2011 NBA Lockout: NBA's Audited Net Income; League Lost $1.5 Billion Over Last Five Years

(Update: post was edited to more strongly reflect the fact that the audited numbers Forbes received did not come directly from the NBA, but from an independent source, and also to give greater clarity to the difference between operating and net income)

Yesterday we got a deluge of points and counterpoints regarding the finances of the NBA and how accurate the estimates are of the losses that the league and the teams are reporting. On the one side, we have Nate SilverTommy CraggsMatthew Yglesias, and Forbes who have directly challenged the league's financial reporting. On the other side, we have the league, who issued two press releases saying that they were all wrong.  

Today we find out that Forbes Magazine has obtained, via individuals close to the negotiation, the league's audited net income numbers from the past five years. These audited numbers (which means that a certified public accounting firm has signed off on them) confirm the losses the league has been claiming.

Audited Numbers Show NBA Lost $1.5 Billion Over Last Five Years | Forbes 

Here are the audited net income numbers, as reported by Forbes:

Year  # of Teams With Loss Total League Losses
05-06 19 $220 Million
06-07 21 $285 Million
07-08 23 $330 Million
09-10 24 $370 Million
10-11 23 $300 Million

A few points after the jump.

  • The first thing that should jump out at you is that these numbers are audited net income numbers. They are the numbers you get after you take into consideration all revenues, expenses, interest expense, taxes, depreciation, and amortization. The original calculations as performed by Forbes and Silver are operating income, which excludes interest expense, taxes, depreciation, and amortization (known as "EBITDA" in accounting parlance). Right away we know that the net income numbers Forbes received, while helpful, do not tell us anything at all about our original operating income calculations, because net income contains those extra components that can mask the true operational performance. The only way these audited numbers would have helped is if they were also the operating income numbers from the past five years. I believe the phrase we're looking for here is "apples and oranges." (As a brief aside, I'm quite surprised that a financial magazine failed to note this fact, because it makes the comparison irrelevant).
  • In the NBA's press releases linked above, they dispute point by point Silver and Forbes' assertions of income versus loss. I think that Silver has it right when he states that:

I simply have no way to adjudicate the N.B.A.'s claims. Mr. Frank's statement includes several specific claims that have the league has not made publicly before, but in general the league has not made substantial detail on its financial condition, or its accounting procedures, available to the general public.

The Forbes data may suffer from this lack of publicly-available information, but they remain the only independent estimates of the league's financial condition. In my view, a degree of skepticism is appropriate toward any claims made about the N.B.A.'s finances.

  • One of the most central points to the entire labor dispute is the accuracy of the league's numbers. The NBA says they have incurred heavy losses, and the NBAPA says that the losses are not nearly as bad as claimed and are not even related to player salaries. This is the whole point of the argument. As it is, analysts, critics, and fans have no obligation to take either party at its word when they say, "the numbers say this." We know the two sides are saying the numbers say different things, but they do not allow the public to see what the numbers really are. Until that happens, the lockout is going to continue to receive this high level of scrutiny because we know that things don't add up. As Jeff Clark argued yesterday, there is a hole in the Celtics' and other teams operating expenses, and we haven't yet received a good answer as to what it might be.
  • Put another way, in a court of law, there is a term called "summary judgment." Summary judgment is a court ruling that occurs when there are no factual issues in dispute and the cause of action can be decided by a judge on those undisputed facts without a trial. The NBA is asking us (the judge) to make a summary judgment - accept that the numbers are what they are, so we must find their case for a lockout conclusive. However, in this case, the attempt at summary judgment does not work because the very thing in dispute is the facts (the numbers) themselves. The only way for the public scrutiny to recede at this point is for each side (the union and the league) to argue its facts and allow an unbiased arbiter to decide which is more compelling. We know that will never happen, but this is the course that we're on at this point. 

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