Tuesday, October 30, 2012

The NBA – a league of haves and have-nots

National Basketball Association commissioner David Stern last week announced he would be was stepping down on February 1, 2014. Adam Silver will be the NBA’s next commissioner. One of the biggest challenges Silver will face the growing disparity between big market teams and smaller market franchises – a growing issue for the NBA.

When 2012-13 National Basketball Association tips off tonight, the Miami Heat and the Los Angeles Lakers are the prohibitive pre-season favourites, the Heat to win the NBA’s eastern conference and claim their second consecutive NBA title, the Lakers to meet the Heat in the NBA Finals after they win the league’s western conference championship. Both the Heat and Lakers dramatically added to their rosters in the off-season. The team the Heat met in the 2012 NBA Finals the Oklahoma City Thunder took their own dramatic step, trading James Hardon Sunday to the Houston Rockets.

The trade is what the business of basketball is about and offers a window into what NBA maybe evolving into -- larger market teams being able to attract talent and smaller market teams unable to hold on to the players they draft and develop.

The Thunder had offered Harden a multi-year agreement that would have paid the NBA’s sixth man of the year $55.5 million. Harden wanted a contract that would have guaranteed him $60 million, the maximum allowed according to the NBA’s collective bargaining agreement. The two sides faced a Wednesday midnight deadline to reach an agreement. If they failed to reach an extension to Harden’s current contact he would have played the 2012-13 season under his current agreement and become a free agent at the end of the season.

"We wanted to sign James to an extension, but at the end of the day, these situations have to work for all those involved. Our ownership group again showed their commitment to the organization with several significant offers," Thunder general manager Sam Presti said in a statement.

"We were unable to reach a mutual agreement, and therefore executed a trade that capitalized on the opportunity to bring in a player of Kevin's caliber, a young talent like Jeremy and draft picks, which will be important to our organizational goal of a sustainable team."

Harden joined Kevin Durant and Russell Westbrook on the 2012 United States Olympic basketball team. Both Durant and Westbrook along with Serge Ibaka have long-term contracts with the Thunder. The Thunder has committed more than $200 million to Durant, Westbrook and Ibaka through the 2016-17 NBA season, reluctantly they were ready to offer Harden a long-term contract worth $55.5 million.

The NBA has a salary cap, but unlike the National Football League and the current National Hockey League (which both have hard salary caps that cannot be exceeded) the NBA has a soft salary cap. Teams can exceed the NBA salary cap. If they decide exceed the salary cap they pay a tax of $1.50 for every dollar that exceeds the cap. The tax increases every year the team is over the cap. If the Harden had accepted the Thunder’s offer, the Thunder would have committed more than $62 million annually to Harden, Durant, Westbrook and Ibaka – putting the team near the NBA salary cap and unable to make any major personal decisions if one of the players became injured and was unable to play.

The Los Angeles Lakers will pay the NBA more than $30 million in luxury taxes after their payroll for the 2012-13 season is added up. The tax for exceeding the NBA’s payroll doesn’t include the $19 million in revenue sharing the Lakers are already being forced to pay the NBA.

The Lakers projected 2012-13 team payroll - $100 million. The Lakers will generate more than $90 million in ticket sales and are in the first year of a local television agreement with Time-Warner Cable that pays the Lakers $120 million annually. The $30 million luxury tax, nothing more than the cost of doing business for the Lakers. And if the Lakers 2013-14 payroll remains around $100 million their luxury tax next year will exceed $85 million.

"It damages the Lakers a lot because they're projected to pay $49 million, which sucks up a lot of the money they're getting from the Time Warner contract," said NBA salary-cap expert Larry Coon in a Los Angeles Times report. "Luckily, they got that contract in order to pay for the revenue sharing.

"They needed to bring player expenses down but also level the playing field. They figured revenue-sharing would do that," Coon said. "Combine that with progressive luxury taxes coming next year and it's getting to the point where few teams will be able to spend."

The Thunder offering Harden $55.5 million would have been a mistake. Durant, Westbrook and Ibaka give the Thunder the core of what will be a very good NBA team. Harden provided a ‘spark’ whenever he came off the bench for the Thunder, an important player but a player the Thunder didn’t need long-term.

The Thunder do not have a local television agreement that pays them the $120 million the Lakers will receive from Time Warner. As much money as the Lakers l generate from projected ticket sales and television revenues this year ($210 million), it remains to be seen if the Lakers will allow their payroll to be anywhere near $100 million next year given that they’ll be forced to pay a luxury tax that exceeds $85 million if they do.

Did the Oklahoma Thunder make the right decision in not agreeing to Harden’s demands trading one of their star players – yes they made the right business decision for their franchise. The Thunder picked up Kevin Martin, Jeremy Lamb and three draft picks. Martin is in the last year of his contract,

Lamb is a rookie and the three draft picks represent future talent. The financial commitment is minimal given Lamb is a rookie and Martin is set to become a free agent. If the Thunder had kept Harden their payroll would have been tied up for the next four seasons, now they have flexibility. The Thunder are a smaller market NBA team, a franchise that doesn’t generate the dollars bigger market teams like the Los Angeles Lakers do. The Thunder cannot position their franchise to be locked into four major long-term player contracts.

The Lakers have already committed almost $77 million to Dwight Howard, Kobe Bryant, Pau Gasol and Steve Nash next year (assuming they sign Howard). The Lakers enjoy the benefits of $210 million in ticket and local television and that doesn’t include the revenue the Lakers receive from the NBA’s national television agreement. Tens of millions of luxury tax dollars for the Lakers, the cost of doing business in a major NBA market.

The current six-year NBA CBA signed last December was going to create a level playing field, where the small market (Oklahoma City) and bigger market (Los Angeles) could compete on a level playing field.

On the surface that may not appear to be what is taking place – the haves (the Lakers) can spend like drunken sailors, while the have-nots (the Thunder) are always saving for a rainy day.

Both teams made the best business decisions, the best boardroom decisions for their respective franchises – however basketball games are played on a basketball court and not in a board room. The 2012-13 NBA season is set to tip-off, if the Thunder manage to do what they did last year, make it to the NBA Finals, denying the Lakers the chance to get there, the Thunder will be both prudent spenders and a very good basketball team.

For Sports Business News this is Howard Bloom

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