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Are Massive Losses Driving The Cavaliers Decisions?

We live in a world where major league sports franchises are often owned by billionaires who seem to have unlimited resources for their big boy toys, but billionaires didn’t get to their lofty financial position by pissing away money. Eventually massive losses, usually long before accumulating into the nine-figure range, will start driving decisions and that’s where the Cleveland Cavaliers are right now.

Wonder why Cavs majority owner had an apparent falling out with the top guy running his team David Griffin? Griffin has built a team that as constructed will have accumulated over $100 million in losses by the end of next season. No parade or ring ceremony is going to make writing that check feel good.

*The 2018-19 numbers only include 11 players and assumes LeBron James picks up his player option.

Crain’s Cleveland Business Kevin Kleps reported in January that the Cavaliers had lost at least $40 million in their championship season and would lose more this year.

After the very public spat, Forbes reported last Friday, Jan. 27, that the Cavs lost $40 million during their championship season.

Well, I was told by an industry source that Forbes’ numbers were indeed off. They were actually “conservative.”

I got the feeling the number was considerably higher.

The Cavs will lose money again this season — though not as much, the source said — and they will continue to do so for “the foreseeable future,” because their payroll is only going to increase.

As Kleps comments, “No one is feeling sorry for Dan Gilbert.” The Cavs majority owner is worth a reported $5 billion dollars and the $375 million price tag on the Cavs when he bought in would be well over a billion now.

However, what often gets overlooked in an environment where an asset is going up in value but losing money hand-over-fist is someone has to keep writing checks to pay the bills and billionaire or not, cutting checks for over $100 million with no end in sight usually ends in prematurely selling your asset.

The last two seasons were estimated to cost Gilbert a conservative $50 million to play basketball team owner and maybe closer to $70-75 million? These next two seasons could easily top $120 million and if Griffin had of been successful in trading for Paul George, the Cavs could easily have blown right past that astronomical sum.

Those are record setting Brooklyn Nets type of loses and their billionaire still hasn’t recovered.

Further complicating the Cavs financial prospects is Cleveland remains a small market team with just over 2 million population in the greater metropolitan area. There is no billion dollar local TV contract coming to cover loses no matter how good the Cavs are and raising ticket prices to New York or L.A. levels would be a foolish gamble.

Maybe we shouldn’t have been so surprised that Gilbert wanted new leadership for his team?

Also, its more complicated than Gilbert just sucking it up, paying the bills and buying LeBron James another shot at a championship. Gilbert has partners in the Cavs and when it comes to asking for big money to fund discretionary operating loses, it not uncommon for partners to disagree.

It’s easy to forget the Cavaliers were purchased by an investor group led by Dan Gilbert in 2005 that included inactive partners Grammy-award winning recording artist Usher Raymond IV, former owner Gordon Gund, movie producer Gary Gilbert and others. Minority owners Jeff Cohen and Nathan Forbes have been active in the business.

In February  Joe Vardon in Cleveland.com reported on a Cavs shake-up at the top.

Jeff Cohen is out as vice chairman and Nathan Forbes, while maintaining his title has lost influence with Gilbert and is spending very little time on Cavs business

The two were “extensions” of Gilbert within the Cavs, according to one source, offering input on major trades and organizational decisions presented to Gilbert by general manager David Griffin.

Based on Griffins release, it appears these two minority partners were more likely acting as advocates for the GM’s rather expensive proposals.

As is usual in large private corporations and partnerships, the books are never open to the public and ownership/partner “discussions” are resolved behind closed doors, so it’s possible we’ll never be sure who made what decision and why. However, it’s very certain that Gilbert is pulling the strings.

The resolution to the Kyrie Irving situation will provide a lot of insight as to how Gilbert really feels about losing over $50 million a year to run his franchise.

This is an opportunity to significantly cut his projected $75 million luxury tax bill and reduce the Cavaliers operating loses this year and going forward. Talent coming back could quickly become a secondary consideration to finding ways to dump salary.  Based on what’s happened so far this year that could easily happen with an eye toward making sure it doesn’t look that way.

There really is nothing like a great off season drama.

 

 

Stephen_Brotherston_insideStephen Brotherston covers the Toronto Raptors and visiting NBA teams at the Air Canada Centre and is a member of the Professional Basketball Writers Association.