Benefits and Drawbacks of the 2017 NBA CBA

Sunday, April 16th, 2017 at 12:44 pm, by Joshua Kameel-Ishmael

In 2011, the National Basketball Association (NBA) and the National Basketball Players Association (NBPA) failed to agree on a new Collective Bargaining Agreement (CBA). The failed negotiations, led by NBA Commissioner David Stern and NBPA President Derek Fisher, resulted in a lockout that ultimately shortened the season from 82 to 66 games. Luckily, this year both parties were able to come to an agreement without infringing on the season, and a new CBA was ratified in late December 2016. Unless provided otherwise, all data and information was derived from the 2011 and 2017 Collective Bargaining Agreements.

What Remains

The hottest point of contention in the 2011 negotiations was the percentage of revenue share between the NBA and the Players. In 2005, players received 57% of Basketball Related Income (BRI); in 2011, however, the NBPA had to concede 6% in order to prevent complete work stoppage, reducing their share of BRI to 51% (subject to reduction in the event of a significant and unexpected downturn in BRI, in no situation resulting in less than 49%).

This year, both parties agreed to keep their share of BRI the same. It appears the Union was willing to accept this split as BRI will rise from $4 Billion to an estimated $8 Billion in the next few years. This increase in BRI is in part due to the astronomical increase in programming revenue, as the NBA recently signed a $24 Billion television contract with it’s national partners, ABC/ESPN/Turner. The hefty television contract is suspected to result from the incredible reviews the 2016 finals received. Game 7 between the Golden State Warriors and the Cleveland Cavaliers had 30.8 Million viewers, making it the third most watched telecast on TV behind the Superbowl and the Academy Awards.

As NBA Players already have the highest average salaries in the world of sports, BRI was, luckily, not a point of contention this year. Nevertheless, the new CBA contains significant other changes.

What Changed

The most significant changes in the new CBA relate to “Right-Sizing” of player compensation, Player retention rules, and Group Licensing.

Right Sizing

Under the new CBA, certain compensation systems will be adjusted upward to maintain their relative position in the overall player compensation system. The NBA has characterized this upward adjustment as “right sizing” of certain compensation scales. The two most significant salaries that will be affected are Rookie contracts and Minimum Salary Contracts

          Rookie Scale

The new CBA states that the Rookie Scale will be increased 45%, with such increase phased in over three years. In addition, Rookie compensation after the 2018-2019 season will be pegged to the Salary Cap, and will increase or decrease annually at the same rate (Salary Cap is calculated annually as a predetermined percentage of BRI). These salaries will grow significantly over the next three years: assuming 5% Salary Cap growth, the 1st pick will receive $8.13 Million in the 2019-2020 season, compared to $5.8 Million today.

          Minimum Salary Contracts

Similar to Rookie contracts, the new CBA provides for Minimum Salary Contracts to increase 45%, although this increase takes place immediately, rather than over the span of three years. Subsequently, the Minimum Salary will increase or decrease at the same rate as the Salary Cap.

Ultimately, the CBA’s “right-sizing” clauses are effective in ensuring specific athletes get their rightful share of the NBA’s ballooning revenue. As the Salary Cap continues to grow, free agent salaries have soared, as maximum contracts are set as a percentage of the Salary Cap, rather than a fixed number. The “Right-sizing” clauses tying of Rookie/Minimum Contract salaries to the Salary Cap in many ways reduces this asymmetry, and we can expect all players in the NBA, whether rookie or veteran, to benefit from the increasing BRI in the upcoming seasons.

Retention

In June of 2016, Kevin Durant, arguably one of the greatest basketball players of all time, signed a two-year, $54.3 Million contract with the Golden State Warriors, less than a year after the Warriors broke the NBA record for most games won in a season. The trade inspired incredible controversy, as critics stated the NBA allowed the Warriors to create a “Superteam”, destroying the competitive nature of the league. Apparently the NBA and NBPA took note, as they have included changes in the CBA to slow down, or even stop, superstar players from leaving their teams in free agency. Fittingly, these changes have been dubbed the “Durant Rule”.

Essentially, the new CBA creates a huge incentive for a select group of franchise players to remain with their home team: home teams can now offer superstars-turned-free-agents an almost 20% greater salary than other teams. Qualifying for this bonus, however, is difficult. Qualifying players must have played either 8 or 9 years in the league, and never changed teams (other than being traded during their rookie contract), and must meet certain performance criteria (such as being named to an All NBA team).

While this change only affects a small number of players currently in the league, fans can expect the change to have significant effects on the NBA lifecycle of future superstars. In order to maximize payment, promising rookies will now sign a four or five-year extension immediately following their rookie contract, and, before that contract ends, sign another five-year extension. He will be in his 8th or 9th year following the first extension, thus this rule enables the home team to offer higher payments on the 5-year extension than any other team. Essentially, future superstars who want to maximize their salary may not hit the open market until he’s played 14 seasons. An unexpected consequence of this trade, however, is an incentive for rookies to force a trade during their first four years, so they can take advantage of the Durant Rule while still being traded to their preferred team. Nevertheless, NBA fans should expect this rule to bring much-needed stability to the NBA Superstar market going forward.

Group Licensing

The Group Licensing Agreement (GLA) is an agreement that permits the NBA to license player attributes, such as pictures, names, and likenesses, along with other forms of NBA Intellectual Property (e.g., team names and logos). Previously, this allowed the NBA to unilaterally license player attributes to third parties for use in various forms of merchandising, such as jerseys, electronic games, and trading cards.

In the previous years, the NBA paid the Players 50% of royalties received from the sale of player-identified merchandise, and guaranteed a minimum payment to the Players Association, regardless of actual sales. For 2016-2017, the 50% payment was projected to be $55 Million, and the guaranteed payment was $31 Million. Among the four major sports leagues, the NBA was the only league that controlled player’s marketing rights in such a way.

The new CBA calls for the termination of the GLA. As such, going forward the NBA and the NBPA will each grant separate licenses of NBA Intellectual Property and player attributes to third party merchandisers that seek to utilize both products. Similarly, the NBA’s financial obligations to the NBPA for player merchandise royalties will cease. However, the NBA retained the right to use player attributes for promotional purposes with respect to game telecasts, sale of tickets, etc.

In addition, the CBA terminated the Union Sponsorship between the NBA and NBPA. In previous years, this agreement prevented the NBPA from using its own logo for commercial purposes, such as in sponsorships, in exchange for an annual $11.5 Million payment. Going forward, the NBPA is free to use its own logo for commercial purposes, and the NBA no longer has any financial obligation to the union.

These changes may ultimately have negative side effects that will affect fans around the world. Various forms of merchandise not only benefit from using both NBA/NBPA IP, but require it. For example, NBA 2K, the dominant NBA video game, would be unable to function without the rights to both NBA trademarks and player’s likenesses. Going forward, however, 2K Sports, Inc., the developer and publisher of NBA 2K, must now negotiate with both the NBA and the NBPA. Merchandisers such as 2K Sports will undoubtedly begin paying more for the rights in order to overcome any holdout issues; as a result, fans should expect official merchandise to become more expensive.

 

Overall, NBA Players, Owners, and fans are all fortunate that the NBA Revenue pie has grown substantially, allowing the NBA/NBPA to swiftly approve the new CBA and avoid another lockout. While the CBA does not drastically change the game, it will be interesting to see how the new rules surrounding Player salaries, retention rules, and the GLA impact the business of Basketball.