NBA

Cap smoothing 101: How the NBA can prevent another 2016-like spike with a new television deal looming

The NBA’s national television deal is set to expire after the 2024-25 season, and for months, all signs have pointed to a significantly bigger deal looming afterward. CNBC’s Jabari Young reported in March that the NBA is seeking $75 billion in a new deal — more than tripling the $24 billion this current deal will pay — and on Sunday, Forbes’ Morten Jensen reported that one league source believes a $171 million salary cap could be possible. The cap is currently set at $112.4 million, meaning it could rise by over 52% in the coming years. 

Diligent NBA fans will remember a very similar scenario taking place after the last deal was signed. Virtually, the entire league had cap space in 2016 thanks to that spike, and among other notable results, the Golden State Warriors used that flexibility to sign Kevin Durant after a 73-win season. This is obviously an outcome that the NBA would prefer not to repeat. So how can the league avoid it? Get ready to hear the words “cap smoothing” a lot over the next few years. 

So, what exactly is cap smoothing?

In short, it is a theoretical alternative to a cap spike that would allow the NBA to give its players all of the money they are owed without drastically altering the cap at one time. This, in theory, would make it more difficult for teams to take advantage of the new deal to acquire players that they otherwise couldn’t. The truth of the subject is significantly more involved and less predictable. The basketball world has changed drastically since the last influx of television money. So let’s dive into what all of this means and how cap smoothing could actually work. 

Why does this new TV deal matter? What is a cap spike?

The salary cap is set before each season and is based on a projection of how much basketball-related income the league expects to receive in the upcoming league year. Players are guaranteed between 49 and 51% of that basketball-related income (BRI), and most of it is allocated toward the cap. Technically, the cap is actually lower than that 49-51% figure — 44.74%, minus player benefits and divided by 30 teams — because teams routinely spend above the cap using exceptions. If players ultimately don’t collectively receive 49% of BRI through their contracts, they get a bonus at the end of the season. If players receive more than 51%, they give the difference back to the owners through the league’s escrow system. 

This model generally anticipates fairly modest annual raises. While it is subject to negotiation, the standard figure the league and players fall back on is 4.5% growth in BRI in all areas except for one: TV revenue. National TV money doesn’t need to be projected because it is agreed upon well in advance. The bulk of the NBA’s total revenue comes from television, so the cap is usually fairly predictable based upon the revenue the league is guaranteed from the current rightsholders, Disney and Turner. When a new television deal is agreed upon, though, the league suddenly has significantly more guaranteed revenue coming in. Because players are guaranteed a certain percentage of that revenue and most of that revenue is reflected in the cap, a significant increase in revenue effectively means a significant increase in the cap. 

Unlike most other forms of revenue, though, that increase is not incremental. It comes all at once. The current model generates $2.6 billion in national TV revenue per year for the NBA. A nine-year, $75 billion agreement would push that figure up to $8.3 billion as soon as the deal kicks in. This is what causes cap spikes. Normally, revenue grows slowly and steadily, but a new TV deal infuses so much revenue at one time that the cap has to rise significantly to accommodate it. 

What happened the last time we saw a cap spike? 

The last time the cap spiked was in 2016, when the current television deal kicked in. In one offseason, the cap jumped from $70 million all the way up to $94.1 million — a 32% bump in one offseason. This had two extremely negative consequences for the NBA. 

First, it allowed several contending teams to generate cap space without sacrificing players that were already on their cap sheet. Most notably, the Warriors were able to sign Durant while retaining Stephen Curry, Klay Thompson, Draymond Green, Andre Iguodala and Shaun Livingston. The last two players need to be mentioned because the Warriors actually could have signed Durant without the spike, at least in theory. Trading Iguodala and Livingston could have saved Golden State roughly $17 million in space that could have gone to Durant, but the spike allowed them to sign a former MVP without giving up anyone from their core. The Warriors went on to win the next two championships with a roster that many consider the greatest in NBA history.

The second, and other major consequence, was far more universal. NBA teams suddenly had an enormous amount of space that, thanks to the league’s 90% salary floor, they had to spend. The problem was that beyond Durant and a few others, there weren’t many players that deserved all of that money. Nicolas Batum signed for as much money in 2016 as Carmelo Anthony got two years earlier in 2014. Mike Conley was, for a period, the highest-paid player in NBA history. Several contracts worth north of $50 million — Ryan Anderson’s $80 million deal from the Knicks, Joakim Noah’s $72 million pact with the Knicks, Luol Deng’s identical contract from the Lakers, and others — ultimately needed to be waived and stretch because they were so toxic to their team’s balance sheets. Others were traded with draft picks attached. 

Teams could have shown more restraint on these long-term deals, but with so much cap space out there, doing so would have effectively prevented teams from signing good players. Why would anyone take a one-year deal when multiple four-year offers awaited them? The downside for players, though, was that all of these bad deals prevented the teams that handed them out from generating cap space in the years that followed. Players that were lucky enough to become free agents in 2016 all made life-changing money. Free agents in 2018 weren’t so lucky. In 2016, 35 players got more than $40 million in free agency, and 16 of them changed teams. Two years later, the cap had actually risen by around $7 million, but those bad contracts were clogging so many cap sheets that only 10 players managed to earn $40 million in free agency and only one of them, LeBron James, changed teams in the process. 

What this means, essentially, is that cap spikes not only enable the building of superteams, but they also arbitrarily reward some players more than others. Should certain players be punished just for becoming free agents at the wrong time? Most fans would argue no. This is where cap smoothing comes in.

How would cap smoothing protect against a spike?

As we covered above, the NBA’s current financial model calls for the players to receive between 49 and 51% of BRI. A cap spike doesn’t change that. It just changes the figure that 49 to 51% is based off. If BRI drastically increases all at once, the current model dictates that the cap would follow. But if both sides agreed, it wouldn’t have to. The NBA and its players could agree to spread the necessary growth in the cap over multiple seasons or compromise on an alternative that allocates revenue through some channel other than the salary cap. This would prevent the cap from jumping drastically in one offseason and disperse revenue amongst the entire player pool more evenly. 

This, broadly, is what cap smoothing is all about. There are a number of possible forms that this could take. Let’s say an artificially reduced salary cap led to players receiving 45% of BRI rather than 49%. There is no reason the league couldn’t agree to make up that difference to the players in form of a end-of-season bonus. That 4% gap could be doled completely evenly, with every player in the NBA receiving an identical bonus, or it could be given as a percentage of each player’s salary so that more expensive ones receive a greater share of the available revenue. They don’t need to stop at 49%, either. So long as the players and owners agree, anything is on the table. 

The Forbes report on Sunday indicated that if the union does agree to smoothing, “it’s likely the league will still see annual increases to the extent of $15 million.” This is another possible form smoothing could take, and it is the more practical application of the term. The NBA and its players could set the cap at agreed-upon numbers multiple years in advance at a level that might not be as high as it otherwise could be with the idea that those lost short-term earnings would be made up for over time due to sustained and guaranteed growth in the cap. 

The players, as a group, could still receive all of the money they are owed. It would just be given to them in ways that wouldn’t have such a drastic effect on roster-building and the league’s on-court product. In the process, they could ensure a fairer division of this new revenue amongst all of its players rather than a smaller, luckier group of them.

Has the NBA ever smoothed the cap before?

Well … kind of. The NBA and player’s association have never agreed to use smoothing to artificially decrease the cap … but they’ve used it to artificially increase the cap. Think of all of the revenue the NBA lost because of COVID-19. If the 2020-21 cap had factored that into its typical model, it would have decreased by tens of millions of dollars. That would have been a disaster for both the players and owners. There would have been no cap space around the league for free agents to be signed with and most NBA teams would have been pushed into the luxury tax. So the two sides came to a solution: rather than calculate a new cap for the 2020-21 season, the NBA kept the 2019-20 cap stable. They agreed to raise the cap at least 3% annually thereafter, but in exchange, players agreed to return up to 20% of their salaries in order to balance out the BRI distribution with owners, if necessary. 

The compromise worked. Player movement was hardly impeded. Extensions are growing more and more frequent. Teams weren’t forced to pay obscene luxury tax bills based on contracts signed before COVID-19. Revenue wound up bouncing back faster than expected. The cap rose by the expected 3% this season, but is expected to jump by almost 6% to $119 million next offseason. Barring something unforeseen, the NBA’s broad financial infrastructure is well on its way to returning to normalcy. 

This guarantees nothing for future negotiations, but it proves that the two sides are capable of working together to solve unorthodox problems. Overall, the NBA has a far more productive and amicable working relationship with its players than most leagues. That will make these negotiations easier. 

Why wasn’t the cap spike smoothed in 2016?

The union rejected the NBA’s proposal to smooth the cap in 2016, and the truth is, we don’t fully know why. In 2018, NBPA executive director Michele Roberts was asked about smoothing and claimed that what followed “completely confirmed the correctness of that position.”

“There was going to be no smoothing of the owners’ profits at all,” Roberts said in an interview with SB Nation’s Paul Flannery. “They were going to enjoy real money that reflected where we were financially as a game. Why in the world would players pretend that the game was not making as much money and therefore have smaller contracts?

“It was an absurd suggestion, I thought personally. But what we did to make sure it wasn’t just Michele’s instinct was hire two separate economists to tell us whether this was something that was going to be of value to our players in the long run.

“Independent of each other and not knowing what either of us felt, they both came almost saying, ‘Are you kidding? Why would you do this?’

“I don’t have any regrets at all. I don’t think a single player does either.

“Not a single owner came up to me and suggested that they thought we should do this. The league did. But I didn’t see any chorus of support from any of the owners. I thought it was a disgraceful request.”

Things become a bit messier when we acknowledge that we don’t know the details of the NBA’s smoothing proposal. The implication here is that the league made an offer that affected players far more than owners, but there is no way of knowing how true that actually was. If the owners proposed a compromise that ended with them taking in more than their allotted share of BRI, the players made a wise choice in rejecting that offer. Even if they didn’t, these negotiations are immensely complicated and involve far more factions with competing agendas than you’d think. 

Rejecting cap smoothing might have been an agent-driven decision. Those enormous 2016 contracts turned out to be great PR for them in recruiting new clients. Broadcast partners might have pushed back against smoothing hoping that a spike would position more star players in premium markets. It might have been a simple leverage play. Perhaps the union was open to smoothing, but only if ownership had made a concession of some sort on another issue that mattered to the players. We just don’t know, but there’s a good chance that the negotiations leading up to 2025 will give us a better idea of where the union stands with the benefit of hindsight.

Why will things be different this time around?

Well, the obvious answer is that everybody now understands the consequences of a cap spike. Maybe players and agents burned by the limited cap space of 2018 will be more open-minded. Maybe owners will push more aggressively this time around. Neither side can feign ignorance. The stakes are clear as day. 

But there’s one other key difference this time around. The NBA’s last two collective bargaining agreements expired in 2011 and 2017. The renegotiated TV deal (2014) and the cap spike (2016) came in between those two CBAs. That won’t be the case this time around. While the new TV deal might be negotiated ahead of time, the current agreement doesn’t expire until after the 2024-25 season. The current CBA expires first, after the 2023-24 season. 

Negotiating a single issue and negotiating an entire CBA are completely different propositions, and the latter favors ownership because they tend to be better equipped to sustain a lockout than players. That doesn’t mean that ownership will absolutely prioritize smoothing and risk a labor stoppage over it, but in truth, both sides come into CBA negotiations with more ammo because, unlike a singular, mid-CBA issue like cap smoothing was the first time, virtually anything is on the table when an entire collective bargaining agreement is being re-written. It’s easier to say “give us X and we’ll give you Y” when both X and Y are already on the table. If owners desperately want smoothing, they can sacrifice something else to get it. If players are vehemently proposed, they can make a similar sacrifice. 

What we can say with relative certainty is that the experience of the 2016 spike is going to inform how both sides approach smoothing moving forward. This is a concept that will be taken seriously, and it’s going to dominate the discourse until an agreement is reached.



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