Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

Examining the NBA Salary Cap Increase

by Michael Blasey

 

Memphis Grizzlies point guard Mike Conley Jr. (Image via NBA.com)

Memphis Grizzlies point guard Mike Conley Jr. (Image via NBA.com)

On July 14th, 2016 Memphis Grizzlies point guard Mike Conley Jr. made himself the most-valued player in the history of professional basketball by signing a deal worth $153 million over five years. It’s interesting to note that this contract pays Conley more money than the Golden State Warriors’ Kevin Durant and Steph Curry, the last two MVPs of the league, while Conley has never even made an All-Star or NBA Finals appearance. His contract comes at rare point in basketball history, as the salary cap has exploded to unprecedented heights. Every team in the league now has the ability to offer some sort of historically rich contract to upper and even middle-tier players based on this cap. How exactly did the league get in this type of financial situation and what exactly does it mean? Is basketball beginning to challenge football as the most popular sport in America?

The NBA first instituted a salary cap in the 1940s. It only lasted one year, but was reinstated in the 1984-1985 season. The premise of a salary cap is to create a league or market where all teams can be competitive regardless of the home city’s size. With this system teams like Milwaukee can play New York without being severely disadvantaged by their much-smaller market size. The NBA’s salary cap includes a “soft cap,” allowing teams to surpass it under some nuanced circumstances.

Presently, the salary cap for each team in the league has been predicated upon overall revenue. Stars of the team can earn a percentage of the cap, previous revenue streams did not allow for more than a one or two max contracts per team.  In the past three years, however, the NBA’s revenue has exploded by more than one billion dollars. Revenue increases like these originate from either ticket price increases or television deals. The average ticket price for an NBA game has stagnated over the past couple of years at around $54 per ticket, so the most recent surge in profits stems solely from new television deals. The 2016-2017 season marks the beginning of the new nine-year, $24 billion TV deal between the NBA, ESPN, and Turner Sports. This monumental deal increased television revenue from $930 million to $2.67 billion per year, a notably high increase in any market.   

With this kind of revenue increase, the reason for salary cap increases becomes apparent. Teams are earning more money, so they should be able to spend it. More teams can afford max contracts (usually 25% of the overall cap), and virtually every team can now sign a superstar. Specifically, the cap moved from $70 million a year ago in 2015 to $94 million this season, with a projected increase to $110 million just next season.

This upcoming salary cap change includes a provision that teams must spend 90% of the cap, meaning that every organization must pay out at least $85 million of salary, regardless of players’ performance and marginal revenue. This is what makes this new salary cap jump so interesting. In the short run, some mid-level players are being compensated way above their market worth. Any basketball analyst would posit that Mike Conley is a productive player. According to NBA.com, Conley ranks just outside the top ten best point guards in the league currently. In other words, he is an above-average starter at the game’s most important position. It’s clear that he has value, but what about this classification makes Conley worthy of the most lucrative deal in NBA history?

The answer: nothing. Conley is just a benefactor of a tumultuous and unpredictable time in NBA salaries. Economically speaking, the league is experiencing large returns on its product, and until the market levels out, mid-level players are going to receive some absurdly valuable deals. As consumers continue to pay the same price of admission, they simply are paying the same amount of money to watch lower-caliber players earn larger income.

What ramifications could these contracts and this market have not just on basketball but the sports market as a whole? Well, quarterback Andrew Luck of the NFL’s Indianapolis Colts also signed a historically lucrative deal this summer by inking a contract worth $140 million over six years. However, one can’t help but notice that Luck’s $23.3 million per-year salary is less than Conley’s yearly salary of $30.6 million. We’ve reached a point where the NFL, whose players have higher injury risks and more long-term damage, is paying its top players significantly less than another far less-dangerous sport. This revelation sparks the inevitable question that could shape the future of American sports: Why would anyone pursue football, a sport known to be extremely damaging to one’s body, if they could easily make more money in a different sport? Could the NBA overtake the NFL as America’s premier sports league?

Although we don’t have the answers yet, one reaction to Conley’s deal could provide some foreshadowing. Emmanuel Sanders, wide receiver for the NFL’s Denver Broncos, tweeted after the deal’s announcement, “looks like I chose the wrong sport #nbafreeagency”. I suppose we’ll just have to wait and see.

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