NBA's new TV deal brings potential lockout, expansion into play
What a first year for the NBA’s new commissioner, Adam Silver. First he outmaneuvers the notoriously litigious Donald Sterling at every legal step, and now he negotiates a record-breaking nine-year, $24 billion television contract with ESPN and Turner. The gargantuan contract approximately triples the amount of the current national TV deal with ESPN and Turner. Payments from the new contract will begin following the 2015-16 season. The 30 NBA teams will evenly split the purse -- which on average will work out to about $2.7 billion a year -- meaning each NBA team will receive on average about $90 million a year through the end of the contract. The deal also prevents rivals networks, including Fox and NBC, from obtaining the rights to nationally broadcast NBA games.
The NBA’s new deal poses six key legal and business implications for the NBA and its players.
1. Another lockout is coming in 2017
In Monday’s press conference to announce the new TV deal, Silver stressed that he would soon begin discussions with Michele Roberts, the new executive director of the National Basketball Players’ Association, on what the deal means for players. The most obvious impact is that players will negotiate more lucrative contracts once the TV money kicks in. This is because the league’s salary cap on team payrolls and the accompanying threshold for the luxury tax will rise, as they are based on a term known as “Basketball Related Income” or BRI. BRI is a term detailed in the league’s collective bargaining agreement and generally refers to revenue collected by the league through television contracts, ticket sales and other sources. BRI is shared with the players in an approximately 50/50 split. The salary cap increases if BRI increases, so players will benefit with more TV money. In the press conference, Silver acknowledged that the TV deal will have a “profound” effect on the salary cap, which was $63 million in the 2013-14 season.
On the surface, the NBA’s new TV deal is excellent news for players, as a higher salary cap will mean more lucrative player contracts. But the financial relationship between the NBA and its players is more of a game of chess than simple arithmetic. This relates to the role of collective bargaining and federal labor law. While the current CBA runs through the 2020-21 season, either the NBA or NBPA can invoke an early termination clause to end the CBA on June 30, 2017. There are two reasons why the NBA is poised to exercise the termination clause and, if necessary, lock out NBA players for the start of the 2017-18 season.
First, the $24 billion TV deal is further evidence that the NBA’s lockout of players in 2011 did not harm the game's popularity, either with fans or broadcast companies, in any lasting way. The league is making more money than ever and league officials likely infer from the new TV deal that the 2011 lockout significantly improved the financial health of the league. The league is also keenly aware that litigation brought by NFL players to end the NFL’s 2011 lockout failed, thus giving the NBA more confidence that labor law insulates the league from lockout liability. If NBA officials and owners were given a truth serum and forced to answer questions, they would likely admit that locking out the players in 2017 is an attractive option. The NBA could lock out the players and demand a higher percentage of BRI, among other concessions the league wants from the players, while feeling confident that any backlash from fans would be manageable and ephemeral, and that any lawsuits by players would be easily defended.
Second, NBA owners now have more money on the line in BRI, and thus a greater incentive to demand a higher percentage in a new CBA. Remember that in the last set of labor negotiations, the league originally demanded that players receive only 41 percent of BRI. Watch for the league to make a similar demand as 2017 approaches, or perhaps demand an even lower percentage than 41. The NBA could reason that even with a smaller percentage of BRI, NBA players still stand to do well due to the growth of revenue. The players would vehemently reject such reasoning, especially since it will be hard for the NBA to again claim its teams are “losing money." In 2011, the NBA asserted that 22 of the 30 teams were in the red. With the Clippers selling for $2 billion and with the infusion of new TV money, it seems hard to imagine many – if any -- teams are losing money.
2. Players and agents who negotiated short-term contracts look smart
With the NBA’s salary cap set to rise significantly for the 2016-17 season, NBA players who have negotiated contracts to become free agents in 2016 likely made wise moves. The most obvious example is LeBron James, who signed a two-year, $42 million deal with the Cavaliers and, barring injury, will be poised to sign a more massive deal in 2016. The deal will be more lucrative because the maximum salary he can receive will be higher with a higher BRI and salary cap.
A less obvious example is Evan Turner, whose agent, David Falk, recently negotiated a two-year, $6.7 million deal for Turner with the Celtics. If Turner -- the second overall pick in the 2010 NBA draft -- can turn his career around under Celtics coach Brad Stevens, he would be set to do quite well as a free agent in 2016, just in time for tons of new money to flow into the NBA.
Robert Raiola, senior manager in the Sports & Entertainment Group of the accounting firm O'Connor Davies, LLP, notes players such as James were smart to sign short-term deals, but those deals still carry risk. “There is always the risk of injury,” Raiola tells SI.com. “We all know about Paul George’s injury during the Team USA scrimmage this past summer. What if he had signed a short-term deal with the Pacers, instead of a 5-year deal? He would have needed the proper disability insurance to protect himself and his family.” Raiola raises a crucial point. We know that if an NBA player loses even a small amount of athleticism, he can become much less effective and thus much less able to demand a high salary.
3. Expansion is now on the table
The NBA has never been healthier, both domestically and internationally. With the league’s national television contract complete, the league will now turn its attention to new sources of revenue. Along those lines, expect the NBA to seriously entertain the idea of expanding to new markets as means of driving revenue. If so, the NBA would form a committee of owners to study expansion and make recommendations to the Board of Governors.
There are surely some owners who are opposed to expansion. The first objection is talent dilution. While that’s a serious concern, there is reason to believe that the growth of basketball in other parts of the world, not to mention the rise of very good professional leagues in other countries, has increased the available supply of NBA talent. The NBA’s D-League is also primed for improvements, which should increase the number of NBA-ready players.
The second objection some owners have to expansion is that a 31st team would mean owners divide the pie of wealth by 31 instead of 30, so each owner would take in less money from the league. This is true. But it stands to reason that owners could more than make-up for a smaller slice of pie by sharing what would be enormous expansion fees. Consider the last time the NBA expanded. It occurred in 2004 and the Charlotte Bobcats paid the NBA expansion fee of $300 million. What would be an expansion fee today, in a world where the Clippers sell for $2 billion? Likely at least double what the Bobcats paid, and perhaps close to $1 billion. Expansion would also bring new fans into the game and increase total sales of apparel and merchandise.
If the NBA pursues expansion, expect Seattle, Louisville and Las Vegas to emerge as the most serious contenders in the United States. Seattle is one of the 15 largest media and television markets in the U.S. and already has a sizable and passionate following of Sonics fans. Seattle would be the favorite to be awarded an NBA expansion team. Louisville is a decidedly smaller market than Seattle, but is located in a part of the country where basketball is beloved. Las Vegas would seem like an unusual pick due to legalized gambling, but Silver was recently quoted as saying sports betting is inevitable and Silver has also talked about a mid-season tournament in Las Vegas. Expansion by two teams, one in the Western Conference and one in the Eastern Conference, would make sense to maintain conference balance.
The NBA might also consider expansion in other countries. Vancouver, the former home of the Grizzlies, would be a logical candidate. At the 2014 MIT Sloan Sports Analytics conference in March, Silver also suggested the league might explore placing teams in London and in Europe. It stands to reason that NBA players would have reservations about expansion to locations that would demand extensive travel.
Regardless of where expansion might take the NBA, the league’s new TV deal seems likely to increase the odds that expansion happens within the next three to five years.
4. Silver can now turn to other priorities
After he took over as commissioner earlier this year, Silver surprised many by expressing that raising the NBA’s age eligibility rule was his top priority. The rule, which is contained in the CBA, requires that U.S. players be at least 19 years old and one year out of high school, while international players -- many of whom turn pro in foreign leagues when they are 14 or 15 -- be at least 19 years old. The rule is controversial on many fronts, and as a disclosure, I have long argued against a rule that prevents players from entering the NBA out of high school. The view of Silver and many others is that the NBA would be better off with older, more polished players. These players are also more marketable when they enter the NBA as their names are often familiar to NBA fans who follow college basketball.
Any change to the league’s eligibility rule would have to be collectively bargained with the NBPA. The NBPA represents the interests of prospective players even though those players, who are in high school or younger, are not NBPA members and thus have no seat at the bargaining table.
One twist to the age eligibility discussion is the possibility that NBA’s D-League could become a more attractive employer to players who are legally too young for the NBA but not interested in playing college basketball or going abroad. The D-League’s age limit is 18, meaning that players are eligible for employment out of high school. Few take advantage of that option due to the league’s low salaries for a six-month season. D-League salaries are reportedly capped at $25,000, although players on NBA contracts who are assigned to the D-League are still paid their NBA salaries.
In his press conference Monday, Silver highlighted that the D-League would benefit from the new TV deal. To that extent, increased TV revenue would mean higher salaries for players and a professional life more akin to playing in the NBA. That should enable the D-League to better compete with the NCAA for top young talent.
Also expect Silver to pursue changes to the league’s domestic violence policy, a topic that I examined in a SI.com article last week.
5. Adam Silver is probably underpaid
In a world where NFL commissioner Roger Goodell earns at least $44 million in total compensation from the NFL, Silver is likely a bargain. Goodell’s compensation (from 2012) is known because as a 501(c)(6) tax-exempt entity, the NFL has heightened reporting requirements to the Internal Revenue Service. The NBA does not classify itself as a tax-exempt entity and thus does not need to make Silver’s compensation publicly available. Still, as a rookie commissioner of a league that generates considerably less money than the NFL, it stands to reason Silver earns considerably less than Goodell. If so, Silver should probably demand a raise.
Not only did Silver negotiate a TV deal with a value that dramatically eclipses all projections, he has adroitly managed controversies. Consider the Sterling saga. To be sure, Sterling’s exit from the NBA was technically the result of legal maneuverings by his wife, Shelly Sterling. But don’t discount the crucial importance of Silver’s prompt and thorough investigation into Sterling following TMZ publishing the infamous recording. Within four days the NBA had interviewed all witnesses, obtained all relevant information and crafted a persuasive interpretation of the league constitution that made it clear Sterling was on his way out. Silver was no doubt aided by his background as an attorney and by the strategic advice of league attorneys, including NBA general counsel and executive vice president Rick Buchanan. Compare Silver’s handling of the Sterling scandal to Goodell’s much-maligned handling of the Ray Rice scandal. It’s not even close. Silver also capably addressed the Bruce Levenson e-mail scandal to the point where it is no longer even being discussed.
6. Donald Sterling’s legal case against NBA may be strengthened
While attempting to legally block the sale of the Clippers to former Microsoft owner Steve Ballmer, Donald Sterling insisted the Clippers were worth between $2.5 and $5 billion and that Ballmer was paying less for the team than market value. Sterling’s argument was unpersuasive at the time, but he may have been correct. If Ballmer sells the Clippers tomorrow, the team is probably worth more than $2 billion, especially if the NBA's national TV deal helps negotiate more lucrative local TV deals. While Ballmer was undoubtedly aware that the NBA would sign a more lucrative TV deal than it currently enjoys, he probably didn't know the deal would be worth so much.
There is a legal significance to the TV deal for Sterling. While Sterling has ended his fight to get the Clippers back, his lawsuits against the NBA, Silver and Shelly Sterling for allegedly harming him through fraud and violations of constitutional and antitrust law continue. In the unlikely event these lawsuits prevail, Sterling could better prove damages by saying he was right the Clippers were sold at a discount to Ballmer. Of course, Shelly Sterling has indemnified the NBA of legal costs associated with her husband, so Donald Sterling's victory would be largely symbolic. But it is a victory he would still savor.
Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. He is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.