As we warm up for the 2014-15 NBA season, the league and its network partners have been thinking about seasons still to come. Nine future seasons, to be specific, starting with 2016-17 and running through 2024-25. The league's new media rights deals with ESPN and Turner Sports will provide $24 billion to the NBA over those nine seasons, an average of $2.66 billion per year. This is a huge increase from the current deal, which provides $7.5 billion over eight years, or an average of $940 million per season.
The new deal will have a pronounced effect on the salary cap, player salaries and even on the possibility of a lockout in 2017.
Effects on the salary cap and players
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.
The effects will be huge. Since the money is subject to revenue sharing, most of it will go to small-market teams. Likewise, the players will benefit tremendously. They are guaranteed to receive 49 to 51 percent of the league's gross revenues -- the exact percentage is tied to the league's financial performance -- so the new TV deal should ensure the players receive the full 51 percent for the remainder of the agreement.
Since the salary cap is directly tied to revenues, this means we would expect the cap to increase significantly. The league sets the cap each year based on its projected revenues for the upcoming season. By the league's convoluted salary-cap math, a $1.1 billion increase in national TV revenues would equate to a nearly $16 million jump in the 2015-16 salary cap, above and beyond its expected increase without the infusion of new TV money.
Several other features of the CBA would increase by a commensurate amount, including maximum salaries, the disabled player exception and the early Bird exception. For example, if the salary cap increases by $16 million, then the maximum salaries would increase by $3.77 million for players with zero to six years of experience, $4.52 million for those with seven to nine years, and $5.27 million for those with 10-plus years.
This sudden infusion of money would have pronounced effects on the league. Since teams are required to spend at least 90 percent of the cap on player salaries, a $16 million cap increase must be accompanied by a least a $14.4 million increase in payroll for every team in the league. This represents a potential windfall for the 2016 free-agent class.
For example, LeBron James recently signed a two-year contract with the Cleveland Cavaliers, and is scheduled to become a free agent again (provided he doesn't opt out a year early) in 2016, which is just in time to take advantage of the new cap. Coming off a $21.6 million salary in 2015-16, James ordinarily would have been eligible for a starting salary of about $23 million in his next contract. But with the full effect of the new TV deal, James' starting salary would increase to more than $28 million, and he could sign with any team for up to $120 million over four seasons.
In light of the new TV deal, James' opting for a two-year contract with the Cavs appears to be a bold strategic move. Similarly, Dwyane Wade, Dwight Howard and a few other players might have crafted their current contracts with 2016 in mind.
But there are downsides to such a sudden influx of cash. First, it puts pressure on players to accept shorter deals in order to become free agents again in 2016, which is bad for job security. This is especially onerous for players coming off their rookie contracts. Such players are eligible to sign extensions to add four or five years to their contracts. They would be faced with choosing between the security of a long-term contract at current rates, or rolling the dice with a shorter extension in order to cash in when 2016 rolls around. Some of these players are eligible for a larger salary (equal to the maximum salary for a player with seven to nine years of experience), but this higher salary bump is available only when the player extends for four or five seasons. For these players, 2016 represents a conundrum.
A huge salary-cap jump in 2016 also provides an unfair advantage to the 2016 free-agent class. Since teams must spend at least 90 percent of the cap and players usually try to sign long-term deals, the windfall might be depleted before the 2017 offseason arrives. This means the 2016 free agents would reap the benefits, but players already locked into long-term deals and players becoming free agents in later years would be left out in the cold. Worse, the cap could actually decrease in later years as the situation normalizes, further disadvantaging the players whose free agency didn't coincide with the 2016 offseason.
The league has already thought of this contingency, and is hoping to smooth out the effects of the new TV deal by gradually phasing in the salary-cap increases over several years. For example, instead of letting the salary cap increase an extra $16 million in one year, the league might limit the increase from the new TV deal to $4 million per year, spread out over four years. Most if not all players -- not just the 2016 free agents -- would then be able to become free agents in an offseason in which the cap jumps significantly.
Such an arrangement requires the consent of the players' association, for which the league already is beginning discussions. It should be an easy proposition to sell -- collectively the players will be entitled to the full 51 percent of revenues (no more and no less) no matter what, and limiting the cap increase would ensure a shortfall. Any such shortfall is paid pro rata to every player in the league. Therefore, limiting the cap increases would ensure that every player in the league benefits -- not just the ones who happen to become free agents in 2016.
Effects on the collective bargaining agreement
When they negotiated the current CBA in 2011, the league and the players' association knew that a new media agreement was coming in 2016, and that it likely would be a game-changer. They built in a mutual opt-out for 2017 -- either side could gauge the deal's effects, and could notify the other side by Dec. 15, 2016, that it was terminating the agreement as of July 1, 2017. Both sides would then return to the negotiating table in order to hammer out a new CBA.
This always was considered somewhat likely, and now appears to be probable.
Back in 2011, the league opted out of the then-current CBA and locked out the players. By its numbers, the system was unsustainable -- most teams were losing money, and they would rather risk canceling an entire season than continue playing under the same agreement.
Following a heated and vitriolic negotiation, the sides eventually came to terms on a CBA that reduced the players' share of revenues from 57 percent to 50 percent (but could range from 49 percent to 51 percent), shortened contracts, lowered raises and imposed substantial penalties for teams that overspent. This massive give-back by the players salvaged the 2011-12 season, and it went a long way toward fixing the league's finances.
As a result of the new CBA and the league's revised revenue-sharing program, most teams are now operating in the black. Just eight teams had an operating loss in 2013-14 after revenue sharing and tax distributions, and most of the total loss came from the Brooklyn Nets' overspending. Just as important, franchise values have skyrocketed. The Milwaukee Bucks and Sacramento Kings each sold for more than $500 million, and Donald and Shelly Sterling reaped a $2 billion windfall for the Los Angeles Clippers.
The players believe they sacrificed on behalf of the league, and now that the NBA is back in a healthy financial state they might want to recoup some of their losses. Their opinion can only be solidified by the announcement of the new media rights deal. The players might seek a cut more commensurate with the share of the pie they would have received prior to sacrificing for the good of the league in 2011. This means that the current CBA likely will be terminated following the 2016-17 season, and the league will lock out the players until a new agreement is reached.
But don't expect a repeat of 2011, where the union dissolved, lawsuits were filed and games didn't get underway until Christmas. In 2011, the owners shut down the league rather than continuing to play under an unsustainable system. But that's not the situation today, and it certainly won't be the situation in 2017. Rather than kill the goose that laid the golden egg, the owners likely will be more amenable to finding some middle ground with the players.
For that matter, the players might take note of the fact that they are receiving 51 percent of a much larger pie, and decide to stand pat. But given the perception that they made sacrifices for the benefit of the league in 2011, the players now appear more likely to seek a return of what they feel is theirs.
So even though the possibility of an opt-out and temporary lockout is high, the probability of missed games in 2017 is much lower. The last thing anyone -- owners, players and networks -- would want is to have a new TV agreement take effect, and have no games to show.