2011 NBA Lockout: Celtics Inking New Media Rights Deal; What Does It Mean for League Revenues?

Today, reports are coming out that the Celtics are finalizing their negotiations with Comcast SportsNet New England (Comcast's Regional Sports Network, or "RSN") which will extend their current media deal by another 20 years. 

New Deal to Give Celtics Stake in RSN | Sports Business Journal Daily

First, let's briefly sum up what it appears that the Celtics are getting, and then we'll follow it up with some analysis.

What the Celtics get:

  • A 20 year extension that tacks onto the end of their current deal. The current deal expires in 2017, so the extension will create a business relationship that will last until at least 2038.
  • The Celtics' current deal pays them between $15-$20 million per year. While the terms of the new deal are undisclosed (both Comcast and the Celtics refused to comment), it is estimated that the new deal will bring the Celtics more in line with current multiples, or approximately double to triple what they're making now in media rights fees.
  • The deal will give the Celtics a "sizable signing bonus and steep increases in the first few years of the deal...The rights fees increases will level off throughout the length of the agreement." In other words, the deal is front-loaded.
  • In addition to the yearly media rights fees, the Celtics would also take up to a 20% equity stake in the Comcast RSN
  • The negotiations heated up around or right before the Lakers signed their 20-year RSN deal with Time Warner Cable, which averages to about $150 million per year, according to the LA Times article linked above.
Clearly, this is a strong deal negotiated by both Comcast and the Celtics' owner Wyc Grousbeck, which keeps them competitive in the media rights revenue game. However, that is just the surface. Let's dig deeper.

The new deal is going to pay the Celtics somewhere between $30 million to $60 million per year. This is a far cry from the Lakers' deal in annual rights fees, but to be sure, the Lakers were already starting off at a higher price point (about $30 million per year in their old deal). As Forbes writer Mike Ozanian notes, these media rights revenues fall into the category of broadcasting revenue, which is a part of the NBA's definition of Basketball Related Income ("BRI"). So in a sense the entire league should benefit from the Celtics' negotiation of a good TV deal.

However, the article notes near the very end that:

"The expected Celtics-CSN New England deal comes as the NBA works to overhaul its revenue-sharing system, an effort led by Celtics owner Wyc Grousbeck, chairman of the NBA's planning committee."

Is this a problem? Here you have Grousbeck, owner of the Celtics, negotiating a media rights deal that presumably is favorable to the Celtics franchise. On the other hand, he is the acting chairman of the NBA's planning committee, which is overseeing the NBA's attempts to overhaul its revenue-sharing system. In other words, Grousbeck has to know how the league is planning on building its revenue-sharing system, which is a system that will likely redistribute local broadcasting rights like the one he just signed with Comcast

Which is the more likely scenario - that Grousbeck would use his inside knowledge of the league's revenue-sharing negotiations to structure a deal that benefits his team the most, or one that benefits the league the most? It would be one thing if the revenue-sharing system were already in place and he just negotiated a deal using that system as his parameters. However, this isn't the case at all. The system isn't even instituted yet; so Grousbeck built his TV deal first, knowing that he as the chairman would have a leadership role and active input in protecting his deal later on.  Of course, the NBA still must approve of this deal after it is finalized, but since Grousbeck is apparently a man of influence in the league office, I would be very surprised if the Comcast deal does not get the rubber stamp of approval.

Lastly, the deal is front-loaded. As stated in the article, a large chunk of the media rights money will come up front and will then level off over the course of the deal. Why would the Celtics do this? One reason might be that the proposed revenue sharing might be designed to be phased in over time, rather than take place all at once. If this graduated adoption occurs, then the most robust form of revenue sharing might not hit until after the Celtics have already received the majority of their money.

Accounting Around BRI

(note - we're about to get a little accounting geeky here, so if that doesn't interest you, feel free to skip on ahead to your daily Calvin and Hobbes reading)

The Celtics have negotiated to acquire up to a 20% equity stake in the RSN. However, as Mike Ozanian writes:

"...None of the income the Celtics owners will get from their equity stake in the profitable RSN will be included in BRI and, by extension, player salaries."

Why would this be? The Celtics are acquiring an equity stake in a broadcasting network that will generate revenues directly because of the games the Celtics play. Why would this equity stake not be included in calculating BRI?

The answer lies in that 20% number above.

Intuitively, we know that since this equity  number is much less than 50%, the Celtics will have some input but no ability to control the RSN. However, this 20% number is also meaningful because it dictates how the Celtics' ownership stake is accounted for. When one organization acquires a stake in another that is 20% or less, they must use what is called the cost method of accounting for an acquisition. This is what the cost method stipulates:

  • The 20% stake in the RSN is considered a non-controlling equity stake.
  • Any revenues that the RSN reports are not apportioned to the Celtics based on this percentage, and are therefore not recorded on the Celtics' income statement as revenue. 
  • Instead, the only thing that the Celtics can report on their own income statement  under the cost method comes in the form of dividend revenue from the RSN which, while possibly still being lumped in with operating revenue, is still going to be separated out specifically as dividend income.
  • Anything greater than a 20% equity stake would result in an entirely different form of accounting that would bring the 20% of the Celtics' take onto their income statement as regular income, not dividend income.
To consider the Celtics:
  • Assume for argument's sake the Comcast RSN makes $100 million per year.
  • The Celtics own 20% of the RSN. However, because of the mandatory use of the cost method of accounting, the Celtics do not have the right to report that 20% of $100 million on their own income statement.
  • Instead, the only thing the Celtics can report on their income statement are dividends they receive from Comcast. Those dividends would show up on the income statement as a part of total revenue, but would receive their own line item designating the dividends as such.
  • The dividend income received from Comcast remains isolated from the rest of the team's basketball-related income.
What does this all mean?

Much of the debate over the lockout has been around percentages; specifically, what percentage of BRI the players should receive (currently it is set at 57%). In focusing exclusively on that percentage however, we're forgetting that there is a back door. The back door is that the NBA could change how it defines BRI by including or excluding revenue streams. For example, if we refer to Larry Coon's FAQ, we can see that one of the things included in the current definition of BRI is broadcast rights. What if the league fought for and won the right to exclude its national TV Deal from this BRI definition of broadcast rights? Last year's BRI would immediately shrink by close to a billion dollars, and consequently the players would lose about $530 million in their aggregate salary ($930M * 57%). However, it is not that the money suddenly disappears; it would still get distributed to the teams. It is just that the teams would no longer have to give up part of that money to the players. 

So I think it is with this scenario involving the Celtics, both as it pertains to BRI and to potential revenue sharing. Assuming the BRI definition stays the same in the new CBA deal, I think that the Celtics would argue that dividend income received from an investing activity is not directly related to basketball operations, and should therefore be excluded from the definitions. While the Celtics' broadcasting rights would still be included, the equity stake would remain completely off the grid when it comes time to compute the league's BRI. The team would be able to keep all of that dividend money and not be required to distribute any of it to the players.

If this is the strategy the Celtics are employing, then I think we're going to see more of these deals go down in the future that take money out of the BRI pot. It is a shrewd way to work around the BRI payout system, and it does not contradict accounting rules. In fact, it doesn't involve the accounting rules at all; it is purely a function of the CBA rules. 

Unless of course the NBA's planning committee opts to change the rules to include dividends received from equity stakes in media companies as a part of BRI and the basis for league revenue sharing.

Lest you forget though, Mr. Grousbeck helps make the rules.
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