The Golden State Warriors and the Cleveland Cavaliers will be fixated on winning a championship as the 2016 NBA Finals get underway Thursday night at the Oracle Arena (ORCL) in Oakland, California. But players on both teams are also in for a sizable check, thanks to the NBA’s performance-based playoff bonus pool.
The NBA will award a total of $15 million to the league’s top teams this year, officials told FOXBusiness.com. This year’s Playoff pool is the largest in league history, surpassing last year’s tally of $14 million.
The winning team in this year’s NBA Finals will earn $2,656,422, to be split amongst its players, coaches and staff members. The losing team gets a consolation prize of $1,760,210 – probably not enough to cure the sting of falling short, but a solid payday nonetheless.
Even if they lose to the Cavaliers, the Warriors have already secured a sizable chunk of the league’s playoff bonus money. Golden State has already locked up more than $1.7 million, thanks to its league-best 73-9 record ($432,632), conference-best record, and appearances in all three preliminary rounds of the NBA playoffs. A win against Cleveland wouldn’t just give Stephen Curry and his teammates their second consecutive NBA championship – it would push the team’s total postseason earnings above $4 million.
LeBron James and the Cavaliers are in a similar position. They’ve already secured about $1.3 million on bonuses, thanks to their playoff exploits and Eastern Conference-best record of 57-25.
A full breakdown of the 2016 NBA Playoff pool can be found below, courtesy of the NBA.
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Best Regular-Season Record: $432,632
Best Record in Conference: $757,106 ($378,553 each)
Second-Best Record in Conference: $608,526 ($304,263 each)
Third-Best Record in Conference: $454,264 ($227,132 each)
Fourth-Best Record in Conference: $357,002 ($178,501 each)
Fifth-Best Record in Conference: $297,476 ($148,738 each)
Sixth-Best Record in Conference: $202,894 ($101,447 each)
Teams Playing in First Round: $3,581,824 ($223,864 each)
Teams Playing in Conference Semifinals: $2,130,952 ($266,369 each)
Teams Playing in Conference Finals: $1,760,692 ($440,173 each)
Losing Team, NBA Finals: $1,760,210
Winning Team, NBA Finals: $2,656,422
Tickets – Tickets range anywhere from $27 to $130 so lets say $50 each which is where most teams are averaging. Most NBA teams about 18,000 sales per game = $900,000. 82 games a season and you get $73,800,000 in ticket sales alone. This leaves about 9 million in profit
Now factor in Concessions, TV Revenue, Advertising, and merchandise and you get a pretty decent profit.
That is not to say that teams do not have plenty of expenses either but most teams are doing pretty well.
Here is the list of team profits from Forbes
- NY Knicks – $96 million
- LA Lakers – $66 million
- Houston Rockets – $64 million
- Chicago Bulls – $52 million
- Golden State Warriors – $43 million
- San Antonio Spurs – $40 million
- Dallas Mavericks – $38 million
- OKC Thunder – $33 million
- Portland Trailblazers – $30 million
- Miami Heat – $29 million
- Toronto Raptors – $29 million
- Pheonix Suns – $28 million
- Utah Jazz – 18 million
- LA Clippers – $15 million
- Sacramento Kings – $13 million
- Orlando Magic – $12 million
- Indiana Pacers – $12 million
- Milwaukee Bucks – $12 million
- New Orleans Pelicans – $11 million
- Memphis Grizzlies – $11 million
- Cleveland Cavaliers – $11 million
- Detroit Pistons – $10 million
- Denver Nuggets – $8 million
- Charlotte Bobcats – $7 million
- Washington Wizards – $7 million
- Minnesota Timberwolves – -$3 million
- Atlanta Hawks – -$4 million
- Philadelphia 76ers – -$4 million
- Brooklyn Nets – -$19 million
Now that means 4 teams actually lost money last year. You can ignore the Nets as an anomaly since they are actually the 5th highest revenue in the league and were in the process of paying for a brand new stadium and the move to Brooklyn which has lead to a huge boost in ticket sales.
The other teams on the negative end have all seen a steady decline in attendance over the last 5 years and if they continue on this path the league will likely have to step in.
NBA franchise values have recently gone in an upward direction as evidenced by the Sacramento Kings’ $534 million sale in January 2013. That’s quite a figure for the 27th ranked metropolitan statistical area (“MSA”) in the country. This transaction is especially fascinating in light of the Philadelphia 76ers (5th largest MSA) selling for only $280 million just 18 months earlier. What fuels such a vast difference? We explore three issues that contribute considerably to these variances – media rights, arena lease structure, and the NBA’s collective bargaining agreement (“CBA”). Some of these factors are more within an owner’s control than others, but all of them contribute to situational changes that valuations hinge upon. We’ll also explore the tale of two transactions: the 76ers and Kings, to see why and how these factors influence the purchase price.
Media Rights: The Quest for Live Content
It is important to note the majority of NBA team revenues come from local sources, (i.e. game day revenues and local media contracts). The most dynamic (and thus value changing) of these sources in the past few years has been local media rights. National media revenues in NBA are significant but are a much lower percentage of total revenues than the biggest league in North America, the NFL. According to Forbes, the 30 NBA teams collectively generated $628 million from local media last season (about $21 million average per team). In addition, national revenues from ESPN, ABC & TNT total $930 million per year and these deals expire in 2015-2016. It’s a relatively balanced mix compared to the other major leagues. NHL & MLB’s media revenues are more locally focused, while the NFL is nationally dominated.
Basketball’s popularity has grown in recent years. This, coupled with intense media competition for quality live content, has fueled increased media contracts in many markets at unprecedented levels (300% to 500%) over prior contracts.
Live sports programming has a relatively fixed supply and is experiencing increased demand from networks looking for content those viewers will watch live. This commands higher advertising dollars compared to content that is consumed over DVRs and online forms (Netflix, Hulu Plus, Amazon Prime, etc.). Content providers also covet the low production costs and favorable demographics of younger fans. These factors, among other variables, have helped fuel the rapid price increases for sports media rights.
Recently, new media rights contracts across all sports programming have soared to record high annual payout levels. The NHL signed two new TV deals in April 2011 which more than doubled the league’s previous annual payouts with an upfront payment of $142 million. Even the media rights for Wimbledon have seen an increase in the amount of suitors. The NBA’s current national deal expires in a couple of years (2016). Many people expect that the next deal’s value will at least double the current agreement. [Side note: In negotiations that date back to the 70’s ABA/NBA merger, two brothers – Ozzie and Daniel Silna, received a direct portion of the NBA’s national TV revenues – in perpetuity. That’s right…perpetuity. In January 2014 they agreed to a $500 million upfront payment from the NBA and a pathway to eventually buy them out completely. The old transaction has withstood litigation and it has been termed as ‘the greatest sports business deal of all time’]
At the local level, in 2011 the Los Angeles Lakers signed the richest television deal in the NBA which dwarfs other teams. The contract reportedly averages $200 million per year for 20 years. The upper tier NBA franchises historically have received $25 to $35 million annually. Some big market teams have expiring contracts in the next few years, such as the Mavericks. While bidding has not yet begun, it’s reasonable to expect Mr. Cuban and his Mavericks to anticipate a healthy bump in rights fees in the future assuming good counsel and creative structuring.
How did these factors translate to the Kings and 76ers? Even with substantial MSA differences, they were at opposite ends of the media spectrum. The Kings’ deal with CSN California expires after this season, which put ownership in strong position to negotiate a new deal at the time of the transaction. The 76ers signed a 20 year contract in 2009 with Comcast Sports Net, which was reported by Forbes to be “undervalued” from the 76ers perspective, reportedly paying the team less than $12 million the season prior to purchase. That’s quite a difference and it almost surely played a pertinent role the Kings’ and 76ers’ valuations.
Arena Lease and Structure: Slicing Up the Game Day Pie
In the NBA, game day and arena revenue typically make up the lion’s share of a franchise’s income. These revenue streams filter up from a multitude of sources. Aside from regular ticket sales there are club seats, suites, naming rights, parking, concessions, merchandise, and sponsorship revenue. In addition there are non-game revenues such as concerts, events and meetings. On the expense side there’s rent (fixed or variable), revenue sharing (or a hybrid arrangement), capital expenditures, maintenance, overhead allocation and more. All of these aspects are negotiable among the business, municipal, and legal teams involved.
Arena deal structures vary across the board. For example, the Detroit Pistons own The Palace at Auburn Hills while the Golden State Warriors are tenants at Oracle Arena (probably until 2017/2018 anyway). Most arena structures involve some form of public/private partnership. One common theme is public ownership, usually financed via local bonds, with the sports franchise as a tenant paying rent of some form. The chief aspect to consider for legal teams is how to structure agreements for the various revenue streams, expense and capital items.
Historically, some of the most negotiated aspects to the arena lease are how proceeds from certain items as defined by the CBA are allocated. For example, while players as a group receive a flat percentage of basketball related income (“BRI”), they receive reduced percentages of others, such as luxury suites and arena naming rights. This nuance represents an opportunity for team ownership to retain a larger portion of these revenues and legal teams to employ shrewd negotiating tactics. In addition, as the arenas age and significant maintenance costs are required, cost sharing between the public/private partnerships can become an issue. Lease structure also can make outright ownership of a stadium appear less attractive without a partner to share or bear costs.
Again as we examine the Kings and 76ers a contrasting picture emerges. Prior Kings’ ownership (the Maloofs) and the city could not reach an agreement on a new stadium lease after nearly a decade of negotiations. Initially there was a buying group that planned to move the team to Seattle, but then, new local ownership purchased the team (with substantial input from the NBA). This agreement included an agreement for a new $447 million stadium (the majority funded publicly) and a guarantee to keep the team in Sacramento. This new deal was reported to be more favorable to ownership and gives the franchise an opportunity to attract more fans and create refreshed revenue channels. The 76ers on the other hand had already been locked into a long term lease at less favorable terms that were more geared towards revenue sharing with Comcast. Again, the Kings’ new opportunity appears more attractive than the 76ers existing arrangement.
Collective Bargaining Agreement: Leveling the Playing Field
On December 8, 2011, after a 161 day lockout, the NBA and its player union reached a new collective bargaining agreement. This agreement brought about meaningful changes to the salary structures, luxury tax, BRI, and free agency (among other things). Although the CBA is not under direct control of a franchise owner, its impact on competiveness, team operational strategy and expense management is significant.
The changes were important for owners, who had reportedly lost over $300 million annually as a group in the three prior years to the negotiations. From a valuation perspective three items deserve focus: (i) length, (ii) BRI, and (iii) luxury tax provisions. Prior to the agreement, there was a great deal of uncertainty as to how negotiations would play out. Uncertainty infers risk and where there’s more risk, values usually fall. The 10 year agreement (with a 2017 opt-out) brings stability to both players and owners as to what operating structure they can plan for the near to intermediate term future. In addition, BRI revenue splits to the players were lowered from 57% of BRI to around 50% for most of the contract. This split brings cash flow relief (but not competitive relief) to owners across the league. Lastly, the luxury tax structure became much more punitive for big-spending owners, like Cuban. In fact, it economically functions similarly to a hard salary cap that the NFL and NHL employ. In light of this change, NBA franchises have committed an enormous amount of time and resources to understand and execute an appropriate competitive strategy. The luxury tax provisions even the competitive playing field for smaller market teams such as Sacramento and the Memphis Grizzlies (who sold for a reported $377 million in October 2012) and constrains the spending of larger market teams such as the Mavericks, Lakers or Knicks.
How did this facet play out with the Kings and 76ers? All one needs to know is that the 76ers were sold before the new CBA was agreed (Summer 2011) to and the Kings were sold after the CBA was in effect (January 2013). Timing, coupled with the Kings small market status, has an increasingly positive effect on them compared to the 76ers. Advantage: Kings.
Takeaway: NBA Boats Don’t Necessarily Need the Tide to Rise (or Fall)
NBA franchise values are on the rise. There is a buzz around the league that if there were teams on the market the price would be robust right now. The values are driven by a number of different factors (TV, arena rights, CBA), some that cannot be controlled by owners and their advisory teams, but others that can be. Don’t be fooled by market size. A value creation scenario can occur in almost any market. In one of the smallest markets in the country, Tom Benson paid more for the Hornets than Josh Harris’ group did for the 76ers. However, owner involvement, savvy counsel and careful negotiations are a must; because as some transactions have shown, there are no guarantees.