Saturday, November 5, 2011
The big deal over BRI
By Andrew Brandt
With dour faces, representatives of the NBA and NBPA abruptly ended their meetings last week. Another two weeks of the season were canceled, union leadership was defending itself to its constituents, and there was no real catalyst for shifting the leverage between the two sides. And now the players' nuclear option -- decertification -- is becoming a potential reality. Gloom and doom abounds in the NBA lockout as hope fades for the season.
Or not. I know it sounds overly sanguine, but the sides are making some progress, with meetings resuming Saturday. While some of the major issues remain unresolved, David Stern and Billy Hunter are moving toward common ground.
There's been some forward movement on two of the three integral issues in this long-running negotiation: how to divide (1) income between the teams (through revenue sharing) and (2) talent between the teams (through the salary cap). As for the third issue, how to divide revenue between owners and players, referred to as basketball related income (BRI), there is still work to do.
The BRI split
Compared to revenue sharing and the cap, this is a simpler concept to understand -- but it is not without nuance or complexity. Although we hear about a percentage split of 52/48 or 50/50, the key is not the percentage, but rather the percentage of what. BRI is a specific pool of money that takes into account some -- although not all -- of the individual teams' local revenue and the collective national revenue of all teams.
The following are the primary components of BRI:
• Regular-season ticket revenues
|Three little letters have caused a lot of headaches for union president Billy Hunter and David Stern.|
• Local broadcast revenue
• National broadcast revenue
• Playoff ticket revenues
• In-arena concessions and merchandise
• 40 percent of signage revenue
• 40 percent of suite revenue
• 50 percent of naming rights revenue
Simply, any revenue-generating activity -- from selling tickets to hot dogs to television rights to video games -- is divided between the players and owners. But it is important to note that only revenue gets shared, not expenses associated with generating revenue. Thus, if owners spend more than they generate on marketing, construction, etc., the players receive a net benefit and the owners receive a loss. Although not unique to professional basketball, it is something owners are intent on revising through a lower share allocated to the players.
A closer look at BRI
The composition of BRI may actually help explain why players are more willing to miss games than many expected. Putting it simply, the BRI pool is not a direct function of how many games are played.
On a pro rata basis, regular-season ticket revenues (as well as those generated by parking, concessions, etc.) vary in direct proportion to the number of games played. Thus, in the event 20 games (or approximately one-quarter of the regular season) were canceled, then regular-season ticket revenue would decrease by 25 percent. That represents a simple 1:1 equation.
But that is not the case for other components in BRI. Playoff revenue -- both from broadcast and ticket sales -- will not change whether the season is 50 games or 82. Local broadcast contracts may be the same or substantially similar even with a reduction in number of games, depending on the specific wording in the contract. Depending on the market and the nature of the deals, the same may be true for sponsorships, arena signage and naming rights revenue.
However, the same cannot be said for game checks, as the players lose one for every regular-season game missed. Owners, though, do not lose income on the same 1:1 scale. So even with the playoff revenue, the lockout is still more costly to the players than to their employers.
The primary source of revenue for the league, the network television deals (ESPN, ABC and TNT), have "lockout clauses." As Stern has noted, these clauses have been part of the NBA television contracts since 1987. (These clauses faced litigation in the NFL-NFLPA dispute, with the players gaining a judgment against the league for such clauses, a victory wrapped into the overall settlement of Brady v. NFL.)
These networks pay for the total number of games that are broadcast. If any games are truly lost, then the league has to pay the money back, with interest. Since national broadcasts are back-loaded, with more games broadcast at the end of the season than at the beginning, early-season cancellations don't necessarily affect the league's income.
Indeed, the only components of the BRI pool that are necessarily lowered with a reduced schedule are revenues from tickets, merchandise and concessions from specific game nights canceled. That is significant, but only a part of the total pool.
Trade-off with system issues
Of course, one mantra of every negotiation rings true here: Until everything is agreed to, nothing is agreed to. While the BRI split is certainly a core issue and the one receiving the most attention, it is inextricably linked to "system issues," which influence the operation and structure of contracts, the cap and its exceptions.
In terms of a change from the previous agreement, the owners appear to have already "won" many of these system issues. It has been tentatively agreed to -- perhaps subject to change until the BRI split is worked out -- that the luxury tax will be harsher than before, contract maximum lengths and year-to-year increases will be shorter than before and the mid-level exception will be smaller than before.
However, there can be potential tradeoffs with the BRI split. For instance, perhaps the players can come off their rigid stance of "not a penny below 52 percent" were there a softer luxury tax and/or a higher mid-level exemption and/or greater annual salary increases. Similarly, perhaps the NBA can come off its rigid stance of not allowing luxury-taxed teams to use the mid-level exception and/or reduce its penalties for those repeat luxury-tax offenders in exchange for a better BRI number.
There is also concern on the players' side over how the revenue is divided among the players on a per-team basis. If the system is too restrictive -- be it through a hard cap, an overly-punitive luxury tax, or preventing taxpaying teams from availing themselves of mechanisms like sign-and-trade and the mid-level exception -- the middle class will be effectively eliminated. The players' split of the revenue will go primarily to the stars, the drafted rookies and the minimum-salary guys, leaving everyone else competing for whatever scraps remain.
In the horse-trading that always goes on in the final stages of a multi-issue negotiation such as this, there will be opportunities to "play" with the BRI number.
The last reported numbers show that league-wide ticket revenue in the 2010-11 season was $1.1 billion, or 29 percent of BRI. Thus, the players are not as impacted by missing games when you consider that the BRI "pie" isn't shrinking by a per-game-missed formula. This may partially explain the players' resolve over a couple of percentage points and their reliance on an economist in many of the meetings.
The truth lies deeper than the simple split. BRI's true composition -- as well as other, non-BRI-related issues -- may allow the players more resolve and unity than we have previously thought. On the other hand, the onus is on Fisher and Hunter to explain this to the players unambiguously.
Andrew Brandt, a former NFL executive and agent, is a sports business analyst for ESPN.
Follow him on Twitter, @adbrandt.