I don’t know him personally. He was frequently in the Staples Center media room. In fact, I think you can tell a lot about the difference between the two LA franchises by observing the goings-on in the media room. For the Lakers, many of the front office and PR people are in there, but I rarely if ever have seen someone with the Buss surname. The Clippers are a different story — many of us in the media have nicknamed the media room “Club Sterling” on Clippers game nights.

It’s a whole different vibe in there when Donald Sterling is around, and I don’t mean that in a good way. Fortunately, it looks like that era has drawn to a close. I only hope that all of the good people I know in the Clippers organization can resume focusing on business without having to worry about Donald Sterling’s residual stink.

I was thrilled to see Adam Silver unload on Sterling with both barrels. The lifetime ban and $2.5 million fine were the harshest penalties over which he had discretion, and I’m sure the Board of Governors will support Silver’s recommendation to force Sterling to sell the team. I’m sure there will be a couple dissenters — Mark Cuban already commented that it was a slippery slope, but I’ll remind Mark that “slippery slope” is the name of a logical fallacy. This is an extraordinary circumstance, and I don’t think we’re opening the door to future owners being outed for arbitrary reasons. In the end, I think the Board will vote to force Sterling to sell.

But I don’t expect Sterling to go away quietly. He can drag his feet. He can sue the league to stop the proceedings — he can probably drag this on for a long time. And the longer this drags on, the longer this stink continues to hang over the team and the league. For that reason, I think the league will try to throw money at the problem — to try to find a price at which Sterling would be willing to sell and walk away.

What will that price be? The most recent Forbes valuation listed the Clippers at $575 million, but that valuation, while only a few months old, now seems hopelessly out of date. The Milwaukee Bucks — the lowest-valued team in the league — are selling for $550 million (although the price is being artificially inflated by including some of the arena costs in the purchase price) so the bar is now set even higher. The league will also want to avoid any potential claim on Sterling’s part that he is being forced to sell the team at below its value.

What will Sterling demand in return for selling the team without a fight? It’ll be at least a billion dollars. I only hope that someone like the Guggenheim Partners (which own the Dodgers and include Magic Johnson) is willing to step up with an offer Sterling will accept. Let that stick in your craw — after all this, it’s Sterling who will walk away with an enormous financial windfall.

I have one complaint with what Silver said at the news conference. When asked to compare the current situation with earlier ones involving Sterling, Silver pointed out that Sterling prevailed in the Elgin Baylor suit, and that the federal issue was settled without an admission of guilt. Therefore, the league had nothing to go on (I’m paraphrasing here).

That’s a little bit misleading. The league doesn’t have a guilty verdict in the current situation either. Instead, they conducted their own fact-finding investigation this week. Why didn’t they do that previously? The stories about Sterling go back decades. He was no different last month, last year, or 30 years ago. They knew who he was back then. Yet players and coaches signed with the team, companies sponsored the team, the media covered the team, fans bought tickets for the team, and the league continued to endorse the team. Continued to endorse Sterling. And everyone who knew what kind of person Sterling is now has some of his stink on them, because everyone continued to look the other way.

Hopefully there won’t be a next time for situations like this. That said, if it ever does happen again, then hopefully the league has learned its lesson, and won’t let a situation like this continue to fester.

New cap, tax and lockout projections

The NBA issued new projections for the 2014-15 and 2015-16 salary cap and luxury tax thresholds. The 2014-15 salary cap is now projected to be $63.2 million and the tax level is projected to be $77.0 million. The numbers for 2015-16 are now projected to be $66.5 million and $81.0 million, respectively.

Note that these are only updated projections. The official numbers won’t come out until July, when the league conducts its audit. The cap and tax thresholds are based on revenues for the current season. When they count all the beans in July (that’s what the July Moratorium is for) they also project the revenues for the upcoming year. They then take 44.74% of that projected amount, subtract projected benefits (a little over $200 million) and divide by 30 (the number of teams in the league) to get the cap. The luxury tax uses a similar formula, but is based on 53.51% of projected revenues.

Both the cap and tax values can be adjusted from the above amounts. See Question 13 of my FAQ for full details on how the salary cap is set, and Question 21 for the luxury tax.

The salary cap and luxury tax values for the current season are $58.679 million and $71.748 million, respectively, which means the new cap projection for next season represents a 7.7% increase over this season. This is a pretty big jump — the league’s baseline assumption for year-to-year increases is 4.5%. It would indicate a projected BRI (Basketball Related Income, i.e., revenues) of about $4.75 billion for next season.

Remember that the players are guaranteed a percentage of the money that comes in. The guarantee is 50% of forecasted revenues (the forecasts were made in 2011), plus or minus 60.5% of the amount by which the actual revenues exceed (or fall short of) their original forecast, with hard limits of 49% and 51% of the actual revenues.

The original revenue forecast for 2014-15 was $4.66 billion, so with an actual revenue of $4.75 billion, the players would get 60.5% of the difference, or $54.45 million, on top of their 50% guarantee ($2,33 billion), for a total of about $2.384 billion. The hard limits (49% and 51% of actual revenues) would be $2.327 billion and $2.422 billion, so we’re fine — the players collectively would be guaranteed about $2.384 billion, which is about $79.4 million per team in salaries and benefits, or about $72 million per team in salaries alone.

Also noteworthy is that the projections themselves have increased over the course of this season. Last July the cap projection for 2014-15 was $62.5 million, which itself would have represented a 6.5% increase over this season. At the All-Star break the league revised its projection to $62.9 million, which would have represented a 7.19% increase over this season. And now they’re projecting a 7.7% increase, which indicates that not only is the league making a lot of money, it’s coming in even faster than they anticipated.

What’s the source of all this new money? I don’t have a firm answer on that one yet, but new local TV deals have kicked-in in several markets, and the Nets’ move to Brooklyn and the Barclays Center also have a lot to do with it.

What does all this have to do with another lockout? The current CBA extends through the 2020-21 season, but both sides have an opt-out in 2016-17 — which means either side can unilaterally decide at that time to end the agreement and re-open negotiations for a new one. The timing of the opt-out is not an accident — it’s set for right after the new national TV deals will be negotiated.

Let’s go back to the previous negotiation — the league opted-out of the last agreement because they felt the system was unsustainable. They said that most teams were losing money, and they couldn’t let things continue as they were. They sought a big give-back from the players, a more restrictive system, harsher penalties for high-spending teams (further keeping salaries down), and much greater revenue sharing. This led to a lockout and canceled games. In the end, the owners received most of the concessions they sought, because, frankly, the owners always win in situations like these. The owners were willing (or at least bluffing that they were willing) to cancel the season entirely rather than play another year under the existing system, and the players couldn’t afford for that to happen.

So what’s going to happen in 2017? The circumstances are entirely different now. Most or all teams are now profitable, thanks to the changes they negotiated in the new agreement, Franchise values have skyrocketed (the Milwaukee Bucks, the least valuable team in the league, is about to sell for around $550 million, which Mark Cuban calls “a bargain”). And on top of that, the league is about to receive a windfall of new cash in the next TV deal.

So it’s no longer a matter of ceasing operations because they can’t afford to play another season under the existing system — now it’s a matter of figuring out how to split the pie equitably so they can all keep the money rolling in.

My prediction is that the players will opt-out of the agreement in 2017 because they will feel they gave back in 2011, the system is now fixed, there’s a lot of new money rolling in, the teams are now making money hand over fist, and they will want to regain some of their previous concessions as well as receive their fair share of the new money. Further, the league will be more obliged to give it to them.

So I expect the players to opt-out in 2017, and for the league to impose a lockout on July 1, 2017 (because they can’t do business without an agreement in place), However, negotiations will be quick and smooth (similar to 2005), and there will be a new CBA in place in time for the 2017-18 season to begin on time.