How the NBA’s New TV Deal Could Blow Up the Salary Cap
This is a huge moment for the NBA and Adam Silver — perhaps an even bigger test than the Donald Sterling fiasco, though certainly not as viscerally interesting.
It’s a massive victory, of course. The NBA’s current national TV deal, signed at a relative low point in basketball’s popularity, pays the league about $930 million per season. The league has soared since then. Everyone knew the next deal, which picks up in 2016-17, would trump that figure in a landslide. Two years ago, smart teams began projecting a rising salary cap, and industry experts wondered if the new TV deal might crack $2 billion per year on average.
Ha, ha. The New York Times was the first to report last night that Disney (ESPN/ABC)1 and Turner (TNT/TBS) will pay the NBA nearly $2.7 billion per year, on average, over nine years to retain exclusive broadcasting national broadcast rights. Holy f---ing crap. The sheer size of the number sent shockwaves through the league late on what had been a peaceful Sunday. Executives wondered what the TV cash bonanza might mean for the salary cap, for contract extension talks under way now, for the prospects of a lockout in 2017. The mood was a mix of excitement and, most of all, uncertainty. Planners don’t like uncertainty.
The importance of the league’s cap situation cannot be overstated. It has been the single biggest topic of conversation among team executives for the last year. The salary cap rises and falls hand in hand with league revenues, and this TV contract will be the largest injection of revenues in NBA history. It is a goddamned jolt.
The cap over the last 10 years jumped from $49.5 million to $63.2 million, a 28 percent increase. It stayed flat at around $58 million for a half decade before finally leaping about $5 million this season due to an uptick in revenue. This has been a period of cap tranquillity; an $8 million contract signed in 2007 was worth about the same, proportionally, as an $8 million contract signed in 2012.
The league right now projects a jump to $66.5 million for 2015-16, a modest rise pegged to the final year of that modest $930 million TV deal. If the new TV deal kicks in for the 2016-17 season just shy of $2 billion, the cap could exceed that same $14 million leap, all the way to around $80-plus million, in a single year. If for some reason the new TV deal starts north of $2 billion in the first year — meaning it would include smaller year-over-year jumps — the cap for 2016-17 could leap even higher. If it started at that exact $2.68 billion figure, it would break $90 million, according to my own math and some bleary-eyed late-Sunday projections from cap gurus around the league.
The plans as of now are to start at $2.1 billion in 2016-17, the first year of the deal, and escalate in even year-over-year increments to a peak of $3.1 billion in the final year, per sources who have reviewed a memo the league sent to teams today.
No one knows exactly how the league plans to infuse the money, and the solution could create fissures among the NBA’s 30 teams. Already, teams have started lobbying for scenarios that most benefit them. The league and players union would both seem to have some interest in avoiding any giant one-year leap in the cap number, a mega-jump that would most likely occur ahead of the 2016-17 season — just in time for free agency in July 2016, headlined by Kevin Durant.
You thought LeBron’s free agency in 2010 was an extravaganza? Durant hitting free agency under an $80 million–plus cap would be the craziest summer show in league history, unless he proactively snuffs the madness by taking meetings with only one or two suitors outside of Oklahoma City.
The Nets, even with Deron Williams’s atrocious contract still on the books, could suddenly find themselves with two maximum cap slots — enough for Durant and a costar. The Knicks, with Carmelo Anthony locked into what today looks like a better deal, might be able to add two more max or near-max players over the next three summers.
The Lakers, with Kobe Bryant’s disastrous extension wiped away that summer, could sniff three max cap slots. The Lakers’ cap flexibility yielded nothing of note last summer, but a Lakers team with the ability to offer a package deal to multiple stars is the ultimate NBA bogeyman.
Other suitors that have never really been considered in the Durant game could at least play it, something that should scare the Thunder and the Wizards, who right now have the best shot at snaring Durant away. Durant may not have any interest now in the Bay Area, but if the Warriors came calling with Stephen Curry, Klay Thompson, Andrew Bogut, Andre Iguodala, and $25 million in cap space, he’d be a fool not to at least pick up the phone.
Teams that have planned carefully for cap flexibility will be unhappy when other teams simply luck into it. The players union has to look out for its entire membership, and a single-year mega-leap would benefit one slice of that membership at the expense of everyone else. Anthony Davis is a lock for a max contract once his rookie deal is up, and that new contract coincidentally kicks in for the 2016-17 season. Would the union want Davis making nearly $25 million per year on his max deal2 while Kyrie Irving’s max nets $16.5 million, simply because Davis entered the league one year later? How do you think the Pelicans might feel about that?
High-profile stars have planned for this with short-term deals that set them up to enter free agency whenever it most benefits them. LeBron James, working on a one-year deal with the Cavaliers,3 is the most famous example, but Dwyane Wade also went the short-term route with Miami, and any star player set for free agency this summer should at least consider signing a one-year deal and jumping back in for the July 2016 madness. Players just below the All-NBA-level — guys like Ryan Anderson, Amir Johnson, and Mike Conley — who might otherwise consider contract extensions should probably opt against them and enter free agency.
Players trade security for some risk going that route. That’s why a number of guys signed long-term contract extensions this month even knowing the cap will rise dramatically in the next few years. The Suns absolutely had the TV deal in mind when they beat the field in inking the Morris twins and Eric Bledsoe to long-term deals over the last two weeks. Those contracts look big, especially Bledsoe’s five-year, $70 million deal, but they’ll look very different in two or three years. Longer is better in this case, provided good health. This may also apply to Kenneth Faried’s extension with Denver, though details on that are still rolling in.
The October 31 deadline for extensions is approaching, and today’s announcement will infect contract talks for Kawhi Leonard, Kemba Walker, Klay Thompson, Jimmy Butler, Nikola Vucevic, Tobias Harris, Brandon Knight, and other high-profile fourth-year guys eligible for extensions now. Both sides just got a bit more data, but they did not get much more certainty. They won’t get any until we know how the TV money and the cap will interact.
Some thoughts on that and other issues:
• “Smoothing” is a popular word now around the league. There is no way to avoid some shock to the cap figure at some point, but there are ways to ease the trauma. The league and its TV partners, the same partners as under the old deal, could agree to make 2015-16 sort of a hybrid year, at some price point between the old $930 million and the new $2 billion–plus. That would raise revenues more than anticipated for 2015-16, and thus raise the cap beyond the current $66.5 million projection.
Any post-2016 jump would thus be a bit less dramatic, since the jump would already be in motion. Several teams have been operating for months under the assumption the cap would reach at least $70 million for 2015-16, and any bigger-than-expected jump for that season could help teams on the borderline of having max cap room this July. Again: Everyone has a selfish interest here.
The league may not need the union for that particular smoothing mechanism, since it would be a deal between the networks and the league. For now, it seems like any smoothing mechanism would have a minimal impact, if any, on the 2015-16 cap; it may well stick around the current $66.5 million projection. But there will be a shock at some point, regardless of how the league and networks parcel out the cash over time.
• Other smoothing mechanisms would need to involve the union, and the league is open to that. Some team executives have floated the idea of retroactively bumping up existing contracts that carry into the new TV deal, to make sure those players get their share. That would draw opposition from teams who signed those contracts specifically with an eye on how their value would evolve.
The league could somehow tinker with revenue split so that players receive more than their guaranteed 51 percent share in particular seasons — presumably including 2015-16. They could mess with escrow funds that would set aside the players’ share of revenue from the cap itself, so that players would get paid in full without a corresponding leap in the team-by-team cap.4
They could do lots of other things we can’t possibly fathom. What did Kevin Garnett scream again? ANY MECHANISM IS FEASIBLE IF YOU GET ENOUGH LAWYERS AND ACCOUNTANTS IN A ROOM!!!!!
But any tinkering with the revenue formula, or even the definition of revenue, requires collective bargaining with the union. That process has not really begun, per several sources. The union’s new executive director, Michele Roberts, has just started in the job. The league hopes to have a smoothing solution and updated 2015-16 cap projection in place after the Board of Governors meets late this month, per today’s memo circulated to teams. That seems ambitious.
• News of the TV deal on Sunday spawned lots of dread talk about a lockout or strike in 2017, when either side can opt out of the current collective bargaining deal. I’m clearly in the minority, but I’m optimistic the league can avoid a work stoppage. This will be Silver’s major test, and he has already started some quiet lobbying with owners against a preemptive lockout in 2017.
The league smushed the union in the 2011 lockout, trimming the players’ share of revenue from 57 percent down to 51 percent. The league just contorted itself through the Sterling situation, this new TV deal is a boon, and team valuations are rising by the day. Silver should and probably will try to convince the 30 owners to surf the rising tide without risking a lockout that could engender ill will.
Only nine teams lost money on basketball-related activities last season, per league documents reviewed exclusively by Grantland, and eight of those teams lost $13 million or less. Silver said Monday the league will review its revenue-sharing system, and those losses don’t factor in rising team valuations and other revenue streams.
The greediest among the owners don’t really care about short-term ill will5 that seems to pass the moment games start again, and these folks didn’t get rich by passing up opportunities to wring out a few extra drips of revenue. There’s a reason every significant sports work stoppage since the mid-1990s has been a league/owner-initiated lockout and not a player strike.
There were rumblings during the last lockout that David Stern didn’t have quite the same grip over this new cadre of owners that he had with the old guard. Those new owners have a deep, deep respect and affection for Silver, but if the commissioner really wants to avoid a lockout, his lobbying skills will be key.
The resolution of the cap issue could also create divisions among teams that will be hard to mend by 2017.
The players could strike, and they are justifiably furious about swallowing a reduced share of revenue at the precise moment the league prances into a TV gold mine and a $2 billion sale of the Clippers. But the players don’t have a great history of united movement. The union struggles to gather players for meetings and even to find working cell phone numbers for huge batches of them.
A fight by the players to nudge their share of revenue back up a couple of percentage points would be a just one, but owners might fight that to the death, and history suggests the owners would win. Ditto for the concept of players somehow sharing in the proceeds of future franchise sales, an idea the union pitched in the 2011 negotiations, per sources familiar with the process. Owners shot it down immediately as a nonstarter — an issue they would trade a prolonged lockout to win.
Remember: The players get 51 percent of a growing pie. They’re netting more money here, too. The league has a chance right now to include the players in the formulation of the cap going forward. They can sow good will. Sow enough, and the two sides could decide in 2017 to ride it out.
Then again, the league still prefers the idea of a hard salary cap. And one or both sides might entertain the notion of scrapping the individual-player max salary. Both issues could send us down the rabbit hole of late-night negotiations, disgusting pizza, infinite sadness, and my planned daily Jeopardy!-themed lockout blog.
Lots of very smart people around the league think I’m a cockeyed optimist on the level of Billy Mumphrey, and perhaps time will prove them right. Cynicism usually wins when money is involved.
• Along those lines: I wonder if the league and union would be open to renegotiating rookie-scale contracts for first-round picks. Those salaries are set through the 2020-21 season, and they do not rise as much as the cap should. We’re talking about a class of players not yet in the union, so it’s possible the two sides don’t feel any urgency to redo anything.
If the rookie scale remains the same, the draft becomes incrementally more valuable — and more painful for teams who blow picks.
• How free agency unfolds over the next three years might influence whether Silver can keep the 30 owners united ahead of a potential lockout. There is real fear across the league that a huge jump in the cap over one or two summers could open a window to create a super-team. The Cavaliers, with three max players, could open up actual cap space, though as I wrote here, doing so depends on a half-dozen key variables. I’ve already mentioned the spook factor of the Nets, Lakers, and Knicks.
If the cap-smoothing breaks right, the Rockets could open max-level room this summer without jettisoning too many players — accelerating their chase for a third star to join Dwight Howard and James Harden.
A star-laden team that can’t quite open up cap room might have enough flexibility under the tax to work a mammoth sign-and-trade; that scenario might apply more readily to the Cavs. The tax is so far in the stratosphere, you can barely see it.
Teams in the building phase, set for some long-planned cap room, are worried about losing quality players to teams already stocked with stars. Even the Thunder, a tiny-market team with its transcendent player set for free agency at exactly the wrong time, could have honest-to-god cap space during Durant’s free-agency summer — enough flexibility to add the game-changing fourth cog they couldn’t lure last summer.
These fears could end up as sky-is-falling paranoia. We’ll see. The future of the NBA is impossible to predict with any certainty right now. Buckle up.