There is a common expression that I often use: never let facts stand in the way of a good argument.

However, with regard to the NBA lockout, true “facts” are difficult to come by.

The issues I’ve had with some recent media articles on the NBA lockout usually fall into three categories:

  1. Interchanging or confusing operating income (EBITDA) margins and net income margins to serve an argument.
  2. The lack of understanding regarding amortization and depreciation of assets, and the general assumptions that all non-cash expenses are “accounting tricks”.
  3. Trying to remove interest payments, taxes and other legitimate cash expenses and/or ignoring the cash flow statement in their analysis.

With regard to the “facts”, we have recent financials from the New Orleans Hornets and a previous Deadspin article on New Jersey’s finances from 2003-2006.

It’s much easier to blame the “mega-rich-super-evil” owners because it’s popular and nothing gets your article cheap hits like a riled up NBA fan base. Feed to mob. Everyone wants someone to blame. Choose the easy target.

Never did I think I would have quite so significant issues with how credible media sources like the NY Times, Huffington Post, and respected economists Nate Silver and David Berri present their arguments. Nor did I with local media writer Bruce Arthur, who is usually spot on, but was quite confident in his financial acumen the other day. I attempted to warn him about the flaws in the article, but he felt confident that I wan’t understanding the accounting as well as he did. Nor did he wish to share his secrets at the time.

By no means am I trying to defend the owners’ position. However, without a clear picture of what data should be compared and a proper understanding of accounting, its difficult to have a balanced debate.

The difference between operating margin and net margin is very material

NY Times’ Nate Silver compared the NBA’s operating margin with Fortune 500 net income margins.

I didn’t see this coming. Here is a widely read and quoted article which is in large part based on a flawed analysis. First, and he does disclose this as a caveat, he relies on Forbes’ estimates for the analysis. While I have an issue with using these estimates as a basis of analysis, its not relevant to this very odd statement:

A 5 percent or 7 percent profit is not dissimilar to what other businesses have experienced recently. Fortune 500 companies, for instance, collectively turned a 4.0 percent profit in 2009 and a 6.6 percent profit in 2010 (both figures after taxes). Profit margins in the entertainment industry, in which the N.B.A. should probably be classified, have generally been a bit lower than that.

Unfortunately, he did not provide a source for this data

However, the data from Forbes is very clear: it defines “operating profit” as Earnings before Interest, Taxes, Deprecation and Amortization, also commonly know as EBITDA. Which is NOT net profit.

The Fortune 500 EBITDA data was not readily available, but the 5-7% range Mr. Silver relied upon appears to be the range of the Fortune 500’s NET profit. The best EBITDA data (and certainly comparable) available to me is S&P 500 data.

Source: Bloomberg

As you can see, EBITDA margins are much (approximately 3x to 10x!) higher than Mr. Silver reports. He states that the entertainment industry is even lower (yet again, no sources). His range of profit margins could be from the Consumer Discretionary sector which yielded a profit margin of 6.5% in the most recent quarter. The S&P 500 media subsector (see link with further segmented information of the Consumer Discretionary category) reported 26.7% EBITDA margin in the first quarter of this year. Perhaps we should classify NBA franchises as “Consumer Services” instead? Well that segment had a 24.0% EBITDA margin.

Mr. Silver even notes both “figures are after taxes” yet continues to compare them to the Forbes data, where Forbes clearly states that their numbers are before taxes. Mr. Silver also unfortunately relies on the flawed Deadspin article. Bad data, but big hits = profit for NY Times.

I do agree with Mr. Silver’s argument….

If the league expects their figures to be viewed credibly, they should open up their books to journalists, economists and fans.

However, if the NY Times and leading economists endorse the comparison of EBITDA for NBA to net profit of a group, then I would be reluctant to disclose this as well. Notice, he didn’t mention accountants nor finance professionals.

While less relevant to the argument, its also clear that Forbes’ estimates can vary significantly from reality (a caveat Mr. Silver clearly makes).

Amortization and non-cash expenses

Amortization/depreciation is the process of depreciating an asset over a period of time. The amortization itself is a “non-cash” expense (no, not an accounting “trick”). The easiest example to conceptionalize this is a car purchase. Say you purchase a car for $20,000. Your “balance sheet” impact on this transaction would be a reduction in cash (an asset) by $20,000 and an increase in your car asset of $20,000. However, since the value of your car depreciates every year, you would depreciate/amortize it over its lifespan. Thus, for simplicity, you assume the car will be useful for 5 years and depreciate it at $4,000 per year. So is the $4,000 per year expense a “gimmick”? Of course not. Cash went out the door up front and you simply deferred the accounting of the expense over its useful life. We can hopefully agree, that when it comes to “hard” or “tangible” assets that this amortization is legitimate.

However, there are certainly “intangible” amortization items that are often removed to obtain some version of “cash earnings”. Amortization of intangibles is not new and certainly not limited to NBA ownership.

As CBA expert Larry Coon points out as it relates to the amortization of some intangibles:

This doesn’t mean they cooked their books, or that they tried to pull a fast one on the players. It is part of the generally accepted accounting practice to transfer expenses from the acquisition to the profit and loss over a certain time period.

And the very next sentences reads:

However, it’s an argument that doesn’t hold water in a discussion with Hunter and the players association, who would claim that the Nets didn’t really “lose” a combined $106.4 million in those two years, but rather that they lost $7.5 million and $17.2 million, respectively.

Okay, so even if we ignore the amortization of intangibles, the Nets “only” lost $24.7 million over two years?! That’s still quite bad, no? A far cry from big supposed profits.

I’ll also offer the response to the Deadspin article from Carol Sawdye, the NBA’s Chief Financial Officer:

We did not include purchase price amortization in the financial data that we gave to the players and all of the net loss numbers we have used both with the players union and disclosed publicly do not include purchase price amortization. Put simply, none of the Nets’ losses or the league losses previously disclosed are related to team purchase accounting. [emphasis added]

Since their are plenty of lawyers involved on both sides watching every word – I’ll take the CFO’s claim at face value. Although NBA executive director Billy Hunter did say:

If you decide you don’t count interest and depreciation, you already lop off 250 [million] of the 370 million dollars.

I have three potential problems with the statement:

  1. It’s not clear what depreciation he’s removing – if its related to capital expenditures, then removing it is aggressive [it’s a legit expense];
  2. Interest should not be removed; debt is a common and often important part of the capital structure of any company and interest is a cash outlay; and
  3. Even with these debatable exclusions, teams would still be losing $120 million in aggregate.

If you invested $400 million, would you at least hope to be able cover your interest costs on your debt? How about the $3 million in improved facilities for your players that is being depreciated? I’d hope that’s viewed as a legitimate expense. And we haven’t even come to the point of discussing why an investor shouldn’t expect a small positive return on investment.

A not so simple solution
David Berri, of Wins Produced fame, penned an interesting piece for Huffington Post “Do the Players — and Cities — Really Need NBA Owners?” He claims “a simple solution is for (cities and players) to come together and form a new basketball league…” Simple?! Um, far from.

An interesting idea, but I would not describe it as a “simple” process. Have you ever sat in a municipal council session?! Can you imagine them trying to run a sports team? Oh, you may also want to call the City of Glendale and ask them how much council enjoyed voting on this? I’m not sure where it ranks exactly but “Managing a Sports Franchise Without Losing Money” is not likely to be anywhere near the top of the list of “Things Municipal Governments Do Well.” Finally, as an economist, I’m a bit disappointed he doesn’t outline the current challenges in the municipal debt markets. Higher yields mean higher debt service costs. He also argues a dozen or so cities with over 1 million people that could potentially host a team, failing to consider their municipal debt challenges, and that many of these arenas would not have the proper (or enough) luxury boxes and local business support needed in this day and age to support expenses.

Here are the comments Berri quoted from Joe Lacob, the new-ish owner of the Golden State Warriors:

Look, sports franchises appreciate 10% a year on average over three decades, the last three decades. There’s no reason to think this won’t appreciate in value. So that is the least of my worries. We will make money on this team in appreciation of value.

While we could debate efficient markets all day, there are many examples where fundamental value and prices diverge for a period of time. The U.S. housing market (traditionally viewed as stable) was the subject of countless quotes very similar to Mr. Lacob’s. Since U.S. homeowners can write off mortgage interest on the tax returns (“Accounting shenanigans! Borrowing money to pay more than you have and getting a tax bonus? Bidding up assets? Those darn owners.” Maybe Billy Hunter should also tell home owners their interest isn’t real.) Housing prices in seven metropolitan areas appreciated by more than 80% in five years only to decline 50%+ in several cases in future years.

As the housing bubble grew, Federal Reserve chairman Alan Greenspan said something worth noting:

…this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent.

Sounds like that just may apply to NBA franchise asset growth arguments as well. Asset prices eventually find fundamental levels. And in the NBA, some reasonable cash flow is needed to sustain $300 million+ valuations (although scarcity value will reduce ROI “hurdles” vis-a-vis many other investments)

Dr. Berri’s article sources Mr. Silver’s piece as well (he should also recognize the difference between EBITDA margins and net margins, but I digress) and fellow Wins Produced disciple Arturo Galletti, who’s post boldly claims owners are “really and truly making a profit” (how he concludes this without seeing all the financial statements is beyond me). However, we can still dissect the example he (and everyone else) uses abuses. In Mr. Galletti’s first chart, he includes $340 in losses under “NBA Claimed Losses”, but adds back Roster Depreciation Allowance despite the league’s comments that “we do not include purchase price amortization from when a team is sold or under any circumstances in any of our reported losses.”

Beyond this, Mr. Galletti appears to be using a relatively current figure for average franchise values and argues a minimum of 40% of NBA franchises are using the full value of their Roster Depreciation Allowance (this figure may not be 100% of intangible amortization). From his own “Smoking Gun” picture of New Jersey’s financials (which we linked to above), it clearly states in the summary of intangible assets acquired that “franchise asset” is valued at $161.1 million or 44.6% of all intangible assets and “is not amortized as it has been categorized as an indefinite-lived intangible asset.” (emphasis added). [Addendum: I would note, however, that the RDA has changed such that his example of recent transactions (like the Golden State Warriors sale) is correct. Its the methodology and assumptions I take issue with]

While a more minor point, his assumptions would also have to assume every single company was profitable without this amortization expense – as a tax shield is useless if the franchise is still losing money even when adding back this amortization (as was the case in the New Orleans Hornets’ financials – you’ll also notice if you’re sharp that TOTAL depreciation AND amortization for the Hornets was under $0.5 million for both years. Interesting.)

One method of helping cut through the clutter is to look to the cash flow statement and calculate free cash flow. This method removes ALL amortization and deprecation and subtracts capital expenditures. For those playing at home, forward to page 7 in the New Jersey Nets financials presented by Deadspin. The New Jersey Nets had negative free cash flow of 67.6 million over the two years presented in the statements. Over 65 million dollars of cash out the door in two years. Cash.

A final note: I began this post shortly after these articles appeared. To the NY Times’ and Deadspin’s credit, they have since updated their sites and at least partially admitted some of their claims were erroneous and/or challenged. You can read Nate Silver’s follow on piece here, however he does not correct his comparison analysis of net margin to EBITDA margin. Deadspin simply edited its original post admitting: “Portions of the analysis below are wrong”. They’ve since changed the title of the post from “Exclusive: How And Why An NBA Team Makes A 7 Million Profit Look Like A 28 Million Loss” to “How An NBA Team Makes Money Disappear.” They finally admit: “The example is bad, and I apologize for that.”

I have a view that whether you are part of the mainstream media or a blogger, you should not manipulate data to serve your argument. The posts I have linked to have been widely read and largely accepted (see the comments sections for any of them) as proper analysis. And endorsed by widely followed journalists like our own Bruce Arthur (I asked Mr. Arthur to comment on my previous warning about the Deadspin article and its subsequent admission of its errors, but did not get a response).

I’ll put together a follow up post on potential solutions and what data we’d like to see. The owners’ position has some many issues (e.g. the argument to look at revenue sharing after finalizing a new CBA is very weak – it NEEDS to be addressed at the same time) and the player’s claims could be exaggerated on occasion as well. As often is the case, the truth is somewhere in the middle.

Everyone is entitled to their own opinions, but they are not entitled to their own facts. -Robert Sobel

The truth is out there.

Comment below, email me: [email protected] or find me on Twitter.

  • William Gates

    Man, I knew there would be a day where i would regret not paying attention in my business courses….

    I sent the link to the accounting dept. , once i get a synopsis at lunch , hopefully ill come back with an “informed” opinion.


  • East Coast

    Good Post Tom, thanks.

  • Tim Donahue

    This is a beautiful, beautiful thing, Mr. Liston.  I, too, have been greatly frustrated by the continuing references to and reliance upon the Deadspin and Nate Silver pieces – both would have been called “bad staff work” by my employers, if I’d done them.

    Thank you, sir.

    • Tim Donahue

      One thing I would note, however.  I think Larry Coon and Darren Rovell have done a great job at remaining “honest brokers.”  Where Coon got trapped in the piece you excerpted was in trying to translate the NBPA’s argument, as well as not knowing exactly what the owners had submitted.

      Qualifying every statement in a piece that is meant for people who don’t have a financial or analytical background gets tedious – for both the reader and the writer.  I know from personal experience.  Unfortunately, it’s easy to slide into the trap that your audience on the same page re: the backstory, and lapse into “understoods”.

  • j_hoss


    The Republic once again shows why it’s at the Top of the Class.

  • JW

    You keep using the Nets as an example, that franchise had a debt load approaching 70%, this is why it got sold to Prokohorv, they had no other choice, they were between a rock and a hard place.

    Take out the Nets, which you keep bringing up as the most generic example, and you have a completely different image of this league. 

    The key to this piece is too look at the general atmosphere to get the big picture, not its exceptions…. Why not bring up the Lakers? How fair would that be? (If you like exceptions so much you should of thrown in the Lakers as much as you threw in the Nets)

    I thought this article displayed some horrible reasoning and logic.  The housing crisis has nothing to do with this.  It’s apples to oranges, we are talking about businesses with huge revenue streams. Not condos in Florida.  Just a lot of mistakes and circular reasoning.

    Waste of time, lots of fence sitting and an overall negative addition to clarity.

    • Quirk

      I agree, the article makes a lot of hay over some nominal issues, and fails to address the post important Issue of all. Why are are owners needed at all? In what way are the required to organize basketball games? How does funding owner profits help fans or players? Tom avoids this with same lame allusion to a municipal council. Private ownership of large organisations is an archaic form of capital, ripe to go the way of feudalism. Most really large are organisations are publicly or sometimes even mutually owned, the NBA and it’s teams should be too, with fans and players holding at least the majority position. Berri is right here, Liston is not even wrong, simply off topic and delving into dodgy obscurities. Bring in some decent professional financiers and kick the owners the fuck out. 

      • Employee

         RED ALERT! RED ALERT! There’s a COMMIE amongst us!

        • Quirk

          You where right in your previous post. You are in way over your head.

          • Employee

             Honest question: are there any teams out there in any major sport that are publicly owned? I honestly don’t know.

            • James O

              I believe the Green Bay Packers are publicly owned.

              • James O
              • Bendit

                You do realize that there are very real historic reasons for this state of ownership (see your link). Under current rules of the NFL such an arrangement is not possible. As well no shareholder benefits financially because of the arrangement and all profits go to charity. I am unsure though about ticket pricing. This said, this is not a good example to use as an alternative to sports team ownership. The GBP share in the NFL’s revenue structure and have to adhere to rules like the salary cap etc. This is a farcry from what is being suggested by some posters…where the NBA becomes a player owned league. The serfs would be at each others throats at the first meeting to discuss profit (or loss) sharing…not much different from the rich owners today not wanting to share revenue.

                • Theswirsky

                  completely agree.. you are just trading one set of owners/managers for a new set that will ultimately have the exact same goals in mind (and will have to take on huge financial obligations to meet in order get the new teams going).

                  “Player owned league” is a utopian fantasy that would almost definetely fail in short order.

                • Quirk

                  In what way does funding profits for owners help organize Basketball games? Generating profits is a simple loss for both players and fans. Sports league are not really competitive, they resemble municipal utilities more than they do markets actors, and in any case the “Tycoon” model of ownership more resembles the archaic world of JP Morgan than the modern world of corporations and managed funds.

                • Theswirsky

                  a players owned league would still fund profits for the new owners (the players).   A players owned league would still have a monopoly on the market.  Nothing changes except who owns the team. 

                  “generating profits is a simple loss for players or fans”.  I have no idea how that even correlates.  You really need to explain this because it does not even remotely follow economic theory. 

                • Quirk

                  Typically consumer or producer co-operatives do not make profits, rather all revenue flows directly through to expenses. 

                  Even if it wasn’t a formal co-op. As a publicly traded organization, fans and players as shareholders would be more interested the on-court product and the general conditions and facilities for basketball than profit, as the Green Bay example shows.Players would prefer higher salaries, benefits and better team mates, facilities, coaches, etc, fans would prefer cheaper tickets, better teams, etc. “Profit” would not be a big motivator since with diffuse ownership, without a single “Tycoon” the portion of profit they could realistically earn in dividend wouldn’t be much, especially compared to what fans spend on sports entertainment products, or players receive in salary and endorsements. Fans are unlikely to lockout players over salary disputes in the hope of increased dividends. Players, obviously, are even less likely to lock themselves out.In economic theory profit is retain earnings after expenses, therefore every dollar an owner puts into his pocket as profit comes from that paid buy a fan and not retained by a player or other contributor.

            • Tom Liston

              Madison Square Garden, Inc. is:

            • Quirk

              FC Barcelona. One of the most valuable franchises in history, in any sport is owned directly by its fans. As far as publicly traded goes, lmgtfy:  


            • Raps Loyalist

              The Sask Roughriders. (by far the most profitable team in the CFL) and GB Packers are community-owned non-profit teams (profits go back into the organization…not paid out to an owner/shareholders)
              Several European futbol teams are publicly traded (Lyon, Juv…being the biggest)

              There is a huge difference between community-owned non-profit (GB,Sask) and teams that are publicly traded on the stock-market (Lyon, Juv).

              The NBA could definitely place franchises on the stock-market but then the whole structure of the league would have to change to a European futbol style (transfer fees, no revenue sharing, no salary cap, no conferences…etc) because the league wouldn’t be able to impose restrictions on the teams finances in the same way they do now.  That would make the NBA the least competitive league in the world until the semi-finals because legit upsets are extremely rare in a 7 game series.

              Just split revs 50/50 between players and owners. Set a hard cap at 60 million. Limit contracts to 4 years and make the rookie contracts 6 years (with a team option to release a player after the 3rd season) so that teams can hang on to their young stars.

              Also have the 8 seeds in each conference up for grabs in a mini tournament at the end of the season so that teams don’t tank (Bill Simmons was on point with this)

              • Nilanka15

                Sounds so simple, it just might work!

      • JW

        Just the allusion, to the worst case scenario being a housing crash, LOL.  Let’s see, one is an example of over supply and pumped up demand, in the real estate market.  Characterized by borrowers who did not have 95% to 100% of  the money.   The other is 30 franchises in a world market with rapidly growing revenues streams and most of the franchises soundly owned.  

        I don’t think there is going to be a bubble here Tom,  I don’t think franchises are going to be sitting vacant and borrded up squatted by hobos because there is too many of them.   I am sorry if A and B looked similar to you… but they are not and just because it comes to your head as an example of capital loss does not mean it is an appropriately weighed counter argument.

        • Tom Liston

          No, not likely a bubble. Attempted to point out that asset prices don’t always reflect their underlying fundamental value.  Again, I ask that you don’t let it take away from the major points I was trying to get across.

      • Tom Liston

        Hi Quirk.  We debated this before:

        Again, I point you to an example the challenges FC Barcelona faces:
        From Wikipedia:
        An audit by Deloitte in July 2010 showed that Barcelona had a net debt of €442 million, currently 58% of net worth as evaluated by Forbes. The new management of Barcelona, which had ordered the audit, cited “structural problems” as the cause of the debt. News had emerged that the club had recorded a loss of €79 million over the course of the year, despite having defended their La Liga title

        • Quirk

          Yes, and respectfully, you failed to defend your position then too. You are now again trying an invalid argument because you have not explained how any debt problems FC Barcelona has are a consequence of the form of ownership, and you ignore that they are still among the valuable sports assets in the world. Further, the chances of you making any argument that ties current debt problems to the form of ownership is slim to none, as economists such as David Ellerman have studied relationships between ownership forms and performance extensively and found that if form of ownership is a factor at all in terms of performance, stakeholder-based ownership such as co-ops, etc, are generally most productive, even huge ones like  John Lews, Mondragon, etc. I’m sure there are more recent versions of his arguments, but I’m recalling the “Worker’s Control” collection of essays Elerman edited in the 70s, which included essays from Daniel Bell and Andre Gorz. No disrespect to the Republic, but I’d be pretty surprised to find out that Ellerman and his associates are wrong in the comments section of this blog. But hey, give it a shot.

          • Quirk

            Since this is a Basketball blog, I guess most people wont know who Ellerman is, so here:

            Short story: He’s a major economist who spent 11 years at the World Bank with Joseph Stiglitz and Nicholas Stern. So he is to contemporary economists what Dennis Lindsey is to GMs. Only even better. 😉

            • meductic

              So he is an egghead from MIT. Isn’t that where the great Noam Chomsky teaches. Noam supported Hugo Chavez but get this, he no longer does because he now thinks Hugo may have anti democratic tendencies. Couldn’t see that won coming. Read Milton Friedman or even Adam Smith. Geez… I went to a business class and a philosophy argument broke out. We should organize the world into worker collectives… no wait, hasn’t that already been tried?

              • Quirk

                Impressive non sequitur density!

          • Tom Liston

            No, its not 100% about the debt – its about the rate they are adding to it.

            Its about running an enterprise at break even or better.
            I had pointed this out in our previous discussion:
            Running loses of ~€77 million in a single season is not sustainable year after year.  

            I’ll quote the Javier Faus, a Barca vice president, “The sporting excellence of the past few years has not been reflected in excellence in economic management.”

            The article also states “Barca admitted cashflow difficulties and were forced to seek a 150-million-euro bank loan to address ‘liquidity problems’.”

            • Quirk

              You can add random details as you like, but to make a valid argument you will need to show that ownership form is the root of these issue, which you will not be able to do, as explained above. It’s a well studied area of economics.

            • Quirk

              And of course, on the subject of Barca specifically even from your short post we can see that they have achieved:
               – Sporting Excellence – Collateral value sufficient to be granted a 150 million euro loan.

              Just these two facts are already enough to know that while they are certainly facing difficulties, they have built a tremendous amount of value. 

              So even this aspect of your argument doesn’t seem to support what you think it does.

              There is no reason to believe that stakeholder based ownership would not work for a Sports franchise. None. Zero. There is mountains of evidence to the contrary. Stop torturing logic and accept this well established fact.

    • Voiceofreason

      I don’t think the point of the article is to discuss the image of the league or the big picture of the lockout. Its  saying that the accountitng and economic principles of widely read and quoted articles in the media/blogosphere are using flawed methodology to prove their points followed by an explanation on why they are flawed.  The Housing market is used an example of an “efficient” market, it was not used as a comparison.  Mr. Liston not only did not sit on the fence in his position that the accounting is flawed he jumped the fence and named names.

    • Tom Liston

      I do not have access to the Lakers’ financial statements.  If I had access to all 30 teams I would have used it.

      I have only found financials for the Nets and Hornets.  If you have access to others, I will happily analyze them.

      The Lakers likely generate a handsome profit.  However, I think the goal is to ensure all 30 teams are solvent.  Hence my analysis.  

      You can ignore the housing analogies.  Its not relevant to the major points like comparisons of EBITDA to net income or highlighting why no one seems to want to address the cash flow statement in their analysis.

      Sorry for wasting your time.

      • JW

        I did not mean to insult you, with it being a waste, more along the lines of it not being clear and all over the place, arguments made for the sake of argument and in the end it muddies the waters more than shines the light on the subject.

        I am not surprised that you don’t have the Lakers financials, those ones are not being circulated.   So at some point you need to use a bit of discretion and consider what spin you yourself got misdirected by and what spin you maybe casting on a subject that you too seem to have a questionable grasp of.

        You point out the flaws in other writers, but make some blunders yourself, and of all the attempts to present this matter to us you end up sitting on the fence, making your readers ask WTF was the point of that?   Is this piece about you checking numbers or is it just word padding?   At some point you need to be a little more concise and have a clearer objective.

        I don’t mind disagreeing with you, but for god sakes spill it. Don’t try to be Mother Teresa.

        • Quirk

          Tom, I agree with JW here, and also echo that no insult is intended on my part either. I like your contributions here a lot. It’s kind of funny, that it seems like when it comes to Basketball performance I agree with you more often than Berri, but it seems with regard to economics I’m in Berri’s court. Anyway, keep up the great work.

        • Tom Liston

          JW, what do you consider “blunders” (no doubt I may a few, but curious what you thought were the major ones).

          I realize you believe its fence sitting, but I was shooting for “balanced” (similar?). 

          Overall, I think the owners are asking for too much in some cases (e.g. hard cap) while the players also need to give (e.g. no more fully guaranteed 5 year deals – actually win-win – fully guaranteed deals “crowd out” salary for other hard working players)

          • JW


            I think your balanced approach is insincere, because it gives the reader the impression you do not have a point of view on the matter.   It is clear you do, and hence the balancing act comes across a little muddled to me, and the over all piece very limp.

            • Malefax

              I find your comments on the piece unfocused and argumentative, lacking evidence and showing a general failure of critical thinking.

              Perhaps if you work harder on making sense and supporting your opinions in a convincing, unbiased way, you will contribute more constructively to the discussion.

              • JW

                I thought my comments were point on, and I still stand by them. 

                (especially the critical thinking part)

                Guys, you give nothing by your ass kissing… I actually give feedback to the writer. If he has the sense to use it. No one wants to see Peggy, Sue and Sally.

          • DeeNBAGuy


            Why in the world would players give up guaranteed contracts? That makes no sense at all…

      • Bendit

        I believe you alluded to the lack of revenue sharing in the post as the negative in the owners approach to putting their own house in order. Teams like the Lakers, Knicks & Celtics eg. with their rich local tv contracts make them not only successful on the court but off it as well. They are in fact feeding off their lodge members who maintain the structure (league) in which they operate and allows them to make their profits. This was more an accident of geography/demographics. Why the “richies” dont see this is beyond me. But then one just needs to follow the economic wrangling occurring on the national level in the US to find this not entirely surprising. 

        • Matt52

          Revenue sharing is most definitely on the table in the NBA.  Stern has said that issue will be addressed once the CBA is done.  It is difficult to discuss sharing the owners portion of revenues when the largest expense (players salaries) is still undetermined.  

          The issue, in my opinion, player are setting themselves up for is contraction.  If a system is in place where the majority of the league is profitable, how long before teams start to question the ‘losers’ existence?  For every team removed that is 13-15 jobs for the players. 

          • Bendit

            Sorry Matt, my memory tells me that Stern has been “promising” this for years now. He may well be sincere on a personal level because it is really the holy grail of professional sports league operations where stability and growth of the league takes precedence over the individual team. It also shows the players that there is a form of self-policing by the owners who while trying to maximize profits individually and collectively as a league offers the best solution to salary and possibly job growth through expansion because of the league’s business stability.

            I am not sure if the NFL today would have enacted their revenue sharing structure if they hadnt many years ago through the foresight of certain owners and a commissioner who saw long term growth thru league-wideoperational equality/profitability. Actually there are frays in that arrangement beginning to happen with teams like Dallas leading the move to provide more restraint on individual team profit sharing. These guys dont get it…they owe their profitability because of the whole in a way.

            If it were possible the others could threaten to expel the Cowboys and replace them with another franchise in Dallas. That is probably the only way Stern could get LA or the Knicks etc to share their individual market’s tv revenue. Will it happen? At best they’ll gloss it over where there is no accountability that recipients of shared dollars will spend it on players and better still on the fans in some way (even more basketball courts in the community would be a start).  I think the players would be more amenable to suggestions of a hard cap etc. if the owners were serious on this matter…not after the fact.

  • Employee

    This is waaaaay over my head.

    Ummm, GO RAPTORS! 

    • JW

      Looks like its over the writers head too.

  • Nilanka15

    Coming from a science background, I’m not going to pretend I understood the finer details of this article.  But the one thing I can say with any certainty is that both sides are being bitches (for lack of a better word) about the whole process, forgetting about the fans who are 100% responsbile for every dollar of the NBA’s worth.  It’s a damn shame that we have to witness two very wealthy sides squabble over amounts that most of us would be lucky enough to see over an entire lifespan.  Cut the bullshit already, and start playing basketball for fuck’s sake.

    Until then, go Jays go.

  • Johnn19

    The NBA CBA un-negotiation, is officially in the HE said, SHE said stages of a divorce settlement and will not get anywhere untill the players start to feel the economic impact, as the owners who are losing money, will be making money by not playing games. 

  • ezz_bee

    Great article.  For me the question isn’t whether the current CBA needs to be changed, the question is how should be changed?  To me it seems like the owners only have 1 solution, cut back salaries. Is that the ONLY option?    

  • barenakedman

    The equitable solution to getting the league up and running quickly has to hinge on revenue sharing that is transparent and includes ALL streams of income. Lets say that split is 50-50 with the players.Each team deposits the players share into one communal account that pays the players. If there isn’t enough to pay the players salaries they all equally take the cut necessary.  In other words if there is a 10% shortfall everyone takes a 10% hit but if there are excess funds  after paying the players salaries distribute them to the players or a pension fund.The players would have to agree on an adjustable team salary cap that would try to reasonably ensure that salaries could be paid from their 50%.As far as some owners losing money while others are raking in huge profits that is something they would have to work out but at least it could be done while the league is operating. I realize this is a simplistic concept and that there would be collateral issues that would have to be worked out but sometimes the simplest things are the best. 

  • CalgaryRapsFan

    Great article Liston!  Even if people don’t agree completely with the analysis, I think the article does a great job outlining the pitfalls of any collective bargaining negotiation.  The two sides are never meant to have full transparency of the opposing side’s finances/goals/strategies/etc…

    There was a good article today on CNNSI (front page of NBA section – sorry, no link) that brings up a few other interesting points, from the union’s side.

    The one big point from the CNNSI article that I hadn’t read about until today, was the inclusion of owners’ related businesses.  For example, when MLSE is doing their finances for the Toronto Raptors, how much can/should they be able to include for things such as: stadiums, restaurants, etc.. that are not exclusive to the NBA franchise and often operate regardless of the status of the NBA season (ie: restaurants that are open year round).

    I think the big problem with the NBA’s collective bargaining is that there is no consensus on a starting point.  What can/can’t be included in income and expenses for an NBA franchise.  Even if they agreed on that, they’d have to agree on how those accepted incomes/expenses were calculated.  These are 2 absolutely huge hurdles to get over before the negotiating can truly even begin.

    • Tom Liston

      I really appreciate the CNNSI link.  Very informative;
      See here:

      I thought something like what the Union’s lead attorney mentioned may come up: “…the idea franchise values generally increase in the long term regardless of short-term financial problems is an important issue for the union, because it could show the sport is healthy.” (I’m quoting Zach Lowe, not the attorney) This is why I included a section on asset prices.

      To paraphrase Joe Lacob, from the MIT Sloan Conference (my post here:
      Lacob: Its really hard to get these deals done. Have to strike when situation comes up. So hard to value teams. But the opportunity to buy rarely comes up.

      Implying you have to pay up due to scarcity value.  So few teams and they do not come up for sale that often.  Recall Oracle’s CEO Larry Ellison was also in the bidding. 

      I agreed with Bill Simmons,  who was at the same session. 
      Simmons: Three reasons why he thinks teams are purchased: 1) Owning is an investment. 2) Hero complex. White knight. 3) Ego thing. Attention.

      The latter two can affect prices – especially given the scarcity value.

      The article also affirms that the union has received “audited financial statements for the teams and the league”.  Thus, the union could also disclose cash flow from operations from all the teams (this would remove all amortization) or even EBITDA if they felt it would help their cause.

      • mountio

        Good article Tom .. thanks.
        I think these posts touch on the most important issues here.
        Your discussion of EBITDA vs net income is a good one .. but frankly, EBITDA is the most prevelant metric in the industry for a couple of reasons. A) its the most widely used value metric (so for those who value teams based on profitability metrics, they use EBITDA primarily as opposed to net income, EBIT or something else and B) those other metrics are very much dependant on a number of factors that dont really relate to the operations of the business. For example, if a company decides to implement intercompany debt and recrod a bunch of interest expense to reduce their taxes .. thats fine, but shouldnt be used to compare agiainst a company that doesnt do this. So, as long as you are talking apples to apples, EBITDA is the way to go from my perspective.
        However, the more important factor is allocations (as calgary refers to). There are many different ways to accont for these. The best illustration is suite revenues. These are typically sold as a package for the year and there are several ways to interpret how they should be allocated between the team (or teams if two share a building) and the general “arena” profitability. This is not simple, and often the teams would account for this one way, the leagues another and Forbes another (forbes is guessing of course as they dont have all the details). Its not a simple issue. If someone pays, say, $50 k for a box at the ACC, how much of that is for the leafs, how much the raps and how much the “arena”? you can divide by number of games, but obiously a leafs game has more value than a crappy concert. The league takes a point of view on this (althought Ive never seen it publicly) as do the teams .. and it varies wildy. The end result can be “teams” that are not very profitable and a hugely profitable “arena”. Making sure you are talking a standardized language on these factors has a much greater effect than the below the EBITDA line items (although both can be impactful)
        Finally, i thik you touch on a good point of asset value tom. if these teams all sold like normal businesses for say 8x ebitda, then ebitda would be a lot more important. But, since teams continue to sell at healthy valuations, regardless of profitability, owners can still make adequate returns even though the majority of those returns come in the forms of increased asset value as opposed to cash flows generated during their ownership.
        Anyways – lots of interesting stuff – thanks for the article. Ill try to tackle the “we dont need owners” point above some time tomorrow, but Im with Tom on that one.  

  • slaw

    Tom, I don’t think it’s a case of people misrepresenting or making up their own facts. Rather, it’s a case of people simply not understanding the concepts and defined terms they are using. It seems to me that from reading some of these articles it is clear that these writers have no idea what these terms of art mean, why they are used, and why they matter/don’t matter.

    For example, a generic EBITDA number (or net profit) tells us nothing when it comes to the main dispute here (i.e. what’s BRI and how should we divvy it up). To my mind, the better approach is a FCF number per team, less cash taxes and cash interest paid in the applicable period. Of course, we’d also want to see gross revenue numbers to determine what expenses were being deducted in calculating OCF and capex. Tweak the D&A to limit it to tangible assets and you have the start of something. Or am I missing something?

  • BCGheradiniJayGots2Go!!!

    Just because some accounting practices are legal and/or accepted practice doesn’t make them honest & forthright as numbers lie to the average fan more than cheating wives lie to their husbands.

    Gross. Net. Transferable. Amortizing. Debt service expense. Roster depreciation expense.

    Revenue sharing amongst the owners is a must unless in Stern they really trust!

    Fyi- The current lowest valued NBA team is 258 million dollars as per Forbes Magazine.

    The NBA’s off court expenses have risen sharply as well, maybe they need to cut back.

    As well, the NBA has a TV deal to renegotiate in 2015 or 16 so most likely there will be major money added to the equation that may or may not be applied and/or taken into consideration in these current negotiations for a new NBA CBA.

    Wikipedia is not a credible source people!!!!lmfao

    • Jonathan

      Better than you. “!!!!lmfao”

  • Brothersteve

    As a (retired) Chartered Business Valuator who has worked for E&Y and KPMG valuing companies for buy/sale, ligitation, and shareholders – putting stock in anyone’s private financial statements without unrestricted access to management, internal records, and the auditor’s working papers is beyond foolish. 

    The Union is NOT getting that kind of access (and the accounting fees to do the work could easily hit seven figures if it was.)

    There is a lot of truth to the old joke: Ask an accountant what 2 + 2 is? Answer – What do you want it to be?

    There is little reason to argue over the numbers – neither side in a labor dispute has any reason to believe what the other side says – BUT the union has to know the owners will lock them out all season if they don’t offer significant concessions.  Accept reality and negotiate knowing all the facts will never be made available.

    • Sam Holako

      I agree 100%, Steve. Stop posturing, and get a deal done. The longer it goes, the more the players will lose in terms of future earnings and next seasons salaries. Look what happened in hockey; the players basically got the same deal the owners gave at the beginning, and lost all that salary in the process.

      • Theswirsky

        “stop posturing, and get a deal done” is easier said then done.  If it was that easy they would have gotten it done long ago. Something as simple as a minimum salary has multi-million dollar reprecussions over the life of a CBA.

        To say that the players should just give up because another union failed is doing a disservice to all unions.  If that was a union’s philosophy the world is taking a step away from workers rights.  Don’t forget the owners have huge interest in this aswell and are losing money daily. If I’m in the player’s union I’m telling the players to tighten their belt buckles and to look for jobs overseas.

        Not sure the owners will be as willing to hold a lockout if Lebron James or Kobe start showing up on NBC or ESPN playing for Real Madrid or Maccabi Tel Aviv

  • Name_discrepancy

    Great post. I’m a CMA/MBA and in the banking industry so have a decent handle on accounting, and it blows my mind about some of the articles and comments out there and how brutally incorrect they are. The NBA is a multi-billion dollar business, and in a financial situation like this, I’m surprised there are not more of the financial media all over this, rather than the traditional sports reporters trying to explain some fairly complex stuff.

    The best financial statistic in my opinion is the free cash flow as its the best way to try to take out some of the noise and get to the guts of how each time is doing. It would all be a lot easier if each team opened up their books, however I’m sure they all report things slightly different and it would be a nightmare to try to combine everything with all of the adjustments. They likely just used net income because its the easiest to add together for 30 teams/30 different financial reports, rather than to do it maliciously – I can’t imagine they would be trying to ‘trick’ the players.

    • CalgaryRapsFan

      Ideally there would be a standardized reporting format across league, even it was strictly for internal league use.  There are 2 big problems that I see: first, some owners own just an NBA team, whereas some own multiple teams, stadiums, cable channels, etc…; second, with each state having unique tax laws, etc… even GAAP doesn’t provide for complete consistency in reporting.

  • RapthoseLeafs

    Great article Tom.

    I started university in the Chartered Accountancy program (but switched to Economics), so it’s great to read an article like this and be able to “dig” into these numbers and subsequent interpretations. 

    From my memories (and keeping up on things), accountants can do slight of hand tricks to numbers (most legit), where they run a contract expense in one year, and the revenue later. Effectively showing a “fundamental profit increase in operations” year over year that can look good for the shareholders – and with “generally accepted accounting procedures” being the catch-all phrase.


  • Matt52

    Great read and great work, Tom.

  • Theswirsky

    Just curious, wasn’t the issue with management amortizing its purchase price not so much with the accounting practice itself, but rather if you amortize the price of the team, and say ‘therefore I need to lower your (players) wage to pay for it’ its actually putting the cost on the players rather than the individual who actually payed for and owns the team (which in the end will still be an asset to them).

    To use your car analogy, its like buying a car and when you give your coworker a ride to work you ask for gas money and a portion of the cost of the car… even though in the end only you maintain complete ownership.

    • Tom Liston

      Good point.  Ultimately, its about if the large majority of owners (if not all) are at least cash flow breakeven (or close to it) or if a significant number of teams have significantly negative cash flows.  

      If its the latter, the second debate is how much the CBA should be adjusted, how much of the costs are due to non-player salaries, benefits, facilities and transportation (i.e. other costs that owners could manage better) and what adjustments to revenue sharing could be made to alleviate part of the problems.

      • JW

        They can expense out loans, just so you understand.   The price of that money will go against their expenses.  So in essence they can write of an entire expansion 100% against profits, even show losses and still be a very sustainable and a well managed business.

        In this environment, corporations are growing due to favourable tax laws and credits that allows them to dominate the entire US economy right now. Folks are doing bad, but CEO’s on average received a 21% rise from 2009 to 2010. Also lots of businesses sustained crucial asset expansions, and they have been lobbying for relaxed capital gains to complete the theft cycle. If the NBA did so badly in this environment, I will be stunned.

  • Joaquim

    The long and the short of this situation, accounting questions aside, is which side has the will to stand their ground and force the other side to budge.  This matter of the worth of franchises doesn’t mean squat to an owner because he will only access this value when he sells the franchise.  Players are making ridiculous money but they gotta keep playing to continue to earn a living (except for the megastars like Kobe who can chill in his mansion).

    All we’re doing is speculating and guessing.  It would be better, and unfortunately ideal, if they both came to an agreement COMPROMISED and moved on.  The useful example is the situation of the NFL: teams like the Packers, in a small market compared to NY, Chicago, LA, has a chance to win the prize.  What are the chances that the Bucks can win the NBA championship?  Much smaller than the Packers’ chances.

    let the posturing continue….

  • Sek99

    This whole article makes the overall issue more complicated than it needs to be; the owners are losing money, and the players make pure profit. The owners are in it to make money, that’s why they spend hundreds of millions each year on the whole team operation. They aren’t going to throw that amount of money away unless there is way they can at least break even while maintaining a team. I’m not an extremely business minded person, but I do know that the owners have so much operating costs, while the players don’t. It’s simple. I think it was Latrell Spreewell who turned down a several million dollar contract, asking for more, saying he needs to ‘feed his family’. Everyone wants to make money after all, but the players are clearly coming out ahead at every turn. Patrick O’Bryant made hundreds of thousands of dollars a year for being 7 feet tall. The reason they get paid this much is obviously because there is a market for it, but still.

    In my mind, this whole issue over the CBA is ridiculous. The players should accept a more fair split so everyone makes a profit. I know I’m saying they should give up millions + dollars, which I wouldn’t want to give up either, but its better for everyone (fans included) if all people involved in a franchise are making a profit, or at least not having ridiculous loses. A hard cap especially would help things be more competitive for all teams. I don’t believe the Mavs won because of their massive payroll (Caron Butler was out, after all) but they still hurt the league in that they are able to pay Haywood and Marion, starters on most teams, starter pay to come off the bench, while teams like the Bobcats have to trade away their best players because, in order to make the playoffs, costs are just way too high in smaller markets. That is a problem, and if Kobe Bryant making 15 million a year (through contract alone, don’t forget sponsorships) instead of 17 or 18 million a year, the players should see that that as good for the league, and realize that any sum with 7 figures is well enough to feed your family for many years to come.  

    • DeeNBAGuy


      Players have every right to negotiate a contract for as much as they can get. It’s the American Way — it’s Capitalism.

      And they players have made concessions for a smaller percentage of the BRI — 54%. Somehow you fail to notice that.

      • Sek99

        Yes it is capitalism, but that doesn’t make it right. This is a sports site, so I’m not going to get into a debate about the merits and failings of capitalism, but everyone can agree that when one makes millions, if they were to make 10 or 20% less, while still earning 7 figures, they are very lucky and should be grateful. Obviously they have the right to earn as much as they want, but they are being selfish when there’s a lockout due to there only willing to concede down to 54%, which is not very far from where they are now, and also hate the idea of the “hard cap” salary which allows all teams to remain competitive even in small markets opposed to something more like the MLB where the Yankees just buy everyone, sort of similar (although not nearly as bad) as to what the Mavs did this year. 

        • DeeNBAGuy

          Should be lucky and grateful? WTF, that makes no sense — the players are the product. This is BIG business.

          Would you be luck and grateful making minimum wage? How about you run to your bosses office tomorrow and volunteer for a salary cut  AND a 10 YEAR salary freeze.

          You seem to have no comprehension of the art of negotiating. You don’t just lay down and get butt-f.ucked. If you knew anything about the CBA of 1999, you’d have some idea of the major points that the owners already have. If players concede anything major this time, they won’t have any leverage in future negotiations.

          The owners have yet to concede ANYTHING in the negotiations thus far. The players are willing to give up $600 million dollars in salary rollbacks. Is that chump change to you?

          The players are right in their argument that a lot of money lost is due to poor decisions on the part of management. And that should extend to league office. They have a TV deal that pays $930 million a year while the networks are selling advertisements for $1.25 BILLION this year. That’s squarely on David Stern. He has the league locked into an 8 year TV deal instead of 4 years like that had always done before. That deal should be up this year and the NBA could easily get about $2.5 Billion. Lemme guess, that’s the players fault too?

          Salary cap is primarily so an ownership issue — Big market vs Small market. The players get paid to do their job not to guarantee competition levels. They are free to take their talents to wherever they see fit

          • 2damkule

            i think you made a significant point in your last paragraph…the chasm between the big-market & small-market teams is probably greater at the moment than that between the union & owners.  i really do think that the players – at the end of the day – will cede a great deal.  they understand that the owners are willing to consider locking out for an entire season, partly because of what happened in the NHL, and partly because they know just how many players live paycheque to paycheque (as ridiculous as that may be for us mere mortals to comprehend…it’s human nature to live to your means, and once those means run out…well, stances that seemed so firm tend to become more flexible).

            anyway, the point is (and there is one in there somewhere) that there is likely going to be a greater (albeit mostly behind-the-scenes) battle amongst the owners than there will be (publicly) between owners & players (though that one will be louder).  and that behind-the-scenes battle is likely going to cause this to drag on much longer than it truly *needs* to.

            • DeeNBAGuy

              That’s why the whole thing seems weird to me because the primary issue is big market vs small market. That needs to be resolved first, in terms of the cap and revenue sharing.

              I don’t see how you can determine the players’ slice of the pie until that is resolved. Say for instance, the players agree to a rollback down to 52% of BRI. The players would be guaranteed that money regardless of a soft cap (like they have now) or a harder, flex cap (the one that owners are pushing).

  • Raptorsss

    I wish I took micro economics/accounting in uni, but alas math isn’t my thing.  However, the best article I read, I could try and find it again, is the owners argument that players costs are out of control is 100% flawed.  The players have a fixed income of 57% of net revenue before expenses.  that means that their income is fixed to inflation and doesn’t increase above of the net revenue. 

    However, what has increased exponentially is management expenses and stadium expenses.   Things the players have no control over whatsoever.   The players have already agreed to reduce their 57% share of revenue and are advocating for revenue sharing before a cap.  something I am 100% in favour of.

  • DeeNBAGuy

    Glad you pointed that out about the player salaries. There seems to be an impression that owners are losing money because of salaries. In reality, salaries never exceed 57% of BRI and there’s an 8% Escrow Tax that effectively creates a hard cap on player salaries.

    The variable expenses (gas for plane flights, food, lodging, management, marketing, etc) have risen due in part to the current economic climate. The owners act like they should be immune to that for some reason.

    I have no pity for any new owners because they know that the players get 57% of BRI before the purchase the team. If they didn’t like the split, they should not have bought the team.

    Eventually, I think the players may go as low as 52% of BRI for maybe 4 years. That’s roughly a salary rollback of $250+ million per year. That’s all the really need to do. The cap issues are between Big market and Small market owners. They need to devise a better revenue sharing plan to make things more competitive. BUT parity is not necessarily a good thing for the NBA. The league thrives when the Big market teams like LA, Boston, Chicago, New York are competitve

  • Nuevo estilo Adidas

    With havin so much written content do you ever run into any issues of plagorism or copyright violation? My blog has a lot of completely unique content I’ve either created myself or outsourced but it seems a lot of it is popping it up all over the web without my agreement. Do you know any solutions to help prevent content from being stolen? I’d genuinely appreciate it.

  • Statement

    can’t be the real Overeem, he wouldn’t admit to eating thee pensuls

  • DH

    Hahahha “cream coldy” that’s gold.