Such a move would not be without precedent: the N.H.L. canceled its 2004-5 season. But the N.B.A.’s current financial condition is different than the N.H.L.’s in one important respect. Whereas there was almost no doubt that the N.H.L. was in fact losing money in advance of its lockout — player salaries had mushroomed by more than 400 percent from 1994 to 2004, according to independent estimates — the N.B.A.’s claims of financial hardship should be viewed more skeptically.
Instead, independent estimates of the N.B.A. financial condition reflect a league that has grown at a somewhat tepid rate compared to other sports, and which has an uneven distribution of revenues between teams — but which is fundamentally a healthy and profitable business. In addition, it is not clear that growth in player salaries, which has been modest compared to other sports and which is strictly pegged to league revenue, is responsible for the league’s difficulties.
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So why are N.B.A. owners seeking such significant reductions in player salaries, reportedly to about 45 percent of league revenues? The simple reason is that they think they can — and this reflects an awful lot of money. If salaries were reduced to 45 percent of revenues, this would save the owners roughly $500 million per year, or about $3 billion over the course of a six-year labor contract. It is hard to estimate either the near or the long-term cost of cancelling a season, but the potential gain from a more favorable contract is large enough that it is something the owners might be willing to risk.
What the owners may be thinking about is their position compared to that of the other sports leagues. Baseball and football are cash cows, with the N.F.L. having brought in more than a billion in profits (before taxes) in 2009, and Major League Baseball about $500 million in its most recent season.
By contrast, the N.B.A.’s position is more comparable to that of the N.H.L. Several N.B.A. owners also own N.H.L. teams, and they may be looking to that league’s lockout as having been successful, because it recovered from $228 million in operating losses in the three seasons preceding its lockout (according to the Forbes data) to a state of profitability comparable to the N.B.A.’s.
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A similar discrepancy exists today between Forbes’s estimates — a $183 million profit for the N.B.A. in 2009-10, and those issued by the league, which claim a $370 million loss. The difference between the two numbers is roughly of the same size on an annual basis as the salary concessions the N.B.A. is seeking.
There are several reasons to be skeptical of the N.B.A.’s figures. First, many of the purported losses — perhaps about $250 million — result from an unusual accounting treatment related to depreciation and amortization when a team is sold. While the accounting treatment is legal, these paper losses would have no impact on a team’s cash flow. Another potential (and usually within-the-law) trick: moving income from the basketball team’s balance sheet to that of a related business like a cable network, or losses in the opposite direction.
Second, the leaked financial statements for one team, the New Orleans Hornets, closely matched the Forbes data. And the sale prices for some teams have exceeded their figures. The Golden State Warriors were purchased for $450 million in 2010 — more than the $363 million that Forbes estimates they are worth. The Detroit Pistons were recently sold for a price reported to be about $420 million, more than Forbes’s estimated value of $360 million. The Washington Wizards were bought for $551 million last year, a 70 percent premium over Forbes’s estimated price of $322 million. Comparing actual to theoretical sale prices is not always safe because other assets are sometimes packaged with the teams, but the market for N.B.A. franchises is clearly quite healthy and inconsistent with what the league claims to be a failing business model.
The third reason for skepticism: the N.B.A.’s data has not been made public, although it has been shared with the players’ union. If the league expects their figures to be viewed credibly, they should open up their books to journalists, economists and fans.
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None of this means that the N.B.A. is without problems. For instance, the sluggish growth in ticket revenues may suggest that the league’s fans, who are younger than those for other sports and more likely to be African-American, are being priced out of the stadium experience.
In addition, the fact that a significant number of teams are failing to turn a profit, even by the Forbes estimates, reflects a potential lack of competitive balance in the league. Since 1990, a total of eight distinct N.B.A. teams have won a championship, compared to 13 teams in each of the other major sports leagues. Although some of this has to do with factors intrinsic to the structure of basketball, the current salary cap rules may worsen matters by limiting player movement, making it difficult for teams to rebuild. Fans in many cities have little realistic hope of seeing a championship any time soon.
Nor does this mean that we aren’t in for a long lockout. Rather, the fact that the N.B.A. has released financial data that is so at odds with estimates provided by credible and unbiased organizations like Forbes suggests that the league’s owners are armed to win the public relations battle — a key part of what could be a yearlong war of words with their players.