NBA-China Dispute: What is the Potential Effect on the Salary Cap?
Director of Research and Analysis for Babcock Hoops, Jeremy Berman, breaks down the potential effect on the NBA salary cap from the ongoing dispute with China.
On September 16th, we were 12 days from the start of NBA training camp. The FIBA World Cup had ended and players were soaking up their final days of vacation before the time came to kick it into gear. On that run-of-the-mill Monday, the NBA League Office released the new salary cap projections to all 30 teams. The projection for the 2020 season, putting the salary cap at $116 million, represented about a 6% increase from the current season salary cap of $109.4 million. Capologists around the league made their adjustments in projections, and everyone got back to business.
Fast forward to October 4th, the day on which possibly the most expensive tweet in NBA history was sent out. Daryl Morey’s tweet defending Hong Kong and the political fallout from that will continue to be debated, but here, we want to look at the potential effect on the NBA Salary Cap going forward.
The NBA releases salary cap projections twice a year - every September and April - so there will be a lot of speculation based on quotes we get from Adam Silver and other NBA personnel. The chatter about the effects of a tarnished relationship with China has died down, but Silver recently declared that “the financial consequences have been and may continue to be fairly dramatic.”
The effect that a lack of Chinese viewership could have on the NBA could be significant. What has become obvious to most in the past two months is that the NBA has a heavy interest in Chinese business. With almost 1.4 billion people, and, according to various reports, more people who watch the NBA than there are US citizens, the Chinese people represent a sizeable share of the NBA economy.
Further, in July, the NBA announced an extension of their partnership with Tencent, China’s largest digital media company, worth $1.5 billion over 5 years. Hence, Tencent retained the rights to stream NBA games in China. This partnership was among multiple NBA-China partnerships that were threatened. Tencent has reportedly released a more limited version of NBA streams than in previous years, with a slight delay in the stream for some games, and a complete blackout of others.
Why is all of this important? Because of the concept of Basketball Related Income, or BRI. BRI is simply the money earned via most (but not all of) NBA-related business. Some of the elements that fall into BRI include regular season and playoff gate receipts, advertising signage rights, arena and practice facility naming rights, and broadcast rights. There are even more “nitty-gritty” aspects of BRI such as in-arena ATM fees and championship parade proceeds. The players, in turn, are guaranteed between 49% and 51% of the BRI in each year, which is reflected in the salary cap amount, plus or minus some adjustments.
Remember the dreaded (for teams - definitely not for players) summer of 2016? Your favorite team may have given out a contract that at the time seemed like an other-worldly dollar amount for the level of player who was receiving it. The cause of this was in part due to the unheard-of jump in the salary cap from $70 million to about $94 million, about a 34% increase. Where did that jump come from? Well, the BRI jumped significantly due to the $24 billion broadcast deal the NBA signed with ESPN and Turner.
Thinking about the summer of 2016 and the fallout of that huge broadcast deal, we can see the relationship that may take place in upcoming years, but in the opposite direction. Thankfully, the business that the NBA does with China has been valued between $4 billion and $5 billion, a large difference from the ESPN and Turner broadcast deal, so the falloff will likely not reach a $20 million shortage in the salary cap calculations. However, front offices and agents around the league will need to bake in some estimation of these events when projecting future spending.
Along with the salary cap amount, the luxury tax line is a function of BRI, so teams that want to avoid it must also take the current $141 million tax projection for the 2020-21 season into account. Let’s look at a team that could have roster decisions affected by a decreased BRI projection next summer.
Right before the rookie extension deadline on October 21st, the Boston Celtics signed Jaylen Brown to a rookie scale extension totaling $103 million in guaranteed money, with up to $12 million in potential incentives. Taking a look at the books for 2020-21, the Celtics now project to fall right around the projected $141 million luxury tax line. This projection includes the following decisions:
Gordon Hayward picking up his $34 million player option
Enes Kanter’s player option at around $5 million
Daniel Theis’ non-guaranteed $5 million
Semi Ojeleye’s team option
Boston rostering two first-round picks in the late to mid-twenties (Boston’s own and Milwaukee’s that is likely to convey next summer)
Waiving Javonte Green and renouncing Brad Wanamaker
To avoid the tax in 2020-21 as it presently stands, Boston can only retain one of Theis or Kanter. Both have dealt with injuries in the early going this season, but project to play important roles. Since Kanter holds the cards on whether he returns, he could ultimately make the decision for the Celtics.
However, if the tax projection for 2020-21 does indeed fall by $5-6 million, Boston will have a decision to make with both of its big men if the franchise wants to stay out of the tax. Assuming the tax line falls to $135 million, Boston could start the summer slightly less than $10 million above the tax. If both Kanter and Theis go, Boston will likely be $1-3 million below the tax with only 13 players on the roster. At that point, they’d have to rely on the development of Robert Williams and Vincent Poirier into at least net neutral centers with a heavier minutes load or find a minimum center who is startable on the free-agent market.
The slope gets even more slippery if Jaylen Brown achieves any of his unlikely bonuses by making an All-NBA team or winning DPOY or MVP. The Celtics would surely be ecstatic if Brown plays well enough to earn any of these honors, but their books would get slightly messier.
For a team that is looking to compete with their core in place, ownership may have to bite the bullet and pay the tax in order to field a starter-worthy center in 2020-21. Otherwise, a trade to slightly decrease team salary could be in the offing next summer.
The Celtics are just one team that may run into issues with financial adjustments due to the China situation. All 30 teams will surely pay close attention to any chatter or information that may affect the placement of the luxury tax and salary cap in coming years.