On July 1st, 2022, just as free agency started in the NBA, Denver Nuggets star Nikola Jokić signed a supermax contract extension that would earn him nearly $270 million over 5 years. Shortly after, Bradley Beal of the Washington Wizards signed a 5-year, $250 million contract as well. These two are just a few of the players making $50 million a year. If you’re not familiar with the NBA, you must be scratching your head and thinking: “Where is all this money coming from?!”
How do NBA teams afford to pay players? NBA franchises made, on average, around $213.5 million each in profit for the 2020/2021 season; this figure is for a COVID-interrupted season, and the average team revenue is usually higher. The NBA (the Commissioner and the team owners) set terms with the NBA players (via the NBA Players Association) to decide how much of the total revenue is to be given to the players via salary.
How do NBA teams make money?
There are several revenue streams that ultimately contribute to an NBA team’s income. The traditional way of making money for NBA teams is selling tickets to their games. Each team has 41 home games (and a few more should they make it to the playoffs) to sell tickets for; the average ticket price around the league is around $100. Along with tickets, teams make revenue on gameday through concession sales, merchandise sales, parking fees, and other small sources of revenue. In total, ticket revenue ranges from 20-25% of a team’s total revenue on average.
The biggest revenue generator for NBA teams is broadcasting rights. The NBA has television and radio deals with various networks, locally, nationally, and internationally, to air various NBA games. The NBA’s current media deal with ESPN, ABC, and Turner Sports currently brings in about $2.7 billion in revenue every year, while teams may have additional deals with local networks. Broadcasting rights has resulted in a revenue increase across the board, and is the most significant source of revenue for NBA teams.
NBA teams also make money through sponsorships: these include jersey sponsors, stadium naming rights, official partners, and so on. Revenue from sponsorships can range based on lucrativeness and length of deal. Merchandising revenue is also a good source of revenue for teams, from selling jerseys, memorabilia, and other types of fan gear.
How is the amount of revenue dedicated to player salary decided?
The sum of a team’s revenue through ticket sales, merchandise sales, sponsorships, broadcasting rights, and other sources of revenue is known as “basketball-related income” (BRI). The total revenue of all 30 NBA teams in a season is the total BRI of the NBA, which is used to calculate player salary.
Players are at the forefront of the NBA that allows the NBA to generate as much revenue as it does. Therefore, the players have come to an agreement with the NBA (through collective bargaining agreements [CBAs] between the NBA Players Association and the NBA Commissioner and owners) that they are to receive their salary as a percentage of the total BRI. The current CBA has mandated that players as a total should receive 44.7% of the total BRI.
While the percentage of the BRI remains constant until the current CBA expires, the total BRI varies per season, and therefore total player salary varies per season. Players receive more salary as the league does better, and vice versa.
How do NBA teams manage their payrolls?
The maximum total salary that teams can give to their players is known as the salary cap. It is calculated as shown below:
(Total basketball revenue * player salary percentage) / total # of teams = salary cap
For theoretical purposes, let’s assume that the total revenue for all the NBA teams was $5 billion. Using the current player salary percentage and total number of teams, the salary cap would be calculated like so:
($5,000,000,000 * 0.447) / 30 = $74,500,000
Therefore, in this scenario, NBA teams would each have a maximum of $74.5 million to pay their players. However, this number comes with caveats. For one, NBA teams have to spend at least 90% of the salary cap to pay their players, in order to ensure that players are getting their dues and that teams do not “penny pinch.” Secondly, the salary cap is a “soft” cap, meaning that teams can regularly exceed the salary cap via the exceptions the NBA has allowed and approved.
The NBA has set a threshold to curtain out-of-control spending on player salaries; exceeding that threshold incurs the luxury tax, which teams have to pay for every dollar they exceed the luxury threshold. Some teams do have payrolls that exceed the luxury threshold, while other teams operate closer to the salary cap. Looking across the league, it’s clear that the salary cap is not a set in stone indicator of how much teams pay their players, which can create issues going forward regarding the competitive and financial parity of the league.
What is the average NBA salary?
The NBA is a smaller-sized league (around 150 players) and a high revenue-generating one at that (the NBA announced they reached a record-high $8.9 billion in BRI for the 2021-2022 season). Because players are getting a portion of the total BRI, they are some of the best paid athletes in the world on average. The average salary for the 2021-2022 season was $8.5 million per year. There are several players who made more than $40 million in the 2021-2022 season in just salary alone.
It seems that every free agency period brings on news of yet another whopping contract; there were no shortages of such news in the 2022 free agency. But looking closer at the finances of the NBA and its teams, it’s no surprise that players are getting big paydays. Revenue for the NBA is on the rise, and with no signs of stopping: it’s only right that the players, who are the true face of the league, also get their rightful compensation.