The NBA's new TV Deal and its effect on the Atlanta Hawks

OK let's start this off by being extremely upfront and honest. This TV deal is not that big of an issue. It is not unprecedented. This is not the largest percentage increase for the NBA -- that was in 1990. This will not create a catastrophic issue for the salary cap rising too fast. We are not going to see a stark, discrete change in NBA player contract structure. And LeBron's current player contract was a smart one whether or not this national TV deal increased or decreased in value.

With that out of the way, let's take a history lesson to learn how the NBA even got to the current situation. Then let's dive into how this new TV contract affects the Hawks as well as the NBA.

NBA TV Contract History

The NBA collectively bargains their National TV rights to both broadcast companies and cable companies. This has happened since the 1950s, although the boom in the cable and television industry in the 1980s marked a stark change in this process. There have been a few bumps in the way (see WGN v. NBA as one example), but the biggest takeaways from NBA TV Contracts is that each team is paid an equal amount of the TV contract. That is right, even though the Lakers dominate the airwaves, the Bucks receive an equal share. Such is the nature of an organization where each of the members have the same voting rights.

What is happening in the background is that the NBA collectively ties together the rights to disseminate games and other events. This could be through broadcast, radio, internet, or whatever new medium of media that may arise in the future. With digital rights still in their infancy, there are still concerns over exactly what will be broadcast and how it will be disseminated. NBA League Pass has been in business for the past 21 years, as it first started in the 1994 although it did not make its way to the internet until 1997.

The NBA has been relatively innovative with their national TV deals in relation to other major sports. Indeed, in 1994 the NBA struck a TV deal with NBC that was valued at $750 million + revenue sharing over the 1994-95 Season through the 1997-98 season by Steve McClellan of Broadcasting & Cable^[1]. The revenue sharing was said to be triggered once advertising revenue exceeded $1.06 billion for NBC, at a split of 50-50 above this level. The deal came about because Dick Ebersol of NBC did not want to take on the entire risk of broadcasting the NBA. This was a tactic that NBC first used with the 1988 Summer Olympics.

At the time, it was not entirely clear that the NBA was going to be a successful program on TV and neither NBC or the NBA had a strong grasp on what their product should be valued at. The advertising revenues exceeded the agreed upon threshold and the NBA received a larger amount of TV revenues than first anticipated which indicates that the NBC-NBA deal worked out well for both entities. Sometimes in life, there truly are win-win situations.

Broadcast Deals^[2]

Seasons	Station	Contracts Amount
1953-54	DUMONT	$39,000/13 games
1954-55 to 1961-62	NBC	N/A
1962-63 to 1972-73	ABC	N/A
1973-74 to 1975-76	CBS	$27 million/3 years
1976-77 to 1977-78	CBS	$21 million/2 years
1978-79 to 1981-82	CBS	$74 million/4 years
1982-83 to 1985-86	CBS	$91.9 million/4 years
1986-87 to 1989-90	CBS	$188 million/4 years
1990-91 to 1993-94	NBC	$601 million/4 years
1994-95 to 1997-98	NBC	$892 million/4 years
1998-99 to 2001-02	NBC	$1.616 billion/4 years
2002-03 to 2007-08	ABC/ESPN	$2.4 billion/6 years
2008-09 to 2015-16	ABC/ESPN	$3.88 billion/8 years

Cable Deals^[2]

Seasons	Station	Contracts Amount
1979-80 to 1981-82	USA	$1.5 million/3 years
1982-83 to 1983-84	USA/ESPN	$11 million/2 years
1984-85 to 1985-86	TBS	$20 million/2 years
1986-87 to 1987-88	TBS	$25 million/2 years
1988-89 to 1989-90	TBS/TNT	$50 million/2 years
1990-91 to 1993-94	TNT	$275 million/4 years
1994-95 to 1997-98	TNT/TBS	$397 million/4 years
1998-99 to 2001-02	TNT/TBS	$840 million/4 years
2002-03 to 2007-08	TNT	$2.2 billion/6 years
2008-09 to 2015-16	TNT	$3.56 billion/8 years

It has been reported that the new rights agreement will start in 2016-17 and extend through 2024-25. According to Sports Business Daily, Disney will pay $1.4 billion a year and Time Warner $1.2 billion a year.

Let's be very clear, the above reported numbers distort reality for a few reasons. One, these are nominal numbers and so we should always expect the nominal value to increase. This isn't such a big deal from one year to the next, but inflation within the U.S. has been about 3% a year since the early 1980s. But this is a small quibble.

The bigger issue is that these are estimated contract values and we do not know the yearly values. A few things of note because of this:

• Writers have slowly understood that a player contract worth $50 million over 5 years does not necessarily mean that each year the contract pays out $10 million. This is a big step in understanding the business of basketball. But most contracts, not just player contracts, have this characteristic. The national TV deals for the NBA undoubtedly are not flat contracts. So when writers project the Salary Cap forward, they have implicitly assumed that the NBA receives the same amount in TV revenue for the 2008-09 Season as they will in the 2015-16 Season. Let that sink in for a moment.
• By saying these are estimates, I really do mean that. This is because the NBA structures their agreements with Disney and Time Warner so that the value each year could be greater or less dependent upon escalators built into the agreement. These escalators are tied to TV ratings and advertising revenues. Some years the NBA has great revenues and their TV revenues are greater than anticipated.
• The TV contracts are not the only source of revenue for the NBA. Although we see an approximate doubling of TV revenues, the TV contracts generally make up somewhere between a quarter to a third of all NBA revenues. We have to talk about this in approximates because these values are not known.

Basketball Related Income

The equivalent of GDP for the NBA is a term called Basketball Related Income. We need to understand this a bit so that we can understand how the national TV deal affects the NBA Salary Cap. To oversimplify things, the Salary Cap is a set percentage of NBA revenues. The details of these revenues, per Larry Coon, are:

Basketball Related Income (BRI) essentially includes any income related to basketball operations received by the NBA, NBA Properties1, NBA Media Ventures, or any other subsidiaries. It also includes income from businesses in which the league, a league entity or a team has an ownership stake of at least 50%. BRI includes:

Regular season gate receipts, minus taxes and certain charges including those related to arena financing; Broadcast rights; Exhibition game proceeds; Playoff gate receipts; The value of all complimentary tickets, minus "excluded complimentary tickets" (1.6 million tickets in 2011-12, increasing by 50,000 each season thereafter); Novelty, program and concession sales (at the arena and in team-identified stores within proximity of an NBA arena); Parking; Proceeds from team sponsorships; Proceeds from team promotions; Arena club revenues; Proceeds from summer camps; Proceeds from non-NBA basketball tournaments; Proceeds from mascot and dance team appearances; Proceeds from beverage sale rights; 40% of proceeds from arena signage; 40% of proceeds from luxury suites; 50% of proceeds from arena naming rights; 50% of the proceeds from team practice facility naming rights; Proceeds from other premium seat licenses; Proceeds received by NBA Properties, including international television, sponsorships, revenues from NBA Entertainment, the All-Star Game, and other NBA special events.

Some of the things specifically not included in BRI are proceeds from the grant of expansion teams, fines, all forms of revenue sharing, interest income, and the sale of assets.

Basketball Related Income has steadily increased throughout the years. With the exception of the 2011 NBA Lockout, we see that BRI has increased every year since I have data available from 2002. If I adjust for the 2011-12 Season having only 66 games instead of 82 games, then we would actually see that BRI increased each year. The data were compiled from the CBA FAQs of Larry Coon (current, 2005, and 1999):

BRI and Salary Cap

While BRI has continuously increased, the Salary Cap had a slow-down around 2010. Part of this was due to the Great Recession, but that only explains a few years. The slowdown is marked and lasting until this past season. This is because the NBA Lockout changed the percentage of BRI that determines the salary cap to a value between 49% and 51% of BRI but no less than $58.044 million (which was the value used for the first two years of the new Collective Bargaining Agreement).

Previously, the salary cap was based on 57% of BRI. This was a one time shock and it took a bit of time for the Salary Cap's level to return to where it once was. But now that the salary cap is at a level of increasing, it will continue to increase. Think of this as a math problem: X is your BRI which has increased at a steady rate of around 5% a year. Your salary cap used to be .57*X and that grew at about 5% a year. Now it is .5*X. So how much should it grow each year? Yup. You got it. About 5% a year, which gives you insight as to why player contracts are capped at 4.5% raises (except for Bird Rights which can pay up to 7.5%). The NBA is smart, they tie the raises to what they project increases in BRI to be.

The underlying revenues for the NBA continue to increase and it does not look like there is a slowdown. This is where Prof. Rodney Fort, a sports economist at the University of Michigan, has an excellent blog post on making sure one knows the difference between a bubble and a rising asset value. It's an excellent read and important if you want to be taken seriously. If someone is telling you that the media rights for sports is a bubble and they do not have a reason beyond pointing to the increased value, then you should ignore that person.

Economic Implications for Hawks Sale

Matthew Yglesias of Vox.com has an article on the changing economic climate surrounding the NBA. There are a lot of good nuggets of information in there that applies to the Hawks, so I suggest taking 5 minutes to read it. But I would also like to elaborate and draw the discussion towards issues pertinent to the Hawks.

As Bruce Levenson, and potentially the other owners from DC and New York, lines up the sale of his share for the Hawks this new TV deal will increase the valuation for the franchise. The Atlanta Hawks receive 1/30th of NBA TV deal^[3] and this deal is growing in value. But anyone who was interested in purchasing an NBA team already knew this. The literal number was not known, but a competent investor would be aware of the large increase. So while this deal increases the value of the Hawks, all parties knew this. It would be unfair to claim this TV deal increased the value of the Hawks. It is more of an effect of the increased value of an NBA franchise than a cause.

What this new TV deal does is erase some uncertainty within the market of NBA franchises. The value of the franchise is becoming more clear to investors and Bruce Levenson, so having this hurdle out of the way will expedite the sale process. There is no timetable on when the sale will occur, and I will try and emphasize that this sale is controlled by Bruce Levenson. But one impediment to Bruce selling his share was the uncertainty of the value for the national TV deal. With this deal announced, that uncertainty goes away.

Now it is up to Bruce to figure out who the highest bidder is and whether he needs to coordinate with the other owners in the sale. He does not have to coordinate, but it might be in his best interests.

Salary Cap Implications for Atlanta

Here is what you have likely been waiting for, but unfortunately this may be the least amount of information I can provide to you. The reason for this is because I aim to give you concrete information and not mindless speculation. Frankly, the amount of projections out there on how this TV deal affects the future NBA salary cap has been poor. I would link to some of them, but I do not want to give them any page views for lacking insight.

I do not have a nice way of figuring out the current national TV deal. The chances that the deal is flat across all years is preposterous and we need to know how this value is changing over time to back out how much the salary cap could increase by. So until I can get you a better estimate of this, we can only say it will go up but we're not sure by how much. Recent reports from Marc Stein indicate that the current national TV deal is not flat:

In last two years of current contract, NBA teams on course to receive annual payments in $35 million range from league's national TV deal

— Marc Stein (@ESPNSteinLine) October 6, 2014

Given there are 30 teams, then the above tweet projects that $1.050 billion revenues will be paid to the NBA. This is greater than the reported $930 million, which lines up with the average annual revenues but not the revenues for each year. Further, Larry Coon has reported through ESPN Insider that the current TV deal for the NBA does escalate and that the upcoming TV deal does as well.

According to league sources, the new agreement escalates over time, starting at $2.1 billion in 2016-17 and climbing to $3.1 billion in 2024-25. The current agreement provides $1.03 billion in 2015-16, meaning the network TV revenue will jump by slightly less than $1.1 billion in 2016-17.

We have a hard enough time projecting the salary cap for just one year away, so projecting to the 2016 offseason would not be prudent. Larry Coon's math shows that if nothing else changes, the salary cap will increase by $16 million due to the new TV deal. But there are other factors involved like the NBA decision on expansion, the potential decline in attendance, growth in apparel sales, and macroeconomic factors involving the US economy to name a few.

Given that the salary cap will go up, take a second to sit down and think about what this means. From a player movement perspective, we should see a greater amount of player movement. This is because all teams will see an increase in cap space, which is the starting point of salary negotiations. Having an increase in the salary cap will have the market of player movement tend towards a competitive market. Teams will be able to differentiate their contract offers to players better with an increase in cap space. This is because teams will not be as constrained in their offers.

For example, suppose one team believed a player was worth $15 million a year while another believed that player was worth $16 million a year. If that player's maximum salary was $14 million (which is tied to BRI), then both teams would bid the maximum. That player will decide which team to go to based upon secondary factors. However, if the player's maximum salary was $20 million (due to an increase in BRI), then the player will tend towards signing with the team that values him at $16 million. All of the sudden, the GM of a team becomes more important in recognizing the worth of players.

This could allow us a framework to test whether Carmelo Anthony's recent comments on Danny Ferry and the Hawks have any merit. The Hawks will have more cap space moving into the 2016 offseason thanks to this new revenue source for the NBA, so if they still strike out in free agency then it will be because of something other than money. We can revisit this article in 2 years to see how everything works out.

Is a Lockout/Strike More Likely?

One thing we should be clear about, a lockout occurs because the NBA owners will not allow NBA players to perform under the current labor agreement. The previous 4 labor disputes for the NBA were all lockouts. A strike occurs because NBA players will not perform services under the current agreement. With that out of the way, Michael McCann wrote an article for SI.com to examine the potential legal implications of this deal and how it will affect labor negotiations.

Labor negotiations in sports are rarely "fair". This is because it is extremely difficult to determine or define what "fair" is. To consider how labor negotiations may be affected by this new TV deal, one should consider what leverage has changed. So what has changed? Part of what has changed is that the cost of not playing basketball games has increased for the NBA Owners. If games are not played, the owners lose out on this increased revenue which makes it less likely they will pursue a lockout. But the same side of the coin is that the players have also seen an increase in the cost of a strike. The NBA players will see a rise in their salaries, and so if they do not play basketball then they are leaving a higher amount of money on the table. So from this perspective, there has not been a change of leverage. In fact, these forces would dictate that a lockout or strike is less likely.

Of course, the above analysis is what one calls ceteris paribus. Not all else is held equal, although all else that has changed has no bearing on this TV Deal. So I argue that the TV Deal itself makes it less likely to have labor issues. What really comes into play for a potential labor dispute is that the NBA Player's Association has a new president. With new leadership, this is the real issue that could lead to a labor dispute. Early indications from Kelly Dwyer is that LeBron James and Deron Williams will push against the owners if there is another labor dispute. This will need a little bit of explaining though.

For LeBron James, apparently he is upset about having a maximum salary for player contracts. One way he was able to get around this was by signing a two year deal with an option to terminate the contract after one season. This is a smart decision if the BRI increases by more than 4.5% over the next year. This is because his corresponding maximum salary would increase by a greater percentage than the maximum raises the current CBA allows. This is the reason why LeBron made a good move with his contract, not necessarily because of the TV deal. As currently constructed, the new TV deal does not come into play until the 2016 offseason. And LeBron will undoubtedly opt out of his contract at the end of this season. To reiterate, the 2016 offseason when this current TV deal kicks in does not have any bearing on the 2015 offseason where LeBron can realize a higher raise by opting out.

But if LeBron is upset with the owners because of this, then he clearly does not understand the issue. From an owner's perspective, the maximum salary for a player is not really a bargaining point they care about. The owners want to keep costs down and the team salary cap is the mechanism that achieves this. So LeBron's fight is not against the owners but actually against the other players.

There are 30 players in the NBA whose worth is greater than their maximum player salary. Or maybe 10. I don't know the number, but it is a small fraction of the roughly 400 NBA players. The maximum player salary is a way to ensure that the other players have money left over. And because the NBA Player's Association allows one vote per player, the majority wins. So the maximum player salary will stay in place for the foreseeable future. This is not unlike the economic and political debates focused on the 99% versus the 1%.

Exit Question: What worries you about this new NBA TV deal? Leave your thoughts in the comments.

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[1]McClellan, Steve. 1994. "NBC-NBA deal: $750 million + revenue sharing." Broadcasting & Cable 123, no. 18: 14. Business Source Complete, EBSCOhost (accessed January 3, 2014).

[2]Sources:

• Numbers before 1986 from Inside Hoops.
• Numbers from 1986 to 2002: Romano, Allison. 2001. "Tight economy may choke NBA rights." Broadcasting & Cable 131, no. 52: 10. Business Source Complete, EBSCOhost (accessed January 3, 2014).
• Numbers from 2002 to 2008: Romano, Allison. 2003. "NBA Basketball Finals Were Not Very, Very Good to ABC." Broadcasting & Cable 133, no. 25: 23. Business Source Complete, EBSCOhost (accessed January 3, 2014).
• Numbers from 2008 and beyond from Wall Street Journal.

[3]This is an oversimplification of how the NBA Revenue Sharing functions. The amount a team will receive from the national TV deal depends on how their TV market performs relative to preset benchmarks which will actually make the Hawks share of TV revenues differ from 1/30th. But seeing that the TV deal raises all of NBA revenue equally (ie, New York does not get a bigger slice of the revenues), the share of percentage the Hawks take from the national TV deal is left unchanged.