NBA Championship Economics and The $600 Million Lakers

by Steven Barboza

In professional sports, there are often financial incentives tied to winning. How much are they and how do they relate to figures like a team’s valuation, star salaries and revenue generation? The Lakers provide a good case study.

 

The Los Angeles Lakers, who won their 16th NBA championship, get to take home the Larry O’Brien trophy for the second time in as many postseasons. The team also gets to take home a little pocket change: $2,125,137 in playoff bonus money. In fact, even the losers of the NBA Finals are winners in a sense. The Boston Celtics get to split a $1,408,168 pool, or roughly two-thirds of the Lakers’ take.

In the NBA, there is no championship prize money – just a $12 million bonus pool split by the playoff teams. “Like most professional sports leagues, there is a pool of playoff money generated from a portion of home gate receipts that is allocated to players on playoff teams,” said Patrick Rishe, Director of Sportsimpacts and associate professor of economics at Webster University in St. Louis, MO. “The team amount earned escalates as one’s team advances in the NBA playoffs.”

Considering the relatively high salaries of professional athletes, and considering the fact that we just witnessed one of the best rivalries in sports, the NBA bonus pool isn’t an earthshaking amount.  But it’s hardly chump change either.

The Lakers’ $2.1 million bonus will be split according to each player’s relative value or contribution to the team, but every player comes out looking like a winner. The playoff pool is icing on the cake. The monies come with a year’s worth of bragging rights – and the potential to earn tens of millions of dollars in product endorsements.

“It’s kind of the old saying: ‘to the victor goes the spoils,’ and I think that does translate individually to players in helping them get individual sponsorship deals,” said John Black, director of communications for the L.A Lakers.

In addition to the Lakers’ and Celtics’ share, the $12 million NBA playoff pool is distributed to teams as follows:

Best Record in NBA:  $346,105

Best Record in Conference, $302,841each (for $605,682)

Second Best Record in Conference, $243,411 each ($486,822)

Third Best Record in Conference, $181,706 each ($363,412)

Fourth Best Record in Conference, $142,800 each ($285,600)

Fifth Best record in Conference, $118,990 each ($237,980)

Sixth Best Record in Conference, $81,157 each ($162,314)

Teams Participating in First Round, $179,092 each ($2,865,472)

Teams Participating in Conference Semifinals, $213,095 each ($1,704,760)

Teams Participating in Conference Finals, $352,137 each ($1,408,548)

The playoff bonus is “extra pay” for postseason work. “For a player making more than $1 million a month, and there

5-time NBA champion Kobe Bryant is slated to be the next $30 million man in annual salary earnings

are some players making $3 million a month, this is a nice chunk of change,” said Bob Myers, sports agent with the Wasserman Media Group who represents, among others, Kendrick Perkins, the Celtics’ six-foot-10-inch, 280 pound center.

Winning the NBA championship increases the earning power not only for players but for the team. The playoff run added $20 million to the Lakers’ revenue in 2009, according to Forbes.com.

When the playoff drags out to seven games,the NBA and the teams make a killing. It results in higher ticket revenue, higher local media revenue, greater licensing and merchandise revenues, and higher response/ad rates from arena signage and web space.  And when the teams are bitter rivals, audience interest hovers at peak levels.

In fact, when the Celtics lost game 6 after having trounced the Lakers in game 5 in Boston, it only fueled speculation that the longer the playoff, the better it was for all concerned.

“The Celtics went into game 6 and should have won the championship in LA, but they didn’t even look like the same team,” said Hugh Lewis, former sportscaster and sports talk show host in Austin, TX. “As a result, [they went to game 7] and revenue kept pouring in. That made a lot of people very happy.”

The NBA Finals was a ratings bonanza. Game 6 had 13.9 million television viewers, according to Nielsen.  Before game 7, average audience levels were up by 2.1 million viewers overall compared to last year, when the Lakers defeated the Orlando Magic in five games. The TV ratings for game 7 marked basketball’s biggest ratings in 14 years.  Final numbers are not yet tallied, but it is thought that as many as 25 million people watched the game.

In the end, winning the championship can benefit players tremendously. “The public appreciates winning, so if you can be associated with a winning product or labeled a champion, it certainly can add to your attractiveness to a company,” said Myers. “Guys like Peyton Manning, Derek Jeter – guys who have won championships – are consistently winning in commercials, in advertisements, and endorsing products.  If you are able to win a championship, it garners more interest from corporations, from companies looking to use athletes to endorse products. It’s a clear positive to win a championship in whatever sport you’re playing.”

NBA players are paid among the best-paid athletes in professional sports. The median NBA salary is $3.1 million. In other words, players earn $37,804 per game – and there are 82 games per season.

Financial incentives abound. A rule of thumb might be: the more games a player wins, the more he is likely to earn. “In my estimation, 10-15% of players have what you’d call playoff bonuses in their team contract,” said Myers. “For a lot more players probably you’d find [bonuses] in their shoe contract” – meaning Nike, Adidas, Reebok, etc.

Kendrick Perkinshas incentives built into his four year, $4.25 million team contract and his shoe contract according to Myers. “The total number surpasses six figures,” he said.

Thursday’s win, his fifth NBA championship, put Kobe Bryant atop the basketball heap.  In fact, he may be the king of basketball. With his three year contract extension, signed in April, he will join the sports megastars. He is destined to become basketball’s second $30 million man.

Bryant is slated to earn $31.5 million in 2013-14 season. Michael Jordan, the only other NBA player to make that much, earned $30.1 million in 1997 and $33.1 million in 1998.

By the time it’s all said and done, Bryant will have been paid $280 million by the Lakers. And that’s just his salary.  He makes many millions more in product endorsements. In 2008, Bryant earned $45 million, ranking No. 10 on Forbes’ list of powerful celebrities.

Is he worth it?  His statistics say so. For the 2010 playoffs, Bryant averaged 29.5 points, 5.6 rebounds, and 5.6 assists. “People want winners on their team,” said Myers. “People want winners endorsing their products. It’s all tied together.”

Winning will almost certainly earn Lakers coach Phil Jackson more if he decides to return next year. Jackson is a virtual franchise, having won more NBA championships, 11, than any single team except for the Lakers and the Celtics.  And he earns more than any other coach in sports history. He is the NBA’s $10 million man.  He earns $3 million more than the second highest paid coaches – NFL Super Bowl winners Bill Belichick and Mike Shanahan.

NBA players costs have skyrocketed.  Including bonuses and benefits, they increased to $2.3 billion during 2008-09 season, from $2.2 billion the previous year. The Lakers have the highest team payroll in the NBA – at nearly $91.4 million annually, versus the Celtics’ $86.5 million.

But the Lakers are the league’s most valuable franchise. The team’s current valuation is $607 million, and its 2008-09 revenue was $209 million, with operating income at $51.1 million. The New York Knicks ranked second, valued at $586 million with revenue of $202 million. The Celtics ranked as the league’s eighth most valuable franchise, at $433 million, with revenue of $144 million.  By way of comparison, the average overall revenue for the league’s 30 teams was $126 million last year.

At the beginning of this past season, the Lakers held the record for having the most wins (3,000), the highest winning percentage (61.8%), and the most NBA Finals appearances (31).

“For the past few seasons, the Lakers have sold out every game, giving us an average attendance of 18,997,” said Tim Harris, the Lakers’ senior vice president for business operations and chief marketing officer. “Average ticket prices for the 2009-10 regular season were $143.69.”

Courtside seat ticket holders are willing to cough up $107,500 for the season. The renewal rate is around 97-99%. “The last few years, we have enjoyed rates in that range.  I am assuming we will do the same this summer but won’t know for sure until we get through the process,” said Harris.

With the priciest tickets in the NBA, each game generated $2 million in revenue for the Lakers’ owners last year, according to Forbes.

Kobe Bryant is the team’s main attraction. And he can afford to be a grateful champion. In 2008, he bought $9,000 Swiss watches for each of his teammates. It was his way of saying thanks for helping him win his first MVP award. So now the question is, what will he buy them this year – a car?