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The End of the Nuclear Winter

And so ends the Great Extortion of 2011.

But let’s give the owners some credit. Call them collusive. Call them greedy. And just to create news cycles, call them plantation owners too – but one thing you cannot criticize them for is poor negotiating skills. They came to the negotiating table with the players with so many asks, both large and small, that by the time they gave a few crumbs up here and there, everyone (present company included) felt that the players got a great deal with a BRI share of 51.2% (Fish – was it the 0.2% that tipped the deal over?)! Details are beginning to leak out on the NBA lockout update and agreement between owners and players, so we decided to analyze the impact of what we know (or think we know) are the biggest changes so far, and how it will affect the landscape of the NBA.

 

1.    Revenue sharing: Players share of BRI is reduced from 57% to 51.2%

By all accounts, the players have agreed to a deal structure that would lower the 57% share of basketball related income (BRI) they are currently receiving down to 51.2%. This represents a minor win (see what I mean about great negotiating skills by the owners?) for players, who just a few weeks ago seemed to be up against an ownership group that was steadfast against any revenue share higher than 50%. So in effect, the players agreed to a 10% pay cut. Of course, superstars will not get paid any less, so the real losers here are the $6-10M per year set of players (that means you: Luke Walton and Brendan Haywood).  Expect there to be a dramatic reduction in salaries for those players who are serviceable role players, but not meant to be anything more.

 

2.   Higher minimum team spending – from 75% to 90%

Previously, all teams were required to spend a minimum of 75% of the league salary cap in any year. This figure will move up to 85% through 2013, at which point it will move up again to 90%. This is probably my least favorite rule change. While the spirit of the rule in its efforts to increase competitive requirements is honorable, the implementation is flawed. It penalizes smart general managers who are able to rebuild their teams by properly managing their cap space and then striking when the time is right. Instead – it almost assuredly will force teams into bad contracts here or there as they seek to meet these minimum salary cap requirements.

 

3.    The New Mid-level Exception

The mid-level exception for the 2010-11 NBA season was set at $5.8M. The new mid-level exception (MLE) will be at $5M and have a maximum term of 4 years. This represents a 15% annual pay cut for those athletes who would have previously been eligible for the MLE. It is also only available to teams under the salary cap.

In addition, two new exceptions have been created. The so-called “mini” mid-level exception applies to teams that are $4M or more over the cap level and allows those teams impacted by the luxury tax to sign MLE players for $3M per year for up to 3 years.

The other new exception is known as the “room” exception which applies to teams below the salary cap and allows them to sign a player for $2.5M per year for 2 years (without counting against their cap number) in addition to the standard MLE.

So what does this change in MLE mean? First and foremost, it is a clear negative for the NBA’s haves: the Lakers, Mavericks, and other organizations whose owners will spare no expense to field a championship squad. These teams will now be at a competitive disadvantage when bidding on the free agent market (being able to pay $2M per year less for the same free agents). The new “room” exception will also likely flood the market with Shannon Brown-type contracts, as lower spending teams will be able to sign these types of players without impacting their future plans to acquire a superstar. Teams that would likely benefit under this exception include organizations that are stockpiling talent : the Nuggets and Wolves come to mind.

The bottom line here: the new MLE appears to be one of many provisions aimed squarely against wealthier organizations while favoring smaller market owners.

 

4.       Restricting sign-and-trade deals among luxury tax teams

The basic premise here: a team is not allowed to complete a sign-and-trade if it will leave them $4M over the salary cap. This will go into effect after the 2013 season. At the risk of sounding redundant: sorry Lakers, Mavericks, and Heat fans. Want to trade Bynum for Howard? Think you can squeeze some value out of Jason Kidd? Better do it fast, because in a couple of years, these may not be options for your favorite team.

 

5.       Raising the NBA ownership escrow account               

A seemingly small point that apparently was a major sticking point with the players. This modification allows owners to withhold 10% of salaries from player to accommodate for any overpayments that may be made above the agreed upon BRI split. This percentage is up from 8% and in general, should have little overall impact.

 

6.       Penalizing teams that are consistently over the salary cap

This is a small bullet in the list, but potentially one of the biggest game changers in the NBA over time. Teams that are consistently over the salary cap (4 out of any 5 year period) will be penalized an additional $1 for each $5M in excess of the salary cap. This will have a huge impact on teams that are currently well over the salary cap. For example, the Lakers were $21M over the cap last year. Under the old CBA, their luxury tax bill would have been $21M. Under the new rules, this could cross $70M in the exact same situation.

This will cause 2 likely scenarios. First, it will hasten the arrival of the Moneyball-esque capologists on every NBA team and teams like the Lakers and Mavericks will try to find loopholes to avoid these stiff penalties (e.g., structuring contracts in such a way that they are only over the cap 3 out of every 5 years).

Second, it will dramatically shift the manner in which teams spend money. Would Jerry Buss have been as likely to sign Odom for $8M per year if he knew that the effective additional salary he would have been paying would be $27M (vs. $16M)? This will have enormous implications on the balance of power in the NBA in the long term that cannot be understated.

 

7.       One-time Amnesty

You’re the New Jersey Nets GM and are in the midst of a 5 year-$35M Travis Outlaw contract. Or, perhaps you’re a Bucks fan lamenting the time left on Drew Gooden’s 5 year-$32M highway robbery. Fear not – with the new one-time amnesty clause being discussed, each team will be able to waive one player and have that player’s contract count against their cap number. Expect several teams to utilize the amnesty once it’s available creating a near term supply of overpaid veterans on the open market.

 

Overall impressions

As a basketball fan, I could care less about assessing who won and who lost in this deal (in any event, is there any doubt as to the answer here?) My primary concern is how this will affect the NBA in the years to come.

The first thing that is clear is that the NBA has taken one giant leap towards the parity-driven model of the NFL. Of all sports, this is not a bad one to model your business after, as the NFL has become the premier sports money making machine in America. That being said, part of the lore of the NBA is that it has always been a winners’ league. The Lakers and Celtics have dominated the NBA record books, and no other sport has been impacted by the idea of a dynasty more. The NFL on the other hand, has seen a series of champions over the years, ranging from the Packers, Steelers, Raiders, Niners, Cowboys, and most recently, Patriots. It is unclear if seeing the Milwaukee Bucks or Minnesota Timberwolves become regular fixtures among the NBA’s best will help the league or hurt it.

The second major consequence is a middle class squeeze that will be so pronounced, it may cause some portion of NBA players to want to Occupy David Stern’s office. As teams become more wary of meeting a lower salary cap, the superstars will continue to reap in max contracts, while the remaining players will be forced to divide a shrinking pool of assets. Given that there will be severe luxury tax consequences over time, expect contract lengths to get much shorter and that the fastest growing salary segment will be between $2-5M.

 

Lastly, expect the rate of free agency to go up while the longevity of one player with one team to go down. This will be partially due to shorter contract lengths, partially due to the fact more teams will be competitive in the free agent market, and also due to the higher spending requirements.

In the end though, regardless of all of these changes, as a basketball fan, it will be nothing short of great to begin playing basketball (fingers crossed) this December 25th. Just hope my wife knows I’ve got new plans for Christmas.

Related posts:

  1. Jonathan Abrams: The New 2011 NBA Ownership (8/26/11)

Discussion

3 Responses to “The End of the Nuclear Winter”

  1. Nice breakdown Mamba. Making powerful teans weaker is bad for the NBA imo. The players may have just as well agreed to a hard cap.

    Posted by sternisthedevil | November 27, 2011, 8:56 am
  2. What’s sad to see is teams like the celtics preparing for this new cap system…their owner overpaid for the team and then waited and some may say helped drag the lockout on so he could turn his team into a money maker. They have 3 players under contract past the next year (rondo, pierce and bradley) for $29m.
    I don’t understand why owners need to protect themselves from themselves…just stop giving out dumb contracts. Joe johnsons deal is going to screw the hawks for years.

    Posted by anti bill simmons | November 27, 2011, 9:45 am
    • ABS — I partially agree. The core issue these leagues face as I see it is how you balance the small market teams with the large market teams. Theoretically, your geography shouldn’t handicap how good of a team you can field. The NFL has done an excellent job of removing this handicap, and is the best league in America right now (in terms of parity, TV ratings, etc.) The problem arises when teams like the Lakers or Knicks spend a lot and force other owners to also increase their spending to unsustainable levels to compete.

      Personally, I think the idea of a soft cap with the luxury tax is the best model (and think it’s a good thing the NBA has kept this in place). This balances out the disparity without completely taking away free market economics.

      Posted by Brown Mamba | November 29, 2011, 10:00 pm

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