July 05, 2011
Last Thursday, we brought you a story from Deadspin's Tommy Craggs on how NBA owners (and really businessmen of all kinds) shunt revenue around to make it seem like their teams are actually losing money. It's all perfectly legal, but it's still somewhat underhanded and unfair.
Now, it turns out Craggs's report may not have been entirely accurate. According to "paceolcid," a fan commenter and certified accountant at the excellent Utah Jazz blog SLC Dunk, the financial statements from the post don't necessarily show a team in great financial standing:
Operations for each year are net losses ($20,497,240) for 2004; ($26,752,919) for 2005; and ($39,534,772) for 2006. So operations are losing a ton of cash. The positive cash flow is coming in through the investing and financing sections; most significantly in new borrowings and contributions from members. Member contributions of money totaled $158,281,600 in 2005 and $65,667,165 in 2006.
In other words, the cash flow statements show that the operations lost ($86,784,931) in cash from 2004 through 2006, and that the ownership group ponied up $223,948,765 in cash to keep the business afloat during that same time period.
If that all looks like gobbledegook to you, the general point is that these teams are only not losing money because loans (whether from the owners themselves or outside parties) are the only things keeping them solvent. That's not a recipe for long-term financial health. For instance, the United States government employs similar practices, and someone on TV the other day told me that I should get my hands on as much gold as possible in preparation for ... well, he didn't say what's coming, but I'm sure it's really bad.
On the other hand, maybe owners really are a bunch of nefarious liars. No less an authority on numbers than Nate Silver, head honcho over at the FiveThirtyEight, says the NBA is doing pretty well considering the recession (via EOB):
Even as it stands, however, the Forbes data suggests that the league is still profitable. Its operating income — revenues less expenses (but before interest payments and taxes) — is estimated to have been $183 million in 2009-10, or about $6 million per team. The N.B.A.'s operating margin (operating income divided by revenues) was about 5 percent in 2009-10 and has been about 7 percent during the life of the current labor deal.
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.
It's unclear which figures give a more accurate picture of NBA finances. However, it may not matter. On Saturday, Matt Yglesias of ThinkProgress made a more general point: with franchise valuations at historic highs, year-to-year earnings and losses matter very little. If owners look at buying franchises as business moves, then they make their real profits when they sell, not while they own:
Normally when we talk about firm performance we make at least some reference to share prices or other measures of equity value. This is especially true when we're talking about owners who are, by definition, the people who own the equity. Microsoft is considerably more profitable than Twitter, but someone who bought a large stake in Twitter four years ago is in much better shape than someone who spent an equivalent sum buying a stake in Microsoft. ... Owning and managing a basketball team would be fun. If Ted Leonsis offered to gift me the Wizards with the proviso that the team loses $10,000 a year that would come out of my pocket, I'd leap at the opportunity. Indeed, the number of people who would like to own an NBA franchise far exceeds the number of NBA franchises available. Which is why WR Hambrecht's comprehensive analysis (PDF) of the financial stake of pro sports teams in the United States confirms the obvious point that NBA teams have a large and positive equity value.
Yglesias's point may be overly simplified -- there are likely some owners who buy teams expecting a profitable business on a year-by-year basis, but it's a useful one nonetheless. In the last decade, nearly every owner in every major sports league has sold his franchise for much more than he bought it, to the point where ownership has to be considered a long-term investment rather than a short-term one. Why assess yearly profits and losses when the real windfall comes several years down the road?
These various takes may differ at times, but, in total, they paint a picture of NBA finances that has very little to do with the players. As Kelly Dwyer pointed out earlier Tuesday, salaries have stayed mostly flat in recent years. This lockout is happening because owners want to save money, as is their right. But they're going after the wrong culprits. If they're losing money, it's because they've willfully entered into a business that 1) requires large sums of money to operate and 2) has to contend with the same greater market forces as any other business.
The argument to be had over the lockout isn't whether or not teams are losing money -- it's about whether or not they're losing it because players are being paid too much. Every answer to that question suggests that they're not. The owners are only going after the players because it's convenient.
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