Blog Entry

What's a few hundred million among friends?

Posted on: March 19, 2010 7:12 pm
 
NEW YORK – David Stern says the NBA will lose $400 million this season. Billy Hunter has crunched the numbers and disagrees. How could the two men charged with negotiating a new collective bargaining agreement for a $4 billion industry potentially be hundreds of millions apart when it comes to the focal point of their argument? 

Well, it’s tax season, so to paraphrase Mark Twain, one way is this: Liars, damn liars, and accountants. 

Aside from the fundamental argument over whether players or owners should bear the brunt of a difficult economic environment, the two sides disagree on what figures should be included in the league’s profit-loss statements. When asked for a response to Hunter disputing Stern’s number Friday, NBA spokesman Tim Frank said, “Our financials are based on GAAP accounting.” This is important because GAAP – Generally Accepted Accounting Principles – allow for non-operating expenses such as interest and depreciation to be included when depicting the health of a business. These expenses, and how they are taxed and depreciated, allow companies more leeway in reporting earnings. (The NBA is not a public company, and thus is not required by law to disclose such things.) 

The players believe that they shouldn’t be asked to make concessions to account for expenses such as interest associated with an owner’s purchase of his team or arena. Since no major American pro sport has ever given players an ownership stake, the players never share in the upside of rising franchise values. That’s an investment risk taken by the owners, most of whom stand to reap huge returns if they ever sell their teams. 

Another tricky aspect of the NBA business that makes deciphering its health difficult is related-party transactions. At least five teams – the Knicks, 76ers, Nuggets, Raptors and Bulls – are the property of owners who also own the arena and local TV network. (The Bulls are co-owners of their arena and network.) Six more – the Kings, Pistons, Hawks, Wizards, Jazz and Lakers – are property of owners who also own the arena. (The Lakers are part-owned by AEG, which owns Staples Center.) More teams, like the Spurs and Pacers, don’t own their arena but operate it. 

This means that if the Sixers, for example, are losing money, chances are a significant portion of that money comes from arena and TV expenses, which all flow to Comcast-Spectacor, which also owns the team. It’s a dream scenario – like losing millions of dollars to yourself. 

Do these issues account for all the difference between Stern and Hunter when it comes to the financial health of the NBA? According to CBSSports.com’s analysis of the NBA’s ticket sales projections for the 2009-10 season, probably not. 

Stern’s $400 million figure appears rooted in a doomsday projection of a double-digit league-wide decline in gate receipts – the money teams bring in from all ticket sales – during the 2009-10 season. Based on ticket sales data from July 2009 obtained by CBSSports.com, the league was looking at a 17 percent decline in revenues from full- and partial-season ticket plans this season. The figures excluded three teams – the Knicks, Lakers and Thunder – because they had not reported season-ticket sales in July 2008 for comparison purposes. 

Season-ticket sales are important not only because they provide teams with revenue certainty, but also because they account for the vast majority of ticket revenues. Of the more than $1.1 billion in league-wide gate receipts during the 2008-09 season, $917 million – or 83 percent – came from full- and partial-season ticket plans, according to league data. 

At the 2009 NBA Finals – weeks before the July report obtained by CBSSports.com was produced – Stern floated the possibility that the league could see as much as a 10 percent decline in basketball-related income during the 2009-10 season. (Gate receipts are about one-third of BRI, which determines the salary cap.) That figure was later revised to a reduction of between 2.5 percent and 5 percent in a league memo to teams. In the memo, the league warned that the resulting drop in the 2010-11 cap would be $5-8 million from its previous level of $58.7 million. 

If 2009-10 gate receipts declined 17 percent – as the league’s July report suggested would be the case – it would’ve resulted in a loss of approximately $200 million in ticket revenue. Potentially, there’s the difference between Stern’s stated annual losses of $200 million in the first four years of the CBA and the $400 million he projected for 2009-10. 

But the latest data available on gate receipts showed a decline of only 7.4 percent for 2009-10, according to another league ticket sales report through Nov. 29 that was obtained by CBSSports.com. The 7.4 percent decline in revenue was associated with a 3.7 percent decline in paid attendance, the report said. No updated figures have been made public since then, but Stern said during All-Star weekend that attendance would be down about 2 percent this season. “It is doing better this season than we were actually projecting it,” he said. 

If the decline were to have held steady at 7.4 percent since Nov. 29, the resulting loss of ticket revenue would be about $80 million – not the $200 million reflected by the league’s July projections. 

Frank, the NBA spokesman, declined to discuss league financials, saying the appropriate data were being provided to the players’ union. 

Which can only mean that those damn accountants have a lot more fun ahead of them.
Category: NBA
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