An Analytical Look at Team Player Expense
Are higher spending NBA teams more successful?
What if I told you that your current monthly income was going to increase 35%? You might be thinking of all the new clothes you may show up to work in or that dream vacation you had been putting off or even that expensive restaurant you had been meaning to go to. That is what the NBA’s current owners and GMs are experiencing as we speak. In 2014, the NBA signed a momentous TV rights deal with ESPN and Turner Sports worth $24 Billion over 9 years ($2.6 Billion Average Annual Value) that kicks in this year. That deal along with other increased BRI (Basketball Related Income of which ~50% is paid out to players negotiated in the most recent Collective Bargaining Agreement) swells this season’s salary cap to $94 million per team, up from $70 million last season. That is a mind-boggling 34% increase…talk about a raise. In fact, as a parent, it may even be time to put a basketball court in your back yard and have your 5-year-old shoot 100 threes per day. These contracts in the NBA are significantly different than their fellow NFL players whose contracts are not fully guaranteed especially when they are a tackle away from a career ending injury every single week.
The salary cap increase has translated into an unprecedented free agency period where GMs and owners can be less frugal and more aggressive when signing free agents. Six days into free agency and over $3 Billion dollars have been transacted which is larger than the GDP of some countries. This has and will continue to allow for an overpayment of players whose contracts expired after this past season like a $64 million contract for Timofey Mozgov or a $150 million contract for Mike Conley (who is the highest paid player in NBA history thus far). However, is it really overpayment and even if it is overpayment, is overpayment necessary to increase return on investment or win an NBA championship? One question one may ask themselves is does spending more on players contribute to more success or a better return on investment? This question is especially relevant when news just came out that the Cleveland Cavaliers, the reigning NBA Champions, owe a hefty $54 million in luxury taxes (the fee calculated for player expenses above the tax level). Let’s take a look to see whether higher player expenses lead to more success and a better return on investment.
Ways to measure success and return on investment (All data comes from each of the 30 teams in the past 6 seasons)
- Improved win percentage
- Playoff appearances
- Finals championships
- Increased team value
- Higher revenue through season ticket sales, luxury seating sales, merchandise / jersey sales, arena naming rights, etc.
First, let’s take a look at the average player expense for NBA teams alongside the average player expense for playoff teams, conference finals teams, and NBA Champions in the past 6 seasons.
It is clear that teams who have made the playoffs or the NBA finals have opened their checkbooks a little bit more than the average team. The 6 NBA Finals Champions have spent $81M on average which is almost $13M more than the league average of $69M.
Next, let’s look at player expense in 6 different spending tiers to see if teams in the higher tiers have higher winning percentages, made the playoffs more often, or won the NBA Finals more frequently in the past 6 seasons.
While the data is not as strong for teams that spent over $100M on players since it has only occurred twice, higher tiered teams have made the playoffs or won a championship more often than teams in lower tiers. It is also interesting to see that the correlation between teams in higher spending tiers and teams with higher winning percentages is fairly strong.
Lastly, it is important to take a look and assess whether spending more on players leads to a higher return on investment. Return on Investment can be measured by average revenue growth and average growth in team value above the league average.
While average revenue growth isn’t as strong, teams in the top two spending tiers experienced much higher revenue growth than teams in the lower spending tiers. One thing to note is that it is important to look at revenue growth over a period of time and not just average revenue since player spending in one season may lead to revenue growth in subsequent years through higher season ticket sales or higher merchandise sales for example. Every season, teams grow in value due to league-wide popularity, league-wide revenues, or simply the larger market. Thus, growth in value of a team above the league average is an important metric. As you can see above, teams in the higher spending tiers grew at a faster rate above the league average than teams in the lower spending tiers.
This is by no means a justification for over spending or signing an overvalued player to a max contract. Team player expense is just one of the millions of variables into why a team may be more successful than others. Winning or higher team valuations could be attributed to the LeBron factor or the fact that a team is in a large market or a team with a player that shoots 44% from beyond the arc. However, this does put the NBA player expense landscape into perspective. More successful teams in the past 6 seasons have opened the checkbook a little bit more on average than teams who haven’t. Those teams are also seeing a better return on investment on average. So, the next time your favorite team’s owner spends a little bit more than you would like on a player, try not to call your local beat writer rambling on about how dumb the owner is.
All revenue and valuation data was found in Forbes’ annual NBA ‘Business of Basketball’ list. Other player expense info was found in HoopsHype.com, TheHoopDoctors.com, and Eskimo.com. Other facts and figures were found using ESPN.com/NBA and Basketball-Reference.com.