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 Nets.
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 Brooklyn:
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 Nets? Brooklyn has by Oct. 21 to decide whether it wants to extend Taurean Prince's contract. If the club doesn't extend Prince, then it would have the rights to match any offer sheet he signs this summer in free agency. Joe Harris, one of the top 3-point shooters in the NBA, will also be a free agent.
If the cap decreases, the Nets would have to pay more money in luxury tax if they re-sign both Prince and Harris (as detailed here). Based on what we know today, it seems like both players would be valuable contributors to a title contender when Kevin Durant returns next season at full health. So a drop in the cap means an increase in a tax bill for the Nets.
Of course, there are no signs that Nets owner Joe Tsai is unwilling to spend what it takes to build a title contender. Tsai expressed his thoughts on the NBA/China issue last week and critiqued Morey's tweet in a Facebook post.
The Nets' luxury tax bill is expected to be even higher once the extension for Jarrett Allen kicks in in 2021-22. If the China issue impacts the NBA's revenue over the course of multiple seasons (which, again, it's too early to say at this point), their tax bill will be significant once they sign Allen to his extension. It's purely speculation to suggest that the tax implications would impact the offer the Nets made to Allen, but it's worth consideration.
The other way a cap decrease hurts the Nets -- and all tax-paying teams -- is by decreasing the value of the exceptions they'd have to offer players. Teams above the apron currently will have a midlevel exception projected at $6.5 million.