Ian Begley, SNY.tv | Twitter |
If you've seen LeBron James' comments on the NBA-China controversy (and the reaction to those comments), you know that the ripple effects of Daryl Morey's tweet in support of demonstrators in Hong Kong will be felt for some time.
There's plenty to unpack with this story: free speech issues, the NBA -- and many other companies -- conducting business with a country that critics say has a history of oppressing dissent, and the potential financial fallout for the league in the form of lost revenue from the business they do in China.
It's way too early to predict how much revenue the league may lose in the aftermath of last week's events. But the lost revenue -- if it's high enough -- will have a tangible impact on the Knicks.
If the NBA loses a significant amount of its China revenue this season, it could change the salary cap for this summer, which would effect how teams spend money and how much 2020 free agents can earn on the open market.
Here's a look at how a potential decrease in the cap could impact the Knicks:
How much will the cap decrease? Again, it's too premature to even guess at this number -- or to assume that the cap will decrease. Yahoo Sports reported that several teams are planning for scenarios where the cap for 2020-21 -- currently set at $116 million -- decreases by 10-15 percent. Several teams reached by SNY called that a worst-case scenario and didn't think that the cap would decrease that significantly, which was pointed out in the Yahoo story.
It's unclear how much of the NBA's revenue is generated in China. One person with business ties to China and the league said a conservative estimate would be roughly $600 million annually.
That's obviously a significant percentage of the league's revenue (estimated at around $8 billion during the last collective bargaining agreement). But it would be surprising if all of that went away in the wake of the NBA/Morey/China issue. (Whether the league or its players should be doing business in China in the first place is a separate question altogether.)
A significant portion of the NBA's China revenue is presumably based on contracts that are already agreed to, so the Chinese companies would have to break those agreements to take the revenue away.
Losing half of the revenue from China: For the purposes of this exercise, let's assume that the NBA loses roughly half of revenue from the fallout of the geopolitical storm with China. (Again: that's a huge -- and unlikely -- number). For the purposes of this exercise, let's assume that the revenue from China is $600 million. According to projections from cap expert Albert Nahmad, a $300M drop in revenue would decrease the 2020-21 salary cap by about $4.7 million. This would put the cap for 2020-21 at roughly $111.5 million, and would also decrease the cap for 2021-22 (barring a subsequent, significant, increase in revenue).
A drop like this affects all teams and players in many ways, including a decrease in the annual value of max contracts for free agents and the value of the exceptions teams can use to sign free agents.
What about the players on the Knicks? Barring any unforeseen moves that would add significant salary, the Knicks aren't in danger of being a luxury tax team next season. That's true even if there is a sizeable decrease in the cap due to the China issue.
New York can, hypothetically, create roughly $67 million in cap room next summer, but they'd have to renounce all of their existing free agents. The Knicks have cap holds for Marcus Morris ($18M), Allonzo Trier ($4M; RFA), and/or Damyean Dotson ($2M; RFA) and team options for Bobby Portis ($16M), Frank Ntilikina ($6M), Dennis Smith ($6M) and Kevin Knox ($5M). New York also has partially guaranteed contracts for Taj Gibson, Elfrid Payton, Wayne Ellington and Reggie Bullock and the nonguaranteed contract of Mitchell Robinson.
For argument's sake, let's say the Knicks pick up the 2020-21 options for Smith Jr., Knox, retain the cap holds for Dotson and Trier and keep Robinson's non-guaranteed deal. If you factor in $5 million for a 2020 first-round pick, that would put them at $58 million in team salary for 2020-21.
If the current cap projection for 2020-21 dropped by $4.7 million, that would leave New York with roughly $47 million in cap space for the summer of 2020. So a cap decrease would cost the Knicks some flexibility next summer.
Could Knicks help tax teams? Of course, the list of free agents available for 2020 is underwhelming (assuming Anthony Davis remains with the Lakers). If New York decided against spending big money on a free agent in 2020, it could still use its cap space in other ways.
A reduced cap could leave more teams in the luxury tax. Owners for these teams may not want to pay the luxury tax. So the GMs for those owners would be looking to shed salary via trade.
Because the Knicks have cap space, they could take on some unwanted salary from a team while also extracting valuable assets (a talented young player or draft pick). You could argue that the trade route would be a more valuable use of their cap space than signing a 2020 unrestricted free agent to big money.
What about Ntilikina? One potentially tricky aspect of all of this for New York is Ntilikina. If the Knicks know there is a decrease in the cap for 2020-21, does that change how they approach Ntilikina's contract option for next season? New York has until Oct. 31 to decide whether or not to exercise the option. If they don't pick it up and renounce their rights to Ntilikina, it would create approximately $5 million in cap space for the summer of 2020.