In an excellently reported feature from ESPN’s Brian Windhorst and Zach Lowe, small market teams — including those who make the NBA Finals — are still struggling to make money in the NBA. According to reports obtained by the duo, the Cleveland Cavaliers were one of nine franchises to lose money during a 2016-17 season, one that that saw the team make their third consecutive appearance in the Finals as the league’s defending champions.
From Windhorst and Lowe:
The gap between the league’s most profitable teams and its weaker siblings will be addressed at the league’s Board of Governors meeting on Sept. 27-28 in New York. Owners have planned a half-day review of the league’s revenue-sharing system, sources said.
Some teams in smaller markets struggling to keep up with a fast-rising salary cap have pushed the league’s richest franchises to share more of their profits, according to ownership sources. Some have argued that the expanding profitability gap could warp competitive balance: If big-market teams can earn fat profits even while paying the luxury tax, they could in theory hoard more stars.
The nine teams that lost money, by the league’s accounting for net income (which includes revenue sharing and luxury tax payments), were the Atlanta Hawks, Brooklyn Nets, Cleveland Cavaliers, Detroit Pistons, Memphis Grizzlies, Milwaukee Bucks, Orlando Magic, San Antonio Spurs and Washington Wizards. League officials pointed out that by a different accounting measure the league tabulates — operating income, which discards various debt obligations — only 10 teams (rather than 14) lost money before accounting for revenue sharing.
The conflict, of course, is that teams which have been among the league’s worst for several years — namely the New York Knicks and Los Angeles Lakers — have been able to derive some of the league’s best numbers despite running their franchises into the ground while some of the league’s best teams —The Cavs, Memphis Grizzlies, Milwaukee Bucks, Washington Wizards, and San Antonio Spurs — struggle. The Lakers, specifically, are cited raking in $115 million profit despite writing a revenue-sharing check for almost $49 million while failing to win more than 27 games in any of the last four seasons. The reason for this: Local revenue versus that on the national scale.
The salary cap is a function of nationally generated revenue (i.e. the recently inked $2.7 billion TV deal) while teams are forced to pay these increasing salaries with locally earned dollars. If these aren’t rising in lockstep (Spoiler alert: They’re not) teams then are forced to deficit spend, especially those who are over the luxury tax threshold. If you’re wondering how the Cavaliers can struggle to earn despite playing in the April, May and June months that do not include the overhead of salaries, here’s all you need to know:
Combined revenue from all 30 teams determines the salary cap, and the biggest teams make the most money — and therefore drag the cap up for everyone else. Consider the Warriors, who have become a business juggernaut. (They had $92 million in net income last season despite playing in the oldest arena in the league and sending $42 million out in revenue sharing.)
Every Golden State home playoff game generates revenue — about $15 million a pop in the NBA Finals last season, sources say — that nudges the cap up a notch for the rest of the league. The Warriors don’t get to keep all that money, as playoff revenues are shared with the league, but the documents show they netted $44.3 million from just nine playoff games last season, more than twice as much as the second-place Cavs, who netted $20 million.
The Knicks made $148 million from their local television deal last season. The Lakers were, of course, right behind them with $104 million. According to Sports Business Daily, the Cavaliers earned a fraction of this at roughly $37 million. The big drag, of course, is that luxury tax payments do not adjust for market size. The Cavs reportedly made $21.7 million in net income before revenue sharing, but quickly drifted into the negative after paying $24.8 million in luxury taxes and $15.2 million in a revenue sharing.
It’s important to disclose that these figures are purely related to income generated by the game of basketball, stripping out additional revenue generated by ownership in ancillary businesses. It’s also important to note that this is the best way to level the playing field when comparing teams within the league as every owner has interest in businesses outside of their respective franchises. This report does not infer that Dan Gilbert, owner of the Cavaliers, lost money last year; it’s that he didn’t make any, from an accounting standpoint, through the Cavaliers.